Intellectual Property Alert | April.28.2020
On April 23, 2020, the Supreme Court resolved a decades-long circuit split as to whether recovery of an infringer’s profits under Section 35(a) of the Lanham Act requires showing willfulness and held that there is no strict willfulness requirement to recover an infringer’s profits. The case is Romag Fasteners Inc. v. Fossil, Inc., et al., – S.Ct. –, 2020 WL 1942012 (April 23, 2020), which is based on Fossil’s use of counterfeit magnetic snaps on some of its handbags. First, we discuss the history of the split as well as background case law that arose under the Lanham Act’s predecessor, the Trademark Act of 1905. Next, we discuss the impact of 1999 amendments to Section 35(a) of the Lanham Act that caused one circuit to switch sides in the debate. Finally, we detail the facts of the Romag case, its unique procedural history, and summarize the Supreme Court’s recent opinion.
Since passage of the Lanham Act of 1946 (the “Lanham Act” or the “Act”), Section 35(a) of the Act has authorized recovery of three primary remedies for trademark infringement: “the plaintiff shall be entitled, subject to the provisions of section 29 and 31(1)(b), and subject to the principles of equity, to recover (1) defendant’s profits, (2) any damages sustained by the plaintiff, and (3) the costs of the action.” Lanham Act § 35(a) (1946); 17 U.S.C. § 1117(a) (1946). As chronicled by the Ninth Circuit in 2017, there has since been a “spirited debate among the circuits … reserved for how the phrase ‘subject to the principles of equity’ applies to an award of the defendant’s profits.” Stone Creek, Inc. v. Omnia Italian Design, Inc., 875 F.3d 426, 440 (9th Cir. 2017). As with many issues of interpretation arising under the Act, the debate is clouded by both uncertain Congressional intent and the murky backdrop of the common law in existence at the time the Act was passed, and which the Act was intended to codify. See Moseley v. V Secret Catalogue, Inc., 537 U.S. 418, 428 (2003) (noting that the Lanham Act largely codified then existing common law of trademark infringement).
The Circuits Split Over § 35(a) of the 1946 Act
Prior to the 1946 Act, the Supreme Court considered the profits remedy (alternatively referred to as an “accounting” or “disgorgement” remedy) in two frequently cited cases—both arising under the Trademark Act of 1905. In Hamilton-Brown Shoe Co. v. Wolf Bros. & Co., 240 U.S. 251 (1916), the Court considered infringement of the plaintiff’s THE AMERICAN GIRL mark for shoes by a competitor that used the mark AMERICAN LADY. The Court suggested that profits could be awarded as a matter of course upon a finding of infringement:
Having reached the conclusion that complainant is entitled to the use of the words ‘The American Girl’ as a trademark, it results that it is entitled to the profits acquired by defendant from the manifestly infringing sales under the label ‘American Lady,’—at least to the extent that such profits are awarded in the decree under review. The right to use a trademark is recognized as a kind of property, of which the owner is entitled to the exclusive enjoyment to the extent that it has been actually used.
Id. at 259. This statement, however, is arguably dicta because the record supported a finding of willful infringement. Id. at 261 (“Not only do the findings of the court of appeals, supported by abundant evidence, show that the imitation of complainant's mark was fraudulent, but the profits included in the decree are confined to such as accrued to defendant through its persistence in the unlawful simulation in the face of the very plain notice of complainant's rights that is contained in its bill.”).
In a later case decided after the 1946 Act was passed but adjudicating a claim arising under the 1905 Act, the Court considered but rejected the rule that disgorgement of profits was required upon a finding of infringement. Champion Spark Plug Co. v. Sanders, 331 U.S. 125, 131 (1947) (“But [prior precedent] does not stand for the proposition that an accounting will be ordered merely because there has been an infringement. Under the Trade Mark Act of 1905, as under its predecessors, an accounting has been denied where an injunction will satisfy the equities of the case.”). The Court continued to note that the case did not involve evidence of fraud or palming off, and an injunction was sufficient to protect the plaintiff’s rights. Id. Aside from the fact that the Court never states that willfulness is required for an award of profits, the facts of Champion arguably limit the breadth of its holding. The case involved refurbished spark plugs for car engines. Although the spark plugs were genuine, they had been used by consumers and then collected and renewed by the defendant. On resale, they were labeled in various ways to indicate they were renewed, although the name and contact information of the defendant was absent. The major issue before the Court was the adequacy of an injunction that required full disclosure of the character of the spark plugs as “renewed” but still permitted use of the original manufacturer’s CHAMPION mark. Id. at 128. The Court found that use of the mark was permitted to accurately describe the source of the spark plugs as originally manufactured, and also noted that the Defendant was complying with an existing FTC order applicable to labeling. The Court further noted that any actual misrepresentation and resulting harm was “slight.” Under those facts, an injunction without an award of profits was adequate. Id. at 131–32.
