Author Archives: david

Festival 2013

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May 29  |  Headlines  |   david

I am happy to be associated with Roanoke Festival in the Park, Inc. which has brought entertainment and activities to Roanoke over the Memorial Day weekend for more than 40 years. Congratulations on another success.

NRA and Virginia Attorney General Cuccinelli Lose on Second Amendment Argument

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March 23  |  Headlines  |   david

In Woollard v. Gallagher, a case decided March 21, 2013, the United States Fourth Circuit Court of Appeals in Richmond upheld a Maryland law which places restrictions on those who can carry handguns outside the home.  Both the National Rifle Association and the Attorney General of Virginia, among others, filed amicus briefs arguing that the Maryland law violated the Second Amendment.  They lost.

The Maryland law was not an absolute ban on carrying handguns outside the home.  It provided a number of exceptions, but said others not falling within an exception must have a “good and substantial reason” for carrying a gun in order for them to obtain the required permit.  The Maryland State Police was given authority to issue the permits.  The State Police adopted a standard which sets out four categories which they would consider to meet the “good and substantial reason” requirement, the last of which was “for personal protection.”   To determine whether the personal protection requirement was met, the State Police applied an objective standard previously adopted by the Maryland Court of Appeals that there must be an “apprehended danger,” something more specific than “a vague threat” or a general fear of “living in a dangerous society.”

 In its analysis, the Fourth Circuit followed its own precedent and applied an “intermediate scrutiny,” not a “strict scrutiny,” standard in determining whether the state regulation restricting guns outside the home placed an impermissible burden on the Second Amendment constitutional right.

 The court held that Maryland’s “good and substantial reason” requirement as applied in this case met second amendment constitutional muster.  Using the intermediate scrutiny standard, the court found Maryland had demonstrated that the statutory “good and substantial reason” requirement is reasonably adapted to Maryland’s significant interest in protecting public safety and preventing crime.

United States Sues S & P Over Derivatives Ratings

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February 5  |  Headlines  |   david

The United States Justice Department has filed a civil action against Standard & Poor’s and it’s parent company McGraw-Hill over the ratings it gave to financial derivatives which are widely blamed for causing the Great Recession.

Rose Bowl Float Side Story – Copyright

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January 1  |  Headlines  |   david

A float in today’s Rose Bowl Parade honored Korean War veterans by depicting the National Korean War Memorial on the Mall in Washington.  Fifty-five years after the war ended, the artist who created the central feature of the memorial had to fight a battle of his own over the copyright to his work.  Here is his story. The Stamp War – Copyright

Apple Ordered to Disclose Patent Infringement Settlement Details

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November 26  |  Headlines  |   david

The United States District Court for the Northern District of California has ordered Apple Computer to disclose the details of the global settlement agreement it reached with HTC dismissing all patent infringement lawsuits between the two companies.  Apple had sought a permanent US sales ban on eight Samsung smartphone models and one tablet computer.  Samsung claimed the iPod Touch 5, the iPad 4, and the iPad mini infringed its patents.

No Dice: The Risks of Trade Secret Misappropriation

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October 29  |  Newsletter  |   david

Often the most important remedy in intellectual property litigation is an injunction.  If someone infringes your patent, copyright or trademark, you want a remedy that will require them to stop doing so.  It had long been held in intellectual property litigation that once an infringement was proven, an injunction would issue.

The Legal Background

The 2006 United States Supreme Court opinion in eBay, Inc. v MercExchange, LLC[1] changed that.  It was a patent infringement case and held that the requirements for obtaining a permanent injunction should be no different than the common law requirements for obtaining a permanent injunction in other types of cases which are that the plaintiff must prove (i) that it has suffered irreparable injury, (ii) that remedies at law (monetary damages) are inadequate to compensate for the injury, (iii) that considering the balance of hardships between the plaintiff and defendant, an injunction is warranted, and (iv) that the public interest would not be disserved by a permanent injunction.

