This past March, the U. S. Supreme Court decided a pair of copyright cases, both of which may have far-reaching ramifications for intellectual property practitioners. On March 31, Justice Thomas, writing for a unanimous Court, held that, although § 504(c) of the Copyright Act is silent on the issue of whether a defendant is entitled to a jury trial when a copyright owner elects to recover statutory damages, the Seventh Amendment provides the defendant a right to a jury trial in such instances, including the right to have a jury determine the amount of statutory damages.
In Feltner v. Columbia Pictures Television, 118 S.Ct. 1279 (1998), Columbia Pictures Television sued C. Elvin Feltner, Jr., the owner of three television stations in the Southeast, for the willful and unauthorized broadcast of Respondent's programming. Feltner had licensed several television series from Columbia, including "Who's the Boss," "Silver Spoons," "Hart to Hart" and the venerable "T.J. Hooker." After Feltner's stations became delinquent in making royalty payments, Columbia entered into negotiations to restructure Feltner's debt. When the negotiations were unsuccessful, Columbia terminated the stations' license agreements. Columbia sued Feltner after Feltner continued to broadcast the programs after termination of his licenses. Feltner argued that Columbia had revoked his copyright licenses merely as a negotiating play. Included in Columbia's prayer for relief was a request for statutory damages "for all infringements involved in the action, with respect to any one work," as provided by § 504(c) of the Copyright Act of 1976 (17 U.S.C. § 101 et seq.). Feltner requested that a jury determine the amount of statutory damages. The District Court rejected Feltner's request, and ruled that the airing of each separate episode, on each television station, constituted a separate copyright violation. The District Court then found that the infringement was willful, and fixed damages at $20,000 per violation, for a total damage award of $8,800,000.
On appeal, the Court of Appeals for the Ninth Circuit rejected Feltner's argument that he was entitled to a jury determination of statutory damages. The appellate court held that § 504(c) does not provide for a jury determination on statutory damages, as it "provides for the award of such damages 'as the court considers just.'" Columbia Pictures Television v. Krypton Broadcasting of Birmingham, Inc., 106 F.3d 284, 293 (9th Ch. 1997) (quoting 17 U.S.C. § 504(c) (Emphasis added)). The Court of Appeals also held that the "Seventh Amendment does not provide a right to a jury trial on the issue of statutory damages because an award of such damages is equitable in nature." Id. The Supreme Court granted certiorari to determine whether either § 504(c) or the Seventh Amendment provides a right to a jury trial in copyright infringement matters, including the right to have a jury determine the amount of statutory damages.
Concluding that the statute is silent as to whether a judge or a jury possesses the power to determine the amount of statutory damages. Justice Thomas proceeded to the issue of whether the Seventh Amendment provides a right to a jury trial in such instances. Relying on years of precedent in both American and English law, including original State copyright laws, as well as the Statute of Anne (8 Anne ch. 19 (1710)) and the Copyright Act of 1790 (1 Stat. 124), Justice Thomas found that "the consistent practice in copyright cases" was to permit "juries to award damages." Thus, the Court held that:
There is clear and direct historical evidence that juries, both as a general matter and in copyright cases, set the amount of damages awarded to a successful plaintiff. ... As a result, if a party so demands, a jury must determine the actual amount of statutory damages under § 504(c) in order "to preserve the substance of the common-law right of trial by jury."
Feltner, 118 S.Ct. at 1288 (quoting Tull V. United States, 481 U.S. 412, 426 (1987), quoting Colgrove v. Battin, 413 U.S. 149, 157 (1973)). It should be noted that, although the Court's ruling was unanimous, Justice Scalia filed a concurring oninion in which he stated that the Court did not need to reach the Constitutional question because the statute could and therefore should have been read to provide for a jury trial.
The immediate effect of Feltner is that damage awards may begin to decrease in size. Entertainment companies, high-tech firms and other corporations who regularly confront copyright infringement issues, typically choose to have infringement trials without a jury, as they believe that juries generally have difficulty interpreting copyright law. Corporations also believe that juries tend to find big corporations less sympathetic than individuals. Whether this general corporate distrust against the sympathy of juries is well-founded remains an issue that will continue to be fought along various battle lines, from the corporate conference rooms to the legal classrooms. In the author's view, it seems that these corporate fears are largely irrelevant, given the alternative. While the court ideally will remove emotion in formulating a decision, judges are just as human as juries. Furthermore, the court may not be as fluent in high-technology as a juror may be (i.e., judges possess a knowledge of the law, while a juror may be a computer scientist). In any event, as a result of the Feltner decision, individual defendants, who have been sued for copyright infringement, can now place their fate in the hands of a jury, and plead their case to the ostensibly emotional nature of the jurors. One feature can be ascertained from this case with some degree of certainty: If Feltner's reasoning as to why Columbia revoked his copyright licenses was true (i.e., as a negotiating ploy), then this decision will effectively nullify such a tactic because juries likely will weigh such actions in making any decisions to award statutory damages.
On March 9, 1998, in a case that may eventually approach "landmark" status. Justice Stevens, again writing for a unanimous Court, penned the Court's decision in Quality King Distributors, Inc., v. L'anza Research International, Inc., 118 S.Ct. 1125 (1998). At issue in Quality King was § 109(a) of the Copyright Act, also known as the 'first sale" doctrine, which provides for the disposition of lawfully-made copyrighted articles, and section 109's relationship with § 602(a), which bans the unauthorized importation of copyrighted material.
