Principles of Equity: A Trademark Infringer’s Profits are Fair Game

By Leo Krapp

University College London

Law Clerk, Viking Tech Law

October 17, 2020

"[To collect an infringer's profits] US courts were split on whether the trademark owner must first show the infringer did so 'willfully.'  But in a victory for trademark owners, the US Supreme Court held that a court has some flexibility. 'Willfulness' is not strictly necessary."

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The Lanham Act permits trademark owners to collect an infringer’s profits in some cases.  US courts were split on whether the trademark owner must first show the infringer did so “willfully.”  But in a victory for trademark owners, the US Supreme Court held that a court has some flexibility. “Willfulness” is not strictly necessary. Romag Fasteners, Inc. v. Fossil Grp., Inc., No. 18-1233 (April 23, 2020). In the UK, a trademark owner may also seek profits of an infringer without proving specific intent.

Background

In 2002, Romag Fasteners, Inc. (“Romag”), a family-owned business from Connecticut that makes magnetic snap fasteners, licensed its fasteners to fashion accessory company Fossil Inc. (“Fossil”). From 2002 to 2008, Fossil purchased tens of thousands of fasteners. But between 2008 and 2010, Romag noticed that the sales of their fasteners had declined considerably. It discovered counterfeit clasps bearing the ROMAG mark on some of the Fossil handbags sold in the United States.

The counterfeit fasteners were traced to Fossil’s Chinese manufacturer, who were purchasing and using the counterfeits in their factories. Just prior to Black Friday in November 2010, Romag obtained a preliminary injunction to stop Fossil from selling certain handbags. Romag pursued a patent and trademark infringement case against Fossil in the United States District Court for the District of Connecticut.

In 2014, Fossil was found to have infringed on both patent and trademark rights. A jury awarded Romag $156,000 in Fossil’s profits to prevent “unjust enrichment,” and more than $6.7 million “to deter future trademark infringement.” The jury found Fossil acted in “callous disregard” for Romag’s trademark rights, but did not specifically find that Fossil had “willfully infringed.” The district court struck the jury award, stating that “a finding of willfulness remains a requirement for an award of defendants’ profits in this Circuit.” After the Federal Circuit upheld the district court, Romag petitioned the U.S. Supreme Court for a writ of certiorari.

Issues and Rules

The Lanham Act of 1946 determines how the plaintiff will be compensated for the effects of trademark infringement, trademark dilution, and false advertising. The remedies for infringement under the Lanham Act include injunctive relief; damages, including the possibility of treble damages when appropriate; attorney's fees in "exceptional cases;" and costs.  See 15 U.S.C. § 1117.  A successful plaintiff may recover the defendant's profits in addition to any damages, or other remedies awarded. 

There has been some confusion in the past concerning an award of profits. The operative portion of 15 U.S.C. § 1117(a) reads:

When a violation of any right of the registrant of a mark registered in the Patent and Trademark Office, a violation under section 1125(a) or (d) of this title, or a willful violation under section 1125(c) of this title, shall have been established...the plaintiff shall be entitled...subject to the principles of equity, to recover (1) defendant’s profits

The term “willful” only precedes the term “violation” with respect to 1125(c) (trademark dilution). There is no “willful” requirement with respect to infringement under 1125(a) (false designation of origin) or 1125(d). Nevertheless, the Circuits were split on whether a finding of willfulness is required to award profits under 1125(a).  As the US Court of Appeals for the Federal Circuit explained in Romag Fasteners, Inc. v. Fossil, Inc. (Romag I), 817 F.3d 782, 789–90 (Fed. Cir. 2016): 

"Monetary damages are not always awarded in Lanham Act cases. Typically, if monetary damages are awarded, it is in the form of a plaintiff’s actual damages or a reasonable royalty to account for past trademark use. 15 U.S.C. § 1117. A court can also award disgorgement of a defendant’s profits. But the circuit courts are evenly split as to whether an award of a defendant’s profits requires a willfulness finding, or is available for any Lanham Act false designation of origin claim. Six circuits require a willfulness finding to award profits—the First, Second, Eighth, Ninth, Tenth, and D.C. Circuits. Six other circuits—the Third, Fourth, Fifth, Sixth, Seventh, and Eleventh Circuits—do not require willfulness."

This has resulted in inconsistency in the US in the way courts have viewed the required mens rea to award profits to a trademark owner. 

The important distinctions in the US Supreme Court decision case in the difference between trademark infringement and trademark dilution, and the difference between “principles of equity” and “proof of willfulness” in dispensing profits. Trademark dilution is a concept that often involves the use of a famous trademark on products that do not compete or relate to the original in any way, but serve to “dilute” the uniqueness of a certain mark, whereas infringement refers to the violation of the rights attached to a mark without authorization. The Supreme Court references Black’s Law Dictionary 1417 (3d ed. 1933); Black’s Law Dictionary 1357 (4th ed. 1951) to define a principle as ”fundamental truth or doctrine, as of law; a comprehensive rule or doctrine which furnishes a basis or origin for others.” 

In addition, principles of equity are usually used to give “transsubstantive guidance on broad and fundamental ques-tions about matters like parties, modes of proof, defenses, and remedies.” Therefore, the Supreme Court determined that “principles of equity” are not dependent on a showing of willfulness, as Fossil tried to argue.

