Reasonable Licensing Revenues as Actual Damages, and Implications on the Market Effects Prong of Fair Use
Section 504 provides that an infringer of copyright may be liable for the copyright owner’s actual damages and any additional profits of the infringer.[1] The copyright owner is entitled to recover the actual damages suffered by him as a result of the infringement.[2] The Supreme Court has yet to address whether a reasonable license fee is an appropriate measure of damages under the “actual damages” prong of section 504.
The Second Circuit in On Davis v. The Gap, Inc. held that section 504(b) permits a copyright owner to recover actual damages, in appropriate circumstances, for the fair market value of a license covering the defendant’s infringing use.[3] The court analogized the question to illegal takings or uses in contexts outside the realm of copyright: in each case, the defendant “has surreptitiously taken a valuable right, for which plaintiff could have charged a reasonable fee.”[4] In such takings, the plaintiff’s revenue is less than it would have been had defendant paid for what he took, but no less than it would have been had defendant refrained from taking altogether.[5] The court concluded that the better reasoned view, “at least in some circumstances,” is to charge the illegal taker with a reasonable cost of what he took (versus leaving the victim of the taking with nothing).[6]
The Seventh and Ninth Circuits are in accord. The Seventh Circuit in Deltak, Inc. v. Advanced Systems, Inc. concluded that “[t]he value of the infringer’s use is a permissible basis for estimating actual damages.”[7] Similarly, the Ninth Circuit in Wall Data Inc. v. Los Angeles County Sheriff’s Dept. held that “[I]t is not improper for a jury to consider either a hypothetical lost license fee or the value of the infringing use to the infringer to determine actual damages, provided the amount is not based on ‘undue speculation.’”[8]
The Sixth Circuit, however, stands in opposition to the Second, Seventh, and Ninth Circuits. The court in Wrench LLC v. Taco Bell Corp. held that “[t]he remedies available under copyright law do not include damages for the reasonable value of the defendants’ use of the work.”[9]
The effects of excluding reasonable license fees from actual damages can be profound. In Chieco v. Willis & Geiger, Chieco won a jury verdict in his favor against Lands’ End for copyright infringement.[10] Despite his success on the infringement suit, Chieco left with a net monetary loss because the jury could not, under the instructions given, award any profit nor fashion a license fee for hundreds of infringements which, though found to exist, did not qualify for statutory damages.[11] The zero dollar profit and actual damage awards dictated the court’s rulings on post-trial requests for fees and costs, resulting in a net monetary loss for the prevailing copyright plaintiff.[12] Petitioning for certiorari to the Supreme Court, Chieco presented the question, “Are the Second and Seventh Circuits correct in holding that a reasonable license fee is an appropriate measure of damages under the “actual damages” prong of the Copyright Act’s damage statute (Section 504(b)) (and is the Sixth Circuit incorrect when it states: “The remedies available under copyright law do not include damages for the reasonable value of the defendants’ use of the work”)?” The Supreme Court denied certiorari.[13]
Given the apparent injustice of Chieco, it seems only proper to account for a reasonable license fee or royalty rate in the computation of actual damages under section 504. While there is certainly a potential for abuse in permitting recovery for such “lost” fees, the potential for abuse may be militated by capping recovery at a fair market value, and denying recovery for claims with are unduly speculative.[14]
But perhaps the issue is not quite so straight forward. The circuits which have opted to account for a reasonable license fee in determining damages have appeared to treat such fees as “entitlements” of the copyright holder.[15] To hold that a copyright holder is entitled to a reasonable license fee seems wholly intertwined with the market effects prong of the fair use defense.
The Second Circuit in Ringgold v. Black Entertainment Television, Inc. considered the propriety of accounting for potential licensing revenue under the market effects factor of fair use. [16] While the court noted the potential for circularity, the court reasoned that it could “avoid the vice of circularity by considering ‘only traditional, reasonable, or likely to be developed markets’ when considering a challenged use upon a potential market.”[17] The court’s position in Ringgold seems consistent with its subsequent treatment of licensing fees in On Davis.
The Sixth Circuit’s positions on the issues cannot be squared so easily. The court in Princeton University Press v. Michigan Document Services, Inc. explicitly held that, where a licensing market already exists, there is no circularity in holding that the potential destruction of the plaintiffs’ market by widespread circumvention of the plaintiffs’ permission fee system is enough to negate fair use.[18] Given the Sixth Circuit’s refusal to account for potential licensing revenues in the context of actual damages in Wrench LLC, it is unclear how the court purports to consider potential licensing revenues in the context of fair use.
Given the apparent inconsistency of the Sixth Circuit’s views, the potential for injustice where potential licensing revenues are not accounted for in computing actual damages (as in Chieco), and the reasonable limitations which can be imposed on consideration of licensing revenues for both actual damages and fair use, the better reasoned view appears to be that of the Second Circuit. By accounting for potential license fees in actual damages—but only those which are not unduly speculative and do not exceed fair market value—and accounting for the same in the context of fair use—but only for “traditional, reasonable, or likely to be developed markets”—the victorious plaintiff can avoid a net monetary loss while preventing him from receiving a windfall.
[1] 17 U.S.C. § 504(a).
[2] § 504(b).
[3] 246 F.3d 152,172 (2d Cir. 2001).
[4] Id. at 165-66. For example, “P, the owner of a baseball stadium charges $50 for admission to games. D, through a corrupt arrangement with a stadium usher, sneaks in free on days when the stadium has excess seating capacity. P shows no economic injury inflicted by D’s free entrance, other than the hypothetical loss of the revenue for the tickets D did not purchase.” Id.
[5] Id.
[6] Id.
[7] 767 F.2d 357, 360-61 (7th Cir.1985).
[8] 447 F.3d 769 (9th Cir 2006) (citations omitted).
[9] 256 F.3d 446 (6th Cir. 2001).
[10]Petition for Writ of Certiorari, Chieco, 2005 WL 1060947 (No. 04-1469).
[11] Id.
[12] Id.
[13] 545 U.S. 1123 (2005).
[14] See On Davis, 246 F.3d 152,172 (2d Cir. 2001).
[15] See, e.g. On Davis at 161.
[16] 126 F.3d 70 (2d Cir 1997).
[17] Id. at 82.
[18] 99 F.3d 1381 (6th Cir. 1996).