WMS Gaming Inc v. WPC Productions Limi ( 2008 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 07-3585
WMS G AMING INC.,
Plaintiff-Appellant,
v.
WPC G AMING P RODUCTIONS L TD. and
P ARTYG AMING PLC,
Defendants-Appellees.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 06 C 7100—Blanche M. Manning, Judge.
____________
A RGUED F EBRUARY 25, 2008—D ECIDED S EPTEMBER 8, 2008
____________
Before R OVNER, W OOD , and W ILLIAMS, Circuit Judges.
W OOD , Circuit Judge. This appeal involves a trademark-
infringement dispute between gaming companies. It
began when WMS Gaming, Inc. (“WMS”), sued WPC
Productions Ltd. and its parent corporation, PartyGaming
PLC (collectively, “PartyGaming” or “the defendants”),
for PartyGaming’s unapologetic infringement of WMS’s
registered trademarks JACKPOT PARTY and SUPER
2 No. 07-3585
JACKPOT PARTY. PartyGaming is based in Gibraltar, but
the electronic gaming services that it provides span
the globe. After several failed attempts to persuade
PartyGaming voluntarily to cease its infringing uses
of WMS’s marks, WMS filed this suit in federal district
court seeking injunctive relief, damages, and an equitable
accounting of the profits PartyGaming reaped from its
use of WMS’s marks in the United States.
Despite receiving proper notice, the defendants have
opted to ignore WMS’s lawsuit entirely. The result was
a default judgment for both monetary and injunctive
relief entered in WMS’s favor. Believing that it was
entitled to additional relief, however, WMS appealed,
arguing that the district court applied the wrong standard
to its claim for an accounting of profits. We reverse.
I
WMS has manufactured, sold, and leased gaming
devices, including slot machines, for many years. Since as
early as 1998, WMS has used the JACKPOT PARTY
trademark (U.S. Reg. No. 2,283,967) in interstate com-
merce in connection with its goods, and since as early
as October 5, 2004, it has used the SUPER JACKPOT
PARTY trademark (U.S. Reg. No. 2,952,924) in the same
way. Under U.S. law, these registrations constitute con-
clusive evidence of WMS’s exclusive rights to the under-
lying marks for the uses specified in the registrations, see
15 U.S.C. § 1115(b), and they also provide nationwide
constructive notice of WMS’s rights to the underlying
marks, dating back to the filing dates of the applications
No. 07-3585 3
from which the registrations matured: December 9, 1997,
for JACKPOT PARTY, and February 22, 2002, for SUPER
JACKPOT PARTY, id. § 1057(c).
PartyGaming’s business is online gaming, including slot
machines, poker, bingo, sports betting, and other
casino games. During the years 2004, 2005, and 2006,
PartyGaming used approximate and even exact reproduc-
tions of WMS’s marks for that business, throughout
the world and in the United States. Its use of WMS’s marks
is well-documented and has occurred frequently and
persistently throughout the years in question.
In addition to having constructive notice of WMS’s
ownership of the trademarks by virtue of their registra-
tion with the U.S. Patent and Trademark Office (“PTO”),
PartyGaming also had actual notice that WMS owned the
JACKPOT PARTY mark by the beginning of 2005. At that
time, it attempted to register the mark “PARTYJACKPOT”
with the PTO, but the PTO promptly rejected the
request because it found that the mark was “confusingly
similar” to WMS’s prior registered mark JACKPOT
PARTY. This was not enough to prompt PartyGaming to
abandon its use of the mark. To the contrary, the record
shows that it instead expanded its use after the PTO’s
action, and with its use, the profits it derived from the
mark. According to PartyGaming’s 2005 Annual Report,
available from its website, the company earned $977.7
million in total revenue that year, of which 84%, or $820
million, came from U.S. customers. (See http://
www.partygaming.com, 2005 Annual Report at 80, 87
(follow “Investors” hyperlink to “Financial Performance”
4 No. 07-3585
and then “Financial Reports” hyperlinks), report repro-
duced in App. vol. 1, at 141 ff.) PartyGaming also contin-
ued for several months to pursue its application in the
United States to register PARTYJACKPOT, ultimately
forcing WMS to oppose that application in litigation
before the Trademark Trial and Appeal Board.
While that litigation was pending, the U.S. Congress
passed the Unlawful Internet Gambling Enforcement Act,
Pub. L. No. 109-347, 120 Stat. 1952 (2006) (“UIGEA”), which
effectively prohibited gambling businesses from re-
ceiving proceeds or monies in connection with online
gambling. Up until that point (late 2006), the largest source
of PartyGaming’s revenues, by far, was the United States.
