Opinion ID: 199861
Heading Depth: 3
Heading Rank: 1

Heading: Standard for an Award of Defendant's Profits

Text: 50 The jury found that Tamko and Ideal were in direct competition. Ideal does not argue that the factual finding was unsupported, but does argue that the district court was nonetheless obligated to inquire further as to the percent of direct market overlap in which such competition took place before it could award an accounting of profits. At most, Ideal says, the two companies competed in 20-30% of their business, so it was error to award 100% of Ideal's profits. Ideal's argument is based on product differentiation. That is, Ideal sold only metal roofing, while Tamko sold only asphalt roofing. Only customers with residential steep-slope roofs would consider buying each of the two types of roofing. Ideal says that only 20% of its sales are in this residential market; its remaining sales are in the commercial and agricultural buildings market, where the products do not compete. 51 The thrust of the argument is essentially that most of the products Ideal sold under the infringing mark should be considered to be noncompeting products and so it is inequitable to award 100% of the profits to Tamko. Under circuit precedent, there may be infringement, as well as an accounting of defendant's profits, even when most of the products are not in competition, if there is evidence, as there was here, of likelihood of confusion. See Baker v. Simmons Co., 325 F.2d 580, 582 (1st Cir.1963) (affirming an award of defendant's profits based on defendant's gross sales where some of goods sold by defendant did not compete with those sold by plaintiff); Baker v. Simmons Co., 307 F.2d 458, 462-63 (1st Cir.1962) (affirming infringement finding where plaintiff held the mark Simmons for mattresses and sleep products and defendant used the name Simmonds for reupholstering services). 52 An accounting of defendant's profits may be awarded in a trademark infringement action subject to the principles of equity. 15 U.S.C. § 1117(a). Here, Tamko did not seek its actual damages, but did seek an accounting as well as injunctive relief. If injunctive relief provides a complete and adequate remedy, then the equities of the case may not require an accounting of profits. Aktiebolaget Electrolux v. Armatron Int'l, Inc., 999 F.2d 1, 5 (1st Cir.1993) (We have found `a clear distinction between the showing required to establish a right to injunctive relief and that required to establish a right to damages.') (quoting Camel Hair and Cashmere Inst. of Am., Inc. v. Associated Dry Goods Corp., 799 F.2d 6, 12 (1st Cir.1986)). For example, injunctive relief may be adequate if there has been no fraud or palming off and there is little likelihood of actual damage to the plaintiff or profit to the defendant. Champion Spark Plug Co. v. Sanders, 331 U.S. 125, 131, 67 S.Ct. 1136, 91 L.Ed. 1386 (1947); Valmor Prods. Co. v. Standard Prods. Corp., 464 F.2d 200, 204 (1st Cir.1972); see generally J. Koelemay Jr., Monetary Relief in Trademark Infringement Cases, in Litigating Copyright, Trademark and Unfair Competition Cases for the Experienced Practitioner 287, 294 (1997). 53 Trying to fit itself into these shoes, Ideal suggests that injunctive relief should suffice, as it engaged in neither fraud nor palming off. Ideal's argument is misplaced. The presence of injunctive relief does not preclude an accounting here. There was adequate evidence that Tamko did suffer actual damages and that Ideal did benefit from its infringement. To boot, Ideal's contumacious behavior also raises a question of the adequacy of injunctive relief alone as a remedy. 54 Repeating its theme that it acted neither fraudulently nor in bad faith, Ideal says that an accounting of profits is unwarranted. Even if we were to accept this theme, it has been this circuit's rule that an accounting of defendant's profits where the products directly compete does not require fraud, bad faith, or palming off. AB Electrolux, 999 F.2d at 5-6. Our rule is thus different from the Restatement rule that an accounting of profits is conditioned on a showing of bad faith. Restatement (Third) of Unfair Competition § 37 cmt. e (1995). Although AB Electrolux was silent on whether willfulness is a precondition for an accounting, the jury here found willfulness, 10 and so we need not reach the issue in this case. 11 55 This circuit and others have articulated three justifications for awarding to plaintiff an accounting of the defendant's profits: (1) as a rough measure of the harm to plaintiff; (2) to avoid unjust enrichment of the defendant; or (3) if necessary to protect the plaintiff by deterring a willful infringer from further infringement. Estate of Bishop, 256 F.3d at 1054; Minn. Pet Breeders, Inc. v. Schell & Kampeter, Inc., 41 F.3d 1242, 1247 (8th Cir.1994); AB Electrolux, 999 F.2d at 5-6; George Basch Co. v. Blue Coral, Inc., 968 F.2d 1532, 1537 (2d. Cir.1992); see generally 5 McCarthy on Trademarks, supra, §§ 30:59, 30:64. 