Opinion ID: 6500058
Heading Depth: 3
Heading Rank: 1

Heading: Profit Disgorgement

Text: The district court ordered disgorgement of $535,854 in profits against Graminex and May based on their violations of the Permanent Injunction and Settlement Agreement. Profit disgorgement is an equitable remedy that a party may seek for an intentional or reckless violation of a settlement agreement. See Restatement (Third) of Restitution and Unjust Enrichment § 39 (2010). Disgorgement prevents a defendant from keeping “gains that the defendant would not have realized but for the breach.” Id. § 39(3); see Chauffeurs, Teamster, & Helpers, Loc. No. 391 v. Terry, 494 U.S. 558, 570–71 (1990). In other words, profit disgorgement “prevent[s] the unjust enrichment of the defendant at the expense of the plaintiff.” Restatement (Third) of Restitution and Unjust Enrichment § 39 cmt. a. Disgorgement may also be used to “coerce future compliance with a court’s order.” Gnesys, Inc. v. Greene, 437 F.3d 482, 493 (6th Cir. 2005) (quoting Glover v. Johnson, 199 F.3d 310, 313 (6th Cir. 1999)). Both parties object to the district court’s decision on disgorgement. Graminex and May argue that the district court’s disgorgement order as related to sales to the Russian distributor was legal error because the Russian distributor held the Russian Cernilton trademark. They assert that because trademarks are territorial, the original Permanent Injunction can apply only to U.S. registrations. Therefore, the sales to the trademark holder in another territory did not violate the Injunction, as Cernelle had no trademark rights in that territory. But at issue here is whether Graminex had the right to breach the Agreement prohibiting it from using the trademark and trade names belonging to Cernelle. In other words, Graminex Pharma’s intellectual property in Russia does not supersede the Settlement Agreement’s prohibition on Graminex’s use of Cernelle’s trademarks and trade names. Graminex and May also overlook that many of the contemptuous -23- Nos. 21-1579/2649, A. B. Cernelle v. Graminex, L.L.C. actions occurred in the United States: creating customs documentation using Cernelle’s trademarks and making shipping labels using those trademarks. More importantly, damages for violations of a contempt order are used not only to compensate, but also to assure future compliance. Gnesys, Inc., 437 F.3d at 493. Given the record evidence that the use of Cernelle’s trademarks helped Graminex secure sales to the foreign distributors, the disgorgement of profits was not an abuse of discretion. Cernelle objects to the district court’s disgorgement decision because the district court granted it only three years rather than six years of disgorged profits. Cernelle argues that because the district court concluded that laches did not bar its contempt motion, there was no legal basis for the district court to limit the disgorgement period to three years. Disgorgement is an equitable remedy, which affords the district court considerable discretion to design the remedy to prevent unjust enrichment. See Osborn, 865 F.3d at 455; see also SEC v. Cavanagh, 445 F.3d 105, 117 (2d Cir. 2006). While Cernelle is correct that the district court concluded that laches did not bar the contempt motion, it also found that Cernelle had unreasonably delayed in filing its motion. More importantly, the district court found that equitable consideration tipped against disgorging a full six years of Graminex’s profits from foreign sales because Cernelle had not taken steps to enter those foreign markets. Because the district court gave a reasoned explanation based in equity for its decision to limit disgorged profits and did not base this decision on legal error, the disgorgement decision was not an abuse of discretion. 2. Modification of the Remedial Permanent Injunction After the district court entered judgment on Cernelle’s contempt motion, Graminex and May requested that the district court reconsider the remedial Injunction. That Order enjoined the defendants from selling or transferring products to a customer that they “know or should know -24- Nos. 21-1579/2649, A. B. Cernelle v. Graminex, L.L.C. uses in any way the trademarks listed in the permanent injunction.” Graminex and May argued that the Injunction impermissibly expanded the scope of the permanent injunction entered pursuant to the Settlement Agreement. The district court granted that request based on its conclusion that it could not, as a matter of law, expand the Permanent Injunction’s scope beyond what the parties had bargained for. Therefore, the court modified the remedial Injunction to replace “should know” with “reason to know,” which it found hewed closer to the Settlement Agreement’s scope. Cernelle argues that the district court’s assertion that it could not expand the Injunction was legal error. An order agreed upon by the parties is “essentially a consent decree,” which is “subject to ongoing judicial review and ‘must be construed to preserve the position for which the parties bargained.’” Rosen v. Tenn. Comm’r of Fin. & Admin., 288 F.3d 918, 924 (6th Cir. 2002) (quoting Grand Traverse Band of Ottawa & Chippewa Indians v. Dir., Mich. Dep’t of Nat. Res., 141 F.3d 635, 641 (6th Cir. 1998)). This protection against overbroad modification is necessary because “[a] consent decree is a strange hybrid in the law.” Vanguards of Cleveland v. City of Cleveland, 23 F.3d 1013, 1017 (6th Cir. 1994) (quoting Brown, 644 F.2d at 560). Consent decrees—and their counterparts like the stipulated Permanent Injunction at issue in this case—are both a voluntary settlement and a final judicial order, meaning that “the power and prestige of the court [is] behind the compromise struck by the parties.” Id. (quoting Williams v. Vukovich, 720 F.2d 909, 920 (6th Cir. 1983)). The scope of a consent decree is part of the settlement. Therefore, its reach “must be discerned within its four corners, and not by reference to what might satisfy the purposes of one of the parties to it.” Firefighters Loc. Union No. 1784 v. Stotts, 467 U.S. 561, 574 (1984) (quoting United States v. Armour & Co., 402 U.S. 673, 681–82 (1971)); see also Vogel v. City of Cincinnati, 959 F.2d 594, 598 (6th Cir. 1992). “This court reviews a district court’s modification of a -25- Nos. 21-1579/2649, A. B. Cernelle v. Graminex, L.L.C. [stipulated permanent injunction] under an abuse of discretion standard.” Vanguards of Cleveland, 23 F.3d at 1017. The district court considered this limitation on its power to modify the stipulated Permanent Injunction and offered a reasoned analysis of why the term “should know” would impose obligations on Graminex and May absent in the original stipulated Permanent Injunction. Such language would give Graminex and May the duty “to use reasonable diligence to ascertain the existence of” a customer’s use of Cernelle’s trademarks before completing any sales. Restatement (Second) of Torts § 12 cmt. a (1965). In contrast, the term “reason to know” would impose liability only if Graminex or May had “knowledge of facts from which a reasonable man of ordinary intelligence . . . would either infer the existence” of that prohibited use “or would regard its existence as so highly probable that his conduct would be predicated upon the assumption that the fact did exist.” Id. The stipulated Permanent Injunction did not impose such a stringent duty; at its broadest it prohibited Graminex and May from participating in or making “plans that employ or relate in any manner to the registered trademarks.” The district court’s conclusion that “reason to know” was more faithful to the language and purpose of the stipulated Permanent Injunction reasonably interpreted the original Order and correctly applied the requirement that remedial orders must hew to the scope of consent decrees and similar stipulated orders.