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How to Measure Trademark Infringement Damages - The Importance of Appropriate Calculation

November 9, 2015
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As seen in New York Law Journal

A trademark is any word, name, emblem,  logo, insignia, or any combination thereof that a business uses to distinguish its goods and services from those of others.
 
McDonald’s®,   Facebook®, Xerox®, Burger King®,   and Chevrolet® are all examples of trademarks.  Trademark law also extends to domain names.
 
Trademarks are  given legal protection  federally  under The Lanham Act  [15 USC 1114-118]  and by various state trademark  registration acts. Under federal law, the administration of trademark  registration and approval is conducted by the United States Patent and Trademark Office (“USPTO”). USPTO  attorneys  review  and screen federal trademark applications   for  registration.   Certain immoral, scandalous, deceptive, or merely descriptive marks cannot be registered. The USPTO attorneys will determine by review of prior registered  marks, whether the applicants proposed mark or trade dress will cause confusion or mistake. If the mark is approved, such approval   will be published  in a federal government publication, the Official Gazette.
 
The purpose of   trademark law is  to  avoid customer confusion and deception, and to protect a firm’s investment in their reputation and goodwill. Priority is given to the first user to register the mark, regardless  of the date of first use. Trademarks are generally  protected  for an unlimited time period, provided they meet re-registration requirements (10 years for federal re-registration)  and the mark remains  in continuous use. The mark must also be affixed to the goods in question.
 
Infringement Damages
In a typical trademark  litigation, counsel  for the trademark owner  (“owner”), will attempt to seek an injunction. In order to be successful, counsel must convince the court that the alleged  infringing mark will likely cause confusion. However, in order to prove economic damages, counsel must prove that actual confusion existed.
 
The Lanham Act and related case law provides  for several measures  of damages:

  • Owner’s lost profits
  • Disgorgement  of infringer’s profits
  • Reasonable  royalty
  • Corrective advertising
  • Augmented punitive damages
  • Statutory damages 
  • Legal fees

Owner’s Lost Profits
An  owner claiming  lost profits  based on lost sales must demonstrate that the infringer’s wrongful acts caused the loss. In proving these cases certain factors must be considered, including, sales trends before and after the infringement; budget to actual expense analyses; market share analyses; as well as, the owner’s operational and financial capacity to produce the alleged infringing goods  without the acquisition of additional plant, equipment, and personnel.
 
Disgorgement of Infringers Profits
The Lanham Act provides for the award of infringer’s profits that he would not have earned,  but for the infringing wrongful acts. Such awards are generally understood to account  for the unjust enrichment of the infringer.
 
The owner is only required  to prove the infringer’s sales. The infringer is required to prove the appropriate expense deductions related to those sales. The most controversial issue in determining disgorgement  of the infringer’s profits is the determination  of the appropriate expense deductions applicable  to the alleged infringing sales. There are a number of competing methods  for computing the infringer’s expense deductions:
 
Differential cost method: Sometimes referred to as the incremental approach which includes only the specific costs that would not otherwise be incurred but for the production of  the infringing  goods. Fixed costs such as  rent for manufacturing  facilities would not be deducted. Only variable costs such as raw materials  and labor that are actually directly utilized in the manufacturing  of the infringing product would be allowed.
 
The direct assistance  method: Is  a  variant of   the differential cost method. Under the direct assistance method cost that directly assisted in the production of the infringing goods are also allowed. Under this method, certain elements of  overhead and general administration are permitted as deductions.
 
Fully allocated  cost method: Sometimes referred to as the full absorption  approach,  is the most beneficial to the infringer.  Under this method, all  expense items properly allocated  under generally  accepted accounting  principles related  to the production of the infringing goods  are allowed.
 
After  determining  the infringer’s  profit  under one of  the three aforementioned methods, the infringer is permitted to apportion that profit to other assets that have contributed to profitability, but are not related to the infringement, such as other intellectual property, business  reputation, and the cost of capital. To avoid a duplicate award, the unit sales utilized in the determination  of the infringer’s profit cannot  be used when calculating lost profits of the owner.

Reasonable Royalty
In the case where  the plaintiff has minimal lost profits, and the infringer’s profits also result in a minimal amount, the courts have discretion to award the owner a reasonable  royalty based upon market transactions.  One must be extremely careful in reading royalty agreements to make sure that they are comparable and relevant to the owner’s products.
 
Corrective Advertising
In addition  to damages stated above, the owner can also be awarded damages in the form of corrective advertising in order to compensate and assist in the reversal  of any negative  associations  resulting from the alleged  infringing actions.
 
Augmented Punitive Damages
 
The Lanham Act  gives the court discretion  to increase damages  under  certain circumstances. “In    assessing damages, the court may enter judgment  according to the circumstances of the case for any sum above the amount found as actual damages, not exceeding three times the amount.  If the court shall find the recovery based on profits is either inadequate or excessive,  the court in its discretion enters judgment for such sum as the court shall find to be just according to the circumstances of the case.” This provision provides the court with substantial  discretion in awarding monetary damages.  It is therefore essential to be aware  of the relevant case law in the circuit in which the case in being tried.
 
Statutory Damages
Statutory damages are only provided in cases involving the use of counterfeit marks. The court has discretion to award the owner not less than a $1,000 per mark, but no more than $200,000 per mark, per type of goods or services sold, offered, or distributed. When the court deems that the use of the counterfeit mark is willful, the $200,000 ceiling per mark is raised  to $2 million dollars. An owner may elect to recover statutory damages at any time before judgment is rendered by the court. 

Legal Fees
Legal fees can be  awarded to the prevailing  party in exceptional circumstances. These circumstances exist when the prevailing parties’ claims are groundless, unreasonable, or pursued in bad faith.
 
The analysis of trademarks and related infringement damages is an intriguing and complex area of the law and requires the expertise  of skilled financial professionals  to assist counsel in calculating  the appropriate amount of  damages under varying scenarios.  Calculating these damages appropriately can make an enormous difference to the value and profits of a firm’s.


Written by Alan Schachter