56 Ideal's most cogent argument is that it did not directly compete against Tamko in all the markets in which it profited from use of the mark, and so all of its profits should not go to Tamko. Ideal points to the articulated justification for the AB Electrolux rule, which is that the defendant acts as a trustee of profits that would otherwise belong to plaintiff. 999 F.2d at 5; see also Valmor Prods. Co., 464 F.2d at 204. From this, Ideal argues that AB Electrolux established a but for rule: a defendant may be deemed to have acted as trustee for the plaintiff's profits, which, but for the infringement, would have been made by plaintiff. It follows then, Ideal argues, that it cannot be deemed to have acted as trustee for the plaintiff's profits as to the 70-80% of the market where, it says, the two companies were not in direct competition; that is, where asphalt roofing and metal roofing did not compete. 57 We reject any such limitation for an accounting of profits award, once there has been a finding of direct competition, for three reasons, each articulated in the Lanham Act, 15 U.S.C. § 1117(a). First, the limitation misplaces the burdens, in assuming plaintiffs must meet such a test as to remedy, once infringement and direct competition are established. The burden of showing that not all profits should be awarded is more akin to the burden of showing the amount of costs to be deducted from profits, which the Act places on defendant. Second, such a test ignores the three rationales for the remedy of accounting of profits. Third, the test is inconsistent with the inherent equitable power of the district court and the Lanham Act's designation of an accounting of defendant's profits as an equitable remedy. 58 First, we think once plaintiff has shown direct competition and infringement, the statute places the burden on the infringer to show the limits of the direct competition: In assessing profits the plaintiff shall be required to prove defendant's sales only; defendant must prove all elements of cost or deduction claimed. 15 U.S.C. § 1117(a). Even before the Lanham Act, the Supreme Court had squarely placed the burden on the infringer to prove that his infringement had no cash value in sales made by him. If he does not do so, the profits made on sales of goods bearing the infringing mark properly belong to the owner of the mark. Mishawaka Rubber & Woolen Mfg. Co. v. S.S. Kresge Co., 316 U.S. 203, 206-07, 62 S.Ct. 1022, 86 L.Ed. 1381 (1942); see also 5 McCarthy on Trademarks, supra, § 30:65, at 30-128 (Under the federal Lanham Act, as well as the common law, it is the infringer's burden to prove any proportion of his total profits which may not have been due to his use of the infringing mark.); Koelemay, supra, at 322-23 (The burden of apportionment [of profits resulting directly from infringement and those not], however, is on the infringer.). Here, the plaintiff proved the amount of defendant's sales; we consider the defense of only partial direct competition to be very similar to an element of cost or deduction claimed, which defendant has the burden of showing. At trial, Ideal did not ask for a jury finding on the percentage of market overlap. Nor did it present the issue and evidence to the trial judge when he requested briefing from both parties on the accounting of profits. The trial judge was under no obligation to raise or resolve the issue sua sponte. In fact, Tamko disputes Ideal's assertions made on appeal about the percentage of direct competition in the market, and says there was 100% overlap. The place for resolution of this issue was the trial court. 59 Second, even ignoring momentarily Ideal's waiver at the district court level, the argument is inconsistent with the first rationale for providing an accounting of profits — recompense to plaintiff for the harms it has suffered. Congress recognized that the defendant's profits may be an inexact proxy for the detriment suffered by plaintiffs. Toward this end, the Act also provides: 60 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 of the case. Such sum in ... the above circumstances shall constitute compensation and not a penalty. 