sign in sign up
<<
Home , Damages

ing a causal connection and that in cases where the profits are attributable to a mix Concern for Causation: of infringing and non-infringing material, “[e]quity places the burden on the defen- dant to unravel the threads.”4 Calculating Fair for Other courts have required that the plaintiff show as a threshold matter a more Indirect robust connection between use of the par- ticular work and defendant’s profits. For example, in a case before the United States By Joshua M. Dalton and Lawrence T. Stanley Jr. of where actual damages are sought, also “any profits of the infringer that are attrib- District Court for the District of Maryland,5 Bingham McCutchen LLP utable to the infringement and are not plaintiff, the publisher of a financial news- taken into account in computing the actual letter, accused defendant of making avail- Joshua M. Dalton is a partner in the damages.”1 under the classic example, a able to its employees copies of plaintiff’s Litigation and defendant selling a copyrighted work (such newsletter without plaintiff’s authorization. Prosecution group at Bingham as a photograph or a musical recording) On the parties’ cross-motions for partial McCutchen LLP, resident in the firm’s without authorization, this clause of the , the court held that Boston office. He may be reached at Copyright Act is easily applied: if the plain- although the defendant was liable for copy- [email protected]. tiff foregoes , the plaintiff right infringement, the plaintiff could not is entitled to its actual damages (i.e., the pursue claims for indirect profits. The court Lawrence T. Stanley Jr. is an associate in the diminished value of the copyrighted work reasoned: Intellectual Property Litigation and Patent or what a willing buyer would pay a will- Although it seems that some of [the Prosecution group at Bingham McCutchen ing seller) plus any profits of the defendant defendant’s] profits ‘should’ relate to LLP, resident in the firm’s Boston office. from the sale that are not taken into account its infringing use of [the plaintiff’s] He may be reached at lawrence.stanley@ in computing the actual damages. Reports, the appearance defies reason The damages calculus becomes much bingham.com. . . . . [The plaintiff] has articulated no more difficult where the defendant generates more than a speculative correlation. It only “indirect” profits from the infringe- is utterly implausible that all of [the hen the Copyright Act was passed ment. This occurs where a defendant does defendant’s] profits resulted from its in 1976, the majority of copy- not sell the copyrighted work itself, but infringing use of the Reports.6 righted works were more traditional rather uses the work in conjunction with W Whether profits are “attributable to the literary and artistic works, such as books, its efforts to generate revenues, such as musical recordings, and the like. Computer using a copyrighted painting in a print infringement” may become murkier when programs were not nearly as common as advertisement, using a copyrighted song the work at issue is a fungible computer they are now. today, computer programs in a commercial, or using a copyrighted program used to operate a larger enterprise, are commonplace, as is their registration market research report in rendering finan- provide a service, or manufacture a product, as a copyrighted work, including programs cial advice. Importantly, Section 504(b) but where the end product does not contain which perform important but very utilitar- only permits recovery of those “profits of the copyrighted work itself in whole or ian functions. as with other works, cal- the infringer that are attributable to the part. Consider, for example, the scenario in culating actual damages concerning the infringement . . .”2 courts have struggled which an attorney uses without authorization direct infringement of software under the with determining what standard should a copyrighted word processor program in Copyright Act, such as copying and redis- apply in indirect profit cases, and as such, offering legal services. Under the Copyright tributing software without authorization, is have set forth varying levels of proof nec- Act, the plaintiff-copyright holder is entitled relatively straightforward. essary to show a connection between the to its actual damages, which would likely On the other hand, courts have been chal- infringement and defendant’s profits. equate to the lost sale or license fee for the lenged in assessing damages where a com- Some courts set a low threshold, requir- software. But under Section 504(b), the puter program is only indirectly infringed ing little more than a showing that the plaintiff is also entitled to defendant’s profits by use in connection with a larger enterprise defendant in fact used the copyrighted work “attributable to the infringement.” Arguably, (i.e., to facilitate generating a good or offer- in any way in connection with its business all of defendant’s profits are “attributable” ing a service not consisting in whole or part activities. For example, in a case before to the infringement because, strictly speak- of the copyrighted work itself) in a manner the united States district court for the ing, the