Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca8-07-01355/USCOURTS-ca8-07-01355-0/pdf.json

Parties Involved:
James A. Chalupnik
Appellant
United States
Appellee

Document Text:

United States Court of Appeals

FOR THE EIGHTH CIRCUIT

___________

No. 07-1355

___________

United States of America, *

*

Plaintiff - Appellee, *

* Appeal from the United States

v. * District Court for the

* District of North Dakota.

James A. Chalupnik, *

*

Defendant - Appellant. *

___________

 

Submitted: October 16, 2007

Filed: February 1, 2008

___________

Before LOKEN, Chief Judge, GRUENDER and BENTON, Circuit Judges.

___________

LOKEN, Chief Judge.

BMG Columbia House (“BMG”) sells CDs and DVDs by mail. Many BMG

discs prove to be undeliverable. During the time in question, BMG arranged with the

United States Postal Service (“USPS”) to gather and discard undeliverable discs, as

it was less costly for BMG to produce replacement discs than to pay for the return and

restocking of undeliverable discs. James Chalupnik, a janitorial supervisor at the

downtown post office in Fargo, North Dakota, took several thousand undeliverable

CDs and DVDs from the post office trash and sold them to used record stores.

Initially charged with felony mail theft, Chalupnik pleaded guilty to misdemeanor

copyright infringement in violation of 17 U.S.C. § 506(a) and 18 U.S.C. § 2319(b)(3).

The district court sentenced Chalupnik to two years probation and ordered him to pay

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BMG restitution in an amount equal to his documented sales proceeds, $78,818.

Chalupnik appeals the restitution award. We conclude that the government failed to

prove the amount of loss to BMG proximately caused by Chalupnik’s offense.

Accordingly, we vacate the restitution award and remand for resentencing.

I.

Chalupnik supervised disabled persons who provided janitorial services at the

downtown post office in Fargo. In October 2001, he began removing undeliverable

CDs and DVDs from the post office trash and selling the discs to used record stores.

In June 2006, USPS began investigating the disappearance of undeliverable CDs and

DVDs at the Fargo post office. A surveillance camera revealed Chalupnik hiding

discs in a telephone closet, and 3,580 CDs and 125 DVDs were found in his

possession. He admitted selling the discs to used record stores in Moorhead and St.

Cloud, Minnesota, and Sioux Falls, South Dakota. Store records reflected purchases

of several thousand discs and payments to Chalupnik totaling $78,818. The stores had

no record of what CD and DVD titles they purchased from Chalupnik, but one store

owner told investigators that most if not all were BMG products. 

Chalupnik pleaded guilty to a charge that he willfully infringed numerous

copyrighted sound recordings for private financial gain between October 2001 and

July 2006 in violation of 17 U.S.C. § 506(a) and 18 U.S.C. § 2319(b)(3). At the

change of plea hearing, he admitted selling discs for $78,818 without authority from

the copyright owners. At sentencing, the government recommended a sentence of

probation. The district court agreed and sentenced Chalupnik to two years probation.

The presentence investigation report (PSR) recommended that Chalupnik be

ordered to pay BMG mandatory restitution in the amount of $78,818 because his

offense conduct deprived BMG of “the option of returning the CD’s to the market or

destroying them.” Chalupnik submitted a Sentencing Memorandum opposing

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restitution. Noting the absence of evidence that BMG owned any copyright interest

in the discs, Chalupnik argued that BMG was not a victim of his offense. He further

argued that the government could not prove actual loss because BMG threw away or

destroyed undeliverable discs, and because customers of used music stores will not

buy new products by mail so BMG cannot show it lost sales on account of his offense

conduct. In response, the government submitted a letter from BMG’s senior counsel

asserting that USPS “routinely returns DVDs” to BMG for restocking, that BMG

accepts CDs returned by customers and “most likely” returns a portion to inventory

for resale, that BMG competes with used record stores in the “larger music market,”

and that Chalupnik’s offense conduct resulted in no royalty payments being made to

the copyright owners. The government’s Sentencing Memorandum argued that BMG

is a victim because it owns the discs, sells them with permission of the copyright

owners, and controls the disposition of undeliverable discs; that each time Chalupnik

sold an undeliverable disc, the artist lost a royalty and BMG lost a potential sale; and

that the amount of those losses is conservatively estimated by Chalupnik’s gross

revenues, $78,818.

