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Developments in Intellectual Property Law

Determining Statutory Damages Per “Violation” Under the DMCA

Preston Woods & Associates LLC v. RZ Enterprises USA Inc. (4:16-cv-01427)

By Matthew F. Abbott
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A recent verdict in the Southern District of Texas may put a novel issue before the Fifth Circuit concerning the scope of statutory damages available under the Digital Millennium Copyright Act (“DMCA”). Under 17 U.S.C. § 1203(b), statutory damages are multiplied by “each violation” of the DMCA, and the interpretation of what constitutes a “violation” could result in a significant increase or decrease in the amount of statutory damages awarded to DMCA plaintiffs.

Background

Plaintiff Preston Wood & Associates, LLC (“Preston Wood”) is an architectural design firm that owns copyrights in various architectural works and technical drawings. Preston Wood licensed some of its works to Defendant Urban Living, a real estate developer.  The lawsuit alleges, inter alia, that Urban Living engaged in unauthorized distribution of Preston Wood’s copyrighted works as part of its marketing materials.  Preston Wood further alleged that Urban Living knowingly distributed these works after removing Preston Wood’s “copyright management information” (“CMI”), in violation of the DMCA.

$28.8 million DMCA award

Following a trial in August 2018, the jury found that Urban Living had directly and contributorily infringed Preston Wood’s copyrights, and awarded Preston Wood $7,539.60 in actual damages for copyright infringement. In regard to the DMCA claims, the jury found further that Urban Living had committed 11,516 violations, based on evidence of the number of recipients to whom Preston Wood’s copyrighted works had been distributed. The jury awarded $28,790,000 in statutory damages, which represented the statutory minimum of $2,500 per violation for each of the 11,516 violations.

Judge David Hittner upheld the jury’s finding and entered judgment for the plaintiff in the amount of $28,797,539.60 which included the statutory damages under the DMCA, as well as actual damages and a permanent injunction. Defendant has stated its intent to appeal this ruling pending the disposition of currently pending post-trial motions.

Damages “for each violation” under the DMCA

Under the DMCA, 17 U.S.C. § 1203(c)(3)(B), a plaintiff electing statutory damages may recover an award “for each violation” of the statute. A significant dispute arose following trial as to what constitutes a “violation” of the DMCA.  Urban Living moved for entry of judgment awarding Preston Wood $5,000 in statutory damages.  Urban Living argued that, as matter of law and based on the evidence at trial, it had only committed two violations of the DMCA: first, when uploading the image of the copyrighted work to its website, and second, when sending an “email blast” containing the copyrighted work to many thousands of recipients.  Urban Living asserted that the number of recipients is irrelevant in determining the number of violations, citing McClatchey v. Associated Press, 2017 WL 1630261 (W.D. Pa. 2017), in which the court found that defendant had committed a single violation of the DMCA by publishing a copyrighted photograph via its wire service.  Urban Living further argued that awarding even minimum statutory damages for the 11,516 violations found by the jury would result in a windfall recovery for Preston Wood when compared to the amount of actual damages, and such award should be remitted by the district court.

In response, Preston Wood argued that the DMCA should be construed according to its unambiguous plain meaning – i.e., since the DMCA expressly prohibits “distributions” of copyrighted materials with their CMI removed, each such distribution to an individual recipient is a violation of the statute.  Preston Wood further argued that McClatchey and other cases cited by Urban Living were distinguishable, were not decided on a full evidentiary record as to the nature of the distributions and did not establish a rule under the DMCA that the number of recipients of materials was irrelevant.

In its November 8, 2018 Order, the Court declined to remit the jury award, and entered Final Judgment against Urban Living for statutory damages under § 1203(b) in the amount of $28,790,000. Urban Living has subsequently moved for approval of a supersedeas bond in order to appeal, and has taken the position that the bond need only account for $23,381.85 of the $28,797,539.60 judgment.   Additionally, Urban Living has moved for a new trial arguing that the jury’s finding that Urban Living violated the DMCA is supported by insufficient evidence.  Both motions have been briefed and are pending before the Court.

