Intellectual Property Law

The Crime of Selling Abandoned CopiesThe Patry Copyright Blog

If you came across a trash can filled with lawfully made compact discs and DVDs that the copyright owner had authorized to be put in that trash can and then thrown away because it didn?t want to pay the postage to have them returned, do you think you could be criminally prosecuted for selling those copies, and would you think that the copyright owners would be entitled to restitution under the Mandatory Victims Restitution Act? If you answered no to these questions, you would be wrong according to the Eighth Circuit.

Here?s the opinion, United States v. Chalupnik, 2008 WL 268997 (8th Cir. Feb. 1, 2008), court?s docket no. 07-1355, available on the court of appeals? website, here (search for Chalupnik).

The facts are pretty much these (at least as recited in the opinion): defendant was an employee for the U.S. Postal Service. BMG Columbia House is a mail order operation selling CDs and DVDs by mail. Many of these discs are undeliverable. Rather than pay the postage to have them returned to it, BMG Columbia House instructed the Postal Service to throw them away. The Postal Service did throw them away. Defendant then retrieved them from the trash and sold them to area stores, netting $78,818. A surveillance camera showed defendant retrieving the items and he was arrested; he was originally charged with felony mail theft, but then pleaded guilty to misdemeanor copyright infringement. The trial court sentenced defendant to two years probation and ordered him to pay $78,818 to BMG in restitution. Chalupnik appealed .

The district court?s theory was ?I do believe that there is in fact a lost opportunity to ... BMG, that the people that bought those CD's ... would likely have bought new CD's, and that that represents a real and substantial loss to ... BMG in the amount of $78,818.? The government argued that ?BMG is a victim because it owns the discs, sells them with permission of the copyright owners, and controls the disposition of undeliverable discs; that each time Chalupnik sold an undeliverable disc, the artist lost a royalty and BMG lost a potential sale; and that the amount of those losses is conservatively estimated by Chalupnik's gross revenues, $78,818.

The court of appeals agreed that BMG Columbia House was a victim within the meaning of the MVRA, but held that no loss had been established:

[I]t is clear that the government proved no actual loss to BMG. The PSR recommended, and the district court agreed, that BMG suffered a ?lost opportunity? when Chalupnik stole BMG's undeliverable discs and sold them to competing retail sellers. The ? lost opportunity rationale is valid in the sense that all authorized retailers of the copyrighted discs-Wal-Mart, Best Buy, iTunes, BMG, and countless others-as well as the copyright owners, suffered collective financial injury when infringer Chalupnik sold purloined discs at cut-rate prices to used record stores. But it would be a windfall to award BMG this entire collective ?injury to the market.? And the large number of victims and the difficulty of determining each victim's actual loss make the collective injury inappropriate for MVRA restitution.

The government argues that the price at which Chalupnik sold the stolen discs is a reasonable, indeed conservative estimate of BMG's lost sales. One problem with this argument is that, for goods held by a merchant for sale, lost profits rather than lost sales revenues are the proper measure of ?actual loss.? A more fundamental problem is that proof of lost sales, like proof of lost profits, may not be ?based entirely upon speculation.? ? Here, the letter from BMG's senior counsel asserted that Chalupnik sold discs to used record stores whose customers ?theoretically could have purchased them [from BMG], resulting in lost sales to BMG.? But BMG's practice of destroying rather than restocking undeliverable discs meant that the discs Chalupnik stole would not have been sold by BMG, and there is no evidence that Chalupnik's sales diverted specific business from BMG. From this standpoint, BMG's position resembles that of the purported MVRA victims whose restitution awards were reversed because the government failed to prove actual loss through lost sales in Hudson, 483 F.3d at 710-11, where counterfeit Microsoft software was turned over to the government by the infringing defendant's customer before any payment to the infringer, and in United States v. Adams, 19 Fed.Appx. 33, 35 (4th Cir.2001) (unpublished), where pirated videocassettes were confiscated before the infringer could sell them.

Finally, the government argues that BMG should receive restitution on behalf of the unidentified copyright owners who would have been paid royalties had BMG sold the purloined discs. This argument is without merit because restitution to each victim is limited to ?the full amount of each victim's losses.? 18 U.S.C. § 3664(f)(1)(A). The letter from BMG's senior counsel admitted that Chalupnik's criminal conduct ?resulted in no royalty payments being made [by BMG] to the artists, record labels, music publishers, and movie studios,? so there was no proof of actual loss to BMG arising out of its unproven relationships with copyright owners.

Among the many things I find amazing in this whole debacle is the assumption that there could be copyright infringement. The copies had been thrown away at the direction of the BMG Columbia House (which may or may not have also been the copyright owner). I would think that means any ownership in the copies had been abandoned and that therefore anyone was free to do with them what they wanted. If instead of the postal worker having taken them out of the trash, what if the trash dump owner had discovered them and sold them?

Full post as published by IP Law Daily on February 07, 2008 (boomark / email).