Show me the money

Copyright is happening all over the place!

Now, a slight digression from the stemwinder I’m about to release here on fee shifting in copyright cases.  I’m going to “hook it up,” Your Honor, don’t worry.  See, Ray Dowd reports that the Supreme Court is going to hear the Costco-Swatch copyright case, which involves the question of the applicability of the first sale doctrine to copyright where the item in question was first “sold” abroad.  That’s an issue I’ve recently gotten very involved in, too–very involved.  But that’s not what I’m writing about right now. Maybe we’ll talk about that some time as well.  But this is another copyright issue, and I just need to get my two cents in, and the Ray Dowd-Eric Goldman juxtaposition here (trust me on this) reminded me…

I had dropped a link to this update by Eric Goldmanon developments concerning the topic of fee shifting in copyright in favor of successful defendants, and more particularly relating to the Offer of Judgment Rule (see below) in my missive of last Friday (just scroll down if you dare).  In that purple thicket it’s almost a throwaway, and the issue of fee-shifting could well get lost in the sauce–but that issue really deserves consideration, and thanks to SCOTUS (and Ray) I am now compelled to raise it here on its own.  Here are excerpts from Goldman, discussing the recent decision in UMG Recordings, Inc. v. Veoh Networks Inc.:

Copyright law contains a statutory fee-shifting/”loser pays” provision (17 USC 505) that, in specified circumstances, gives the judge discretion to award attorneys’ fees to a copyright lawsuit winner. Veoh decisively won a 512(c) defense against UMG’s copyright infringement claim, so Veoh applied for its attorneys’ fees under 505. The court, exercising its discretion, declined to award them. . . .

Not surprising.  Just as bad cops don’t typically serve time, plaintiffs don’t often get sanctioned with fees for filing cases that turn out to be meritless, even when the statute permits it:

I think the judge’s decision is a fair application of the statute, but consider its consequences. UMG helped drain Veoh’s coffers through the litigation, yet the court does not impose any disincentives for plaintiffs to bring such a lawsuit. As a result, UMG walks away from the lawsuit while Veoh goes belly-up.

Well, that’s why it’s maybe not such a fair application–“exercise of discretion,” that is.  But here’s the thing:

The next part of the ruling confused me, and maybe my litigator friends can help me understand it. As a fallback position, Veoh asked for its attorneys’ fees under FRCP Rule 68. Rule 68 tries to encourage litigants to settle their disputes by providing a penalty for refusing a reasonable settlement offer. If Party A proposes settlement terms and Party B declines (because it expects to do better in court), but the ultimate judgment is less favorable to Party B than the proposed settlement, Party B has to pay Party A’s costs that accrue post-settlement offer. Rule 68 makes a lot of sense from a game theory standpoint, but I’ve been told by litigators that it doesn’t mean much in practice, and this case might illustrate why.

I’m not sure it actually does.  The main reason it doesn’t mean much in practice is not the interesting legal twists–see below–but rather the fact that very, very few cases actually get to a final judgment.  Well, one of the twists is kind of a stinker, too:

The court doesn’t provide the terms of Veoh’s Rule 68 settlement offer, but because Veoh won the case, any settlement offer Veoh made by definition was better for UMG than the actual results UMG got. Therefore, on its face, Rule 68 seems to say that, at minimum, UMG should pay Veoh’s costs post-settlement offer.

But not.  Yeah, what kills you here is that if you win, Rule 68 doesn’t do anything for you at all.  You have to lose! Just not so much.  As one treatise describes it, it’s meant to prevent a defendant that recognizes that it is liable from having to watch chargeable “costs” run up while litigation keeps going and going.  Thus it’s not available as a hedge to the “maybe not so liable” defendant–which certainly sounds like a very questionable policy.

Here’s the interesting part.  Are attorneys’ fees ever a “cost”?  Usually not.  Oh sure–attorneys’ fees might sound like “costs” to a mere person, but the law in this area distinguishes between “fees” and “costs”–which is why you often see the presumptively non-redundant phrase, “fees and costs.”  So while we all want fees, if we’re lucky what we get is “costs”–pretty modest gruel.

