Obtaining full relief against infringers is an important part of any trademark enforcement effort. In trademark cases, trademark owners generally seek the defendant’s profits from infringement. But while it is clear that the Trademark Act provides such a remedy, courts are split about what standards to apply. A recent Connecticut case, Romag Fasteners Inc. v. Fossil, Inc., presents the Supreme Court with an opportunity to clarify when and under what circumstances profits may be awarded.
In many areas, the law of remedies can be as important as the law of rights. The strength of a particular right is often commensurate with the remedies a court is willing to grant for violations of that right. Trademark law is one area where that is particularly so. Often, courts award an injunction to stop infringing use of a trademark.
Money damages, however, are harder to obtain – in most competitive markets it is quite difficult to prove the amount lost by the trademark owner due to a competitor’s use of a confusing mark. The traditional answer is to instead award disgorgement of the infringing defendant’s profits, either as a rough proxy of the trademark owner’s loss, or to disgorge unjust enrichment.
A recent Connecticut case, Romag Fasteners Inc. v. Fossil, Inc., presents the Supreme Court with an opportunity to resolve a long-standing dispute in trademark law: whether a prevailing trademark plaintiff must show willfulness to obtain disgorgement of the infringer’s profits. This issue has split federal courts for decades.
Romag owns patents on certain magnetic fasteners used in fashion accessories such as handbags and other small leather goods. It also owns the registered trademark ROMAG for these fasteners.
Fossil designs and markets leather goods; Fossil contracted with Romag for use of its fasteners. Romag later discovered that Fossil had been using counterfeit fasteners. It brought suit for both patent and trademark infringement.
A jury found Fossil to have acted with “callous disregard,” yet not willfully, in infringing Romag’s trademarks and awarded $6.7 Million in profits. The district court, however, applying Second Circuit law, ruled that Romag was not entitled to any profits, as there was no showing of willfulness. On appeal, the Federal Circuit (which heard the appeal because of the patent claim), applied what it viewed as Second Circuit law and affirmed. Romag has petitioned the Supreme Court for review.
The Legal Issue
Section 35 of the Lanham Act provides for monetary remedies, providing that when certain violations of the Act are shown, “the plaintiff shall be entitled . . . subject to the principles of equity, to recover (1) defendant's profits, (2) any damages sustained by the plaintiff, and (3) the costs of the action.” 15 U.S.C. 1117. No mention is made of a showing of willfulness.
Nevertheless, several federal Circuits have held that such is required in order to award the defendant’s profits. The most extensive discussion is in George Basch Co., Inc. v. Blue Coral, Inc., 968 F.2d 1532 (2d Cir. 1992). The Second Circuit held that the phrase “subject to the principles of equity” means that there has to be an equitable basis for disgorgement of profits. The traditional reasons to award profits are (1) to avoid unjust enrichment by the defendant; (2) to compensate the plaintiff for losses which are generally difficult to prove, and (3) as deterrence.
The Second Circuit held, not particularly convincingly, that all three require a showing of willful conduct.Today, three other Circuits – the Eight, Tenth and D.C. – agree and require willfulness in all cases.
Two Circuits – the First and Ninth – require willfulness only when the parties are not in direct competition.
The Third, Fourth, Fifth, Sixth, Seventh, and Eleventh Circuits, in contrast, do not require willfulness in any particular case, although it is a factor to be weighed as part of the “principles of equity.”
The 1999 Amendments
Complicating matters, Congress amended Section 35 of the Lanham Act in 1999, and courts are split as to whether that affected this legal issue. Section 35 at the time provided a list of violations for which its monetary remedies were available: “a violation of any right of the registrant of a mark registered in the Patent and Trademark Office, a violation under section 1125(a) of this title.”
These were, respectively, infringement of a registered trademark or infringement of an unregistered mark. In 1995, Congress added a federal cause of action for trademark dilution, codified at 15 USC 1125(c). In 1999, Congress conformed Section 35 to provide monetary remedies for this new dilution cause of action. It did so by inserting the phrase “or a willful violation under section 1125(c) of this title.” The word “willful” made clear that only willful trademark dilution qualified for monetary relief.
