Opinion ID: 58381
Heading Depth: 1
Heading Rank: 3

Heading: ARI's Appeal

Text: In its appeal, ARI argues first that the application of the election of remedies theory to its recovery was erroneous because its theories of recovery are neither inconsistent nor do they allow ARI to recover twice for the same injury. ARI sought: (1) an injunction under both breach of contract and the Lanham Act; (2) profits disgorgement of PRMI under the Lanham Act; and (3) attorney's fees under both theories. The district court awarded the injunction on both theories. It awarded profits disgorgement under the Lanham Act and found that no award for this element was recoverable under a breach of contract theory. The court then found that attorney's fees could only be awarded under a breach of contract theory. [41] The court concluded that ARI could not simultaneously recover the attorney's fees under the breach of contract theory and lost profits under the Lanham Act because of the election of remedies theory. The district court determined that an election of remedies was appropriate under Texas law because to allow ARI to receive both an attorney's fees award for contract breach and profits disgorgement under the Lanham Act would constitute impermissible picking and choosing among damage elements arising under different theories of recovery. Whether to impose the election of remedies requirement under Texas law is a question of law that is reviewed de novo. [42] In Quest Medical, Inc. v. Apprill, we explained that Under Texas law, when a party tries a case on alternative theories of recovery and a jury returns favorable findings on two or more theories, the party has a right to a judgment on the theory entitling him to the greatest or most favorable relief. . . . If prior to judgment the prevailing party fails to elect between the alternative theories, the court should utilize the findings affording the greater recovery and render judgment accordingly. [43] ARI was not granted both a monetary award and attorney's fees on either a Lanham Act or contract theory; ARI was granted the monetary award on the Lanham Act claim and the attorney's fees on the breach of contract claim. Were this Court to grant both awards to ARI, we would be picking and choosing from damage elements arising under different theories, which is impermissible under Texas law. [44] Thus, we affirm the district court's application of the election of remedies theory. [45]
ARI next challenges the district court's conclusion that PRMI's profit for 2005 that should be disgorged is $227.10. [46] An award of profits under the Lanham Act is subject to an abuse of discretion standard of review. [47] The district court initially awarded ARI $1,256,280.00, the amount of PRMI's sales for that year. It then vacated that award after finding, based on PRMI's supplemental evidence, that PRMI's taxable income of $227.10 was a more appropriate sum. In calculating profits due to ARI under the Lanham Act, the district court correctly looked to the formula provided in 15 U.S.C. § 1117(a) which provides: When a violation of any right of the registrant of a mark registered in the Patent and Trademark office . . . shall have been established in any civil action arising under this chapter, the plaintiff shall be entitled . . . subject to the principles of equity . . . to recover . . . defendant's profits. . . . In assessing profits the plaintiff shall be required to prove defendant's sales only; defendant must prove all elements of cost or deduction claimed. . . . 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 . . . shall constitute compensation and not a penalty. [48] Thus, the Act allows the plaintiff to recover the defendant's profits based on proof of the defendant's sales. Once the plaintiff establishes the defendant's sales, then it is the defendant's burden to prove all elements of cost or deduction claimed. [49] The district court's initial profits award was based on trial testimony by Mr. Baden, PRMI's Senior Vice President, that PRMI sold 3,000 tons of rice in Saudi Arabia in 2005 at $19.00 per bag. He also testified that to determine the amount of sales for the 3,000 tons, he multiplied 3,000 times 22.04623 (to get the total number of bags in the 3,000 tons) times the per bag price of $19.00, which equals $1,256,280.00. The court initially awarded the 2005 sales figure as profits to ARI because PRMI failed to provide any evidence of its costs to be deducted from sales, as required by the statutory formula in 15 U.S.C. § 1117(a). [50] The court limited the award of PRMI's profits to the year 2005 because it determined that PRMI was prejudiced in its ability to provide evidence of costs for past years because suit was not brought until twenty years after the infringement began. In its amended findings, the court made its decision to reduce ARI's profits award to $227.10 based on supplemental evidence presented by PRMI consisting of its 2004 tax return and testimony by PRMI's CEO, Keith Glover. Mr. Glover explained that the tax return shows that PRMI's gross worldwide sales of rice totaled $264,229,177.00, and that PRMI's taxable income on these