After a jury trial awarding plaintiff $305 million in damages based on a reasonable royalty, an accounting of profits, and punitive damages, defendant moved for judgment as a matter of law, a new trial, and remittitur. The district court held that $137 million of the jury's $305 million damages award had been based on plaintiff's overly aggressive and overstated calculation of defendant's profits, and reduced the damages award to $19.7 million. The court also reduced the $137 million punitive damages award to $15 million, largely due to the solely economic nature of the plaintiff's harm.
In 2001, Adidas-America, Inc. and its parent company, Adidas-Solomon AG (collectively "Adidas"), claimed that Payless ShoeSource, Inc. ("Payless") sold shoes and sportswear that were confusingly similar to the Adidas "Three Stripe Mark" and "Superstar" trade dress. The case had initially been dismissed by the district court, which held that a 1994 settlement agreement between the parties precluded most of Adidas's claims. The Ninth Circuit reversed the dismissal in 2006, finding that trademark infringement claims cannot be precluded when the allegedly infringing activity started after the agreement was finalized. The case was remanded back to the district court for trial. At trial, the jury returned a verdict for Adidas on its trademark infringement, trade dress infringement, and dilution claims. The jury also found that Payless acted willfully and maliciously, and determined that Adidas was entitled to $30.6 million in actual damages (based on a 7.78 percent royalty calculation), $137 million for Payless's profits, and $137 million in punitive damages. Payless responded by moving for judgment as a matter of law, for a new trial, and for remittitur on various grounds.
The court first dismissed Payless's motion for a new trial based on alleged juror misconduct, stating that a juror's brief discussion about the Ninth Circuit's appeal process did not directly relate to any material fact or substantive law applicable to the case, and there was no reasonable possibility of prejudice. The court also refused to dismiss its prior rulings regarding likelihood of confusion, dilution, actual harm, and willfulness, noting that Adidas submitted sufficient evidence to support the jury's findings on these issues.
The court considered Payless's arguments regarding the $305 million award, including Payless's contention that the award of damages violates the Lanham Act's prohibition against damages as a penalty. The court first examined the "reasonable royalty" aspect of the award and held that the jury correctly accepted Adidas's calculations of a 7.78 percent royalty as a surrogate measure of damage to the marks, noting that the royalty figure awarded was consistent with royalties between Adidas or Payless with third parties and with royalties between third parties.
The court evaluated the award of Payless's profits ($137 million), holding that Adidas's expert's calculations were aggressive, overstated, and did not follow generally accepted accounting principles. Adidas's expert's calculation did not include a royalty deduction as a direct expense of selling the shoes, which the court cited as an example of its unreasonable methodology. The court compared the figures offered by both parties' experts for Payless's profits ($208 million by Adidas's expert versus $19 million by Payless's expert) and concluded that the difference between the amounts also demonstrated the unreasonableness of Adidas's calculations and the jury's award. The court reduced the recovery of Payless's profits to $19.7 million under its reasoning that the $137 million profits award was punitive rather than compensatory, and thus violated the Lanham Act.
The court then addressed the jury's $137 million punitive damages award, which was based on Adidas's common-law claims for trademark and trade dress infringement and statutory claims for unfair and deceptive trade practices under various state acts. Payless argued that the punitive damages award was a violation of the Due Process Clause's prohibition against grossly excessive or arbitrary punishments of a tortfeasor. Citing the three "guideposts" for reviewing a punitive damages award set forth by the Supreme Court in BMW of North America, Inc. v. Gore, the court focused on what it deemed the most important indicator of the reasonableness of a punitive damages award–the degree of reprehensibility of the defendant's misconduct. The court found that the harm to Adidas was entirely economic, that Payless did not show disregard to the health or safety of others, and that there was no evidence Adidas lost any sales due to the infringement. The court also noted the Supreme Court's observation in Gore that, in practice, awards exceeding a single-digit ratio between punitive and compensatory damages will likely violate due process.
In its evaluation of the second Gore guidepost, namely, the disparity between the harm suffered by Adidas and the punitive damages award, the court found a 4.5:1 ratio between the $30.6 million royalties and $137 million punitive damages award. While concluding that this single-digit ratio on its own does not offend due process, the court stated that $30.6 million in compensatory damages was already substantial, considering that Adidas did not lose any sales and any damage to the Adidas brand was theoretical and not easily quantified. Based on this reasoning, the court held that even a 1:1 ratio between the compensatory and punitive damages would be too extreme and reduced the punitive damages to a $15 million award. The court defended its self-proclaimed "unusual" reduction of an award to below a 1:1 ratio by stating that such awards have been approved if there is solely economic harm, as was the case here. Accordingly, the court denied Payless's motion for a new trial on the condition of Adidas's acceptance of the remittitur of the punitive damages award.
The court's dramatic reduction of the profits calculation and punitive damages award is notable both for its criticism of plaintiff's accounting method regarding defendant's profits and its finding that punitive damages should be greatly decreased if the harm is solely economic in nature.