Expert witnesses can make or break your intellectual property litigation. This series addresses how to get the most out of an economic expert to establish plaintiff’s case for damages for infringement of its intellectual property. (Part 1 and Part 2.) Today’s article focuses on trademark infringement.
A successful trademark infringement plaintiff claim establishes that the defendant used the plaintiff’s trademark or a similar mark to convince others that the defendant’s goods and services were associated with or sourced from the plaintiff’s goods or services in a manner that harmed the plaintiff. Trademark plaintiffs often consider injunctive relief their most important remedy, but they can recover damages if they meet the burden of proof. Trademark damages are not automatically awarded and cannot be punitive; the damages must not benefit plaintiff more than is required to repair the damage.
A trademark owner can recover three types of compensatory damages for infringement: an accounting of infringer’s profits, the actual damages (diverted moneys) the owner lost to the infringer and a reasonable royalty representing the owner’s damages. Both sides can use economic experts to help prove these, and then a jury decides any award.
The infringer’s profits
Once a plaintiff has established it suffered damages, it must demonstrate a reasonable basis for calculating damages. The plaintiff can recover the infringer’s profits from using the mark (attributable to the infringement) minus expenses the plaintiff would have incurred to earn those profits. However, the plaintiff must only prove the infringer’s sales as damages; the infringer must prove any deductions that reduce the calculation (e.g., variable business operating costs including labor, raw materials, and other costs associated with producing the infringing goods). Fixed operating costs are not generally deductible. The infringer can also deduct sales it proves were not made because of the infringement.
Information from discovery helps the owner prove the infringer’s profits. An economic expert calculates profits and confirms that defendant only deducted reasonable costs from its claimed variable operating costs.
Parties awarded actual damages generally prove that customer confusion resulted in economic loss or that using the trademark unjustly enriched the infringer. The owner must establish it suffered an actual loss, which involves demonstrating sale or profit loss, goodwill loss or corrective advertising costs. Some courts require proof of actual confusion or deception.
Measuring lost profits involves calculating the revenue the owner would have earned if not for the infringer’s actions, less the variable operating costs that would have been incurred to earn those revenues. Economic experts perform this analysis by considering:
- Demand for the product sold with the trademark
- Absence of acceptable noninfringing substitutes
- Plaintiff’s manufacturing and marketing capability to absorb production increases
- The profit plaintiff would have made
Loss of goodwill
Estimating loss of goodwill requires comparing the value of the owner’s goodwill before and after the infringement, using comparative data like plaintiff’s drop in market share or the impact measured by consumer surveys. The economic expert may be asked to assume the holder was damaged based on evidence from other experts (i.e., trademark survey experts) and to calculate damages based on that.
Corrective advertising cost
Corrective advertising seeks to counteract public confusion resulting from the trademark infringement. To be recoverable, corrective advertising costs cannot eclipse the mark’s value and must occur in a market where plaintiff and defendant are direct competitors; otherwise, such costs may represent a windfall for the plaintiff, assisting the plaintiff in advertising its goods or services. Economic experts can review costs for similar types of advertising to calculate these costs.
A reasonable royalty for trademark infringement is calculated based on the reasonable value of a license to plaintiff’s trademark. Georgia-Pacific Corp. v. United States Plywood Corp., a patent infringement case, established the leading methodology. An economic expert must understand how the factors should be applied to trademarks, trademark licensing, and the alleged infringement because trademark rights are unique and can extend beyond a patent’s life.
Georgia-Pacific hypothetical negotiation
The reasonable royalty rate is determined by constructing a hypothetical negotiation for licensing the trademark between the parties at the time infringement began. The law presumes this hypothetical negotiation occurred and that plaintiff, who ordinarily would not be required to license its trademark, did so willingly. The following factors help determine a reasonably negotiated rate. Not all factors may apply, or with equal effect; however, the net result can never fall below the last factor, the statutory minimum:
- The owner’s royalties for licensing the mark
- Rates the licensee paid for other comparable marks
- The license’s nature and scope
- The licensor’s policy and marketing program to maintain its mark
- The licensor and licensee’s commercial relationship
- The effect of selling products bearing the mark in promoting the licensee’s other products’ sales
- The mark’s duration and the license’s term
- The product’s profitability, commercial success and current popularity
- The advantage of marked products over others
- The nature of the marked products as owned and produced by the licensor, and benefits to those using it
- How the infringer used the mark and any evidence proving that use’s value
- The portion of the profit or selling price customary to allow the mark’s use
- The portion of the profit credited to the mark, the manufacturing process, business risks, or significant features the infringer added
- Expert opinion testimony
- The amount that a licensee and licensor would have agreed upon if both had tried to reach an agreement
Using these factors, the expert reaches a royalty expressed as a percentage of defendant’s sales (e.g., 5 percent reasonable royalty), a per-unit amount (60 cents per widget) or a flat sum. That number is applied to defendant’s infringing sales to derive a damages figure. That figure is then adjusted for interest. The court may require that plaintiff establish a connection between the sales and the trademark to avoid a windfall to plaintiff.