Michael A. Einhorn is an economic consultant and expert witness in the areas of intellectual property, media, entertainment, and technology. He received a B.A. from Dartmouth College and a Ph. D. in economics from Yale University, and is a former professor of economics at Rutgers University. He is the author of seventy articles related to intellectual property and economics, as well as the book Media, Technology, and Copyright: Integrating Law and Economics. Dr. Einhorn has worked on matters in trademarks, trade secrets, and false advertising that have involved Samsung Electronics, Dish Network, Madonna/Material Girl, Jakks Pacific, Kische USA, Oprah Winfrey/Harpo Productions, Avon Cosmetics, The New York Observer, the Kardashians/BOLDFACE Licensing), The Weather Channel, Hasbro, J. Walter Thompson/Banco Popular, Kia Motors, Coca Cola, and General Automobile Insurance Company.
From the vantage of an economic expert active in valuation of intellectual property, this blog reviews some issues in remediation in U.S. trademark law, with particular regard to litigation concerns that damage experts should be made aware of. This blog is a shortened version of a paper available online that includes fuller analysis and citation, and is the first of a series of related blogs that will appear on this website.
The Lanham Act establishes two remedies for trademark infringement – injunction and monetary relief, but there is no assurance that a prevailing plaintiff will walk away with any of the latter. Per 15 U.S.C. 1117, a prevailing mark owner may recover as a result of the infringement (1) his/her actual damages, (2) defendant’s profits, and (3) the costs of the action. The Court also has discretionary power to increase the damage award to treble level for compensatory (but not punitive reasons), and may increase or decrease in equity an award of profits by any amount if the owner’s recovery is deemed inadequate or excessive. Also allowable but less frequent are corrective advertising and statutory damages (for counterfeiting). Plaintiff may recover both damages and profits if the levels exclude one another. Maltina Corp. v. Cawy Bottling Co., Inc., 613 F.2d 582, 585 (5th Cir. 1980).
Rule 1: Trademark remedies can include recovery of actual damages and disgorgement of defendant profits, inter alia.
Actual damages are commonly estimated by lost sales, or lost licensing income that should have been paid for use of the mark. The recovery interval for actual damages begins at the time the infringer became aware of its malfeasance through a formal notification or demonstrated through the presence of a registration mark. 15 U.S.C.A. 1111.
The recovery of actual damages is determined as a remedy in law, and profit disgorgement is a remedy in equity. Experts should note the difference. With regard to the former, there is a significant constraint for any prospective expert.
Rule 2: As a matter of law, the award of actual damages requires a showing of actual buyer confusion, and not a mere likelihood.
Boosey & Hawkes Music Publishers, Ltd. v. Walt Disney Co. 145 F. 3d 481 (2d Cir. 1998).
But the pursuit of actual damages may involve the uncertainty or general desirability of a jury trial
Rule 3: If a matter of law can be demonstrated, an expert’s opinion regarding the matter can be put to a jury at the request of either party.
While expert testimony may be allowable, actual damages can be difficult to prove. Tread carefully! With regard to lost sales,
Rule 4: The usual “before and after/but for” technique elsewhere found (e.g., personal injury, wrongful termination) may be less useful for examining movement of revenues over an historic period when several factors can complicate the analysis.
The more common measure of actual damages is lost licensing income, as measured by royalties or franchise fees. This putative amount is usually established as a percent share of defendant’s sales volume. A licensing result should then be based on the prospective outcome of a hypothetical negotiation between a willing buyer and a willing seller in an arms-length transaction. Boston Professional Hockey Association v. Dallas Cap & Emblem Manufacturing, Inc., 597 F. 2d 71, 202.
Whenever facts permit, the determination of a royalty award is relatively easy if some previous licensing arrangement involving one or both parties actually exists. However, plaintiffs with no history of licensing must derive a relevant benchmark rate from comparable third-party transactions ---- a non-trivial exercise. It is not proper in IP valuation simply to compile a diffuse collection of licenses from related transactions and choose the average or midpoint as the strike point. ResQNet v. Lansa, 594 F.3d 860 (Fed. Cir. 2010).
Rule 5: A valuation expert should select those few benchmark licenses most comparable to the matter in suit and be prepared to explain and account for any differences in market circumstances.
Under threat of limitation or exclusion, experts should never stretch a benchmark analysis to obtain a result that cannot be defended under court guidelines.
A mark owner may then find that disgorgement of infringer profits is the only practical remedy. This is justified in equity as a means of preventing wrongful gain and/or deterring future infringement. However, disgorgement can sometimes be useful in law as an approximation of actual plaintiff harm (when parties are direct competitors and plaintiff could have demonstrably made the same sales). Polo Fashions, Inc. v. Craftex, Inc., 816 F. 2d 145, 149 (4th Cir. 1987); see also Intel Corp. v. Terabyte Intl’; 6 F. 3d 614 (9th Cir. 1993). When profits are a surrogate for actual damages, a claim for profits gives rise to a matter of law and right to trial by jury.” Daisy Group, Ltd. v. Newport News, Inc. 999 F. Supp. 548, 551 (S.D.N.Y. 1998).
The Lanham Act does not set forth any definite standards that should be considered when choosing to enforce disgorgement. As summarized in the referred report, each Circuit Court may establish its own criteria to determine suitability of disgorgement. Factors in equity may include willful intent, act of fraud, palming off, strength of mark – inter alia.
Rule 6: So long as some egregious conduct is apparent, it is not necessary in equity to demonstrate actual damages or actual confusion to recover a profit disgorgement.
Both plaintiff and defendant bear evidentiary burdens when profit disgorgement is at issue. Plaintiff bears the first burden to prove defendant revenues related to infringement. Plaintiff may claim revenue totals only for those items bearing the infringing mark, and not the defendant’s entire product line. Lindy Pen Co., Inc. v. Bic Pen Co., 982 F.2d 1400, 1405-7 (9th Cir. 1993).
Once plaintiff has proven revenues, defendant must prove offsetting costs. Under the differential cost method, allowable deductions include the cost of goods sold directly related to production and distribution of the infringing item(s). Common costs related to administration of a wider product line have varied interpretations. In addition to deductible costs, defendant must prove a means for apportioning the value of non-infringing elements that are commingled with the infringing mark, or otherwise support sales. Hamilton-Brown Shoe v. Wolf Bros., 240 U.S. 251, 36 S.Ct. 269, 60 L.Ed. 629 (1916)
Rule 7: Respective burdens for revenue, costs, and apportionment of commingled items differ for plaintiff and defense.
To summarize, recovery of actual damages and profit disgorgement then depend in law and equity upon two different predicates – actual confusion and egregious conduct. An expert report must be heedful of the legal distinction between the two, and the restrictions thereto. Experts must also properly handle revenues and costs with full attention to the respective burden for plaintiff and defense.