Opinion ID: 586833
Heading Depth: 3
Heading Rank: 2

Heading: Grounds for Awarding Profits

Text: 25 We turn now to the issue of whether the district court correctly authorized an award of Blue Coral's profits. Section 35(a) of the Lanham Act generally provides that a successful plaintiff under the act shall be entitled, subject to the principles of equity, to recover (1) defendant's profits, (2) any damages sustained by the plaintiff, and (3) costs of the action. 15 U.S.C. § 1117(a). Clearly, the statute's invocation of equitable principles as guideposts in the assessment of monetary relief vests the district court with some degree of discretion in shaping that relief. See id., (both damage and profit awards may be assessed according to the circumstances of the case). Nevertheless, that discretion must operate within legally defined parameters. 26 For example, it is well settled that in order for a Lanham Act plaintiff to receive an award of damages the plaintiff must prove either  'actual consumer confusion or deception resulting from the violation,'  Getty Petroleum Corp. v. Island Transportation Corp., 878 F.2d 650, 655 (2d Cir.1989) (quoting PPX Enterprises, Inc. v. Audiofidelity Enterprises, Inc., 818 F.2d 266, 271 (2d Cir.1987)), or that the defendant's actions were intentionally deceptive thus giving rise to a rebuttable presumption of consumer confusion. See Resource Developers, Inc. v. Statue of Liberty-Ellis Island Foundation, Inc., 926 F.2d 134, 140 (2d Cir.1991); PPX Enterprises, 818 F.2d at 273. Here, Basch failed to present any evidence regarding consumer confusion or intentional deception. Accordingly, prior to the jury's deliberation, the district court correctly decided that damages were not an available form of relief. Basch does not appeal from this ruling. 27 However, with respect to authorizing an award of Blue Coral's profits, the district judge concluded that § 35(a) affords a wider degree of equitable latitude. In denying its j.n.o.v. motion, the district court rejected Blue Coral's position that, absent a finding of defendant's willfully deceptive conduct, a court may not award profits. Rather, it relied upon contrary dictum in Louis Vuitton S.A. v. Lee, 875 F.2d 584, 588-89 (7th Cir.1989), in determining that a Lanham Act plaintiff may be entitled to the profits of an innocent infringer, i.e., one who inadvertently misappropriates the plaintiff's trade dress. To the extent that the cases are ambiguous as to whether deceptive conduct is a necessary basis for an accounting, we take this opportunity to clarify the law. 28 The rule in this circuit has been that an accounting for profits is normally available only if the 'defendant is unjustly enriched, if the plaintiff sustained damages from the infringement, or if the accounting is necessary to deter a willful infringer from doing so again.'  Burndy Corp. v. Teledyne Industries, Inc., 748 F.2d 767, 772 (2d Cir.1984) (quoting W.E. Bassett Co. v. Revlon, Inc., 435 F.2d 656, 664 (2d Cir.1970)). Courts have interpreted the rule to describe three categorically distinct rationales. See e.g., Cuisinarts, Inc. v. Robot-Coupe Intern. Corp., 580 F.Supp. 634, 637 (S.D.N.Y.1984) (These justifications are stated in the disjunctive. Any one will do.). 29 Thus, the fact that willfulness expressly defines the third rationale (deterrence) may suggest that the element of intentional misconduct is unnecessary in order to require an accounting based upon a theory of unjust enrichment or damages. However, the broad language contained in Burndy Corp. and W.E. Bassett Co. is in no way dispositive on this point. Indeed, a closer investigation into the law's historical development strongly supports our present conclusion that, under any theory, a finding of defendant's willful deceptiveness is a prerequisite for awarding profits. 