Thursday, June 16, 2005

Breach of Contract, Infringement, Ja Rule and Murder Inc.

On Tuesday, the Second Circuit set aside an award of $54 million in the long running dispute between TVT Records/Steve Gottlieb and Island Def Jam Music/Lyor Cohen over the right to produce and market sound recordings by the group Cash Money Click (which included Ja Rule), 2005 U.S. App. LEXIS 11147. Irv Gotti (Irving Lorenzo), originally a talent scout at TVT and then infamous from his role as a producer for Murder Inc., was also a key player. A jury had awarded $25 million in actual and $107 million in punitive damages on to TVT, but Judge Marrero remitted that amount to the $54 million. The Second Circuit has now reduced that amount to zero.

In an earlier decision that caused a stir, Judge Marrero held open the possibility of punitive damages under the Copyright Act. When plaintiffs later opted for statutory damages the issue was moot although it lives on as a bad dream for many. Bluntly put, punitive damages are never available in copyright cases. Bad behavior is remedied, if at all, under increased willful statutory damages.

The Second Circuit's vacation of the copyright infringement verdict and damages raises the economically and legally important relationship between breach of contract and copyright claims. The former are state law questions, the latter exclusively federal. The basis for the court of appeals' holding was its disagreement with Judge Marrero's legal conclusion that a fraudulently induced copyright license is invalid "ipso facto," and therefore any use which would constitute infringement in the absence of a license is infringement since the license doesn't exist. The Second Circuit, per Judge B.D. Parker, reversed, holding that "the license must be formally rescinded before an infringement action based on fraudulent infringement of a copyright license can proceed."

As a matter of contract law, a material breach will provide the grounds to terminate a license. An automatic recission provision is the best idea for copyright owners. With a material breach, the copyright owner can elect to sue for breach of contract or infringement, but absent a recission, the grant continues in place and only a contract action may be brought. The Second Circuit's TVT opinion makes clear this principle applies to claims of fraudulent inducement and the principle was worth $54 million. Those who wish to sue for copyright infringement where a contract existed but has been materially breached should make sure the contract has, in fact, been rescinded before an infringement claim is brought. Without recission (automatically or formally), any award for infringement will be void.


Tom said...

Yet another problem, as far as I am concerned, with the structure of the copyright act-- no punitive damages because the statutory damages framework is present.

But, the wrinkle on that is the registration must take place before infringement, or within 3 months of first publication. Sec. 412. So a successful plaintiff is barred from punitive damages, because there are statutory damages, which may not be available to him.

As a practicing lawyer, I find this discrepancy baffling. If the infringement occurs after registration, the Copyright owner is given a cornucopia of remedies (actual damages, statutory damages and attorney's fees). If not, the Owner has to contend, mostly likely, with actual damages, in the form of defendant's profits, no matter how egregious the defendant's conduct.

This is one of the bigger injustices in the system: Smart, rich, sophisticated parties get more damages than small, poor, unsophisticated ones.

Same conduct, same infringement, different remedies, all based on when the money is sent to the copyright office.

Anonymous said...

Meh. Honestly, I lean the other way. I'd be willing to grant some protection to unpublished manuscripts, provided that there was a bona fide intent to publish soon, the definition of publication was expanded to include public performance, display, and somewhat broader distribution than under current caselaw, and that the protection still expired fairly rapidly.

But real copyrights should be reserved for published, registered works, so that we can ensure that authors comply with formalities, particularly deposit.

This is one of the bigger injustices in the system: Smart, rich, sophisticated parties get more damages than small, poor, unsophisticated ones.

Rich and poor are opposites. Sophisticated and unsophisticated are too. But Smart and small are not. I suspect that you should've said 'dumb.'

This is why I'm not very sympathetic. It's easy to register, it's cheap, and the benefits of registration are very plain, and I think we'd all advise anyone to register if it was even worth asking the question about a given work.

Amateurs who try to go it alone, who don't learn simple basics such as the importance of registration, and who don't seek good advice, really do not belong.