Following Champion, the language of the 1946 Act was interpreted and applied differently in the various circuits. The Second Circuit adopted the reasoning of the 1991 tentative draft of § 37 the Restatement (3d) of Unfair Competition (1991) to hold that willfulness was a prerequisite for an award of the infringer’s profits. George Basch Co. v. Blue Coral, Inc., 968 F.2d 1532, 1539–40 (2d Cir. 1992). The Second Circuit reasoned that an accounting of profits was “draconian” in some cases where the infringement was “innocent” or in “good faith,” and may create an impermissible windfall to the plaintiff. Id. at 1540; see also W. E. Bassett Co. v. Revlon, Inc., 435 F.2d 656, 664 (2d Cir. 1970) (permitting an accounting of profits where the defendant was unjustly enriched or deterrence was appropriate due to deliberate infringement of a mark). Similarly, the Ninth Circuit definitively held in Lindy Pen Co. v. Bic Pen Corp., 982 F.2d 1400, 1406–407 (9th Cir. 1993), that an award of profits absent a finding of willfulness “would amount to a punishment in violation of the Lanham Act which clearly stipulates that a remedy ‘shall constitute compensation not a penalty.’” Interestingly, Lindy Pen cited Hamilton Brown Shoe for the proposition that “an accounting of profits follows as a matter of course after infringement is found by a competitor,” but adopted the additional willfulness requirement anyway. Id. at 1405. The Third, Sixth, Eighth, Tenth and D.C. Circuits followed this approach. SecuraComm Consulting Inc. v. Securacom Inc., 166 F.3d 182, 190 (3d Cir. 1999); Frisch's Rests., Inc. v. Elby's Big Boy of Steubenville, Ohio, 849 F.2d 1012, 1015 (6th Cir. 1988); ALPO Petfoods, Inc. v. Ralston Purina Co., 913 F.2d 958, 968 (D.C. Cir. 1990).
In contrast, the First, Fourth, Fifth, and Seventh Circuits consider willfulness of the infringer as a non-dispositive, albeit important, factor when determining whether profits may be awarded under § 35(a) of the Lanham Act. In Roulo v. Russ Berrie & Co., 886 F.2d 931, 934 (7th Cir. 1989), the Seventh Circuit considered copyright and trademark infringement claims arising out of two competing lines of greeting cards. The Lanham Act claims were based on the greeting cards’ trade dress, which was the same material covered by the copyright claims. Although the Copyright Act permits recovery of infringers’ profits without a showing of willfulness, 17 U.S.C. § 504(b), the court addressed whether willfulness was required to disgorge profits under the Lanham Act and found that it was not. Id. at 941. The Fifth Circuit considers a number of factors such as intent, diversion of sales, adequacy of other remedies, and a palming off that are synthesized from the factors noted in Champion, and considers no one factor to be dispositive. Pebble Beach Co. v. Tour 18 I Ltd., 155 F.3d 526, 554 (5th Cir. 1998); Tamko Roofing Prods., Inc. v. Ideal Roofing Co., 282 F.3d 23, 36 (1st Cir. 2002) (noting that willfulness is not required where the parties are direct competitors, but is where they are not).
