The Profits of Infringement: Richard Posner V. Learned Hand
41 Pages Posted: 16 Mar 2006
Date Written: March 8, 2006
Owners of infringed trademarks and copyrights can be awarded the defendant's profits from the infringement. The statutes are silent on the definition of profits, and the federal Courts of Appeals split on how profits are computed. In the Second Circuit, a 1939 decision written by Judge Learned Hand establishes a practice of allocating a portion of the infringer's overhead to the costs of infringing production. In the Seventh Circuit, the controlling case, written by Judge Richard Posner, stipulates that only costs that vary as a consequence of infringement may be considered in computing profits. While the variable-costs-only rule would appear to reflect the teaching of economics, the correct rule would credit the defendant for the incremental opportunity cost of the infringement. Because the use of fixed facilities for infringing production will generally foreclose other opportunities, a variable-cost-only rule will not reflect the true incremental costs of infringement. A rule that allocates the costs of these assets cannot precisely reflect the opportunity cost of using them, however the optimization condition that determines the firm's use of these assets implies that on average, marginal factor costs will equal the value of their marginal product, which is to say their marginal opportunity cost. Consequently, an allocated-fixed-cost rule provides a reasonable proxy for the incremental costs of infringement. Thus Judge Hand's rule provides a suitable implementation of Judge Posner's economic principle.
Keywords: Copyright, Trademark, Infringement, Remedies, Full absorption, Incremental Method
JEL Classification: K00, K29
Suggested Citation: Suggested Citation