Tuesday, February 13, 2007

What Did the 4th Circuit Eat for Breakfast?

Jerome Frank (Second Circuit 1941-1957), an echt Legal Realist (see Brian Leiter, "Legal Realism and Positivism Reconsidered," 111 Ethics 278 (2001)), is reputed to have remarked that a court's decision might turn on what the judge had for breakfast. This led litigants to have a generous morning repast waiting for him at the Plaza Hotel. Eventually, Judge Frank ballooned to 450 pounds and burst like the Stay-Puft Marshmellow Man in the movie Ghostbusters. Judge Alex Kozinski of the Ninth Circuit, while a bon vivant, is nevertheless more careful about breakfast, as he detailed in his March 19,1993 speeech, "What I Ate for Breakfast and other Mysteries of Judicial Decision Making," available here.

All this is by way of background to wondering what a panel of the 4th Circuit had for breakfast when it decided, yesterday, Christopher Phelps and Associates, LLC v. Galloway; whatever it is was, I earnestly pray it is never served again. (HT to LKB for letting me know about the opinion).

The case, while possessed of some factual interest, is, in its legal essence, simple: an individual (Galloway) had an unauthorized copy of architectural plans made and then built a house based on them. The building design firm plaintiff sued for infringement. There was a jury trial; the jury awarded plaintiff its lost fees for use of the plans ($20,0000). The trial court denied plaintiff's motion for a new trial on damages and refused to order an injunction barring the future lease or sale of the house or mandating destruction or return of the infringing plans. Since there was no registration for the architectural plans, the lost fee award can be justified only as a value of use award for infringement of an architectural work.

But, alas, the Fourth Circuit issued a 22-page opinion. The opinion is a maddening mixture of getting some things right and some things very very wrong. The court's holding on how the first sale doctrine works applies across all subject matter, and bears no resemblance to how copyright law has worked since its inception centuries ago. Let's work through the issues methodically, though, since there is error built on error, which must be peeled back.

The first error, and it is a common one, is in fixing the proper measure of damages for infringement of architectural plans. Architectural plans have been protected since the 1909 Act; architectural works only since 1990. Because of their historically different roots, great care should be taken to ensure that the proper remedies are awarded for the particular type of work sued upon. This is more of a problem than one would think, given the failure of many plaintiffs to obtain a registration for both types of work, even if that party is the creator and owner of both. Copyright Office regulations are crystal clear that two separate registrations are required, one for the architectural plans and one for the architectural work. If plaintiff has failed to obtain both registrations, the court lacks subject matter jurisdiction of the work for which registration has not been obtained and obviously has no power to award any relief for such a work.

In the typical case, plaintiffs obtain a registration for architectural plans, but not for the architectural work, and yet attempt to claim remedies for infringement of the architectural work, that is, they seek defendant’s profits from sale of infringing houses. Such claims must be rejected. Assuming there are proper registrations for both types of works, what are the available monetary remedies? For architectural plans, a common measure is the fee the architect or building designer charges for use of his or her plans. One may never obtain damages for infringement of architectural plans measured by profits made from sale of infringing homes; such damages are proper only for infringement of architectural works, although courts with a disturbing regularity overlook this critical distinction. For infringement of architectural works, a common remedy is either the profit plaintiff would have made but for the infringement from sale of the house, or the profits defendant made from the same sale. In the case of the profits plaintiff would have made, one might ask why isn't this the fee the architect would have charged? This would, of course, justify the jury's award under a different theory.

In the Christopher Phelps case, plaintiff only sued on (I believe) infringement of the architectural work. The only remedies the jury could award, therefore, was damages from violation of the architectural work copyright. In an ordinary case, looking at defendant's profits, this would be calculated by the profit the builder made from selling the house(s), reduced by expenses and things like the value of the land, the location, and many other features, like the comps in the neighborhood. For plaintiff's losses, it seems a stretch to claim plaintiff suffered losses calculated by the value of the house: if authorized plaintiff's don't charge that way. Rather they charge either a flat fee for use of the plans or a percentage of the construction costs (in the case of skyscrapers, this is no small amount). In Phelps, though, defendant didn't sell the house: it was his dream house, which he built and still lives in. I don't disagree that in such circumstances, it might be possible to award the fair market value of the infringing house, apportioned by non-infringing elements of the design, and deducting for other non-infringing things like the construction costs, the value of the land, the value of the location etc. This may be a speculative task, although not impossible. More straightforward, however, is the fee the architect would have charged if authorized, in Phelps, $20,000.

