IP Law Daily Correction of statutory ‘error’ did not eliminate willfulness requirement for profits awards
Thursday, March 31, 2016

Correction of statutory ‘error’ did not eliminate willfulness requirement for profits awards

By Thomas Long, J.D.

Magnetic fastener maker Romag was not entitled to an award of $6.8 million in profits derived by fashion accessories designer Fossil from Fossil’s use of counterfeit ROMAG-brand snaps on handbags because Fossil’s infringement was not willful, as required for a profits award under Section 35(a) of the Lanham Act, the U.S. Court of Appeals for the Federal Circuit has held (Romag Fasteners, Inc. v. Fossil, Inc., March 31, 2016, Dyk, T.). A 1999 amendment to the Lanham Act made to correct a “drafting error” that inadvertently left out trademark dilution from the remedies provisions of the Act did not change the status of the law on the willfulness requirement with respect to infringement or other non-dilution violations. A decision of the federal district court in New Haven, Connecticut, was affirmed. The Federal Circuit also upheld the district court’s determination that patent infringement claims by Romag were barred by laches because Romag waited too long to take action to protect its patent rights.

Romag sold magnetic snap fasteners for wallets, purses, handbags, and other products under its registered trademark, ROMAG. The fasteners were also covered by the claims of a patent held by Romag. Fossil designed, marketed, and distributed fashion accessories, including handbags and small leather goods, and contracted with independent businesses to manufacture its products. In 2002, Fossil and Romag entered into an agreement to use ROMAG magnetic snap fasteners in Fossil products. In 2010, Romag learned that one of Fossil’s authorized manufacturers was using counterfeit ROMAG fasteners in Fossil’s handbags. Romag filed suit against Fossil on November 22, 2010, alleging, among other things, patent infringement and trademark infringement.

On April 4, 2014, after a seven-day trial, the jury returned a verdict finding Fossil liable for patent and trademark infringement. The jury awarded damages for patent infringement based on a reasonable royalty. With respect to trademark infringement, the jury made an advisory award of nearly $6.8 million of Fossil’s profits under a deterrence theory. However, despite determining that Fossil had acted with “callous disregard” for Romag’s trademark rights, the jury found that Fossil’s patent and trademark infringement was not willful. The district court subsequently ruled that Romag’s delay in bringing suit until just before “Black Friday” constituted laches, and reduced the jury’s reasonable royalty award for patent infringement to exclude sales made during the period of delay. The district court also held as a matter of law that, because Fossil’s trademark infringement was not willful, Romag was not entitled to an award of Fossil’s profits. Romag appealed.

Laches defense to patent infringement. Romag contended that Fossil could not invoke a laches defense to patent infringement, pursuant to the Supreme Court’s decision in Petrella v. Metro-Goldwyn-Mayer, Inc., 134 S. Ct. 1962 (2014). In Petrella, the Court held that the equitable defense of laches cannot be invoked as a defense against a claim for copyright infringement. However, the Federal Circuit recently held en banc in SCA Hygiene Prods. Aktiebolag v. First Quality Baby Prods., LLC, 807 F.3d 1311, 1321 (Fed. Cir. 2015) that laches remained a defense to legal relief in a patent infringement case because Congress codified a laches defense in 35 U.S.C. §282(b)(1). Romag conceded that SCA Hygiene applied. Therefore, the district court did not err in holding that Fossil could bring a laches defense to a patent infringement claim.

Accounting of profits from trademark infringement. Romag next contended that the district court erred when it held that a trademark owner must prove that the infringer acted willfully in order to recover the infringing defendant’s profits. The issue turned on the interpretation of a 1999 amendment to Section 35(a) of the Lanham Act, 15 U.S.C. §1117(a), which added the language “or a willful violation under section 1125(c).”

The court noted that the law of the Second Circuit applied in this case. Interpreting the pre-1999 version the statute, the Second Circuit had taken the view that a plaintiff must prove that an infringer acted with willful deception in order to obtain an accounting of the infringer’s profits. The Second Circuit reasoned that this requirement was necessary to avoid “draconian” results. While damages directly measure the plaintiff’s loss, the defendant’s profits measured the defendant’s gain. Therefore, an accounting could overcompensate for a plaintiff’s actual injury and create a windfall for the plaintiff at the defendant’s expense. The circuits were split on the issue, with some holding that the infringer’s intent to deceive or confuse was simply a “relevant factor” in the court’s analysis of whether a profits award was appropriate.

