Today, the U.S. Supreme Court heard oral arguments in Dewberry Group, Inc. v. Dewberry Engineers Inc., which asks the Court to determine whether an award of defendant’s profits for trademark infringement under the Lanham Act can include profits from legally separate non-party corporate affiliates. Much of the day’s questioning revolved around whether the $43 million profits award affirmed by the Fourth Circuit was authorized under the just sum provision of 15 U.S.C. § 1117(a) given the circuit court’s scant consideration of equitable considerations and the unique facts of the case, in which the defendant property management firm claimed 30 years of losses and the entire profits award was calculated from revenues held by affiliated real estate holding entities having the same sole owner as the defendant.

In August 2023, a panel majority in the Fourth Circuit affirmed a disgorged profits award entered against Dewberry Group (“Group”) over a dissent from Circuit Judge Marvin Quattlebaum challenging the calculation of the profits award based on revenues never realized by Group. This June, the Supreme Court granted Group’s petition for writ of certiorari to determine whether the profits award could be supported without resorting to corporate veil piercing principles.

Dewberry Group: Court Shouldn’t Fix Tactical Errors in Liability Theories

Acknowledging that equity allows a court to look past the defendant’s own financial accounting to understand the true economic reality of a situation, Thomas Hungar, Counsel for Group, argued that principles of equity encompassed by Section 1117(a)’s just sum provision only entitle Dewberry Engineers (“Engineers”) to profits actually owned by Group. As a service provider contracting with the affiliates’ tenants, Group was not itself entitled to the rents collected by its affiliates, making the profits award justifiable only under expressly stated equitable principles of corporate veil piercing or alter ego.

Justice Ketanji Brown Jackson asked Hungar whether the unique circumstances of the case could allow the courts to view affiliate earnings as evidence of the defendant’s true gain. Noting that the financial arrangement of Group precludes normal profits recovery under the Lanham Act, Justice Jackson pressed that this is the kind of situation where equity is supposed to ensure that a legal violation has a remedy. Hungar opined that this would essentially fix the tactical error made by Engineers by not pursuing profits under equitable considerations or secondary liability.

Hungar also pushed back on the below market rate profits calculation theory advanced by the U.S. Solicitor General. Contending that disgorged profits can only be based on actual profits, not potential profits, Hungar noted that there was no finding in the record that Group charged below market rates to its affiliates. Hungar added that the horizontal management structure at issue was common in the real estate industry and that the profits calculation included profits attributable to non-infringing services.

U.S. Solicitor General: Profits Analysis Should Look to Arm’s Length Negotiations

While Nicholas Crown, representing the U.S. Solicitor General’s views, acknowledged that the profits award affirmed by the Fourth Circuit was not consistent with principles of corporate separateness, he advanced the federal government’s view that lower courts could calculate profits in a way that addresses Group’s attempts to disguise economic reality without crossing lines of corporate separateness. Given the closely held nature of Group’s affiliates, Crown argued that the court’s profits inquiry should ask what the defendant would charge unaffiliated entities for the same services through arm’s length negotiations.

Crown raised several issues with the application of veil piercing principles to the circumstances of this case, including the lack of evidence of direct infringement by Group’s affiliates. Responding to Justice Samuel Alito’s concerns on the open-ended nature of this theory, Crown pointed out that Supreme Court cases relied upon in Group’s petition, including City of Elizabeth v. Pavement Co. (1878) and Rubber Co. v. Goodyear (1870), provided principles for dealing with profits awards where courts have to look beyond a defendant’s own accounting to assess economic realities.

Dewberry Engineers: Unchallenged Evidentiary Findings Provide Basis for Just Sum

Although the Fourth Circuit could have conducted a more express analysis, Elbert Lin, counsel for Engineers, argued that the just sum provision of Section 1117(a) provided lower courts with the discretion to rely on the revenues of Group’s affiliates as evidence of Group’s true financial gain. Justice Clarence Thomas asked why Engineers didn’t sue the affiliate entities, to which Lin responded that Engineers acted on property ownership representations made on Group’s website.

Pointing to the evidentiary record, Lin noted the lower court’s unchallenged findings that Group alone drove and created the revenues that were then put on the affiliate’s books at Group’s direction. Justice Amy Coney Barrett said that although Lin was providing a mechanism for attributing the affiliate’s profits to Group, the Court would be “wading into uncertainty” by articulating a theory not squarely addressed by the Fourth Circuit. Lin conceded that the Court could rule by vacating and remanding to give lower courts a chance for further explanation.

However, to the extent that there was any uncertainty over the portion of profits not attributable to infringement, Lin contended that it was the burden of petitioner Group to disentangle costs and other money to which Engineers was not entitled once Engineers made its prima facie showing of infringement. Lin added that the district court made unchallenged factual findings that the affiliates generated no value, that Group controlled the allocation of the revenues and that Group’s revenues were recorded on the books of the property-owning affiliates.

“So what you have is not the idea that [the Petitioner and the affiliates] are indistinguishable… It’s to the contrary. It’s a recognition that they are separate entities and that only one of them drove and created the gain.” – Lin

Hungar was provided a period for Group’s rebuttal, remarking that service providers generating corporate profits are not the owners of those profits as a matter of law. Hungar noted that the Court had recently reached this conclusion within the tax context in 2005’s Commissioner of Internal Revenue v. Banks. He insisted that the only theories argued at the Fourth Circuit involved disregard of the corporate form, and that Engineers other arguments were not properly raised in briefing before the Court as required by Rule 15 such that the Court should reverse the Fourth Circuit without remand.

Commenting on the case today, Evan Everist of Dorsey & Whitney predicted the Court will either remand or reverse. “Based on the tone of the argument, my prediction is that the procedural, issue-preservation argument will result either in remand or outright reversal,” Everist said. “The biggest question is to what extent the Court will discuss the bounds of the ‘just sums’ provision in cases like this in order to provide guidance to the lower courts.”