On to injunctions. The court of appeals, citing eBay, rejected the argument (if it was made), that plaintiff was entitled to a permanent injunction since it prevailed on the merits. Since it was very unlikely defendant (an individual building his "dream" house) would do anything else with the plans, an injunction was unnecessary, although plaintiff was entitled to get the infringing copy back (on this point, the court of appeal remanded and hopefully the district court will order return of the copy, although for reasons given at the end of this posting, I don't see how it can). Plaintiff, though, asked for an injunction against defendant leasing or selling the house. The argument was based on the radical view that there can be a distribution of a house within the meaning of the Copyright Act merely by selling it. I disagree: there can only be a distribution by physical transfer of the copy, not by transfer of the title to the copy. In the case of an architectural work, that means selling it and moving it to a different location.

The Section 106(3) right is: "to distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending." There is no definition of "distribution" but one thing is clear: the operative terms are not, as plaintiff asserts, "by rental, lease or lending," but instead to "distribute copies." Whatever distribute means, it means distributing a copy, not title to the copy, and that's all that happened in Christopher Phelps.

Now on to the real La-La-Land. In rejecting plaintiff's argument, the court of appeals didn't focus on the statutory language, and instead found for defendant on a ground not briefed or argued (I am told). That ground was the first sale doctrine, in Section 109. At this point, I expect readers to say, "huh?" What does first sale have to do with it; the first doctrine states, in Section 109 that it is limited to lawfully made copies. An infringing copy is by definition, not lawfully made. Yes, but the 4th Circuit panel clearly had something very very bad for breakfast. The panel holding is that when the jury awarded plaintiff the $20,000 for the use fee for the plans, plaintiff was made whole-- and this is the kicker -- the infringing copy magically became a lawfully made copy.

In reaching this result, the court cited to the 1976 House committee report; that report, however, refers to copies made under a compulsory license; that is, by a congressional act, not a judicial act. The court also cited to the Second Circuit's decision in Platt and Munk Co. v. Republic Graphics, Inc., 315 F.2d 847, 854 (2d Cir. 1963). Platt was allegedly construing the the term "vend" under that Act, and in doing so, inquired into whether the copyright owner had received its "reward" for transfer of the copies. This passage was external to the statutory provision at issue, and indeed to the facts of the case, which involved a dispute between the copyright owner of games and the manufacturer thereof over quality deficiencies. When the copyright owner refused to pay for defective goods, the manufacturer sold them. Those facts have nothing to do with a first sale since the copyright owner never took possession of the copies and the initial distribution (by the manufacturer) was, in any event, unauthorized by the copyright owner. Platt and Munk was bad law under the 1909 Act and has not been followed in the Second Circuit under the 1976 Act.

If I read the 4th Circuit opinion correctly, defendant now owns an authorized copy of the plans and can sell them; why then remand to the district court for a possible return or destruction order under Section 503(b)? That section only covers infringing copies, and of course, that paradox points out another fatal flaw in the court's first sale holding: all of the post-judgment remedies are now impossible, including an injunction. But beyond this case, are we now in a situation in the 4th Circuit where copyright owners have to elect between damages and all other remedies, on pain of infringing copies being deemed lawfully made if monetary relief is granted?


Anonymous said...

[Disclaimer: I represent the Appellant in this case.]

A point of point of factual clarification: The copyright registration in this case **was** for an "architectural work," not for technical drawings.

With respect to Prof. Patry's argument that "distribution" requires physical movement of the copy (an argument not made by or in this case, but that he and I have been debating offline for many weeks), I disagree. There's no authority (other than the good Prof's sayso) that holds this. Indeed, there are legions of AWCPA cases that have held that the sale of an infringing house *is* an act of infringement, inherent lack of movement of the copy notwithstanding.

