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Walmart Burned by the Jury in Trademark Infringement Suit

About: Trademark/Copyright Prosecution & Portfolio Management, IP Litigation, Trademark/Copyright Litigation, Advertising, Marketing & Promotions

Earlier this month, a federal jury in North Carolina hit Walmart with a $95.5 million verdict for its willful infringement of Variety Stores, Inc.’s “BACKYARD” trademarks. The jury awarded $45.5 million as a reasonable royalty and disgorged $50 million in Walmart’s profits to create the total award. The case presents an interesting study in trademark infringement remedies under the Lanham Act federal trademark statute. While the dollar amount of the verdict is significant, the damages methodology accepted by the jury is equally noteworthy.

History of the case

Variety operates Roses and Maxway retail locations in 16 states and the District of Columbia, selling primarily outdoor products, including grills and grilling accessories. Variety owns a federal trademark registration for THE BACKYARD for lawn and garden retail store services, and it established common law rights in the marks THE BACKYARD, BACKYARD, and BACKYARD BBQ (“BACKYARD marks”) in connection with related goods, including grills, dating back to 1993.

The dispute began in August 2011 when Walmart filed an intent-to-use trademark application in the U.S. Patent and Trademark Office (USPTO) for BACKYARD GRILL for grills and grill accessories. Variety subsequently filed an opposition in the USPTO’s Trademark Trial and Appeal Board. The TTAB suspended the opposition in 2014, when Variety filed suit in the Eastern District of North Carolina, alleging that Walmart infringed Variety’s BACKYARD marks through sales of its BACKYARD GRILL products. The court granted partial summary judgment in Variety’s favor and found Walmart liable for trademark infringement. In 2016, following a bench trial on remedies, the district court ordered Walmart to disgorge the $32.5 million in profits earned in the 16 states where the parties’ retail stores overlapped, plus attorney’s fees and costs. The Fourth Circuit reversed on appeal, holding that the district court erred by failing to consider disputed issues of material fact as to four of the nine likelihood of confusion factors. It also vacated the damages award and remanded the case for trial.

A bifurcated jury trial began in October 2018. At the liability phase, the jury held that Walmart willfully infringed Variety’s BACKYARD marks. Three months later, in January 2019, the district court rejected Walmart’s request for a new trial and granted Variety’s motion for a jury trial on damages and profits. After a two-day trial, on February 12, 2019, the jury awarded Variety a “reasonable royalty” of $45.5 million, and $50 million for profits Walmart allegedly earned from sales under the infringing trademark. The district court entered the jury’s award on February 19, 2019.

Why this case is noteworthy

This case is interesting because it illustrates the potential impact of trademark infringement awards and the broad scope of monetary remedies under the Lanham Act. The Lanham Act provides for recovery of both plaintiff’s damages and disgorgement of defendant’s profits. See 15 U.S.C. § 1117. Consequently, a plaintiff like Variety can potentially recover its out-of-pocket “damages” in addition to a disgorgement of a defendant’s profits. Typically, the damages award is based on demonstrable lost sales and profits, such as financial records showing a decrease in the plaintiff’s sales after the defendant introduced its infringing product.

However, in the BACKYARD case, the jury accepted a damages theory based on a “reasonable royalty.” While common in the patent infringement context, reasonable royalty damages are rare in trademark infringement cases. Under its theory, Variety apparently convinced the jury that Walmart owed a royalty payment to Variety for each grill sold under the infringing mark. Unless Variety had a history of licensing its BACKYARD marks at a certain royalty rate, this theory likely required Variety’s damages expert to establish a royalty rate applicable to Variety’s mark based on some demonstrable market criteria. This criteria appeared to be a 5 percent royalty rate “consistent with similar royalties that Walmart paid for other companies’ trademarks.” The jury ultimately awarded $45.5 million. In post-trial motions, Variety may seek trebling of this amount, “subject to the principles of equity.” See 15 U.S.C. § 1117.

As to profits disgorgement, the Lanham Act merely requires a plaintiff to establish the defendant’s gross sales.  The defendant bears the burden of apportioning some percentage of those revenues to the infringing goods, then proving any appropriate costs or deductions. This ultimately results in “profits” subject to disgorgement. Here, the jury awarded $50 million.

Walmart is likely to appeal, challenging the applicability of the reasonable royalty damages model, as well as the actual award. It is also likely to appeal the profits disgorgement calculation. As Walmart will surely note, the statute expressly states that the award must constitute “compensation and not a penalty.” See 15 U.S.C. § 1117. In other words, this fire may keep burning.

Thomas M. Williams litigates trademark and false advertising disputes on behalf of a number of the world’s largest and most sophisticated brands, and manages prosecution and maintenance of trademark portfolios. He also specializes in competitor false advertising disputes under the Lanham Act and authored a Lexis-Nexis published book entitled, “False Advertising and the Lanham Act,” which is updated annually. Hillary E. Maynard counsels clients on intellectual property matters, including trademark matters, unfair competition, and copyright issues. She handles trademark clearance, prosecution, portfolio maintenance, and enforcement for brand owners in multiple industries, and also assists with intellectual property litigation.