Michael Ratoza of U.S. IP LAW reports (via @BeelJDPhD) on a case that issues a somewhat stunning ruling for those of us, such as LIKELIHOOD OF CONFUSION®, who have never really thought about the question of common-law indemnification for copyright infringement — or, worse, who have thought about it a little and assumed it must exist.
The story: A builder was sued for copyright infringement for selling a house constructed on plans it had purchased from a third party but which, it turned out, had in fact been copied, without permission, from another set of plans which happened to have been protected by copyright owned by a competing developer.
In attempting to defend itself, the builder brought indemnification claims against the seller of the counterfeit plans. He argued that the seller committed fraud and misrepresentation in selling plans that the seller knew were wrongfully copied. The court dismissed the indemnification claims because there is no right of indemnity for copyright infringement.
The court pointed out that there is no indemnity right included in the Copyright Act, and that the Copyright Act preempts conflicting state law. As such, state indemnity law does not apply. In any event, it is federal common law, not state common law, that applies in a copyright proceeding. Federal common law is very limited and does not include the right of indemnity for violation of federal law.
Outside of the building context, this case raises anew the obvious problem faced by the buyer of goods that turn out to be counterfeit. How can the innocent buyer of counterfeit goods protect itself from liability when the seller fails to disclose that the sold goods were wrongfully copied?
And sellers usually will fail to disclose that sort of thing, after all. Maybe.
I found this language a little odd:
The court pointed out that there is no indemnity right included in the Copyright Act, and that the Copyright Act preempts conflicting state law. As such, state indemnity law does not apply.
Well, wait. If there is no indemnity right, there is nothing to preempt, is there, unless the Copyright Act explivity forbids indemnification (which it does not)? It turns out, in fact, that I’m not the only one who sees it this way:
Unlike claims of contribution, courts have upheld state law claims for indemnification, arising out of state common law or statute. In Foley v. Luster,249 F.3d 1281 (11th Cir. 2001), the Eleventh Circuit upheld against a preemption argument, a state common law claim to indemnification. As with contribution claims in copyright cases, the right of indemnification was asserted as a cross-claim. After the plaintiffs settled , the cross-claim went forward, with a jury finding indemnification was required. A post-trial motion to dismiss on the ground of preemption was filed and denied. The Eleventh Circuit affirmed the denial, holding that the extra element test for preemption did not apply, allegedly, because indemnification “does not concern the rights of a copyright holder. Rather, it concerns the allocation of responsibility between copyright infringers.” But that is true of contribution too, the right to which has been held preempted. . . .
This does not mean, however, that the right to indemnification for paying infringement damages is preempted. It is my opinion, such a right is not preempted because the right or remedy is not equivalent to any granted under the Copyright Act and does not arise under the Copyright Act: once payment is made to the copyright owner, the federal interest in extinguished.
That’s not just any opinion out there, disagreeing with the Eleventh Circuit’s rationale but agreeing with its holding — it’s Bill Patry‘s.
So, the case I first thought Michael was writing about was KBL Corp. v. Arnouts, 2009 WL 302060 (S.D.N.Y. 2009), from February of this year (opinion here). Interestingly, the court there disagrees with Patry’s link between contribution and indemnifiction, citing Conrad v. Beck-Turek, Ltd., Inc., 891 F.Supp. 962, 966 (S.D.N.Y.1995), and after dispensing of the contribution argument analyzes the indemnifcation on its own merits. But its rationale in denying indemnification is based on a peculiarity of New York indemnification law:
The defendants argue that the plaintiff has failed to state a claim for indemnification, because indemnification may only be implied under common law where the party seeking indemnification was without fault, and the plaintiff was not without fault in the conduct that led to its losses in the Betz litigations.
The parties do not dispute that the right to indemnification would be available to the plaintiff if it could meet the requirements for indemnification under New York State common law. Because the validity of this assumption does not affect the outcome of the case, the Court analyzes whether the plaintiff can state a claim for indemnification pursuant to the requirements of state law. However, it should be noted at the outset that courts holding that a state law right to contribution is unavailable in connection with a federal statutory scheme that does not itself provide for contribution, often apply the same analysis to state law claims for indemnification in connection with a federal statute that does not itself provide for indemnification. . . . In this case, the plaintiff cannot establish that it was without fault with respect to the underlying injuries to Betz. According to the allegations in its own Complaint, the plaintiff knew that the plans at issue in both Betz lawsuits originated from designs that belonged to Betz, even before it gave the plans to the defendants for modification and approval.
That’s the “maybe” I meant before — sometimes, bad guys do disclose their bad acts. So, it’s like this, I guess:
Indemnification is an equitable doctrine, and as you know, he who comes into equity must come with clean hands. Very interesting, and very absolute, too. But this can’t be the case Michael Ratoza, an experienced and accomplished IP lawyer, was writing about, so I called him and asked. And I was right: I was wrong! I’m still not sure why my search on Westlaw didn’t bring up his case, but the case he was reporting on is Frank Betz Associates, Inc. v. Signature Homes, 2009 WL 2151304 (M.D.Tenn. 2009), decided only last month (which you can read here) (and presumably related to the “Betz” referred to in the New York case). And that court says:
It is generally, if not entirely, accepted that there is no common law right of indemnification under the Copyright Act. Pure Country Weavers, Inc. v. Bristar, Inc., 410 F.Supp.2d 439, 448 (W.D.N.C.2006); Equity Builders & Contractors, Inc. v. Russell, 406 F.Supp.2d 882, 886 (N.D.Ill.2005); Lehman Bros. v. Wu, 294 F.Supp.2d 504, 504 (S.D.N.Y.2003); but see Foley v. Luster,249 F.3d 1281, 1286 (11th Cir.2001) (applying general preemption law to common law indemnification between copyright infringers); 3-12 Nimmer on Copyright § 12.04 (2009) (“the question remains whether substantive law authorizes such a claim for indemnification to go forward”). The scope and limitation of indemnification are treated as questions of federal rather than state law. Equity Builders, 406 F.Supp. at 885.
So, Michael’s right, but I still think the Middle District of Tennessee is wrong, as a matter of the reasoning expressed by Bill Patry: “such a right is not preempted because the right or remedy is not equivalent to any granted under the Copyright Act and does not arise under the Copyright Act: once payment is made to the copyright owner, the federal interest in extinguished.”
One copyright ka-ching per copyright-protected widget, in other words. This is, of course, a far more cramped version of copyright liability than a lot of IP owners would like to see obtain these days. But it reflects a full appreciation of the first-sale doctrine for copyright that seems to make sense — even if it is a little harsh, and absolute, for copyright owners. Under such a rule they don’t have the option of merely suing the deepest pocket among all possible downstream infringers or, as if so often the case (especially in grey goods and “unauthorized distribution” cases), suing their more efficient competitors using specious claims of copyright. Which is absolutely awful.