It's Friday morning. Instead of enjoying your usual cup of coffee with today's newspaper, you're reluctantly reading something new: Legal papers. You're being sued for trademark infringement, and all you can think is, "How much is this going to cost me? How will this affect the business moving forward?"

Trademark infringement lawsuits have many moving parts. Each case must be evaluated based on its own facts, circumstances, and local laws.

The good news? There is a strong likelihood you will settle before ever reaching court. Contrary to popular belief, most cease and desist letters do not lead to litigation. Proceeding to trial is an expensive process most parties would prefer to avoid if possible.

Being Sued for Trademark Infringement Damages

Should a resolution be identified to the complainant’s satisfaction, all charges will be dropped. But what if you, the defendant, don't want to roll over and comply?

Assuming the plaintiff isn't Microsoft (although there are many examples of the little guys beating the big guys in trademark law), you may want to challenge that complaint in court. But you will first need to be aware of all the potential costs that could be incurred. For the remainder of this article, we'll discuss those costs, along with how to best avoid them in the first place.

The Costs Involved

When entering a trademark infringement case, there are three categories of costs to be aware of

  • Profits unjustly incurred by you
  • Profits lost by the plaintiff
  • Actual damages incurred by the plaintiff

Your opponent (the plaintiff) is trying to prove that you (the defendant) used their trademark to convince others that your offerings were associated with, or sourced from, their offerings in a manner that was harmful. In most cases, the basic goal is injunctive relief.

It's important to note the legal system is prudent in regards to rewarding trademark infringement damages. The rewards can not be punitive and must not benefit the plaintiff more than is required to repair the damage. However, damages can be recovered if the burden of proof is met.

According to Inside Counsel, a trademark owner can recover one of three types of compensatory damages.

1. Infringer’s Profits

If the plaintiff has successfully established that they have incurred damages, they can seek to recover any profits you made from using the mark (minus the expenses they would have incurred to earn said profits). Information from discovery helps the owner prove the infringer’s profits. An economic expert calculates profits and confirms that defendant only deducted reasonable costs from its claimed variable operating costs.

2. Actual Damages

Alternatively, a party can be awarded actual damages if they have proven customer confusion resulted in either a). Economic loss or b). Unjustly enriching the infringer. Actual damages fall into three categories:

Lost Profits: Measuring lost profits involves calculating the revenue the owner would have earned if not for the infringer’s actions, less the variable operating costs that would have been incurred to earn those revenues. Economic experts perform this analysis by considering:

  • Plaintiff’s manufacturing and marketing capability to absorb production increases
  • Demand for the product sold under the trademark
  • Absence of acceptable noninfringing substitutes
  • ‎The profit plaintiff would have made

Loss of Goodwill: Estimating loss of goodwill requires comparing the value of the owner’s goodwill before and after the infringement. Comparative data, like the plaintiff’s drop in market share or impact measured by consumer surveys, is assessed by economic experts to calculate damages.

Corrective Advertising Costs: Finally, the plaintiff may garner corrective advertising reimbursement. Corrective advertising costs can only occur in a market where the plaintiff and defendant are direct competitors. Again, economic experts can review costs for similar types of advertising to arrive at a fair number.

3. Reasonable Royalty

Finally, the third type of trademark infringement damage that can be awarded is a reasonable royalty. This number is calculated based on the "reasonable value" of the licensed trademark in question. The reasonable royalty rate is determined by constructing a hypothetical negotiation for licensing the trademark between the parties at the time infringement began.

Using these factors, the expert reaches a royalty expressed as a percentage of defendant’s sales (e.g., 5 percent reasonable royalty), a per-unit amount (60 cents per subscription) or a flat sum. That number is then applied to the defendant’s infringing sales to derive a damages figure.

How to Avoid The Costs

No matter how you spin it, losing a trademark infringement case is expensive! And consumer products are especially at risk for running into disputes. On average, trademark claims result in more than $100,000 in associated expenses. Total costs, depending upon how vigorously the matter is defended or appealed, can be in the millions.

The best way to avoid trademark infringement damages? Avoid using high-risk trademarks in the first place. Though that may sound simple, it's been easier said than done – until now.