trademark

In a landmark decision, the U.S. Supreme Court has issued a unanimous ruling in Dewberry Group, Inc. v. Dewberry Engineers Inc. that underscores the importance of corporate separateness in calculating damages for trademark infringement. The Court vacated a $43 million profit disgorgement award, a ruling that has far-reaching implications for corporate liability and the recovery of profits under the Lanham Act.

Case Overview: Dewberry Engineers vs. Dewberry Group
The case centers around Dewberry Engineers, a holder of the “Dewberry” trademark, which filed a lawsuit against Dewberry Group, a competing real estate management company. Dewberry Engineers alleged trademark infringement and unfair competition under the Lanham Act, along with a breach of contract claim under state law. The dispute arose from Dewberry Group’s unauthorized use of the Dewberry trademark in promoting its real estate services, despite a prior settlement agreement that prohibited such use.

The U.S. District Court for the Eastern District of Virginia ruled that Dewberry Group violated the Lanham Act, concluding that the infringement was “intentional, willful, and in bad faith.” Despite Dewberry Group reporting no profits and relying on cash infusions from its owner, the District Court aggregated the profits of Dewberry Group and its affiliates—non-party entities that held income-generating properties—to calculate the damages, awarding nearly $43 million. The Fourth Circuit Court of Appeals affirmed this decision, citing the “economic reality” of Dewberry Group’s operations.

Supreme Court’s Holding: Corporate Separateness Matters
The U.S. Supreme Court reversed the lower court’s decision, ruling that profit disgorgement under the Lanham Act is limited to the profits of the named defendant—Dewberry Group in this case—and does not extend to its non-party affiliates. The Court emphasized the longstanding legal principle that separately incorporated entities are distinct legal units with their own rights and obligations.

In this case, because Dewberry Group’s affiliates were not named as defendants and no evidence was presented to pierce the corporate veil, the Court held that the profits of these affiliates could not be included in calculating “defendant’s profits” under 15 U.S.C. § 1117(a). As the Court noted in remanding the case for a new damages award, “The ‘defendant’s profits’ are the defendant’s profits, not its plus its affiliates.”

Key Unanswered Questions
While the Court addressed the issue of corporate separateness, it did not fully resolve several critical aspects of the case. Specifically, the Court declined to comment on whether the lower court could have used the Lanham Act’s “just-sum” provision (15 U.S.C. § 1117(a)) to award a more equitable recovery by considering affiliate profits. This provision allows courts to adjust profit-based recovery when it is deemed “inadequate or excessive,” but the Supreme Court did not rule on whether this approach would have been appropriate.

Additionally, the Court did not address whether plaintiffs could rely on other methods—such as looking beyond a defendant’s accounting records—to assess the “true financial gain” of an infringing party. Nor did it definitively rule on the potential for veil-piercing, leaving open the possibility for future arguments regarding corporate formalities and liability.

Justice Sotomayor’s Concurring Opinion: A Caution on Creative Accounting
In her concurring opinion, Justice Sonia Sotomayor raised concerns that corporate separateness could be exploited by defendants to avoid liability through creative accounting. She urged that courts remain vigilant in considering “economic realities” when calculating trademark infringement damages. Justice Sotomayor suggested that the trial court might reopen the record to explore methods of calculating profits that go beyond a defendant’s books, particularly when analyzing financial inflows from affiliates.

Implications for Trademark Owners and Businesses
The Supreme Court’s ruling highlights the importance of corporate formalities and the need for careful litigation strategy. Trademark owners pursuing Lanham Act claims must ensure they identify and include all relevant entities from the outset of litigation, especially when dealing with related or affiliate companies that may have benefited from the infringement.

Failing to name all responsible parties could result in an unenforceable judgment, even if the defendant is found liable. Plaintiffs should also consider whether a veil-piercing argument could be made in cases where affiliates may be used to shield profits from infringement.

While the Court’s decision focused narrowly on the aggregation of affiliate profits, it left open significant questions regarding the methods available for determining a defendant’s true financial gain. This leaves room for further litigation on the most accurate and fair way to calculate damages under the Lanham Act.

Conclusion
The Dewberry Group decision reinforces the principle that corporate separateness must be respected in calculating trademark infringement damages under the Lanham Act. It also raises important considerations for plaintiffs in trademark disputes, urging early and strategic planning to ensure a comprehensive approach to damages. While the Court’s ruling narrows the scope of profit recovery, it also leaves open avenues for creative legal arguments and future litigation on corporate liability.