March 20, 2025

A trademark owner that prevails on its claim for infringement under the Lanham Act may be entitled to an award of “defendant’s profits” under 15 U.S.C. § 1117(a).  In Dewberry Group, Inc. v. Dewberry Engineers Inc., 145 S. Ct. 681 (Feb. 26, 2025), the U.S. Supreme Court faced a dispute over a § 1117(a) award to Dewberry Engineers reached simply by totaling the profits of Dewberry Group, the sole named defendant, with those of its separately incorporated affiliates who were not parties to the lawsuit. 145 S. Ct. at 684.  The issue was whether the district and appellate courts erred in treating Dewberry group and its affiliates as a single entity to calculate “defendant’s profits” under § 1117(a).

Underlying the method used by the lower courts to calculate the § 1117(a) award at issue are these facts: Dewberry Group is owned by developer John Dewberry, who also owns many separately incorporated affiliates of Dewberry Group. Id. at 685.  These affiliates each own a piece of commercial property for lease but have no employees to carry out business functions. Id.  Dewberry Group serves in this capacity and provides the affiliates the services (financial, legal, operational, and marketing) needed to generate rental income from the properties the affiliates own. Id.  That income goes on the affiliates’ books and Dewberry Group receives only agreed-upon fees seemingly set at less than market rates. Id.  Dewberry Group reports no profits, its tax returns show it has operated at a loss for decades, and it survives through cash infusions Mr. Dewberry occasionally provides. Id.  The affiliates, though, have received tens of millions of dollars in profit. Id. (observing that “the success of Mr. Dewberry’s overall business comes in part from trademark infringement—specifically, from Dew­berry Group’s violation of Dewberry Engineers’ trademark rights in the ‘Dewberry’ name”).

To reflect this “economic reality,” the district court treated Dewberry Group AND its non-party affiliates as a single corporate entity for purposes of calculating a profits award. Id. at 685-86.  It reasoned that “the profits from the Group’s illicit conduct (as from all its services) ‘shows up exclusively on the [property-owning affiliates’] books’ [and that] the ‘entire Dewberry Group enterprise’ would ‘evade the financial consequences of its willful, bad faith infringement’” if these companies were viewed separately. Id. (quoting the district court’s order).  The district court concluded that considering the companies together “would prevent the ‘unjust enrichment’ that the Act was meant to target.” Id.  Hence, the affiliates’ real-estate profits from the years Dewberry Group infringed were totaled, resulting in an award of nearly $43 million. Id.

A divided Fourth Circuit affirmed the award. Id. at 686.  The majority cited the “economic reality” of the relationship between Dewberry Group and its affiliates and approved the treatment of all the companies as a single corporate entity. Id.  It reasoned that this approach “properly ‘h[e]ld Dewberry Group to account’ for its use of infringing materials to generate corporate profits. Id. (quoting the appellate opinion).  In view of the links among the companies, it made no difference to the majority that the affiliates, not Dewberry Group, received the revenues earned. Id.  The majority reasoned that any other holding would give businesses a “blueprint for using corporate formalities to insulate their infringement from fi­nancial consequences.” Id. (quoting the appellate opinion).  The dissenting judge would have held the district court had no authority to, in calculating a defendant’s profits, “simply add the revenues [of] non-parties.” Id.

The U.S. Supreme Court vacated the award and remanded after finding the approach taken by the lower courts was unsupported in the statutory text authorizing a profits award for trademark infringement. Id. at 686-88.  In reaching this decision, the Court considered the meaning of “defendant” in § 1117(a), noted it was not specially defined, and thus gave the term its usual legal meaning, as set forth in Black’s Law Dictionary: “the party against whom relief or recovery is sought in an action or suit.” Id.  In this case, the only entity named in the complaint as being liable for infringing the “Dewberry” trademark was Dewberry Group. Id.  Noting that Dewberry Engineers elected to omit the affiliates as defendants, the Court determined that “the affiliates’ profits are not the (statutorily disgorgable) ‘defendant’s profits’ as ordinarily understood.” Id.

