U.S. Supreme Court to Consider Whether Trademark Plaintiffs May Recover Profits of a Defendant's Non-Party Corporate Affiliates
The U.S. Supreme Court is set to decide whether the damages available to a plaintiff in a trademark case include the profits realized by non-party corporate affiliates of the defendant. Specifically, the Court has granted certiorari in Dewberry Group, Inc. v. Dewberry Engineers Inc. to determine the question whether an award of the "defendant's profits" under the Lanham Act, 15 U.S.C. § 1117 (a), can include an order for the defendant to disgorge the distinct profits of legally separate corporate affiliates who are not parties to the litigation.
That statute provides that "the plaintiff shall be entitled . . . subject to the principles of equity, to recover," inter alia, the "defendant's profits." 15 U.S.C. § 1117 (a). The statute further states that, "[i]f the court shall find the amount of the recovery based on profits is either inadequate or excessive the court may in its discretion enter judgment for such sum as the court shall find to be just, according to the circumstances of the case. Such sum . . . shall constitute compensation and not a penalty." Id.
In the underlying trial court proceedings, the U.S. District Court for the Eastern District of Virginia granted summary judgment to the plaintiff, Dewberry Engineers, on its trademark infringement claim based on defendant Dewberry Group's use of the "Dewberry" trademark. The trial court then awarded plaintiff nearly $43 million in damages in the form of disgorgement of profits, which amount reflected profits earned by the defendant's affiliates. Dewberry Engineers, Inc. v. Dewberry Group, Inc., 2022 WL 1439826, at *10, 14 (E.D. Va. Mar. 2, 2022). The business of the only defendant in the case, Dewberry Group, was to support several other affiliated real estate leasing companies—separate corporate entities whose names also included the "Dewberry" mark—by providing them with legal, accounting, human resources, and real estate development services. None of the affiliates were parties to the infringement suit, but they were all under the common ownership of defendant Dewberry Group's founder and owner. The defendant's damages expert opined that the defendant generated zero profits because its tax returns showed losses. The plaintiff's expert offered an opinion that, based on the "economic reality" of how the defendant's business operates, and considered from an economic perspective, the total revenues and profits of the defendant's affiliates should be considered in calculating an award of the defendant's profits.
The trial court agreed and held that the defendant and its affiliates would be treated as a single corporate entity when calculating profits generated from use of the infringing trademarks. The court stated that it would "not allow the non-arms' length corporate dealings and tax treatment of Dewberry Group's business enterprise to trump the economic reality," and reasoned that the fact "[t]hat plaintiff did not name the [affiliates] as defendants or allege contributory infringement or alter-ego liability is of no moment." Id. at *10.
The Court of Appeals for the Fourth Circuit affirmed. Dewberry Engineers Inc. v. Dewberry Group, Inc., 77 F.4th 265 (4th Cir. 2023). The Fourth Circuit understood the trial court's decision not to "pierce the corporate veil," but rather as "consider[ing] the revenues of entities under common ownership with Dewberry Group in calculating Dewberry Group's true financial gain from its infringing activities that necessarily involved those affiliates." Id. at 292. The court reasoned that "[a] district court's grant of profit disgorgement is 'subject to the principles of equity' . . . and is ultimately a matter of the court's discretion," finding "[t]he district court here 'weighed the equities of the dispute and exercised its discretion' to hold Dewberry Group to account for the revenues generated in part from infringing materials used by its affiliates under common ownership." Id. at 293. The court further explained that "[a]dmonishing courts for using their discretion in this fashion risks handing potential trademark infringers the blueprint for using corporate formalities to insulate their infringement from financial consequences." Id.
In seeking appeal before the U.S. Supreme Court, the petitioner, Dewberry Group, argues that the Fourth Circuit's decision is in conflict with the decisions of the Ninth and Eleventh Circuits, as well as U.S. Supreme Court precedent recognizing the "bedrock principle" that a corporation "is not liable for the acts" of its affiliates except when "the corporate veil may be pierced." United States v. Bestfoods, 524 U.S. 51, 61-62 (1998). In the Lanham Act context, the Ninth Circuit has recognized the principle under Florida law that, as it relates to the liability of individual stockholders, "[t]he corporate veil will not be penetrated . . . unless it is shown that the corporation was organized or employed to mislead creditors or to work a fraud upon them." U-Haul International, Inc. v. Jartran, Inc., 793 F.2d 1034, 1043 (9th Cir. 1986). Similarly, the Eleventh Circuit has recognized, again in the Lanham Act context, that "distinct entities" are protected from liability unless the plaintiff proves "that the corporation is formed or used for some illegal, fraudulent or other unjust purpose which justifies piercing of the corporate veil." Edmondson v. Velvet Lifestyles, LLC, 43 F.4th 1153, 1162 (11th Cir. 2022).
Petitioner argues that the Fourth Circuit's decision allows "Lanham Act plaintiffs to disregard the corporate form without satisfying the traditional veil-piercing principles." Petitioner also claims, among other things, that the decision is inconsistent with the text of 15 U.S.C. § 1117(a), which permits recovery only of the "defendant's profits." The respondent, by contrast, characterizes the trial court's decision as permissible under the statute's language permitting the court, in its discretion, to "enter judgment for such sum as the court shall find to be just" where "the amount of the recovery based on profits is [otherwise] either inadequate or excessive."
The U.S. Supreme Court's decision in the case stands potentially to impact the scope of profits disgorgement trademark plaintiffs may recover and, conversely, the considerations that corporate entities take into account when structuring their businesses.
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