Monday, June 18, 2007

Double Counting of Damages

A recent decision in the 6th circuit, Thoroughbred Software International, Inc. v. Dice Corporation, 2007 WL 1702777 (6th Cir. June 14, 2007), raises the question of double counting of damages that can arise when plaintiff seeks both its losses and defendant's gains. Section 504(b) permits copyright owners to recover its actual damages "and any profits of the infringer that are attributable to the infringement and are not taken into account in computing the actual damages."

In Bucklew v. Hawkins, Ash & Baptie, LLP, 329 F.3d 923, 931 (7th Cir. 2003), Judge Posner wrote: “A copyright owner can sue for his losses or the infringer's profits, but not for the sum of the two amounts … . That would be double counting.” For example, if the copyright owner proves it lost 10 sales because of the infringement, and that defendant made those 10 sales, there is only one award of damages/profits from the 10 sales, and not 20 (the sum of the two in Judge Posner's terminology). If the copyright owner proves it lost 10 sales because of the infringement, and that defendant made 15 sales, 5 of which plaintiff wouldn't have made, plaintiff recovers on 15 sales, not on 25.

Judge Posner gave another formulation of the principle in Taylor v. Meirick, 712 F.2d 1112, 1120 (7th Cir. 1983): “If the profits the owner would have made but for the infringement are equal to the profits the infringer made by selling the copyrighted item, and the owner proves up his lost profits,” the statute “bars the owner from receiving an additional award of damages based on the infringer's profits.” In most cases, the choice faced by the prevailing copyright owner is straightforward: pick the largest number.

In Thoroughbred Software, plaintiff licensed accounting software. Defendant licensee (with permission), installed plaintiff's software on computers and then rented the computers to its own customers. The rental fee wasn't broken down between the hardware and software. Defendant made more copies than it paid for and plaintiff sued. Some of those extra copies were unused, though, and one issue on appeal was whether plaintiff could prove that it was damaged by the unauthorized, but unused copies. The district court found plaintiff had failed to show a causal connection between the unused copies and any financial loss. By contrast, the cour of appeals found the license agreement straightforward: defendant was required to pay for all copies made, without any limitation on whether they were used. Plaintiff was, therefore, awarded actual damages of lost license fees for the unused copies.

On to defendant's gains. The court of appeals thought the proper measure of defendant's gains was "the amount that Dice Corp. charges its customers for the infringing software, minus the amount that Dice Corp. should have paid for the infringing software (i.e. the lost license fee), which was already been included as actual damages." Because the court found plaintiff couldn't provide a non-speculative basis for such an amount - due in large part to the bundling of the software with the hardware rental - an award of defendant's damages was precluded.

I am very interested in what others think of the court's theory of how to measure defendant's gains. I am skeptical it was proper (although none were ultimately awarded). Usually defendant's non- double counted damages are for sales that plaintiff could not have made, but which are nonetheless one-for-displacement, as where defendant is selling a knock-off of plaintiff's sweater design. But in Thoroughbred, the most plaintiff could ever get was the proper license fee paid by defendant, a measure of damages already taken into account by the award of plaintiff's license fee for the unused copies. Plaintiff never had a claim to the profit defendant made off the license fee, which seems to be what the court of appeal was trying to figure out.

11 comments:

Max said...

/* Plaintiff never had a claim to the profit defendant made off the license fee, which seems to be what the court of appeal was trying to figure out.
*/

In a normal business arrangement, I agree. I buy a Chevy, and GM pockets the money. If I then turn that Chevy into a taxi, or simply rent it out, I have no obligation to pay Chevy any more money.

But the question wasn't for a normal business plan. It was to recover what the statute says can be recovered:

/* Section 504(b) permits copyright owners to recover its actual damages "and any profits of the infringer that are attributable to the infringement and are not taken into account in computing the actual damages."
*/

In which case, whether the copyright owner would normally have a claim on those profits is beside the point. Did the infringer make a profit from the infringement? Was that profit already accounted for in the actual damages calculation? If the answers are "yes, no," then it seems that it's correct to try to get that profit.

William Patry said...

Fair enough to ask what the statute asks, but what is the answer?

Dean C. Rowan said...

