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Burden of Proof in Profits Claims

By William Patry

The Fourth Circuit has issued an interesting opinion on the burden shifting involved in claims to recover defendant?s profits attributable to the infringement, but unfortunately, it marked the opinion as nonprecedentail, indicating the lower courts continue to thumb their noses at Congress and the public, and the spirit of new FRAP 32.1, which requires courts of appeals to permit citation to unpublished opinions, but which does not restrict courts have stating they don't have precedential value: of what use is it to cite to something that has no precedential value? Not much.

It is one thing when the opinion is a one-page toss-off prepared by circuit staff counsel; it is quite another when, as here, the opinion is an extended one that contains significant statements of law about an important issue. The only solution to such intransigence seems to be legislation barring the courts from marking any opinion unpublished: all opinion should have the same potential value, with the only determinant being the quality of their reasoning.

The case is Phoenix Renovation Corporation v. Rodriguez, 2007 WL 4443328 (4th Cir. Dec. 17, 2007)(available here). The district court had granted plaintiff?s motion for summary judgment on liability, and denied defendant?s motion for partial summary judgment on the issue of damages for the copyright infringement, reserving the question for trial. After a three-day bench trial, the trial court found defendants were not liable for any damages. Defendant did not appeal the liability finding, but plaintiff appealed the lack of an award for defendant?s profits.

Section 504(b) reads in relevant part: ?In establishing the infringer's profits, the copyright owner is required to present proof only of the infringer's gross revenue, and the infringer is required to prove his or her deductible expenses and the elements of profit attributable to factors other than the copyrighted work." In Bonner v. Dawson, 404 F.3d 290, 294 (4th Cir. 2005), the Fourth Circuit had held that §504(b) ?creates an initial presumption that the infringer's profits attributable to the infringement are equal to its gross revenue,? and in Bouchat v. Baltimore Ravens Football Club, Inc., 346 F.3d 514, 520 (4th Cir.2003), the court of appeals had held that once the copyright holder establishes the infringer's gross revenue, "the burden shifts to the infringer to prove either that part or all of those revenues are 'deductible expenses' ( i.e., are not profits), or that they are attributable to factors other than the copyrighted work."

The Phoenix court summarized the issue as follows:

In Bouchat, we established that because the phrase "gross revenue" in § 504(b) refers only to revenue reasonably related to the infringement, "a copyright holder must show more than the infringer's total gross revenue from all of its revenue streams" in order to meet its initial burden under the statute. Bonner, 404 F.3d at 294. Accordingly, before the burden-shifting provision of § 504(b) is triggered, the copyright owner must "demonstrat [e] some causal link between the infringement and the particular profit stream." Id.

As applied to the case at bar, the court wrote:

Here, in denying Appellees' Partial Motion for Summary Judgment as to damages for the copyright infringement, the district court found that Phoenix had met its initial burden of proof. First, the district court noted that Phoenix did not indiscriminately seek the totality of Appellees' profits without regard to the source, but rather "anticipate[d] presenting evidence at trial that [Appellees'] use of Phoenix's Interior Repipe Agreement enabled [them] to enter into 626 transactions in which they received approximately $2.6 million in revenue." Next, the district court identified three factors demonstrating a causal connection between the use of the Infringing Contract and the claimed revenue ?. Finally, the district court stated that Phoenix had provided non-speculative evidence of a causal connection and determined that "[b]ecause the claimed revenue ha [d] a reasonable relation to the infringement, ... summary judgment for [Appellees] would be inappropriate."

So what was the rub? The rub came in a different approach taken by the district court at trial. As the 4th Circuit put the matter:

Following the bench trial, however, the district court changed course, finding Appellees not liable for damages. The court found that Phoenix failed to provide evidence supporting each of its three purported causal links. With regard to Phoenix's theory that the contract assisted Atlantic in marketing itself to customers, the district court concluded that Appellees had presented credible evidence establishing that customers hired Atlantic for reasons such as its experience and price, not the appearance of its contract, while "Phoenix ha[d] not presented any evidence that supports this particular causation theory." It therefore deemed the "purported causal link ... mere speculation." The district court further concluded that although use of the Infringing Contract allowed Atlantic to comply with Virginia's requirement that residential contractors make use of written contracts for a time without incurring the expense necessary to do so, any cost avoidance was temporary and did not permanently contribute to Atlantic's revenues because Atlantic later paid an attorney to draft a new contract. Finally, the district court found that none of Atlantic's revenue was attributable to its use of the Infringing Contract in collecting balances owed because Atlantic only collected more money than it cost to enforce the terms of the contract on one occasion, and the proceeds from that collection effort were more than offset by the $7,000 Atlantic spent to collect $3,618 owed on another occasion. Moreover, Atlantic had proven unsuccessful in other collection attempts. The district court therefore concluded that "Phoenix ha[d] not proven the existence of a causal link between [Appellee's] infringement of the Re-Pipe Agreement and their gross revenue from polybutylene replacement jobs where the Infringing Contract was used." Accordingly, it determined that "the burden-shifting provisions of § 504(b) [were] inapplicable to this case" and Phoenix was not entitled to damages.

