Justices Nix Award of Affiliate Profits in Trademark Case (1)

The US Supreme Court tossed out a federal appeals court decision that forced an Atlanta-based real estate developer to give up $43 million in profits earned by affiliated companies for trademark infringement.

In a unanimous decision Wednesday, the court said the US Court of Appeals for the Fourth Circuit wrongly ignored corporate separateness by awarding “defendant’s profits” from affiliated companies not named in the lawsuit. The justices rejected the reasoning that the award reflected the “economic reality” that defendant Dewberry Group and the affiliates are all owned by John Dewberry, with affiliates booking tens of millions in profits as the former performs services for them at a loss.

The opinion by Justice Elena Kagan upheld the principle of corporate separateness, but left doors open for Dewberry Engineers Inc. and lower courts to reach beyond Dewberry Group’s profit-less books on remand. The court explicitly left unaddressed questions including whether an expansive trademark law damages provision or corporate veil-piercing could still be options.

The case stems from a long-running dispute involving two companies that both claimed rights to market their real estate development services under the Dewberry name. Dewberry Engineers’ 2020 lawsuit in US District Court for the Eastern District of Virginia accused Dewberry Group of violating a 2007 settlement agreement restraining its use of “Dewberry Capital” when it rebranded in 2017.

The court found Dewberry Group liable, and “was especially scathing” about infringement deemed “intentional, willful, and in bad faith,” Kagan’s opinion said. As the defendant reports no profits from its work managing the commercial properties owned by the affiliates, the district court used affiliate profits to calculate the $43 million Dewberry Group owed. The Fourth Circuit affirmed.

But the high court—as it signaled during oral argument—found that insufficient. Dewberry Engineers failed to join the affiliates as defendants, and didn’t attempt to “pierce the corporate veil” to show the entities were functionally indistinguishable, Kagan noted.

The plaintiff argued to the high court that the award was justified by a trademark law provision allowing courts to award “such a sum as the court shall find to be just” if a profits award is “inadequate,” Kagan noted. But she said the lower court didn’t cite the provision in its ruling. The court “expressed no view” on the argument or whether Dewberry Engineers had forfeited it on remand.

The court also declined to take a view on the Justice Department’s position regarding when courts can look behind tax and accounting records to consider “the economic realities of a transaction” to identify “true financial gain.” It also declined to say whether veil-piercing would be available on remand.

Justice Sonia Sotomayor’s concurring opinion stressed that “principles of corporate separateness do not blind courts to economic realities.” There are “myriad ways” for courts to consider accounting arrangements between a defendant and affiliates to calculate profits, she said.

Gibson, Dunn & Crutcher LLP represents Dewberry Group. Hunton Andrews Kurth LLP represents Dewberry Engineers.

The case is Dewberry Group, Inc. v. Dewberry Engineers Inc., U.S., No. 23-900.