This term, the U.S. Supreme Court is set to weigh in on a trademark dispute that has the potential to impute financial liability on a private equity sponsor or acquiring company, even if it was not directly involved in the litigation. Under the Lanham Act, plaintiffs that have suffered trademark infringement are entitled to recover, subject to the court’s discretion, the defendant’s profits. In a recent trademark dispute, a federal district court took—and the appellate court affirmed—an expansive view of “defendant’s profits” to include the profits of legally separate, nonparty corporate affiliates of the defendant that shared common ownership. The matter, Dewberry Group Inc. v. Dewberry Engineers, Inc., is now on the docket at the Supreme Court, which will take up the question of how broadly “defendant’s profits” can be defined. Below, we review the case and its potential implications.

The Lanham Act and Dewberry

Respondent Dewberry Engineers is a commercial real estate development corporation that owns two federal trademarks for “Dewberry.” Petitioner Dewberry Group is a Georgia real estate development business owned by developer John Dewberry. In 2006, Dewberry Group—then doing business as Dewberry Capital—sent Dewberry Engineers a cease-and-desist letter asserting common law trademark rights to “Dewberry” and claiming a likelihood of confusion between the parties’ marks. Dewberry Engineers responded by suing Dewberry Capital for registered trademark infringement. The parties settled a year later, signing a confidential settlement agreement allowing Dewberry Engineers unfettered use of its registered marks and putting strict limitations on Dewberry Capital’s use of the term “Dewberry.”

The parties operated peacefully under this agreement until 2017, when Dewberry Capital rebranded as Dewberry Group and filed several Dewberry-formative trademark applications with the United States Patent and Trademark Office, in violation of the settlement agreement. Dewberry Engineers sued Dewberry Group in May 2020 for breach of contract and for trademark infringement, and on August 11, 2021, the federal district court for the Eastern District of Virginia granted summary judgment in favor of Dewberry Engineers on both of its claims. In its judgment, the district court held that under the Lanham Act, a disgorgement of more than $42 million of Dewberry Group’s profits was appropriate. Although Dewberry Group had presented evidence from its tax returns that it generated no profits, the court calculated the profits award by considering the revenues and profits of Dewberry Group’s affiliated entities. Though the court had previously acknowledged that the affiliates were “third parties, separated by the corporate veil” and were not parties to the litigation, the court found that Dewberry Group depended on the profits of its corporate affiliates to make up for decades of massive losses. Thus, without the revenue generated by the affiliate entities, Dewberry Group as an ongoing, standalone entity would not exist.

A divided Fourth Circuit panel affirmed, noting that a court’s disgorgement award is “subject to the principles of equity” and that the district court weighed the equities and appropriately exercised its discretion to hold Dewberry Group to account. The Fourth Circuit further held that the district court properly exercised its equitable discretion to include in that account affiliates under common ownership, following the district court’s reasoning that doing so was necessary to prevent trademark infringers from using corporate formalities to insulate their infringement from financial consequences and shirk legal accountability.

Dewberry Group filed a petition for certiorari to the Supreme Court on February 16, 2024, which the Supreme Court granted on June 24, 2024. The case has been briefed, and oral argument is scheduled for December 11, 2024.

Dewberry Group argues that the Fourth Circuit’s holding contravenes the Lanham Act’s text, which limits any profits-disgorgement award to defendant’s own profits and disrupts the bedrock principle of corporate separateness by overriding the presumption that legally separate entities are distinct unless the corporate veil is pierced. Further, Dewberry Group argues that the Fourth Circuit overstates concerns that companies would use corporate separateness to evade responsibility for infringement, given that plaintiffs can still be compensated by the Lanham Act’s provisions allowing for any damages sustained by the plaintiff, the costs of the action, and, in exceptional cases, attorneys’ fees. Additionally, plaintiffs can opt to name corporate affiliates as defendants to the lawsuit. Dewberry Engineers counters that the district court and the Fourth Circuit’s decision was correct under the broad discretion afforded under the plain language of the Lanham Act, which allows courts to set the amount of a disgorgement award to reflect the “true profits” when an infringer has gained more than the infringer’s profits reflect. Dewberry Engineers also contends that the Fourth Circuit’s decision did not expand the scope of liability because it did not hold a nonparty jointly liable, but only treated the companies as a single corporate entity for the limited purpose of calculating the award against the named party.