Romag argued that pre-1999 authority requiring willfulness was no longer applicable in light of the 1999 amendment to the Lanham Act. The 1999 amendment was made to correct an error in Section 1117(a) made when Congress amended the Lanham Act to add a cause of action for trademark dilution under Section 1125(c). Congress had intended to provide for monetary relief for willful dilution, but the 1996 amendment did not amend Section 1117(a) to provide for such relief. In 1999, Section 1117(a) was changed so that its current text read as follows (with text added by the 1999 amendment in italics):

When a violation of any right of the registrant of a mark registered in the Patent and Trademark Office, a violation under section 1125(a) or (d) of this title, or a willful violation under section 1125(c) of this title, shall have been established in any civil action arising under this chapter, the plaintiff shall be entitled, subject to the provisions of sections 1111 and 1114 of this title, and subject to the principles of equity, to recover (1) defendant’s profits, (2) any damages sustained by the plaintiff, and (3) the costs of the action.

According to Romag, the 1999 change made it clear that Congress chose to make willfulness a prerequisite for recovering monetary damages for dilution, but not for other types of violations. Like the question of the requirement for willfulness under the pre-1999 Lanham Act, circuit courts varied in their interpretations of the post-1999 statute. Critically, however, the willfulness rule was reaffirmed by the Second Circuit in Merck Eprova AG v. Gnosis S.p.A., 760 F.3d 247, 252–53 (2d Cir. 2014). In that case—which involved a false advertising claim under 15 U.S.C. §1125(a)—the Second Circuit restated its rule that a finding of the defendant’s willful deceptiveness was a prerequisite for awarding profits. Although the Second Circuit had not directly addressed the 1999 amendment, the Federal Circuit saw nothing in the amendment that permitted it to declare that the governing Second Circuit precedent was no longer good law.

First, the legislative history of the 1999 amendatory legislation did not indicate that Congress contemplated its addition of “or a willful violation under section 1125(c)” as effecting any change to the willfulness requirements for violations of Section 1125(a). Rather, the legislative history indicated that Congress sought only to correct the mistaken omissions from the text of Sections 1117(a) and 1118 of willful violations of Section 1125(c).

Second, the language of the statute as to infringement liability was unchanged with regard to the award of profits under the “principles of equity.” Therefore, Congress could not have meant to resolve the circuit split regarding the willfulness requirement.

Third, the inserted language concerning willfulness in dilution cases did not create a negative pregnant that willfulness was always required in dilution cases but never for infringement. Cases cited by Romag where a negative pregnant was inferred involved statutory provisions enacted at the same time; in the Federal Circuit’s view, Congressional intent could not be inferred from an amendment passed several years after the fact to address a drafting error.

According to the Federal Circuit, the 1999 amendment to the Lanham Act left the law where it existed before 1999—it left a conflict among the courts of appeals as to whether willfulness was required for recovery of profits. Therefore, the court followed the Second Circuit’s precedent and affirmed the district court’s ruling that Romag was not entitled to recover Fossil’s profits.

The case is Nos. 2014-1856 and 2014-1857.

Attorneys: Jonathan Freiman (Wiggin and Dana LLP) for Romag Fasteners, Inc. Jeffrey E. Dupler (Gibney Anthony & Flaherty, LLP) for Fossil, Inc.; Fossil Stores I, Inc.; Macy’s, Inc.; Macy’s Retail Holdings, Inc.; Belk, Inc.; The Bon-Ton Stores, Inc.; The Bon-Ton Department Stores, Inc.; Dillard’s, Inc.: Nordstrom, Inc.; Zappos.Com, Inc.; and Zappos Retail, Inc.

Companies: Romag Fasteners, Inc.; Fossil, Inc.; Fossil Stores I, Inc.; Macy’s, Inc.; Macy’s Retail Holdings, Inc.; Belk, Inc.; The Bon-Ton Stores, Inc.; The Bon-Ton Department Stores, Inc.; Dillard’s, Inc.: Nordstrom, Inc.; Zappos.Com, Inc.; Zappos Retail, Inc.

MainStory: TopStory Patent Trademark FedCirNews

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