Two weeks from now, on January 14, 2020, the Supreme Court will hear oral argument in Romag Fasteners, Inc. v. Fossil, Inc. on the long-standing circuit split over whether willful infringement is a necessary precondition for an award of profits in a Section 43(a) trademark infringement case.
Under the Lanham Act, a victorious plaintiff in a trademark infringement case may be entitled to an election of either a monetary award of its damages or a disgorgement of the infringer’s profits, subject to equitable principles. 15 U.S.C. §1117(a). However, monetary relief is not a given, and injunctive relief is awarded far more commonly. The remedy is to make the plaintiff whole. While a disgorgement of profits is available, it is not intended to be punitive – in theory it serves as a proxy for actual damages, in a case where actual damages are difficult to prove, or alternatively as a means of preventing unjust enrichment or deterring future infringement.
More than 25 years ago, the Second Circuit, in George Basch Co. Inc. v. Blue Coral, Inc., 986 F.2d 1532 (2d Cir. 1992), adopted a per se willfulness standard in keeping with the then current Restatement of Unfair Competition, as necessary to maintain these “principles of equity.” A finding of willfulness would avoid the risk of a windfall beyond what would be considered appropriate damages. This precondition of willfulness for a disgorgement of profits has been long-standing in cases arising in the Second, Eighth, Ninth, Tenth and D.C. Circuits.
After the Lanham Act was amended in 1999 to add a separate claim for dilution, Congress expressly included a willfulness requirement for an award of profits on dilution under Section 1117(c) but remained silent on willfulness under Section 1117(a). The failure to add comparable language to Section 1117(a) led some circuits to disavow the traditional requirement that profits required bad intent, reasoning that since willfulness was expressly referenced in other contexts in the Lanham Act, its absence in the statutory section on monetary damage awards under Section 1117(a) meant that willfulness is not a precondition. The circuit split meant that a Third Circuit plaintiff could obtain the infringer’s profits, regardless of the infringer’s intent. In the Second Circuit, that same plaintiff’s remedies would be limited to injunctive relief and money damages, if elected and available.
In Romag, the Federal Circuit (applying Second Circuit law) held that Romag, the manufacturer of magnetic fasteners sold to handbag maker Fossil, was not entitled to a disgorgement of Fossil’s profits, despite the jury finding of infringement and advisory award of profits. The action arose when Romag determined that Fossil was purchasing counterfeit Romag fasteners from Romag’s authorized factory. Romag argued that Fossil should have known it was purchasing fakes among legitimate goods. While the jury found Fossil liable for trademark and patent infringement, the jury also determined that neither was willful, and on that basis the district court in the Second Circuit rejected the jury’s advisory profits award. The Federal Circuit affirmed, acknowledging both Second Circuit precedent and the circuit split.
Romag argues that a willfulness standard imposed by several circuits is contrary to the statute, which provides no such limitation in Section 1117(a). Romag notes that in addition to “willfulness” being absent from the plain language of Section 1117(a), it is not a prerequisite for monetary relief in copyright or patent suits. Fossil argues that intent is necessarily required for an accounting, as it is an element of a likelihood of confusion analysis and ultimately is the factor that informs, according to equitable principles, whether disgorgement is proper at the damages phase of a trial.
While a willfulness standard is fundamentally easy to apply, it takes away from the court’s mandate to fashion relief based on equitable principles. The point of monetary relief is to make a plaintiff whole – not to give it a windfall, and not to impose a penalty. Indeed, if an injunction alone makes the plaintiff whole, that may be the sole remedy.
If an award serves as a proxy for damages, a risk of windfall is lessened where a court looks at any number of factors, including the mark’s strength, the competitive markets for the products, a delay in bringing action, intent to trade on another’s mark and any other facts deemed relevant. An accounting based on a theory of unjust enrichment or deterrence is logical only if there is some bad intent.
Notably, the Supreme Court granted certiorari solely in the context of Section 43(a) trademark infringement, false endorsement or affiliation – and not in consideration of the false advertising arm of Lanham Act Section 43(a). Although the right of recovery by disgorgement of profits under Section 1117(a) equally applies to Lanham Act false advertising cases, those cases look at statements that are either literally false or, while true, are likely to be misconstrued, and are subject to a review of intent, materiality and injury. Given the distinctions between the posture of a false advertising case and a Section 43(a) trademark infringement case – which relies on a different, multifactor test – it is unclear what importance, if any, the Court’s ultimate decision will have in a determination of relief in a Lanham Act false advertising case.