Potential implications

If the case is appealed and the Fifth Circuit rules in favor of Urban Living, it will greatly limit statutory damages where a defendant has performed a limited number of distributive acts, regardless of how many individuals actually received the DMCA-violative materials as a result of those acts. Alternatively, a ruling in favor of Preston Wood could subject DMCA defendants to potentially tens of millions of dollars in statutory damages for a single distributive act, such as sending a single email to their mailing list.  Either result will have a substantial impact on the scope of recovery of statutory damages for violations of Section 1202 of the DMCA in the Fifth Circuit.

The Meaning of “Article of Manufacture” to Damages in Design Patent Infringement Cases

By Fritz Klantschi
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In 2016, the Supreme Court held that an “article of manufacture” under the law covering damages for infringement of a design patent could encompass either the entire finished product or a discrete component of the product. This distinction has had major implications on the amount of damages awarded to a design patent owner.  In Microsoft Corp. v Corel Corp. a District Court ruled that Microsoft was not precluded from disgorgement damages under Section 289 because the infringing article of manufacture is a software product. Microsoft Corp. v Corel Corp., 2018 WL 2183268 at *4 [ND Cal May 11, 2018]. This article highlights what constitutes a design patent and the potential for monetary damages awards for design patent infringement.

Utility patents protect the way an invention works and how it is used. In contrast, a design patent protects the ornamental features of an article, such as its shape/configuration or surface ornamentation. A patent holder, whether utility or design, can seek damages under Section 284 of the Patent Act (lost profits or reasonable royalty). However, a design patent holder also has the option to seek damages under Section 289 which allows the patent holder to disgorge the infringer’s total profits from the infringing article of manufacture. Section 289 states that

“[w]hoever during the term of a patent for a design, without license of the owner, (1) applies the patented design, or any colorable imitation thereof, to any article of manufacture for the purpose of sale, or (2) sells or exposes for sale any article of manufacture to which such design or colorable imitation has been applied shall be liable to the owner to the extent of his total profit, but not less than $250, recoverable in any United States district court having jurisdiction of the parties.” (emphasis added)

In 2011 Apple sued Samsung alleging that several of Samsung’s smartphones infringed three of Apple’s design patents covering the phone’s front surfaces and screen icon grid. A jury found that a number of Samsung’s smartphones infringed Apple’s patents and awarded $399 million in damages. This was the entire profit of Samsung’s sales of their infringing smartphones, rather than a portion representing only the features covered by the design patents. The U.S. Court of Appeals for the Federal Circuit affirmed the damages award, and rejected Samsung’s argument “that the profits awarded should have been limited to the infringing ‘article of manufacture’” (the screen or case of the phone, not the whole smartphone).

Samsung appealed to the Supreme Court (Samsung Electronics Co., Ltd., et al. v. Apple Inc., 137 S.Ct. 429 (Dec. 6, 2016), hereinafter “Samsung v. Apple”) which laid out a two-step process for determining damages award under Section 289. As a threshold step, the Supreme Court first defined what an “article of manufacture” is when considering a multicomponent product. Is it the end product that is sold to a consumer (i.e, a smartphone) or can an “article of manufacture” be a component of that product (i.e., a discrete feature of the smartphone)? The Court first looked at the definitions of “article” and “manufacture” and concluded that an “article of manufacture” is “a thing made by hand or machine,” which is broad enough to encompass both a product sold to a consumer as well as a component of that product. Id. at 434-435. The two-step process the Court established is to first identify the “article of manufacture” to which the infringed design had been applied and, second, to calculate the infringer’s total profit made on that article of manufacture. Id. at 434 The Supreme Court remanded the case to resolve whether the relevant article of manufacture for each design patent is the smartphone or a component of a particular smartphone. In the remanded case, the Court adopted the four factors proposed by the Solicitor General in his amicus brief to the Supreme Court in determining the relevant article of manufacture: (i) the scope of the design claim; (ii) the relative prominence of the design within the product as a whole; (iii) the conceptual distinctiveness of the design from the product as a whole; and (iv) the physical relationship between the patented design and the rest of the product. Apple, Inc. v Samsung Elecs. Co. Ltd., 2017 WL 4776443, at *8 [ND Cal Oct. 22, 2017]

Design patents can be a valuable tool for a patent holder and should be considered when protecting a new product. Section 289 of the Patent Act may potentially provide a significant higher damage award than what is available under Section 284 for an infringement of a design patent. When drafting a design patent application, a patent filer needs to consider the above four factors to be able to properly protect and enforce a patented design.

