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LANHAM ACT DAMAGES – What Is the Plaintiff’s Burden?

Posted in Trademark Law

by Dale C. Campbell

 

Section 43(a) the Lanham Act provides for liability related to unregistered marks. Section 43(a) provides for civil liability for any person who, IN connection with any goods or service uses in commerce any word, term, name, symbol or any combination thereof, or any false designation origin, false or misleading description of fact or false or misleading misrepresentation of which (a) is likely to cause confusion as to the origin, sponsorship or approval of the goods or services by another person or (b) in commercial advertising or promotion misrepresents the nature, character qualities or origin of his or her good, service or commercial activity. Subsection (a) is commonly known as the false origin claim and subsection (b) is commonly known as false advertising claim. In short, one can’t be liable for claims of false origin even if the statements are not made in the course of commercial advertising or promotion as required in subsection (b).

Under 15 U.S.C. § 1117(a), plaintiff is entitled to recover, subject to principals of equity: (1) defendant’s profit; (2) any damages sustained by plaintiff; and (3) the cost of the action. The court shall assess profits and damages or cause the same to be assessed under its direction. In assessing profits, the plaintiff shall be required to prove defendant’s sales only; defendant must prove all elements of cost or deduction claimed.

A plaintiff frequently elects to rely on defendant’s profits rather than attempt to prove its own damages. Defendant’s profits may be greater than the plaintiff’s damages and, perhaps more importantly, reliance on defendant’s profits is often easier to prove and does not require the plaintiff to disclose its own internal financial information or deal with the requirement to prove damages with reasonable certainty; without undue speculation.

           

The Seventh Circuit Court of Appeal issued a decision in late 2008 which addressed the issues of legal standards for damages under the Lanham Act. WMS Gaming, Inc. v. WPC Productions, Ltd. Plaintiff and defendant were both engaged in internet gaming on an international basis. Defendant had been utilizing plaintiff’s registered trademarks during the years 2004 through 2006.  Defendant predominantly displayed plaintiff’s marks on its website and other marketing materials. Defendants had refused numerous demands to take down the marks and, in fact, refused to defend a lawsuit thereby allowing entry of default judgment. At the prove up hearing, the District Court focused just on plaintiff’s damages based upon its interpretation of the complaint as seeking only damages, rather than an award for an accounting of defendant’s profits. The District Court also found that the evidence plaintiff submitted with respect to defendant’s profit did not identify which portion of that revenue was attributable to the games that infringed plaintiff’s mark. 

           

The Seventh Circuit Court of Appeal reversed stating that the plaintiff has the alternative of pursuing defendant’s profits or plaintiff’s damages citing a Supreme Court decision from nearly a century ago, in Hamilton-Brown Shoe Company v. Wolf Brothers & Company 240 U.S. 251 (1916). In Hamilton-Brown, the Supreme Court stated: “The owner of the trademark is entitled to so much of the profit as resulted from the use of the trademark.” The Supreme Court ruled that the burden would be on defendant to establish any proper cost to deduct from the entire revenue stream as well as to try to identify any element of profit that was intrinsic to the product, not attributable to the use of the name. The Appellate Court in WMS Gaming found that the District Court improperly placed the burden upon plaintiff to show which of defendant’s sales were attributable to the use of plaintiff’s mark stating: “When a trademark plaintiff offers evidence of infringing sales and the infringer fails to carry its statutory burden to offer evidence of deductions, the plaintiff’s entitlement to profits under the Lanham Act is equal to the infringer’s gross sales.” 

           

The litigants in a Lanham Act case must be careful not to assume too much with respect to the legal issues related to recovery of defendant’s profits versus plaintiff’s damages. Not all uses of a mark constitutes commercial advertising such as in the WMS Gaming or other leading cases dealing with the option of pursuing defendant’s profits. Subdivision 43(a)(1)(b) of the Lanham  Act requires that the confusing word or phrase be used “in commercial advertising or promotion.” The Circuit Courts which have addressed this issue instruct that a defendant cannot be liable for violating the Lanham Act on a false advertising claim unless, among other things, the complained of communications were part of an overall strategic marketing plan. Fashion Boutique of Short Hills, Inc. v. Fendi USA, Inc. 134 F.3d 48 (2nd Cir. 2002). In Fendi, various sales persons had made disparaging comments stating that the defendant sold fake merchandise. The Second Circuit found that plaintiffs could only establish approximately 30 such false and misleading comments and therefore plaintiff had not established that the misrepresentations were used in “commercial advertising or promotion.” The court held: “The touchstone of whether a defendant’s actions may be considered ‘internal advertising or promotion’ under the Lanham Act is that the contested representations are part of an organized campaign to penetrate the relevant markets. Proof of widespread dissemination within the relevant industry is normal concomitant of meeting this requirement. Thus, businesses harmed by isolated disparaging statements do not have redress under the Lanham  Act, but instead must seek redress under state law causes of action. Fashion Boutique, Id. at 56.

           

If a defendant utilizes plaintiff’s mark in something other than a “commercial advertising or promotion” the plaintiff need do more than just establish a few isolated uses of its mark in order to seek all of plaintiff’s profits. The Ninth Circuit has addressed this issue in Lindy Pen Company, Inc. v. Bic Pen Company, Inc. 982 F.2d 1400 (9th Cir. 1993). The Lindy court found that one of the hallmarks of trademark infringement is that, should a plaintiff be able to infringement, it is only entitled to recover damages directly caused by the infringement. Citing Rolex Watch v. Michel Company 179 F.3d 704, 712 (9th Cir. 1999). The “plaintiff must prove both the fact and the amount of damage.” Lindy Pen at p. 1407. Furthermore, a jury cannot infer trademark damages based solely on evidence of a decline in sales or willful misconduct; the law requires plaintiffs to distinguish between damages caused by lawful and unlawful conduct. Computer Access Tech. Corp. v. CatalystEnters, Inc. 273 F.Supp.2d 1063, 1074 (N.D. Cal. 2003). 

           

The Lanham Act provides broad and varying remedies available to a plaintiff. However, the plaintiff must not treat the issue of damages cavalierly by relying on case law affirming defendant’s obligation to present evidence of costs or what elements of gross sales are not attributable to the use of plaintiff’s mark. Lawsuits alleging sufficient wrongful acts constituting commercial advertising or promotions offers plaintiff a wide ranging options to seek either its damages or defendant’s profits. However, in false origin cases or false statement cases not involving commercial advertising or promotion, plaintiff still has the burden of proving the isolated wrongful acts and causal connection between those acts and either plaintiff’s damages or defendant’s profits. The burden shifting provisions of the Lanham Act work well in commercial advertising promotion cases; but cannot be applied in ways to seek all of defendant’s profits from all business activities if plaintiff is only able to establish isolated infringing use of the mark or isolated misleading statements.