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Supreme Court Hears Challenge to $43 Million Disgorgement Award Tied to Affiliate Profits
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Summary
At oral argument in Dewberry Group v. Dewberry Engineers, petitioner's counsel argued the Lanham Act permits disgorgement only of a defendant's own profits and that the Fourth Circuit erred by attributing $43 million in affiliate profits to a defendant that had zero net profits; government counsel urged courts can probe "true gain" in limited circumstances under the statute's "just"-sum provision.
The Supreme Court heard arguments over whether a court may order disgorgement under the Lanham Act based on profits earned by legally separate affiliates, a dispute that could reshape remedies in trademark cases.
Counsel for the petitioner, identified in the record as Mr. Hungar, told the justices the Lanham Act authorizes disgorgement of a defendant's profits but "petitioner had no profits to disgorge," and the Fourth Circuit's decision to treat the defendant and its affiliates as a single corporate entity and attribute $43,000,000 in affiliate profits to the defendant was unlawful. "The disgorgement award is unlawful under the Lanham Act and should be reversed outright," he said.
Hungar relied on a line of precedents that presume corporate separateness unless Congress speaks clearly, citing Best Foods and decisions that limit equitable remedies. He argued the record shows petitioner did not receive the affiliate revenues and that the courts below effectively disregarded corporate form without asserting traditional veil-piercing doctrines.
Representing the government's position in argument, Mr. Lynn characterized the issue as largely evidentiary: a court awarding a profits remedy may, in some circumstances, consider an affiliate's finances as evidence of the defendant's "true gain" without necessarily treating the affiliates as indistinguishable from the defendant. He pointed to the Lanham Act's "just"-sum provision and to district-court findings (unchallenged in the record, he said) that the petitioner drove and created the revenues and controlled how they were recorded.
"If the district court finds that the petitioner alone created all of the revenues and then put those revenues on the books of the affiliates," Lynn said, the statute permits a court to look beyond tax returns and traditional ledgers to reach a compensatory measure of the plaintiff's loss. He emphasized, however, that such authority must respect corporate separateness and treat the affiliates' receipts only as evidentiary, not as an automatic substitution for the defendant's profits.
Several justices probed the limits of that approach. One asked whether a court could treat capital contributions or later payments as profits if they were unrelated in time to the infringement; counsel for the petitioner answered that only revenues related to the infringement period and traceable to the infringing conduct may be included. Another justice questioned whether the "just"-sum provision is a broad safety valve or constrained by traditional equitable limits; petitioner's counsel pointed to Starbucks and other precedent to argue it is cabined to compensatory relief.
The bench also examined practical alternatives: why plaintiffs did not sue the affiliates directly or pursue veil-piercing or other equitable theories, and whether remand would be required to develop any alternate profit-calculation theory not litigated below. Counsel for the petitioner stressed waiver and forfeiture rules, arguing some alternative theories were not presented in the court of appeals and should not be accepted for the first time in this Court; government counsel said remand would be appropriate if the Court is uncertain about what the Fourth Circuit did or whether the record supports it.
In rebuttal, petitioner's counsel reiterated that the courts below treated the defendant and affiliates as a "single corporate entity," which, he said, amounts to disregarding corporate separateness and must be reversed. The case was submitted after the bench concluded questioning.
What happens next: The Court may choose to answer the narrow question presented'whether a court may include nonparty affiliate profits in a disgorgement award'or it may provide narrower guidance and remand to the lower courts to clarify the reasoning and record-based determinations. Any opinion will likely confront the balance between equitable tools for compensatory relief and the long-standing presumption of corporate separateness.
Quotes used in this article are drawn from counsel's remarks during oral argument as reflected in the official transcript.