Monetary Remedies in Trademark Cases

INTERNATIONAL TRADEMARK ASSOCIATION

Monetary Remedies in Trademark Cases

Weston Anson, CONSOR Intellectual Asset Management

R. Charles Henn Jr., Kilpatrick Stockton LLP

Paul C. Llewellyn, Kaye Scholer LLP

May 25, 2010


Growing Interest in Monetary Remedies

• Recent high profile verdictsadidas $300+ million (→ $65.3 million)

any others?

• Pressure on enforcement budgets


Lanham Act Monetary Remedies

• Lost profits– lost sales– lost royalties– price erosion

• Disgorgement of profits• Loss of business value• Corrective advertising expenses


Threshold Requirements

• Actual injury and/or willfulness generally required

• Courts have broad discretion

• Precise calculation not mandatory


Value Definitions

• Fair market value• In-place value• Fair value• Liquidation value• Deal value• Licensing value

• Transaction value• Securitization value• Replacement or

reproduction value• But-for value• Opportunity cost value


What is Damaged: The Trademark Bundle

• Core brand• Primary trademark• Corporate name and logo• Sub-brand names• Worldwide trademark registrations• Secondary trademarks• Packaging design and copyrights• Trade dress• Logos


Opposing Valuation Conclusions: Case Study

Action: Federal trademark infringement

Cause: Infringing shoe logos and designs

Plaintiff: Large sporting goods company

Defendant: Large shoe retailer

Plaintiff's Expert: $40.0 million

Defendant’s Expert: $2.0 million

Award: $60.0 million


Lost Sales

• Most common form of “damages sustained by the plaintiff”

• Actual confusion or intentional deception generally required– Survey evidence sometimes accepted as surrogate for

actual confusion


Quantifying Lost Sales

Lost SalesProfits

(in millions)

Infringing Sales $100.6

Allocated Direct Costs $30.3

Other Allocated Incremental Costs $25.0

Infringer’s Profits $45.3


Lost Sales: Practical Considerations

• Generally Only in Point-of-Sale Cases• Actual Confusion Evidence Key

– Early communication with sales force– “Form” approach to gathering instances

• Plaintiff Must Disclose Its Margins– Potential issues with jury perception– Potential conflict with “lost profit” position


Reasonable Royalties

• Available as alternative measure of damages in some circuits

• Actual confusion or intent to deceive generally required

• Georgia-Pacific elements widely accepted as factors to consider in awarding royalties.


Georgia-Pacific Elements• royalty rates received by licensor in prior licenses;• prior rates paid by licensee;• licensor’s licensing policies;• nature and scope of the infringer’s use;• special value of the mark to the infringer;• profitability of the infringer’s use;• lack of viable alternatives;• opinion of expert witnesses; and• amount that licensor and licensee would have agreed upon in voluntary negotiations

Georgia-Pacific Corp. v. U.S. Plywood-Champion Papers, Inc., 318 F. Supp. 1116 (S.D.N.Y. 1970), modified and aff’d, 446 F.2d 295 (2d Cir.

1971).


