Trademark Financial Risk (and Rewards0

For any business, it is important to both police and protect your own trademarks and also to avoid adopting a trademark or trade dress that might come to close to a competitor’s protected mark. Considering the financial costs and risks in bringing (or defending) a trademark infringement claim in federal court, you need some awareness of what the trademark owner might possibly recover as a financial award from the court. When any potential trademark infringement question arises, both the trademark owner and the (possibly accused ) infringer need to understand fully understand what types of damages might be available under federal law (the Lanham Act) in view of the fact that a district court has very wide discretion to determine or limit the amount of any damages award.

The US Trademark Act, i.e., Lanham Act, provides for three categories of financial relief that a court may award to a trademark infringement Plaintiff or find against a trademark infringement Defendant: (1) Actual Damages, (2) Disgorgement of the Infringer’s Profits, and (3) Attorney’s Fees and Costs.

Actual damages are the actual, provable losses that the trademark owner had and which resulted from the Defendant’s trademark use (or misuse). This typically requires proof of actual consumer confusion, mistake or deception. This needs a higher burden of proof than what is required to show the “likelihood of confusion” for infringement. Actual damages may be hard to prove as well, because economic losses can occur due to a multitude of factors having nothing to do with the Defendants actions. Because of this most infringement actions if successful only result in an injunction.

Disgorgement of profits is an equitable remedy approximating the defendant’s unfair enrichment from its unfair use of the Plaintiff’s trademark (i.e., the Plaintiff’s reputation and good will). This equitable remedy requires an accounting of Defendant’s profits that resulted from the infringement of the successful Plaintiff’s mark. Plaintiff has to establish Defendant’s gross revenues from the infringement, and then the burden shifts to the Defendant to prove expenses and costs.

The law on this theory of compensation for the infringement has recently changed as a result of a U.S. Supreme Court decision in Romag Fasteners v. Fossil. Prior to that decision, disgorgement of profits was not awarded unless the Plaintiff proved that the Defendant’s infringement was “willful.” Anything less than willfulness, including even callous disregard was not enough. However, in Romag, the Court found that the relevant trademark infringement section of the trademark act did not expressly require willfulness. Court instead stated that evidence of Defendant’s willful mental state is not necessary for disgorgement of defendant’s profits for trademark infringement. However, a concurring opinion pointed out that there is still a requirment for any award to be limited by the principals of equity (i.e., reasonableness and fair play), making a windfall inappropriate where the defendant is well-meaning but infringing . In some cases, defendant’s profits may serve as a proxy for plaintiff’s lost profits, where there are not too many other companies competing.

Reasonable Royalty may also be appropriate, if there is a history of licensing either by the parties or by others in the same field. The object would be to approximate the hypothetical trademark license fee that the Defendant should have paid to Plaintiff instead for the use of the Plaintiff’s mark. Some federal courts require an existing license agreement.

The court may award enhanced damages up to three times the actual damages proved by Plaintiff. Usually this happens if the court perceive that Plaintiff would be under-compensated for the damage caused by the infringement. The court may also award reasonable attorneys fees where the case is seen as “exceptional” (which typically means “egregious”, i.e., the act of a pirate).

When the lawyer counsels a client about a possible trademark infringement matter, either for the potential plaintiff or for the potential infringement defendant, a through explanation of potential damages (and issues in proving or disproving them) should be a chapter in the discussion. There are financial risks and rewards for both parties. A thorough damages discussion in the counseling session can help the client avoid serious financial consequences. Failure to engage in a full discussion of damages may result in the client making poor choices. It may be the job of the Lawyer to bring these topics up, but is certainly within the client’s zone of responsibility to ask.