Episode 124
Opinion Summary: Dewberry Group, Inc. v. Dewberry Engineers Inc. | Date Decided: 2/26/25 | Case No. 23-900
The question presented in this case is: Whether an award of the "defendant's profits" under the Lanham Act, 15 U.S.C. § 1117(a), can include an order for the defendant to disgorge the distinct profits of legally separate non-party corporate affiliates.
The Supreme Court held: In awarding the “defendant’s profits” to the prevailing plaintiff in a trademark infringement suit under the Lanham Act, §1117(a), a court can award only profits ascribable to the “defendant” itself. And the term “defendant” bears its usual legal meaning: the party against whom relief or recovery is sought—here, Dewberry Group. The Engineers chose not to add the Group’s affiliates as defendants. Accordingly, the affiliates’ profits are not the (statutorily disgorgable) “defendant’s profits” as ordinarily understood.
Transcript
V.
Speaker A:Dewberry Engineers, Inc.
Speaker A:Case number 23 900.
Speaker A:The question presented in this case is whether an award of the defendant's profits under the Lanham Act, 15 U.S.C.
Speaker A: section: Speaker A:Justice Kagan delivered the opinion for a unanimous court.
Speaker A:Justice Sotomayor filed a concurring opinion.
Speaker A:Please note that this summary is read by an automated voice.
Speaker B:Justice Kagan's unanimous opinion the Federal Lanham act provides for a prevailing plaintiff to recover the defendant's profits deriving from improper use of a mark.
Speaker B: USC Section: Speaker B:Dewberry engineers successfully sued Dewberry Group, a competitor real estate development company, for trademark infringement under the Lanham Act.
Speaker B:Dubarry Group provides services needed to generate rental income from properties owned by separately incorporated affiliates.
Speaker B:That income goes on the affiliates books.
Speaker B:Dewberry Group receives only agreed upon fees, and those fees are apparently set at less than market rates.
Speaker B:The group has operated at a loss for decades, surviving only through cash infusions by John Dewberry, who owns both the group and the affiliates.
Speaker B:To reflect that economic reality, the District Court treated Dewberry Group and its affiliates as a single corporate entity for purposes of calculating a profits award.
Speaker B:The District Court thus totaled the affiliates real estate profits from the years Dewberry Group infringed, producing an award of nearly $43 million.
Speaker B: under the lanham Act, Section: Speaker B:Here, Dewberry Group the engineers chose not to add the group's affiliates as defendants.
Speaker B:Accordingly, the affiliates profits are not the statutorily disgorgeable defendants profits as ordinarily understood.
Speaker B:Nor do background principles of corporate law convert the one into the other.
Speaker B:This Court has often read federal statutes to incorporate such principles.
Speaker B:So if corporate law treated all affiliated companies as a single corporate entity, there could be reason to construe the term defendant in the same vein.
Speaker B:C.
Speaker B:United States vs Best Foods, 524 U.S.
Speaker B:51.
Speaker B:62.
Speaker B:But the usual rule is the opposite.
Speaker B:It is long settled as a matter of American corporate law that separately incorporated organizations are separate legal units with distinct legal rights and obligations Agency for International Development Vers.
Speaker B:Alliance for Open Society International, Inc.
Speaker B:591, 430, 435 and that is so even if the entities are affiliated as they are here by virtue of having a common owner.
Speaker B:While a court may, in select circumstances pierce the corporate veil, especially to prevent corporate formalities from shielding fraudulent conduct, Best Foods, 524us@62 Dewberry Engineers admits that it never tried to make the showing needed for veil piercing.
Speaker B:So the demand to respect corporate formalities remains, and that demand accords with the Lanham Act's text the defendant's profits are the defendant's profits, not its plus its affiliates.
Speaker B:Dewberry Engineers does not contest these points.
Speaker B:It instead argues that a court may take account of an affiliate's profits under a later sentence in the Lanimax Remedies section.
