Electing Statutory Damages in a Counterfeiting Case May Bar an Award of Attorneys Fees in the Ninth Circuit

The Ninth Circuit's recent interpretation of the Lanham Act's damages provisions surely surprised many trademark practitioners.  It held that, when a plaintiff chooses to receive statutory damages in a counterfeiting case instead of opting for actual damages, it may also be barred from recovering its attorneys' fees.  K&N Engineering, Inc. v. Bulat, (9th Cir. 2007).

Before discussing the court's opinion, let's go through a brief synopsis of Lanham Act remedies provisions.  15 U.S.C. § 1117 of the Lanham Act (also known as Section 35) sets out the monetary relief to which a successful plaintiff is entitled.  Section 1117(a) allows a Lanham Act plaintiff to obtain actual damages, plus attorneys' fees if the case is "exceptional."  Section 1117(b) allows a plaintiff in a counterfeiting case to obtain treble actual damages, plus "a reasonable attorney's fee."  Section 1117(c) allows a plaintiff in a counterfeiting case to elect statutory damages instead of actual damages, with no mention of attorneys' fees.

In the K&N Engineering case, the Ninth Circuit reasoned that because Section 1117(c) does not mention attorneys' fees, it does not allow for attorneys' fees.  The court compared Section 1117(c) to Sections 1117(a) and (b), which explicitly do provide for an award of fees.  In addition, the court found that the explicit provision of attorneys' fees in Section 1117(b) does not authorize attorneys' fees in conjunction with a statutory damage award, such as the one in this case, because that provision only relates to an award of treble actual damages.  Therefore, because the plaintiff in this case had elected statutory damages under Section 1117(c), it could not request attorneys' fees under Section 1117(b).

This case represents a departure from precedent.  Other than a handful of opinions from the Southern District of New York foreshadowing the K&N Engineering opinion, several lower courts have awarded attorneys' fees under Section 1117(b) in addition to statutory damages under Section 1117(c).  Most made the dual award without engaging in statutory interpretation or discussing whether it was correct to do so.

Statutory damages are especially appropriate in counterfeiting cases where profits are uncertain because the counterfeiter has not kept records of its activities.  Nevertheless, a plaintiff may elect statutory damages no matter how exact the defendant's records.  Statutory damages may also be used to penalize the counterfeiter and deter future violations, if an award of actual damages and profits would not be high.  Therefore, when actual damages are very low or are indeterminate, a plaintiff in a counterfeiting case may prefer to opt for statutory damages.

What is a plaintiff in a counterfeiting case to do after this decision?  A plaintiff may choose to take the smaller amount of actual damages (trebled) in order to be sure of recovering attorneys' fees.  It should weigh the amount of trebled actual damages along with attorneys' fees against the amount of statutory damages it believes it could receive, based on the evidence and on similar reported cases.

Another option is to request statutory damages and seek fees under Section 1117(a) if the plaintiff can prove that the case is "exceptional."  The K&N Engineering court explicitly did not decide whether a party electing statutory damages under Section 1117(c) could receive an award of attorneys' fees under Section 1117(a) if the case was "exceptional."  K&N Engineering, 510 F.3d at 1082 n.5.  It did not have to reach that issue because the district court had made a fee award under Section 1117(b) and not under the "exceptional case" provision of Section 1117(a).  While no appeals court has squarely decided that issue, district courts across the country have awarded both statutory damages under 15 U.S.C. § 1117(c) and attorneys' fees under 15 U.S.C. § 1117(a).

Although no court has found that an award of statutory damages precludes an award of attorneys' fees under Section 1117(a), each court making such an award has simply assumed that it was proper.  With the Ninth Circuit ruling in K&N Engineering, courts may look twice at whether such an award is warranted under the statute.  Section 1117(a) provides that, when a defendant violates any right of the holder of a registered mark, the plaintiff may receive the defendant's profits, damages and costs.  As a separate sentence at the end, that section also provides:  "The court in exceptional cases may award reasonable attorney fees to the prevailing party."  15 U.S.C. § 1117(a).  It is quite plausible to argue that this sentence applies to all Lanham Act cases, including those in which the plaintiff has elected statutory damages.

A plaintiff opting for statutory damages also could argue that it should receive attorneys' fees under Section 1117(a) based on grounds other than counterfeiting.  Courts have awarded fees on other grounds - false advertising or unfair competition under 15 U.S.C. § 1125(a) - where the case is exceptional, even where the plaintiff also received statutory damages under Section 1117(c).