“The court said that providing evidence of actual consumer confusion is incredibly difficult, and requiring a showing of it even where there is a clear exhibition of bad faith would prevent courts from deterring willful misconduct, contrary to the intentions of the Lanham Act.”
The U.S. Court of Appeals for the Second Circuit issued a decision in an appeal from the U.S. District Court for the Southern District of New York last Thursday that in part clarified that “a plaintiff prosecuting a trademark infringement claim need not in every case demonstrate actual consumer confusion to be entitled to an award of an infringer’s profits.” The Second Circuit court also remanded the case back to the District Court to apply the Octane Fitness standard for determining “exceptional” cases under the Lanham Act.
Defendants New York & Company, Inc. and New York & Company Stores, Inc. appealed the District Court’s judgment against them for trademark infringement of the “Velocity” trademark held by plaintiffs 4 Pillar Dynasty LLC and Reflex Performance Resources Inc. Plaintiffs were awarded the gross profits earned by the defendants from the sale of activewear infringing the trademark. The Second Circuit affirmed the District Court’s judgment for the award of gross profits to 4 Pillar, but they vacated the award for attorney’s fees and prejudgment interest and determined that there was no clear error in the District Court’s amendment of the judgment to remove the trebled portion of the profits award. The Second Circuit also vacated the District Court’s determination that this case was “exceptional” under the Lanham Act, since in the interim the court had ruled in Sleepy’s LLC v. Select Comfort Wholesale Corp. (909 F.3d 519 [2d Cir. 2018]) that the 2014 Octane Fitness LLC v. ICON Health & Fitness, Inc. (572 U.S. 545 ) decision involving exceptional cases under the Patent Act should apply.
In 2012, 4 Pillar applied for registration of the “Velocity” trademark for their activewear products, and the trademark was approved by the U.S. Patent and Trademark Office (USPTO) in 2014. In 2016, 4 Pillar sued New York & Company, alleging that New York & Company’s use of the label “NY & C Velocity” on their women’s activewear product line infringed upon 4 Pillar’s “Velocity” trademark. At trial, an owner of the Plaintiff company, Behrooz Hedvat, testified that he believed New York & Company was selling similar products that were intended for similar target demographic buyers at a similar price, using the “Velocity” trademark to accomplish this goal. New York & Company continued using the label after a lawsuit was filed. According to the Second Circuit decision, at trial, New York & Company failed to call forward two key witnesses: one that allegedly could have attested to an expert lack of knowledge of the trademark, and another that could have endorsed the idea that the Defendants’ label was unlikely to confuse consumers. As a result, the jury awarded Plaintiffs the full gross profit of New York & Company’s infringing product sales, for a total of $1,864,337.29. The District Court adopted a verdict of “willful infringement,” and directed that a judgment for three times the gross profits be entered. This brought the total judgment to well over $5.5 million.
Following the trial, New York & Company moved for judgment as a matter of law and for an alteration of the judgment award. They argued that gross profits could not legally be awarded because the plaintiffs had not introduced evidence of willful infringement or consumer confusion. They urged that the Lanham Act does not allow for judgments of three times the award to be made by the court. Conversely, 4 Pillar moved for additional awarding of attorney’s fees and interest. The District Court, relying on circumstantial evidence to prove willful infringement, denied the defendants’ motion. However, the court reduced its $5.5 million award to the original judgment of just over $1.8 million and awarded attorney’s fees and interest on the profits to plaintiffs.
