Supreme Court Nixes Fourth Circuit Ruling on Affiliate Profits Award in Trademark Case

Supreme Court Justice Elena Kagan today handed down an opinion in a trademark case holding that the prevailing plaintiff in a trademark infringement suit between two marketing real estate development services companies is not entitled to the profits of its competitor’s affiliates because it did not name them in its complaint.

The case stems from the August 2023 U.S. Court of Appeals for the Fourth Circuit ruling in Dewberry Engineers Inc. v. Dewberry Group, Inc. affirming a series of district court orders, including a $43 million profit disgorgement award for trademark infringement, which included the profits of the Group’ affiliates. The Fourth Circuit also affirmed an attorneys’ fees award for pervasive breaches of a previous agreement settling trademark claims between the commercial real estate firms in the case. Dewberry Group petitioned the Supreme Court and that petition was granted last June.

The petition challenged the Fourth Circuit’s endorsement of reaching into profits earned by affiliates who were not included as defendants in the case without any regard to principles of corporate veil piercing. In November, the Court granted leave for the U.S. Solicitor General (SG) to participate in oral arguments. The SG supported Dewberry Group’s effort to overturn the Fourth Circuit’s ruling, but both it and another amicus filing underscored that the economic realities of trademarks allow consideration of affiliates’ financial gains without disregarding corporate veil piercing principles.

During oral argument, Nicholas Crown, representing the SG’s views, acknowledged that the profits award affirmed by the Fourth Circuit was not consistent with principles of corporate separateness, but advanced the federal government’s view that lower courts could calculate profits in a way that addresses Dewberry Group’s attempts to disguise economic reality without crossing lines of corporate separateness. Given the closely held nature of the Group’s affiliates, Crown argued that the court’s profits inquiry should ask what the defendant would charge unaffiliated entities for the same services through arm’s length negotiations.

The arguments focused heavily on whether the $43 million profits award was authorized under the just sum provision of 15 U.S.C. § 1117(a) given the circuit court’s scant consideration of equitable considerations and the unique facts of the case, in which the defendant property management firm claimed 30 years of losses and the entire profits award was calculated from revenues held by affiliated real estate holding entities having the same sole owner as the defendant. Acknowledging that equity allows a court to look past the defendant’s own financial accounting to understand the true economic reality of a situation, Thomas Hungar, Counsel for Dewberry Group, argued that principles of equity encompassed by the just sum provision only entitle Dewberry Engineers to profits actually owned by Group. As a service provider contracting with the affiliates’ tenants, Group was not itself entitled to the rents collected by its affiliates, making the profits award justifiable only under expressly stated equitable principles of corporate veil piercing or alter ego.

But Dewberry Engineers argued that, while the Fourth Circuit could have conducted a more express analysis, the just sum provision provides lower courts with the discretion to rely on the revenues of the Group’s affiliates as evidence of Group’s true financial gain. When asked by Justice Clarence Thomas why the Engineers didn’t sue the affiliate entities, Elbert Lin, counsel for Engineers, responded that Engineers acted on property ownership representations made on Dewberry Group’s website.

The Supreme Court’s opinion ultimately expressed no view on the SG’s middle-ground proposals and left it up to the courts on remand to decide whether to consider them. The Court also left unaddressed whether Dewberry Engineers’ understanding of the just-sum provision is correct; “whether (or how) they could have used the provision”; or “whether Dewberry Engineers may press its just-sum theory on remand given forfeiture rules.” The justices also offered “no opinion on whether, as raised during oral argument here, corporate veil-piercing is an available option on remand.”

The Court said only that “[t]he statutory text authorizing a profits award for trademark infringement offers no support for the approach the courts below took.” Its holding ultimately stated:

“In awarding the ‘defendant’s profits’ to the prevailing plaintiff in a trademark Infringement suit under the Lanham Act, §1117(a), a court can award only profits ascribable to the ‘defendant’ itself. And the term “defendant” bears its usual legal meaning: the party against whom relief or recovery is sought—here, Dewberry Group. The Engineers chose not to add the Group’s affiliates as defendants. Accordingly, the affiliates’ profits are not the (statutorily disgorgable) ‘defendant’s profits’ as ordinarily understood.”

The case was therefore vacated and remanded.

While the opinion was unanimous, Justice Sonia Sotomayor wrote separately “to underscore that principles of corporate separateness do not blind courts to economic realities. Nor do they force courts to accept clever accounting, including efforts to obscure a defendant’s true financial gain.” Sotomayor offered two examples of instances in which a court “might consider accounting arrangements between a defendant and its affiliates in calculating a ‘defendant’s profits.’” She added: “This is all to say that principles of corporate separateness do not force courts to close their eyes to practical realities in calculating a ‘defendant’s profits,'” and urged the courts to heed those words on remand.

Evan Everist of Dorsey & Whitney commented in an emailed statement that “with a $43 million judgment erased, this nearly 20-year legal battle seems far from over and, should it continue, the lower courts will need to grapple with these unanswered questions.”

David Bell of Haynes Boone added that the impact of the decision “might come more from what the Court didn’t say.” He explained: “It did not repudiate or outright dismiss any of the potential theories for a remedy to exceed the named defendant’s profits.  This in turn may open the door to more plaintiffs trying the just-sum provision or other alternative methods of obtaining profits from non-party related entities.”

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Author: Willard
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