Similarly, where an infringing house has not yet been sold, there are many cases (e.g., Van Brouck & Associates v. Darmik, 329 F.Supp.2d 924 (E.D. Mi. 2004)) that hold that the fair market value of the infringing house is sufficient proof of the infringer's gross receipts arising from the infringing construction. (Again, this argument was not presented on appeal, nor did it form any basis for the Court's decision -- but Bill and I have been debating it offline for a while.)

As to the particular merits of the Fourth Circuit's decision, since this case remains pending it would not be appropriate for me to make extensive public comments at this time. Suffice it to say, however, that the Court's discovery that a final judgment somehow transmutes existant infringing copies into "lawfully made" ones is unprecedented, and if followed will have severe consequences for all copyright owners.

LKB in Houston

William Patry said...

I have amended the original posting to take into account the fact that the registration was for an architectural work. On the distribution point, my dear friend LKB still doesn't address the authority I do cite, which is a plain reading of the statute. He is talking about transferring title to a copy, not distributing that copy, and i think the two are quite different.

Anonymous said...

[Same disclaimer as before . . .]

You say tomato, I say tomahto . . .

The language of 106(3) speaks of distribution of copies "by sale or other transfer of ownership." To me, the plain reading of this statute is that sales of copies = distribution.

Consider also the following hypothetical (BTW, I ran this by Bill a while back, for those of you just tuning in): Pirate acquires a shipping container full of bootleg DVD's, which is sent to a freight terminal and stored there. Pirate then sells them to Wholesaler, and in exchange for payment signs over the bill of lading / warehouse receipt / other instrument of title. Wholesaler then sells the DVD's at a markup to Retailer in the same fashion: the buyer takes title based on the transfer of an instrument, rather than the delivery / movement of the goods. Retailer, as the owner of the goods, then has them shipped from the freight yard to his establishment.

Under what I contend is the proper analysis of 106(3), each sale of the illegal DVD's would be an act of infringement, and so the copyright owner could sue Pirate and Wholesaler (and of course Retailer, if he thereafter sold the goods). Under Prof. Patry's analysis -- which, again, to the best of my research has never been even suggested by any court -- Wholesaler is completely off the hook, insofar as he only "distributed" title to the goods, which never moved while he owned them. Pirate might also have a good defense for the same reason. That hardly seems like the correct result.

Or what about this: Retailer, having read this blog and being convinced of Prof. Patry's position, structures his on-line sales of bootlegged DVD's so that they are FOB his warehouse (i.e., legal title passes to the buyer **before** they are shipped). Why wouldn't such a tactic immunize his sales of bootleg DVD's, insofar as the infringing copy does not move until *after* the sale?

Again, while I have the highest respect for Prof. Patry, and I share much of his dismay as to the recent CTA4 opinion, I do not think that his "distribution" argument is supported by the law.

LKB in Houston

William Patry said...

With the greatest respect for LBK, who is in the trenches on these issues, although presumably not in the shipping containers, saying "sales of copies = distribution" reverses the order of the statute, and thereby the the main point, which is what is a distribution of a copy?

On the pirate hypo, to be consistent, I would agree whosesaler is off the hook under the first set of facts. It may be wholesaler is on the hook under the definition of "trafficking" though in the criminal statutes.

On the second FOB hypo, the retailer will at some point distribute the physical copy and at that point is liable.

Anonymous said...

[same disclaimer as before]

On what the "plain reading" of 106(3) is, I guess Prof. Patry and I will just have to disagree.

As to my retailer hypo, methinks he misses my point. Under his logic, if there is only a sale of title to the infringing copy, but no accompanying movement of the copy **by the seller**, then there's no distribution and therefore no infringement. Why couldn't a clever retailer just insulate himself from liability by removing himself from any "movement" of the infringing copy? Example: terms of sale of infringing copies are FOB retailer's warehouse and buyer must arrange for a third party (which just happens to be managing retailer's warehouse, but is not in the chain of title) to ship them to buyer.

And yet another hypo: rentals. Assume Pirate acquires (but did not himself make) illegal copies of very expensive reference books (e.g., Patry on Copyrights [!]). Rather than sell them, however, he rents them to researchers by the hour (i.e., the books do not leave his establishment). Per the conventional interpretation of 106(3), Pirate commits infringement (distribution by rental). Per the Prof, however, this little scheme is perfectly legal because there is no "distribution."