Analysis

Through their close reading of the Lanham Act, the Supreme Court ruled unanimously in favor of Romag. Principles of equity should be taken into consideration when looking at an award of profits, but the Supreme Court refuses to extrapolate a precondition of willfulness that is not there, especially when it is explicitly mentioned in other parts of the same act. Justice Gorsuch, who delivered the opinion of the court, wrote at Romag Fasteners, Inc. v. Fossil, Inc, 590 U.S. ___; 140 S. Ct. 1492; 206 L. Ed. 2d672:

At the end of it all, the most we can say with certainty is this. Mens rea figured as an important consideration in awarding profits in pre-Lanham Act cases…Given these traditional principles, we do not doubt that a trademark defendant’s mental state is a highly important consideration in determining whether an award of profits is appropriate. But acknowledging that much is a far cry from insisting on the inflexible precondition to recovery Fossil advances.

This has several implications for the future of trademark cases. The first is that the unfair competition provisions in the Lanham Act, initially designed to protect smaller and less distinctive brands in cases of real innocent infringement, will no longer be a confounding factor in more high profile trademark conflicts like this one. Willfulness is no longer a prerequisite for the awarding of profits. 

In this case, “callous disregard,” a lesser standard than “willfulness,” was sufficient. In a similar manner to the way criminal negligence cases are handled, an objective standard of behavior expected of the defendant becomes more and more important. 

As Romag involves counterfeiting, an especially explosive topic at present, trademark licensees are advised to take reasonable steps to safeguard against the use of counterfeits by its manufacturers.

Comparison of US and UK Awards of Profit

A trademark case from 2016 in the U.K. provides a standard of comparison in regards to awards of profit. Jack Wills Ltd v House of Fraser (Stores) Ltd is a case that is significant to the development of trademark law because it entailed an exact calculation of profits related to a particular instance of infringement. 

Jack Wills sued House of Fraser for trademark infringement because they used a pigeon logo on a selection of menswear that was extremely similar to Jack Wills’ own pheasant logo. The High Court determined that this was indeed infringement, but then needed to decide what percentage of their profits House of Fraser owed Jack Wills. In this case, an “account of profits” is distinct from the concept of “damages.” Because Jack Wills elected to receive the former as compensation for the infringement, they needed to accept the report of profits as it was, rather than engaging in a determination of how much their own brand was hurt by the infringement. 

In addition, in the case Design & Display Ltd v Ooo Abbott, the High Court ruled that an infringing defendant had the right to portion off a proportion of their overhead cost that would have normally sustained a non-infringing business. This means that if House of Fraser could prove that the overhead costs they had incurred would have occurred regardless and that non-infringing goods would have replaced the infringing ones, they could avoid paying out their entire net profits from the selection of menswear.

The square footage basis was used to determine property, depreciation and establishment overhead costs, which basically entailed determining the proportion of physical space that the infringing products took up, and the sales revenue method was used to determine all other categories of overheads.

There was no evidence that the infringement drove the sale of these products, or that the pigeon logo had any sustained impact on the profits of House of Frasers retail business. Thus, based on this and the conclusions on infringement, it was decided that 41% of House of Frasers net profits was the appropriate amount to award Jack Wills Ltd. 

In the UK, this case confirmed that it was possible to determine a proportion of profits to award a plaintiff within the case itself, rather than relying on the two parties to come to an external, private agreement. The concept of “account of profits” also switches the scope of responsibility in determining the award of profits to the defendant, rather than the concept of “damages” that was used in Romag v Fossil, which places the responsibility of determining compensation on the plaintiff. 

Another difference is that willfulness or any psychological analysis of motivation relating to callous disregard was taken into consideration when determining compensation. The only mention of intent is from a quotation of a barrister referred to as Arnold J ([2016] EWHC 626 (Ch)):

“Due to the resemblance to the Trade Marks, the effect of House of Fraser’s use of the Pigeon Logo will have been to cause a subtle but insidious transfer of image from the Trade Marks to the Pigeon Logo (and hence from Jack Wills goods to House of Fraser’s goods) in the minds of some consumers, whether that was House of Fraser’s intention or not… Furthermore, House of Fraser had no justification for such conduct. Thus I conclude that House of Fraser did take unfair advantage of the reputation of the Trade Marks.”

The judge presiding over the case agreed with the argument above. As you can see, intent was not important in determining the award of profits. Much of the prose from the first part of the quotation builds up the term “unfair advantage,” which is all that matters in determining culpability in this particular case of English trademark law. More attention is paid instead to the exact determining of profits to be paid out, which concerns a variety of other business decisions relating to retail strategies, just not the motivations of such.

Conclusion

It will now be somewhat easier for trademark attorneys to collect an infringing party's profits. Clearance opinions from trademark lawyers will become more important for their clients in order to prevent future liability. This is because the “mental state” of the defendant will now play a bigger role in identifying what profits to award. 

In addition, both trademark owners and potential infringers should monitor the number and amount of lost profit awards in trademark cases going forward. In some cases, damage to a brand is difficult to document, and was made even more difficult by the importance of intent.

It remains to be seen what the impact of Romag will be. Small companies that have favored removal of the willfulness requirement to deter infringement of large companies, may find trigger-happy, powerful brands seeking to flatten opposition. Time will tell.

The complexity of trademark law stems from the paradox of who it is intended to serve. In an ideal world, it would give small brands the freedom to carve out their own niche next to the giants, while simultaneously ensuring that these giants would not be cut down by malevolent business practices. The tension between trying to fulfill both these functions will need to be resolved in the future through more cases like this before trademark law can be said to be straightforward, fair, and effective.