attorney could not have practiced that fairly compensates the copyright holder Eastern district of Pennsylvania,3 plain- without the software. The Copyright Act, without generating an unfair windfall. In tiff, an insurance brokerage firm, accused however, clearly was not intended to give a order to more fairly address such instances defendant of infringing two books contain- copyright holder all of the law firm’s profits of indirect infringement, courts should not ing plaintiff’s copyrighted insurance forms in connection with the infringement of a take an overly-literal view of the Copyright and coverage descriptions. Plaintiff sought software program that likely sells for a few Act, but rather should focus on the causal as defendant’s indirect profits all commis- hundred dollars. connection between the specific work and sions that the defendant was paid when its This problem arises because, under a the success of the enterprise, in part by bor- clients purchased insurance after receiving strict reading of the copyright act, once rowing the concept of non-infringing alterna- proposals containing language from the basic causation is shown, the burden shifts tives from patent law. copyrighted forms. the court relied upon to the defendant to apportion what, if any, The copyright act provides that the the express language of the Copyright Act, of its revenue is not attributable to the copyright holder is entitled to either actual which places the burden of apportionment infringement. a review of caselaw sug- damages or statutory damages for the on the infringer, and held that the plaintiff gests that courts can vary wildly in doing infringement of a copyrighted work, and has only a “minimal” burden in establish- the apportionment analysis, commonly giv-

18 Intellectual Property Today JUNE, 2008 ing the plaintiff a windfall recovery of meet its initial burden, [plaintiff] for copyright infringement, boost criminal more than 20% of defendant’s profits, even must ‘establish[] a causal nexus enforcement, and even create a new federal where the court acknowledges that the between the infringing conduct and agency charged with coordinating national copyrighted work had little to do with the the infringer’s gross revenue.’ ... and international enforcement efforts to profits generated.7 Clearly, [defendant’s] entire gross protect intellectual property rights. In the context of using a software pro- revenue is not attributable to alaS In view of these efforts to crackdown on gram in a larger enterprise, a literal inter- source code. It is therefore incumbent copyright infringement and increase the pretation of Section 504(b) thus creates an upon [plaintiff] to make a threshold penalties stemming from copyright infringe- exposure that is vastly out of proportion to showing of the nexus between [defen- ment, it becomes all the more imperative to the actual value of the software to the larger dant] and those profits generated by ensure that the damages recovered by a enterprise, particularly in instances where the infringement of ALAS.10 copyright holder, particularly actual dam- multiple alternative programs exist that In determining whether a causal nexus ages and infringer’s profits, actually relate could perform the same function and obtain has been established, the most striking to the copyrighted work itself. The approach the same results in the enterprise for little analogy -- an analogy that courts do not yet advocated here is intended to do just that. or no additional cost. To avoid unjustified appear to rely on -- is the comparison to While still providing for significant com- windfalls, there is a need to acknowledge the non-infringing alternatives analysis in pensation for infringement, by placing a that the value of copyrighted works used patent law. heightened initial burden on the copyright in creating a product or service should be One type of damages awarded under the holder to justify reaching a defendant’s tied to the cost of replacing or licensing that Patent Act is lost profits, which are intended indirect profits, the approach advocated work. However, that understanding must to award the patent owner the profits it here will help prevent unjustified windfall be balanced with public policy concerns, would have received “but for” defendant’s recoveries that are not at all related to the namely that the statute cannot make the infringement. It is well-established that value of the copyrighted work itself. IPT cost of infringement the same as the cost of one of the threshold inquiries in analyz- compliance, because then there would be ing lost profits is whether non-infringing Endnotes no incentive to play by the rules. a more alternatives exist.11 courts reason that, if 1. See 17 U.S.C. § 504(b). thorough analysis is therefore necessary. 2. 17 U.S.C. § 504(b) (emphasis added). a defendant could have accomplished the 3. William A. Graham Company v. Haughey, 2006 To start, there should be a focus on same thing without infringing the patent, U.S. dist. leXIS 84736 (E.D. Pa. nov. 21, whether the infringement was innocent/ then the value plainly derives from some- 2006) merely negligent or willful. For example, 4. Id. at *18. thing other than the patented invention. 