Infringer bears burden of proving lawful revenues, says Seventh Circuit

In WMS Gaming Inc v WPC Gaming Productions Ltd (Case 07-3585, September 8 2008), the US Court of Appeals for the Seventh Circuit has reversed the decision of the district court and held that the infringer was liable for the entire amount of its gross sales, minus any deductions and expenses proven by the infringer. 
WMS Gaming Inc brought suit against WPC Gaming Productions and its parent PartyGaming PLC (collectively PartyGaming) for infringement of WMS’s trademarks JACKPOT PARTY and SUPER JACKPOT PARTY. WMS sought an injunction, damages and an equitable accounting of profits for infringement of its trademarks. PartyGaming failed to appear or answer, and a default judgment resulted.  
WMS’s profits estimate was based on the total amount of revenue from casino games listed in PartyGaming’s annual report. However, the district court determined that this estimate failed to identify which profits were specifically linked to games using the infringed trademarks, as opposed to profits derived from non-infringing activities. Consequently, the court rejected WMS’s estimation and allowed only those damages that could be “ascertained with reasonable certainty”. Applying the actual damages 'reasonable certainty' standard, the court allowed only $2.6 million in damages, instead of the entire $287 million that WMS was seeking under the equitable accounting of profits remedy. WMS appealed, challenging the district court’s limitation of damages under the actual damages theory. According to WMS, the district court should have acknowledged its request for an accounting of profits as a separate, statutorily prescribed remedy under 15 USC § 1117(a)
The Seventh Circuit reversed, finding that the district court had erred in conflating the two remedies available to WMS. Under the district court’s holding, WMS would bear the risk of uncertainty regarding the proper characterization of the revenues, even though PartyGaming was in a better position to ascertain the correct distribution of the profits. The court cited a 1916 case, Hamilton-Brown Shoe Co v Wolf Brothers & Co (240 US 251), in which the Supreme Court held that: 
it is more consonant with reason and justice that the owner of the trademark should have the whole profit than that he should be deprived of any part of it by the fraudulent act of the [infringer] ... for the reason that the fault is his; and it is but just that [the infringer] should suffer the loss rather than the innocent party, who in no degree contributed to the wrong.” 
Therefore, the Seventh Circuit held that both trademark damages remedies were available to WMS, and reiterated the established legal standard for an equitable accounting of profits: once the plaintiff has proved the infringer’s sales, or all sales relating to products bearing the infringing mark, the burden shifts to the infringer to prove its expenses and other deductions from gross sales. 
R Whitman Burns, McDermott Will & Emery LLP, Chicago

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