Expert witnesses can make or break your intellectual property litigation. This series addresses how to get the most out of an economic expert to establish plaintiff’s case for damages for infringement of its intellectual property. Today’s article focuses on copyright infringement.
A successful trade secret misappropriation plaintiff claim establishes that the defendant made an unauthorized use or reproduction of the copyrighted work in a manner that harmed the copyright holder. The plaintiff can recover damages of different types depending on the registration status of the work.
A work does not need to be registered with the U.S. Copyright Office in order for the copyright holder to enforce rights in the work. However, if the work was registered in a timely manner (within three months of its first publication or distribution to the public), the copyright holder may elect to claim statutory damages and attorney’s fees rather than actual damages and profits. Statutory damages can reach up to $150,000 per infringement in the most egregious circumstances, and are a matter of discretion by the court. When the plaintiff does not or cannot elect statutory damages, the plaintiff can prove two types of alternative remedies with the assistance of an economic expert.
Actual damages through reward of lost profits
Actual damages compensate the plaintiff by rewarding the plaintiff lost profits in order to “repair” the damage. Under copyright law, the plaintiff is entitled to recover its actual damages and any of the infringer’s profits that 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, and the infringer is required to prove its deductible expenses and to identify any elements of its profit that it attributes to factors other than the copyrighted work, such as the ability of other non-copyrighted works within a compilation to drive sales of the article.
While the copyright statute does not expressly require a plaintiff to show a connection between the defendant’s gross revenue and the infringements, courts in almost all circuits have held that the plaintiff must do so in order to establish actual damages. This means that the plaintiff must establish that the infringement led in some meaningful way to the alleged unjust revenue that the defendant received. For instance, if the revenue was generated by selling a book of 50 separate photographs and the plaintiff’s photograph is only one of the 50, the plaintiff will likely be required to show that it was his work that drove a portion of the sales.
Once the plaintiff presents proof of the infringer’s gross revenue, the infringer must prove any deductible expenses by proving any deductions that reduce the calculation (e.g., variable business operating costs including labor, raw materials, and other costs associated with producing the infringing goods). Fixed operating costs are not generally deductible, and copyright law does not permit expenses not linked to production of the infringing work to be deducted. Therefore, not all business expenses can be deducted from the revenue calculation. An economic expert can be useful in distinguishing what expenses are legitimately deductible.
After legitimate deductible expenses are removed, the infringer can also deduct sales it proves were not made because of the infringement. Following these deductions, the infringer’s net profit remains. The court must then determine the percentage of the net profit attributable to the infringed work. Using the example above regarding the book of 50 photographs, the fact-finder must assess how many copies of the book were purchased due to the presence of the plaintiff’s photograph.
The calculation of actual damages and the infringer’s profits may overlap where sales of an infringing article have displaced sales that the copyright owner would otherwise have made. In such cases, the volume of lost sales can be a measure of actual damages. The plaintiff retains the burden to show its own lost sales and also its profit margin on the lost sales.
To establish a claim for lost profits, a plaintiff must show it could have made the sales itself. The fact finder must consider the following types of factors in deciding this issue:
- Demand for the copyrighted work;
- Absence of acceptable noninfringing substitutes;
- Plaintiff’s manufacturing and marketing capability to exploit demand; and
- The profit that sales of the work would have made.
Expert testimony generally establishes these conditions for the fact finder. Next, the expert models how the market would have behaved if defendant had never released the infringing work. The plaintiff recovers the amount of profits it would have made minus profits it actually made.
Disgorgement of defendant’s profits as damages
Alternatively, a copyright plaintiff can be compensated for infringement through disgorgement of a plaintiff’s wrongfully-obtained profits to prevent infringers from benefiting from the illegal act. Once a plaintiff has established it suffered damages, the plaintiff can recover the infringer’s profits from using the work (attributable to the infringement) minus expenses the plaintiff would have incurred to earn those profits. However, as above, only certain kinds of costs are deductible under copyright law. The plaintiff will most likely use an economic expert to testify regarding defendant’s deductible costs and the issue of which sales are attributable to infringement.
Copyright damages do not require an intent element to be proven, meaning that a copyright infringer’s defense of unknowing infringement may mitigate an award of damages based on willful behavior, but it will not preclude an award of damages. Statutory damages cases do not routinely require use of an economic expert, but it is not uncommon for cases to have mixed damages models. For instance, a plaintiff may sue a defendant for infringement of 20 of plaintiff’s individual copyrighted works and seek actual damages for lost profits for some work and statutory damages for others. Thus, an expert may be used to prove some infringement but not others within the same case.