The Supreme Court issued a unanimous decision February 26 that significantly narrows how courts can calculate trademark infringement damages under federal law, ruling that courts cannot aggregate profits from corporate affiliates when determining awards under the Lanham Act.
In *Dewberry Group, Inc. v. Dewberry Engineers Inc.*, the high court held that when awarding "defendant's profits" under Section 1117(a) of the Lanham Act, courts can only consider profits actually earned by the defendant entity itself, not profits generated by separately incorporated affiliates.
The case arose from a trademark infringement dispute between two companies with similar names operating in related industries. Dewberry Engineers, an engineering firm, successfully sued Dewberry Group, a real estate development company, for trademark infringement under the Lanham Act.
The central issue involved how to calculate the "defendant's profits" that Dewberry Engineers could recover as damages. Dewberry Group provides services needed to generate rental income from properties, but those properties are owned by separately incorporated affiliates. The rental income appears on the affiliates' books, while Dewberry Group receives only agreed-upon service fees.
Crucially, those fees were apparently set below market rates. The record showed that Dewberry Group has operated at a loss for decades, surviving only through cash infusions from John Dewberry, who owns both the Group and the affiliate companies.
Faced with this complex corporate structure, the U.S. District Court adopted what it called an "economic reality" approach. The trial court treated Dewberry Group and its affiliates "as a single corporate entity" for purposes of calculating the profits award. By aggregating the affiliates' real estate profits from the years when Dewberry Group engaged in trademark infringement, the district court produced a damages award of nearly $43 million.
The Fourth Circuit Court of Appeals affirmed that award in a divided panel decision, accepting the district court's reasoning that the corporate structure should be disregarded to reflect the economic reality of the business relationships.
However, the Supreme Court reversed this approach in its February 26 opinion. The court held that Section 1117(a) of the Lanham Act limits recovery to profits "ascribable to the defendant" itself.
The Lanham Act, codified at 15 U.S.C. § 1117(a), provides that a prevailing plaintiff in a trademark infringement case can recover the "defendant's profits" deriving from improper use of a trademark. The statute's language specifically refers to "defendant's profits," which the Supreme Court interpreted as limiting recovery to profits actually earned by the defendant entity.
This interpretation means that even when corporate affiliates generate substantial profits that may be indirectly related to the defendant's trademark infringement, those profits cannot be included in the damage calculation unless they can be directly attributed to the defendant company itself.
The decision represents a significant limitation on trademark damage awards, particularly in cases involving complex corporate structures where the infringing entity may be structured as a service provider with minimal direct profits while affiliated entities capture the primary economic benefits.
The ruling affects how courts approach damage calculations in trademark cases going forward. Rather than looking to the "economic reality" of business relationships or attempting to pierce corporate structures, courts must focus specifically on profits earned by the named defendant.
For trademark holders seeking damages, the decision means they may need to be more strategic in identifying the proper defendants when filing infringement lawsuits. If the entity actually generating substantial profits from trademark infringement is a separate corporation, plaintiffs may need to name that entity as a defendant to recover its profits.
The unanimous nature of the decision suggests broad agreement among the justices that the Lanham Act's text requires this more restrictive interpretation, despite potential concerns about defendants potentially structuring their businesses to minimize damage exposure.
The case also highlights ongoing tensions in intellectual property law between protecting trademark holders' rights and respecting corporate formalities. While the decision may limit some damage awards, it provides clearer guidance to courts and parties about how to calculate trademark infringement damages.
Legal practitioners expect the decision will prompt closer examination of corporate structures in trademark infringement cases and may influence how businesses organize their trademark-using activities across related entities.
The Supreme Court's opinion in *Dewberry Group v. Dewberry Engineers* clarifies that regardless of economic interconnections between corporate entities, the Lanham Act's damage provisions are limited by the statutory language focusing specifically on "defendant's profits."