Monetary Remedies in Trademark Cases
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  • 1. Monetary Remedies in Trademark Cases Weston Anson, CONSOR Intellectual Asset Management R. Charles Henn Jr., Kilpatrick Stockton LLP Paul C. Llewellyn, Kaye Scholer LLP May 25, 2010
  • 2. Growing Interest in Monetary Remedies Recent high profile verdicts adidas $300+ million (-> $65.3 million) any others? Pressure on enforcement budgets
  • 3. Lanham Act Monetary Remedies Lost profits lost sales lost royalties price erosion Disgorgement of profits Loss of business value Corrective advertising expenses
  • 4. Threshold Requirements Actual injury and/or willfulness generally required Courts have broad discretion Precise calculation not mandatory
  • 5. Value Definitions Fair market value In-place value Fair value Liquidation value Deal value Licensing value Transaction value Securitization value Replacement or reproduction value But-for value Opportunity cost value
  • 6. What is Damaged: The Trademark Bundle Core brand Primary trademark Corporate name and logo Sub-brand names Worldwide trademark registrations Secondary trademarks Packaging design and copyrights Trade dress Logos
  • 7. Opposing Valuation Conclusions: Case Study Action: Federal trademark infringement Cause: Infringing shoe logos and designs Plaintiff: Large sporting goods company Defendant: Large shoe retailer Plaintiff's Expert: $40.0 million Defendant’s Expert: $2.0 million Award: $60.0 million
  • 8. Lost Sales Most common form of “damages sustained by the plaintiff” Actual confusion or intentional deception generally required Survey evidence sometimes accepted as surrogate for actual confusion
  • 9. Quantifying Lost Sales Lost Sales Profits (in millions) Infringing Sales $100.6 Allocated Direct Costs $30.3 Other Allocated Incremental Costs $25.0 Infringer’s Profits $45.3
  • 10. Lost Sales: Practical Considerations Generally Only in Point-of-Sale Cases Actual Confusion Evidence Key Early communication with sales force “ Form” approach to gathering instances Plaintiff Must Disclose Its Margins Potential issues with jury perception Potential conflict with “lost profit” position
  • 11. Reasonable Royalties Available as alternative measure of damages in some circuits Actual confusion or intent to deceive generally required Georgia-Pacific elements widely accepted as factors to consider in awarding royalties.
  • 12. Georgia-Pacific Elements royalty rates received by licensor in prior licenses; prior rates paid by licensee; licensor’s licensing policies; nature and scope of the infringer’s use; special value of the mark to the infringer; profitability of the infringer’s use; lack of viable alternatives; opinion of expert witnesses; and amount that licensor and licensee would have agreed upon in voluntary negotiations Georgia-Pacific Corp. v. U.S. Plywood-Champion Papers, Inc. , 318 F. Supp. 1116 (S.D.N.Y. 1970), modified and aff’d , 446 F.2d 295 (2d Cir. 1971) .
  • 13. Establishing Comparable Royalty Rates LICENSOR ROYALTY RATE COMMENTS TOTAL Wimbledon / TM 6.0% 2-4% for advertising 8.0 – 10.0% Rawlings 3.5% - 5.0% ------- 3.5% - 5.0% NFL 8.0% – 15.0% 2% for advertising 10.0% - 17.0% MLBB 6.0% - 12.0% 2% for advertising 8.0% - 14.0% LA Gear 4.0% - 6.0% 1-3% for advertising 5.0% - 9.0% Playboy 6.0% - 10.0% 2% for advertising 8.0% - 12.0% Bancroft 3.0% - 5.0% Product design fees 3.5% - 5++% Louisville Slugger 5.0% - 8.0% 2% for advertising 7.0% - 10.0% RANGE 3.5% - 17.0% SPREAD 485%
  • 14. Quantifying Reasonable Royalties Annual Sales of Brand X Widgets $100,000 Industry Average Royalty Rate for Branded Widgets 15.0% Estimated Annual Royalty Income $15,000 Extended for 10 years $150,000 Annual Discount Rate 15.0% Total Value or Damage = $80, 730 Simplified Damages Analysis
  • 15. Royalties : Practical Considerations Measuring value of the brand Analogous License Agreements From client and opponent From third-party sources The “We Never Would’ve Done It” Defense
  • 16. Price Erosion Existence of infringement forces plaintiff to lower its prices Accepted in patent cases but not generally accepted in trademark cases Rejected where price competition caused by factors other than infringement
  • 17. Approaches to Quantifying Price Erosion Decrease in the number of units sold; Increase in production or management costs; Increases in R & D or capital costs; Increases in capital expenditures to run a business; Increase in working capital needed; Decreases in past sales or future sales; Changes in the price per unit charged; Changes in market share Reduction in market size The cost of not being the first to market.