The Court also discussed the principle of corporate separateness—the long-settled matter of American corporate law that separately incorporated organizations are separate legal units with distinct legal rights and obligations. Id.  It noted the exception to this principle whereby a court can, in select circumstances, pierce the corporate veil—particularly “to prevent corporate formalities from shielding fraudulent conduct.” Id.  Here, however, Dewberry Engineers admittedly did not try to make the requisite showing for veil-piercing. Id.  Thus, the Court found that “the demand to respect corporate formalities remains” and that this demand “fits hand-in-glove with the Lanham Act’s text.” Id. (stressing that “the ‘defendant’s profits’ are the defendant’s profits, not its plus its affiliates’”).

Dewberry Engineers argued the affiliates’ profits could be taken into account under the sentence of §1117(a) that reads: “If the court shall find that the amount of the recovery based on profits is either inadequate or excessive[,] the court may in its discretion enter judgment for such sum as the court shall find to be just, according to the circum­stances.” Id. (summarizing the approach Dewberry Engineers argued under this “just-sum” provision).  Dewberry Engineers argued the courts below followed this approach—that is, they merely considered the affiliates’ profits as evidence in assessing Dewberry Group’s “true financial gain” under the just-sum provision. Id.  The Court was not persuaded and found that Dewberry Engineers’ position was not a “tenable take on why Dewberry Engineers got a $43 million award.” Id.  The Court identified several problems with the position argued. Id.  One was that the district court did not rely on the just-sum provision or suggest in any way that it was departing from Dewberry Group’s reported profits to reflect the company’s true gain. Id.  Another was that only a single step in calculating “defendant’s profits” was performed rather than the two-step process evident in the just-sum provision. Id.  A third was that the district court, in making its assessment, said both Dewberry Group’s and the affiliates’ profits should count because all these companies should be treated as a single corporate entity—thus disregarding corporate formalities and the principle of corporate separateness. Id.  The Court determined “[t]he proof” was in the number the district court reached, which “was simply the sum of all the Dewberry entities’ real-estate profits for the relevant years.” Id.  The Court found the amount in accord “with the idea that Dewberry Group and its affiliates should be regarded as one—as in toto the ‘defendant.’” Id.  This, the Court said, conflicts with Dewberry Engineers’ view because a court adopting that view would have had to identify which of the affiliates’ profits were properly attributable to Dewberry Group, as reflecting the Group’s own gain, and the court could not plausibly have concluded that all of them were, given that, at a minimum, the affiliates owned the rent-producing properties. Id.  The Court concluded that the only way to arrive at the district court’s “wholesale result” was to “take a simpler tack”—lump Dewberry Group and its affiliates together as a single entity. Id.

The Fourth Circuit’s decision similarly bore no resemblance to Dewberry Engineers’ description of the approach taken below. Id.  The Court said the Fourth Circuit no more relied on the “just-sum” provision than did the district court, nor on any “second step” analysis the provision “enables.” Id.  It found instead that the Fourth Circuit, in a straightforward manner, related the basis for the district court’s decision—treating Dewberry Group and its affiliates as a single corporate entity in order to determine profits—and approved that treatment, largely for the same reasons the district court gave. Id.  The Court explained that while, under the circumstances, the concerns articulated by the lower courts were not wrong, they could not justify “ignoring the distinction between a corporate defendant (i.e., Dewberry Group) and its separately incorporated affiliates.” Id.  The Court concluded that by treating these entities “as one and the same, the courts below approved an award including non-defendants’ profits—and thus went further than the Lanham Act permits.” Id.

The Court then vacated the Fourth Circuit’s judgment and remanded for further proceedings consistent with its opinion. Id.  The Court in its remand order briefly identified questions it did not address regarding the just-sum provision, the proposals presented in the Government’s amicus brief for when courts may look behind a defendant’s tax or accounting records to consider “the economic realities of a transaction” to identify the defendant’s “true financial gain,” and corporate veil-piercing. Id.  It stressed that its holding was only that the courts below were wrong to treat Dewberry Group and its affiliates as a single entity in calculating the “defendant’s profits” under § 1117(a). Id. (noting Dewberry Group is the sole defendant and that under the statutory language “defendant’s profits,” only its own profits are recoverable).

Justice Sotomayor joined the Court’s opinion in full but wrote a concurring opinion to “underscore that principles of corporate separateness do not blind courts to economic realities” nor do they “force courts to accept clever accounting, including efforts to obscure a defendant’s true financial gain through arrangements with affiliates.” Id. at 688-90.