Nice post by Eric Ostroff on a case involving pleading requirements (Iqbal/Twombly) under the federal Defend Trade Secrets Act.
As more plaintiffs bring claims under the shiny new Defend Trade Secrets Act, we continue to learn about how courts are interpreting this statute. On Tuesday, the District of New Jersey answered an open question: whether the statute, in conjunction with Twombly/Iqbal, requires a heightened pleading standard for misappropriation. In Chubb INA Holdings, Inc. v. Chang, the DNJ declined to apply such a standard. A copy of the opinion can be downloaded below.
In this case, Chubb sued its former employee and its competitor Endurance, alleging that the former employee worked with Endurance to solicit a large number of employees from Chubb’s real estate and hospitality division. The goal was to hire enough Chubb employees to create a “turnkey” operation for Endurance. In the process, Chubb alleges, the former employees took Chubb’s confidential information. Chubb sued for, among other things, violations of the Defend Trade Secrets Act.
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Sedlik’s Multiplier – an acceptable use of a multiplier as part of calculating fair market value to account for factors such as exclusivity or rarity when determining actual damages under the Copyright Act.
Using an electron microscope, in the mid-1990s, photographer Andrew Paul Leonard created colorized stem cell images from cell samples he obtained from doctors, scientists, and researchers. Leonard built a profitable business licensing rare stem cell images, and received a range of fees for different types of licenses. One appeared on the cover of TIME.
Defendant Stemtech sells nutritional supplements through thousands of distributors. Stemtech contacted Leonard about licensing his stem cell images, because as Stemtech employees explained, “using these images was important to Stemtech’s business.” Stemtech declined to license Leonard’s image for website use because “the price was too high,” but chose to license an image for use twice in its internal magazine.
Leonard sued Stemtech for copyright infringement in Delaware federal district court when he discovered that Stemtech had vastly exceeded the scope of the license. Because Leonard had not registered his copyright sufficiently in advance to seek statutory damages, he had to prove actual damages under the Copyright statute. See 17 U.S.C. §504 Remedies for infringement: Damages and profits. At trial, the jury awarded Leonard $1.6 million in actual damages.
Stemtech appealed to the Third Circuit Court of Appeals, arguing among other things, that the award of actual damages was grossly excessive and that the district court improperly allowed the testimony of Leonard’s damages expert, Jeff Sedlik. The Third Circuit rejected Stemtech’s arguments, and sent the case back to the district court to determine whether interest should be added as well. See Leonard v. Stemtech, __ F.3d ___, 2016 WL 4446560, at *1 (3d Cir. Aug. 24, 2016).
[There is some good discussion of secondary infringement, including application of and distinctions between contributory infringement liability and vicarious liability.]
This post focuses on the Third Circuit’s discussion of methods for calculating actual damages under the Copyright Act, its review the District Court’s decision to permit Leonard’s damages expert to testify, and its evaluation of whether the $1.6 million dollar award was grossly excessive.
Methods for Calculating Actual Damages under the Copyright Act [§ 504(b)]
The Copyright Act allows a copyright owner to recover actual damages resulting from infringement. It usually involves determining the loss in fair market value of the copyright, measured by the profits lost due to the infringement or by the value of the use of the copyrighted work to the infringer. The primary measure is the injury to the market value of the copyrighted work at the time of the infringement. Case law describes two permissible methods for determining damages:
(1) calculating the fair market value of the licensing fees the owner was entitled to charge for such use;
(2) calculating damages based on the plaintiff’s own past licensing fees.
The District Court’s Decision to Permit Leonard’s Damages Expert to Testify
Leonard hired a photography expert, Jeff Sedlik, to provide testimony regarding Leonard’s actual damages. Stemtech filed a motion to exclude Sedlik’s testimony (a Daubert motion). The district court, denied Stemtech’s motion because: (1) Sedlik’s method for calculating actual damages using fair market value, as opposed to past licensing history, was reliable; (2) there was a sufficient factual basis for his calculation; and (3) there was a fit between the facts of the case and Sedlik’s damages calculation.
The Third Circuit agreed. Sedlik had adopted a recognized method – the fair market value approach. Stemtech’s disagreements with Sedlik’s calculation methodology and assumptions about which images and uses were similar to those of Leonard, went to the weight the jury may give Sedlik’s expert testimony, but were not reasons to keep the information from the jury.
Excessiveness of the $1.6 Million Damage Award by the Jury
The Third Circuit noted that courts will respect a jury verdict unless it is so grossly excessive that it shocks the judicial conscience, or it relies on an impermissible basis.
The Third Circuit examined Sedlik’s expert damages opinion, breaking it down as follows:
- Sedlik surveyed four stock photo agencies to obtain image licensing rates for uses similar to the infringing uses. These fees factored in the image size, form of media, size of audience, geographical scope, placement, number of appearances, and length of the license.