At sentencing, the government introduced no additional evidence relating to

BMG’s actual loss. Chalupnik testified that all undeliverable discs were discarded in

the post office trash or, after a change in practice in March 2005, were bagged and

sent to a postal facility in the Twin Cities. Agreeing with the government and the

PSR, the district court ordered Chalupnik to pay $78,818 in restitution to BMG. The

court explained: “I do believe that there is in fact a lost opportunity to . . . BMG, that

the people that bought those CD’s . . . would likely have bought new CD’s, and that

that represents a real and substantial loss to . . . BMG in the amount of $78,818.” The

court further noted that, in a civil lawsuit by BMG, Chalupnik’s liability would

include disgorgement of his profits from converting BMG property; therefore,

imposing a fine payable to the United States instead of restitution might well increase

Chalupnik’s total liability.

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In his reply brief, Chalupnik argued for the first time that the MVRA does not

apply to a criminal copyright infringement conviction because, although an offense

“against property,” it is found in Title 17, not Title 18, of the United States Code. We

decline to consider this issue as it was not timely raised. See Barham v. Reliance

Standard Life Ins. Co., 441 F.3d 581, 584 (8th Cir. 2006). The statute provides that

a willful infringer for private financial gain “shall be punished as provided under

section 2319 of title 18.” 17 U.S.C. § 506(a)(1)(A). Courts have applied the MVRA

to criminal copyright convictions without discussing this issue. See United States v.

Hudson, 483 F.3d 707, 710 (10th Cir. 2007); United States v. Susel, 429 F.3d 782,

784 (8th Cir. 2005).

2

Initially codified at 18 U.S.C. § 3579 (1982), this statute as amended is now

18 U.S.C. § 3663. It continues to govern the award of discretionary restitution for

offenses not covered by the MVRA.

-4-

II.

The Mandatory Victims Restitution Act (“MVRA”) provides that a sentencing

court “shall order” a defendant convicted of “an offense against property under this

title” to pay restitution to a “victim.” 18 U.S.C. §§ 3663A(a)(1), (c)(1). The

restitution award in this case raises two distinct issues: whether BMG is a “victim”

entitled to mandatory restitution under the MVRA1

 and, if so, what is the proper

amount of restitution to be awarded. The first is primarily an issue of law that we

review de novo. See United States v. Wilcox, 487 F.3d 1163, 1176 (8th Cir. 2007).

In resolving the second issue, we review a finding as to the amount of loss for clear

error and the district court’s decision to award restitution for abuse of discretion. See

United States v. Petruk, 484 F.3d 1035, 1038 (8th Cir. 2007). The government has the

burden of proof on both issues. 

A. Is BMG a Victim?

In Hughey v. United States, 495 U.S. 411 (1990), the Supreme Court held that

the Victim and Witness Protection Act of 1982 (“VWPA”)2

 was “intended to

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compensate victims only for losses caused by the conduct underlying the offense of

conviction.” 495 U.S. at 416. Therefore, restitution may be awarded only to victims

of the offense of conviction, and a victim may not be compensated for conduct

unrelated to the offense of conviction, even if that unrelated conduct was the subject

of criminal charges dropped by the government in exchange for the defendant’s guilty

plea. Id. at 420-21. Congress responded by adding a definition of “victim” that

retained the core limiting principle of Hughey but clarified its application to certain

offenses and to plea agreements. See 18 U.S.C. § 3663(a)(2)-(3) (Supp. III 1991). 

When Congress enacted the MVRA in 1996, it included a definition of

“victim” that again incorporated the core principle of Hughey:

(2) For the purposes of this section, the term “victim” means a

person directly and proximately harmed as a result of the commission of

an offense for which restitution may be ordered including, in the case of

an offense that involves as an element a scheme, conspiracy, or pattern

of criminal activity, any person directly harmed by the defendant’s

criminal conduct in the course of the scheme, conspiracy, or pattern. . . .

(3) The court shall also order, if agreed to by the parties in a plea

agreement, restitution to persons other than the victim of the offense.

18 U.S.C. § 3663A(a)(2)-(3). Consistent with Hughey, the Senate Judiciary

Committee Report explained that, unless a plea agreement provides otherwise, the

“mandatory restitution provisions apply only in those instances where a named,

identifiable victim suffers a physical injury or pecuniary loss directly and proximately

caused by the course of conduct under the count or counts for which the offender is

convicted.” S.REP.NO.104-179, at 19 (1996), reprinted in 1996-4 U.S.C.C.A.N. 924,

932. Congress also amended the VWPA so that the two statutes would contain

identical definitions of the term “victim” and substantively identical plea agreement

provisions. See 18 U.S.C. § 3663(a)(2)-(3); United States v. Ramirez, 196 F.3d 895,

899-900 (8th Cir. 1999). 

