On February 26, 2025, the Supreme Court issued a ruling that served to uphold the tenet of “corporate separateness” in litigation. The case reinforces that if a plaintiff wants to hold a corporate affiliate liable for damages, that affiliate has to be named as a party to the case. While this case dealt specifically with trademark infringement litigation under the Lanham Act, it is applicable to corporate litigation at large.
In Dewberry Group, Inc. v. Dewberry Engineers Inc., the U.S. Supreme Court issued a unanimous opinion that vacated and remanded an earlier judgment made by the U.S. District Court for the Eastern District of Virginia, which had also been subsequently affirmed by a split Fourth Circuit.
The companies, which are both in the real estate industry, were engaged in a years-long litigation battle in which plaintiff Dewberry Engineers successfully sued defendant Dewberry Group for infringement of the trademark “Dewberry.”
In cases where a party profits off of trademark infringement, the Lanham Act allows plaintiffs to recoup profits that a defendant earned as a result of its infringing activities (15 U.S. Code § 1117(a)). The Act allows for the equitable “disgorgement of profits” along with other provable damages.
In this case, the named defendant Dewberry Group had no profits; in fact, it operates at a loss. The company provides services that generate income for a variety of affiliate companies which are owned by the same person who owns Dewberry Group but are incorporated separately. This meant that the profits Dewberry Group earned that could be attributed to the infringing activities showed up in the books of its affiliates, not its own.
In order to better reflect the “economic reality” of Dewberry Group’s corporate structure, the District Court treated Dewberry Group and its affiliates as a “single corporate entity” for the purpose of calculating a disgorgement award. Dewberry Engineers was awarded $43 million based on Dewberry Group’s affiliates’ profits.
The question before the Supreme Court was whether the District Court erred and violated the concept of “corporate separateness” in holding the defendant’s affiliates liable even though they were not named as defendants in the suit. The idea of “corporate separateness” generally states that “separately incorporated organizations are separate legal units with distinct legal rights and obligations.” This separateness creates a barrier of protection from liability for related affiliates, subsidiaries, and parent companies.
The Supreme Court reasoned that where the Lanham Act provides for the recoupment of “defendant’s” profits attributable to the infringement, the term “defendant” must carry its standard legal definition, which is a party that is specifically named in a suit. Because none of the affiliate companies were named in Dewberry Engineers’ lawsuit, they therefore could not simply be lumped together with Dewberry Group for the purpose of determining an award amount.
Dewberry Engineers argued that the District Court’s latitude was permissible under the so-called “just-sum provision” in the text of the Lanham Act, which allows a Court to adjust a recovery sum if it thinks that a different sum would more appropriately reflect the financial gain attributable to the defendant’s trademark violation:
“If the court shall find that the amount of the recovery based on profits is either inadequate or excessive[,] the court may in its discretion enter judgment for such sum as the court shall find to be just, according to the circumstances.”
However, the Supreme Court pointed out that the District Court never invoked the just-sum provision in its reasoning but expressly stated that it was treating Dewberry Group and its affiliates as a single corporate entity. The Supreme Court did not express an opinion about whether the District Court might have used the just-sum provision to determine a disgorgement award, but it certainly left this door open.
The Court also chose not to express views on whether and how other methods of altering the award amount to more accurately reflect financial gain might work, but it strongly suggested that using these other routes would have a higher chance of success without violating corporate separateness.
For example, there are instances where a court is permitted to “pierce the corporate veil,” i.e., hold the owners of a corporation liable for the obligations of the corporation, eliminating the legal separation that typically exists between these two parties. However, plaintiffs have the burden of showing that piercing the corporate veil is justified.
A takeaway for other would-be plaintiffs is the critical need to perform early due diligence and name all parties that they may seek to hold liable and from which they may seek to collect damages.
If you have any further questions regarding intellectual property disputes or trademark infringement under the Lanham Act, please contact Tara Aaron-Stelluto.
Tara Aaron-Stelluto