Supreme Court Holds that Lost Foreign Profits are Permissible Damages

By Fritz Klantschi
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The U.S. Supreme Court recently upheld a lost profits award of $93.4 million in a patent infringement suit, finding that profits lost by a patent owner outside the United States are recoverable in a patent infringement suit in the U.S.

Background

The case, WesternGeco LLC v. ION Geophysical, 138 S Ct 2129, 201 L Ed 2d 584 [2018], involves competitors in the field of ocean floor surveying systems.

ION manufactured the components to its infringing system in the U.S. and shipped them to companies abroad for assembly. Once ION’s components were assembled, the ION system was indistinguishable from the WesternGeco system.  At trial, the jury found ION liable for patent infringement and awarded WesternGeco damages in royalties ($12.5 million) and lost profits ($93.4 million). ION appealed to have the verdict set aside, arguing that WesternGeco could not recover damages for lost profits because the relevant statute, 35 U.S.C. § 271(f)(1) of the patent law, does not apply to damages outside the U.S.  Section 271(f) addresses patent infringement for exporting uncombined components of a patented invention and interacts with another provision of the patent statute, § 284, which provides damages “adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer.”

There is a presumption against the extraterritorial effect of U.S. laws. When dealing with questions of extraterritoriality, the Supreme Court in RJR Nabisco, Inc. v. European Community, 136 S.Ct. 2090, 195 L.Ed.2d 476 (2016) established a two-step test.  The first step asks “whether the presumption against extraterritoriality has been rebutted.” Id. at 2101.  If the presumption against extraterritoriality has not been rebutted, the second step asks “whether the case involves a domestic application of the statute.” Id.  To make this determination it is necessary to identify the statute’s focus,”and whether the conduct relevant to that focus occurred in the U.S.  If it did, that would allow a permissible domestic application of the statute. WesternGeco at 2136.

The Decision

In a 7 to 2 decision, Justice Thomas, writing for the majority, held that WesternGeco’s damages award for lost profits was a permissible domestic application of § 284. Id. at 2139.

The Court addressed step two of the extraterritorial test first and held that § 284 provides a general remedy for patent infringement. The focus of § 284 is determined by the type of infringement that occurred. The Court considered § 271(f)(2), the basis of WesternGeco’s infringement claim and the lost-profits damages that the jury awarded.  The focus of § 271(f)(2) is on domestic conduct and states a “company shall be liable as an infringer if it supplies certain components of a patented invention in or from the United States with the intent that they will be combined outside of the United States in a manner that would infringe the patent if such combination occurred within the United States.” Id. at 2137 – 2138 (internal quotes omitted).

The Court ultimately determined that § 284, in a case involving infringement under § 271(f)(2), addresses the act of exporting components of a patented invention from the United States. In the present case, ION exported components that infringed WesternGeco’s patents from the United States.  Taking § 271(f)(2)  and § 284 together, a patent owner can recover for lost foreign profits because under § 284, “damages are adequate to compensate for infringement when they place the patent owner in as good a position as he would have been in if the patent had not been infringed.” Id. at 2139 (citing General Motors Corp. v. Devex Corp., 461 U.S. 648, 655, 103 S.Ct. 2058, 76 L.Ed.2d 211 (1983), internal quotes omitted).  Hence, damages awarded to WesternGeco can include lost foreign profits under a domestic application of § 284. Id.

