July 2020: Romag Fasteners Inc. v. Fossil Inc. – Willfulness Not Required for Lost Profits in Trademark Disputes

By Quinn Emanuel Urquhart & Sullivan, LLP

Aug 5, 2020

Summary

On April 23, 2020, the Supreme Court unanimously held in Romag Fasteners Inc. v. Fossil Inc. that “willfulness” is not required for trademark owners to recover lost profits from infringers under § 35(a) of the Lanham Act, 15 U.S.C. § 1117(a). 140 S. Ct. 1492 (2020).

Factual Background

Plaintiff Romag is a manufacturer of magnetic snaps, fasteners, and closures. Defendant Fossil manufactures, designs, and markets fashion accessories like handbags and watches. In 2002, the two companies signed an agreement in which Romag would sell its magnetic fasteners to Fossil for use in Fossil’s handbags and other products. Under the 2002 agreement, Fossil instructed its Chinese factories to purchase officially licensed Romag fasteners. The controversy began when Romag noticed that sales of its fasteners to Fossil factories declined precipitously from 2008 to 2010. Romag discovered that the decline was due to Fossil’s Chinese manufacturers purchasing and using counterfeit fasteners – albeit without Fossil’s knowledge. Romag sued Fossil in 2010 for trademark infringement in the District Court of Connecticut.

Procedural Background and Split of Authority

In the district court trial, the jury found that Fossil infringed Romag’s trademarks (and patents). However, although the jury concluded that Fossil had acted in “callous disregard” of Romag’s rights, the jury rejected Romag’s allegations that Fossil had acted willfully. Romag Fasteners, Inc. v. Fossil, Inc., 29 F. Supp. 3d 85 (D. Conn. 2014). Based on controlling Second Circuit precedent requiring willfulness as a prerequisite for lost profits, the district court refused to order Fossil to turn over nearly $7 million in profits to Romag. Instead, Romag was awarded only a reasonable royalty of about $42,000 from Fossil for patent infringement. Id.

Romag appealed to the Federal Circuit which affirmed the district court’s ruling. The result of the appeal would have been different in the Third, Fourth, Fifth, Sixth, Seventh, and Eleventh Circuits where willfulness is considered just one of many factors the court may consider in awarding profits. The Third Circuit rationale, for example, was that the 1999 amendment to the Lanham Act expressed Congress’ intent to limit the willfulness requirement to § 43(c) violations: “By… limiting [willfulness] to § 43(c) violations, Congress effectively superseded the willfulness requirement as applied to § 43(a).” Banjo Buddies, Inc. v. Renosky, 399 F.3d 168, 174 (3d Cir. 2005). In contrast, the Second Circuit, along with the First, Eighth, Ninth, Tenth, and D.C. Circuits required willfulness for an award of lost profits. The Second Circuit reasoning, for example, was that not having the willfulness requirement would result in impermissible windfall to the plaintiff where the infringement was innocent or in good faith. George Basch Co. v. Blue Coral, Inc., 968 F.2d 1532 (2d Cir. 1992). Romag appealed and the Supreme Court took the case to resolve this circuit split.

The Supreme Court Decision

The Supreme Court sided with the trademark owner Romag’s position that willfulness is not required to recover the infringer’s profits. Justice Neil Gorsuch wrote the opinion and was joined by all of the justices except for Justice Sonia Sotomayor, who concurred. Staying true to his reputation as a strict textualist, Justice Gorsuch focused primarily on the plain language of the statute. The statute reads:

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 . . . ,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) (emphasis added).

The Justice began with an analysis of the statute’s language, noting that the term “willful” precedes the term “violation” only with regards to § 1125(c). 140 S. Ct. at 1495. “Willful” does not appear before the term “violation” under § 1125(a) or (d). As a result, the Justice reasoned that “the statute does make a showing of willfulness a precondition to a profits award when the plaintiff proceeds under § 1125(c).” Id. However, in the lower courts Romag alleged and proved a violation of § 1125(a). In such cases, the Court found that “the statutory language has never required a showing of willfulness to win a defendant’s profits.” Id. While the words “willful” may be “read into” the statute to modify the “violation” appearing before § 1125(a) and (d), the Justice refused to take this approach, pointing to the fact that “Congress has … included the term in question elsewhere in the very same statutory provision.” Id.

Justice Gorsuch then turned to the wider structure of the Lanham Act. He pointed out that the act “speaks often and expressly about mental states.” Id. To support his argument he listed several examples of Congress’ clear expression of mental states in other sections of the statute. Section 1117(b), for example, includes the words “intentionally” and “knowledge” while § 1117(c) uses the word “willful”. Id. From this, Justice Gorsuch found that “the absence of such standard in the provision before us, thus, seems all the more telling.” Id.

The Justice also addressed the statutory phrase “subject to the principles of equity” which Fossil had asserted as supporting its argument that that equity courts had a history of requiring a showing of willfulness before granting profits in trademark disputes. Justice Gorsuch rejected Fossil’s argument explaining that it was “far from clear whether trademark law historically required a showing of willfulness before allowing a profits remedy.” Id. at 1496. He concluded:

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…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.

Id. at 1497.

Following the trends in the recent intellectual property cases, the Supreme Court rejected the inflexible, bright-line rule and held that willfulness is not a requirement for profit recovery under § 1125(a). However, the Court’s opinion noted that while willfulness was not an “inflexible precondition,” a trademark defendant’s mental state may still be a “highly important consideration in determining whether an award of profits is appropriate.” Id.

Practice Tips

While the Supreme Court’s ruling in Romag does not change the willfulness requirement in trademark dilution cases under 15 U.S.C. § 1125(c), Romag is a significant decision impacting trademark holders’ rights to recover trademark infringers’ profits under 15 U.S.C. § 1117(a). As such, we recommend the following:

Trademark users should monitor supply chains more carefully.
As the Court expressly held that the alleged infringer’s mental state may be highly relevant, the trademark users should consider obtaining a clearance opinion from a qualified attorney if possible. This may help demonstrate good faith use of a trademark.
Defendants in trademark lawsuits should carefully consider litigation strategies even when the alleged infringement is not willful – especially if the evidence support a potential finding of “callous disregard” of the trademark owners’ rights – as lack of willfulness will not shield them against disgorgement of profits.
Both trademark owners and users should monitor the number and amount of lost profit awards going forward. Under Romag, district court judges and juries will have greater flexibility in determining whether lost profit awards are suitable. The long-term impact of this decision may be that judges will view this decision as a greenlight to permit a greater number of awards of infringers’ profits going forward.