Supreme Court Rules Disgorgement of Profits Remedy Cannot Include Profits Attributable To Corporate Affiliates By Sean D. Garrison with assistance from Craig Garrison

The U.S. Supreme Court has issued its latest opinion in a trademark infringement case - this time ruling on the scope of the remedy for a disgorgement of an infringer's profits.  The case, Dewberry Group v. Dewberry Engineers, involved a long-running dispute between two companies in the real estate industry.  The Supreme Court vacated a $43 million disgorgement of profits judgment entered against Dewberry Group and remanded the case for further consideration.

Dewberry Engineers owns registered trademarks for "Dewberry" in connection with real estate development and other services.  In 2007, it sued Dewberry Group for infringement, which led to a settlement agreement between the two parties limiting Dewberry Group's use of the word "Dewberry."  About a decade later, Dewberry Group breached the settlement agreement and resumed using "Dewberry" in marketing and other materials used to lease commercial properties that were owned and leased by various corporate affiliates.  Dewberry Group and its affiliates are all owned by John Dewberry.  Under their corporate structure, Dewberry Group provides certain administrative, legal and other services to the corporate affiliates needed to generate rental income from properties they owned.  The affiliates, which have no employees, were not names as defendants in this case.  All rental income from the properties was attributed to the various corporate affiliates, which then paid Dewberry Group agreed-upon fees for its services, which were generally set at below market rates.  As a result, Dewberry Group consistently operates at a loss, reporting no profit on its taxes, and needing cash infusions from John Dewberry to survive.

Dewberry Engineers prevailed at trial and was awarded $43 million under the provision in the Lanham Act that allows a prevailing plaintiff to recover the "defendants profits."  In determining the amount of the award, the trial court took into consideration the rental income attributed to Dewberry Group's corporate affiliates.  The trial court decided to treat the Dewberry Group and its affiliates as a "single corporate entity" to reflect their "economic reality" of how they operated.  The District Court found Dewberry Group liable on all counts of alleged trademark infringement, unfair competition under the federal Lanham Act, and breach of contract under state law and that those violations were "intentional, willful, and in bad faith."  That judgment was affirmed on appeal to the 4th Circuit Court of Appeals.

The Supreme Court held that courts cannot ignore corporate formalities in rendering a disgorgement of profits award and that the lower court erred in combining the profits of Dewberry Group with its affiliates, as the affiliates are not named defendants.  Specifically, it held that "the courts below were wrong to treat Dewberry Group and its affiliates as a single entity in calculating the defendant's profits."  Therefore, the affiliates profits are not the "defendant's profits."  Not surprisingly, the Supreme Court vacated the judgment stating "Dewberry Group is the sole defendant here, and under that language only its own profits are recoverable."  A pretty straightforward result.

Of interest, however, is Justice Sotomayor's concurring opinion which may offer a roadmap for the plaintiff on remand.  Citing prior tax cases, she noted that where evidence establishes that the defendant did not engage in arm's length transactions with its affiliates and charged below market rates for its services to those affiliates, courts might consider whether this arrangement constitutes an anticipatory assignment of the defendant's profits to its affiliate.  Or the court might also consider whether the common owner of the defendant and its affiliates had effectively subsidized the below market rates by making cash infusions to the defendant, artificially reducing its profits.  In essence, Justice Sotomayor explained that "principles of corporate separateness do not blind the courts to economic realities" or force them "to accept clever accounting, including efforts to obscure a defendant's true financial gain through arrangements with affiliates."  So, perhaps there is still an avenue for Dewberry Engineers to obtain at least some award against Dewberry Group.  What remains a mystery to those not involved in the case is why Dewberry Engineers did not name the affiliates and John Dewberry, as the guiding force, as defendants in the first instance.