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Addressing the issue of whether willfulness is required to award profits in trademark cases, and continuing a circuit split on the issue, the US Court of Appeals for the Ninth Circuit affirmed the district court's conclusion that willfulness is a necessary condition for the disgorgement of profits. Stone Creek, Inc. v. Omnia Italian Design, Inc., Case No. 15-17418 (9th Cir., July 11, 2017) (McKeown, J).
In 2003, Stone Creek, a furniture manufacturer in the Arizona area, contracted with Omnia to buy Omnia's furniture branded with the STONE CREEK mark. In 2008, Omnia wanted to capture another large customer, Bon-Ton Stores, a retailer in the Midwest. Bon-Ton signed on for Omnia to supply it with leather furniture. However, Bon-Ton wanted an "American- sounding" label. Although it had many choices, Bon-Ton opted for STONE CREEK. Without permission, Omnia copied the STONE CREEK mark and applied it to a host of items, including binders, leather samples, in-store displays, warranty cards and the furniture. Stone Creek learned of Omnia's unauthorized use of the STONE CREEK mark and promptly filed suit, alleging trademark infringement and unfair competition. After the district court determined that Omnia did not infringe Stone Creek's trademark, Stone Creek appealed.
The Ninth Circuit analyzed the Sleekcraft likelihood of confusion factors and concluded that the district court committed legal error in framing many of the factors. In analyzing the market channels factor, the Ninth Circuit found that the district court was led astray by its "myopic focus on the considerable distance between Stone Creek's physical showrooms in Arizona and Bon-Ton's in the Midwest." Essentially, the district court's failure to properly analyze this factor rested on its faulty legal assumption that geographic separation automatically means no intersection in market channels. Such analysis fails to take into account the internet as a sales channel, the Court explained. Finding a powerful case for a likelihood of confusion, the Ninth Circuit reversed the district court on the issue of infringement.
Omnia asserted that its use of the Stone Creek mark was protected under the Tea Rose-Rectanus good faith adoption doctrine. But that doctrine requires the junior user to establish good faith use in a geographically remote area. Since Omnia serendipitously chose to use the Stone Creek mark, without authorization from the registered owner, the Ninth Circuit found that the junior user acted in bad faith and that therefore the doctrine was not available to it as a defense.
The Ninth Circuit then addressed the standard for disgorgement of profits as the proper measure of damages. Prior to a 1999 amendment to the Lanham Act's remedies provision, Ninth Circuit precedent held that an award of a defendant's profits required a showing of willful infringement. In this case, the Court examined the legislative history of the Lanham Act amendment and found that it was intended only to correct a mistaken omission under the trademark dilution statute, not to change the foundation of Ninth Circuit precedent on defendants' profits as a measure of damages. Addressing the question for the first time, the Ninth Circuit held that "willfulness remains a prerequisite for awarding a defendant's profits."
Practice Note: Several circuits have ruled the other way, viewing willfulness as one factor in the overall determination of whether an award of the infringer's profits is appropriate. The Third, Fourth, Fifth and Seventh circuits have adhered to the rule that willfulness is but one piece of the puzzle. Given this split, trademark owners should be aware of what they must plead to recover the defendant's profits in the various regional circuits.