In the years since eBay, there has been a great deal of discussion about the application of its holding to other types of intellectual property and other related areas of the law.  The decision in eBay specifically discussed the Copyright Act, and so it is easy to conclude that it also applies to copyright cases.  It has also been held to apply to trademark infringement cases[2] and to false advertising cases[3] brought under §43(a) of the Lanham Act (the federal trademark act); however, there has been some inconsistency in doing so.[4]

Now comes a trade secret case in Virginia.  A trade secret is a legally protected right of a business to its confidential, proprietary information.  Patent, copyright and trademark are ways for a business to protect its creative efforts.  Trade secrets provide another way.  For a general discussion of trade secret law, see Trade Secret Law.

The case is a big one.  It resulted in a $920 million judgment and a 20-year, world-wide injunction against the Korean manufacturer Kolon Industries, Inc. producing its competitive product.  The case is in the Richmond District of the United States District for the Eastern District of Virginia.  The court had personal jurisdiction over the South Korean defendant because some aspects of the misappropriation occurred in the United States and Kolon entered a general appearance in the case and filed a counterclaim (which was severed).  As would be expected in such a large case, every issue was contested which has resulted in numerous written opinions, including a 70-page opinion entered August 30, 2012 on DuPont’s post-trial motion for a permanent injunction.

The Factual Background

The following facts are from the court’s opinion.  They are egregious.  After a seven-week trial, a jury found that Kolon violated the Virginia Uniform Trade Secrets Act.  Using a fifty-one page verdict form, the jury specifically found that Kolon willfully and maliciously misappropriated and used 149 DuPont trade secrets for the manufacture of DuPont’s para-aramid fiber Kevlar®.

Kolon had attempted in the 1980s and 1990s to develop a commercial para-aramid product.  It was unsuccessful and in 1995 abandoned the effort.  In 2002, Kolon’s top executive directed that the company renew its efforts to produce para-aramid.  In 2005, Kolon announced that it soon would enter the para-aramid fiber market with its product Heracron®.  It did begin production but its efforts were less than successful.  Because it is a lucrative market, the company’s top management again made success in the manufacture of Heracron® a top priority.

Kolon continued its development efforts and was making some progress toward success, but it encountered significant problems in quality control and in efficient production, both of which kept Heracron® from being competitive in the market.  In its effort to become competitive, Kolon made the deliberate decision to acquire DuPont’s trade secrets and confidential information.

To achieve its objective, Kolon retained as “consultants” former DuPont employees whom it paid to divulge DuPont’s trade secrets.  Once such consultant, Mitchell, was a long-time former employee that DuPont had terminated in 2006.  Despite having entered into a non-disclosure agreement with DuPont, Mitchell divulged DuPont trade secrets to Kolon.  Apparently not satisfied that Mitchell was spilling all the beans, during a luncheon recess from a meeting in Korea, Kolon surreptitiously copied the hard drive of Mitchell’s laptop.

At trial, DuPont presented evidence that Kolon had incorporated the stolen DuPont trade secrets into Kolon’s own manufacturing facilities, including machine configurations that DuPont had used solely because of its need to fit machinery into limited space in its plant.

Kolon’s flagrant behavior didn’t end when the lawsuit was filed.  Kolon also engaged in some serious shenanigans during the trial.  DuPont discovered a number of screenshots that indicated employees of Kolon had deliberately deleted, overwritten or destroyed approximately 17,000 emails and other documents.  That resulted in Judge Payne granting an adverse inference instruction to the jury, meaning that the jury could infer that the documents destroyed were adverse to Kolon.

Whether eBay Applies to Permanent Injunction under Virginia Uniform Trade Secrets Act

Following trial, DuPont moved for a permanent injunction against Kolon using DuPont’s trade secrets.  In considering the issue of whether a permanent injection should issue against Kolon, Judge Payne conducted a comprehensive analysis which begins with the question of whether the eBay doctrine for issuance of an injunction, if applied to this case, would encroach upon the bedrock case of Erie R. R. v. Tompkins.[5]

Remember, the eBay case involved patent infringement – a violation of federal law for which the federal trial court had federal question jurisdiction.  The Kolon case involved trade secrets under Virginia law for which the federal trial court had diversity jurisdiction, not federal question jurisdiction.  As noted by Judge Payne, under the Erie doctrine, federal courts must apply the substantive law of the forum state in diversity of citizenship cases.  As he also notes, since Erie federal courts have struggled to distinguish substance from procedure.