As I read the opinion, the court did not find "plaintiff couldn't provide a non-speculative basis" for determining profits (my emphasis). Rather, the court suggested, "Thoroughbred might have offered evidence of the entire monthly fee that Dice Corp. charges a customer, and then submitted expert testimony as to what portion of this monthly charge could reasonably be subtracted for the use of a computer, customer service, and the like. Even if the resulting amount still included some non-infringing revenue, this method might have discharged Thoroughbred's burden and placed the onus either on Dice Corp. to prove deductible expenses or on the court to apportion." Practically speaking, this may have proven as unworkable and "opaque" (the court's characterization of Dice's pricing scheme) as the actual circumstances, but it at least proposes that there is a possibility for appropriate restitution.

Max said...

Under the description you gave, I think it was proper for the court to consider the profit the defendant made from leasing the machines. And, if the invoices broke out the value of the hardware and the value of the software, I believe it would be proper to count the value the software added to the lease against the defendant.

As to the larger question of whether law should be written this way, I would have to vote no. At least in in civil actions. You should be able to recover damages I cause you, and punitive damages, but it bothers me if your ultimate payout depends on how clever I was in trading off of your intellectual property.

Although it's not the conservative way, in such a case I would consider "unjust profits" a harm society at large suffers, and would be fine with the government seizing that money through criminal proceedings.

William Patry said...

Dean, by "couldn't" I meant "didn't" and should have used that word instead, although as you point out in the end no acceptable evidence was adducced.

Carolyn E. Wright said...

Section 504(b) is not just designed to be compensatory, but to remove all benefits of the infringement. If the infringer only pays a standard license fee when caught, no one (other than those with a heavy conscience) would obtain a license in the first place.

William Patry said...

Carolyn:

True enough, but there are other remedies available to prevent the probelm you identify, including willful statutory damages and attorney's fees.

Anonymous said...

I'm curious about what happens if we change the facts a little bit. Plaintiff licenses software to Defendant. The license fee is $25k per month for each computer. The software is just used to make money -- for instance financial trading software. A competent user of the software would make $225k per license per month.

Defendant makes an unauthorized copy of the software and uses it for 6 months before Plaintiff finds out and gets an injunction. And then we get to determination of damages...

In this situation, Plaintiffs' actual damages would be $25k per month. If Plaintiff cannot also recover Defendant's gains ($200k per month for a total of $1.2mil), even if Plaintiff gets the maximum willful statutory damages, the Defendant is still making a huge net profit after paying back Plaintiffs' actual damages + statutory damages.

This may seem like a bizarre situation, but do you think 504(b) sjpi;d allow Plaintiff to recover Defendant's gains here? If not it seems that Defendant would have no incentive not to infringe.

Thos said...

I am a bit surprised by this discussion. As a UK lawyer and non-expert, I thought that the effect of this section was both to reverse the common law rule against double recovery and to obviate the requirement that a plaintiff elect between damages or an account of profits. According to my US textbook, the House report stated: "Where the defendant's profits are nothing more than a measure of the damages suffered by the copyright owner, it would be inappropriate to award damages and profits cumulatively, since in effect they amount to the same thing" (H.Rep., p. 161).

Now it would be exceptionally rare for a defendant's profits to be "taken into account in computing the actual damages", as they are not normally regarded as a relevant factor, but (especially in imaginative US courts) this is conceivable (perhaps as so-called restitutionary damages). Apart from such cases, the House report seems to say that damages and profits are cumulatively recoverable. If this is not so, what is the point of the section? Plaintiffs would just go for the higher figure and no off-setting would ever be necessary.

William Patry said...

Anonymous, what would the competent user of the software do with it to make his or her profit? If, for example, it was used for trades and the profit was on the trades, that sounds like an indirect profits claim.

William Patry said...

Thos, in most cases, plaintiffs do just go for the higher figure. As a statutory right, there was no common law rule to reverse, but I agree Congress did not want to preclude the possbility in a given case of plaintiff collecting both its lost sales and profits that defendant made from its sales, but only if the sales were not to the same people. This is what I think the passage you quote from the committee report means:

"Where the defendant's profits are nothing more than a measure of the damages suffered by the copyright owner, it would be inappropriate to award damages and profits cumulatively, since in effect they amount to the same thing."

The Thoroughbred case I think deals with something else, an effort to collect plaintiff's lost license fees (quite OK), and the profit defendant made for those same same license fees; to me that is trying to collect twice for the same transaction.