Fraud and Preemption

Issues involving when state laws are preempted are both frequent and vexing. A recent, marvelous opinion by Chief Judge Curtis L. Collier of the Eastern District of Tennesse is important for its insights into this difficult area. The case is Shuptrine v. McDougal Littell, 2008 WL 400453 (E.D. Ten. Feb. 12, 2008), Docket No. 1:07-CV-181. Congratulations to Christopher Seidman and Maurice Harmon of Harmon & Seidman for prevailing against defendant’s motion for judgment on the pleadings.

Here are the relevant facts as described by the court:

According to Plaintiff's complaint, she holds copyrights to paintings made by her late husband, Hubert Shuptrine (“Shuptrine”).. . Prior to his death in 2006, Shuptrine held the copyrights, and in exchange for payment granted licenses to print his paintings to Defendant, a textbook publisher, for expressly limited print runs … However, Plaintiff alleges those limits were misrepresentations by Defendant intended to obtain access to the paintings at a lower cost than had it been honest with Shuptrine … Plaintiff alleges that at the time of the licensing agreements, Defendant knew its actual use would greatly exceed the number of copies it agreed to make… . For instance, Plaintiff states Defendant requested a license to print 40,000 copies of a painting in a textbook, even though it knew at the time it would need to print hundreds of thousands copies, and it eventually printed over 1.2 million copies … . By licensing copyrighted work for low numbers of reproductions while allegedly surreptitiously making far more copies, Defendant lulled Shuptrine into a false sense of trust, giving no reason to suspect it was making excessive copies … Shuptrine set the reproduction fee based on Defendant's representations as to how many copies it would make, and discovered the excessive copying fortuitously ….

Count XI of the compliant alleged defendant committed fraud by deliberately obtained a price for the license based on a representation that it would be making fewer copies than it knew it would be. Defendant argued that the fraud claim was preempted “because the fraud and copyright claims rest on the same fundamental allegations that Defendant copied and distributed Shuptrine's paintings beyond the limitations in the license agreements.” Plaintiff asserted there was no preemption “because Defendant misrepresented to Shuptrine the number of copies it would make with the intention of obtaining the paintings at a lower price.”


As the court noted,

A claim for common-law fraud exists “When a party intentionally misrepresents a material fact or produces a false impression in order to mislead another or to obtain an undue advantage over him.” … “The representation must have been made with knowledge of its falsity and with a fraudulent intent. The representation must have been to an existing fact which is material and the plaintiff must have reasonably relied upon that misrepresentation to his injury.” … By requiring misrepresentation of a material fact, knowledge of falsity, fraudulent intent, and reliance on a misrepresentation, fraud has extra elements that are not illusory. Assuming the truth of Plaintiff's allegations, Defendant did not merely infringe Plaintiff's copyrights. Rather, she contends Defendant obtained the right to make copies of Shuptrine's paintings under fraudulent pretenses, by knowingly misrepresenting how many copies it intended to make for the purpose of obtaining the copies at a lower cost and decreasing the likelihood Plaintiff would discover the copyright violations.

Defendant argues Plaintiff's fraud claim mischaracterizes its actions. Defendant analogizes the situation to “a customer's purchase of three pairs of blue jeans while intending to steal a fourth pair the next day,” which is not fraud. But the analogy is imprecise. In a more accurate representation of Plaintiff's allegations, the customer would agree with the seller to buy three pairs of jeans for a certain price while knowing that he would have to pay a significantly higher price for the ten pairs he intends to, and does, take. But even that analogy does not fully explain the alleged fraud. A store owner conducting inventory would notice missing blue jeans, but a trusting copyright holder cannot easily notice that a licensee misrepresented how many copies it would make of copyrighted work. The infringing activity is obscured from view by the fraudulent act of a knowing misrepresentation.

Defendant contends Plaintiff's claims are about only the exclusive rights to copy and distribute the paintings. Assuming Defendant printed copies in excess of the licenses, it “should have taken out a broader license, and, as a result, should pay for allegedly unauthorized copies which exceeded the numbers stated in the licenses.” Defendant further argues, “Plaintiff's fraud claim is nothing more than a claim for intentional infringement, which damaged Plaintiff to the extent of what the license fee would have been for the unlicensed copies.”. The Court disagrees. Defendant entered into a relationship with Shuptrine allegedly under false pretenses designed to lower the cost of obtaining Shuptrine's paintings. Plaintiff's fraud allegation is a qualitatively different offense than merely exceeding the licensing agreement.

… Even though the alleged fraud in this case could not have existed without the alleged copyright infringement, the fraud accusation is more than just copyright infringement. It meets the Sixth Circuit's test, and is therefore not preempted.

I think Chief Judge Collier got the issue exactly right: the allegation (which must be accepted as true in the procedural posture of the case) was that the original license price was set far too low as a result of the fraud; this has nothing to do with violation of exclusive rights under title 17. Bravo Judge Collier.