Tag Archives: Copyright Litigation

Sedlik’s Multiplier & Actual Damages for Copyright Infringement

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;

or

(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.

THE TAKE-AWAYS

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.”

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Copyright Defense Win Reversed – Proving Authorization to Copy is Defendant’s Burden

In a recent copyright infringement case about making and distributing copies of a painting, the Seventh Circuit Court of Appeals in  Ali v. Final Call, Inc. (7th Cir., Aug. 10, 2016, No. 15-2963) held that the district court misstated the elements of a prima facie copyright infringement claim and erroneously shifted to plaintiff the burden of proving that copies made and distributed by the defendant were unauthorized.  The opinion identifies some important pitfalls for copyright litigators, and offers some preventative guidance for those who make copies of or distribute the creative works of others.  [See THE TAKE-AWAYS below.]

Here are the basic facts:

Plaintiff Ali is an artist.  In 1983, Ali painted a portrait of Minister Louis Farrakhan (“Minister Farrakhan painting”), for which Farrakhan paid Ali $5,000.  Ali registered his copyright in the painting in 1997.  Defendant The Final Call (a newspaper for the Nation of Islam) sells various posters and prints.  The Final Call sold lithographs titled Allah’s Star of Guidance that featured a reproduction of Ali’s Minister Farrakhan painting.

Ali sued The Final Call for copyright infringement, alleging he never authorized The Final Call to create or distribute the Star of Guidance prints or lithographs.  The Final Call argued that Ali’s commission with Louis Farrakhan included permission to make copies, which in turn, authorized creation and distribution of the Star of Guidance lithographs.

The parties waived a jury, and the case was tried to the court.  The district court identified the key issue as “whether in agreeing to the commission with Minister Farrakhan back in 1983, Ali agreed to give the right to create and distribute the Star of Guidance prints.” It found that Ali had authorized the creation and distribution of the Star of Guidance prints/lithographs, based primarily on a letter Ali had sent in 2008 that said, in part, “The commission awarded by the minister for his oil and litho entitled The Star of Guidance…” Noted the district court, “That very plainly says in Mr. Ali’s own letter that the commission with Minister Farrakhan included lithographs and prints.”  Ali tried to explain that the letter was taken out of context, but the court discounted his explanations.

On appeal, Ali argued that the district court had misstated the elements of a prima facie copyright infringement claim and erroneously shifted to him the burden of proving that the copies were unauthorized.  The Seventh Circuit agreed, and reversed the district court’s judgment.

In summary, the Seventh Circuit Court of Appeal reasoned as follows:

To establish a prima facie case of copyright infringement, Ali only had to prove two things: (1) ownership of a valid copyright, and (2) copying of constituent elements of the work that are original.  The district court, however, also required Ali to prove that the copying was unauthorized.  That was error, because the defendant (The Final Call) has the burden of proving affirmative defenses like authorization (e.g., license).  Therefore, unless The Final Call could prove an affirmative defense (e.g., authorization to make and distribute copies), it was liable for copyright infringement.

[For more on establishing a prima facie case and burdens of proof, see Allocation of the Burdens of Proof – Burden of Producing Evidence.]

The Final Call did assert affirmative defenses of implied license (authorization) and laches [albeit late, as discussed in THE TAKE-AWAYS below].  However, believing that it was plaintiff’s burden to show that the copies were unauthorized, The Final Call decided to withdraw its affirmative defenses at the pretrial conference.  Because defenses had been waived, the Seventh Circuit held the district court had improperly relied on a waived implied license defense and an unasserted first-sale defense when the district court ruled in favor of The Final Call at trial.

Even if the defenses could properly be considered, the Seventh Circuit found that The Final Call failed to carry the burden of proving the elements of either defense at trial.

An implied license defense requires the defendant to prove that:  (1) a person (the licensee) requested the creation of a work, (2) the creator (the licensor) made that particular work and delivered it to the licensee who requested it, and (3) the licensor intended that the licensee-requestor copy and distribute his work.  The Final Call did not prove an implied license because (1) Farrakhan commissioned the portrait, not The Final Call, (2) Ali made the work Farrakhan requested and delivered it to Farrakhan, not The Final Call, and (3) no evidence showed that Ali intended for The Final Call to copy and distribute his work.  And even assuming Farrakhan may have had an implied license, no evidence showed that Farrakhan ever attempted to transfer a license to The Final Call.

Under the first sale doctrine, “once a given copy has been sold, its owner may do with it as he pleases (provided that he does not create another copy or a derivative work).”   The Final Call’s evidence, however, failed to prove that the lithographs at issue were from a batch of authorized copies.

THE TAKE-AWAYS

While there are many sub-issues throughout the Seventh Circuit’s opinion, here are some important take-aways from Ali v. Final Call, Inc.:

As the first take-away, the burdens should now be clear:

To establish a prima facie case of copyright infringement, the plaintiff must prove two things: (1) ownership of a valid copyright (registered) in the work, and (2) copying of constituent elements of the work that are original.

If the plaintiff presents a prima facie case, the defendant has the burden to prove the elements of its affirmative defenses, such as the first sale doctrine, or authorization to make or sell another’s work, whether by express or implied license (or otherwise).

