Thursday, May 08, 2008

Retail Value among Thieves

You have been nabbed by the FBI for selling 300 counterfeit DVDs. You are facing prison time and fines, but how for long and how much money? The answer depends on the retail value of the DVDs, in particular whether they are worth more than $2,500. How do you get to below $2,500 for selling 300 counterfeit DVDs? By explaining to the judge that you sold them for $1,500. But is the relevant retail value the value for legitimate copies or the retail value that those who buy from counterfeiters pay? Who in other words are the willing buyers we look at? The term "retail value" is undefined, but the issue was just decided by the Fourth Circuit in United States v. Armstead, 2008 WL 1947869 (4th Cir. May 6, 2008)(05-5157). The court's approach seems unduly complicated, although it waqs of no moment to defendant since the court upheld the jury's verdict.

Here is the court's explication of defendant Armstead's argument:

He asserts that retail value, as used in the statute, means "the price a willing buyer would pay a willing seller at the time and in the market in which it is sold-the thieves' market." With this definition of "retail value," he argues that what a willing buyer would pay a willing seller at the time was evidenced by what the undercover agent paid him and therefore that the retail value amount was insufficient to satisfy the felony threshold amount of $2,500.

Here is the court's explication of the government's position:

The government contends that "retail value" refers to the higher value of what a willing buyer would pay a willing seller for a legitimate copy of the infringed item, such as an authentic, authorized DVD of the same movie. The government states that retail value as used in the statute is not the " 'bootleg value' the defendant received on the black market." It argues, "[i]f the Congress had meant to use the 'bootleg value' or 'wholesale value' of counterfeit product[s], it certainly would have used that or similar language; instead, the Congress used the phrase 'total retail value' of the copyright works."

The government's view makes sense and is easy to apply. Alas, that is not the approach taken by the court of appeals:

The government provides no authority to support the position that prices paid in a "thieves' market" cannot be a market value. Indeed, its only definition - the price of a movie "if it were sold to a member of the public" - would seem to include any market, except for the fact that the government argues for a value determined only by a market of "legitimate" copies. The government's assertion that the market for illicit goods is not determinative of "retail value" may be correct, but only if there is other evidence of a higher "value." ... Otherwise, a black market for illegitimate goods undoubtedly may provide evidence of a "market value." .... It remains undisputed by the parties that whatever value is used, it must be a value applicable at the time the violations occurred and the transactions in question took place-in this case, June 2003 and January 2004. Accordingly, retail value, as used in § 2319(b)(1), refers to prices assigned to commodities and goods for sale at the retail level at the time of sales at issue, representing face value or par value, or prices of commodities and goods determined by actual transactions between willing buyers and willing sellers at the retail level- whichever is the greatest. In this case, Armstead sold the illicit DVDs to an undercover agent when the movies recorded on them had only been distributed for theatrical release (and perhaps for hotel and airline release) but certainly before they had been released on DVDs to the public. Thus, at the time of the illicit transactions, there was no legitimate retail market for the sale of DVDs except as evidenced by the occasional and sporadic illicit transactions of the kind represented in this case. As noted, prices paid in those illicit transactions might be evidence of a market value. But in this case, the "thieves' market" prices were not the only evidence. The government presented evidence of other kinds of value that related to retail value during the theatrical release stage of the movies when the illegal transactions occurred.

...

Based on our reading of the statute, the government's evidence of the prerelease values of copies of movies, the actual selling prices of legitimate copies of movies in the postrelease period, as well as the suggested retail prices (which were erroneously excluded by the trial court), were all appropriate evidence for a jury to consider in determining total retail value of the illicit transactions. Likewise, the evidence relied on by Armstead of the actual transaction prices in the wholesale "thieves' market" was appropriate evidence for a jury to consider.

...
The fact that Armstead actually sold his DVDs in bulk for $5 per copy was also evidence that the jury could have considered. But this evidence would not be evidence of the greatest value; rather, it provided evidence of the lowest value that could be assigned to the DVDs. Indeed, the $5-per-copy price was a wholesale price, suggesting a "retail" value somewhat greater than $5 per copy.

BTW, Armstead was ultimately sentenced to six months' home detention, and paid $1,500 in fines.

12 comments:

Anonymous said...

You are dealing here with a criminal offence. From my dim memory of criminal law (a compulsory subject that had to be endured in law school), the courts interpreted criminal law strictly, the thieves’ market was the only market at that time for the DVDs so the court of appeal’s decision has a certain logic to it. If the legislature wished to exclude the bootleg value then it should have said so.

Also, if you adopt the stance that the market should be what a willing buyer of a legitimate product is prepared to buy it for, what is that amount? The same DVD varies greatly in price depending where and when it is sold. Most DVDs are not sold for the full retail price. They are purchased at a discounted rate, they may never even be sold or they may be abandoned by the copyright owner (for the last point, see your post on Thursday, February 07, 2008 on The Crime of Selling Abandoned Copies).

William Patry said...