In the wake of the UIGEA’s enactment, however,
PartyGaming decided to cease its operations in the U.S.
market. It also abandoned its application and litigation
in this country regarding the PARTYJACKPOT mark.
Once again, however, PartyGaming did not abandon
its use of WMS’s trademarks. It continued, for a time, to
rake in hundreds of millions of dollars in revenues from
U.S. customers. When amicable efforts to resolve the
dispute failed, WMS filed this suit, which, as we noted,
PartyGaming chose to boycott despite proper service of
process. Eventually, the district court, having found that
it had subject-matter jurisdiction under 15 U.S.C. § 1121
and 28 U.S.C. § 1338 (and, we might add, apparently 28
U.S.C. § 1332(a)(2)), and that the requirements of
Illinois’s long-arm statute, 735 ILCS 5/2-209 were satis-
fied, granted WMS’s motion for entry of default judg-
ment. Its order, entered July 19, 2007, awarded damages to
No. 07-3585 5
WMS in the amount of $2,673,422.10. It also granted
injunctive relief, the terms of which it provided in an
order entered on September 21, 2007.
Though the district court granted relief to WMS, the
monetary award that WMS had sought was exponentially
larger than the one it got: WMS had requested
$287,391,140.70. It arrived at this figure by determining the
total amount of revenue that PartyGaming had earned as
a result of its business in the United States in 2004, 2005,
and 2006. WMS obtained that data from PartyGaming’s
website, which featured links to its public financial state-
ments and annual revenue reports. The reports (which
we have in the substantial Appendices that WMS has
filed) reveal, in PartyGaming’s own words and colorful
charts, the hundreds of millions of dollars that it earned
during the years in question. The reports even separate
the revenues into “U.S.” and “non-U.S.” revenues. When
it became clear that PartyGaming would not respond to
WMS’s lawsuit, WMS turned its focus to the accounting-of-
profits remedy it wanted, and it used the defendants’
annual reports to estimate how much money the defen-
dants had earned in the United States while infringing
WMS’s trademark rights.
The district court concluded that WMS’s estimate of its
2004 damages was “reasonable.” That amount was
$891,140.70, and it was significantly lower than the esti-
mates for 2005 and 2006, because the revenues for the
later years reflected PartyGaming’s expanded use of the
marks. In the district court’s view, however, WMS’s
estimates for 2005 and 2006 could not “be ascertained with
6 No. 07-3585
reasonable certainty” and were “clearly excessive.” It
therefore based its awards for those years not in the
amounts that WMS had requested, but instead on the
same amount that it had deemed “reasonable” for 2004:
$891,140.70. The result was the total award reflected in
the court’s order, $2,673,422.10.
WMS responded with a motion under F ED. R. C IV. P.
59(e) to alter or amend the judgment. In its motion, it
tried to persuade the district court that it had committed
legal error by applying the standard for actual damages
in its order for default judgment, rather than the proper
(and more flexible) standard for an equitable accounting
of profits. Both types of relief are available under the
Lanham Act to redress trademark infringement, see 15
U.S.C. § 1117(a), and they are distinct remedies with
different legal standards and burdens of proof. The dis-
trict court denied the Rule 59(e) motion; it remained
committed to its prior interpretation of WMS’s request as
one for “damages” and concluded again that WMS was
asking for “damages that are clearly excessive” and
“cannot be ascertained with reasonable certainty.”
II
Before proceeding to the substance of WMS’s claims,
we believe that it is prudent to assure ourselves that the
federal courts have jurisdiction over this lawsuit. The
statutes on which the district court based its conclusion
that subject-matter jurisdiction exists were 15 U.S.C. § 1121
and 28 U.S.C. § 1338. See 15 U.S.C. § 1121(a) (granting
original jurisdiction to the district courts, and appellate
No. 07-3585 7
jurisdiction to the circuit courts of appeals, “of all actions
arising under this chapter [Chapter 22: Trademarks],
without regard to the amount in controversy or to
diversity or lack of diversity of the citizenship of the
parties”); 28 U.S.C. § 1338(a) (granting exclusive jurisdic-
tion to the district courts “of any civil action arising
under any Act of Congress relating to patents, . . . copy-
rights and trademarks”); and 28 U.S.C. § 1338(b) (granting
the district courts “original jurisdiction of any civil action
asserting a claim of unfair competition when joined with
a substantial and related claim under the copyright,
patent, plant variety protection or trademark laws”).
