UPDATE: How the Supreme Court Made Restitution Harder for Brand Owners and How the Fifth Court Preserved Restitution for Corporate Victims

John Zacharia
Founder, Zacharia Law PLLC

When a defendant is convicted of an intellectual property (IP) crime, one important remedy that the federal Mandatory Victim Restitution Act of 1996 (MVRA) grants brand owners and other victims who suffer pecuniary harm is restitution. Unfortunately for brand owners and other victims, the Supreme Court issued an opinion in 2018 placing new limits on which victim expenses are subject to restitution (Lagos v. United States, 138 S. Ct. 1684 (2018)). Later that year, the BPP published an article I wrote discussing the impact of this opinion. Now the Fifth Circuit has reviewed a case reinterpreting Lagos that will be of interest to the brand protection community.  

The Mandatory Victim Restitution Act

The MVRA requires convicted defendants to pay restitution for certain “offense[s] against property . . . in which an identifiable victim or victims have suffered a . . . pecuniary harm.” 18 U.S.C. § 3663A(c)(1)(A)(ii), (B). Although federal courts had already recognized most IP crimes as “offense[s] against property” authorizing restitution to its victims under the MVRA, Congress codified this case law when it enacted the PRO-IP Act of 2008 (18 U.S.C. § 2323) 

The MVRA requires convicted defendants to make full restitution for two categories of pecuniary harm to victims. First, defendants must compensate victims for pecuniary harm to their property, usually in the form of lost sales. 18 U.S.C. § 3663A(b)(1); e.g., United States v. Milstein, 481 F. 3d 132, 136-37 (2d Cir. 2007).  

Second, defendants must reimburse a brand owner’s “lost income and necessary . . . transportation, and other expenses incurred during participation in the investigation or prosecution of the offense or attendance at proceedings related to the offense” (18 U.S.C. § 3663A(b)(4)). Brand owners incur such expenses to support investigations of IP crimes in a number of ways. For example, prosecutors ask brand owners to travel to talk to investigators and to participate in the execution of a search warrant (after obtaining permission from a federal judge) so they can use their expertise to help federal investigators distinguish between counterfeit and non-counterfeit goods. Federal investigators send samples of goods seized during an investigation to brand owners for testing to determine whether the goods are counterfeit. And prosecutors ask brand owners to send representatives to testify before a grand jury, at trial, or during a sentencing hearing.

Most importantly, brand owners will conduct their own investigation and provide information to investigators as part of a criminal referral. This is invaluable for criminal investigators because brand owners often learn of infringing or counterfeiting conduct before investigators do and provide detailed investigative reports with evidence identifying the target of the IP crime and proving the elements of the crime. Although investigators independently verify what a brand owner provides, it is usually easier for investigators to conduct their investigation after a brand owner’s referral than to start their own investigation from scratch. 

Lagos v. United States

Lagos narrowed a victim’s right to restitution for the cost of the victim’s own investigation. In that case, a federal district court in the Southern District of Texas convicted the defendant for defrauding General Electric (GE) of tens of millions of dollars. GE shared with the Government information that its private investigation uncovered. The district court ordered the defendant to pay GE restitution for the expenses of its own investigation pursuant to the MVRA, and the Fifth Circuit Court of Appeals affirmed the restitution order—consistent with all other federal courts of appeals but one (Lagos, 138 S. Ct. at 1687).

Nevertheless, the Supreme Court unanimously reversed, holding that victims may only receive mandatory restitution for expense incurred during a criminal investigation and prosecution (See my BPP article The Supreme Court Just Made Restitution Harder For Brand Owners: Here’s What They Can Do About It). 

United States v. Richardson

On May 5, 2023, the United States Court of Appeals issued a significant published decision interpreting Lagos in a way that preserves the right of entities — such as companies that own trademarks or copyrights — to receive mandatory restitution.  U.S. v. Richardson, 2023 WL 3264591, 67 F.4th 268 (5th Cir. May 5, 2023).  In United States v. Richardson, the district ordered a defendant convicted of a Hobbs Act robbery to pay $5,000 in restitution to the store he robbed as part of his sentence.  

The defendant appealed the ordered restitution on the grounds that Lagos required a narrow interpretation of the MVRA that limits restitution only to “a natural person.” Id. at *1. The defendant seized upon the MVRA’s definition of “victim,” i.e., “a person directly and proximately harmed as a result of the commission of an offense for which restitution may be ordered,” 18 U.S.C. § 3663A(a)(2), and argued that Lagos compelled limiting “a person” to exclude entities. Id. As noted, the Supreme Court in Lagos chose to adopt a narrow reading of the words “investigation” and “proceedings,” in part, because a broad reading of the MVRA “could result in more conflict as to the MVRA’s coverage and correspondingly increase administrative burdens.”  Id. (citing Lagos, 138 S. Ct. at 1689). In short, the defendant read Lagos as requiring courts to apply a narrow reading to every term in the MVRA, including the definition of a “victim.” Id. at *2. The defendant’s argument, if accepted and applied to brand owners, could have precluded any corporate trademark owner from ever receiving restitution in a criminal trademark counterfeiting case.

Fortunately, the Fifth Circuit rejected the defendant’s argument. The court in Richardson held that “nothing in Lagos suggests that its holding extends so far — indeed, Lagos itself cabined its discussion of the benefits of a ‘narrow’ rather than ‘broad’ reading to the specific provision at issue.” Id. The panel further highlighted the obvious: that the victim in Lagos was a corporate victim (GE). Id. The Supreme Court in Lagos “directly acknowledged that a victim under the MVRA could be a corporation.” Id.

What Should Brand Owners Do Post-Lagos and Post-Richardson

Although the Richardson case closed the door on the defendant’s attempt to use Lagos to preclude corporate victims from receiving mandatory restitution, it did not resolve the harmful holding in Lagos. As discussed more fully in my 2018 BPP article, Lagos has had a particularly negative effect on brand owners because IP crime victims rely heavily on their own private investigations. Similarly, criminal investigators rely on brand owners’ referrals — both to decide whether to open a criminal IP investigation and to conduct their own independent investigation. Ultimately, Lagos still leaves brand owners and other victims without a restitution remedy sufficient to cover expenses for their own investigations, even when they are incurred as a result of the IP crime.

To address this problem in the short term, I recommended that brand owners approach law enforcement as soon as possible to give the Government the opportunity to “invit[e] or request” a further investigation by brand owners sooner and minimize the brand owner’s pre-invitation investigative costs. In the long term, brand owners should seek a legislative fix to the MVRA by including language that explicitly authorizes restitution for “the value of the time reasonably spent by the victim in an attempt to remediate the intended or actual harm incurred by the victim from the offense.” That would likely allow brand owners and other victims to obtain the broader restitution that Lagos now denies them.