Thanks Anon. One approach to the fact that one can buy the same DVD (or book, or CD, or software) at different prices is just to go with list price, and that could hav been done here too even though they movies hadn't been released yet: after all there was nothing special about the pricing of these movies from movies that had been released, and in line with construing statutes strictly that value would have been less than the value of a copy of a not-yet released to DVD movie

Anonymous said...

There is a potential benefit to this approach. Sometimes bootlegged material is not of the same quality as that produced for retail sale. Let's say the movies were recorded by someone hiding a camcorder under his jacket in a movie theater. Or let's say it's a piece of software that's been cracked, but doesn't have the full functionality of the legitimate retail version. In these cases, the value of the good is clearly objectively lower than the retail price.

William Patry said...

Hi Anon, in this case the copies were camcorded and of lower quality. I fully recognize there are a number of ways to look at valuation in this instance and don't claim the government's approach is a plain meaning one, but on balance I think it is the closest to what Congress intended, and it is the simplest to apply too, and recognizing there are problems with the government's approach too.

Anonymous said...

For what it's worth, although I didn't see the briefs before the 4th Cir online, there is a section of DOJ's manual on prosecuting intellectual property crime that discusses this issue, and which presumably informed the government's arguments in Armstead:

http://www.cybercrime.gov/ipmanual/02ipma.html#II.B.3.b.ii.

William Patry said...

Excellent research Anon. The 4th circuit quoted the section of the legislative history that is in the manual, which as you pointed out presumably was quoted in the government's brief. There are two points here, the first is the manual refers to the value "in the market in which it is sold." So the question is what is the market: the market for thieves or traditional legal markets? The second point the manual acknoweldges is that the sentencing commission uses a different appraoch from the statute (no surprise there), and this results in a weird task: the actual time served or fines paid is determined not by the statute but what the sentencing commission dtermines, yet, the courts are construing the statute.

Anonymous said...

Yes, valuing the US sentencing guidelines do call for a different measure to be used in calculating a sentence than the amount to be used to determine whether the threshold is met under the statute. But that's an issue that goes beyond just copyright cases; the guidelines do that in other situations as well, I believe, and for sentencing purposes, courts can also consider other "relevant conduct" (and not just the specific act for which the defendant was convicted).

It's worth noting that the task gets even weirder, as you put it: there's a third measure of value at work as well, for purposes of paying restitution. (Your post refers to $1500 in "fines," although actually, Armstead was ordered to pay this in restitution to the copyright owners. Presumably, this was framed by the district court as disgorging of profits or gross revenue from sales of the pirated DVDs.)

William Patry said...

Thanks, Anon for you extremely helpful comments and research

billposer said...

It seems to me that the court's decision, though against the interests of the instant defendant, may actually benefit other defendants. It happens that in this case the sale was at a discount over the regular price, but it is quite frequently the case that illegal sales are at enhanced prices, if there is strong demand and the goods are hard to get. These days in the case of copyright that will be rare because the cost of reproduction is so low, but it may still be the case with, e.g., pharmaceuticals.

This makes me wonder whether the court's ruling is consistent with the valuation used in drug cases where the drug has both a legal market and an illegal market (e.g. codeine or various amphetamines and barbiturates). Is an illegal sale of such drugs valued at the street price or the legal price?

Anonymous said...

This case is such a waste of time and resources of the FBI and the judicial system.

My two cents:

I think the "retail value" of the copies could fairly have been and should be the value of the movie ticket the bootlegger purchased multiplied by the number of copies, since the DVDs were camcorder reproductions of the movies as presented to the bootlegger in that theater.

That would not, of course, have supported a felony conviction in this case, which equates bootleg DVD distribution with:

aggravated assault and/or battery, arson, burglary, illegal drug abuse/sales, embezzlement, grand theft, treason, espionage, racketeering, robbery, murder, rape, kidnapping and fraud.

Thank you FBI, for protecting us from people helpig people avoid the movite theater! I am safe.

Also, the court failed to considered the following "post resale value." The DVDs at issue and current Amazon.com prices - Used/New
2 Fast 2 Furious: $1.24/$2.48
Bad Santa: $0.94/$4.00
Italian Job: $2.48/$5.40
Finding Nemo: $9.95/$11.83
Matrix Reloaded: $0.20/$1.19
Wrong Turn: $1.47/$4.98

Again, thank you FBI.

The one thing I do agree with:
"[I]t could have recognized, for example, that at this prerelease stage, advance knowledge of the plot of a movie, the action, and how the movie ends might be far more significant to retail value than reproduction quality."

So true. I mean, knowing whether they ever "found Nemo." Priceless.

Thanks again FBI, for protecting us from would-be plot spoilers who don't even bother to attend the movie in the theater.

William Patry said...

Dear Anon: just wait and see if the Pro-IP bill passes; if that happens, we can look forward not only to more of this, but also forfeitures of houses and cars; only the death penalty remains.

Andrew Oh-Willeke said...

The fact that it was a government agent that offerred the $1500 does seem relevant.

Amount of profits (in this case $1500 less the cost of 300 CDs) would seem a more robust measure for some future copyright statute, because, while there was a somewhat relevant retail market in this case, the case aptly makes clear that not all IP has a meaningful retail market, legitimate or otherwise, and that the definitional issues are non-trivial.