WMS’s claims fall squarely within the scope of these
statutes.
Our appellate jurisdiction is secure because the defen-
dants were properly served but failed to appear or answer
WMS’s complaint. They therefore were found to be in
default, and the district court’s entry of default judg-
ment and later denial of WMS’s Rule 59(e) motion consti-
tutes an appealable judgment. Though a few loose ends
remain in the district court (namely, WMS’s motion for
fees and costs and a separate motion to have the defen-
dants held in contempt), those collateral issues do not
affect the existence of appellate jurisdiction for purposes
of the issues before us. See Osterneck v. Ernst & Whinney,
489 U.S. 169, 175 (1989) (costs); Budinich v. Becton Dickinson
& Co., 486 U.S. 196, 199-201 (1988) (attorneys’ fees).
We also note that while the defendants had the oppor-
tunity to contest the district court’s personal jurisdiction
over them, they have now waived their opportunity to
8 No. 07-3585
do so. See F ED. R. C IV. P. 12(h)(1). While we thus cannot
rule on the point, it does appear to us that their business
contacts with the United States probably would have
sufficed to secure personal jurisdiction under F ED. R. C IV.
P. 4(k)(2). Cf. Ins. Corp. of Ireland, Ltd. v. Compagnie
des Bauxites de Guinee, 456 U.S. 694, 715-16 (1982) (Powell,
J., concurring in the judgment) (court should assure
itself of prima facie support for personal jurisdiction).
III
WMS’s appeal rests on its position that the district
court misconstrued its request for relief as limited to one
for actual damages, rather than seeing it for what it was:
a request for the separate remedies of damages at law
(if possible) and an equitable accounting of profits. In-
deed, WMS maintains that its central claim was for an
accounting, not for damages, and so the district court
committed reversible error when it failed to recognize
that distinct standards apply to each type of claim, which
in turn led it to conflate the standards for damages with
those that govern an equitable accounting of profits.
We begin by noting that because this was a default
judgment, the usual rule that a party should be given
the relief to which it is entitled whether or not it has
requested that relief does not apply. See FED. R. C IV. P.
54(c). Instead, Rule 54(c) stipulates that “[a] default
judgment must not differ in kind from, or exceed in
amount, what is demanded in the pleadings.” WMS’s
pleadings thus are more important, for purposes of relief,
No. 07-3585 9
than they would have been had PartyGaming appeared
and contested the case.
That said, we find it clear from WMS’s filings in the
district court that, contrary to the assumption in the
district court’s orders of July 19, 2007, and September 24,
2007, WMS has throughout this litigation requested an
equitable accounting of profits, rather than—or at least
in addition to—actual damages. In its six-count com-
plaint, WMS repeatedly stated that it sought the equitable
remedies of injunctive relief and an accounting of profits,
and it asserted multiple times that “there is no adequate
remedy at law” for the defendants’ actions. The complaint
also asks for attorneys’ fees, costs, statutory damages,
treble damages, punitive damages, and, at a few points,
actual damages. All of the paragraphs requesting actual
damages also request an accounting of profits. From the
start, then, WMS recognized the distinction between
these two types of relief and properly requested that the
court consider both. The complaint also shows that the
request for an accounting appears far more often than
the request for actual damages. WMS thus did not bury
or obscure its requests for an accounting, nor did it
attempt a sudden change of course midway through the
proceedings.
WMS’s motion for entry of default judgment continues
this theme. This motion, filed after WMS realized that
PartyGaming would not respond or participate in this
litigation in any way, asks only for “injunctive relief
and . . . an accounting of profits.” Similarly, WMS’s
memorandum in support of entry of default judgment
10 No. 07-3585
requested only statutory damages (available for willful
infringement), injunctive relief, and “an accounting of
defendants’ profits while operating under the infringing
marks”; it makes no mention at any point of a request
for actual damages.
Section 35 of the Lanham Act, on which WMS was
relying, has this to say, in relevant part, about a plaintiff’s
remedies:
When a violation of any right of the registrant of a
mark registered in the Patent and Trademark Office . . .
shall have been established in any civil action arising
under this chapter, the plaintiff shall be entitled,
subject to the provisions of sections 1111 and 1114 of
this title, and subject to the principles of equity, to
recover (1) defendant’s profits, (2) any damages
sustained by the plaintiff, and (3) the costs of the
action. . . . In assessing profits the plaintiff shall be
required to prove defendant’s sales only; defendant
must prove all elements of cost or deduction claimed.