30 Unjust Enrichment: The fact that an accounting may proceed on a theory of unjust enrichment is largely a result of legal institutional evolution. Prior to the fusion of law and equity under the Federal Rules of Civil Procedure, see Fed.R.Civ.P. 2, courts of law were the sole dispensary of damages, while the chancellor issued specific relief. However, in order to avoid piecemeal litigation, once a court of equity took jurisdiction over a case it would do complete justice--even if that entailed granting a monetary award. This resulted in the development of parallel remedial schemes. 31 Long ago, the Supreme Court explained the origin of profit awards in trademark infringement suits: 32 The infringer is required in equity to account for and yield up his gains to the true owner [of the mark], upon a principle analogous to that which charges a trustee with the profits acquired by the wrongful use of the property of the cestui que trust. Not that equity assumes jurisdiction upon the ground that a trust exists.... [T]he jurisdiction must be rested upon some other equitable ground--in ordinary cases, as in the present, the right to an injunction--but the court of equity, having acquired jurisdiction upon such a ground, retains it for the purpose of administering complete relief, rather than send the injured party to a court of law for his damages. And profits are then allowed as an equitable measure of compensation, on the theory of a trust ex maleficio. 33 Hamilton-Brown Shoe Co. v. Wolf Brothers & Co., 240 U.S. 251, 259, 36 S.Ct. 269, 272, 60 L.Ed. 629 (1916). 34 Thus, a defendant who is liable in a trademark or trade dress infringement action may be deemed to hold its profits in constructive trust for the injured plaintiff. However, this results only when the defendant's sales 'were attributable to its infringing use' of the plaintiff's mark, Burndy Corp., 748 F.2d at 772 (quoting W.E. Bassett Co., 435 F.2d at 664), and when the infringing use was at the plaintiff's expense. Id. at 773. In other words, a defendant becomes accountable for its profits when the plaintiff can show that, were it not for defendant's infringement, the defendant's sales would otherwise have gone to the plaintiff. Id. at 772. 35 At bottom, this is simply another way of formulating the element of consumer confusion required to justify a damage award under the Lanham Act. As such, it follows that a profits award, premised upon a theory of unjust enrichment, requires a showing of actual consumer confusion--or at least proof of deceptive intent so as to raise the rebuttable presumption of consumer confusion. See Resource Developers, 926 F.2d at 140; PPX Enterprises, 818 F.2d at 273. 36 Moreover, the doctrine of constructive trust has traditionally been invoked to defeat those gains accrued by wrongdoers as a result of fraud. See Latham v. Father Divine, 299 N.Y. 22, 26-27, 85 N.E.2d 168, 170 (1949) (A constructive trust will be erected whenever necessary to satisfy the demands of justice.... [I]ts applicability is limited only by the inventiveness of men who find new ways to enrich themselves by grasping what should not belong to them.); Restatement of Restitution, § 160 cmt. d (1937); cf Robert Stigwood Group Ltd. v. O'Reilly, 530 F.2d 1096, 1100-1101 & n. 9 (2d Cir.), cert. denied, 429 U.S. 848, 97 S.Ct. 135, 50 L.Ed.2d 121 (1976) (recognizing that imposition of a constructive trust over defendant's profits may be an available remedy for willful copyright infringement). 37 The rationale underlying the Supreme Court's holding in Hamilton-Brown Shoe Co. reflects this purpose. There, the Court upheld a profits award for trademark infringement where the imitation of complainant's mark was fraudulent, [and] the profits included in the decree [were] confined to such as accrued to the defendant through its persistence in the unlawful simulation.... 240 U.S. at 261, 36 S.Ct. at 273. Thus, it would seem that for the defendant's enrichment to be unjust in terms of warranting an accounting, it must be the fruit of willful deception. See El Greco Leather Products Co. v. Shoe World Inc., 726 F.Supp. 25, 29-30 (E.D.N.Y.1989). 