Michael A. Einhorn, Ph.D. 973-618-1212

MEDIA, TECHNOLOGY, COPYRIGHT

COPYRIGHT, CAUSALITY, AND

STATUTORY REFORM

Michael A. Einhorn, Ph.D.

.

Introduction

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.

At mae@mediatechcopy.com, http://www.mediatechcopy.com. The author 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 seventy related

professional articles in intellectual property, economic analysis, and damage valuation. He is also a former professor of economics at Rutgers University. A

complete professional biography can be found in the appendix. This article is forthcoming in LANDSLIDE Magazine, a publication of the American Bar

Association.

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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.

Your 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 from a willful infringement.3 This preregistration

requirement for statutory damages is a modern American oddity that was not present in

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).

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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

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.

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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

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.

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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

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)).

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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

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. Graves-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.”).

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Inc.16

—a distinguished marketing professor demonstrated through a complex linear

regression that a retail store’s (i.e., The Fair) 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

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.

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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

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).

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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—

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).

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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

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.

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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

Copyright 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

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).

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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

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.

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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

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”).

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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.

ABOUT THE AUTHOR

Michael A. Einhorn (mae@mediatechcopy.com, http://www.mediatechcopy.com) is

an economic consultant and expert witness active in the areas of intellectual property,

media, entertainment, damage valuation, licensing, antitrust, personal injury, and

commercial losses. He received a Ph. D. in economics from Yale University. He is

the author of the book Media, Technology, and Copyright: Integrating Law and

Economics (Edward Elgar Publishers), a Senior Research Fellow at the Columbia

Institute for Tele-Information, and a former professor of economics and law at Rutgers

University. He has published over seventy professional and academic articles and

lectured in Great Britain, France, Holland, Germany, Italy, Sri Lanka, China, and Japan.

In the technology sector, Dr. Einhorn worked at Bell Laboratories and the U.S.

Department of Justice (Antitrust Division) and consulted to General Electric, AT&T,

Argonne Labs, Telcordia, Pacific Gas and Electric, and the Federal Energy Regulatory

Commission. He has advised parties and supported litigation in matters involving patent

damages and related valuations in semiconductors, medical technologies, search engines,

e-commerce, wireless systems, and proprietary and open source software.

Litigation support involving media economics and copyright damages has involved

music, movies, television, advertising, branding, apparel, architecture, fine arts, video

games, and photography. Matters have involved Universal Music, BMG, Sony Music

Holdings, Disney Music, NBCUniversal, Paramount Pictures, DreamWorks, Burnett

Productions, Rascal Flatts, P. Diddy, Nelly Furtado, Usher, 50 Cent, Madonna, and U2.

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Matters involving trademark damages have included the Kardashians/BOLDFACE

Licensing, Oprah Winfrey/Harpo Productions, Madonna/Material Girl, CompUSA, Steve

Madden Shoes, Kohl’s Department Stores, The New York Observer, and Avon

Cosmetics. Matters in publicity right damages have involved Zooey Deschanel, Arnold

Schwarzenegger, Rosa Parks, Diane Keaton, Michelle Pfeiffer, Yogi Berra, Melina

Kanakaredes, Woody Allen, and Sandra Bullock.

Dr. Einhorn can be reached at 973-618-1212.

This biography is also available at http://www.jurispro.com/MichaelEinhorn