Road to Recovery: Recouping Profits From Trademark Infringement

BACKGROUND

Since 1947, the Lanham Act (also known as the Trademark Act of 1946) has governed trademark infringement litigation in the United States. When a defendant is found to have infringed on a plaintiff’s trademark under § 1125 of the Act, § 1117(a) allows the plaintiff to recover the defendant’s profits from the violation. It was never entirely clear whether the infringement must be willful in order for the plaintiff to recover. However, in 1999, Congress added to the confusion. That year, Congress amended § 1117 of the Act, allowing profits, damages to the plaintiff, and costs to be recovered for a violation under section 43(a) or (d), or a willful violation under section 43(c).

THE ISSUE

The statutory construction of §1117(a) appears to attach the word “willful” only to dilution-related violations under §1125(c). However, the statute requires recovery to be “subject to the principles of equity,” which suggests judicial discretion on the matter. If the courts decide that willful conduct is required for plaintiffs to recover, will that result in unjust enrichment of unwittingly infringing defendants? Or do the principles of equity point the courts away from punishing unintentional violators?

The question dividing the courts is as follows: Does §1117(a) allow a plaintiff to recover a defendant’s profits from an unintentional violation of a trademark?

THE SPLIT

There are two sides to this split: The first view generally requires the defendant’s conduct to be willful in order for a plaintiff to recover profits. This includes the First, Second, Eighth, Ninth, Tenth, and D.C. Circuits. The treatment of willfulness does have some variation within this side. For example, the First Circuit only requires evidence of willful infringement in cases where the parties were not direct competitors. In Fishman Transducers, Inc. v. Paul (2012), the First Circuit described the direct competition rule as an exception to the willfulness requirement.

The second view does not require willfulness for a plaintiff to recover. Instead, willfulness is often treated as one factor in a multi-factor test for recovery, and in other circuits, one situation in which recovery is warranted. This general side is represented by the Third, Fourth, Fifth, Sixth, Seventh, and Eleventh Circuits. The Eleventh Circuit illustrated its multiple-situations approach in Optimum Techs., Inc. v. Home Depot U.S.A., Inc. (2007). In this opinion, the court listed as potential circumstances leading to recovery: “(1) the defendant’s conduct was willful and deliberate, (2) the defendant was unjustly enriched, or (3) it is necessary to deter future conduct.” Based on the logic of the Optimum opinion, the absence of willful conduct may yield a requirement of causation between the infringement and the enrichment of the defendant through sales. There is a strong consideration of unjust enrichment in these circuits.

It should be noted that in no Circuit can a plaintiff automatically recover profits from an infringing defendant. Even when willfulness is not a requirement, recovery is still “subject to the principles of equity” through varying tests.

LOOKING FORWARD

The Supreme Court will directly address this issue in the upcoming term. On June 28, the Court granted the petition for certiorari to hear Romag Fasteners, Inc. v. Fossil, Inc. In this case, Fossil was found to have unwilfully infringed on Romag’s trademark. The Second Circuit applied its longstanding willfulness requirement and affirmed a judgment barring recovery of profits from Fossil. In its respondent brief, Fossil argued that “no meaningful conflict exists,” asserting that in the Circuits hearing the majority of trademark cases (the Second and Ninth), the willfulness requirement prevails. Fossil also claims that even in circuits treating willfulness as a factor, it is rare for a plaintiff to recover in its absence.

As the case awaits adjudication, the Intellectual Property Owners Association has filed an amicus brief in favor of the interpretation requiring willfulness for recovery. In its brief, the Association argued that prior to the addition of the word “willful” in 1999, courts largely held willfulness as a requirement based on the “principles of equity” language of the statute. The American Intellectual Property Law Association disagreed with that statement in its amicus brief, calling a willfulness requirement “antithetical to the principles of equity.” The majority of amicus briefs already filed appear to align more closely with the latter view.

If the petitioners prevail, there is no guarantee that they will recover. However, a verdict for either party would most likely change the standard for recovery in half of the circuits. The decades-long difference in approaches will hopefully be resolved and provide a more uniform law nationwide.

Nominative Use: A Three-Way Split

Today, we’ll tackle a trademark problem ripe for picking by SCOTUS—nominative use.

 What Are Trademarks?

A trademark is a word, phrase, symbol, and/or design that identifies and distinguishes the source of the goods of one party from those of others. Unlike patents which require a lengthy registration process to have any legal redress, trademarks can gain some initial legal protection under common law via mere use.

For those individuals wanting to give more protective #oomph to the holder of a mark, one can register their mark with the US Patent and Trademark Office, granting federal trademark protection under the Lanham Act, 15 U.S.C. §1051 et.seq.

