Volume 20, Number 6
September 2003


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INTELLECTUAL PROPERTY LAW

SHAREHOLDER LIABILITY UNDER THE U.S. COPYRIGHT ACT

By Scott J. Spooner

Scott J. Spooner practices intellectual property law as an associate at Bean, Kinney & Korman, PC, in Arlington, Virginia.


One area of the law in which shareholders are not shielded from liability for the acts of a corporation is copyright infringement under the U.S. Copyright Act (the Act). However, the test for determining shareholder liability is rather abstract, unsettled, and ill defined. This article examines the circumstances under which a shareholder can be held liable for the acts of copyright infringement committed by a corporation.

Test for establishing vicarious liability under the Act. The Second Circuit Court of Appeals in Shapiro, Bernstein & Co., Inc. v. H.L. Green Co., Inc. first established the two-part vicarious liability test for determining when third parties could be held liable under the Act. The court in Shapiro cited no provision of the Act as a basis for its holding that vicarious liability can be imposed on a third party. In fact, neither the 1909 Copyright Act nor the 1976 Copyright Act contains any provision regarding contributory liability or vicarious liability. Nevertheless, the Supreme Court and various circuit courts of appeals have followed Shapiro in permitting the imposition of vicarious liability on a third party if the third party maintained the right and ability to control the infringing conduct and had a direct and obvious financial interest in the exploitation of the copyrighted material.

A litigant seeking to reach a shareholder first must show that the shareholder had the right and ability to supervise the conduct of the infringing corporation. The Second Circuit in Shapiro placed principal emphasis on a party's right to police the conduct of the primary infringer. However, the "power to police," though easily articulable as a principle of law, has proved difficult in application. Some courts hold that the actual exercise of control is not required and that all that is needed to establish liability is the legal right and ability to control and supervise the infringing conduct. Other courts place principal emphasis on whether the alleged vicarious infringer in fact exercised actual control and supervision of the infringing conduct.

A plaintiff seeking to hold a shareholder vicariously liable for the copyright infringement of a corporation also must show that the shareholder possessed an obvious and direct financial interest in the exploitation of the copyrighted work allegedly infringed. Courts have not developed a bright-line test for determining when a party maintains a sufficiently direct financial interest in the infringing activity to warrant the imposition of vicarious liability. Most courts hold that stock ownership in the infringing corporation establishes a sufficiently direct financial interest in the infringing activity. Some courts even gloss over the direct financial interest prong and summarily conclude that the financial interest of certain parties is obvious, while other courts require evidence of a direct financial benefit.

The vicarious liability test applicable to copyright infringement claims differs in material respects from the vicarious liability test applicable to other causes of action. In Polygram International Pub., Inc. v. Nevada/TIG, Inc., the court stated: "[t]he distinctive version of vicarious liability that has developed in the context of copyright omits the requirement, common elsewhere in the law of vicarious liability, that the right and ability to control extend to the manner and means of performance."

Liability of shareholders. Because vicarious liability principles applicable to copyright infringement allow copyright owners to reach parties ordinarily shielded from liability, copyright owners frequently sue shareholders on the basis of a corporation's alleged copyright infringement. Such suits seek to hold shareholders of the infringing corporation jointly and severally liable for the infringements carried out by the corporation. The legal test for determining whether a shareholder may be liable for the copyright infringement of a corporation will vary depending on whether the shareholder is an individual or a corporation.

Few, if any, reported decisions impose vicarious liability against an individual shareholder who was not an officer and/or director of the corporation. Virtually every reported decision in which a court found an individual shareholder vicariously liable for the copyright infringement of a corporation involved a shareholder who also served as an officer and/or director of the corporation. Moreover, courts imposing liability against an individual shareholder almost universally emphasize the individual's status as a shareholder only with regard to the financial interest prong of the Shapiro test while finding the requisite control through the individual's service as an officer and/or director of the corporation. A consensus appears to have emerged among the federal district courts that an individual's status as a shareholder is determinative only with respect to the financial interest prong of the Shapiro test and cannot by itself satisfy the supervision and control element of the vicarious liability test.

Federal courts also appear to be split regarding the test to be applied in determining when a parent corporation can be held liable for the infringing acts of its subsidiary. The leading case in this area is Frank Music Corp. v. MGM, Inc. (Frank Music II), where the Ninth Circuit held that "[a] parent corporation cannot be held liable for the infringing actions of its subsidiary unless there is a substantial and continuing connection between the two with respect to the infringing acts." The Ninth Circuit then remanded the case. On remand, the district court concluded that the plaintiff failed to establish a substantial and continuing connection. The Ninth Circuit overruled the district court's determination, finding that the following facts buttressed its holding that a substantial and continuing connection existed: (1) MGM Grand was a wholly owned subsidiary of MGM, Inc.; (2) MGM, Inc.'s legal counsel responded to the plaintiff's allegations of infringement; (3) MGM, Inc. actually hired the MGM Grand employee who created the infringing works; and (4) the MGM Grand employee who created the infringing works maintained an office at MGM, Inc.

While most appellate courts have not addressed the parent-subsidiary liability issue, most district courts confronting the issue have followed Frank Music II in adopting the substantial and continuing connection standard. Other district courts have endorsed an evidentiary standard analogous to, or co-extensive with, the substantial and continuing connection standard articulated in Frank Music II. In Banff, Ltd. v. Limited, Inc., the district court held that actual control and supervision, rather than merely the legal right to control and supervise, is required to hold a parent corporation vicariously liable for the infringing acts of a subsidiary. By contrast, another district court has held that, as a matter of law, a parent corporation is always liable for the infringing acts of its subsidiaries. The court in Broadcast Music, Inc. v. Hartmax Corp. found that, as a matter of law, the parent has the right and ability to supervise its subsidiaries-that is, to guard against or police the allegedly infringing activity. The court in Broadcast Music reasoned that it is the existence of the right to supervise, not whether the parent in fact chose to exercise that right, that is at issue. Whereas Banff held that actual control/supervision is necessary to establish the vicarious liability of a parent corporation for the infringing acts of its subsidiaries, Broadcast Music emphasizes that the legal right to control is determinative. Broadcast Music, however, constitutes questionable authority for the proposition that a parent is per se liable for the infringing acts of its wholly owned subsidiaries since it appears to be the only reported decision standing for this proposition.


FOR MORE INFORMATION ABOUT THE SECTION OF INTELLECTUAL PROPERTY LAW
- This article is an abridged and edited version of one that originally appeared on page 1 of IPL Newsletter, Spring 2003 (21:3).
- For more information or to obtain a copy of the periodical in which the full article appears, please call the ABA Service Center at 800/285-2221.
- Website: www.abanet.org/intelprop/.
- Periodicals: IPL Chair's Bulletin, a monthly update of Section activities and timely intellectual property issues; IPL Newsletter, a quarterly newsletter with current developments and Section news; Annual Report, a comprehensive summary of committee activities.
- Books and Other Recent Publications: Pamphlet series intended for clients, including Marketing Your Invention, Submitting an Idea, What Is a Patent?, What is a Trademark?, and What is a Copyright? Extensive course materials in connection with CLE programs are also available.


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