The Dissent

Justice Gorsuch joined by Justice Breyer dissented. The dissent disagreed with the majority that the Patent Act permitted WesternGeco’s claim for lost profits because a U.S. patent provides a lawful monopoly on the manufacture, use and sale of an invention in the U.S. whereas WesternGeco’s lost profits were derived from uses outside of the U.S.  According to the dissent, the effect of WesternGeco’s lost profit is that WesternGeco can charge monopoly rates abroad based on a U.S. patent that has no legal force abroad.  To allow this would permit patent owners to use American courts to extend their monopolies to foreign markets.  Justice Gorsuch’s concern is that other countries would use their patent laws and courts to assert control over the U.S. economy. Id.

Takeaway

The takeaway from this decision is that the focus of the Patent Act’s damages section, § 284, in a case involving infringement under § 271(f)(2) is on the act of supplying/exporting components of a patented invention from the U.S. If those components are combined outside of the United States in a manner that would infringe the patent if such combination occurred within the United States then a patent owner can recover lost foreign profits as a permissible domestic application of § 284. On January 11. 2019, the Federal Circuit remanded the case back to the district court to decide whether to hold a new trial to determine if WesternGeco can recover from ION $93.4 million in lost profits.

Second Circuit Affirms Ruling Finding Secondary Digital Marketplace Liable for Copyright Infringement

By Patrick B. Monahan
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The Second Circuit recently affirmed a lower court ruling that an online marketplace purporting to allow legal resale of digital music files in fact infringed the plaintiff record companies’ exclusive right to reproduce their copyrighted works.

The founders and operators of ReDigi Inc. (“ReDigi”) contended that their service allowed consumers to sell digital music files purchased on iTunes (or from another ReDigi user) without committing copyright infringement. Users installed Redigi’s Media Manager, a scanning and monitoring program to identify music files eligible for resale, and had the option to upload those files into a “Cloud Locker.” The central innovation of ReDigi was the method by which the files were transferred. The files were broken up into a series of “packets”, which were delivered individually (and deleted as they were delivered) and then reassembled at their destination. At the end of the upload process, the file existed in the Cloud Locker and not on the user’s computer.–Similarly, if a music file was purchased from a user’s Cloud Locker by another user, that file would be transferred packet-by-packet and, at the end of the process, would exist on the purchaser’s computer and not in the Cloud Locker. The effect of this packet-transfer system, ReDigi claimed, was that only one full copy of a given music file existed at any time and the transfer complied with copyright law.

First Sale Doctrine not applicable

ReDigi argued that sales of digital music files using its service was protected under the Copyright Act’s first sale doctrine, which entitles the owner of “a particular copy or phonorecord” purchased from or otherwise authorized by the copyright holder to sell or otherwise dispose of that particular copy or phonorecord without the copyright holder’s authorization. However, the Second Circuit, in affirming the Southern District of New York’s holding, found that ReDigi’s packet-transfer system, by its very nature, creates an unauthorized reproduction of a given digital music file and violates copyright holders’ exclusive right to reproduction. The first sale doctrine, the Court noted, only establishes when a copyright holder’s distribution right of a particular copy of a copyrighted work terminates, that is, once it is sold to the consumer. Digital music files are phonorecords, that is, a material object in which sound is fixed. When a user uploads a digital music file to its ReDigi “Cloud Locker”, or when it is transferred from the “Cloud Locker” to a purchaser’s computer, that sound is fixed in a new material object for a sufficient amount of time to create a new phonorecord. Each time a new phonorecord is made constitutes a violation of the copyright holder’s exclusive right to reproduction under the Copyright Act, and the separate distribution right is not implicated. The Second Circuit was not persuaded that the “packet transfer” method, or ReDigi requiring deletion of the file from a user’s computer once it was uploaded, negated the fact that an unauthorized copy was made.

ReDigi system is not fair use

Turning to ReDigi’s affirmative defense of fair use, the Second Circuit held that ReDigi’s operation did not constitute fair use of the copyrighted music files. The Copyright Act shields from liability those making “fair use” of a copyrighted work and lists a number of factors for courts to consider, including the (1) the purpose and nature of the use, including whether the use is for commercial or nonprofit purposes and whether the use is transformative in some way; (2) the nature of the copyrighted work; (3) the portion of the copyrighted work used; and (4) the effect of the use on the potential market for or value of the copyrighted work. Of particular importance to the Second Circuit was the fact that ReDigi’s use was for commercial purpose and was in no way transformative; that its operation necessitates copying of the entire works, and the fact that ReDigi’s resale market directly competes with the primary market (i.e., digital music marketplaces such as iTunes).

