Addressing the issue of the legal standard for trademark infringement damages under the equitable accounting of profits remedy, the U.S. Court of Appeals for the Seventh Circuit reversed the district court and held that the infringer was liable for the entire amount of its gross sales, minus any deductions and expenses proven by the infringer. WMS Gaming Inc. v. WPC Gaming Productions Ltd., Case No. 07-3585 (7th Cir., Sept. 8, 2008) (Wood, J.).

WMS Gaming brought suit against WPC Gaming Productions and its parent PartyGaming PLC (collectively, PartyGaming) for infringement of WMS’s "JACKPOT PARTY" and "SUPER JACKPOT PARTY" trademarks. WMS filed its complaint with the district court seeking an injunction, damages and an equitable accounting of profits for infringement of its U.S. trademarks. PartyGaming failed to appear or answer, and a default judgment resulted. On appeal, WMS challenged the district court’s limiting damages to actual damages, rather than considering WMS's request for an accounting of profits (a separate, statutorily prescribed remedy under 15 U.S.C. § 1117(a)).

In submitting its equitable accounting of profits calculation, WMS’s profits estimate was based on the total amount of revenue from casino games listed in PartyGaming’s annual report. The district court, however, determined that this estimate failed to identify which profits were specifically linked to games using the infringed trademarks, as opposed to profits derived from non-infringing activities. Consequently, the court rejected WMS’s estimation and allowed only those damages that could be “ascertained with reasonable certainty.” Applying the actual damages “reasonable certainty” standard, the court allowed only $2.6 million in damages, instead of the entire $287 million that WMS was seeking under the equitable accounting of profits remedy. WMS appealed.

The Seventh Circuit reversed, finding that the district court erred in conflating the two damages remedies available to WMS. Under the district court’s holding, the plaintiff would bear the risk of uncertainty regarding the proper characterization of the revenues, even though the defendant was in a better position to ascertain the correct distribution of the profits. The Court cited a 1916 Supreme Court case, Hamilton-Brown Shoe Co. for the principle that “it is more consonant with reason and justice that the owner of the trademark should have the whole profit than that he should be deprived of any part of it by the fraudulent act of the [infringer] ... for the reason that the fault is his; and it is but just that [the infringer] should suffer the loss rather than the innocent party, who in no degree contributed to the wrong.”

Therefore, the Court held that both trademark damages remedies were available to WMS, and reiterated the established legal standard for an equitable accounting of profits—once the plaintiff proves the infringer’s sales, or all sales relating to products bearing the infringing mark, the burden then shifts to the infringer to prove its expenses and other deductions from gross sales.