The good Prof.'s argument leads to these and many other absurd results that are simply at odds with how 106(3) has been consistently interpreted for decades.

Finally, from my standpoint as a practitioner, this argument must face two realities: (1) no court has ever even suggested it, and (2) myriad reported cases (especially AWCPA cases) go the other way. Indeed, in circuits (such as CTA4) that have affirmed AWCPA liability for sales or rentals of infringing buildings, the law is probably set in stone against the Prof's argument until Congress, the Supremes, or an en banc panel of those circuits say differently.

LKB in Houston

William Patry said...

I think LKB's hypos are interesting but nevertheless flawed efforts to create absurd results; those results are then used as support against the plain language of the statute. As to the first hypo, if you direct someone else to commit an infringing act and benefit from it, there will be vicarious liability. As for the second, there is a distribution because the rental of an unlawful copy isn't covered by the first sale doctrine. In the case of architectural works, the issue should have been addressed by making the distribution right inapplicable in Section 106.

Anonymous said...

[same disclaimer as before . . ]

Re: rental hypo -- where's the infringement? If the book doesn't physically move, under your analysis there is no "distribution" and thus there cannot be a 106(3) violation as a matter of law. And no other exclusive right is implicated by this situation.

We can debate these issues endlessly (and indeed we seem to have done so), so I guess we'll just have to respectfully disagree. However, Prof. Patry's last comment is extremely interesting:

"In the case of architectural works, the issue should have been addressed by making the distribution right inapplicable in Section 106"

Ah, now perhaps we come to the heart of the matter.

Certainly, Congress *could* have exempted completed structures from the distribution right when it passed the AWCPA. (Whether they *should* have done so is a policy matter I'll leave for the politicians, or at least for another discussion.) The point is that Congress did NOT create such an exception (the only AWCPA exceptions are set forth in section 120), and courts should not create exceptions whether Congress refused to do so. Expressio unius est exclusio alterius, etc.

If the AWCPA is flawed, then it should be fixed legislatively -- not by torturing the statute in a way no court has ever recognized, and that if followed would lead to absurd results.

Respectfully -- LKB in Houston

William Patry said...

Re your rental example, I had assumed incorrectly you meant the evil pirate gave the researchers a physical copy. But if the researchers just came and read the copies at the pirate's lair, then yes there is no distribution, and also no infringement: there is no exclusive right to read or to authorize reading in the Copyright Act. In the bootleg statute, for example, it is illegal to sell bootlegs (as a distribution), but it is not illegal for me to buy them. Its a matter of how the statute in question is drafted. I suggested that Section 106 should have been drafted differently not out a belief it is ambiguous, but merely to foreclose further court decisions that defy what I regard as contrary to a plain meaning, common sense interpretation.

Respectfully in Stamford

Anonymous said...

[same disclaimers as above . . .]

Re: rental. You are of course correct that it is not an act of infringement to read (or to buy) an infringing work. However, to **rent** an infringing work to another is indisputably an act of infringement. See 106(3). That's the activity that I am focusing on: **Pirate's** liability for renting to a third party, not the customer's liability in that transaction.

So, given that understanding, would you still say that one who rents illegal copies to others commits no act of infringement as long as the copies don't move?

LKB in Houston

Anonymous said...

Can I point out the entirely inefficient real property result of understanding sale of an infringing architectural work as a distribution?

It's not clear to me that anyone contemplating protecting architectural works had preventing the sale of real property for the duration of the copyright to be correct.

William Patry said...

Well put indeed Anonymous. We certainly never contemplated such a result which I agree would be extreme, but which is indeed flows from what plaintiff was asking for.

Anonymous said...

Dang, I should have logged in. I could have gotten praise from the good professor.

Such is life.

William Patry said...

Praise be to Your Friendly Transactional Lawyer

Anonymous said...

Prof. Patry,

I would greatly appreciate feedback you have and/or a case you can direct me to regarding the scope of protection for architectural plans -- specifically three-dimentional structures in landscape designs. For example, a landscape architect's design of an outdoor firepit has two basic elements: the shape of the structure and the design of the surfacing materials. Is the design of the shape of the structure itself protected? Or is the shape of the structure utilitarian, leaving the scope of protection to the design of the structure's surface materials (e.g., tile design)? Thanks in advance for your thoughts.