L'anza Research International is engaged in manufacturing and selling hair care products. Within the United States, L'anza's products are promoted heavily and sold exclusively to authorized distributors. The authorized distributors in turn sell the products to barber shops, beauty salons and professional hair care colleges. L'anza also sells its products abroad, but, due to its lack of aggressive advertising and promotion, at a significantly lower cost than in the United States. Petitioner, Quality King, a foreign distributor and purchaser of L'anza's products, sold L'anza's products to a Maltese distributor, who subsequently re-introduced the products to U.S. markets, where the products were resold to retailers not within L'anza's authorized chain of distribution and at a much lower cost than products sold through authorized distributorships. L'anza subsequently brought suit, alleging Quality King to be liable for the unauthorized importation of copyrighted material, under § 602(a). Quality King defended on the grounds of the "first sale" doctrine, statutorily recognized by § 109(a), contending that once a lawfully-made copyrighted good has been sold, the purchaser can dispose of the good as he wishes. The District Court rejected the defense, relying primarily on the premise that § 602(a) would be rendered meaningless if § 109(a) allowed such a defense. The Ninth Circuit Court of Appeals affirmed the District Court's holding. Because the Ninth Circuit decision was in conflict with a Third Circuit holding, Sebastian International Inc. v. Consumer Contracts Ltd., 847 F.2d 1093 (1988), the Supreme Court granted certiorari.
The Supreme Court observed that this was an unusual case because L'anza did not claim that anyone had made unauthorized copies of its copyrighted labels. Rather, L'anza was "primarily interested in protecting the integrity of its method of marketing the products to which the labels are affixed." The Court noted that although labels have only a limited creative component, the Court's interpretation of the relevant statutory provisions would apply equally to cases involving "more familiar copyrighted materials" such as books. The Court initially endorsed the first sale doctrine in Bobbs Merrill Co. v. Straus, 210 U.S. 339 (1908), which dealt with a publisher claiming the discounted resale of his books constituted copyright infringement. In that case, the Supreme Court disagreed with the publisher, holding that the copyright holder's exclusive statutory right to vend extended only to the first sale of the copyrighted work. The "first sale" doctrine eventually was codified at § 109.
L'anza argued that § 602(a) of the Act prohibited the unauthorized resale of products sold to foreign distributors in the United States. Section 602(a) provides that the unauthorized importation of copies of a work constitutes an infringement of the exclusive right to distribute copies under § 106 of the Act. The Court reasoned that, like the exclusive right to "vend" at issue in the Bobbs Merrill case, the exclusive right to distribute is a limited right. Section 106 expressly provides that all of the exclusive rights granted in that section, including the right to distribute, are limited by the provisions of §§ 107-120. Of course, the codified version of the "first sale" doctrine is to be found in § 109, which expressly permits the owner of a lawfully made copy to sell that copy "[n]ot withstanding the provisions of § 106(3)." Accordingly, the Court held that since § 602(a) merely provides that unauthorized importation is an infringement of an exclusive right under § 106, and since the exclusive right granted by § 106 is limited by § 109 and does not encompass the resale of a copy by its lawful owner, "the literal text of § 602(a) is simply inapplicable to both domestic and foreign owners of L'anza's products who decide to import them and resell them in the United States." In a concurring opinion, Justice Ginsburg emphasized that the Court's decision involved copies that made a "round trip" journey and that the Court did not "resolve cases in which the allegedly infringing imports were manufactured abroad."
Although the ramifications of the L'anza decision will not fully be known for quite some time, it could pose significant problems for U.S. manufacturers, particularly those that export worldwide. In light of this ruling, many of these products, if re-imported, will likely have the effect of driving down prices in the domestic market. While this may appear initially to be a welcome change for the American consumer, a serious problem may arise if, in the long term, these products from foreign import companies cause a significant dent within the American markets. In such a case, and in an effort to erase the problem of re-imported goods and the competition that comes with those goods, U.S. manufacturers may choose to manufacture their exports abroad, resulting in a loss of a jobs in the domestic manufacturing, as well as other supportive (i.e., retailing, advertising, etc.), industries. Additionally, assuming the foreign place of production does not maintain the quality of workmanship that American consumers have become accustomed to and that the American markets require, the most probable scenario would be an increase in price (due to import taxes, tariffs and shipping costs), coupled with a decrease in quality. Thus, while the initial lure of lower prices may lead the American consumer to applaud the Court's ruling in L'anza, potential unemployment, especially if significant, as well as lower quality goods and higher prices, may abate such applause.
Obviously, the effect of L'anza goes well beyond the hair-care arena. Within the booming American technology field, concerns about the L'anza decision have begun to surface:
Neil Smith, an intellectual property litigator at Limbach & Limbach, said the decision could have a broad impact on semiconductor and software makers, which may want to sell their products at a discount in markets outside the United States.
"Copyright law is really much more applicable to software, computer games, and the like, so it's really the tail wagging the dog to have a shampoo case having some application to these high-tech companies," Smith added. 'There certainly are companies that are able to make [products] cheaper here and ship them out of the country. They really don't want that stuff coming back."
Rich Gray, an attorney representing high-tech clients, agreed, saying the high court today removed "an important intellectual property statute" relied on by many companies.
"It's even more important now than it has been in the past to have licensing provisions that impose restrictions on overseas purchasers that will prevent domestic distribution," said Gray, a partner at Bergeson, Eliopoulos, Grady & Gray.
He added that, following the decision, manufacturers "better carefully review their licensing restrictions and be thoughtful of what they impose in the future. What they do overseas can come back to haunt them." Goodin, Dan. "Shampoo Ruling to Affect High Tech." C-NET News.com. March 9, 1998.
Although there has been no indication from the leadership in Congress as to whether this ruling will be legislatively reversed, one has to expect that, with its potential to cause a loss of domestic jobs, legislative action will be likely to occur.
*Timothy M. Morella is an Associate Intellectual Property Attorney in the Chicago Office of Ladas & Parry, and a member of the Chicago Lawyers Chapter.