In trademark infringement cases involving competitors, the plaintiff typically seeks damages in the form of lost profits once infringement has been proven. The purpose of “lost profits” is to compensate the plaintiff for its losses. In contrast, disgorgement requires a defendant to give up all profits it has made as a result of illegal or wrongful acts, regardless of the actual loss incurred by the plaintiff. Disgorgement is an equitable remedy issued by the court, not the jury. Accordingly, a plaintiff seeking disgorgement in lieu of actual damages is not entitled to a jury trial in the remedies phase.
The case America Can! Cars for Kids v. Kars 4 Kids Inc., Case No. 3:16-cv-4232 (D.N.J.), demonstrates how courts may view a damages theory framed as lost profits as a de facto claim for disgorgement. The parties, America Can! and Kars 4 Kids, are both charities that sell donated vehicles to fund children’s programs. In seeking lost profits, America Can! alleged that any donation to Kars 4 Kids was a donation that America Can! should have received but for the alleged infringement, due to the parties’ relationship as direct competitors. Based on this allegation alone, the district court determined that America Can!’s claim to Kars 4 Kids’ profits as a “rough proxy measure” of America Can!’s own damages was in fact a claim of disgorgement, and ordered the parties to present evidence relating to remedies outside the presence of a jury.
By the same line of reasoning, the district court rejected America Can!’s other theories of damages (cost of corrective advertising and royalties) on the basis that an award of both damages and defendant’s profits would result in “double recovery” and “over-compensation.” As a result, after the jury rendered a verdict on liability, remedies were determined in a bench trial under the theory of disgorgement alone. The district court entered a judgment in the amount of $11,247,542, the amount of net profits of Kars 4 Kids, in favor of America Can!.
The judgment was vacated on appeal. The Court of Appeals for the Third Circuit set forth six equitable factors that district courts must consider before ordering disgorgement: (1) whether the infringer had the intent to confuse or deceive, (2) whether sales have been diverted, (3) the adequacy of other remedies (including an injunction), (4) any unreasonable delay by the plaintiff in asserting his rights, (5) the public interest in making the misconduct unprofitable, and (6) whether it is a case of palming off. Kars 4 Kids Inc. v. America Can!, Case 20-2813 (3rd Cir. Aug. 10, 2021). The court of appeals found that the district court erred by only considering the second factor (diversion of sale), and ordered a remand for the court to consider the five factors previously neglected.
This case highlights the special considerations trademark holders should take into account in formulating damages theories in competitor cases. If the theory of lost profits is elected, it may be in the trademark holder’s interest to evaluate and gather evidence regarding all relevant factors the courts must consider in evaluating disgorgement under controlling authority.