- Sedlik averaged the quotes provided by the agencies and arrived at benchmark license fees for each usage, in the range of $1,277.10 to $2,569.46. Sedlik then assigned an applicable fee to each of the 92 unauthorized usages, and calculated the sum of those fees to arrive a fair market value of $215,767.65 in total.
- Sedlik then adjusted the benchmark amount to account for scarcity—the rarity of stem cell images—and exclusivity—that is, how Stemtech’s extensive use would be akin to an exclusive license that would eliminate or reduce licensing revenue from other sources and/or decrease the value of Leonard’s work.
- This adjustment to the benchmark took the form of a “premium” or multiplier of three to five times the benchmark for scarcity, and a multiplier of 3.75 to 8.75 times the benchmark for exclusivity of Leonard’s images during the infringement period. That yielded an actual damages range of $1.4 million to nearly $3 million.
Stemtech argued that Sedlik’s use of multipliers effectively resulted in a jury award that included punitive damages. Since punitive damages are not an available remedy under the Copyright Act (i.e., an impermissible basis), Stemtech argued, the jury’s award was excessive.
In rejecting Stemtech’s argument, the Third Circuit distinguished Sedlik’s multiplier from case law finding multipliers to be impermissibly punitive.
The Third Circuit first recognized case law rejecting punitive multipliers because “[t]he value of what was illegally taken is not determined by multiplying it,” and where a multiplier amounts to a “fee for unauthorized usage” over and above what “would otherwise represent a fair and reasonable licensing fee for the infringed material.”
Sedlik’s multiplier, the court held, was different. It was not related to unauthorized use of the images (it was not an “infringer’s penalty”). Rather, it was part of calculating fair market value. The sum calculated from the stock photo agency rates did not represent a full calculation of the fair market value of Leonard’s images because the stock agency rates yielded a benchmark that did not account for scarcity and exclusivity. Sedlik’s multipliers reflected a premium that, according to Sedlik, the market would find acceptable given the scarcity and exclusivity of the images as compared to the images for which he had secured rates for comparative purposes. The fair market value calculation was complete only after those additional factors (scarcity and exclusivity) were applied.
Because “Stemtech presented no evidence or methodology to cast doubt on the use of multipliers to account for factors relevant to a final fair market value,” neither the district court nor the jury had any basis to discount Sedlik’s testimony. And without evidence that the scarcity and exclusivity multipliers were punitive as opposed to being valid factors for calculating fair market value, the Third Circuit could not say the jury’s verdict was based on an improper consideration.
Nor could the Third Circuit conclude that the jury’s verdict was grossly excessive. Unrebutted expert testimony provided a basis for a fair market value that included a benchmark for similar but less unique images, and a range for a premium reflecting the rarity of Leonard’s image and its unusually widespread use in Stemtech’s materials. Sedlik provided a multiplier of three to five times the benchmark for scarcity and 3.75 to 8.75 times for exclusivity, and jury returned a verdict of $1.6 million, which was at the lower end of Sedlik’s range.
Accordingly, because the jury’s damages award was tethered to the record, and Stemtech presented no alternative calculations, the damages award could not be reversed as excessive.
A damages expert may use multiplier as part of calculating fair market value to account for factors such as exclusivity or rarity, as long as it is not essentially a “fee for unauthorized usage.”
Whether the stock agency rates were truly comparable to Leonard’s images, whether the stock photos were actually licensed by paid customers at those rates, whether taking an average of selected licensing rates was reliable, whether issues like scarcity and exclusivity (or either of them) were already taken into account in the stock photo rates, or whether the market would find premiums for scarcity and exclusivity acceptable – those were all issues Stemtech was free explore when cross-examining Sedlik, or with Stemtech’s own expert (if it had one). Yet, Sedlik’s testimony went largely unrebutted. Stemtech did not cross-examine Sedlik about his use of these premiums and Stemtech did not present its own expert to rebut Sedlik’s opinions.
Stemtech instead relied heavily on its ability to exclude Sedlik’s expert damages testimony. As a back-up, it sought to convince the court (and jury) that license fees Leonard actually charged his clients over fifteen years and the fees that Leonard quoted Stemtech were the only viable measures of Leonard’s actual damages.
According to the Third Circuit, however, Stemtech had cited “no authority requiring the use of this method as opposed to the fair market value approach, and case law on this subject supports using the fair market value.”
Ultimately, Stemtech made three key decisions: (1) to rely on its ability to have the Sedlik expert opinions excluded, (2) to rely on Leonard’s past licensing history as the only method of calculating Leonard’s actual damages, and (3) to proceed without its own damages expert to counter Sedlik’s methodology and opinions.
Combined, these decisions amounted to an all-or-nothing damages strategy, which proved perilous when the jury chose “all.”
Here’s a collection of links to “Top” articles discussing tips, benefits, traps, warnings, distinctions, myths, and explanations of copyrights and trademarks:
What an amazing collection. Thank you Ted and Written Description!