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Recent Developments on Disgorgement Damages

July 4, 2022

Disgorgement, a remedy available in some intellectual property cases, was recently highlighted in two cases from the United States Supreme Court, Romag Fasteners, Inc. v. Fossil, Inc., 590 U.S.___, 206 L.Ed. 2d 672 (2020) and from the Federal Circuit Court of Appeals, Tex. Advanced Optoelectronic Sols., Inc. v. Renesas Elecs. Am., Inc., 895 F.3d 1304 (Fed. Cir. 2018). Those cases affirmed that disgorgement damages are to be decided, not by a jury, but rather the judge. The Romag case further resolved a split in the Circuits that disgorgement in trademark cases may be awarded even in the absence of willful infringement.

This article will address the ramifications of those two decisions and how clients should view cases where disgorgement is a potential remedy.

First, however, a brief discussion of disgorgement is provided. The remedy of disgorgement, traditionally known as an accounting for one’s profits, takes away a wrongdoer’s rewards for their infringing activity. Disgorgement has its roots in English equity jurisprudence and is derived from the general proposition that one should not be unjustly enriched when one engages in illegal or wrongful acts. Ultimately, the theory is that if one profits from wrongdoing, one should not be permitted to keep those profits. As a traditional equitable remedy, judges, not juries, would decide when conduct was culpable enough to award the aggrieved party the profits of the wrongdoer. Disgorgement has been found at common law to be a remedy in fraud cases, certain contract cases, trespass cases, breach of fiduciary duty cases and certain infringement claims.

In intellectual property cases, disgorgement has been codified as a remedy in nearly every type of infringement case, except for infringement of utility patents. Thus, for copyright infringement, 17 U.S.C. § 504(a)(1) provides that an infringer is liable for its profits. For trade secret actions brought under the Federal Defend Trade Secrets Act, “damages for any unjust enrichment caused by the misappropriation of the trade secret” is available. 18 U.S.C. § 1836(b)(3)(B). That remedy is substantially similar to States’ trade secrets statutes that have codified trade secret liability under State law. For trademark infringement, “subject to the principles of equity,” an aggrieved plaintiff may “recover (1) defendant’s profits ….” 15 U.S.C. § 1117(a). 35 U.S.C. § 289 provides that “Whoever during the term of a patent for a design … sells or exposes for sale any article of manufacture to which such design or colorable imitation has been applied shall be liable to the owner to the extent of his total profit.”

Recent substantial disgorgement damages include a $50 million dollar award against Wal-Mart Stores in a trademark infringement matter, Variety Stores, Inc. v. Wal-Mart Stores, Inc., E.D.N.C. No. 5:14-CV-217 (2019); a 2018, $706.2 million dollar verdict against real estate valuation company, Amrok, for misappropriation of trade secrets in a Texas state case; and a 2017, $3 million dollar verdict against Seirus for infringement of Columbia Sportswear’s design patent for heat reflective material. (See below.)

Within the high stakes of disgorgement litigation, certain conflicts among the courts have arisen as to who should hear disgorgement claims and what standards should be applied; especially with reference to trademark infringement.

The Federal Circuit had the opportunity to address whether disgorgement should be decided by a judge or jury in Tex. Advanced Optoelectronic Sols., Inc. v. Renesas Elecs. Am., Inc., 895 F.3d 1304 (Fed. Cir. 2018).

Texas Advanced Optoelectronic Solutions, Inc. (“TAOS”) and the Defendant Renesas (also known as Intersil) both develop and sell ambient light sensors used to adjust screen brightness in response to incident light. During negotiations for a potential partnership or merger, the parties shared proprietary technical and financial information. The merger discussions fell through; but soon thereafter, “Intersil released new sensors with the technical design TAOS had disclosed in the confidential negotiations.” Id. As a result, TAOS sued Intersil in federal district court for patent infringement, trade secret misappropriation, breach of contract, and tortious interference with prospective business relations under Texas state law.

In 2015, as a result of a jury trial, TAOS was awarded $48.8 million in disgorgement of Intersil’s profits. Intersil appealed and argued that the district court erred in relying on the jury’s verdict on disgorgement damages for the trade secret misappropriation claim, since this was an equitable issue for the judge to decide, not the jury.

