In WMS Gaming, Inc. v. WPC Gaming Prods., Ltd., 542 F.3d 601 (7th Cir. 2008), the Seventh Circuit Court of Appeals reversed a trademark damages ruling issued by the Northern District of Illinois, holding that the lower court had incorrectly assessed actual damages only, despite plaintiff’s request for, and entitlement to, an accounting of profits under Lanham Act Section 35(a), 15 U.S.C. § 1117(a).

Plaintiff WMS Gaming, Inc. (“WMS”) has manufactured gaming devices under the registered mark JACKPOT PARTY since 1998, and under the registered mark SUPERJACKPOT PARTY since 2004. Defendant WPC Gaming Products, Ltd. (“WPC”), based in Gibraltar, was an on-line gaming servicethat, from 2004-2006, used approximate and even exact reproductions of WMS’s JACKPOT marks in connection with its on-line gaming services both in the U.S. and abroad. In 2005, WPC attempted to register the mark PARTYJACKPOT, and WMS opposed. WPC ultimately abandoned its application in the wake of the U.S. Congress’ passage of the Unlawful Internet Gambling Enforcement Act in 2006, which prohibited on-line gambling. At that time, WPC ceased its U.S. operations, but continued to use WMS’s marks abroad. Concerned about WPC’s unauthorized use of its trademarks and unable to amicably resolve the matter, WMS initiated this trademark infringement suit in federal district court seeking injunctive relief, damages, and an equitable accounting of WPC’s profits attributable to WPC’s use of WMS’s marks in the U.S. during the 2004, 2005 and 2006 time period.

WPC chose to ignore the suit in its entirety and the district court thereafter entered a default judgment in favor of WMS, granting injunctive relief and awarding $2,673,442.10 in damages. WMS actually had sought a recovery of close to $300 million, based on the profit figures contained in WPC’s publicly available annual reports and financial statements. The district court, however, concluded that while WMS’s estimate for 2004 revenues was “reasonable,” its estimates for 2005 and 2006 could not “be ascertained with reasonable certainty” and were “clearly excessive.” Accordingly, the court based its award for these latter two years on the amount deemed reasonable for 2004, even though actual U.S. revenues in 2005 alone exceeded $800 million.

Unsatisfied with the district court’s award, WMS moved under Rule 59(e) of the Federal Rules of Civil Procedure to alter or amend the judgment, arguing that the district court had erred in applying the standard for “actual damages” as opposed to the standard for an equitable accounting of profits. The district court denied the Rule 59(e) motion, and maintained that WMS’s request was for “damages that are clearly excessive” and “cannot be ascertained with reasonable certainty.”

On appeal, the Seventh Circuit pointed out that because this was a default judgment, “the usual rule that a party should be given the relief to which it is entitled whether or not it has requested that relief” did not apply. Rather, the appeals court pointed out that Rule 54(c) of the Federal Rules of Civil Procedure provides that “[a] default judgment must not differ in kind from, or exceed in amount, what is demanded in the pleadings.” But the court made it clear that WMS consistently had requested an equitable accounting of profits, rather than, or at least in addition to, actual damages under Section 35(a) of the Lanham Act. The relevant statute, 15 U.S.C. § 1117(a), provides relief for a trademark infringement, stating in pertinent part:

[T]he plaintiff shall be entitled . . . subject to the principles of equity, to recover (1) defendant’s profits, (2) any damages sustained by the plaintiff, and (3) the costs of the action . . . . In assessing profits the plaintiff shall be required to prove defendant’s sales only; defendant must prove all elements of cost or deduction claimed. In assessing damages the court may enter judgment . . . for any sum above the amount found as actual damages, not exceeding three times such amount.

The appeals court held that the district court clearly erred by failing to distinguish between WMS’s right to the defendant’s profits and its rights to its damages. Indeed, while the district court acknowledged the three “types of damages” available for trademark infringement, it failed to follow through with two distinct computations, one for the accounting and one for damages.” Rather, it conflated the standards for damages with those governing an equitable accounting of profits.

As a result, the Seventh Circuit found that the district court mistakenly incorporated into its accountingof- profits analysis the additional considerations of whether the “damages” could be “ascertained with reasonable certainty”, and whether WMS had proven that its calculation properly separated out lawfully gained revenues. Here, the court pointed out that the district court further erred by shifting the burden to WMS to identify which portion of WPC’s revenues were attributable to casino games that infringed the WMS marks, as opposed to revenues gained from other, non-infringing businesses. Such analysis was based on the wrong standard, and was contrary to a long-standing Supreme Court precedent that recognized that while it might be difficult to ascertain these proportions with any “reasonable certainty,”

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 defendant. It is the same principle which is applicable to a confusion of goods. If one wrongfully mixes his own goods with those of another, so that they cannot be distinguished and separated, he shall lose the whole, for the reason that the fault is his; and it is but just that he should suffer the loss rather than an innocent party, who in no degree contributed to the wrong.

Citing, Hamilton-Brown Shoe Co. v. Wolf Bros. & Co., 240 U.S. 251, 262 (1916).

Finally, the court held that the burden was on the defendant to segregate its legitimate revenues from those derived through its infringing use of WMS’s marks. Indeed, the court pointed out that if the infringer fails to prove his lawful revenues over those due to infringement, “[t]here may well be a windfall to the trade-mark owner . . . [b]ut to hold otherwise would give the windfall to the wrongdoer”, citing Mishawaka Rubber and Woolen Mfg. Co. v. S.S. Kresge Co., 316 U.S. 203, 206-207 (1942). The court reversed and remanded the case for a proper accounting.