Feature

Proving the Causal Connection from Infringement to Defendant Profits: Punitive Considerations for the Copyright Act

Michael A. Einhorn

©2014. Published in Landslide, Vol. 6, No. 3, January/February 2014, by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association or the copyright holder.

Imagine that you are a young songwriter and you are looking to sign up with a hot publisher to plug your latest work to a number of leading recording artists. Unfortunately, a major car company (Fraud Motors) picks up your song, strips the lyrics, and sets your melody with new words on a very different mission—the promotion of its latest sports coupe. It expands the use of its new jingle (i.e., your song) from its website to a national advertising campaign on three major broadcast channels, beginning with a well-placed television ad during the Super Bowl. It also registers the copyright of the derivative work in its name, thus giving Fraud complete control over your melody in all future uses.

As the commercial reaches national attention, you find that your interesting song is now a ditty hummed by shoppers in every auto mart, but lost irretrievably to you. When you hire an attorney to recover copyright damages, your admirers at Fraud offer you the sum of $100, which it presents as the market value of a previously unlicensed tune written by an undistinguished songwriter such as yourself. Unless you can get an injunction (now itself an uncertainty1), you can now be the proud grantor of a “bargain basement” license for the use of your song in an infringement that has vacated all of your ownership rights in the work.

Recovery Attempts

As you had not yet had a chance to register the copyright (a common occurrence for individual creators2), you cannot recover statutory damages of $30,000 (or more) that otherwise would have been recoverable for a willful infringement.3 This preregistration requirement for statutory damages is a modern American oddity that was not present in U.S. law before 1975, and now appears in no other major country.4 And without preregistration, you cannot recover attorneys’ fees, which can cost you well into six digits for a small case.5 If you lose your case for any number of reasons—by the way, how good is your musicologist?—you can also expect to pay for the defendant’s legal costs.6

When you suggest that your attorney hire an expert to recover additional defendant profits allowable under the Copyright Act, you learn the harsh reality of the present common law. While your song had great public appeal hawking sports coupes, your dream team finds it difficult to prove that the song itself actually generated any discernible revenue increase for Fraud Motors. If the appellee defends with a suitable motion or appeal, it is unlikely that you will recover any of the defendant’s profits because you cannot prove causality.

The Legal Issue of Causality

Your problem implicates the Ninth Circuit’s distinction regarding defendant profits.7 Direct profits arise from money collected from the sale of the specific infringed work, or a commingled work in which the infringement was one component. Direct infringement apparently implicates the sale of any imprinted or live media product that directly bears a reproduction, performance, synchronization, or display of the original work (e.g., record albums, concerts, movie soundtracks, sheet music). By contrast, indirect profits arise from sales of noninfringing products or performance venues where revenues might nonetheless have increased due to infringement in a related advertisement, promotion, or ancillary work. For example, when a musical work from Kismet was infringed in a live revue at MGM’s Las Vegas hotel, the plaintiff recovered a portion of ticket sales from the box office as direct profits, and additional shares from MGM’s restaurant, hotel, and parking lot as indirect profits.8 Neither the term “direct” nor “indirect” appears in the Copyright Act of 1976, nor does the act refer to them.