  • 18. Price Erosion: Practical Considerations Proof of causation critical Evidence regarding marketplace situation in addition to evidence of plaintiff’s costs and sales
  • 19. Disgorgement of Profits Many circuits require willfulness, others include it as a factor to consider Actual confusion not always required Plaintiff’s burden to establish defendant’s revenue; defendant’s burden to prove offsetting costs
  • 20. Calculating Infringer’s Profits Simplest of all in theory*, toughest in practice: Infringer’s Sales AAA Less: Direct Costs BBB Net Profits = Damages CCC *With full discovery and disclosure – which is NEVER forthcoming
  • 21. Disgorgement of Profits: Practical Considerations Remember Burden Allocation Missing expert disclosure dates Proof at trial (save profits expert for “rebuttal”) “ Attributable to the infringement” Copyright standard (17 USC § 504(b)) Sometimes imported into trademark cases Consider Giving Jury Alternatives The “but if...” approach Watch for Double Recovery
  • 22. Loss of Business Value Focus on change in worth of plaintiff’s business caused by wrongful conduct breach of contract theft of trade secret cases Not yet accepted in trademark context
  • 23. Quantifying Loss of Business Value Annual Sales $15.9 M $24.1 M Operating Expenses $5.4M $6.3 M Pre-Tax Margins (5 years) $10.5 M $17.8 M Discount Rate 18.8% 18.8% Net Business Value $7.2 M $24.9 M LOSS IN BUSINESS VALUE: $17.7 M
  • 24. Loss of Business Value: Practical Considerations
  • 25. Corrective Advertising Rare but available in limited circumstances Courts look at necessity of corrective advertising undertaken by plaintiff Actual confusion or marketplace injury not always required
  • 26. Seeking Corrective Advertising Damages Only makes sense in cases of extensive advertising of the infringing mark Decide early in the case Need discovery targeted at drilled-down advertising expenditures Avoids “double recovery”
  • 27. Other damages issues to keep in mind Treble damages / profits Enhanced and statutory damages for counterfeiting (per mark) Attorneys’ fees Lots of case law on “block billing,” so consider recording time differently from the beginning. Combining damages remedies
  • 28. Damages / Valuation Methodologies are Changing No longer: Cost, Comparables, Income, Relief from Royalty The Brand Value Equation Methodology (BVEQ™) Premium Pricing Analysis The Competitive Advantage Technique Profit Split Methodology The Concept of Relative Incremental Value Rules of Thumb Decremental Cost Savings Valuation Snapshots of Value Approach Enterprise Value Enhancement Subtraction Method of Value or Benchmark Method of Value Imputed Income Analysis The Technology Factor Approach Income Capitalization or Direct Capitalization Methodology The ValCalc Methodology Income Differential Analysis Valmatrix Analysis Technique Liquidation Value Options Pricing Technique (The Black-Scholes)
  • 29. Problems in Litigation Damages Cases Purely defendant vs. plaintiff POV Adversarial, always Extremes in value, not midpoints Premiums above market values Enforced transaction assumptions Reliance on court decisions (e.g. GP) rather than economic logic Too many hired gun experts – and too little real IP experience