sales was $47,753.00. From this, Glover deduced that PRMI's taxable income as a percentage of worldwide gross sales converted to .018072%. Glover then applied this percentage to the $1,256,280.00 Saudi sales figure for 2005 originally awarded by the court to arrive at a figure of $227.10 in taxable income for that year. The court was persuaded by this evidence, and in its amended Findings of Fact and Conclusions of Law and Order, the court determined that this evidence constituted proof of PRMI's profits and that to award an amount higher than $227.10 would be a penalty. With this background, we consider first whether the district court erred in concluding that a profits award in any amount was warranted in this case. PRMI argued that an accounting of profits was not proper based on 15 U.S.C. § 1117(a) and this Court's jurisprudence. We have held that § 1117(a) remedies are awarded subject to the principles of equity, and thus, an award of the defendant's profits is not automatic. [51] This Court has explained that in determining whether an award of profits under § 1117(a) is appropriate in trademark infringement cases, factors to be considered include, but are not limited to[,] (1) whether the defendant had the intent to confuse or deceive, (2) whether sales have been diverted, (3) the adequacy of other remedies, (4) any unreasonable delay by the plaintiff in asserting his rights, (5) the public interest in making the misconduct unprofitable, and (6) whether it is a case of palming off. [52] As discussed earlier, we found ample record support for the district court's findings that PRMI had the requisite intent to trade on ARI's goodwill and that ARI did not unreasonably delay in filing suit because it did not know of PRMI's infringement before filing suit. We also find that an injunction alone would not compensate ARI for PRMI's past infringement and that infringing conduct should be unprofitable to infringers. In light of the foregoing, the district court did not abuse its discretion in ordering an accounting of profits and in considering an appropriate sum to award for lost profits. We next turn to whether the district court abused its discretion in finding that PRMI's profits for 2005 amounted to $227.10. PRMI maintains that the court erred in considering profits as a recoverable Lanham Act damage item because due to the nature of its business, it retains no profits  they flow through to the member farmers. ARI argues that PRMI's business structure is irrelevant to its obligation as an infringer to disgorge profits and that since PRMI did not produce evidence of costs, ARI should be awarded profits in the amount of PRMI's sales. We must thus address two issues: (1) whether PRMI met its evidentiary burden of proving costs to offset the sales and (2) whether PRMI's status as a flow-through entity is relevant. First, PRMI has never claimed that it produced evidence of its costs. The district court, in its original Findings of Fact, found that PRMI did not prove any costs or deductions to be subtracted from its sales. In its amended Findings of Fact and Conclusions of Law and Order, the district court did not amend this finding, nor did it consider the tax return and related testimony to be evidence of costs. Instead, the court explained that PRMI's supplemental evidence established PRMI's profits. Because § 1117(a) provides that a plaintiff can recover as lost profits the sales of the infringer unless the infringer can prove legitimate costs to reduce that sum (which PRMI did not do), ARI argues that the district court erred in refusing to accept its damage model, PRMI's sales. We agree that PRMI produced no evidence of proper deduction from sales to reduce its profit as contemplated by § 1117(a). At bottom, PRMI must argue that the amounts it paid to the farmer members of the cooperative are appropriate costs to be applied to sales to reduce its profit. Although PRMI did not produce evidence of its costs, it did produce evidence of its taxable income, through its tax return and the testimony of its CEO, to show that it made no profit. In the hearing on its motion for reconsideration, PRMI explained that it is a cooperative, meaning that it is owned by member farmers, to which PRMI refers as patrons. Initially, the patrons deliver a quantity of rice to PRMI pursuant to an agreement. PRMI then makes an advance to the patrons of about eighty or ninety percent of what it expects to ultimately pay the patrons. Once PRMI sells the rice, depending on its success in the market, PRMI may make further monetary advances to the patrons. At the end of the crop season, PRMI disburses whatever money is left after its expenses to its patrons. PRMI is not taxed on any profits it receives from rice sales; rather, any profit flows through to the patrons who must bear any tax liability on these proceeds. Because of this business structure, PRMI claims that it makes no profit on the rice and so should be deemed profitless for purposes of the Lanham Act. ARI argues, however, that PRMI's flow-through status is irrelevant to the profits award. We agree with ARI. First, it is clear from the record that