Judge Payne then engages in a thoughtful analysis of the application of Erie to the issue of a permanent injunction, which courts and lawyers in other jurisdiction will find instructive.  He concludes that analysis by stating that there is a widely held perception the issue has not been resolved by the Supreme Court of the United States.

However, he then resolves the issue for the Kolon case by stating that the Fourth Circuit, which is direct authority for federal courts in Virginia, “has spoken directly on this admittedly complicated issue.…  In Capital Tool,[6] the Fourth Circuit concluded that the application of state law to the issuance of a final injunction in diversity cases is consistent with the principles announced in Erie when it articulated that:  ‘There is no reason to exclude form Erie state substantive law regarding the issuance of final injunctions. 837 F.2d at 172’.”

Judge Payne continues:  “(A) complainant need not allege or prove irreparable harm when it involves a statute that authorizes injunctive relief.  All that need be proved is a violation of the statute.” (Emphasis by Judge Payne) (citing Va. Beach S.P.C.A., Inc. v. S. Hampton Roads Veterinary Ass’n, 329 S.E.2d 10 (Va. 1985) and Envtl. Def. Fund., Inc. v. Lamphier, 714 F.2d 331 (4th Cir. 1983)).[7]

Judge Payne then holds:  “For the foregoing reasons, the Court finds that applying the standard for injunctive relief in eBay to DuPont’s request for a permanent injunction under the VUTSA would trench upon the rule of Erie.  Hence, the Court will apply Virginia’s principles as set forth in the decisions of the Commonwealth’s highest court.  Under those principles,  DuPont, having proved a violation of the VUTSA, does not have to prove irreparable harm or the lack of an adequate remedy at law to receive an injunction against the actual misappropriation of its trade secrets by Kolon.”  (Opinion p. 30)

Judge Payne then states:  “The conclusion that DuPont is not required to establish irreparable injury or the lack of an adequate remedy at law does not mean that DuPont is automatically entitled to injunctive relief.” (Opinion p. 31)   He then turned his attention to the factors under Virginia law which should be considered in determining whether to grant an injunction.

Injunction under Virginia Uniform Trade Secrets Act[8]

Kolon, relying upon Faiveley Transport Malmo AG v. Wabtee Corp.,[9] argued that the $920 million judgment against it makes in unnecessary and inappropriate to issue an injunction.  The Second Circuit in Faiveley commented that an award of damages often will provide a complete remedy for misappropriation absent a showing that, unless enjoined, the misappropriator will further disseminate the stolen secret.  Judge Payne gave Faiveley short shrift:  “That somewhat remarkable, overly simplified statement was made without the benefit of a full record, and it was dictum.”  (Opinion p. 33)

Judge Payne pointed to Kolon’s assertion that it could not afford the premiums on an  appeal bond and noted that they may have no assets in the United States forcing DuPont to attempt to enforce its judgment in Korea, to indicate there is no assurance DuPont will be successful in obtaining satisfaction of its judgment.   During the time DuPont would be required to spend in seeking to enforce its judgment, without an injunction, Kolon would be free to use the stolen trade secrets.  Judge Payne concluded that the $920 million monetary judgment would not preclude an injunction.

In balancing the equities between DuPont and Kolon, Judge Payne found that the equities strongly favored granting and injunction.  In considering the public interest in determining whether an injunction should issue, Judge Payne found that in a global economy where many international companies do not accord trade secrets the same respect and protection as they are granted under the Uniform Trade Secrets Act, which has been enacted by all states except Massachusetts, New York, North Carolina and Texas, it serves the public interest for those who violate the law to know that they will be caught, they will be prosecuted civilly, and they will not be able to profit from their stealing.  Judge Payne then found that injunctive relief will help serve as a deterrent to trade secret misappropriation.

Judge Payne thus found that the factors under Virginia law favor granting an injunction.  When granted, an injunction must be tailored to address properly the wrong that has been proved and to effectuate proper relief.