Another take-away concerns jury instructions.  While this was a court trial and didn’t involve a jury, lawyers and judges sometimes consult jury instructions as fairly solid statements of current law.  Interestingly here, the Seventh Circuit traced the district court’s error, in part, to the Seventh Circuit’s pattern jury instructions.  Instruction No. 12.2.1 states:

To succeed on his claim, Plaintiff must prove the following things:

1. [Describe the work] is the subject of a valid copyright;

2. Plaintiff owns the copyright; and

3. Defendant copied protected expression in Plaintiff’s copyrighted work.

I will explain what these terms mean…

Instruction No. 12.5.1 COPYING, appears to explain what “copied protected expression” means, and includes this bracketed language:

[In determining whether Plaintiff has proved copying, you may consider evidence that … Defendant had authority from Plaintiff to copy Plaintiff’s work.]

That bracketed language in Instruction No. 12.5.1 COPYING created confusion for the district court as to whether plaintiff Ali had to disprove authorization as part of his burden of proving there was “copying,” or whether authorization was solely an affirmative defense that The Final Call had the burden of proving.

[It is worth noting that the comments for use of Instruction No. 12.5.1 COPYING state, “This instruction should be used only when the plaintiff seeks to prove copying inferentially.  If the plaintiff offers only direct evidence of copying, then this instruction is unnecessary.”  Here, Ali and The Final Call had stipulated that the “Star of Guidance” contained the protected expression from the “Minister Farrakhan painting.”  In other words, Ali was not seeking to prove copying by inference.]

Nevertheless, the Ali v. Final Call opinion should prompt an evaluation of pattern jury instructions for copyright cases in all of the federal circuits.  For instance, one conceivably could make the same mistake based on certain portions of the Ninth Circuit’s Jury Instructions.  Instruction No. 17.0 includes “without authority” within its statement on LIABILITY FOR INFRINGEMENT, as follows:

One who [reproduces] [distributes] [performs] [displays] [uses] [prepares derivative works from] a copyrighted work without authority from the copyright owner during the term of the copyright infringes the copyright.

Similarly, in Instruction 17.4 COPYRIGHT INFRINGEMENT—ELEMENTS—OWNERSHIP AND COPYING, the first sentence references “without the owner’s permission”:

Anyone who copies original elements of a copyrighted work during the term of the copyright without the owner’s permission infringes the copyright.

The Ninth Circuit jury instructions, however, do have separate and distinct instructions for the defenses of implied license [No. 17.24 COPYRIGHT—AFFIRMATIVE DEFENSE – IMPLIED LICENSE] and the first sale doctrine [No. 17.25 COPYRIGHT—AFFIRMATIVE DEFENSE—FIRST SALE], which should make it clear that those are affirmative defenses that the defendant has the burden of proving.

Other take-aways from this case concern the importance of the pretrial conference and pretrial order.

As explained in DeliverMed Holdings, LLC v. Schaltenbrand (7th Cir. 2013) 734 F.3d 616, 628, the parties rely on the pretrial conference to inform them precisely what is in controversy, the pretrial order is treated as superseding the pleadings and establishes the issues to be considered at trial.  In order to preserve the pretrial order’s usefulness in focusing the parties’ efforts, a claim or theory not raised in the pretrial order should not be considered by the fact-finder (i.e., the judge in a bench trial or the jury in a jury trial).

The U.S. Supreme Court also has emphasized the importance of the pretrial order. As stated in Rockwell Intern. Corp. v. U.S. (2007) 549 U.S. 457, 474, “[C]laims, issues, defenses, or theories of damages not included in the pretrial order are waived even if they appeared in the complaint and, conversely, the inclusion of a claim in the pretrial order is deemed to amend any previous pleadings which did not include that claim.”  Thus, even an entirely new claim or defense in a pretrial order will be deemed to amend the previous pleadings to state the new claim or defense.

Here, The Final Call did not assert any affirmative defenses in response to the original Complaint or the First Amended Complaint.  And when plaintiff Ali filed a Second Amended Complaint, The Final Call did not file an answer asserting the defenses of implied license and laches until many months later.  By then, The Final Call’s answer was untimely, fact discovery had long-since closed, and Ali had filed a summary judgment motion that was fully briefed for decision by the court.  That prompted Ali to file a motion to strike The Final Call’s newly asserted affirmative defenses as untimely and prejudicial.

The district court never ruled on Ali’s motion to strike, however, because The Final Call withdrew the affirmative defenses (implied license and laches) at the pretrial conference.   The Final Call argued that it was Ali’s burden to prove the copies were unauthorized.  And it did not seem to matter, because at the Pretrial Conference, the district court judge said, “[I]f it turns out that lack of authorization is the plaintiff’s burden, then…the defendant can certainly — regardless of whether the defendant has waived irrevocably the ability to assert affirmative defenses, he can certainly make that argument against one of the elements of your claim.”

When the Seventh Circuit ultimately determined that the defendant has the burden of proving defenses such as implied license and the first sale doctrine, The Final Call’s withdrawal of its affirmative defenses at the pretrial conference turned out to be the “nail in the coffin.”

Nevertheless, the Seventh Circuit’s opinion went on to analyze and explain how The Final Call had not proved the elements of implied license or first sale.  That analysis (in the final paragraphs of the opinion) highlights another key take-away:

By not clarifying whether it has the burden of proving a particular defense early in a case, a defendant may miss out on the opportunity to discover facts, and to identify, prepare, and call witnesses at trial that can establish facts supporting each element of its affirmative defenses.

As a final take-away from Ali v. Final Call, those who make or distribute copies of other’s works should be prepared to prove their right to do so by creating and maintaining records that show authorization or other defenses – even if it was many years ago.  As the Seventh Circuit noted, “if there is evidence of a license, it is most likely to be in the possession of the purported licensee.”