Plaintiff claimed foul:

Phoenix argues that the district court's about face improperly denied it the benefit of § 504(b)'s burden shifting provision, depriving it of damages to which it is entitled. Phoenix claims to have met its minimal initial burden of demonstrating some causal link between the infringement and the revenue stream by showing that (1) customers' obligation to pay Atlantic arose out of the Infringing Contract, and (2) Atlantic benefitted from the use of the contract, which allowed it to appear more professional, conduct its business in accordance with Virginia law, and collect payment from reluctant customers.

Defendant not surprisingly disagreed:

Appellees counter that the district court correctly applied our holding in Bouchat that a defendant should prevail if either (1) there exists no conceivable casual connection between the infringement and a particular revenue stream, or (2) despite the existence of a conceivable connection, the copyright holder offers only speculation as to the existence of a causal link between the infringement and the claimed revenues. Bouchat, 346 F.3d at 522-23.

The court of appeals agreed with Plaintiff:

As an initial matter, we agree with Phoenix that the district court erred in failing to shift the burden of proof to Appellees pursuant to § 504(b). Although Bouchat held that copyright plaintiffs may not meet their initial burden under the statute simply by submitting evidence of an infringer's gross profits from all of its revenue streams, in requiring proof of a causal link between the infringement and a particular profit stream or streams, we did not purport to saddle plaintiffs with an onerous evidentiary burden.

The court then entered into a sustained review of Bouchat and Bonner:

Bouchat involved a suit for "infringer's profits" by the author of an original drawing that became the basis for the Baltimore Ravens football team's logo. The Ravens obtained revenue from a variety of sources, including a subset of merchandise sales, "minimum guarantee" shortfalls and "free merchandise" requirements established by the Ravens's licensing agent (National Football League Properties, Inc.), that could not fluctuate in response to consumer behavior. We held that Bouchat had not met his initial burden of proof under § 504(b) only with regard to those sources because Bouchat could not establish a conceivable connection between the revenue from the "minimum guarantee" shortfalls and "free merchandise" requirement and the copyright infringement. Bouchat, 346 F.3d at 524.

Our subsequent decision in Bonner clarified the extent of the causal connection required under Bouchat. There, we distinguished Bouchat on the ground that Bonner was not seeking all gross revenues from a defendant with multiple streams of income, but rather only the revenue derived from the leasing arrangements of an infringing building. We concluded that because "[t]he building generating the funds was designed based upon Bonner's copyright ," Bonner had satisfied Bouchat's requirement of a causal connection between the infringement and the revenue stream. Bonner, 404 F.3d at 294. We reversed the district court's conclusion to the contrary, holding that the district court had "misinterpreted the level of connection between infringement and profits that is required under Bouchat " when it determined that Bonner had not met his initial burden because it was not clear that the building's design formed the basis of the profits from the lease. Id.; see also Konor Enter. Inc. v. Eagle Publ'ns Inc., 878 F.2d 138, 140 (4th Cir.1989) (holding that where a defendant's only product was a military telephone directory that infringed on a plaintiff's copyright, the burden of proof shifted to the defendant pursuant to § 504(b), because "[i]t [wa]s plausible, absent proof to the contrary, that all profits were a direct result of [the] infringement of [the] copyright").

The court then applied its approach to the issue to the district court?s ruling:

In this case, the district court's summary judgment order correctly followed Bouchat and Bonner to conclude that Phoenix had met its initial burden under § 504(b) of demonstrating a conceivable connection between the copyright infringement and the revenue obtained from jobs on which Appellees used the Infringing Contract. Such a connection exists because customers' obligation to pay arose out of their contract with Atlantic and because it is conceivable that the Infringing Contract generated revenue by: (1) enabling Atlantic to attract customers by looking like a less expensive version of Phoenix; (2) comply with state law governing its business; and (3) collect past due balances. The district court erred in concluding to the contrary in the opinion and order entering the final judgment.

Nevertheless, we agree with Appellees that this flaw in the district court's analysis did not affect the outcome of the case. A review of the record compels the conclusion that the district court's finding that Phoenix was not entitled to damages ultimately was based on its finding that the evidence was entirely one-sided, not on its allocation of the burden of proof. The court credited Appellees' evidence that none of Atlantic's revenue was attributable to the Infringing Contract and found that Phoenix had offered only speculation to the contrary. Thus, the district court's finding that Phoenix failed to supply any non-speculative evidence to counter Appellees' showing that Atlantic's revenue stemmed from sources other than the copyright infringement, if correct, compels the conclusion that Phoenix was not entitled to damages.

As long as all this is, it represents merely a snapshot of a far longer discussion of prior case law and statutory interpretation, all of which brings me repeat the point raised at the beginning of the post: why an unpublished opinion? The court obviously took a great deal of care with the case and its opinion; the opinion contains important glosses on the statute and prior case law. It should be published and able to be relied on by litigants in line with the purposes of new FRAP 32.1

Full post as published by The Patry Copyright Blog on December 27, 2007 (boomark / email).