Type and Scope of Injunction

Judge Payne then addressed the type of injunction to issue – a “production” injunction or a “use” injunction.  DuPont requested an injunction prohibiting Kolon from making a para-aramid product altogether, not just prohibiting Kolon from using the stolen secrets in making the product.

Judge Payne determined that Kolon had not created a significant and comparable design for the product prior to stealing DuPont’s trade secrets.  He further determined that the misappropriated trade secrets are inextricably intertwined in Kolon’s production line and operating processes, and further that it would not be possible for Kolon’s employees to “unlearn” the secrets that were misappropriated.  He also determined that given Kolon’s flagrant misconduct, Kolon could not be trusted to police itself on an injunction that would prohibit only use of the stolen trade secrets.

The scope of the injunction deals with both its geographic scope and its duration.  DuPont requested a worldwide scope.  Judge Payne looked to the Restatement (Third) of Unfair Competition, authority from the Eleventh Circuit[10] and the Ninth Circuit,[11] and general principles of equity to conclude that an extraterritorial injunction is warranted.

Judge Payne considered the “independent development” standard in determining the duration of the injunction, but also cited with approval a treatise[12] which states that while the general principle and judicial preference is to limit injunctive relief to independent development time, courts seek to do equity and will enter an injunction for an arbitrary term if needed to accomplish an equitable result.  In this case, Kolon had not perfected the technology after almost 20 years of trying and the evidence was that it took DuPont 30 years to develop Kevlar.®

As a result, Judge Payne issued an injunction against Kolon prohibiting the production of any para-aramid fiber for 20 years, as well as a permanent injunction against the use of the trade secrets, and a permanent injunction against disclosure of the trade secrets not only to others outside Kolon but also against further disclosure to other employees of Kolon.

Footnote

On September 21, 2012, in a split decision a three-judge panel of the Fourth Circuit stayed the injunction pending Kolon’s appeal.

For his part, in 2010 DuPont’s former employee Mitchell was convicted of stealing numerous trade secrets concerning the making of Kevlar® and passing them to Kolon.

And now, on October 18, 2012, Kolon and five of its employees were indicted for their actions.  That may take some of the fight out of them.  Those employees could soon find themselves with a free one-way airplane ride to the United States, handcuffed to U.S. Marshalls.

What It All Means

For lawyers, the case is instructive because of its exhaustive analysis, first on the issue of a permanent injunction under the Uniform Trade Secrets Act.  It will be persuasive authority in all states, except the four which have not adopted the UTSA.  Perhaps more importantly, though, the case clearly sets cases brought under the UTSA, state law, outside the limitations of eBay on issuance of a permanent injunction when a statutory violation has been established.

For business men and women, the lesson is clear.  If you steal property of a competitor there is a significant downside if you get caught.  There is also a significant downside if you get caught later destroying evidence during the course of the trial.  No judge would take kindly to that.  It goes to the heart of being able to have a fair trial.  Kolon’s egregious misconduct permeates every aspect of this case and the court’s opinion.

Instead to taking their company to new heights and building an empire for themselves, the key executives of Kolon may instead be known for the company’s collapse.  They not only rolled the dice on the future of their company, they did so with no small amount of personal risk as well – time away from their families in a foreign country, living in the spartan accommodations of a U.S. prison.

Copyright 2012 David G. Harrison.  All Rights Reserved.

[1] 547 U.S. 388, 26 S.Ct. 1843,164 L.Ed.2d 625 (2006)

[2] See Audi AG v. D’Amato, 469 F.3d 534 (6th Cir. 2006);  North American Medical Corp. v. Axiom Worldwide, Inc., 522 F.3d 1211 (11th Cir. 2008); Voices of the Arab World, Inc. v. MDTV Medical News Now, Inc., 645 F.3d 26 (1st Cir. 2011)

[3] See PBM Products, et al. v Mead Johnson (4th Cir. 2011)

[4] See Reno Air Racing Association v. McCord, 452 F.3d 1126 (9th Cir. 2006); Abercrombie & Fitch Co. v Moose Creek, Inc., 486 F.3d 629 (9th Cir. 2007); Marlyn Nutraceuticals, Inc. v. Muchos Pharma GmBH & Co., 571 F.3d 873 (9th Cir. 2009)

