Page 108 - Intellectual Property Disputes

the average profit margin because infringement may allow the infringer to recognize net profit at a much
larger profit margin percentage of its gross revenue than in the absence of infringement. fn 10

In On Davis, a copyright case, the Ninth Circuit Court of Appeals narrowed the definition of revenues to
be used in the damage claim, stating "we think the term ‘gross revenue’ under the statute means gross
revenue reasonably related to the infringement, not unrelated revenues." fn 11 In arriving at its decision,
the Ninth Circuit relied in part on the Seventh Circuit’s 1983 decision in Taylor v. Meirick, which held
that the copyright owner was entitled to profits of the infringer related to infringed product sales but not
on everything the infringer sold. Therefore, to establish a prima facie case, the copyright owner should
show the infringer’s gross sales of infringing products. fn 12 Notably, the Seventh Circuit in the Taylor
case explained its logic in interpreting the statute as follows: "If General Motors were to steal your
copyright and put it in a sales brochure, you could not just put a copy of General Motors’ corporate
income tax return in the record and rest your case for an award of infringer’s profits." fn 13

Consistent with the previous discussion on incremental costs, some courts accept as deductible expenses
only those costs directly attributable to the production, distribution, performance, or display of the
infringing work. For the infringer to deduct such expenses, it should prove them with a reasonable
degree of "specificity." fn 14 In some Federal Circuit opinions, the acceptable profit measure is not
incremental profit; rather, it is based on a full recognition of the costs related to the infringement,
including overhead and fixed costs. Some courts, however, have refused to recognize certain overhead
costs. The client attorney should provide guidance to the expert in this area.

Under Section 35(a) of the Lanham Act, a trademark owner is entitled to receive only infringers
"profits." Determining which costs are deductible from gross revenues to arrive at an infringer’s profits,
however, is not an easy task. There are a number of competing standards for measuring appropriate cost
deductions. Under the differential cost rule, sometimes referred to as the incremental approach, only
specific costs that would not otherwise have been incurred but for the production of the infringing goods
are allowed as deductions. Fixed costs, such as rent for manufacturing facilities, would not be deducted.
Only variable costs, such as the raw materials and labor that actually go into manufacturing the
infringing product, are allowed as deductions. This is the most favorable rule for trademark owners.

The direct assistance rule is a variant of the differential cost rule, which is more generous to infringers.
Under the direct assistance rule, costs that directly assisted in the production of the infringing goods are
allowed as deductions. The benefit to infringers under this rule is that some elements of overhead and
general administration are permitted deductions. This is the approach taken under the Restatement
(Third) of Unfair Competition.

The fully allocated cost rule, sometimes referred to as the full absorption approach, is even more
generous to infringers. Under this rule, all expense items properly allocated under generally accepted

fn 10 Johnson v. Jones, 149 F.3d 494 (6th Cir. 1998).

fn 11 On Davis v. The Gap, Inc., 246 F.3d 152, 160 (9th Cir. 2001).

fn 12 Taylor v. Meirick, 712 F.2d 1112, 1122 (7th Cir. 1983).

fn 13 Id.

fn 14 Allen-Myland v. Int’l Bus. Machs. Corp., 770 F. Supp. 1014, 1024 (3d Cir. 1991).

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