5. Lowry’s Reports, Inc. v. Legg Mason, Inc., 271 F. for the infringer who thinks it had a license Therefore the existence of non-infringing Supp. 2d 737 (D. Md. 2003) or went beyond the scope of a license by alternatives lowers, if not defeats outright, 6. Id. at 752. accident or mere , no amount 12 7. See, e.g., Bruce v. Weekly World News, Inc., 310 the claim to lost profits. F.3d 25 (1st cir. 2002) (affirming 50% appor- of would have deterred A similar analysis is appropriate in the tionment of defendant’s profits where publisher the infringement because the infringer exceeded licensed use of copyrighted photo of copyright context. Indeed, although not President clinton within magazine and on t- never had an intent to cheat. Furthermore, discussing non-infringing alternatives, the shirts, even though court recognized the sig- while increasing damages against a willful Supreme Court has even acknowledged that nificant contribution other non-infringing factors infringer will more likely provide a deter- have on profits); Caffey v. Cook, 409 F. Supp. “[i]n passing the Copyright Act, the appar- 2d 484 (S.D.N.Y. 2006) (where theater produc- rent, it should be recognized that even with ent of Congress was to assimilate tion company infringed copyrighted materials by willful infringement, the Copyright Act was the remedy with respect to the recovery of including those materials in the production, court not meant to create huge windfalls.8 awarded plaintiff 33% of defendant’s profits, even profits to that already recognized in patent though court noted that other substantial factors Nonetheless, cases acknowledge that, cases.”13 Similar to the patent law analysis, aside from copyrighted material contributed to while a windfall is not the intent of the where a copyrighted software program is success and profits generated and that it would statute, some amount of windfall is likely be “unjust” to award all profits from the shows used to perform a very utilitarian function to the copyright holder). But see Cream Records, inevitable once profits are awarded, espe- and is fungible with programs that do not Inc. v. Joseph Schlitz Brewing Co., 754 F.2d 826 cially on indirect infringement. as such, (9th Cir. 1985) (affirming award of 1/10 of 1% of violate the plaintiff’s copyright, the defen- defendant’s profits where brewing company used whether plaintiff’s recovery should stretch dant’s profits are plainly attributable to portion of copyrighted song in a commercial cre- to defendant’s profits created from using a something besides the protectable elements ated by an advertiser, but commissioned by the copyrighted work in a larger enterprise is brewer, because profits of defendant allocable to of the copyrighted work and therefore cau- the infringement were “miniscule”). best addressed at the causation prong. The sation is lacking. Courts should give signifi- 8. See Sheldon v. Metro-Goldwyn Pictures Corp., 309 court’s approach in DaimlerChrysler Services cant weight to that fact, just as courts give U.S. 390, 399 (1940) (“The purpose [of awarding v. National Summit9 provides a model for infringer’s profits] is … to provide just compen- to non-infringing alternatives in the patent sation for the wrong, not to impose a penalty by using causation to avoid a disproportion- law context. In other words, the existence giving to the copyright proprietor profits which are ate award. there, the plaintiff alleged that not attributable to the infringement.”). of alternative programs should lower, if not 9. 2006 U.S. Dist. LEXIS 4282 (E.D. Mich. Jan. 26, the defendant used its alaS source code defeat, plaintiff’s claim to indirect profits. 2006) without authorization in connection with Developing a proper framework for ana- 10. Id. 11. financing automobiles and sought defen- 11. See Panduit Corp. v. Stahlin Bros. Fibre Works, lyzing indirect profit claims is all the more Inc., 575 F.2d 1152 (6th Cir. 1978) (non-infring- dant’s profits. The court rejected plaintiff’s important in view of congress’ recently ing substitutes considered in lost profits analy- broad reading of Section 504(b) and stated renewed interest in the damages recover- sis). that it was persuaded by cases placing a 12. Grain Processing v. American Maize-Products, 185 able under the copyright act. this past F.3d 1341, 1351-52 (Fed. Cir. 1999) (holding that “heightened initial burden” on the copyright December, representatives in the U.S. House “only by comparing the patented invention to its holder where profits are indirect: next-best available alternative(s) … can the court of Representatives introduced a bipartisan discern the market value of the patent owner’s exclu- To recover [defendant’s] profits as bill called the Prioritizing resources and sive right” and noting cases illustrating that “market provided by Section 504(b), [plain- Organization for Intellectual Property act, sales of an acceptable noninfringing substitute often 14 suffice alone to defeat a case for lost profits”). tiff] must do more than merely point or PRO IP Act. Aims of this now-pending 13. Sheldon, 309 U.S. at 400. to [defendant’s] balance sheet. to bill include to increase the civil penalties 14. H.R. 4279.

Intellectual Property Today JUNE, 2008 19