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Chalupnik argues that the government failed to prove that BMG was a “victim”

for purposes of the MVRA because it presented no evidence that BMG, a retail mailorder seller of CDs and DVDs, had an interest in the infringed copyrights sufficient

to make BMG a victim of his copyright infringement offense. This is a novel and

intriguing contention. We agree with a number of its underlying premises. First,

restitution is “essentially a civil remedy created by Congress and incorporated into

criminal proceedings for reasons of economy and practicality.” United States v.

Carruth, 418 F.3d 900, 904 (8th Cir. 2005). Therefore, restitution, at least in theory,

“tracks the recovery to which the victim would have been entitled in a civil suit

against the criminal.” United States v. Behrman, 235 F.3d 1049, 1052 (7th Cir. 2000)

(quotation omitted). Second, copyright law generally limits standing to seek a civil

remedy for copyright infringement to the owner of the copyright or to a person who

holds an exclusive license to one of the owner’s exclusive rights in the copyrighted

work. See 17 U.S.C. §§ 106, 501(b); 3 Nimmer on Copyright § 12.02[B] (2007).

This may be an unsettled issue of copyright law. See the conflicting opinions in

Silvers v. Sony Pictures Entm’t, Inc., 402 F.3d 881 (9th Cir. 2005) (en banc). But it

appears that BMG could not bring a civil action against Chalupnik for copyright

infringement unless it was the exclusive licensee of the copyright owners, and the

government does not argue to the contrary. Third, the government offered no

evidence that BMG was an owner or exclusive licensee of any of the infringed

copyrights, and there is good reason to believe that BMG has not been granted

exclusive licenses. See 3 Nimmer § 12.02[B] at 12-57 to 12-58. 

Though we agree with Chalupnik’s underlying premises, we agree with the

government that BMG was a victim under the MVRA as a matter of law. The issue

posed by Chalupnik is whether, to be a victim for purposes of the MVRA, a person

must have standing to bring a civil action for the injury the criminal statute is intended

to remedy -- here, copyright infringement -- or whether MVRA victims include

persons who have other injuries proximately caused by, in the words of Hughey, “the

conduct underlying the offense of conviction.” 495 U.S. at 416. The MVRA does not

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The court commented: “Isn’t it a bailment [between BMG and USPS]? . . .

You’ve [Chalupnik] converted the property to your own use. All right? And you’ve

made a profit. . . . If the property can’t be specifically recovered, then there’s a

constructive trust that’s created in the proceeds of . . . that property. Which would be

what? The $78,000. Just ordinary property principles, that would happen, right?”

-7-

use the term, “conduct underlying the offense of conviction.” Instead, it defines a

victim as a person “proximately harmed as a result of the commission of” the offense.

18 U.S.C. § 3663A(a)(2). But the word “commission” reflects an intent to include the

defendant’s total conduct in committing the offense, an intent confirmed by the Senate

Judiciary Committee Report, which paraphrased Hughey in referring to “the course

of conduct under the count or counts for which the offender is convicted.” S.REP.NO.

104-179, at 19.

For this reason, we conclude that the relevant analogy is not whether BMG

could sue Chalupnik for copyright infringement. Rather, the relevant analogy is

whether BMG would have a civil cause of action against Chalupnik for his conduct

in committing the copyright infringement offense of conviction. As the district court

noted at sentencing, the answer to that question is clearly yes, because Chalupnik’s

offense conduct included stealing or converting BMG property from BMG’s bailee,

USPS.3

 That qualifies BMG as an MVRA victim, just as the bank customer who

suffered lost wages as a result of witnessing an attempted bank robbery was an

MVRA victim in Moore v. United States, 178 F.3d 994, 1001 (8th Cir. 1999). The

bank customer could not have sued the defendant for attempting to rob the bank, but

the customer was an MVRA victim because he suffered pecuniary damage as a result

of the defendant’s commission of the offense. Accord United States v. Donaby, 349

F.3d 1046, 1054 (7th Cir. 2003) (owner of police car damaged during bank robber’s

getaway was MVRA victim).

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B. Did the Government Prove a BMG Loss?

When an MVRA victim is identified, the government must prove “the amount

of the loss sustained by [the] victim as a result of the offense” by a preponderance of

the evidence. 18 U.S.C. § 3664(e); see United States v. Searing, 250 F.3d 665, 667

(8th Cir. 2001). Chalupnik argues that the government failed to prove that BMG

suffered lost profits, or any other actual loss, as a result of his committing the offense

of conviction. On this barren record, we agree. 