The Federal Circuit’s lengthy analysis of judge vs. jury rightfully started with a discussion of the 7th Amendment which provides that “[s]uits at common law, where the value in controversy shall exceed twenty dollars, the right of a trial by jury shall be preserved." Under prior precedent, the Supreme Court has held that the “right of trial by jury ‘is the right which existed under the English common law when the Amendment was adopted.’” Balt. & Carolina Line, Inc. v. Redman, 295 U.S. 654, 657, 55 S. Ct. 890, 79 L. Ed. 1636 (1935). In this case, the Federal Circuit focused its analysis on “a history-focused question: did the law courts award the defendant's profits as a remedy for this kind of wrong?” TAOS, 895 F.3d at 1319.

The Court traced the history of the disgorgement remedy and considered dicta from the Supreme Court in a copyright disgorgement matter wherein the Court determined that disgorgement was a form of equity (thus judge ruled). Ultimately, the Court ruled that the disgorgement remedy in a trade secret misappropriations case is to be decided by a judge, not a jury.

The importance of having a judge determine the remedy versus a jury resides in the “equitable considerations” that the judge must consider when deciding disgorgement. For example, the judge may consider the egregiousness of the conduct, the actions of the aggrieved, the harm to the public, if any, or the harm to the plaintiff or defendant. In addition, a judge may not be emotionally influenced by the underlying finding of liability as a jury may be. Thus, a defendant may fair better in front of a judge when faced with a disgorgement claim.

While the Federal Circuit’s decision in TAOS may not be binding precedent throughout the United States, the Supreme Court’s recent decision in Romag Fasteners appears to confirm the result.

In Romag Fastener’s, the Court was confronted with conflicting authority from the Circuits as to whether a finding of “willful” infringement was required. Prior to the Supreme Court’s decision, every federal court of appeals had considered whether plaintiffs must establish willful infringement as a perquisite to disgorgement damages. Six had answered in the negative (Third, Fourth, Fifth, Sixth, Seventh, and Eleventh) and six had answered in the affirmative (First, Second, Eighth, Ninth, Tenth, and Federal).

One interesting commonality about all of the Circuits’ holdings was that each one considered intent as an element to consider in awarding disgorgement. Thus, every Circuit was concerned about lumping an egregious infringer with an innocent infringer when considering disgorgement damages. Ultimately though, for a unanimous Supreme Court, the issue became one of statutory interpretation. The Court reasoned that unlike the statute for disgorgement in trademark dilution claims, 17 U.S.C. § 1125(c), which specifically requires a finding of willful dilution, Congress had not put that requirement into the trademark infringement damages section of 15 U.S. Code § 1117(a).

Writing for the majority, Justice Gorsuch commented on the issue of intent:

At the end of it all, the most we can say with certainty is this. Mens rea figured as an important consideration in awarding profits in pre-Lanham Act cases. This reflects the ordinary, transsubstantive principle that a defendant’s mental state is relevant to assigning an appropriate remedy. That principle arises not only in equity, but across many legal contexts. See, e.g., Smith v. Wade, 461 U. S. 30, 38–51 (1983) (42 U. S. C. §1983); Morissette v. United States, 342 U. S. 246, 250–263 (1952) (criminal law); Wooden-Ware Co. v. United States, 106 U. S. 432, 434–435 (1882) (common law trespass). It’s a principle reflected in the Lanham Act’s text, too, which permits greater statutory damages for certain willful violations than for other violations. 15 U. S. C. §1117(c). And it is a principle long reflected in equity practice where district courts have often considered a defendant’s mental state, among other factors, when exercising their discretion in choosing a fitting remedy. See, e.g., L. P. Larson, Jr., Co. v. Wm. Wrigley, Jr., Co., 277 U. S. 97, 99–100 (1928); Lander v. Lujan, 888 F. 2d 153, 155–156 (CADC 1989); United States v. Klimek, 952 F. Supp. 1100, 1117 (ED Pa. 1997). Given these traditional principles, we do not doubt that a trademark defendant’s mental state is a highly important consideration in determining whether an award of profits is appropriate. But acknowledging that much is a far cry from insisting on the inflexible precondition to recovery Fossil advances. Romag Fasteners, Inc. v. Fossil Grp., Inc., 206 L. Ed. 2d 676 (2020)

Justice Gorsuch’s discussion about intent and the “principal long reflected in equity practice” tacitly affirms the Federal Circuit’s TAOS holding, that judges, not juries, determine the disgorgement remedy even if “willful” infringement is not specifically required.

If you have questions regarding disgorgement as a possible remedy in an intellectual property case, contact an intellectual property attorney for guidance.