There is an exception, however, under the cases.  That is where a statute defines them as a “taxable” cost to the losing side.  Does copyright do that?  Yes, and no.  Eric continues, regarding the Veoh case–I’ll repeat the last sentence where I broke off, to reestablish the flow:

Therefore, on its face, Rule 68 seems to say that, at minimum, UMG should pay Veoh’s costs post-settlement offer.  However, the court looks at the interaction of copyright law’s 505 fee-shifting provision and Rule 68 and, in effect, concludes that 505 moots Rule 68. The court says it couldn’t find any on-point precedent (I haven’t double-checked, but this was the first time I recall seeing any discussion of this interaction), so it cites an analogous case for the proposition that Rule 68 was not designed to expand the bases of fee awards. Thus, because the court had already concluded that Veoh wasn’t entitled to a fee award under the Copyright Act, that eliminated any Rule 68 cost award.

Right.  We faced this in the Arizona suntan lotion case:  The Ninth Circuit says there’s pretty much never any way for a copyright defendant to benefit from Rule 68.  In another link to Ray also cited on Eric Goldman’s site (begrudgingly, by the way–I don’t think fairly), the former wrestles with the problem, which I think is also put very well by David Gingras, who writes as follows:

[In] Champion Produce, Inc. v. Ruby Robinson Co., 342 F.3d 1016 (9th Cir. 2003) . . . [t]he court tried to outsmart everyone else by saying that . . . [attorneys’] fees can only be awarded as costs under 17 USC § 505 to the “prevailing party”, and they felt that a defendant who made a $20k or whatever offer of judgment under Rule 68 but then lost at trial in which the plaintiff received a judgment of only $19,999 could not be considered as the “prevailing party” and thus could not recover fees as part of the mandatory costs award under Rule 68. Of course, this completely ignores the purposes of Rule 68 and it rewards plaintiffs who reject settlement offers and seek to roll the dice at trial.

Yep–which makes it hardly a roll of the dice at all for the plaintiff in a situation such as this, which is nearly always more financially able to play at the $1000 table anyway.

In the Designer Skin case in Phoenix, we thought we had a reasonable way around this–at least at the 17 USC § 505 level, if not regarding Rule 68–by the way.  As we explained (here it comes, professor, you may want to look away here–another working-stiff lawyer is doing “self-promotion” ;-)) in our Proposed Findings of Fact and conclusions of Law, the Designer Skin case should have been a fees-to-defendants situation in copyright, even though we were in the Ninth Circuit.  We represented two defendants, a corporation and its principal, and the plaintiffs, collectively known as “Designer Skin” (the lead plaintiff’s name at the time) had brought a raft of claims against both of them for the offense of selling their indoor suntan lotion on the Internet without permission.  These claims were all thrown out before trial or on motion under Fed. R. Civ. P. 50, except for one:  copyright infringement as against the corporation only, based on the use of what plaintiffs claimed were copies of their thumbnail photos on our clients’ “unauthorized” retail website.

That jury subsequently found infringement on most, but not all, of the copyright claims.  (Well look, we put on no witnesses or defense case.   And then some.)  But there were no damages, there having been neither competent proof of actual damages (as the court ruled at trial) or a statutory basis for statutory damages or attorneys’ fees (plaintiffs having registered the copyrights belatedly).  All they could get, which they did get, was an injunction prohibiting future infringement–which was a Pyrrhic victory indeed, considering that the use of the thumbnails had ended long before.  That sounds like “prevailing” doesn’t it?  Well, let me explain:

Courts have deemed a defendant as “prevailing,” where despite suffering an adverse entry of judgment, a defendant is nevertheless able to withstand the attacks of an overzealous plaintiff. See 3 M. Nimmer & D. Nimmer, Copyright § 14.10[B] (2008) citing Warner Bros., Inc. v. Dae Rim Trading, Inc., 677 F. Supp. 740, 745 (S.D.N.Y.), rev’d on other grounds 877 F.2d 1120, 1126 (2d Cir. 1989). These rulings are to be distinguished from cases such as Pure Grace, Inc. v. Furlong, 2006 U.S. Dist. LEXIS 88080 (D. Or. 2006), where the court granted costs to plaintiff as the prevailing party who received only injunctive relief. In Pure Grace, the court expressly held that the issuance of injunction in that case was “significant” in that it afforded plaintiff a substantial portion of the relief it sought.

