On April 23, the U.S. Supreme Court decided Romag Fasteners Inc. v. Fossil Inc., holding that proof of willful trademark infringement is not a “categorical” prerequisite for disgorgement of the defendant’s profits, but merely one factor to consider.
What can trademark practitioners (and trademark holders) expect as a result of this decision? As Yogi Berra said, “It’s tough to make predictions, especially about the future.” Still, Romag’s impact will likely be limited—except in cases, like Romag itself, involving the sale of counterfeit goods.
Fossil argued to the Supreme Court that eliminating willfulness as a threshold requirement for a profits award would unleash a tsunami of “abusive” and “extortionate” trademark litigation. It highlighted the phenomenon of “trademark bullying”—i.e., “[c]ampaigns by powerful trademark holders to ‘intimidate the small business or individual into forgoing the use and/or registration of their trademark.’” But this dire prediction is unlikely to come true.
Willfulness Still ‘Highly Important Consideration’
While it is now clear that willfulness is not an “inflexible precondition” to disgorgement, in the court’s words, it is still “a highly important consideration.” In most cases, it is likely to be the deciding factor, even after Romag.
Notably, at the certiorari stage, Fossil had argued against high-court review by highlighting the “lack of practical importance” of the question presented: Even in the circuits that had rejected a categorical test, willfulness was nevertheless present “[i]n the overwhelming majority of cases … whe[re] an accounting of profits [has] been ordered.”
Now that those circuits’ approach is the law of the land, willfulness should continue to be the deciding factor in the vast majority of cases.
Post-Romag, for a court to disgorge an infringer’s profits absent a willfulness finding, there would have to be extenuating circumstances sufficient to shift the equities markedly in the plaintiff’s favor. This would likely require (1) a mental state approaching willfulness, such as reckless disregard, and (2) one or more “plus factors,” such as: (a) significant diversion of sales or deception of the public; (b) demonstrated inadequacy of other remedies, such as actual damages or injunctive relief; and/or (c) other unique facts creating a heightened need for deterrence. See, e.g., Synergistic Int’l LLC v. Korman (4th Cir. 2006); Quick Techs. Inc. v. Sage Grp. PLC (5th Cir. 2002).
As Justice Sonia Sotomayor’s Romag concurrence points out, even where one or more “plus” factors are present, it is unlikely that a court would (or could) order disgorgement where the defendant’s infringement was truly innocent, or even merely negligent. Thus, even after Romag, businesses that act in good faith have little practical reason to fear a draconian disgorgement award.
Overlooking Counterfeit Goods
Romag’s real effect is most likely to be felt in cases—like Romag itself—involving merchants that allegedly turn a blind eye to counterfeit goods or parts in their supply chain. Such defendants routinely claim that they lacked knowledge that the goods they sold were counterfeit.
In Romag, for example, the jury believed Fossil’s denial of knowledge. At the same time, it found that, in failing to police its supply chain under circumstances that raised red flags, Fossil’s conduct exceeded simple negligence and constituted “callous disregard” of Romag’s trademark rights. This mental state should be culpable enough to justify a disgorgement award, at least when one or more of the “plus factors” are present. See Fendi Adele S.R.L. v. Ashley Reed Trading Inc. (2d Cir. 2013) (affirming award of enhanced damages where defendant “knew it might be selling [counterfeit] goods but … intentionally shielded itself from discovering the truth”).
And in counterfeiting cases, these “plus” factors are almost certain to exist. Diversion of sales and deception of the public are usually a foregone conclusion. See Innovation Ventures LLC v. Ultimate One Distrib. Corp. (E.D.N.Y. 2016) (noting that “counterfeit marks, by their very nature, cause confusion”). As Congress has recognized, proving actual damages with reasonable certainty in such cases is “extremely difficult if not impossible.” Gucci Am. Inc. v. Duty Free Apparel Ltd. (S.D.N.Y. 2004) (quoting S. Rep. No. 104-177, at 10 (1995)).
Finally, unlike traditional trademark infringement, the sale of counterfeits can pose threats to public health and safety, necessitating severe measures “to punish and deter such dangerous conduct.” Innovation Ventures, supra. Thus, post-Romag, victims of counterfeiting should have an easier time pursuing a disgorgement remedy against gray-market merchants and others who fail to police their supply chains.
In short, Romag is unlikely to upend the overall trademark landscape. Legitimate businesses that follow commercial best practices are unlikely to see a flood of new trademark suits, and they have little reason to fear increased damage awards.
At the same time, Romag gives trademark holders an additional remedy against those who turn a blind eye to potential counterfeiting in their supply chains. Because statutory damages for the non-willful sale of counterfeits is limited to $200,000 “per counterfeit mark per type of goods or services sold,” 15 U.S.C. § 1117(c)(1), the availability of a disgorgement remedy in such cases may make a real difference. Those who traffic in gray-market, diverted, or other suspect merchandise should take note.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Jonah Knobler is a partner at Patterson Belknap Webb & Tyler LLP in New York. He frequently litigates false advertising and trademark infringement cases and co-edits the firm’s false advertising blog, Misbranded. Follow him on Twitter: @jonahknobler.