Under 17 U.S.C. § 504, a court finding copyright infringement may award to the plaintiff actual damages arising from lost sales or licensing opportunities plus any of the defendant’s additional profits not previously taken into account. The U.S. Congress explicitly stated the justification for the Copyright Act of 1976: “[actual] damages are awarded to compensate the copyright owner for losses from the infringement, and [additional] profits are awarded to prevent the infringer from unfairly benefiting from a wrongful act.”9 Instead of recovering actual damages and additional defendant revenues, a copyright plaintiff may choose to recover statutory damages ranging from $200 to $150,000, depending on the degree of the defendant’s egregiousness (most importantly, willfulness).10 However, particularly when indirect profits are at issue, the aggrieved plaintiff is often called—usually in partial motion for summary judgment under Rule 5611—to prove a connection—i.e., a causal nexus or reasonable relationship12—between the use of the original work and the gross revenues from product sales. The standards here have been tightened considerably since the 1980s. Practically speaking, the plaintiff may demonstrate the required connection most effectively with circumstantial evidence of an infringing use with a relation to sales so secure that it is reasonable to infer that the use of the infringed work actually promoted sales.13 The demonstration of actual causality from infringement to defendant revenues must be based on facts and not mere speculation.14 If a plaintiff can respond successfully to a defendant and prove the required connection in a suitable manner, it must then prove the level of the defendant’s gross revenues that arose from lines of business related to the direct or indirect infringement. The defendant must then prove offsetting costs and reasonable procedures for apportioning the relative worth of infringing and noninfringing components that may be commingled.15 Any doubt regarding any element of the profit calculation is to be resolved in favor of the plaintiff.

Some Case Law

The demonstration of actual revenue causality from copyright infringement is no small order. In a case involving very competent technical expertise—Estate of Vane v. The Fair Inc.16—a distinguished marketing professor demonstrated through a complex linear regression that a retail store’s (i.e., The Fair’s) television commercials (which had integrated both infringing and noninfringing photographic slides of store merchandise) had increased the establishment’s overall sales volume. However, the expert could not prove to the court’s satisfaction that the advertiser’s use of each or all of the particular infringements themselves actually had any positive effect on overall revenues or the sale of any product. The Fifth Circuit disallowed the plaintiff from recovering “a lump-sum figure for profits attributable to the television commercials that contained infringed material as a whole without accounting for the fact that the infringed material constituted only a fraction of the given commercial.”17

Subsequent plaintiff claims for damages in matters involving indirect infringement were dismissed or vacated for lack of a causal connection in oft-cited cases related to advertising (On Davis), marketing (Mackie), brand goodwill (Polar Bear), and related sporting events (Bouchat).18 Based upon an earlier decision in the Federal Circuit,19 the Ninth Circuit’s decision in Mackie v. Rieser20 seems to be the most cited, particularly in the Fourth and Ninth Circuits. In the first case involving causality and direct infringement (generally less common), the Fourth Circuit heard Walker v. Forbes, Inc.,21 which would come to form a precedent for the District Court opinion of Bouchat v. Baltimore Ravens.22

In Walker v. Forbes, plaintiff Wesley Walker owned the copyright to a photograph that Forbes Magazine infringed in a magazine article about a South Carolina textiles magnate. Disappointed with a jury award, Walker sought on appeal to recover apportioned defendant revenues, which were earned from advertising, subscriptions, and newsstand sales of the magazine; the Circuit Court declined to disgorge any revenues from the first two. Since Forbes’ transactions involving advertising and subscription were established before the work was actually imprinted, advertisers and subscribers were unaware of the presence of the photo; causation from the defendant’s infringement to actual revenues presumably was not possible. Of the remaining newsstand sales (amounting to 2.9 percent of Forbes revenues), the plaintiff was entitled to a recovery of one-ninth of one page—the space consumed by the infringement—or $5,823. The mitigating problem here—and in Bouchat—was precedential contracting; i.e., the signing of contracts before the actual infringement was made.

In each of these cases, the ruling court may yet have allowed the plaintiff to recover the actual damages that it demonstrably suffered from lost licensing fees. But this prospective recovery is the amount that the defendant should have expected to pay anyhow—i.e., efficient breach.23 Thus, the defendant lost nothing in the venture, and had the actual possibility of suffering no loss at all if the plaintiff chose instead to back off—a common occurrence when potential recovery is meager. And if the matter does go to court, settlement for lost licensing fees will be easy because there may be little real cash on the line.