61 15 U.S.C. § 1117(a). Here, Ideal provided little basis for the district court to conclude that an award of all of defendant's profits was excessive. In addition to its own loss of profits, a plaintiff may, for example, suffer harm to the goodwill associated with its mark. But beyond that, the district court, so long as the sum awarded was not a penalty, was entitled to consider two other policy objectives once it found that defendant's conduct was inequitable: awarding defendant's profits based on unjust enrichment to the defendant, or based on a deterrence theory. AB Electrolux, 999 F.2d at 5 ([W]here defendant's inequitable conduct warrants bypassing the usual rule of actual harm, damages may be assessed on an unjust enrichment or deterrence theory.). 62 Even assuming that Tamko and Ideal directly compete as to only a portion of Ideal's sales, and even if we were to give Ideal the benefit of plain error review, we could not say that there was an abuse of discretion in awarding defendant's profits in order to avoid unjust enrichment where the infringement was willful. The award itself was conservative. Further, the evidence is that the infringement was willful, intended to divert customers from Tamko, and, importantly, to trade on the goodwill Tamko had established, nurtured, and assiduously guarded in its Heritage mark. There was also evidence of customer confusion. Thus, even in the absence of palming off, it is reasonable to conclude that Ideal was unjustly enriched by trading on Tamko's goodwill beyond the two companies' areas of direct competition. 63 In cases of at least some direct competition and willfulness, some role may exist for deterrence in an award of an accounting of profits. The role of deterrence must be carefully weighed in light of the statutory prohibition on the imposition of penalties. 15 U.S.C. § 1117(a) (Such sum ... shall constitute compensation and not a penalty.); Koelemay, supra, at 307; see also ALPO Petfoods, Inc. v. Ralston Purina Co., 913 F.2d 958, 969 (D.C.Cir. 1990) (criticizing deterrence rationale). In an analogous case, one circuit revised an award of 20% of defendant's profits and directed an award of 100% of the profits because it believed that 20% was clearly inadequate to ensure that similar conduct will not reoccur in the future. Truck Equip. Serv. Co. v. Fruehauf Corp., 536 F.2d 1210, 1223 (8th Cir.1976). The rule that where there is willful infringement, an accounting of profits is not necessarily restricted to the particular area of direct competition is reinforced by the intention of the Lanham Act to provide nationwide protection of a mark, in contrast to the more limited geographic protection afforded by the common law. See Minn. Pet Breeders, 41 F.3d at 1246. Tamko had an unusually strong interest in deterrence, given Ideal's track record, and it would not be an abuse of discretion to conclude that the accounting of profits should reflect some recognition of that interest. Nonetheless, the deterrence rationale is primarily served by the attorneys' fees award, and should not be the primary reason for an accounting of profits. Koelemay, supra, at 308. 64 Our third reason for rejecting Ideal's limitation on profits awards is that it is inconsistent with the equitable nature of the court's remedial power. It may well be equitable for a court to include in the damages calculation an award of less than the defendant's complete profits in light of less than complete direct competition. See, e.g., Truck Equip. Serv. Co., 536 F.2d at 1221-22 (awarding defendant's profits only from geographical areas where parties directly competed). On other facts it may be inequitable to give defendants such a benefit. Mechanical rules are of little aid in this analysis. 65 Equity must take account of the purposes served by the Lanham Act: 66 One is to protect the public so it may be confident that, in purchasing a product bearing a particular trade-mark which it favorably knows, it will get the product which it asks for and wants to get. Secondly, where the owner of a trade-mark has spent energy, time, and money in presenting to the public the product, he is protected in his investment from its misappropriation by pirates and cheats. 67 S.Rep. No. 1333 (1946), reprinted in 1946 U.S.C.C.S. 1274, 1274. As another circuit cogently observed in a case raising the issue of less than 100% competition, either through product differentiation or geographical separation: We think it doubtful whether even the second of these purposes, protection of the trademark owner, is adequately served by a rule which would allow accountings only where the parties directly compete. Monsanto Chem. Co. v. Perfect Fit Prods. Mfg. Co., 349 F.2d 389, 395 (2d Cir.1965); see also Maltina Corp. v. Cawy Bottling Co., 613 F.2d 582, 585 (5th Cir.1980) (holding that a diversion of sales, or direct competition, is not necessary for an award of profits because of the need to protect a trademark as a property right). 68 The award of Ideal's entire profits was correct.