Speaker B:If the court shall find that the amount of the recovery based on profits is either inadequate or excessive, the court may, in its discretion, enter judgment for such sum as the court shall find to be just according to the circumstances.
Speaker B: Section: Speaker B:Brief for respondent 24 and at that second step of the process, the court can consider as relevant evidence the profits of related entities.
Speaker B:But the district court did not rely on the just sum provision.
Speaker B:It simply treated Dewberry Group and its affiliates as a single corporate entity in calculating the defendant's profits, and the Fourth Circuit approved that approach, thinking it justifiable in the circumstances to ignore the corporate separateness of the affiliated companies.
Speaker B:The just sum provision did not come into the analysis and therefore does not support the $43 million award given.
Speaker B:In remanding this case for a new award proceeding, the Court leaves a number of questions unaddressed.
Speaker B:The Court expresses no view on whether or how the courts could have used the just sum provision to support a profits award, whether or how courts can look behind a defendant's tax or accounting records to consider a defendant's true financial gain even without relying on the just sum provision and whether veil piercing remains an available option.
Speaker B: Put: Speaker C:I join in full the Court's opinion, which holds that courts must respect principles of corporate separateness in calculating a defendant's profits for purposes of the Lanham Act.
Speaker C:I write separately to underscore that Principles of corporate separateness do not blind courts to economic realities, nor do they force courts to accept clever accounting, including efforts to obscure a defendant's true financial gain through arrangements with affiliates.
Speaker C:To the contrary, there are myriad ways in which courts might consider accounting arrangements between a defendant and its affiliates in calculating a defendant's profits.
Speaker C:Two examples illustrate the point.
Speaker C:Courts may consider two specific scenarios when calculating a defendant's profits without transgressing corporate formalities or the Lanham Act's text.
Speaker C:First, non arm's length relationships where a company establishes arrangements that effectively assign revenues to affiliates warrant scrutiny.
Speaker C:When a company charges below market rates to affiliates for infringing services, courts may view this as essentially assigning a share of the company's earnings to the affiliate in advance.
Speaker C:The affiliate's profits in such cases might indicate what the company would have earned in an arm's length relationship.
Speaker C:This approach aligns with established Supreme Court tax precedent addressing anticipatory assignment schemes such as Commissioner V's Banks, 543 U.S.
Speaker C:426 Lucas V.
Speaker C:Earle, 281 U.S.
Speaker C:111 and Commissioner V.
Speaker C:Sunnen, 333 U.S.
Speaker C:591, which may guide courts in calculating profits under the Lanham act when faced with arrangements designed to prevent income from vesting in the entity that earned it.
Speaker C:Second, courts may consider indirect compensation through related entities.
Speaker C:When evidence shows a company charged below market rates for infringing services to affiliates but received offsetting cash infusions from a common owner, courts may factor this evidence into profit calculations under the Lanham act.
Speaker C:Such cash infusions may reflect profits the company would have earned from its infringing services in an arm's length relationship.
Speaker C:This consideration of indirect compensation remains permissible without improperly attributing an affiliate's profits to the defendant as it focuses on the defendant's actual economic gain rather than disregarding corporate separateness.
Speaker A:Case Implications this decision may impact how companies structure their trademark using operations.
Speaker A:As businesses might need to reconsider arrangements where they charge below market rates to affiliates or rely heavily on intercompany cash transfers in connection with trademark usage, legal practitioners might need to adapt their litigation strategies, potentially focusing more on forensic accounting evidence and detailed financial analysis to either demonstrate or defend against claims of profit shifting through affiliate relationships, trademark holders may find it more challenging to recover substantial damages in cases involving complex corporate structures unless they can specifically demonstrate how the defendant's accounting practices obscure actual profits from infringement.
Speaker A:Corporate counsel might need to review and potentially revise existing licensing and service agreements between affiliated entities to ensure they reflect arm's length relationships, particularly where trademark usage is involved.
Speaker A:As courts may scrutinize these arrangements more closely in future infringement litigation.