The ReDigi litigation has raised philosophical questions about how copyright law, and in particular the right of reproduction and the first sale doctrine, should be adapted in an increasingly digital world, but the Second Circuit, while acknowledging those questions, issued a limited ruling, relying on the specific wording of the Copyright Act.

Decision Highlights Copyright Protection Available for Transactional Documents

By Suzanna M. M. Morales
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In a case that highlights the level of creativity required for copyright protection, the U.S. District for the Northern District of Illinois held that a company that sells bonds may have valid copyrights in documents relating to offering those bonds.

Plaintiff UIRC-GAS Holdings, Inc. sells bonds to finance the purchase and operation of property leased to the federal government. UIRC created forms related to the offering of those bonds (“UIRC Forms”) and obtained federal copyright registrations for these works from the U.S. Copyright Office. Defendant William Blair & Company, LLC, an investment banking firm, acted as the placement agent for UIRC and used the UIRC Forms for some of those bond offerings. Blair also assisted Rainier, a competitor of plaintiff, with a similarly-structured bond offering. UIRC sued Rainier for copyright infringement of the URIC Forms and subsequently settled. Then, plaintiff sued Blair and a former employee of Blair, alleging copyright infringement of the same URIC Forms.

The decision

Blair moved to dismiss UIRC’s claims related to the content of the URIC Forms, claiming that some of the definitions contained therein were sentence fragments and definitions that are “driven entirely by utilitarian considerations” based on the structure of the bond and are therefore not eligible for copyright protection. Blair argued that the plaintiff was trying to own a concept for the type of bond offering. Blair also claimed that descriptions of the U.S. government’s leasing structure, necessary to the type of transaction covered by the URIC Forms, are not protectable under copyright law because they are simply facts about the transaction.

To survive a motion to dismiss, a plaintiff only needs to show that its complaint contains enough facts to state a plausible claim. Blair argued that UIRC did not do this because the URIC Forms did not possess the minimal level of creativity necessary for copyright protection. The court, however, held that UIRC had at least included sufficient facts and assertions in its complaint to allege viable copyright rights in the UIRC Forms and to support a viable claim for copyright infringement of those rights.

Ideas v. expression in copyright law

The case highlights a critical dichotomy in copyright law, that copyright law protects the expression of an idea, not the idea itself. For example, copyright protection is not available for the idea of a fictional detective character. On the other hand, copyright law protects movies and books expressing the story of such a detective. Further, a copyrighted work must contain a minimal level of creativity for that expression to be eligible for protection under the copyright laws.

Here, Blair claimed that the UIRC Forms, by their nature, had to describe the underlying concept of government leases, which are non-protectable facts. Blair argued that UIRC was the first to offer this type of bond, and that, by claiming copyright protection in the UIRC Forms, UIRC actually is trying to monopolize the market for this type of transaction. Blair claimed that there was no other way to express the underlying idea of the bond, and that UIRC’s complaint did not even claim the minimal level of creativity in the content of the UIRC Forms necessary for copyright protection. The court disagreed, holding that the terms and definitions in the UIRC Forms contained at least a minimal level of creativity in expressing the leasing structure.

Although a contract or other legal document can be copyrightable, such documents frequently contain relatively common terms and language, so that it may be difficult to prove that the document, or portions thereof, was an original creative work. This case seems to differ because the type of transaction is new, and UIRC apparently created the documents specific to the purpose of effectuating the sale of these bonds.

Following this motion to dismiss, the case will now go forward. We will monitor this case for a decision on whether UIRC’s bond documents are original works entitled to copyright and whether Blair copied a copyrighted work of UIRC. Subsequent decisions in this case may have a lasting impact on the scope of copyright protection for transactional documents and forms in the future.

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