Establishing Comparable Royalty Rates

LICENSOR ROYALTY RATE COMMENTS TOTAL

Wimbledon / TM 6.0% 2-4% for advertising 8.0 – 10.0%

Rawlings 3.5% - 5.0% ------- 3.5% - 5.0%

NFL 8.0% – 15.0% 2% for advertising 10.0% - 17.0%

MLBB 6.0% - 12.0% 2% for advertising 8.0% - 14.0%

LA Gear 4.0% - 6.0% 1-3% for advertising 5.0% - 9.0%

Playboy 6.0% - 10.0% 2% for advertising 8.0% - 12.0%

Bancroft 3.0% - 5.0% Product design fees 3.5% - 5++%

Louisville Slugger 5.0% - 8.0% 2% for advertising 7.0% - 10.0%

RANGE 3.5% - 17.0%

SPREAD 485%


Quantifying Reasonable Royalties

Annual Sales of Brand X Widgets $100,000

Industry Average Royalty Rate for Branded Widgets 15.0%

Estimated Annual Royalty Income $15,000

Extended for 10 years $150,000

Annual Discount Rate 15.0%

Total Value or Damage = $80, 730

Simplified Damages Analysis


Royalties : Practical Considerations

• Measuring value of the brand• Analogous License Agreements

– From client and opponent– From third-party sources

• The “We Never Would’ve Done It” Defense


Price Erosion

• Existence of infringement forces plaintiff to lower its prices

• Accepted in patent cases but not generally accepted in trademark cases

• Rejected where price competition caused by factors other than infringement


Approaches to Quantifying Price Erosion

• Decrease in the number of units sold;• Increase in production or management costs;• Increases in R & D or capital costs;• Increases in capital expenditures to run a business;• Increase in working capital needed;• Decreases in past sales or future sales;• Changes in the price per unit charged;• Changes in market share• Reduction in market size• The cost of not being the first to market.


Price Erosion:Practical Considerations

• Proof of causation critical

• Evidence regarding marketplace situation in addition to evidence of plaintiff’s costs and sales


Disgorgement of Profits

• Many circuits require willfulness, others include it as a factor to consider

• Actual confusion not always required• Plaintiff’s burden to establish defendant’s

revenue; defendant’s burden to prove offsetting costs


Calculating Infringer’s Profits

• Simplest of all in theory*, toughest in practice:

Infringer’s Sales AAA

Less: Direct Costs BBB

Net Profits = Damages CCC

*With full discovery and disclosure – which is NEVER forthcoming


Disgorgement of Profits:Practical Considerations

• Remember Burden Allocation– Missing expert disclosure dates– Proof at trial (save profits expert for “rebuttal”)

• “Attributable to the infringement”– Copyright standard (17 USC § 504(b))– Sometimes imported into trademark cases

• Consider Giving Jury Alternatives– The “but if...” approach

• Watch for Double Recovery


Loss of Business Value

• Focus on change in worth of plaintiff’s business caused by wrongful conduct– breach of contract– theft of trade secret cases

• Not yet accepted in trademark context


Quantifying Loss of Business Value

Annual Sales $15.9 M $24.1 M

Operating Expenses $5.4M $6.3 M

Pre-Tax Margins (5 years) $10.5 M $17.8 M

Discount Rate 18.8% 18.8%

Net Business Value $7.2 M $24.9 M

LOSS IN BUSINESS VALUE: $17.7 M


Loss of Business Value:Practical Considerations


Corrective Advertising

• Rare but available in limited circumstances• Courts look at necessity of corrective

advertising undertaken by plaintiff• Actual confusion or marketplace injury not

always required


Seeking Corrective Advertising Damages

• Only makes sense in cases of extensive advertising of the infringing mark

• Decide early in the case– Need discovery targeted at drilled-down advertising

expenditures

• Avoids “double recovery”


Other damages issues to keep in mind

• Treble damages / profits• Enhanced and statutory damages for counterfeiting

(per mark)• Attorneys’ fees

– Lots of case law on “block billing,” so consider recording time differently from the beginning.

• Combining damages remedies


Damages / Valuation Methodologies are Changing

• No longer: Cost, Comparables, Income, Relief from Royalty

• The Brand Value Equation Methodology (BVEQ™) • Premium Pricing Analysis

• The Competitive Advantage Technique • Profit Split Methodology

• The Concept of Relative Incremental Value • Rules of Thumb

• Decremental Cost Savings Valuation • Snapshots of Value Approach

• Enterprise Value Enhancement• Subtraction Method of Value or Benchmark Method of Value

• Imputed Income Analysis • The Technology Factor Approach

• Income Capitalization or Direct Capitalization Methodology

• The ValCalc Methodology

• Income Differential Analysis • Valmatrix Analysis Technique

• Liquidation Value• Options Pricing Technique (The Black-Scholes)


Problems in Litigation Damages Cases

• Purely defendant vs. plaintiff POV• Adversarial, always• Extremes in value, not midpoints• Premiums above market values• Enforced transaction assumptions• Reliance on court decisions (e.g. GP) rather

than economic logic• Too many hired gun experts – and too little real

IP experience