On April 21, 2020, the U.S. Supreme Court resolved a long-unsettled issue in trademark law, holding that Section 43(a) of the Lanham Act enables a trademark owner to recover the profits earned by an infringer without proving that its infringement was willful.
Generally, Section 43(a) of the Lanham Act is a federal unfair competition statute providing individuals and businesses with a civil remedy against anyone who, in connection with any goods or services, uses a trademark or makes a description of fact that is likely to cause confusion or to deceive purchasers about his or her affiliation or connection with another. The statute is frequently invoked as the vehicle for asserting claims for trademark infringement and false advertising. The statute permits a plaintiff to recover its damages resulting from the defendant’s wrongful activities. It also permits a plaintiff, consistent with principles of equity, to recover the profits that the defendant earned through those activities.
The potential that a defendant can be ordered to disgorge the profits it earned through trademark infringement or false advertising is often a powerful litigation advantage for a plaintiff because it can substantially increase the defendant’s financial risk in the event it loses the case. As a practical matter, the remedy is also tilted heavily in the plaintiff’s favor because it does not require the plaintiff to prove the amount of the defendant’s profits resulting from its wrongful activities. Rather, a plaintiff satisfies its burden merely by establishing the defendant’s revenues attributable to its trademark infringement or false advertising; the law places on the defendant the more difficult burden of proving the costs it incurred to derive those revenues that can be properly deducted to determine its profits.
Over the years a split has developed in the federal courts about the proof required for a plaintiff to recover the defendant’s profits in a Section 43(a) case. Some courts held that a defendant’s profits could be recovered only upon a showing that the defendant’s wrongful activities were willful. Other courts refused to require proof of the defendant’s willfulness as a prerequisite for a plaintiff to recover the profits it derived through its wrongful activities.
In Romag Fasteners, Inc. v. Fossil Group, Inc., a unanimous U.S. Supreme Court resolved the federal courts’ differing positions on this issue, holding that proof of a defendant’s willfulness is not a prerequisite to a plaintiff’s recovery of a defendant’s profits under Section 43(a). Writing for the court, Justice Gorsuch observed as an initial matter that the text of Section 43(a) contains no requirement that a plaintiff prove willfulness to recover a defendant’s profits. Section 43(c), by contrast, explicitly makes proof of willfulness a precondition to a plaintiff’s recovery of profits in an action under that section, and other provisions of the Lanham Act likewise specify when proof of a defendant’s state of mind is required to prove liability or damages. Because the statute thus speaks “often and expressly” about mental states, the absence of any such standard in Section 43(a) demonstrates that proof of willfulness was never intended as a precondition to recovery of profits under that portion of the statute. Justice Gorsuch noted that “a trademark defendant’s mental state is a highly important consideration in determining whether an award of profits is appropriate” under Section 43(a), but that is still “a far cry” from insisting on proof of willfulness as an “inflexible precondition” to a profits recovery.
A question the decision presents is whether profits may be recovered, consistent with principles of equity, where infringement arises from a defendant’s negligence or where the defendant acts entirely in good faith and without knowledge of the plaintiff’s trademark rights. Justice Gorsuch’s opinion points out that some pre-Lanham Act decisions held that a defendant could be required to disgorge its profits only if it knowingly or fraudulently infringed the plaintiff’s trademark, but other decisions allowed recovery of profits even where the defendant did not know of the plaintiff’s trademark. Thus, while Justice Gorsuch’s opinion confirms that a defendant’s mental state is important for a court to consider in deciding whether defendant’s profits should be awarded to a plaintiff, the opinion arguably leaves open the potential that disgorgement of profits might be appropriate even if the defendant’s infringement was the result of a good faith or negligent mistake.
In a separate concurrence, Justice Sotomayor registered her disagreement with the opinion’s “agnostic[ism] about awarding profits for both ‘willful’ and innocent infringement.” While agreeing with Justice Gorsuch that proof of willfulness was not an inflexible prerequisite to recovery of profits under Section 43(a), Justice Sotomayor argued that the weight of pre-Lanham Act authority did not permit recovery of profits where a defendant acted in good faith or without knowledge of the plaintiff’s rights. Justice Sotomayor therefore concluded that awarding profits in situations involving innocent infringement would not be consistent with principles of equity. Implicit in Justice Sotomayor’s concurrence, however, is an understanding that Justice Gorsuch’s opinion correctly holds that profits could be appropriately awarded not only for intentional infringement but, potentially, for infringement that is reckless or even negligent.
Plaintiffs may attempt to extend the decision’s reasoning to the judicially-created requirement for a showing of willfulness by the defendant before the court will exercise its power under another provision of the Lanham Act to award enhanced damages to a successful plaintiff in a Section 43(a) case. As with the statutory provision authorizing an award of profits, there is no explicit statutory text limiting an award of enhanced damages in a Section 43(a) case only to situations in which a defendant is shown to have acted willfully, so plaintiffs may argue that enhanced damages conceptually could be awarded based upon infringement resulting from a defendant’s recklessness or negligence.
The decision is significant to trademark and brand owners, as well as businesses harmed by false advertising, because it confirms that a defendant not only can be held liable for damages in an action under Section 43(a) but also can be ordered to cough up all of the profits it earned through its wrongful activities – without proof that it acted willfully or intentionally. A defendant likewise could be required to pay up to treble damages in situations in which its conduct was reckless or merely a negligent mistake.
The decision also serves as a strong reminder of the importance for businesses and individuals to conduct a thorough search of trademarks already in use before launching a new trademark, because the risk associated with infringement could include the loss of all of its profits earned in association with its new trademark and – potentially – enhanced damages under Section 43(a), even if its infringement was the result of negligence or a poorly-constructed investigation.