Aset Freeze is Limited to Accounting for Profits; No Seizure Permitted for Statutory Damages Award

The assets that may be frozen to fund an equitable accounting in a trademark counterfeiting case are limited to those necessary to disgorge profits, according to a recent decision in the Southern District of New York.  Thus, while the plaintiff may ultimately be entitled to a statutory damages award, no pre-judgment remedy will be available to assure payment at the end of the case.

In that case, Klipsch Group, Inc. v. Big Box Store Ltd., the court had initially granted temporary relief restraining the assets of some 20 defendants including the Hong Kong company DealDxtreme.com.  The result of the Court’s order was that approximately $2 million were seized from one of DealExtreme’s PayPal accounts.  When DealExtreme – an auction site like e-Bay — demonstrated evidence that less than $10,000 of the alleged counterfeit goods had been sold through its site, the restrained funds were dropped to no more than $20,000.

Lanham Act Permits Asset Freeze

The case involved Klipsch-branded headsets, which the plaintiff’s investigators had purchased through a number of on-line retailers between December 2011 and June 2012.  The plaintiff sued 20 retailers and obtained an ex-parte order training the assets of the defendants.

At the preliminary injunction, DealExtreme demonstrated to the Court’s satisfaction that it had sold far less than the $2 million that had been restrained in its PayPal account.

Lanham Act Statutory Damage Award Not Protected

The plaintiff in the action argued that the Court had authority, however, to restrain assets in an amount sufficient to satisfy a statutory damages award (as much as $2 million in a counterfeiting case.)  The trial court, however, rejected that argument, holding that it was contrary to the U.S. Supreme Court’s holding in Grupo Mexicano de Desarrolo, S.A. V. Alliance Bond Fund, Inc., 527. U.S. 308 (1999), which prohibits the freezing of assets solely to satisfy a future judgment.

The trial court held that the plaintiff in a counterfeiting case is entitled to an asset freeze to preserve its right to an equitable accounting.  The amount of the assets that may be frozen, however, should not be more than the profits that were likely derived from the sale of the counterfeit goods.  Thus, the amount of the DealExtreme’s assets that could be frozen were limited by the likely profits that they had derived.

The trial court rejected the arguments of the plaintiff that all of the remedies provided under the Lanham Act are equitable in nature, and thus that the Grupo Mexicano decision did not limit its authority to restrain sufficient funds to satisfy a statutory damages award.