People who treat copyright as a serious business matter will either take the time to learn at least something about it, or will get good advice.

Ultimately, my view springs from the mechanism of copyright; it's an economic motivation for authors to create. You don't need a copyright if you're after fame, or pursuing your muse, or whatever. Ideally then, we'd only grant copyrights to the first group; they're wasted otherwise. The unsophisticated amateur seems to me to fall into the latter category.

Ranting... said...

Copyright infringement is a tort but the damages for infringement are essentially contractual with a tossed-on injunctive remedy pulled from property law and statutory damages added as a special, paternalistic flip. This is part of the Frankensteinian ad hoc design of the U.S. copyright law.

Statutory damages and recovery of attorney fees serve two completely unrelated purposes. They recognize that in matters of artistic, non commercial appropriation some financial disincentive to bad acts is needed as well as some sort of eventual dollar return from an eventual litigation or nothing would or could be done about the violation of important artistic rights. The copyright owners, however, as they do with many of the author protections in copyright law, co-opted statutory damages and attorney fees as extraordinarily effective intimidations to the class of infringers who make public uses of copyrighted content and dispute the amount that they should have to pay for that use. Typically, there is no argument over whether the owner of the copyright wants the user to exercise those rights. The only issue is price. Statutory damages, particularly those for willful infringement, are an extraordinarily powerful privilege in the negotiation.

ASCAP, NMPA, RIAA, MPAA litigations against consumers and business enterprises such as television stations, bars, and Websites typically have little to do with preserving the integrity of works and everything to do with making money. These cases permit copyright owners to aggregate infringement claims to numbers that are literally stupefying as was the case in both the Grokster and Napster cases.

So... Isn't it a bit ironic that in this TVT case where the fact finders conclude there was outrageously bad internecine behavior sufficient to justify more than $100 million in punitive damages, the law as now applied by the Court of Appeals might actually encourage further similar bad practices among copyright owners in light of the relative leniency of the penalties while a college student downloading a modest number of songs and some favorite TV shows or a movie faces near-certain bankruptcy for his family?

Infringement is a strict liability tort and by marrying fixed statutory damages to that act we have, in effect, created a system of private fines. I would almost rather see exemplary damages left entirely to the discretion of the court. At least there would be some check on the near abusive and really abusive litigations brought by copyright owner groups. (For authors, there would be the potential that in a bad appropriation case they could get a hearing on the injury to their reputation or artistic well-being.) If the point is to stop an unauthorized distribution or transmission - - rather than getting the distributor to pay - - there is always an injunction available and usually in advance of a full-blown trial.

You can say: "But what about rampant piracy? We need the big stick to whack the moles."

Counterfeiting and real "piracy" could be considered theft and just criminalized. Instead of torturing the civil remedies to turn copyright owners into super enforcers armed with the capability to bankrupt almost any commercial infringing actor without the need to preserve any constitutional decorum, why not empower copyright owners as private attorney generals in those cases and force them to a higher burden of proof if they are going to do permanent and fatal damage?

Tom said...

Rich and poor are opposites. Sophisticated and unsophisticated are too. But Smart and small are not. I suspect that you should've said 'dumb.'

I think it's fine the way it is, although sophisticated and unsophistcated would probably have done just fine too.

I don't think "dumb" is the right word for someone who doesn't know to register his or her work. If you are rich, smart or sophisticated, you're more likely to work the copyright system correctly. Likewise, if you are small, poor or unsophisticated, you are not.
Amateurs who try to go it alone, who don't learn simple basics such as the importance of registration, and who don't seek good advice, really do not belong.

There's a bit of circularity there, or at the very least the thoughts incomplete. Why don't they belong? Because they don't know any better?

From a purely economic stand point, it doesn't make any sense to favor some works (registered) over others. Why should an infringer get a fre(er) pass because the author didn't register early?

The big problem, for me, is that if we have a system, like the patent system, where unregistered works are in the public domain, we've done society some good.

Under the current system, unregistered works are still copyrighted, but once registered for an infringement suit, are worth less.