In Adidas America Inc v Payless ShoeSource Inc(1) the District Court for the District of Oregon drastically reduced a jury award for trademark and trade dress infringement from $305 million to $65 million.

A jury had previously held Payless ShoeSource Inc liable for trademark and trade dress infringement, dilution, unfair competition and deceptive trade practices arising out of its sale of shoes which infringed Adidas America Inc's three-stripe mark. The jury also found that Payless had acted wilfully in disregard of Adidas's trademark and trade dress rights. Therefore, the jury awarded Adidas: 

  • actual damages of approximately $30.6 million; 
  • lost profits of approximately $137 million; and 
  • punitive damages of approximately $137 million.

In the present case the district court denied Payless's post-trial motions for judgment as a matter of law or for a new trial, conditioned on Adidas accepting remittitur of the punitive damages award to $15 million. The court also significantly reduced the award of Payless's profits.

Before the court were Payless's motions for judgment as a matter of law or for a new trial. Payless made several arguments in support of its post-trial motions, including the following: 

  • There was alleged juror misconduct; 
  • There was insufficient evidence to establish a likelihood of confusion; 
  • The trademark dilution claims would fail as a matter of law; and 
  • There was a lack of evidence of actual lost sales.

The court considered and dismissed each of these claims. Payless also argued that: (i) the finding of wilfulness and the resulting award of profits should be vacated; and (ii) the $305 million award was flawed.

Payless made several arguments in support of its claims that each of the damage awards was contrary to the law. Instead of addressing each of Payless's damages arguments individually, the court applied its discretion in conducting its own analysis and arriving at a revised damages award.

With respect to actual damages, the court maintained the jury's award of $30.6 million. Payless argued that the jury's award was contrary to law because it was based on a "reasonable royalty" calculation. However, the court found that the royalty figure awarded by the jury was consistent with industry standards. Interestingly, the court made this determination in spite of the fact that the royalty award would have resulted in a net loss to Payless.

With respect to profits, the court concluded that the lost profits were overstated and did not follow generally accepted accounting principles. In reaching this conclusion, the court considered several factors, including the testimony of Adidas's expert. The court noted that weighing in favour of a finding of unreasonableness was an admission by the Adidas expert - who had advocated a figure of $208 million - that a commonly used measure of profit would amount to only $19 million in Payless's profits. On the issue of profits, the court further considered the jury's finding of wilfulness in light of several factors, including Payless's alleged belief that (i) it was insulated from liability for selling the shoes at issue based on a 1994 settlement agreement between Adidas and Payless, and (ii) Payless's continued sale of the shoes after the agreement had expired.

Based on these and other considerations, the court concluded that the jury's verdict of about $137 million in lost profits was so extreme that it was punitive rather than compensatory. Therefore, the award violated the Lanham Act. The court thus reduced Adidas's lost profits to $19.7 million.

In addition, the court concluded that the award of punitive damages should also be reduced. At issue was whether the clear and convincing standard applied at trial conflicted with the jury award based on sales in all 50 states, where only a minority of states allow punitive damages under a clear and convincing standard. Payless argued that the $137 million award was unfair in view of the holding in State Farm Mutual Automobile Insurance Co v Campbell.(2) However, the court distinguished State Farm, noting that in the present case the punitive damages awarded by the jury were actually related to Payless's conduct, while in State Farm the punitive damages were not similarly related to the defendant.

Payless further argued that the punitive damages award was grossly excessive and violated due process principles. Applying the factors set out in BMW of North America Inc v Gore,(3) the court noted that: 

  • Payless's harm was entirely economic; 
  • there was no evidence that Adidas had lost any sales because of the infringement; 
  • there was no evidence that Adidas had financial vulnerability because of the infringement; and 
  • 267 lots of Payless's shoes infringed Adidas's marks.

Considering these and other factors, and in view of due process concerns, the court ultimately reduced the punitive damages award to $15 million.

Endnotes 

(1) Case 01-1655-Kl, September 12 2008. 

(2) 538 US 408, 421-22, 123 S Ct 1513, 2003. 

(3) 517 US 559, 575, 116 S Ct 1589,1996.