By contrast, even under the most generous of assessments, the record in this case precludes a similar finding. Here, Defendants are the prevailing parties under the Copyright Act because they achieved substantially all the benefits they could have hoped to achieve in defending this suit. See Florentine Art Studio, 891 F. Supp. at 541. All of Plaintiffs’ claims for damages, actual or otherwise were dismissed. See Excerpted Oral Argument re Rule 50 Motion at 12, 34-37. Furthermore, all claims [including copyright infringement] against defendant Sagarin have been dismissed. See Doc #98.  There can be no cavil that defendant Sagarin himself is a “prevailing party” here, having defeated each and every claim brought against him by Designer Skin and having prevailed on two of three counterclaims brought by him against Designer Skin.  Furthermore, as set forth above the Court declines to enter an injunction against Defendant S&L, which, in any case, has suffered neither a judgment for damages nor attorneys’ fees. Consequently, as a practical matter there is no greater outcome that Plaintiffs could have achieved.

By contrast, Defendants lost on substantially all of the claims it alleged throughout the course of this litigation, as set forth above. In light of Plaintiffs’ near complete defeat of all of its claims, under no plausible construction can it be viewed as “prevailing”; rather, by all rights Defendant Sagarin has “prevailed” on each of the claims brought against him; and this Court finds, upon consideration of the totality of the record and weighing its previous dispositions on the merits, its rulings herein on the merits, and the evidence at trial and arguments of counsel, that Defendant S&L is also a prevailing party as defined by 17 U.S.C. § 505.

Pretty good, right?  Our client, Larry Sagarin, unconditionally prevailed on all the copyright claims.  As to the corporation, it got hit with a verdict of 30-something infringements, and a verdict of no infringement on 12.  That wasn’t so great, but we did argue, “big picture,” as follows:

In light of Plaintiffs’ near complete defeat of all of its claims, under no plausible construction can it be viewed as “prevailing”; rather, by all rights Defendant Sagarin has “prevailed” on each of the claims brought against him; and this Court finds, uponconsideration of the totality of the record and weighing its previous dispositions onthe merits, its rulings herein on the merits, and the evidence at trial and arguments ofcounsel, that Defendant S&L is also a prevailing party as defined by 17 U.S.C. § 505.

Maybe, maybe not.  Let’s take that second part as a wash.  So what did the court do with our argument that, at least based on the dismissal of all claims against Larry Sagarin individually, he was the winner here? Here’s the ruling, which is unpublished–it’s not a “decision,” anyway, but Findings of Fact and Conclusions of Law:

The Court declines to view Defendant Larry Sagarin as distinct from S & L Vitamins for purposes of determining the “prevailing party” in this case because the issues involving these parties overlapped for all cost-incurring purposes.

Yeah?  And?

I don’t have to explain the problems with that rationale, do I?

Well, you know what they say about successful defendants and attorneys fees in IP cases, don’t you?  You’d better–because you’ve got to say it to clients and prospective clients who walk in with summonses and complaints for infringement.  Defendants don’t get their fees.  As Eric Goldman put it above, “UMG helped drain Veoh’s coffers through the litigation, yet the court does not impose any disincentives for plaintiffs to bring such a lawsuit. As a result, UMG walks away from the lawsuit while Veoh goes belly-up.”  Yep.  Happens every day!

Oh, and, well, there was a Rule 68 motion later, too.  But don’t get me started.  Really.

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Author:Ron Coleman

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  1. Copycense - April 20, 2010

    Attorneys fees in #copyright litigation http://bit.ly/bkrlMQ per @RonColeman | Interesting view in legal system economics

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