BY:Michael I. Rudell
(Originally published in the Entertainment Law column in the New York Law Journal, August 27, 1999.)
A federal court has made a determination as to the computation of damages arising from the infringement by a pay cable network of the copyright in a television pilot program previously licensed to it. In so doing, it granted in part and denied in part defendants’ motion for partial summary judgment.
In 1988, Encyclopedia Brown Productions, Ltd. (“EBP”) and Home Box Office, Inc. (“HBO”) entered into an agreement under which HBO was granted an option to license an hour-long television pilot program (the “Pilot”) based upon Encyclopedia Brown, a character in a series of children’s books. The agreement provided that HBO would have the right to produce additional television programs.
After HBO exercised its option to order the Pilot, EBP produced, delivered and licensed it to HBO for a fee of $300,000. EBP also produced and delivered to HBO six additional episodes for $1,620,000. EBP registered copyrights in both the Pilot and the episodes.
The agreement provided that HBO would have the right to distribute the Pilot to cable system operators during a two-year period ending March 3, 1991. Following that date, HBO exhibited the Pilot several times on May 2, 13, 22 and 26 of 1991. The last exhibition of the episodes occurred on October 22, 1991.
On August 24, 1994, the Court granted plaintiff’s motion for summary judgment that HBO had infringed the copyright in the Pilot by exhibiting it during May of 1991. Regarding exhibition of the episodes, the Court granted HBO’s motion for summary judgment, finding that plaintiffs were equitably stopped from asserting that HBO had infringed the copyright in the episodes and, in addition, that plaintiffs’ conduct had the effect of creating a nonexclusive license for HBO to exhibit the episodes.
Plaintiffs offer the deposition testimony of an expert witness to support their claim for damages in two respects. First, they were denied the reasonable license fee defendants should have paid instead of infringing the copyright in the Pilot. The expert calculates a traditional license fee of between $350,000 and $500,000 for the illegal exhibitions. He would increase the amount of this fee by at least 50% because of the supposedly unique circumstances involved in this case.
Second, they were damaged by HBO’s assertion during the course of the litigation that it was granted an exclusive 75-year license for the Pilot. The expert asserts that potential licensees of the Pilot, episodes or new programming based upon the Encyclopedia Brown character would not be willing to consummate an agreement until the assertion by HBO of such an exclusive license definitely is resolved.
Howard Deutsch, the president and controlling shareholder of EBP, offers a third theory of damages which alleges that the infringement by HBO “contaminated” potential deals between plaintiffs and third parties to license the Pilot or consummate other related transactions. In particular, he testified that deals with two cable programmers failed to occur because of the illegal exhibitions by HBO of the Pilot.
Plaintiffs had named as defendants, in addition to HBO, several cable operators. The relationship between HBO and these operators is governed by Service Network Affiliation Agreements under which HBO delivers programming to them by means of a signal transmission from a communications satellite. The operators deliver such programming to subscribers exactly as received. Decisions regarding programming are made solely by HBO and the operators do not have the right or ability under these Service Network Affiliation Agreements to review the content of the programs transmitted by HBO or make alterations of any kind.
It is undisputed that these Service Network Affiliation Agreements contain an explicit disclaimer of any principal-agent relationship between the parties. The agreements also provide for indemnification of the operators by HBO.
Under Rule 56 of the Federal Rules of Civil Procedure, defendants moved for partial summary judgment with respect to the claims by plaintiffs of damages and the allegation that the cable operator defendants constitute willful infringers. The issue before the Court is the determination of damages, if any, to plaintiffs resulting from HBO’s infringement of the Pilot copyright and the determination of the liability of the cable operator defendants, if any.
In moving for summary judgment, defendant’s assert that (i) plaintiffs’ claim for recovery of a reasonable license fee is not cognizable as a matter of law and that plaintiffs’ attempt to quantify such a rule is overly speculative; (ii) insufficient evidence exists by which a reasonable jury could find that HBO’s infringement “contaminated” potential business dealings between plaintiffs and third parties; and (iii) plaintiffs’ claim for damages stemming from HBO’s assertion of an exclusive 75-year license for the copyright in the Pilot is not causally connected to the infringement.
The opinion first cites the standards for summary judgment and notes that in adjudicating such motions its function is not to try issues of fact but, instead, to determine whether same exist. In doing so, the Court must resolve all ambiguities and draw all justifiable inferences in favor of the non-moving party.
The recovery of damages because of copyright infringement is governed by section 504(b) of the Copyright Act, which provides in part: “The copyright owner is entitled to recover the actual damages suffered by him or her as a result of the infringement, and any profits of the infringer that are attributable to the infringement and are not taken into account in computing the actual damages. In establishing the infringer’s profits, the copyright owner is required to present proof only of the infringer’s gross revenue …” Thus, under this section, a plaintiff may recover the “actual damages” it suffers and any of defendant’s non-redundant “profits” derived from the infringement. (The plaintiffs in this case have not sought to recover statutory damages as a alternative to actual damages and profits.)