On September 6, 2024, Debevoise attorneys, on behalf of the International Trademark Association (INTA), filed an amicus brief with the Supreme Court in support of neither party, arguing for the narrower definition of “defendant’s profits” consistent with the actual text of the statute. INTA contends that including non-parties’ profits in the damages calculation usurps established guardrails—such as piercing the corporate veil or joining additional defendants—and risks undermining the fundamental principles of corporate separateness. The brief emphasizes that trademark owners have numerous avenues for securing full and just compensation under the law without the need to implicate non-parties, and the Fourth Circuit’s decision risks exposing corporations to unpredictable and expansive liability.

Legal and Business Implications of Dewberry

If the Supreme Court rules in favor of Petitioner Dewberry Group, the status quo will be maintained, and private equity sponsors can take comfort in the security of corporate formalities and corporate separateness as methods to protect assets and limit the scope of litigation discovery and potential liability in intellectual property cases.

On the other hand, if Respondent Dewberry Engineers prevails, subject to the specifics of the decision, there are enhanced risks that businesses may need to consider in the private equity space:

• Corporate and Tax Structuring: A ruling for the Respondent in Dewberry means that courts can consider the profits of nonparty affiliates when assessing damages, even without a piercing of the corporate veil having occurred. Businesses will face greater challenges and risks when relying on corporate formalities and the doctrine of corporate separateness to shield assets in the damages phase of trademark cases.
• Enhanced Due Diligence Needs and Strategic Brand Management: Private equity firms will need to intensify their due diligence of the intellectual property portfolios of target companies’ affiliates and subsidiaries. And acquiring and target companies will want to strategize to ensure that their use of trademarks and branding aligns across the whole company, paying close attention to the clarity of trademark ownership or risk of trademark dilution post-acquisition.
• Implications for Scope of Discovery and Legal Risk: Companies with affiliated business entities will need to consider potential risks and costs associated with litigation discovery, the scope of which could be expanded to encompass legally separate corporate affiliates’ information and documents. And the broader scope of discovery could also lead to greater risks of liability where opposing parties have greater leeway to obtain documents that could form the basis for direct liability.
• Considering Corporate Affiliates in Potential Litigation: Companies seeking to recover monetary damages in connection with an infringement of its intellectual property rights will want to take a prospective defendant’s corporate structure and any corporate affiliates into account when determining the appropriate value of the dispute. Even if the infringing party lacks recoverable profits, a favorable decision for the Respondent in Dewberry would mean a defendant’s parent company or other nonparty corporate affiliate’s profits could be considered in determining a damages award.

Conclusion

As we await the Supreme Court’s decision in Dewberry, private equity sponsors and corporate boards and management must prepare for the possibility that the risk landscape could be altered by new guidance for courts evaluating disgorgement in trademark infringement and dilution cases.

A ruling in Dewberry upholding the lower courts’ decisions may influence the approach of private equity firms to assessing and integrating the intellectual properties of target companies. Businesses would then need to think carefully about how to manage their brand strategies to effectively mitigate legal risks and protect brand equity, especially if they are restructuring or marketing for acquisition. And plaintiffs seeking to vindicate their intellectual property rights could demand more extensive discovery of financial records, even into entities that are not named as defendants in a lawsuit. Regardless of the outcome, however, Dewberry underscores the importance of comprehensive intellectual property evaluations during due diligence and the strategic alignment of brand portfolios post-acquisition. By understanding and preparing for both potential outcomes, businesses can better navigate the complexities of trademark law and leverage their intellectual property for competitive advantage.

The Private Equity Report Fall 2024, Vol 24, No 3