Reasonable royalties for uses that never would have been licensed

Masters v. UHS of Delaware, Inc., 2008 WL 5586244 (E.D. Mo.)

Plaintiff, part of the team of Masters and Johnson, is the owner of a service mark for “Masters and Johnson,” licensed to clinics who use the teachings, research, principles, and methodology they developed in the diagnosis and treatment of sexual disorders. She alleged that the defendant, a licensee, exceeded the scope of its license, and she sued for unfair competition and breach of contract.

The issue was damages. Plaintiff hired an expert, Hoffman, who proposed to offer opinions on (1) defendant UHS’s gross revenue from the allegedly infringing programs, (2) its profits, (3) an estimated reasonable royalty, and (4) prejudgment interest. UHS argued that, without evidence of actual confusion, a damage recovery was improper; that recovery of profits is an equitable remedy for the court, not for a jury; and that a reasonable royalty is an improper Lanham Act remedy.

To recover damages under the Lanham Act, a plaintiff must prove actual damages and causation, though courts have broad discretion to award monetary relief as long as they don’t impose penalties. Plaintiffs may get both actual damages and disgorgement of profits (as long as those aren’t duplicative). Reasonable royalty awards are also available, though less frequently, measuring revenues lost from failure to obtain a license when the marks are normally licensed. (This sometimes makes sense, but it's magical thinking when the licensor never would have licensed a particular use; our theories about how trademarks require and guarantee quality control can go out the window when we want to compensate a trademark owner for some sort of bad behavior by the defendant.)

Given the allegations of the case (misuse by a licensee), the court thought that actual confusion was inherent, thus plaintiff didn’t need further evidence of actual confusion to get damages. As for presenting the issue of profits to the jury, the court recognized that any award would be subject to review for inadequacy or excessiveness, but still wanted to put it before the jury in the first instance.

On reasonable royalties, the court thought that this was an issue of how damages should be measured; damage awards do require an evidentiary basis. UHS argued that no controlling authority had ever approved a reasonable royalty in a trademark case, and that such an award would vastly overstate the damages, given that the existing licensing agreement didn’t allow plaintiff to license the service mark to anyone else. The court rejected these arguments on the theory that, under the circumstances, a reasonable royalty might be the most exact measure of actual damages.

UHS also challenged a second expert, Dr. Woods, who offered opinions on UHS’s profits. Woods relied on statements made by Dr. Mark Schwartz, a therapist who was in charge of UHS’s programs who opined that the use of the service mark increased attendance at the programs by up to 20%. UHS called this a “guesstimate,” which sounds right to me (though it might be impossible to get better evidence), while plaintiff argued that Schwartz was uniquely positioned to testify about the programs and that the factual predicates of the expert opinion should be challenged through cross-examination and presentation of contrary evidence. The court agreed that disputes over methodology of damage calculations should be submitted to the jury.