In assessing damages the court may enter judgment,
according to the circumstances of the case, for any
sum above the amount found as actual damages, not
exceeding three times such amount. If the court
shall find that the amount of the recovery based on
profits is either inadequate or excessive the court
may in its discretion enter judgment for such sum as
the court shall find to be just, according to the circum-
stances of the case. Such sum in either of the above
circumstances shall constitute compensation and not
a penalty. . . .
15 U.S.C. § 1117(a).
No. 07-3585 11
We agree with WMS that the district court, despite
mentioning in passing the proper standard for an ac-
counting of profits, made a fundamental error of law by
failing to distinguish between WMS’s right to the defen-
dants’ profits and its right to its damages. In its order of
July 19, 2007, the district court referred to WMS’s “requests
for damages.” It then noted that “the plaintiff must provide
evidence to the court so that it may . . . ‘ascertain the
amount of damages with reasonable certainty.’ ” The court
quoted from In re Catt, 368 F.3d 789, 793 (7th Cir. 2004),
which had quoted Credit Lyonnais Securities (USA), Inc. v.
Alcantara, 183 F.3d 151, 155 (2d Cir. 1999). Both of those
cases dealt with claims for actual damages, not for an
accounting of profits.
The court then set forth the three “types of damages”
that “are available for the infringement of trademarks,”
quoting in part the language from section 35 of the Lanham
Act that we have furnished above. But after doing so,
the district court did not follow through with two
separate computations, one for the accounting and one
for damages. The result was that the court incorporated
into its accounting-of-profits analysis the additional
considerations of whether the “damages” could be “ascer-
tained with reasonable certainty,” and whether WMS had
proven that its calculation properly separated out the
revenues gained from lawful business as opposed to
infringing uses of WMS’s marks. In rejecting WMS’s
estimate of profits for 2005, for example, the court stated:
Although the defendants’ Annual Report reported
revenue attributable to casino games, it did not identify
12 No. 07-3585
which portion of that revenue was attributable to
games that infringed WMS’ mark. According to WMS’
own submissions, the defendants offered a wide
variety of casino games, including “poker, bingo,
backgammon, sports betting,” and slot machines,
which presumably included slot machines that did not
infringe WMS’ marks. Therefore, the revenue amount
upon which WMS based its damages calculation
overstated the revenue generated by the defendants’
infringing uses of WMS’ marks. WMS has not identi-
fied any information from which the court can calcu-
late what percentage of the defendants’ casino reve-
nues are attributable to the defendants’ infringing
uses of WMS’ marks.
The court applied the same reasoning when rejecting
WMS’s 2006 estimate. This analysis was based on the
wrong standard. The Supreme Court held nearly a
century ago in Hamilton-Brown Shoe Co. v. Wolf Bros. & Co.,
240 U.S. 251 (1916), that “the owner of the trademark is
entitled to so much of the profit as resulted from the use
of the trademark,” and while it is often difficult to “ascer-
tain[ ] what proportion of the profit is due to the trade-
mark, and what to the intrinsic value of the commod-
ity”—such that the proper proportional often “cannot be
ascertained with any reasonable certainty”—the Court
decided that
it is more consonant with reason and justice that the
owner of the trademark should have the whole
profit than that he should be deprived of any part of it
by the fraudulent act of the defendant. It is the same
No. 07-3585 13
principle which is applicable to a confusion of goods.
If one wrongfully mixes his own goods with those of
another, so that they cannot be distinguished and
separated, he shall lose the whole, for the reason that
the fault is his; and it is but just that he should suffer
the loss rather than an innocent party, who in no
degree contributed to the wrong.
240 U.S. at 262.
Thus, when the district court in this case assumed that
it had to segregate PartyGaming’s legitimate revenues
from those that PartyGaming derived through its infringe-
ment, and that WMS had to bear the risk of uncertainty
about the proper characterization of the revenues, it
erred. Moreover, as WMS points out, it was more generous
to PartyGaming than it had to be when it used low-
end estimates and U.S.-only revenues to calculate its
estimates. In doing so, the court relieved PartyGaming of
its burden to show which portions of its gross income
were not attributable to its infringing uses. The Supreme
Court has made it clear, both in Hamilton-Brown Shoe Co.
and in later cases, that
[t]he burden is the infringer’s to prove that his in-
fringement had no cash value in sales made by him. If
he does not do so, the profits made on sales of goods
bearing the infringing mark properly belong to the
owner of the mark. There may well be a windfall to
the trade-mark owner where it is impossible to isolate
the profits which are attributable to the use of the
infringing mark. But to hold otherwise would give
the windfall to the wrongdoer.