While the Lanham Act covers a wide range of topics ranging from the gamut of procedures for obtaining federal trademark recognition, the various types of marks that the law recognizes, and specific international trademark protections, our focus turns on the causes of action for infringement granted under the Lanham Act, 15 U.S.C. §1114. Specifically, an individual is liable in a civil action commenced by a trademark registrant whenever any person without the registrant’s consent:

use[s] in commerce any reproduction, counterfeit, copy, or colorable imitation of a registered mark in connection with the sale, offering for sale, distribution, or advertising of any goods or services on or in connection with which such use is likely to cause confusion, or to cause mistake, or to deceive…

The importance of such a liability rule is plain—absent protection, a third-rate shoe manufacturer could use the Nike “swoosh” at their leisure, marketing their shoes to consumers who might believe that the pair of kicks they are purchasing are name-brand, not knock-offs. While seemingly straightforward, courts take differing stances on how infringement actions are analyzed and ruled on.

A (trade)Marked Split

The Ninth Circuit established nominative use in 1992, in New Kids on the Block v. News America Pub. Inc. New Kids on the Block v. News America Pub. Inc.

In a move to prevent inordinate control of their fans, New Kids on the Block brought suit against News America for use of the term “New Kids” as part of their phone survey hotline (incidentally focused on the members of the band). The Ninth Circuit reasoned that a strict construction of trademark exclusivity would lead to a practical impossibility in describing well-known products by generic names, bringing up examples of using the phrase “the professional basketball team from Chicago” in lieu of the Chicago Bulls. To facilitate fair use of trademarks, the Ninth Circuit posited the doctrine of “nominative use”:

a non-trademark use of a mark . . . [occurs when a]…trademark does not attempt to capitalize on consumer confusion or to appropriate the cachet of one product for a different one. Such nominative use of a mark—where the only word reasonably available to describe a particular thing is pressed into service—lies outside the strictures of trademark law [and cannot be said to promote unfair competition]…a commercial user is entitled [nominative fair use] provided he meets the following . . . (1) the product or service in question must be one not readily identifiable without use of the trademark; (2) only so much of the mark or marks may be used as is reasonably necessary to identify the product or service; and (3) the user must do nothing that would, in conjunction with the mark, suggest sponsorship or endorsement by the trademark holder.

The Third Circuit, in 2005, offered a slightly different formulation:

(1) that the use of plaintiff’s mark is necessary to describe both the plaintiff’s product or service and the defendant’s product or service; (2) that the defendant uses only so much of the plaintiff’s mark as is necessary to describe plaintiff’s product; and (3) that the defendant’s conduct or language reflect the true and accurate relationship between plaintiff and defendant’s products or services.

Keeping these two distinct approaches to trademark infringement analysis in mind, the Second Circuit recently complicated the matter in International Information Systems Sec. Certification Consortium, Inc. v. Security University, LLC (2016).

Information Systems brought suit against Security University for allegedly using a particular certification trademark used by Information Systems to denote passing a certain stage of computer security exams, and on appeal the Second Circuit held that the infringement was erroneously evaluated at trial based on the Ninth Circuit’s test for nominative use and not on the Polaroid factors.

The court noted that Information Systems’s mark was part of a special class of marks that are intended to be used by individuals other than the registrant, explaining that:

[the mark in question] is meant to certify quality and characteristics . . .[despite] the differences between certification marks and other types of marks, the Lanham Act provides that certification marks are generally entitled to the same protection from infringement as are trademarks . . . except when used so as to represent falsely that the owner or a user thereof makes or sells the goods or performs the services on or in connection with which such mark is used . . .

In using only the nominative use test, the trial court apparently failed to take into account other ways that trademarks can be infringed under the Polaroid test even if the test factors do not all apply.

In highlighting the weakness of source confusion in the Ninth Circuit test and the inadequacies found in similar nominative use tests in the Third Circuit, the Second Circuit ultimately overturned its own precedent by adopting a much more expansive test for trademark infringement, stating that:

[while there is] no reason to replace the Polaroid test . . . [we recognize that the] the Polaroid factors are a bad fit here and that we have repeatedly emphasized that the Polaroid factors are non-exclusive . . . [and we] “have recognized that a defendant may lawfully use a plaintiff’s trademark where doing so is necessary to describe the plaintiff’s product and does not imply a false affiliation or endorsement by the plaintiff of the defendant . . . [As a result,] district courts are to consider the Ninth Circuit and Third Circuit’s nominative fair use factors, in addition to the Polaroid factors…

Looking Forward

Based on this ruling by the Second Circuit, there are three (somewhat different, somewhat the same) approaches to nominative use. For litigants in the Second Circuit, the mélange approach could potentially require 15 different factors to be considered. Unfortunately, with the recent denial of certiorari, business owners and trademark attorneys across the country must continue to deal with the confusion.

For further reading, see what firms Morgan Lewis & Bockius and Arent Fox have to say on the matter.