[5] 304 U.S. 64 (1938)

[6] Capital Tool & Mgf. Co., Inc. v.  Maschinenfabrik Herkules, Hans Thoma Gmbh, 837 F.2d 171, 172 (4th Cir. 1988)

[7] Like Kolon,  Capital Tool involved the alleged violation of the Virginia Uniform Trade Secrets Act; but unlike Kolon, Capital Tool involved a request for a preliminary injunction, not a permanent injunction after a trial on the merits.  The trial court in Capital Tool denied the preliminary injunction which the Fourth Circuit affirmed.  The Virginia Uniform Trade Secrets Act provides that “(a)ctual or threatened misappropriation may be enjoined” (emphasis added).  Code of Virginia §59.1-337 A

[8] Code of Virginia §59.1-336 et seq.

[9] 559 F.3d 110 (2d Cir 2009)

[10] Nordson Corp. v. Plasschaert, 674 F.2d 1371 (11th Cir 1982)

[11] Lamb-Weston, Inc. v McCain Foods, Ltd., 941 F.2d 970 (9th Cir. 1991)

[12] Milgrim on Trade Secrets §15.02[1][e]

Largest Health Care Fraud Settlement in U.S. History

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July 2  |  Headlines  |   david

GlaxoSmithKline LLC agreed today to plead guilty and pay $3 billion to resolve criminal charges brought by the U.S. Justice Department for introducing misbranded Paxil and Wellbutrin into interstate commerce, and failing to report safety data about the diabetes drug Avandia, and also to resolve civil claims brought by the government for alleged false price reporting practices.  It is the largest payment ever by a drug company.  http://1.usa.gov/M1nehB

Supreme Court Upholds Health Care Law

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June 28  |  Headlines  |   david

The Supreme Court today released its opinion upholding the constitutionality of the Patient Protection and Affordable Care Act.  http://www.scotusblog.com/

Service Mark Infringement – Eighth Circuit

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May 31  |  Headlines  |   david

The First National Bank in Sioux Falls v. First National Bank South Dakota

 In this service mark infringement suit over two banks using similar names, on May 25, 2012 the Eighth Circuit affirmed the issuance of a permanent injunction.  It held that there was sufficient evidence in the record of likelihood of confusion that the District Court of South Dakota’s factual finding of likelihood of confusion was not clearly erroneous.

 In an earlier decision, the court had not extended the injunction to prevent First National  Bank of South Dakota from using its full name.  In a redesigned logo and in advertising materials, FNB SD then used its full name but highlighted “First National” and “First National Bank” and minimized “South Dakota.”

 After the first suit, First National Bank of Sioux Falls federally registered its mark, so the second suit was brought under the Lanham Act.  In this second suit, the use of the redesigned logo and advertising materials was enjoined; however, the court held this was not an “exceptional case” meeting the statutory standard for the award of attorneys fees.

http://law.justia.com/cases/federal/appellate-courts/ca8/11-1568/11-1568-2012-05-25.html

The Stamp War — Shoot Five: Gaylord v. United States – Copyright Infringement

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May 21  |  Newsletter  |   david

In litigation that already has lasted nearly twice as long as the war itself, volleys are still being fired over the copyright for a portion of the memorial to a war that ended in armistice and not peace.  The case is Gaylord v. United States.  On May 14, 2012, it was remanded by the U. S. Court of Appeals for the Federal Circuit to the U. S. Court of Federal Claims for another shot at determining the amount of damages, the fifth courthouse battle in this protracted campaign.

John Alli, a very good amateur photographer, wanted to do the right thing and tried to do the right thing, but nevertheless got caught in the cross-fire of what the trial court called an “open and contentious dispute” over copyright ownership to the sculpted figures in the Korean War Memorial on the National Mall in Washington. 

Wanting to give his father, a Korean War veteran, a meaningful retirement gift, Alli went to the Korean War Memorial on a winter day after a snowstorm and took numerous pictures.  He settled on one.  He thought it was good and decided to enter it in a photo contest.  He won.