In concluding that BMG was an MVRA victim, the district court commented

that it was appropriate to award restitution in the amount of Chalupnik’s $78,818 in

sale proceeds because BMG could recover these ill-gotten gains in a civil lawsuit.

The government stresses this disgorgement concept on appeal. However, we rejected

this approach to criminal restitution some two months after the district court ruled:

The modern trend in private civil litigation endorses use of the common

law remedy of restitution to punish intentional wrongdoers by

compelling the disgorgement of all ill-gotten gain. See Restatement

(Third) of Restitution and Unjust Enrichment § 51 (Tentative Draft No.

5, Mar. 12, 2007). . . . However, while restitution under the MVRA may

be a form of punishment for Ex Post Facto Clause purposes . . . it is clear

that Congress intended that restitution be a compensatory remedy from

the victim’s perspective. Therefore . . . MVRA victims, should be

limited to compensation for their actual losses.

Petruk, 484 F.3d at 1038. In other words, while the availability of a civil remedy is

relevant in determining who is an MVRA victim, the amount of restitution that may

be awarded is limited to the victim’s provable actual loss, even if more punitive

remedies would be available in a civil action. Thus, while the fact that a defendant

profited from the crime without causing actual loss to an identifiable victim may be

an appropriate reason to increase his punishment, Petruk and the plain language of the

MVRA confirm that punishment of a federal criminal defendant must be imposed by

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means of criminal penalties -- fines, criminal forfeitures, and imprisonment.

Restitution to MVRA victims “must be based on the amount of loss actually caused

by the defendant’s offense.” Id. at 1036 (quotation omitted, emphasis in original). 

Stripped of a disgorgement rationale, it is clear that the government proved no

actual loss to BMG. The PSR recommended, and the district court agreed, that BMG

suffered a “lost opportunity” when Chalupnik stole BMG’s undeliverable discs and

sold them to competing retail sellers. The PSR’s lost opportunity rationale is valid in

the sense that all authorized retailers of the copyrighted discs -- Wal-Mart, Best Buy,

iTunes, BMG, and countless others -- as well as the copyright owners, suffered

collective financial injury when infringer Chalupnik sold purloined discs at cut-rate

prices to used record stores. But it would be a windfall to award BMG this entire

collective “injury to the market.” And the large number of victims and the difficulty

of determining each victim’s actual loss make the collective injury inappropriate for

MVRA restitution. See 18 U.S.C. § 3663A(c)(3). 

The government argues that the price at which Chalupnik sold the stolen discs

is a reasonable, indeed conservative estimate of BMG’s lost sales. One problem with

this argument is that, for goods held by a merchant for sale, lost profits rather than lost

sales revenues are the proper measure of “actual loss.” A more fundamental problem

is that proof of lost sales, like proof of lost profits, may not be “based entirely upon

speculation.” United States v. Young, 272 F.3d 1052, 1056 (8th Cir. 2001). Here, the

letter from BMG’s senior counsel asserted that Chalupnik sold discs to used record

stores whose customers “theoretically could have purchased them [from BMG],

resulting in lost sales to BMG.” But BMG’s practice of destroying rather than

restocking undeliverable discs meant that the discs Chalupnik stole would not have

been sold by BMG, and there is no evidence that Chalupnik’s sales diverted specific

business from BMG. From this standpoint, BMG’s position resembles that of the

purported MVRA victims whose restitution awards were reversed because the

government failed to prove actual loss through lost sales in Hudson, 483 F.3d at 710-

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11, where counterfeit Microsoft software was turned over to the government by the

infringing defendant’s customer before any payment to the infringer, and in United

States v. Adams, 19 Fed. Appx. 33, 35 (4th Cir. 2001) (unpublished), where pirated

videocassettes were confiscated before the infringer could sell them.

Finally, the government argues that BMG should receive restitution on behalf

of the unidentified copyright owners who would have been paid royalties had BMG

sold the purloined discs. This argument is without merit because restitution to each

victim is limited to “the full amount of each victim’s losses.” 18 U.S.C.

§ 3664(f)(1)(A). The letter from BMG’s senior counsel admitted that Chalupnik’s

criminal conduct “resulted in no royalty payments being made [by BMG] to the

artists, record labels, music publishers, and movie studios,” so there was no proof of

actual loss to BMG arising out of its unproven relationships with copyright owners.

For the foregoing reasons, we vacate the restitution portion of the district

court’s judgment and remand for resentencing. Because our decision in Petruk

clarified the applicable law after the district court entered the judgment, we leave to

the district court’s discretion on remand whether to reconsider the restitution issue on

an expanded sentencing record as well as its previous decision not to impose a fine.

______________________________

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