The present corpus of common law then apparently provides to defendants the legal tactics to avoid disgorging any revenue amount greater than the plaintiff’s actual damages, which may be no greater than a lost licensing fee. By its nature, the situation presents a moral hazard for strategic infringement. For example, major book publishers—Houghton Mifflin Harcourt,24 Pearson Education,25 John Wiley,26 Random House,27 and McGraw Hill28—contracted with visual artists in limited run licenses, and extended their uses in prints well beyond contract coverage. As the book publishers did not see fit to pay royalties for books sold past the limited run, their attorneys made motions for summary judgment arguing that there was no causal connection between infringement and sales of the book.

Toward a Legal Resolution

The proper resolution of this legal quandary might draw upon some of the structure of patent law, where courts may set punitive damages up to triple the actual damages.29 The critical consideration in enhancing patent awards is the egregiousness of the defendant’s conduct.30 As many as nine factors have been itemized, including the defendant’s willfulness.31 Considerable discretion for punitive recovery is then left to the trier of fact. By contrast, the Copyright Act now makes no explicit provision for punitive damages whatsoever. And while some courts have come in recent years to rule that punitive damages are permissible,32 there is no general consensus on this point.33 This ambiguity should change.

The legislative course that most easily meets Congress’ stated intent behind the Copryight Act of 1976 to dissuade infringement would extend the Copyright Act in several manners. First, the law can set forth statutory definitions of direct and indirect infringement. Second, the law should specify the guiding standard to be applied to causation regarding each—i.e., causal nexus, reasonable relationship, or something else. Arguably, the plaintiff would not have to prove causality for direct infringements or actions where willfulness, neglect, or other egregious behaviors can be identified and proven.34

With regard to damage recovery, the present terms in 17 U.S.C. § 504 are appropriately continued in instances of direct or indirect infringement where liability and causality can both be proven. In those instances where infringement is proven but a causal connection from infringement to revenues is not discernible, the statute may specify some measure of punitive damages based on proven actual damages and defendant behavior. The new standards would be more effective if small claims cases could be referred to a special tribunal, a position advanced by the U.S. Copyright Office in September 2013.35

Punitive recovery should not obviate the rights owner’s incentive to preregister properly his or her works.36 There are several advantages of preregistration; statutory damages do not have measurement problems, properly registered owners may recover legal costs, and the redress of statutory damages is more generally applicable to all acts of infringement. Nonetheless, the costs of preregistration ($35 per work) can be daunting for serial creators (e.g., photographers), whose professional oeuvre—and related costs—can be quite extensive.37

Once a plaintiff crosses the causality hurdle, there is no cakewalk in the courtroom to easy money. After the plaintiff proves defendant gross revenues, the defendant may prove offsetting costs to calculate net profits. Based on facts or creative accounting, the resulting defendant profits may prove to be minimal. After profits are determined, the defendant may make an apportionment between the valuation of infringing and noninfringing elements—a difficult exercise. Nonetheless, a defendant who loses on causality yet has the opportunity to protect most—if not all—of its revenue earnings from any disgorgement for the plaintiff.

Conclusion

With judicial discretion, punitive damages might be most commonly applied in those instances where the work is an indirect infringement. Here, it is quite clear that a musical or visual work can generate tremendous audience interest and word-of-mouth appeal for a particular product or event that advertisers may value highly. However, there is also a need—particularly with willful behavior—to protect creators with regard to merchandise and ticketed events that directly infringe on copyrighted works, usually commingling them with noninfringing elements that defendants must suitably apportion.

Endnotes

1. eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 392–93 (2006) (“[T]his Court has consistently rejected invitations to replace traditional equitable considerations with a rule that an injunction automatically follows a determination that a copyright has been infringed.”).

2. Pamela Samuelson & Tara Wheatland, Statutory Damages in Copyright Law: A Remedy in Need of Reform, 51 Wm. & Mary L. Rev. 439, 454 (2009).

3. See 17 U.S.C. § 412; Derek Andrew, Inc. v. Poof Apparel Corp., 528 F.3d 696 (9th Cir. 2008).

4. 2 Melville B. Nimmer & David Nimmer, Nimmer on Copyright § 7.16[C][2] (2008); 4 id. § 17.01.

