Indirect Profits, Casualty, and Punitive Damages by Michael A. Einhorn, Ph.D.

Imagine that you are a young photographer and you’ve just taken an interesting shot and you are now looking to sell the work in a gallery. A prominent soft drink company picks up your photo and doctors your work with a new mission — the promotion of a new brand of soft drinks. They also register the copyright of the derivative work in their names, giving them complete control over your picture in all future uses.

When the commercial reaches national attention, you find that your interesting photo is now recognized by shoppers in every supermarket. However, the rights to control it may now be lost irretrievably to you!

When you hire an attorney to recover copyright damages, your infringing soft drink company offers you all of $3000, which an expert presents as a reasonable royalty that covers the actual damages lost by a non-distinguished person such as yourself. As you had not yet had a chance to register the copyright, you cannot recover statutory damages of $30,000 (or more) that would be otherwise payable for a willful infringement, nor can you recover your attorney’s fees.

And when you suggest to your attorney a recovery of defendant profits, you learn a harsh reality of copyright law. Your photo generated only indirect profits; that is, no consumer actually paid money for the photo itself, or any composite product (such as an album or movie) bearing its imprint. In order to collect defendant profits, you will need to prove a causal connection between your photo and sales of soft drink – a nearly impossible feat.

While Courts have allowed plaintiffs to recover indirect profits, the standards have been tightened considerably since the 1980s. The critical demonstration now before a plaintiff is proving causality. This is most effectively demonstrated — through circumstantial evidence — of a central use with a nexus so secure that is reasonable to infer causality. When a plaintiff proves causality, it must then prove defendant revenues, and defendant must prove offsetting costs and reasonable procedures for apportioning the relative worth of infringing and noninfringing components

However, this demonstration of causality is no small order. In the pivotal decision of Estate of Vane v. The Fair (5th Cir., 1988), a distinguished marketing expert showed through the use of a linear regression that defendant’s advertising campaign (which made infringing use of a copyrighted photograph) influenced defendant sales. However, the expert could not prove that the use of the photo in the advertisement had any causal effect on defendant revenues. That is, the advertisement might have been just as effective without the photo. This leads one to wonder why the photo was included. Nonetheless, the Court allowed plaintiff to recover only actual damages that it suffered through unpaid licensing fees that it should have earned.

In this domain, many would-be infringers learn the ropes of an interesting business strategy. Steal, because the plaintiff will never prove causality and can only recover reasonable royalties that would have been paid anyhow. Or perhaps the injured plaintiff will just go away.

The proper modification of law here would seem to be a change in the construction of statutory damages similar to patent law. 35 U.S.C. S 284 However, the U.S. Supreme Court requires three factors before enhanced patent damages can be recovered: (1) whether the infringement was willful or deliberate; (2) whether the infringer had a good faith belief that the patent was invalid; and (3) the party’s conduct during the litigation. 35 U.S.C. S 285 also provides for the recovery of attorney fees in “exceptional cases.”

The Copyright Act now makes no allowance for punitive damages. Although some courts have ruled that punitive damages are admissible, there is no general concensus that any plaintiff’s attorney would find reassuring, or any infringer would find definitive.

The legislative course that best meets the Constitutional requirement to provide incentives to creators of original artistic works would allow a plaintiff to recover punitive damages in instances where direct profits (i.e., causality) cannot be proven. The statute should also keep in place the plaintiff’s current option to recover statutory damages and attorney’s fees if the original work is properly registered in the Copyright Office. This will provide to copyright owners the considerable incentive to continue to register their works, since the palate of remedies before the court is reduced otherwise.

The structure here is admittedly redundant. However, the statutory and punitive domains are designed to achieve two different results. Statutory damages (with attorney’s fees) provide the compelling incentive for authors to register their works, and to activate the option in any point. Punitive domains are designed to provide a disincentive to infringers when other means break down, and may be conditioned upon the demonstration that causality cannot be proven.

Michael A. Einhorn, Ph.D. is an economic consultant and expert witness in the areas of intellectual property, media, entertainment, technology, and product design.  Dr. Einhorn is the author of  Media, Technology, and Copyright:  Integrating Law and Economics  (Edward Elgar Publishers, 2004) and over seventy professional articles related to intellectual property and economic analysis. He is also a former professor of economics at Rutgers University and a Senior Research Fellow at  the  Columbia Institute for Tele-Information.. More detail on this topic can be found at his recently published article    Copyright, Causality, and the CourtsJOURNAL OF THE COPYRIGHT SOCIETY, Summer, 2014.

Dr. Einhorn may be reached at mae@mediatechcopy.com, 973-618-1212.

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