In discussing defendants’ contention that plaintiffs’ claim for recovery of a reasonable license fee is not cognizable as a matter of law, the Court relies on the Business Trends Decision. There defendants had incorporated into their products a portion of industry research reports copyrighted by plaintiff, which was a direct competitor of defendants. The Second Circuit reversed the lower court’s ruling that awarded damages to plaintiff in part based on the “value of use” of its reports by defendants equal to the market price of those reports times the number of infringing reports sold, less the price at which defendants had sold them. The Second Circuit held that this award exceeded the “conventional and narrow method of calculating [both] damages and profits” under section 504(b) of the Copyright Act. Specifically, it found that the award of “value of use” damages did not qualify as “actual damages” to plaintiff under that section because the award was premised on an entirely hypothetical sale between plaintiff and defendants. It also found that the “value of use” damages, if viewed as saved acquisition costs to defendants, do not fit within the meaning of profits recoverable under the Copyright Act. It determined that, although saved costs might be considered gains in economic theory, section 504(b) has a more conventional view of profits comprising gross revenues less out-of-pocket costs.
In the instant case, the Court states that to the extent plaintiffs assert that a reasonable license fee should be awarded as “profits” gained by HBO as cost savings in not licensing the Pilot copyright during the infringing period, the Business Trends decision precludes such claim as a matter of law. Saved acquisition costs do not fall within the layman’s meaning of the word “profits” in section 504(b) irrespective of whether they are labeled “value of use,” a “reasonable license fee” or some other term.
An issue remains, however, as to whether a reasonable license fee is recoverable under the “actual damages” prong of section 504(b) as a lost sale by plaintiffs of a license to HBO for use of the Pilot during the infringing period. The Court finds that the Business Trends decision does not preclude such a claim for recovery as a matter of law.
The principal measure of “actual damages” is the extent to which the market value of the copyrighted work at the time of infringement has been injured or destroyed by the infringement. Indirect evidence may be used to fix the amount of such damages and may include proof of profits which the plaintiffs might have earned were it not for the defendants’ infringement, such as lost sales.
An analysis of a claim of lost sales to a defendant is the same as that which would apply to a claim of lost sales to a third party. Both involve assessing whether plaintiff would have sold or licensed the copyrighted work to a party absent the infringement, and, if so, whether plaintiff would have made a profit. If plaintiff is successful in establishing these factual elements, it may recover for lost sales whether same would have been to defendant or a third party. The Court does not read the Business Trends decision to reach a contrary conclusion. However, the Court emphasizes that, as with the case with claims of lost sales involving third parties, the burden rests squarely with the plaintiff to demonstrate that it would have made the sales in question but for the infringing activity.
On the facts presented, the Court finds that there is a genuine issue of material fact as to whether a sale to HBO would have occurred absent the infringement. It is undisputed that the parties had a preexisting license agreement regarding the copyrighted product infringed by defendants. They are not direct competitors, which supports a reasonable inference that licensing of the Pilot for additional broadcasts would have been a viable alternative. The Court notes HBO’s contention that its infringement was not willful, but instead was based upon a good faith belief that the Pilot was being properly exhibited. Based on these facts, the Court cannot say that the possibility of payment to plaintiffs of a reasonable license fee by HBO for the infringing use would have been purely abstract or hypothetical. Thus the motion of defendants for summary judgment on this issue is denied.
The Court also disagrees with defendants’ contention that the evidence presented of the amount of a reasonable license fee is overly speculative. It cites the testimony of plaintiffs’ expert witness as to the appropriate amount of a reasonable license fee for use of the Pilot during the infringing period. In addition, the agreement between the parties which provided for payment to plaintiffs at least in part of a license fee is further evidence of the appropriate value of its claim for damages.
Defendant’s contentions regarding the evidence submitted by the plaintiffs go to credibility and weight, but they do not establish a basis for granting summary judgment. Accordingly, the Court finds that a genuine issue of material fact exists as to the quantification of a reasonable license fee, and it denies summary judgment in favor of defendants with regard to that issue as well.
The Court also disagrees with defendants’ contention that plaintiffs have failed to provide sufficient evidence of lost sales to third parties resulting from the infringement. Plaintiffs offer the deposition of Deutsch, who testifies that two agreements were not consummated because of HBO’s infringing broadcasts. A genuine issue of material fact exists with respect to those lost sales, and although the evidence in this respect is somewhat meager, it must draw all reasonable inferences raised by that evidence in plaintiffs’ favor. The task for weighing that evidence and deciding the issue of fact must be left for trial.
In addressing plaintiffs’ argument that they have been damaged by HBO’s assertion that the agreement between the parties grants HBO an exclusive 75-year license for the Pilot, the Court notes that plaintiffs’ claim of harm clearly does not bear a necessary, immediate and direct contention to the defendants’ infringement. In addition, the plaintiffs have offered no evidence that HBO made the assertion to any third party or that anyone relied on HBO’s position in refusing to consummate an agreement with plaintiffs. Consequently, as to this claim, the Court finds that the plaintiffs have failed to establish a genuine issue of material fact and it grants summary judgment in favor of defendants.
Finally, the Court indicates that there is no evidence by which a reasonable juror could find HBO acted as the agent of the cable operator defendants. It notes that the Service Network Affiliation Agreements between HBO and the cable operator defendants specifically disclaim any agency relationship. Also, it is undisputed that under the agreements the cable operator defendants have no control regarding the content of HBO’s programming; they simply convey to subscribers the programming signal received by HBO. They cannot under such agreements alter the signals or even review them prior to broadcast for content or for compliance with relevant copyrights.
The Court finds that there is no evidence from which a trier of fact reasonably could infer an agency relationship between HBO and the cable operator defendants and there is no basis on which such defendants could be imputed to be willful infringers of the copyright in the Pilot. Accordingly, the defendants are entitled to summary judgment on this issue.
Since the decision, there have been various motions between the parties regarding sealing portions of the record and amending witness lists, as this case makes its way to trial.