Thinking his photo might have commercial value, Alli made some inquiries.  He was told by a mall vendor that the war memorial artwork was copyrighted.  Mr. Alli sought to locate the copyright holder of the sculptures so that he could obtain a license to commercialize his photo of them.  Through a series of referrals Alli ended up locating and talking with a Mr. Lecky of Coopers-Lecky Architects, P.C.  He entered into a licensing agreement with Lecky and agreed to pay a 10-percent royalty to an entity Lecky organized for the purpose.  There was no dispute that Alli is entitled to a copyright in his photograph as a derivative work.  The dispute is over the copyright to the underlying work, the sculpted figures in the memorial.

When the idea of creating the Korean War Memorial arose, an independent commission was created with the responsibility of constructing the memorial.  That commission sought the assistance of the Army Corp of Engineers.  The Army Corp of Engineers selected Cooper-Lecky Architects (CLA) to create, construct and install the memorial.  A contact was entered into between the Corp of Engineers and CLA which provided that CLA could not assert or establish a copyright claim in the project and that all designs, drawings and other works developed in the performance of the contract are the sole property of the government.

CLA entered into a sub-contract with an artist, the plaintiff, Mr. Frank Gaylord, to sculpt the human figures, a platoon of 19 soldiers he called the “Column,” which is a central component of the memorial.  The contract between CLA and Gaylord did not contain the provisions regarding copyright that were in the prime contract.  Instead, it provided that rights to copyright would be covered by a separate agreement.

There is no indication from the court opinions that Gaylord was aware of the copyright provisions in the prime contract between the Corp of Engineers and CLA.  Perhaps Lecky hadn’t carefully read his contract with the Corp of Engineers.  At one point the commission organized to create the memorial had claimed a copyright, but for unexplained reasons it withdrew all claims for copyright ownership or royalties.  A dispute ensued between Lecky and Gaylord over copyrights to the memorial.  Eventually, however, Gaylord and CLA entered into an agreement which acknowledged Gaylord owned the copyright to the Column.  A separate agreement granted CLA a license and provided a royalty schedule; however, Gaylord terminated the licensing agreement claiming Lecky had breached it.[1]

Although there may have been some confusion over the copyright claims[2], what appears from the opinions is that on one side the prime contract between CLA and the Corp of Engineers provided that CLA could not assert a copyright claim; and on the other side CLA acknowledged that Gaylord owned the copyright to the Column.

Despite this, when Alli located Lecky and inquired about copyright ownership of the underlying work, Lecky said that he, Lecky, was the “outright” owner of the copyright.  That was wrong and thus the troubles began.

At about this time, the U. S. Postal service wanted to create a commemorative stamp to honor Korean War veterans.  It held a competition and Alli entered his photograph of the Column.  He won.  The Postal Service entered into an agreement with Alli.  Mr. Alli told the Postal Service that it would also need permission of the owner of the copyright to the underlying work and referred the Postal Service to Lecky.  Apparently Lecky neglected to mention to either Alli or the Postal Service that Gaylord created the Column.  It appears both thought that Lecky had created it.  The appellate opinion indicates Lecky also did not tell Gaylord about his agreement with Alli.

The Postal Service then proceeded to produce approximately 86.8 million of the stamps from July 27, 2003 through March 31, 2005, and received over $17 million in sales.  Some of the stamps were used as postage, some were held by collectors.

The stamp came to the attention of Gaylord.  He took exception and filed suit against the United States for copyright infringement in the United States Court of Federal Claims.[3]  Gaylord also filed a companion suit against Alli in the U. S. District Court of Maryland, presumably where Alli lived.  That suit settled.

It must be assumed the prime contract which the government had with CLA did not contain a provision which required CLA to include the copyright ownership language in its sub-contracts.  It must also be assumed that neither Alli nor the Postal Service required a written representation and warranty from Lecky that he owned the copyright and provide indemnification against  infringement claims.  Ah, hindsight.  For whatever reason, CLA and Lecky avoided having the government bring a third-party claim against either of them.  There is also no mention of a direct claim by Gaylord against CLA for breach of contract.