The 1999 Amendment to Section 35(a) of the Act
In the shadow of the circuit split on willfulness, Congress amended the Lanham Act in 1996 to allow monetary recovery for willful dilution of a famous mark in § 43(c)(5) of the Act. In 1999, it amended § 35(a) to cross reference amended § 43(c) as follows:
When a violation of any right of the registrant of a mark registered in the Patent and Trademark Office, or
a violation under section 1125(a) a violation under section 43(a), or a willful violation under section 1125(c) of this title, shall have been established in any civil action arising under this chapter, the plaintiff shall be entitled, subject to the provisions of sections 1111 and 1114 of this title, and subject to the principles of equity, to recover (1) defendant's profits, (2) any damages sustained by the plaintiff, and (3) the costs of the action.
Aug. 5, 1999, Pub.L. 106-43, § 3(b), 113 Stat. 219. Based on the addition of a specific reference to claims for a “willful violation” of § 1125(c) but no additional language specific to claims for infringement of registered or unregistered marks, courts began to consider whether the 1999 amendment changed their approach to the disgorgement remedy. In other words, the addition of a specific reference to willfulness suggested to some that Congress intended to impose a willfulness requirement for monetary recovery for all claims under § 1125(c), but no such requirement existed for claims under § 1114 for infringement of registered marks and § 1125(a) for infringement of unregistered marks and false advertising.
The 1999 amendments caused the Third Circuit to switch sides in the circuit split. Banjo Buddies, Inc. v. Renosky, 399 F.3d 168, 174 (3d Cir. 2005). Banjo Buddies presumed that Congress was aware of the circuit split when it legislated in 1999, and the decision to reference willfulness with respect to dilution claims only showed intent to limit the willfulness requirement to those claims. Id. (“By adding this word to the statute in 1999, but limiting it to § 43(c) violations, Congress effectively superseded the willfulness requirement as applied to § 43(a).”).
The Ninth and Federal Circuits, on the other hand, saw no change in Congressional intent or the substantive law applicable to infringement claims. The Federal Circuit went first and, applying Second Circuit law, considered the 1999 amendment and found that it reflected no relevant change in the law. Romag Fasteners, Inc. v. Fossil, Inc. (Romag I), 817 F.3d 782, 789–90 (Fed. Cir. 2016). Romag I considered three arguments related to the 1999 amendments and rejected each. First, Romag I pointed out that the 1999 amendment was effectively a drafting error because the 1996 amendments added a provision to § 1125(c) allowing claims for monetary recovery, but failed to add a cross reference in § 1117(a). As a result, the legislative history of the amendments “does not even acknowledge the pre-1999 split in the courts of appeals on the willfulness requirement.” Romag I, 817 F.3d at 790. Second, Congress did not remove the “subject to the principles of equity” language that generated the willfulness requirement in the first place. Third, a grammatical “negative pregnant” could not be inferred because the language applicable to dilution claims was added much later than the language applicable to trademark infringement claims. Id. at 790. The Ninth Circuit relied primarily on the reasoning in Romag I (often without citation) to come to the same conclusion and looked to its own precedent in Lindy Pen to point out that if Congress wanted to overrule entrenched case law, it had to do so more explicitly. Stone Creek, Inc. v. Omnia Italian Design, Inc., 875 F.3d 426, 441 (9th Cir. 2017).
Romag’s Two Trips to the Supreme Court
As mentioned above, the Federal Circuit held that the 1999 amendments to the Lanham Act did not disturb existing case law requiring a showing of willfulness to sustain an award of infringers’ profits under 15 U.S.C. § 1117(a). Romag I, 817 F.3d at 790. Since the Federal Circuit’s initial decision, the case has twice gone to the Supreme Court and a decision on the standard necessary to disgorge profits for trademark infringement is expected this term.
Romag Fasteners, Inc. makes magnetic clasps that are used, among other things, as closures on items such as handbags. Fossil makes fashion accessories, including handbags. Id. at 783. For years, Fossil’s licensed manufacturer purchased tens of thousands of genuine Romag fasteners for its products. From 2008–2010, however, the number dropped to a few thousand. Romag investigated and determined that Fossil’s handbags were made with counterfeit clasps. Id. In 2010, Romag sued and moved for a preliminary injunction. Id. The case went to trial and the jury found that Fossil infringed Romag’s patents and trademarks. The jury found that Fossil acted with “callous disregard” for Romag’s rights, but also found that the infringement was not willful. Id. at 784. The district court, applying Second Circuit law, vacated the jury’s award of $6,794,805.36 of Fossil’s profits because the infringement was not willful. Id. at 784. The judge also reduced Romag’s reasonable royalty for patent infringement by 18% because Romag had delayed suit until three days before Black Friday in order to have maximum impact on Fossil’s sales, finding that the delay constituted laches. Id. at 784. The Federal Circuit affirmed on both points. Id. at 783.