PRMI made profits on the sales of the rice. While explaining that PRMI profits for [its] farmers, Mr. Baden testified that PRMI is very profitable in terms of the returns the farmers get. Mr. Baden explained: [PRMI] is very profitable. In fact, we beat the national average for the last sixteen years. Thus, PRMI clearly earns a profit on the rice sales. That PRMI passes the profits on to its patrons is irrelevant in the context of a Lanham Act profits award. The flow-through of the profits to the farmers is certainly relevant to how PRMI is treated for tax purposes; [53] however, PRMI cites no authority for the proposition that tax treatment is relevant to the Lanham Act remedies. [54] The fact that PRMI is not taxed on the revenues it passes on to its patrons is similar to the tax structure applied to partnerships or to subchapter S corporations. [55] Cooperatives like PRMI, partnerships, and subchapter S corporations are all flow-through entities for tax purposes. We have been able to locate no cases addressing the disgorgement of profits of cooperatives under the Lanham Act. Additionally, we have found no authority for excusing any kind of flow-through entities from disgorgement due to their flow-through character, though we have found analogous cases in which partnerships and subchapter S corporations have had profits disgorged pursuant to the Act. [56] We see no reason to treat cooperatives such as PRMI differently. We conclude, therefore, that profits earned by PRMI are PRMI's profits for purposes of the Lanham Act, regardless of how such profits are passed on or how they are taxed. Although the district court concluded that an award of lost profits in excess of PRMI's taxable income would represent a penalty, it provided no explanation for this conclusion. The court apparently thought it inappropriate to require PRMI to disgorge progits as measured by its sales when it had already passed those proceeds on to its farmer owners. As indicated above, we do not agree with this reasoning and see no more reason to give a cooperative infringer a pass on disgorging of profits than other business models such as partnerships or subchapter S corporations, where profits also flow through to their owners. Such a conclusion comports with the purpose behind Lanham Act profits disgorgement. The intent of this chapter is to regulate commerce within the control of Congress by making actionable the deceptive and misleading use of marks in such commerce; . . . to prevent fraud and deception in such commerce by the use of reproductions, copies, counterfeits, or colorable imitations of registered marks. . . . [57] Additionally, [t]he purpose of section 1117 is to take all the economic incentive out of trademark infringement. [58] This Court has held it appropriate to award profits of an infringer pursuant to § 1117(a) for various purposes: to compensate for diverted sales, to remedy unjust enrichment of the infringer, or to deter future infringement. [59] We conclude that it comports with the purpose of § 1117 to award ARI the profits of PRMI, as contemplated by § 1117(a), due to its infringement. As such, the district court abused its discretion arriving at the $227.10 profits figure. This figure is not representative of PRMI's profits because PRMI did not prove costs or deductions from its sales and because PRMI's status as a flow-through entity for tax purposes is irrelevant. We also conclude, however, that the district court did not abuse its discretion in determining that such a profit award should be limited to PRMI's profits earned in the year 2005. The district court acted within its broad discretion [60] in temporally limiting the profits award to 2005 because of the twenty year delay in the filing of suit by ARI, notwithstanding that the delay was reasonable for purposes of PRMI's laches defense. The district court did not abuse its discretion by finding that the delay prejudiced PRMI by inhibiting its ability to provide proof of costs or deductions from previous years. We therefore conclude that the district court abused its discretion in its amended order finding $227.10 in profits. We vacate that order and find that an award of $1,256,635.00, which was the amount originally awarded by the district court before it amended its findings and conclusions, based on PRMI's sales of infringing rice in 2005, is proper.
The district court's award of attorney's fees under Chapter 38 of the Texas Civil Practice & Remedies Code is also reviewed for abuse of discretion. [61] However, findings of fact regarding the reasonableness of attorney's fee awards are reviewed for clear error. [62] Because we conclude that the election of remedies theory applies in this case, the issue of whether the district court's attorney's fee award was proper is moot. The lost profits we find proper on appeal are greater than the attorney's fee award that the district court granted. Further, the profits amount is now greater than the attorney's fee figure even if reasonable fees for appeal of this case are added to that amount. Therefore, we need not address whether the amount of the award of the attorney's fees was proper.