Opinion ID: 569100
Heading Depth: 2
Heading Rank: 3

Heading: Application of Exhaustion Principles in This Case

Text: 28 We now turn to the question of whether--considering the policies enunciated in McKart, Myers, and Schlesinger--the present circumstances mandate the invocation of the exhaustion doctrine to bar judicial interference in the administrative process. Federal courts have jurisdiction exclusive of any state court over copyright cases, 28 U.S.C. § 1338(a), reflecting the federal nature of copyright law, which itself derives from the Copyright Clause of the United States Constitution. U.S. Const. art. 1, § 8, cl. 8; 1 Nimmer, Copyright, § 1.01[A] at 1-3 (1989). The district court plainly has jurisdiction over plaintiffs' demand for a declaratory judgment that the dolls are not infringing, as well as over the infringement claim brought by Mattel in its counterclaim. 29 The Treasury Department also has been assigned the duty of enforcing the copyright laws in cases in which there is reason to believe an imported item may be an infringing copy. Any action taken in fulfillment of that duty therefore lies, as it were, within the jurisdiction of Customs. We therefore must ask whether, given such concurrent jurisdiction, the district court in this case should exercise its jurisdiction to interfere with administrative proceedings that are properly brought and now ongoing. 30 A strong argument may be made that the exhaustion doctrine bars such interference. To allow plaintiffs to avoid the procedure Congress mandated in § 603 would set a precedent without perceivable limit that could be invoked by other importers whose goods have been detained. Plaintiffs say their case is unusual--and would not set such a precedent--because they are suffering irreparable harm due to time constraints in filling contract orders in marketing their product, and damage to their reputation as reliable suppliers. Theirs is an unusual case, they also assert, because the Miss America line is a major new product introduction important to the financial health of the company, they have a unique opportunity to enter a large, long-term market, and most other importers do not rely on a single item as heavily as they are and are not involved with seasonal marketing concerns. 31 All of these arguments are, of course, routinely available to any importer that has invested a great deal of money in goods that have been detained. Most importers would secure customer orders before importing goods, and would be able to argue that they are losing a large investment, and a unique opportunity to enter a market, if they must submit to the Customs' procedures. All merchants are naturally concerned with their reputations. As to seasonal sensitivity and reliance on a single product, Kenner has presented no proof that its financial viability as a company hinges on the success of this one line of dolls. In fact, in its Amended Complaint it stated that it is one of the leading and best known American toy companies, [and] sells a diverse line of toys throughout the world. In addition, a number of Miss America dolls already have entered the country, have been introduced at the Toy Fair, and are now gracing retail shelves. 32 Further, there are other importers whose products are sensitive to seasonal marketing, as well as a large number who have only one product line. In short, we have no doubt that were we to rule in Kenner's favor, the Customs exclusion order process would be eviscerated because there is nothing unique about Kenner's circumstances that would justify judicial crafting of a different rule in its favor. At the very least we would encourage increased litigation in federal court by opening the door for parties to argue they fit whatever exception to the exhaustion rule this case would carve out. 33 Plaintiffs also contend that only six cases in the last 40 years have been reported in which a party has sought relief from Customs detention in a trademark or copyright context. This proves only that plaintiffs have chosen to tread a path not often taken and not, as they would have us believe, that only in rare cases will an importer follow their lead. With respect to the contention that few will wish to attempt to meet the heavy legal burden faced by a party seeking an injunction, it seems more likely that once the legal gates have been lowered, many will hurdle the costs of filing and attorneys' fees to move for an injunction on the off-chance they can meet the legal test for obtaining that relief. Again, were we to determine that plaintiffs in this case had satisfied the preliminary injunction standard, then this case would not be the exception, but the rule, for every importer would be able to allege the type of injury plaintiffs allege. Such a result would effectively turn the Congressional scheme set forth in 17 U.S.C. §§ 501 and 603--granting the copyright holder its choice of forum and expressing a policy of giving the holder an advantage over the alleged infringer--upside down. 34 The other policies mentioned in McKart also support the conclusion we reach. Allowing the plaintiffs to invoke judicial review would prematurely interrupt the administrative process, for at this point, though Customs has determined that the Kenner dolls infringe on Mattel's copyright, the agency's seizure and forfeiture