5. Am. Intellectual Prop. Law Ass’n, 2011 Report of the Economic Survey, at 35 (2011). The median cost of a copyright case involving prospective damages of less than $1 million is $350,000.

6. 17 U.S.C. § 505.

7. Mackie v. Rieser, 296 F.3d 909, 914 (9th Cir. 2002).

8. Frank Music Corp. v. Metro-Goldwyn-Mayer Inc., 886 F.2d 1545, 1548–50 (9th Cir. 1989).

9. Rep. 94-1476, 1976 U.S.C.C.A.N. at 161, 5777.

10. Samuelson & Wheatland, supra note 2.

11. Fed. R. Civ. P. 56(c). Summary judgment will be awarded “if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.”

12. See Polar Bear Prods., Inc. v. Timex Corp., 384 F.3d 700, 713 (9th Cir. 2004) (“Polar Bear failed to satisfy its antecedent obligation of demonstrating causation.” (emphasis added)); Bouchat v. Baltimore Ravens Football Club, Inc., 346 F.3d 514, 522 (4th Cir. 2003) (“Defendants could properly be awarded summary judgment . . . if . . . there exists no conceivable connection between the infringement and [the defendant’s] revenues.” (emphasis added)); Andreas v. Volkswagen of Am., Inc., 336 F.3d 789, 799 (8th Cir. 2003) (“Although the Copyright Act places the burden on the defendant of apportioning the defendant’s profits between the infringement and other factors, the copyright holder must first establish some connection or relationship between the infringement and the profits he seeks.” (emphasis added)); Mackie v. Rieser, 296 F.3d 909, 915 (9th Cir. 2002) (“[T]here must first be a demonstration that the infringing acts had an effect on profits before the parties can wrangle about apportionment.” (emphasis added)); On Davis v. The Gap, Inc., 246 F.3d 152, 160 (2d Cir. 2001) (“[T]he term ‘gross revenue’ under the statute means gross revenue reasonably related to the infringement, not unrelated revenues.” (emphasis added)).

13. Andreas, 336 F.3d at 796–97 (“The [infringing material] was the centerpiece of a commercial that essentially showed nothing but the TT coupe. . . . We conclude the jury had enough circumstantial evidence to find that the commercial contributed to profitable introduction of the TT coupe, which shifted the burden to [the defendant] of showing what effect other factors had on its profits.” (emphasis added)); Thale v. Apple Inc., No. C-11-03778-YGR (N.D. Cal. June 26, 2013) (citing Mackie, 296 F.3d at 916) (finding that the plaintiff failed to proffer sufficient evidence to a support a causal relationship between an infringing photo that served as the centerpiece of a television ad and the resulting sales of Apple products).

14. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586–87 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986); Felty v. Gaves-Humphrey Co, 818 F. 2d 1126, 1128 (4th Cir. 1987); Cray Commc’ns, Inc. v. Novatel Computer Sys., Inc., 33 F. 3d 390, 393–94 (4th Cir. 1994).

15. Andreas, 336 F.3d at 796–97; see also Konor Enters., Inc. v. Eagle Publ’ns, Inc., 878 F.2d 138, 140 (4th Cir. 1989) (“[O]nce there is a finding of copyright infringement and a demonstration by the plaintiff of the defendant’s revenues, the burden shifts to the defendant to prove what portion of its revenue did not result from the infringement.”).

16. 849 F.2d 186 (5th Cir. 1988); see also Straus v. DVC Worldwide, Inc., 484 F. Supp. 2d 620, 647 (S.D. Tex. 2007).

17. Estate of Vane, 849 F.2d at 188–90.

18. See supra note 12.

19. Univ. of Colo. Found. v. Am. Cyanamid Co., 196 F.3d 1366, 1375 (Fed.Cir. 1999) (holding that the plaintiff has the “burden” to demonstrate a nexus between the infringement and the indirect profits before apportionment can occur).

