This article first appeared on Entertainment Law Matters
Deciding when to pursue fashion counterfeiters is a tough call. The vendors hawking fake Prada bags from a folding table may be judgment-proof. The Web sites peddling bogus Cartier watches often reside off-shore or are registered under false names. Is it worth it for fashion brands to go after these kinds of operations?
The Lanham Act provides attractive legal remedies. Willful counterfeiters are subject to mandatory financial penalties, and absent unusual circumstances, the court must award treble damages or profits (whichever is greater) plus reasonable attorney's fees if the counterfeiter knew the goods were counterfeit and intentionally offered them for sale.
In some cases, however, actual profits or damages may be difficult, if not impossible, to ascertain. Counterfeiters may maintain deceptive records or no records at all. In other cases, actual damages are so insignificant that they are unlikely to deter future counterfeiting. As an alternative, the Lanham Act permits so-called "statutory" damages: rather than showing actual damages, a trademark owner can seek statutory damages ranging from $1,000 to $200,000 per counterfeit mark per type of goods and services, and up to $2 million if the infringement is deemed willful. Congress increased this range, previously set at $500 to $100,000 per mark ($1 million for willful infringement), in October 2008.
Courts have wide discretion here, and the amounts awarded are subject only to general principles of fairness. While the Lanham Act is silent on how this discretion should be exercised, courts nevertheless have held that the statutory award should have some relationship to the actual damages suffered and should be sufficient to deter the defendant without bestowing a windfall on the plaintiff. In the Southern District of New York, courts employ an analysis used in copyright cases, considering the defendant's expenses and profits, plaintiff's lost revenues, the value of the trademark, defendant's willfulness, defendant's cooperation in providing information from which to assess the counterfeit goods' value, and the deterrent effect on both the defendant and others.
The recent decision in Chanel, Inc. v. Banks is instructive. The defendant in Banks was a young woman who allegedly operated a Web site through which she sold counterfeit Chanel handbags and wallets. Banks failed to appear or otherwise respond to the complaint, and the French fashion house moved for an entry of default judgment.
After determining that Chanel's allegations supported a finding of liability, the magistrate judge considered the appropriate amount of damages. Bereft of information about Banks' actual sales or profits, Chanel opted for statutory damages. The judge first determined the "baseline figure" was within the range of $1,000 to $2,000,000. Chanel proposed trebling Banks' average gross sales based on inventory listed on the Web site. The court rejected this calculation as "speculative and imprecise" without information about Banks' sales. However, the court noted that gross sales may be an appropriate baseline figure where the absence of information was due to the counterfeiter's wrongdoing (such as improper recordkeeping) or if the ultimate award is discounted in some way to reflect profits more accurately, as awarded by a New Jersey district court in an earlier Chanel case.
Ultimately, the magistrate judge in Banks recommended a baseline figure of $2,000, multiplied by the number of marks (2) and trebled for willfulness, for a total of $83,000 in statutory damages. The judge emphasized the relatively insignificant size of the defendant's business: the inventory on the Web site in question amounted to between $6,000 and $7,000 in value, and the defendant's "operation was quite unsuccessful." For undisclosed reasons, the magistrate's final recommendation was for $126,000 in statutory damages plus attorney's fees and costs, along with the issuance of a permanent injunction against, among other things, future counterfeiting of Chanel goods.
Entertainment Law Matters took a look at recent cases awarding damages for fashion counterfeiting. We found that, as a general rule, the size of the counterfeiting operation has a direct relationship with the amount of the award. Counterfeiting Web sites, in particular, sustain higher damage awards because of their far reach. Since the statutory damage range was increased in October 2008, courts have awarded damages ranging from $1,000 to $1 million per mark in fashion brand counterfeiting cases. Here is a chart summarizing our findings.
In light of the potential recovery, fashion brands certainly have the financial incentive to pursue those who manufacture and distribute counterfeit goods. In addition to significant damage awards, they can recover attorney's fees and costs, and courts will often order the destruction of the infringing goods. Moreover, the high monetary penalties may also serve to deter would-be counterfeiters. The challenge, of course, is collection of these judgments. Statutory damages are provided, in part, because of uncooperative defendants who refuse to provide accurate information as to their sales figures and, more often than not, simply do not appear to defend themselves in court. The likelihood of collecting from such defendants can sometimes be discouraging. Nevertheless, trademark owners who fail to prosecute may lose the strength of their marks or even be deemed to have abandoned them. This risk, along with the potential rewards, would seem to make such litigation a worthwhile endeavor in many cases.
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