14 No. 07-3585
Mishawaka Rubber & Woolen Mfg. Co. v. S.S. Kresge Co., 316
U.S. 203, 206-07 (1942). The Court in Mishawaka went on
to note that, unless the infringer could provide evidence
that it did not earn some or all of its profits by infringing
the owner’s marks, “it promotes honesty and comports
with experience to assume that the wrongdoer who
makes profits from the sales of goods bearing a mark
belonging to another was enabled to do so because he
was drawing upon the good will generated by that mark.”
Id. at 207; see also Nintendo of Am., Inc. v. Dragon Pac. Int’l,
40 F.3d 1007, 1012 (9th Cir. 1994) (“[W]here infringing
and noninfringing elements of a work cannot be readily
separated, all of a defendant’s profits should be awarded
to a plaintiff.”); Wesco Mfg. v. Tropical Attractions of Palm
Beach, Inc., 833 F.2d 1484, 1488 (5th Cir. 1987) (“Although
the exact amount of infringing sales cannot be deter-
mined from the [evidence], exactness is not required. [The
defendant] is in the best position to ascertain exact sales
and profits, and it bears the burden of doing so in an
accounting.”); id. at 1487-88 (“A plaintiff need not demon-
strate actual damage to obtain an accounting of an in-
fringer’s profits under section 35 of the Lanham Act. It is
enough that the plaintiff proves the infringer’s sales. The
burden then shifts to the defendant, which must prove
its expenses and other deductions from gross sales.”
(citations omitted)).
The burden was therefore on PartyGaming to show that
certain portions of its revenues—which for purposes of
the award after its default judgment WMS established by
using PartyGaming’s own public financial statements and
reports—were not obtained through its infringement of
No. 07-3585 15
WMS’s marks. There was no evidence in the record that
would have helped PartyGaming to meet that burden. As
the Second Circuit noted in Louis Vuitton S.A. v. Spencer
Handbags Corp., 765 F.2d 966 (2d Cir. 1985),
[p]laintiffs here proved defendants’ sales, using defen-
dants’ own words. The burden then shifted, requiring
defendants to prove costs or deductions. Defendants
failed to sustain their burden. In the absence of any
evidence introduced by defendants, the court’s reliance
on defendants’ videotaped statements as to their
profits was not unreasonable.
Id. at 973.
Similarly, in this case PartyGaming has not come forward
with any evidence suggesting that deductions are war-
ranted from the revenues that its own annual reports
reflect. Courts consistently find that when a trademark
plaintiff offers evidence of infringing sales and the in-
fringer fails to carry its statutory burden to offer evidence
of deductions, the plaintiff’s entitlement to profits under
the Lanham Act is equal to the infringer’s gross sales. See,
e.g., Tex. Tech. v. Spiegelberg, 461 F. Supp. 2d 510, 526 (N.D.
Tex. 2006); N.Y. Racing Ass’n, Inc. v. Stroup News Agency
Corp., 920 F. Supp. 295, 301 (N.D.N.Y. 1996).
WMS has provided evidence of the profits that
PartyGaming earned from its U.S. sales. In the absence of
evidence from PartyGaming showing that deductions
are warranted, WMS is entitled to the revenues supported
by its evidence. A remand is necessary so that the dis-
trict court can assess WMS’s claim for an accounting in
accordance with the proper legal standard for that claim.
16 No. 07-3585
We add that while the figure WMS seeks, $287,391,140.70,
is considerably larger than the “damages” award granted
by the district court, $2,673,422.10, the record shows that
in a single year (2005), the defendants reported revenues of
$977.7 million—nearly $1 billion. WMS urges that “this is
not a case in which [the plaintiff] is seeking wildly exces-
sive relief.” Be that as it may, it is Congress that has
specified the types of relief to which WMS is entitled, and
it is our job to uphold those rules. The record shows
persistent, pervasive, knowing, and willing infringement
for several years by PartyGaming, as it repeatedly
refused to cease and desist even after receiving several
forms of actual notice of its unlawful activity, from both
the PTO and from WMS. We therefore R EVERSE the judg-
ment of the district court and R EMAND for further pro-
ceedings consistent with this opinion.
9-8-08