20. See supra note 12.

21. 28 F.3d 409 (4th Cir. 1994).

22. 215 F. Supp. 2d 611 (D. Md. 2002).

23. Robert Birmingham, Breach of Contract, Damage Measures, and Economic Efficiency, 24 Rutgers L. Rev. 273, 284 (1970) (“Repudiation of obligations should be encouraged where the promisor is able to profit from his default after placing his promisee in as good a position as he would have occupied had performance been rendered”). The theory was named by Charles Goetz and Robert Scott, Liquidated Damages, Penalties, and the Just Compensation Principle: A Theory of Efficient Breach, 77 Colum. L. Rev. 554 (1977).

24. Wood v. Houghton Mifflin Harcourt, 589 F. Supp. 2d 1230 (D. Colo. 2008); Bergt v. McDougal Littell, 661 F. Supp. 2d 916 (N.D. Ill. 2009); Semerdjian v. McDougal Littell, 641 F. Supp. 2d 233 (S.D.N.Y. 2009).

25. Bean v. Pearson Education, Inc., 2013 WL 2564106 (D. Ariz. 2013).

26. Grant Heilman Photography Inc. v. John Wiley & Sons, Inc., 11-cv-01665 (E.D. Pa. 2012).

27. Beidleman v. Random House, Inc., 1:07-cv-01347 (D. Colo. 2008).

28. DRK Photo v. The McGraw-Hill Companies, Inc., 3:12-cv-08093 (D. Ariz. 2013).

29. 35 U.S.C. § 284.

30. Rite-Hite Corp. v. Kelley Co., 819 F.2d 1120, 1125–26 (Fed. Cir. 1987).

31. Read Corp. v. Portec, Inc., 970 F.2d 816 (Fed. Cir. 1992), provides a comprehensive list of factors: (1) whether the infringer deliberately copied the ideas or design of another; (2) whether the infringer, when it knew of the other’s patent, investigated the patent and formed a good faith belief that it was invalid or that it was not infringed; (3) the infringer’s behavior in the litigation; (4) the infringer’s size and financial condition; (5) the closeness of the case; (6) the duration of the misconduct; (7) the remedial action by the infringer; (8) the infringer’s motivation for harm; and (9) whether the infringer attempted to conceal its misconduct.

32. See, e.g., Blanch v. Koons, 329 F. Supp. 2d 568 (S.D.N.Y. 2004); Stehrenberger v. R.J. Reynolds Tobacco Holdings, Inc., 335 F. Supp. 2d 466 (S.D.N.Y. 2004); TVT Records v. Island Def Jam Music Grp., 262 F. Supp. 2d 185 (S.D.N.Y. 2003).

33.Bucklew v. Hawkins, Ash, Baptie & Co., 329 F.3d 923, 931–32 (7th Cir. 2003).

34. For the willfulness idea, see A. Israeli, Escaping the Indirect Profits Loophole: Finding the Elusive Causal Link in the Case of Knowing Copyright Infringement, 25 Cardozo L. Rev. 2453 (2004).

35. United States Copyright Office, Copyright Small Claims at 4 (Sept. 2013).

36. Registration generally must be made within three months of publication, or, for unpublished works, before the commencement of infringement. 17 U.S.C. § 412.

37. National Writers’ Union, Comments Submitted in Response to Third Notice of Inquiry, at 3 (Apr. 12, 2013) (“the [required] investment of time and money [is often] economically unjustifiable . . . and a diversion from revenue-generating creative work”).

Michael A. Einhorn, Ph.D. (http://www.jurispro.com/MichaelEinhorn) is an economic consultant and expert witness in the areas of intellectual property, media, entertainment, and product design. He is the author of Media, Technology and Copyright: Integrating Law and Economics (2004) and over 70 related professional articles in intellectual property and economic analysis. He is also a former professor of economics at Rutgers University.