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One of the most coveted remedies potentially available to victims of trademark infringement is an award of the infringer’s profits. This remedy, however, is not always available to the company or individual who has been wronged. Traditionally, the availability of an infringer’s profits has been tied closely to the willfulness of the infringement. The 3rd U.S. Circuit Court of Appeals previously held that an award of profits requires proof of a willful violation. The court recently revisited the issue in Gucci America, Inc. v. Daffy’s, Inc., 354 F.3d 228 (3d Cir. 2003). Although it did not expressly overrule its prior holdings, the court left open the question of whether a victim of trademark infringement, under certain circumstances, may recover the infringer’s profits without demonstrating that the infringement was willful. The court’s analysis also raises issues of particular concern within the context of counterfeiting and the sale of “knock-off” goods. The language of the court’s opinion suggests that, to the extent that a trademark infringer’s profits are recoverable based upon an equitable analysis, it might often prove difficult for the victim of an infringement to establish that the sales of high-quality counterfeits occurred because of the infringement. The consequences of such a holding could serve to reward an “innocent” infringer who sells or distributes counterfeit goods of high quality — hence, the better the quality of the knock-off product, the more protection for the infringing distributor. PRE-AMENDMENT RULE In SecuraComm Consulting, Inc. v. Securacom, Inc., 166 F.3d 182 (3d Cir. 1999), the 3rd Circuit reversed the district court’s award of defendant’s profits to plaintiff, basing its holding on the lack of evidence in the record to support a finding of willfulness. The court noted that “[k]nowing or willful infringement consists of more than the accidental encroachment of another’s rights” and that willfulness “involves an intent to infringe or a deliberate disregard of a mark holder’s rights.” SecuraComm, 166 F.3d at 187. The court stated that, because the rationale for awarding the infringer’s profits is to “deter the defendant’s assertedly egregious misconduct,” a plaintiff “must prove that an infringer acted willfully before an infringer’s profits are recoverable.” Id. at 190 (citations omitted). LANHAM ACT AMENDMENT Section 35(a) of the Lanham Act provides the damages recoverable for infringement of a registered mark, as well as remedies for violations of �43(a) of the Act. The language of �35(a) was revised and amended in the Trademark Amendments Act of 1999:
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. 15 U.S.C. � 1117(a) (West 2004).

The amendment inserted the phrase “a willful violation of section 1125(c) of this title,” but left unmodified the language relating to a “violation of any right of the registrant of a mark registered in the Patent and Trademark Office” or a “violation under section 1125(a).” 5TH CIRCUIT INTERPRETS AMENDMENT The language of the amendments to �35(a) may be interpreted as removing any willfulness requirement for violations of the rights held by the registrant of a federally registered mark, as well as for violations of ��43(a) and (d) of the Act. Thus, the revision arguably clarifies that willfulness operates solely as a prerequisite to recovery of a defendant’s profits in a trademark dilution cause of action, but not in an action for trademark infringement. The 5th U.S. Circuit Court of Appeals adopted such an analysis and refused to find that willful intent is a condition precedent to an award of profits for trademark infringement. In Quick Technologies, Inc. v. Sage Group PLC, 313 F.3d 338 (5th Cir. 2002), the court held that, although willfulness is an important factor to be considered in determining whether an award of profits is appropriate, the willful nature of the infringement is not in itself dispositive. Instead, the determination of an award of profits should be based upon additional factors such as: (1) whether sales have been diverted; (2) the adequacy of other remedies; (3) any unreasonable delay by the plaintiff in asserting his rights; (4) the public interest in making the misconduct unprofitable; and (5) whether it is a case of palming off. See id. at 348-49 (citations omitted). THE 3RD CIRCUIT REVISITS THE ISSUE The 3rd Circuit was forced to re-evaluate its prior holdings in light of the relevant amendments to the Lanham Act. In Gucci America, the court declined to employ the approach used by the 5th Circuit. Rather, the court merely ruled that the district court did not err in denying an award of lost profits. The court referenced the “bright-line” rule that it had established, and noted the amendments to �35(a) and the 5th Circuit’s holding in Quick Technologies. The court focused upon the 5th Circuit’s holding that “an award of profits is governed by the particular equities in each case.” The court stated that, despite any impact the amendments might have upon the “bright-line” rule it had previously established in SecuraComm, if an equitable analysis controls whether profits should be awarded, then the district court did not abuse its discretion given the equities presented. In choosing not to rely upon a willfulness prerequisite, the court left open the question of whether a plaintiff, so long as the equities supported such a finding, could recover an infringer’s profits without having to prove that the violation was willful. In light of the language of the court’s opinion, willfulness now may be merely a factor in the equitable analysis, albeit a factor that holds a great deal of influence. GUCCI AMERICA‘S IMPACT Due to difficulties in locating the source of counterfeit goods and in enforcing trademark rights overseas, trademark owners must sometimes focus primarily upon the channels of distribution of counterfeit goods. The Gucci America decision may have serious ramifications with respect to such distributors of high-quality counterfeit products purchased from sources outside of a manufacturer’s authorized chain of distribution. If a counterfeit good is of particularly high quality, it becomes harder for a plaintiff to prove that the distributor’s sales were attributable to the infringing activity (i.e., that the purchase was based upon the “brand name” or good will of the mark), rather than due to the desirable qualities of the product itself. In addition, when the counterfeit product is of particularly high quality it becomes more difficult to demonstrate willfulness and bad faith on the part of the distributor, as the superior quality of a product often lends it the appearance of being authentic. The distributor may purchase the product outside of the normal chain of distribution, taking only nominal steps toward verifying the product’s authenticity, and nevertheless be viewed as having acted in good faith. (A strong case for a willful infringement would nevertheless remain against the manufacturer of the counterfeit goods, if it can be found and is subject to jurisdiction.) As discussed by the dissent, those ramifications arguably place too great a burden on the trademark owner to demonstrate that the counterfeit goods were purchased because of the mark. The application of those factors under such circumstances arguably rejects the core purpose of the trademark laws — to protect the consuming public from being confused or deceived as to the source or origin of the goods. After Gucci America, willfulness and intent, though not dispositive, undoubtedly will continue to be important factors in the analysis. Other factors will need to weigh heavily in a plaintiff’s favor for an award of profits to be considered the equitable result required. Courts within the 3rd Circuit likely will examine the following factors in their analysis: (1) the price and quality of the infringing product; (2) the number of units sold; (3) the potential for recovery against other, more culpable parties (i.e., the manufacturer); and (4) the availability and adequacy of other types of damages (i.e., actual damages or counterfeit-specific statutory damages). See Gucci America, 354 F.3d at 242-43. Howard J. Schwartz is a principal and chair of the Intellectual Property Department, and Michael J. Gilleece is an associate and member of the Intellectual Property Department with Porzio Bromberg & Newman (www.pbnlaw.com) of Morristown. If you are interested in submitting an article to law.com, please click here for our submission guidelines.

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