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Cyclone USA, Inc. v. LL&C Dealer Services

May 24, 2010


The opinion of the court was delivered by: Andrew J. Wistrich United States Magistrate Judge



This case was tried to the Court sitting without a jury. After the Court issued its ruling on liability, Cyclone USA filed a motion for a further accounting of profits [Cyclone USA's Brief Regarding Further Accounting ("Cyclone USA's Brief")], LL&C filed an opposition [LL&C's Opposition to Cyclone USA's Request for Profits and Prejudgment Interest of Profits ("LL&C's Opposition")],*fn1 and Cyclone USA filed a reply. [Plaintiff's Reply to LL&C's Brief Regarding the Further Accounting ("Cyclone USA's Reply")]. Since the Court already has determined that Cyclone USA is entitled to a further accounting of LL&C's profits, only the amount is at issue. [Memorandum of Decision, at 22; see also Memorandum of Decision, 49-51, 53 (regarding Sei Kim)]. Even LL&C concedes that the profits attributable to its Lanham Act violations during the period 2004-2007 are at least $311,477.00. [Declaration of Barbara Luna, at 2, 7].

Legal Standard

In computing a defendant's profits for violations of the Lanham Act, "both the language of Section 1117 and the case law indicate that the defendant has the burden of proof as to any deductions from his gross sales." Maier Brewing Co. v. Fleischmann Distilling Corp., 390 F.2d 117, 124 (9th Cir.), cert. denied, 391 U.S. 966 (1968) (citation omitted); 15 U.S.C. § 1117(a) ("In assessing profits the plaintiff shall be required to prove defendant's sales only; defendant must prove all elements of cost or deduction claimed."). Although not all costs are deductible, allowable deductions include items such as overhead and most operating expenses. See W.E. Basset Co. v. Revlon, Inc., 435 F.2d 656, 665 (2d Cir. 1970); 5 J. Thomas McCarthy, Trademarks and Unfair Competition § 30:66 (4th ed. 2008). "Any doubts about the actual amount of profits will be resolved against the infringer." H-D Michigan Inc. v. Biker's Dream, Inc., 48 U.S.P.Q. 2d 1108, 1113 (C.D. Cal. 1998), aff'd in part, appeal dismissed in part, 230 F.3d 1366 (9th Cir. 2000) (citing Louis Vuitton, S.A. v. Spencer Handbag Corp., 765 F.2d 966, 972-73 (2d Cir. 1985)).

1. LL&C's Attorney's Fees

LL&C maintains that if the legal fees it expended in litigating this action are taken into account, "LL&C clearly would not have had any 'net' profit." [LL&C's Opposition, at 2-3]. However, attorneys' fees and associated expenses incurred by an infringer in unsuccessfully defending against a trademark infringement claim are not deductible when calculating an infringer's profits, even though such expenses are directly related to the sale of the infringing goods. Wolfe v. Nat'l Lead Co., 272 F.2d 867, 873 (9th Cir. 1959) (finding that the attorneys' fees and costs paid by the defendant in connection with the trademark infringement litigation were not proper deductions), cert. denied, 362 U.S. 950 (1960) overruled in part on other grounds by Maier Brewing Co. v. Fleischmann Distilling Corp., 359 F.2d 156 (9th Cir. 1966); Maltina Corp. v. Cawy Bottling Co., Inc., 613 F.2d 582, 586 (5th Cir. 1980) (finding that the legal fees arising from the defendant's infringement "would not be allowable in any case"); Tommy Hilfiger Licensing, Inc. v. Goody's Family Clothing, Inc., 2003 WL 22331254, *24 (N.D. Ga. 2003) (refusing to allow a deduction for defendant's attorneys' fees; reasoning that "[a] contrary holding would allow a defendant to act with willful blindness in purchasing counterfeit products and make a profit by selling those products, but force the innocent trademark holder to bear the expense of legal action caused by the purchase of the products"). Even LL&C's expert excluded the legal fees related to this litigation from LL&C's claimed deductible expenses "in order to determine LL&C's true profitability on the Tornado products." [Declaration of Dr. Barbara Luna, at 4]. Accordingly, attorneys' fees and associated expenses incurred by LL&C litigating this action are not deductible for the purpose of computing LL&C's net profit on infringing sales during the period 2004-2007.

2. Salaries of the Two Members of LL&C

LL&C contends that no salaries for either of the two members of LL&C were deducted from the profit and loss statements. It argues that the calculation of its net profits is greater than it would be if LL&C was a legal entity that paid salaries to its officers rather than a limited liability company that merely distributed profits. [LL&C's Opposition at 3].

There is authority supporting the deduction of reasonable salaries for the officers or principals of a corporation in computing an infringer's profits, at least under some circumstances. See, e.g., Wolfe v. Nat'l Lead Co., 156 F. Supp. 883, 892 (N.D. Cal. 1957) ("Provided the salaries are reasonable and the recipients are in fact doing the work for which they are paid, corporate salaries should be allowed regardless of whether they were paid to the dominant personalities of the corporation."), aff'd, 272 F.2d 867 (9th Cir. 1959), cert. denied, 362 U.S. 950 (1960). See also Clair v. Kastar, Inc., 70 F. Supp. 484, 487-88 (S.D.N.Y. 1946) (holding that in the context of calculating profits in cases of patent infringement, "salaries to officers in payment of services rendered will be allowed as a credit, but only if such salaries are reasonable in amount and are not a distribution of profits in disguise"). However, LL&C has not offered any basis upon which a reasonable salaries for the two principals of LL&C might be calculated. Therefore, the Court makes no deduction for the salaries of LL&C's principals.

3. LL&C's 2005 Loss

LL&C argues that LL&C's net profit for the period from 2004-2007 should take into account a loss LL&C realized in 2005. LL&C's expert says this loss amounted to $61,366. [Declaration of Dr. Barbara Luna, Ex. B]. The Ninth Circuit, however, has rejected the proposition that such a loss is an allowable deduction when computing a trademark infringer's profits. Wolfe v. Nat'l Lead Co., 272 F.2d at 870 ("The owner of the patent, in holding the infringers to an accounting, is not confined to all or nothing. There may be an acceptance of transactions resulting in a gain with a rejection of transactions resulting in a loss. Upon a statement of an account, a patentee is not looked upon as a quasi-partner of the infringers, under a duty to contribute to the cost of the infringing business as a whole. He is the victim of a tort, free at his own election to adopt what will help and discard what will harm. The principle applies in trademark cases.")(quoting Duplate Corp. v. Triplex Safety Glass Co., 298 U.S. 448, 458 (1936))(internal quotations and citations omitted).

Other circuits have allowed infringers to offset unprofitable years against profitable ones in accounting for the net profits received during a period of trademark infringement, relying on the broad discretion conferred on district courts by the Lanham Act to fashion damages according to the specific circumstances of the case. See, e.g., Burger King Corp. v. Mason, 855 F.2d 779, 782-83 (11th Cir. 1988). However, while Wolfe has been overruled on other grounds by Maier Brewing Co. v. Fleischmann Distilling Corp., 359 F.2d 156 (9th Cir. 1966), aff'd, 386 U.S. 714 (1967), it nevertheless remains controlling Ninth Circuit law on the specific issue of whether an ...

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