TRADEMARK INFRINGEMENT DAMAGES
Trademark infringement damages are governed by the principals of equity. In equity, the typical remedy for trademark infringement is an injunction against the infringer. Injunctive relief can take many forms, including (1) recall of the infringing items; (2) prohibition against the defendant’s infringing use; and (3) corrective advertising. Kane, Trademark Law, §17.2, 17-3 (2003). Monetary damages are also available in trademark cases and can be calculated in different ways. The federal Lanham Act provides the basis for recovering monetary damages for trademark infringement. This law allows plaintiffs to recover (1) defendant’s profits; (2) plaintiff ’s damages; and the (3) the costs of the action. 15 U.S.C. §1117(a). Judges are given flexibility in how they assess these damages and in what amount. For example, courts can assess up to three times the actual-damage amount. Reasonable attorney’s fees can also be awarded in exceptional cases. But an award of monetary damages is not automatic however. Many jurisdictions hold that when the infringement is unintentional and no actual confusion is proven, injunctions, not monetary damages, are the proper remedy. Intel Corp. v. Terabyte Int., Inc., 6 F.3d 614,620 (9th Cir. 1993). In other words, an award of money damages usually requires either actual confusion or intentional deception.
1. Defendant’s Profits
The Lanham Act allows a trademark owner to recover both his actual damages and the infringer’s profits (unless the profits are from the same lost sales claimed by the owner as actual damages.) Defendant’s profits are most often awarded in cases of intentional infringement. Trademark owners only need to prove the infringer’s sales to recover the defendant’s profits. This is usually done by obtaining the defendant’s financial information during discovery. But when the information is unavailable or unreliable, judges often allow trademark owners to estimate total sales, usually with the assistance of an expert witness. All infringing sales established under this damage standard are presumed to be attributable to the infringer’s misconduct. Ross, Intellectual Property Law Damages and Remedies, §4.03[3],4-27(2002). Once the infringer’s sales are established, the infringer has the burden of proof to show that the sales in question were not the result of any unlawful conduct. In this analysis, if the infringer’s misconduct was a "substantial factor" in a sale, then the sale is attributable to the infringement and the trademark owner may recover the profits. After the number of sales attributable to the infringement are established, defendant infringers must prove their costs and deductions relating to the sales in order to establish their profits or net revenues.
2. Plaintiff ’s Damages
Courts award plaintiffs damages as compensation for actual injury caused by wrongful conduct. Actual damages for trademark infringement include (1) lost profits on sales; (2) reasonable royalty; (3) lost goodwill or future sales because of harm to reputation; and (4) advertising expenses realized to correct any market confusion caused by the infringing mark. Kane, at §17.3.2.
2(a). Lost Profits
Lost profits are the profits the trademark owner would have made "but for" the infringement. This does not include the defendant’s profits. The typical trademark lost profit analysis compares the trademark owner’s profits pre-infringement to the profits from the time of the infringement. Restatement (Third) of Unfair Competition §36(2)(a) 1995. The keyto this analysis is establishing the correct profit margin. The applicable profit margin will establish the average price per unit prior to the infringement for a representative sales period less the applicable cost per unit for the same or similar pre-infringement period. BASF Corp. v. Old World Trading Co., Inc., 41 F.3d 1081 (7th Cir. 1994).Although the plaintiff / trademark owner must prove the defendant’s sales, he is not required to prove the exact number of sales to recover lost profits. Ross at §4.03[1][a] at 4-17. Defendants are not responsible for those lost profits that were caused by acts other than the infringement.
2(b). Reasonable Royalty
Another method of determining damages for trademark infringement is calculating a reasonable royalty. This method is especially useful when the owner of the infringed trademark previously licensed the mark and had established a reasonable royalty. For example, if the mark’s owner licensed a mark at a 15 % royalty rate (i.e. 15% of gross sales for all products using the mark), a court could establish a reasonable royalty for any infringing uses of the mark based on the previously negotiated royalty rate. In the absence of a previous royalty, many courts base the reasonably royalty on a "hypothetical negotiation" between a willing trademark owner and a willing licensee as of the date of the initial infringement. Sands, Taylor & Wood v. QuakerOats Co., 34 F.3d 1340 (7th Cir. 1994). In calculating a reasonable royalty, courts often "err on the high side" in calculating the royalty amount to encourage potential infringers to license the mark rather than to simply infringe it. Id. at 1351.
2(c). Lost Goodwill or Harm to Reputation
Courts have also awarded damages when the infringement harms a business’ reputation or the goodwill associated with a trademark. These damage awards compensate the trademark owner for the loss of value to the mark but are often difficult to prove. However, "the threat to reputation may be direct, as when the defendant misrepresents the quality of the plaintiff ’s goods in comparative advertising, or indirect, as when the defendant sells inferior goods under the plaintiff’s trademark." Restatement at §36 cmt. e. Recovery for lost goodwill is limited to those damages that cannot be recovered under a corrective advertisement damage theory since such damages are considered duplicative.
2(d). Corrective Advertising
In an effort to restore the damage done by infringing activities, the trademark owner may advertise to restore value to the mark. This advertising is known as corrective advertising, and the owner can recover the cost of such advertising as a damage under the Lanham Act. For example, if a company was required to spe nd $2 million dollars in advertising in an effort to offset the damage caused by an infringing product, the entire cost of the advertising may be recoverable. A second type of corrective advertising known as prospective-corrective advertising may also be available to the trademark owner. In situations where the owner is unable to finance a corrective advertising campaign, courts have awarded the trademark owner damages equivalent to a percentage of the infringer’s advertising campaign promoting the infringing product. The general rule in these situations, and adopted by the Eighth Circuit, is that the trademark owner may recover an amount equal to 25% of the amount spent on the infringing advertisements. West Des Moines State Bank v. Hawkeye Banc Corporation, 722 F.2d 411, 414(8th Cir. 1983).
3. Costs of the Action
Lanham Act section 35(a) allows plaintiffs (or defendants if they are the prevailing party) who establish a violation of their registered mark to recover the "costs of the action." 15 U.S.C. §1117(a). Most courts limit recovery to those costs listed in 28 U.S.C. §1920 including court reporter fees, clerk fees, document copying charges, and witness fees. Other courts have allowed the recovery of costs not listed in the statute including courier fees, deposition-travel expenses, long-distance phone calls, and other reasonable out-of-pocket expenses that attorneys normally charge to clients. These various equitable and monetary damages should act as a strong warning and deterrent to both accidental and intentional infringers. Additional information on trademark-infringement damages, and many other intellectual- property litigation topics, is available in the December 2004 Arthur Chapman Intellectual Property Law Reference Guide.
About the Author: Christopher Newkirk’s practice focuses on commercial litigation in the areas of general and products liability and on intellectual property litigation. He has extensive first chair jury and bench trial experience; having conducted well over thirty-five jury trials and seventy bench trials to verdict. In addition to his current focus on civil litigation, he has years of experience in criminal prosecution and class action lawsuits.