Prior License Agreement Not Needed To Pursue Reasonable Royalty Damages

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By Natasha Dhillon

Reasonable royalty damages are available in a trademark infringement case, despite a trademark owner not having prior licensing agreements with a third party and thus there being no established royalty rate, the U.S. District Court for the Northern district of Georgia ruled Aug. 5 (ITT Corp. v. Xylem Grp., L.L.C., N.D. Ga., No. 1:11-cv-03669-WSD, 8/5/13).

Denying a motion for partial summary judgment, the court determined that a trademark owner may show the value of the intellectual property taken by a reasonable royalty rate because allowing reasonable royalty damages in patent and copyright cases, but not trademark infringement cases would allow an infringer of this type of intellectual property to unfairly capitalize on its infringing conduct.

Same Name, Similar Products
In 2011, ITT Corp., a global multi-industry company, separated itself into three companies: a manufacturing company, a water-technology business, and a defense and security company.

ITT Corp. hired a brand consulting company to assist with the search for a name of its water-technology company. Limiting the possibilities to a list of seven, including “Xylem,” ITT hired an outside firm to conduct a worldwide trademark search to identify any legal issues associated with the seven proposed names,

During the search, the firm discovered that “Xylem” had been registered with the U.S. Patent and Trademark Office in 2006 by Xylem Group, a Georgia company that designs and sells bathroom furniture and fixtures.

It notified ITT Corp. that there may be “high difficulty” in obtaining trademark protection for “Xylem” in the United States.

ITT Corp. considered this information and after discussions with its executives and counsel announced its new water-technology company would be named Xylem Inc.

After the announcement, Xylem Group sent a cease-and-desist letter to ITT alleging that the use of “Xylem” would infringe Xylem Group's registered “Xylem” trademark.

ITT Corp. and Xylem Inc. filed a complaint seeking a declaratory judgment that their use of “Xylem” did not infringe Xylem Group's trademark interests.

Xylem Group filed a counterclaim alleging that ITT Corp. had engaged in trademark infringement and unfair competition and filed a motion for partial summary judgment on the issue of infringement.

ITT Corp. and Xylem Inc. also filed a motion for partial summary judgment on the issue of damges, alleging that Xylem Group “ 'cannot recover damages for lost sales,' that they “cannot recover damages measured by reasonable royalty,' and that 'there is no legal basis for punitive damages.' ”

Reasonable Royalty Damages Appropriate for Trademark
ITT Corp. and Xylem Inc. argued that the reasonable royalty damage theory was not appropriate for trademark infringement cases and should be used in trademark cases only when “the royalty amount is 'sensible, non-speculative, and grounded in commercial reality.' ”

ITT Corp. and Xylem Inc. alleged that Xylem Group's claims were speculative because they had been based on a “hypothetical royalty rate” and reasonable royalty is available in trademark cases only when “a plaintiff can point to an established royalty based on an actual license agreement.”

Judge William S. Duffy Jr., citing Dowagiac Manufacturing Co. v. Minnesota Moline Plow Co., 235 U.S. 641 (1915), a patent case, and Sheldon v. Metro-Goldwyn Pictures Corp., 309 U.S. 390 (1940), a copyright case, rejected this argument.

The court concluded that both cases had determined that “damages may be measured by the value of the intellectual property taken by what would have been a reasonable royalty … [which,] compel[s] the conclusion that the 'reasonable royalty' theory of damages is a viable, if not necessary, measure of protecting the property rights afforded a trademark holder under the Lanham Act.”

Thus, the court denied ITT Corp. and Xylem Inc.'s motion for partial summary judgment as to damages measured by a reasonable royalty rate.

The court also denied the motion for partial summary judgment for damages based on lost sales after it determined that there is a genuine issue of material fact as to whether Xylem Group suffered actual damages due to lost sales. The court also concluded that the issue of whether Xylem Group could recover punitive damages is premature.

Type of Mark and Actual Confusion
Xylem Group alleged that Xylem Inc. had infringed its trademark interests pursuant to Section 32 of the Lanham Act, 15 U.S.C. § 1114.

Xylem Inc. did not contest the validity of the mark or dispute whether Xylem Group held a registration; thus, the court's infringement analysis focused on whether Xylem Inc's use of “Xylem” was likely to cause confusion.

The court applied a seven-factor to test to determine a likelihood of confusion stating that “of the seven factors, the type of mark and the evidence of actual confusion are the most important.”

First, addressing the type of mark, the court found that the “Xylem” mark is at least suggestive. Relying on Welding Servs. v. Forman, 509 F.3d 1351, 85 U.S.P.Q.2d 1233 (11th Cir. 2007) (02 PTD, 1/4/08), the court concluded that “Xylem” was at least suggestive “because it takes a leap of imagination to connect the plant tissue 'xylem' to [Xylem Group's] products, even though the two share a water-transport function.”

However, “[a]ctual consumer confusion is 'the best evidence' of likelihood of confusion,” the court said. It noted that “the [Eleventh Circuit has] no hard-and-fast rule, under [its] standard the quantum of evidence needed to show actual confusion is relatively small,” citing Caliber Automotive Liquidators Inc. v. Premier Chrysler, Jeep, Dodge L.L.C., 605 F.3d 931, 94 U.S.P.Q.2d 1866 (11th Cir. 2010) (90 PTD, 5/12/10).

The court found that the actual level of confusion satisfied this standard. Xylem Group offered evidence of 127 instances in which actual confusion occurred including 58 checks written to Xylem Inc., 38 phone calls concerning Xylem Inc. products, and 23 emails and faxes intended for Xylem Inc.

The court rejected Xylem Inc.'s argument that this level of actual confusion was de minimis concluding that more than 100 instances of actual confusion had come from “people who ought to not have been confused, including customers and others in whom [Xylem Group] conducts its business.”

However, the court rejected Xylem Group's motion for summary judgment, despite finding that the analysis of the seven factors resulted in a “stronger factual and legal argument in favor of 'likelihood of confusion,' ” because it found that a reasonable juror could find that there is no confusion created by Xylem Inc.'s use of “Xylem.”

The court also noted that if Xylem Inc. is found to have infringed Xylem Group's trademark interests, ITT Corp. would be liable for contributory infringement because it knew of Xylem Group's registration and despite warnings from legal counsel, it still chose the name Xylem Inc.

ITT Corp. and Xylem Inc. were represented by Emmet T. Flood, Robert J. Shaughnessy, and Sarah F. Teich of Williams & Connolly, Washington. Xylem Group was represented by Gerard F. Dunne and Joseph A. Dunne, New York.


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