Second Circuit Weighs In
In reviewing the case, the Second Circuit looked to both the Lanham Act and the Copyright Act. Mirroring the Copyright Act, the Lanham Act requires that a plaintiff either prove that the defendant was aware of their infringement, or infringement resulting from reckless disregard or willful ignorance. The court recognized that a defendant may, in some cases, rightfully decline to remove their product from the market if due diligence points to a reasonable conclusion that no infringement has taken place. However, even with a sparse record of willfulness in this case, the Second Circuit declined to find the ruling of the District Court to be erroneous, as the court agreed with the jury’s unanimous findings. Unlike in Sands, Taylor & Wood Co. v. Quaker Oats Co.(978 F.2d 947 [7th Cir. 1992]). the Defendants gave no reasoning for their failure to cease sales of infringing products upon notice of 4 Pillars’ trademark, nor did they give reasoning as to why they failed to call their key witnesses. The Second Circuit thus found it reasonable for the District Court to infer that lack of witness testimony was due to credibility issues. Defendants argued that the District Court could not draw inferences from the Defendants’ inability to provide witnesses, contending that their sole reliance on the Plaintiffs’ lack of evidence of willful infringement was a strategic move. The Second Circuit disagreed, stating that the conduct exhibited by the Defendants at trial was open to many interpretations, and thus the District Court was well within its bounds in choosing which of those interpretations to move forward with. Thus, the District Court’s “totality of the factors” approach was appropriate.
In regard to consumer confusion, the Second Circuit clarified that “three categorically distinct rationales” for the award of an accounting of profits were outlined in George Basch Co. v. Blue Coral, Inc. (968 F.2d 1532 [2d Cir. 1992]) and repeatedly affirmed ever since; the first, to avoid unjust enrichment; the second, as proxy for actual damages; and third, to deter infringement. A concern of unjust enrichment cannot be grounds for relief where actual confusion or willfulness is not demonstrated by plaintiffs. However, the Second Circuit highlighted the third rationale, deterrence, in stating that the District Court has discretion in awarding monetary profits in this instance solely upon finding that a defendant infringed on a plaintiff’s mark in bad faith, regardless of actual proof of consumer confusion. The court reasoned that this has the positive effect of deterring fraudulent use of trademarks, because although actual consumer confusion is an important factor in determining if infringement took place, deterrence focuses solely on the infringer’s good or bad faith as exhibited by their actions. Additionally, the court said that providing evidence of actual consumer confusion is incredibly difficult, and requiring a showing of it even where there is a clear exhibition of bad faith would prevent courts from deterring willful misconduct, contrary to the intentions of the Lanham Act. Furthermore, the court rebutted the defendants’ argument that G.H. Mumm Champagne v. E. Wine Corp. (142 F.2d 499, 501  [Hand, J.]) was controlling case law, because it predated the Lanham Act and dealt only with a request for injunctive relief.
Balancing Deterrence with “Lottery-Level Windfalls”
While district courts may have discretion in determining what situations merit profit awards, justice requires that they ensure that the award deters willful misconduct without giving plaintiffs a “lottery-level windfall.” In this case, there was shaky evidence at best to support the Plaintiffs’ argument for infringement. Nevertheless, the Second Circuit found that the District Court did not abuse its discretion in awarding the full amount of profits as a means of deterring the Defendants and other potential infringers. The Second Circuit did, however, decline to affirm the District Court’s ruling involving attorney’s fees and prejudgment interest, reasoning that this case did not have “exceptional” qualities that would qualify the Plaintiffs for an award of fees and interest. It also declined to alter the District Court’s final judgment of approximately $1.8 million dollars that reflected a profit award in line with the jury, opposed to its first award that landed at over $5.5 million. As a means of self-correction, the Second Circuit found that the District Court had discretion to amend judgments upon revisiting the non-prevailing party’s arguments, since the basis for amendment had been raised with the court prior to the entry of judgment. Therefore, the District Court’s decision to reduce the gross profit award, being in the interest of balancing deterrence with an award that was necessary, was absolutely within its discretion.
The District Court’s ruling was Affirmed in part, Vacated in part, and Remanded in part.
This article was updated on August 16 to include the following statements of counsel:
Oved & Oved LLP attorneys Darren Oved and Aaron Solomon, who represented 4 Pillar, said: “We are pleased that the Second Circuit has upheld the Jury’s and Judge Rakoff’s finding of willfulness and award of profits.”
David Bernstein of Debevoise, who acted for New York & Company, said: “We are pleased that the court agreed that treble damages were inappropriate, and that it affirmed the reduction in the verdict accordingly. We are disappointed, though, that the court upheld the award of gross profits. NY& Co. is considering all of its options.”
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