In its first petition to the Supreme Court, Romag sought review of the laches and willfulness issues, seeking to maximize its monetary awards for its successful infringement claims. Romag’s Petition for Writ of Certiorari at i, Case No. 16-202 (Aug. 12, 2016). The Court granted certiorari, vacated the Federal Circuit’s opinion, and remanded for reconsideration in light of the intervening decision in SCA Hygiene Prods. Aktiebolag v. First Quality Baby Prods., LLC, 137 S. Ct. 954 (2017), which resolved the laches issue in Romag’s favor. Romag Fasteners, Inc. v. Fossil, Inc., 137 S. Ct. 1373 (2017). On remand, the Federal Circuit vacated the district court’s decision to reduce royalties based on a laches defense and reinstated its opinion with respect to profits—leaving Romag with only a partial success. Romag Fasteners, Inc. v. Fossil, Inc. (“Romag II”), 686 F. App'x 889 (Fed. Cir. 2017).
On remand, the district court considered a number of issues related to the recovery of attorneys’ fees, and Romag again appealed, inclusive of the district court’s order denying recovery of profits. Romag Fasteners, Inc. v. Fossil, Inc., Notice of Appeal, Case No. 18-2417, ECF No. 1 (Fed. Cir. Sept. 26, 2018). The Federal Circuit dismissed the portion of the appeal directed to already decided issues, specifically the recovery of infringer’s profits pursuant to 15 U.S.C. § 1117(a). Romag Fasteners, Inc. v. Fossil, Inc., No. 18-2417, 2019 WL 2677388, at *1–2 (Fed. Cir. Feb. 5, 2019). Romag again petitioned for certiorari and on June 28, 2019, the Court granted it.
The Supreme Court’s Decision
Argument was heard in Romag on January 14, 2020 (just weeks before the Court ceased operations due to the Covid-19 health crisis). A review of the transcript shows that several justices struggled at the hearing with the idea that “principles of equity” in § 1117(a) is intended to mean willfulness. Justice Sotomayor pointed out that willfulness is not a fixed concept under the law and recognized the lack of universal definition of willfulness would make it difficult to establish a fixed standard governing profit awards. Justices Ginsburg, Kavanaugh, and Gorsuch asked questions about why Congress would use “principles of equity” when it could have easily said “willfulness” directly—and Justice Gorsuch pointed out that “principles of equity” generally means laches to the Court, not willfulness. Justice Kavanaugh reiterated the point several times that a willfulness standard excludes potentially culpable behavior such as reckless disregard for the rights of others. In contrast, counsel for Fossil and Macy’s (the retail defendant) persuasively argued that a willfulness requirement is well supported in the pre-Lanham Act case law and would have been understood to be at least part of the applicable “principles of equity” at the time the Lanham Act was passed on 1946.
The decision issued on April 23, 2020, with all nine justices concurring in the result. The majority opinion was authored by Justice Gorsuch and largely tracked his position at argument that there was little if any language in § 1117(a) that plainly imposed a willfulness requirement on awards of infringers’ profits. Due to either a lack of clear statutory language or a weight of authority in the pre-Lanham Act common law, the majority found that there was no strict willfulness requirement but made clear that “a trademark defendant’s mental state is a highly important consideration in determining whether an award of profits is appropriate.” 2020 WL 1942012 at *4 (quotation marks omitted). In an opinion concurring in the judgment, Justice Sotomayor reiterated the point that there is a dearth of common-law authority awarding profits for “innocent” infringement and that such an award “would not be consonant with the ‘principles of equity’ referenced in § 1117(a).” Id. at *5 (Sotomayor, J., concurring).
 A later panel did not require willfulness in an unpublished decision, citing nonbinding authority from the Third and Fifth Circuits without giving reasoning for its departure from binding circuit precedent. Laukus v. Rio Brands, Inc., 391 F. App'x 416, 424 (6th Cir. 2010).