On the issue of liability, the trial court (2008 opinion) held that Gaylord did have a valid copyright, but that the stamp fell under the “fair use” exception and thus there was no infringement by the Postal Service.[4]  The appellate court held that the fair use exception did not apply and there was infringement, and remanded for a determination of damages.

The Copyright Act provides that even if someone has a copyright in a work, another person may use the copyrighted work for purposes such as criticism, comment, news reporting, teaching, scholarship or research.[5]  Such use, which has become known as “fair use,” is not an infringement.  The statute sets out four factors which must be considered in determining fair use: (1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes, (2) the nature of the copyrighted work, (3) the amount and substantiality of the portions used in relation to the copyrighted work as a whole, and (4) the effect of the use upon the potential market for or value of the copyrighted work.

Whether use in a particular circumstance is fair use is not always easy to determine.  Cases are fact dependent.  The trial court analyzed these four factors leaning heavily on the first factor.  In evaluating the purpose and character of the use of the work, courts inquire whether the use is “transformative.”  That is, whether the use of the copyrighted work adds something new, with a further purpose or different character, altering the first with new expression, meaning, or message.[6]

The trial court found that the photographic image was transformative because of its gray winter colors and snow, and that the Postal Service edited the photograph image for its stamp, making it even more monochromatic in appearance.

The appellate court didn’t go for that.  It held[7] that the photographic image was not transformative, dismissing the Postal Service’s argument that it was by saying nature’s decision to snow cannot deprive Mr. Gaylord of an otherwise valid right.  It analyzed the other three factors and held that the Postal Service’s use of the Column did infringe Gaylord’s copyright.  It sent the case back to the U. S. Court of Federal Claims for its first attempt at determining damages.

The statute which waives sovereign immunity and allows claims of copyright infringement to proceed against the United States also sets out the remedy.  It provides that the owner of the copyright may recover “reasonable and entire compensation.”

In the remand, Gaylord argued for a 10% royalty as reasonable compensation and offered evidence of other royalties he had received.  Gaylord calculated such a royalty would amount to slightly over $3 million.  As in other cases before it, the court looked to 17 U.S.C §504, the statute which provides remedies for copyright infringement claims.  It rejected a damage calculation based upon royalties as being authorized by either 28 U.S.C §1498(b) or 17 U.S.C. §504.  The Postal Service had paid Alli $1,500 to use his photographic image.  The highest amount the Postal Service had ever paid for an image to use on a stamp was $5,000.  The court called this range the “zone of reasonableness” and awarded Gaylord the maximum amount within that range, $5,000.  That was April 22, 2011.  Gaylord filed suit on July 25, 2006.  His copyright was infringed.  After nearly five years of litigation, he got $5,000.

Gaylord didn’t like that and so the case went back up to the U.S. Court of Appeals for the Federal Circuit.  The appeals court noted favorably that when a plaintiff, such as here with Gaylord, cannot show lost sales, lost opportunities to license, or diminution in the value of the copyright, other circuits have used “the fair market value of a license covering the defendant’s use” in calculating damages.  It then held that the value of this license should be calculated based upon a hypothetical arms length negotiation between the parties.  It stated that it is incorrect in a hypothetical negotiation inquiry for a court to limit its analysis to only one side of the negotiating table.  The trial court in this case had looked only to what the Postal Service would have paid and did not consider what Gaylord had received for royalties on other works he licensed.  The appellate court went on to say that the Postal Service could not insulate itself from paying for the damages it caused by resting on its past agreements and by creating internal policies that shield it from paying fair market value for what it took.

The Federal Circuit thus joins other circuits in holding that a royalty based analysis is proper in copyright infringement claims against the United States when the plaintiff cannot show lost sales, lost opportunities to license, or diminution in the value of the copyright because of the infringement.  It found that the trial court’s damage calculation was an abuse of discretion and reversed.

The Federal Circuit then provided guidance.  Mr. Alli had entered into a license agreement with CLA agreeing to pay a 10% royalty thinking it owned the copyright.  The Postal Service itself had licensed the stamp image to third parties for use on retail goods in exchange for a royalty of 8% of sales.  The appellate court then said that on remand the trial court’s analysis of a hypothetical negotiation may lead it to conclude that different license fees are appropriate for the three categories of infringing goods the court identified: (1) stamps used to send mail, (2) unused stamps purchased by collectors, and (3) commercial merchandise featuring an image of the stamp.

