WMS Gaming Inc. v. WPC Gaming Productions Ltd. and PartyGaming PLC, No. 07-3585 (7th Cir. September 8, 2008)
An online gambling concern has lost its trademark bet and, as a result, stands to forfeit infringement profits that may amount to a hundred million dollars or more, the U.S. Court of Appeals for the Seventh Circuit ruled earlier this week. The decision cast aside a district court determination that recovery of the ill-gotten profits would have awarded a “clearly excessive” windfall to the trademark owner and thus were impermissible. The appellate court reasoned that any profit from misconduct should belong to the victim and not the wrongdoer even if the award is a high number. The decision should operate as a powerful disincentive against low overhead, high-profit Web businesses that continue infringing activity due to shrewd calculation the margin achieved will enable them to simply buy their way out from legal trouble.
Plaintiff WMS had acquired several federal trademark registrations which cover gaming devices such as slot machines. The company manufactures, sells and leases its products in the U.S. under the registered marks JACKPOT PARTY and SUPER JACKPOT PARTY. It learned that defendants WPC and PartyGaming, affiliated entities, had sought to register PARTYJACKPOT in connection with online gaming services such as virtual slot machines and other Web-based casino games of chance. Nonetheless, the U.S. Patent and Trademark Office rejected the application based on the prior registrations secured by WMS. Undissuaded, defendants continued their use of PARTYJACKPOT and other marks which were highly similar, even identical, to the registered ones. WMS sued the infringers in the U.S. District Court for the Northern District of Illinois. Despite proper service of process, the defendants opted to not respond to the suit and a default judgment was against them. Thereafter WMS submitted its request for damages consideration.
To evidence its damage claims, WMS provided the district court with financial statements that had been downloaded from PartyGaming’s public website. The figures, depicted with colorful graphics, showed that the infringers had generated at least $977.7 million in total revenue over a period of a few years. Based on this evidence, WMS computed that defendants’ profits amounted to $287,391,140.70 and framed its request accordingly. The profits WMS attributed to infringing activity were a very broad estimate that likely included some revenue derived from non-infringing business.
Defendants chose not to divulge profits from actual infringement at that phase of the litigation, denying WMS cooperation. Based on the evidence presented, the district court concluded that the WMS estimate for its own annual losses, $891,140.70, constituted a “reasonable” sum. However the court soundly rejected awarding the much larger amount of the claimed infringing profits, $287,391,140.70, holding these could not “be ascertained with reasonable certainty.” WMS responded with a motion pursuant to Fed.R.Civ.P. 59(e) in an attempt to persuade the district court why WMS had met its burden under The Trademark Act of proving up the defendants’ profits by estimating the infringers’ gross sales. Nonetheless, the court refused to change its position and WMS appealed.
The Seventh Circuit reversed, holding that the lower court had committed “a fundamental error of law by failing to distinguish between WMS’s right to the defendants’ profits and its right to its damages.” It drew upon Hamilton-Brown Shoe Co. v. Wolf Bros. & Co., 240 U.S. 251 (1916) and Mishawaka Rubber & Woolen Mfg. Co. v. S.S. Kresge Co., 316 U.S. 203 (1942), which note that “[t]he burden is the infringer’s to prove that his infringement had no cash value in sales made by him . . . [i]f he does not do so, the profits made on sales of goods bearing the infringing mark properly belong to the owner of the mark.” Thus, where a trademark owner evidences an infringer’s sales with the infringer’s own words it is the infringer who must prove any costs or deductions, not the trademark owner. The Seventh Circuit concluded, “[c]ourts consistently find that when a trademark plaintiff offers evidence of infringing sales and the infringer fails to carry its statutory burden to offer evidence of deductions, the plaintiff’s entitlement to profits under [The Trademark Act] is equal to the infringer’s gross sales.”
The case furnishes a valuable lesson to nascent Web businesses. Namely, they will be gambling their entire gross sales, not just damages a trademark owner can “prove,” if management operates by the seat of its pants with the expectation that a perceived ability to scale up rapidly will enable the business to buy its way out from legal problems for pennies on the dollar later on. In fact, such a bet very well could cost the business everything.