But what does that mean for trademark infringement? That itself has split the courts. The Third Circuit previously held, like the Second Circuit, that willfulness is a per se requirement for an award of profits. But it reversed course in Banjo Buddies, Inc. v. Renosky, 399 F.3d 168 (3d Cir. 2005), reasoning that the use of “willful” for dilution implies that other violations listed in Section 35 – ordinary trademark infringement – do not need to be willful. The Second Circuit has not revisited the issue since 1999.
A minority of district judges in the Second Circuit follow the Third Circuit and hold that George Basch is no longer the law. But most district judges in the Second Circuit reason that the 1999 Amendments have no bearing on the issue.
Rather, all the amendments mean is that Congress wanted to impose a willfulness requirement for dilution cases – it sheds no light on the question at hand. Accordingly, according to these judges George Basch remains the law of the Second Circuit. This is the approach that the Federal Circuit took in Romag, since it was tasked with applying the law of the Second Circuit to the non-patent issues (here trademark issues) in the appeal.
The Mental State: Willfulness or Willful Blindness
Another complication is what exactly is meant by “willful” conduct. Many courts hold that acting with “willful blindness” to the probability of infringement is the legal equivalent of intentional conduct.
In the Romag case, the jury paradoxically found that the infringer acted with “callous disregard” to Romag’s trademark rights. That would qualify as bad faith (or knowing) infringement. Yet the same jury found the infringer not willful.
This issue only heightens the question as to what role the infringer’s mental state should play. “Callous disregard” certainly smacks of bad faith, and weighs in favor of awarding an accounting of profits. If willfulness is a pre-requisite, why does that not qualify?
What The Supreme Court Should Do
The issue here is clearly ripe for Supreme Court review. Even on the narrow question of whether willfulness is a requirement for an award of profits, the Circuits are split three ways: Yes (four circuits), no (six), sometimes (two circuits).
But that itself masks a more subtle issue – for example, among those that do not require willfulness, courts have various approaches as to how a court should decide whether to award profits.
The key statutory phrase is “subject to the principles of equity.” Every federal court agrees that an award of profits is subject to equitable review.
That has a very solid legal foundation. In Champion Spark Plug Co. v. Sanders, 331 U.S. 125, 131 (1947), a case decided about the time of the passage of the Lanham Act, the Supreme Court held that an accounting of profits is not automatic, and may be denied where the equities are satisfied by an injunction.
The issue, then, is how a court should decide whether equity requires an accounting or not. Imposing a willfulness requirement is, in our view, too inflexible. The importance of flexibility in equity has long been emphasized by the Supreme Court.
“The essence of equity jurisdiction has been the power of the Chancellor to do equity and to mold each decree to the necessities of the particular case. Flexibility rather than rigidity has distinguished it.” Hecht Co. v. Bowles, 321 U.S. 321, 329 (1944).
Beyond that, it would be most helpful for the Court to offer guidance as to how courts are to decide whether to award profits, since the circuits are divided on this as well. Many federal courts instruct that a court should balance a variety of “factors” (which includes willfulness), but do not explain how these factors should be put together for consideration.
In our view, the focus should be on whether there is an equitable basis for an award:
unjust enrichment – did the defendant profit because of confusion caused by the trademark infringement?
lost profits – is there some indication that the infringement caused loss to the plaintiff, even if difficult to quantify?
deterrence – was there some bad behavior that needs to be deterred in the future?
Ironically enough, the Supreme Court took such an approach in Champion Spark Plug, supra, and that seems to us to be the most sound way of proceeding.
In any event, what is important is not merely that the Court answer the narrow question of whether willfulness is required, but address the broader issue of how a court is to apply the “principles of equity” to determine whether to make a profits award.
A previous version of this post appeared in the New York Law Journal, April, 20 2017