The legal significance of the case is that Federal Circuit has now held that a royalty based calculation of damages is appropriate in the circumstances of this case.

The practical lesson for businesses or individuals who want to license a copyrighted work is to retain a lawyer to (1) do a copyright search, and (2) incorporate into the license agreement a representation and warranty by the party granting the license that it is the sole owner of the copyright to the work as well as an indemnity against infringement claims.  Apparently in this case neither Mr. Alli nor the Postal Service did either of those things.

It’s understandable to me that Mr. Alli wouldn’t know to do so.  He is an amateur photographer who started out only wanting to create a gift for his father.  But it seems he soon got in over his head.  He should have consulted with a lawyer knowledgeable in such matters before entering into a license agreement with Mr. Lecky, but that mistake for an individual is not uncommon.

It is inconceivable to me, however, that the Postal Service apparently did not do so.  It has been caught up in long, and undoubtedly very expensive ligation, when an ounce of prevention could have avoided it.

For an artist looking for a lesson in this case, I’m not sure there is anything Mr. Gaylord could have done differently to better protect himself.  He registered five copyrights of his work at various stages of completion.  A copyright search would have shown his claim.

This case is one that should have had early mediation.  Perhaps they tried and couldn’t reach an agreement.  It’s hard to know why the parties seemed hardened into their positions.  The case is still ongoing after five years.  Avoiding lengthy and costly litigation would seem a strong incentive to mediate.  Ah, hindsight.

As for the outcome in the upcoming fifth battle of this campaign, in my book Mr. Gaylord deserves a hefty damage award.  My prediction is it will come in at high six figures or possibly low seven figures.  Too bad for the Postal Service.  It’s hurting economically and I’m sure doesn’t have extra cash laying around to pay such a damage award, but it could have avoided its predicament with only a little legal work up front.  If it didn’t conduct a proper due diligence investigation before entering into the transaction, or create the documents to protect it and provide it with a claim against Lecky, that’s it’s fault.  Perhaps this will be the final battle and within another year the troops can come home.

Copyright 2012 David G. Harrison.  All Rights Reserved.
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[1] There is no indication that the question of whether Gaylord had a right to terminate the licensing agreement was ever litigated.  The trial court opinion indicates that Gaylord terminated “both” agreements; however, it is not clear from the appellate court’s recitation of facts that he terminated the agreement in which Lecky acknowledged that he, Gaylord, owned the copyright to the Column.  There would seem to be no advantage for him to do so.  The appellate opinion does recite that Lecky failed to notify Alli of his agreement with Gaylord, which would seem to imply it was still in existence.

[2] A copyright search indicates that Cooper Lecky Architects, PC had registered copyrights to some aspects of the memorial.

[3] United States Code §1498 (b) waives sovereign immunity for copyright claims against the United States and provides that exclusive jurisdiction for such actions is in the U.S. Court of  Federal Claims.

[4] The Postal Service also argued joint authorship of Alli and Gaylord which would permit Alli to license the work but would require him to account to Gaylord for any profit he made.  It also argued that the memorial is an “architectural work” covered by the Architectural Works Copyright Protection Act.  The AWCPA was enacted in 1990 and extended limited copyright protection to architectural works.  The AWCPA provides that copyright protection under AWCPA “does not include the right to prevent the making, distributing or public display of pictures, paintings, photographs, or other pictorial representations of the work, if the building in which the work is embodied is located in or ordinarily visible from a public place.”  The Postal Service argued that since the memorial has benches it is a “building” to which copyright protection could only be extended under the limited provisions of AWCPA.  That argument seems a reach and apparently the trial court thought so as well.  The Postal Service lost on both the joint authorship and AWCPA arguments.  Those holdings were affirmed on appeal.

[5] 17 U.S.C §107

[6] Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569, 579 (1994)

[7] Gaylord v. U.S., 595 F.3d 1364 (Fed. Cir. 2010)