38 Where Plaintiff Sustains Damages: Historically, an award of defendant's profits has also served as a rough proxy measure of plaintiff's damages. Champion Plug Co. v. Sanders, 331 U.S. 125, 131, 67 S.Ct. 1136, 1139, 91 L.Ed. 1386 (1947); Mishawaka Mfg. Co. v. S.S. Kresge Co., 316 U.S. 203, 206, 62 S.Ct. 1022, 1024, 86 L.Ed. 1381 (1942); Hamilton-Brown Shoe Co., 240 U.S. at 261-62, 36 S.Ct. at 272-73; see also, Restatement (Third) of Unfair Competition § 37 cmt. b (Tent. Draft No. 3, 1991) (Restatement). Due to the inherent difficulty in isolating the causation behind diverted sales and injured reputation, damages from trademark or trade dress infringement are often hard to establish. Recognizing this, the Supreme Court has stated that, [i]nfringement and damage having been found, the Act requires the trademark owner to prove only the sales of articles bearing the infringing mark. Mishawaka Mfg. Co., 316 U.S. at 206, 62 S.Ct. at 1024. 39 Under this rule, profits from defendant's proven sales are awarded to the plaintiff unless the defendant can show that the infringement had no relationship to those earnings. Id. This shifts the burden of proving economic injury off the innocent party, and places the hardship of disproving economic gain onto the infringer. Of course, this does not stand for the proposition that an accounting will be ordered merely because there has been an infringement. Champion Plug Co., 331 U.S. at 131, 67 S.Ct. at 1139. Rather, in order to award profits there must first be a basis for finding damage. Id.; Mishawaka Mfg. Co., 316 U.S. at 206, 62 S.Ct. at 1024. While a plaintiff who seeks the defendant's profits may be relieved of certain evidentiary requirements otherwise carried by those trying to prove damages, a plaintiff must nevertheless establish its general right to damages before defendant's profits are recoverable. 40 Thus, under the damage theory of profits, a plaintiff typically has been required to show consumer confusion resulting from the infringement. Cf. Perfect Fit Indus., Inc. v. Acme Quilting Co., 618 F.2d 950, 955 (2d Cir.), cert. denied, 459 U.S. 832, 103 S.Ct. 73, 74 L.Ed.2d 71 (1982) (New York law of unfair competition); G.H. Mumm Champagne v. Eastern Wine Corp., 142 F.2d 499, 501 (2d Cir.), cert. denied, 323 U.S. 715, 65 S.Ct. 41, 89 L.Ed. 575 (1944) (L. Hand, J.). Whether a plaintiff also had to show willfully deceptive conduct on the part of the defendant is not so clear. While some courts rejected good faith as a defense to an accounting for profits, Burger King Corp. v. Mason, 855 F.2d 779, 781 (11th Cir.1988) (citing Wolfe v. National Lead Co., 272 F.2d 867, 871 (9th Cir.1959), cert. denied, 362 U.S. 950, 80 S.Ct. 860, 4 L.Ed.2d 868 (1960)), others have concluded that a defendant's bad faith is the touchstone of accounting liability. Cf. Champion Plug Co., 331 U.S. at 131, 67 S.Ct. at 1139 (accounting was unavailable where there ha[d] been no showing of fraud or palming off); Carl Zeiss Stiftung v. Veb Carl Zeiss Jena, 433 F.2d 686, 706-08 (2d Cir.1970) (discussing monetary awards which are inclusive of both damages and profits). 41 Deterrence: Finally, we have held that a court may award a defendant's profits solely upon a finding that the defendant fraudulently used the plaintiff's mark. See Monsanto Chemical Co. v. Perfect Fit Mfg. Co., 349 F.2d 389, 396 (2d Cir.1965), cert. denied, 383 U.S. 942, 86 S.Ct. 1195, 1198, 16 L.Ed.2d 206 (1966). The rationale underlying this holding is not compensatory in nature, but rather seeks to protect the public at large. By awarding the profits of a bad faith infringer to the rightful owner of a mark, we promote the secondary effect of deterring public fraud regarding the source and quality of consumer goods and services. Id.; W.E. Bassett Co., 435 F.2d at 664. 42