Does the Bad Faith Requirement in Accounting of Profits Damages Make Economic Sense?

Journal of Intellectual Property Law Volume 6 | Issue 1 Article 4 October 1998 Does the Bad Faith Requirement in Accounting of Profits Damages Make Economic Sense? Eugene W. Luciani Follow this and additional works at: https://digitalcommons.law.uga.edu/jipl Part of the Intellectual Property Law Commons Recommended Citation Eugene W. Luciani, Does the Bad Faith Requirement in Accounting of Profits Damages Make Economic Sense?, 6 J. Intell. Prop. L. 69 (1998). Available at: https://digitalcommons.law.uga.edu/jipl/vol6/iss1/4 This Notes is brought to you for free and open access by Digital Commons @ Georgia Law. It has been accepted for inclusion in Journal of Intellectual Property Law by an authorized editor of Digital Commons @ Georgia Law. Please share how you have benefited from this access For more information, please contact . Luciani: Does the Bad Faith Requirement in Accounting of Profits Damages M NOTES DOES THE BAD FAITH REQUIREMENT IN ACCOUNTING OF PROFITS DAMAGES MAKE ECONOMIC SENSE? I. INTRODUCTION An accounting of profits damages in trademark infringement actions amounts to the disgorging of the defendant's profits made due to infringement. Although the Lanham Act provides for this remedy, it is far from being awarded as a matter of course upon a finding of infringement. Although a split among the federal circuits currently exists, a majority of the circuits require a finding of bad faith before awarding an accounting of profits. This paper seeks to determine whether the bad faith requirement makes economic sense in light of the policies advanced by the Lanham Act and subsequent legislation. First, a survey of the legislation and legislative history will establish the policies behind trademark protection. Next, an examination of Supreme Court and federal circuit court opinions will provide a glimpse into the treatment and rationales advanced by the judiciary on this subject. A more in-depth analysis of the components of an accounting will follow in order to clarify and sharpen the economic models which will follow and conclude the note. These models suggest that the bad faith requirement not only may not be necessary to compensate the wronged plaintiff, but also may not be necessary to deter intentional infringers. Rather, the bad faith requirement may act as a proxy for a more important inquiry into the comparative costs facing the infringing and infringed firms. Published by Digital Commons @ Georgia Law, 1998 1 Journal of Intellectual Property Law, Vol. 6, Iss. 1 [1998], Art. 4 J. INTELL. PROP. L. A. [Vol. 6:69 LANHAM ACT AND ITS LEGISLATIVE HISTORY In 1946 the United States Congress passed the Lanham Act,' which placed "all matters relating to trade-marks in one statute."2 In so doing, Congress hoped to protect the public, an investor's energy, capital and effort, and to provide prompt and effective relief against infringement by "making infringement and piracy unprofitable."' As trademark infringement is merely a subsection of unfair competition, the protection afforded is against what Congress deemed "swindling".4 Congress understood the importance of trademark protection, as it has emphasized that trademarks serve public policy by providing the public with a symbol or name to distinguish one product from another.5 Furthermore, Congress acknowledged that trademarks insure high quality products "by securing to the producer the benefit of the good reputation which excellence creates."6 As we shall see, without trademark protection these goals would quickly erode as incentives to create and police marks would decrease and public perception of a trademark's reliability would diminish. B. RELIEF PROVIDED BY THE LANHAM ACT Congress provided for injunctive relief to prevent the unauthorized use of a trademark.7 A trademark owner can use an injunction to "restrain an infringer from any current or prospective infringing activities."8 The injunctive relief only provides a 1 Lanham Trademark Act of 1946, ch. 540, 60 Stat. 427. 2 S. REP. No. 79-1333, at 3 (1946), reprintedin 1946 U.S.C.C.A.N. 1274. 3 Id. at 1275. 414. 6 Id. 6 id. 7 15 U.S.C. § 1116(a) (1994). The pertinent part of this section follows: The several courts... shall have power to grant injunctions, according to the principles of equity and upon such terms as the court may deem reasonable, to prevent the violation of any right of the registrant of a mark registered . .. or to prevent a violation under section 1125(a) of this title. Id. 8 Keith M. Stolte, Remedying Judicial Limitations on Trademark Remedies: An Accounting of Profits Should Not Require a Findingof Bad Faith, 87 TRADEMARK REP. 271, 273 (1997). https://digitalcommons.law.uga.edu/jipl/vol6/iss1/4 2 Luciani: Does the Bad Faith Requirement in Accounting of Profits Damages M 1998] ACCOUNTING OF PROFITS 71 sufficient remedy when an infringer "has not yet entered the market in any appreciable manner, or where past sales of infringing articles have not caused significant damage to a trademark 9 owner." Since injunctions may not be a totally sufficient remedy for the wronged trademark owner, 10 Congress passed Lanham Act section 35.11 This section provides an election of possible remedies for the wronged trademark owner. The owner is entitled, subject to two provisions in the Act and the "principles of equity, to recover (1) defendant's profits, (2) any damages sustained by the plaintiff, and (3) the costs of the action." 2 In assessing profits the plaintiff need 9 Id. at 273-274. ' 0 Id. at 274. " Act of July 5, 1946, ch. 540, title VI, § 35, 60 Stat. 439 (codified as amended at 15 U.S.C.A. § 1117 (1998)). 12 15 U.S.C.A. § 1117. The relevant sections of the statute are: § 1117. Recovery for violation of rights; profits, damages and costs; attorney fees; treble damages; election (a) When a violation of any right of the registrant of a mark registered in the Patent and Trademark Office, or a violation under section 1125(a) of this title, shall have been established in any civil action arising under this chapter, 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. The court shall assess such profits and damages or cause the same to be assessed under its direction. In assessing profits the plaintiff shall be required to prove defendant's sales only; defendant must prove all elements of cost or deduction claimed. In assessing damages the court may enter judgment, according to the circumstances of the case, for any sum above the amount found as actual damages, not exceeding three times such amount. 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 judgement for such sum as the court shall find to be just, according to the (...truncated)