process has yet to be completed. A Customs determination regarding infringement also may eliminate any need for judicial action, if only because the losing party may decide judicial review on the infringement issue is not worth the cost. Plaintiffs argue that in this case, no judicial efficiency will be served because they have sued on claims outside Customs' jurisdiction that will remain in court, and because they fully intend to pursue any infringement determination. These arguments are unavailing. First, the losing party will not always seek to obtain judicial review of an adverse administrative decision. That the plaintiffs intend to pursue the infringement determination in this instance does not warrant precedential intrusion on the part of the judiciary. Second, if an administrative process could be so easily by-passed by adding a few more causes of action onto a request for preliminary relief, then every importer would take this tack and the courts would become the primary adjudicators not only of every dispute involving detained imported goods, but of numerous side claims as well. 35 Appellants' contention that the legislative history of the 1976 Copyright Act indicates that Customs has no expertise in making determinations of infringement is also unpersuasive. They cite a House Report for the proposition that, under the previous act, Customs was often in no position to make determinations as to whether particular articles [we]re 'piratical.'  H.R.Rep. No. 94-1476, 94 Cong., 2d Sess. 171 (1976), U.S.Code Cong. & Admin.News 1976, pp. 5659, 5787. But the last part of the sentence, which was not quoted, clearly indicates the difficulty only existed under the earlier act because the copyright holder did not need to submit proof of infringement. Now that the statutes and regulations require such proof, Customs is in a position to make that determination. 36 Further, plaintiffs' reliance on Goya Foods, Inc. v. Tropicana Prods., Inc., 846 F.2d 848 (2d Cir.1988), as authority for the proposition that Customs does not have expertise in infringement determinations does not help them. In Goya, the question presented was whether a district court could stay trademark infringement litigation pending the outcome of registration proceedings before the United States Patent and Trademark Office. Id. at 851. While it is true that in the course of distinguishing the case before it from cases in which the application of the primary jurisdiction doctrine was appropriate, the court found that [l]ikelihood of consumer confusion ... is a legal standard with which courts have long-standing familiarity in resolving suits and thus was within the traditional competency of the court, id. at 853, this language was meant to distinguish cases implicating the notion that primary jurisdiction applied. Primary jurisdiction is related to the exhaustion doctrine. It has effect when Congress has delegated initial or exclusive responsibilities to an administrative agency to resolve certain issues in complex matters in which the agency has special competence. See Aircraft & Diesel Equip. Corp. v. Hirsch, 331 U.S. 752, 767-68, 67 S.Ct. 1493, 1500-01, 91 L.Ed. 1796 (1947); Goya Foods, Inc., 846 F.2d at 851. We do not believe that doctrine comes into play in copyright jurisprudence. 37 Congress has granted Customs some independence and autonomy in making determinations of infringement regarding items imported into the United States, and as a separate executive agency with its own powers and duties, it is entitled to our forbearance as it carries out its duties. That federal courts are competent to make infringement determinations does not lead to the conclusion that Customs is not. Because federal courts may have a greater knowledge of and ability to apply the copyright statute, due to their broad experience in applying that statute, should not be a reason--so long as Customs proceeds in conformity with the statutory scheme--to enjoin the Service from performing its statutory duties. See McKart, 395 U.S. at 194, 89 S.Ct. at 1662; Dor, 891 F.2d at 1001. II Exceptions A. Statutory Exception 38 Whether the district court correctly found the case does not fall within two of the exceptions to the exhaustion doctrine is next discussed. The first of the exceptions invoked by appellants occurs when the issue presented to the court is one of purely statutory interpretation. Touche Ross & Co. v. S.E.C., 609 F.2d 570, 577 (2d Cir.1979); see T.I.M.E.-DC, 756 F.2d at 945. This exception exists primarily because there is no need for the exercise of any agency expertise or discretion where there is a question of statutory interpretation. See Touche Ross & Co., 609 F.2d at 577. Plaintiffs declare this case falls within this exception because the question of infringement is a legal question relating to the scope of copyright protection. They insist the courts, not Customs, are experts on questions regarding what is copyrightable and whether there is substantial similarity. 39 Whether one particular item infringes on another particular item is not the sort of general legal principle calling for the kind of statutory interpretation to which the exception applies, but is instead one calling for a decision based on a factual record. See Financial Info., Inc. v. Moody's Investors Serv., Inc., 808 F.2d 204, 207-08 (2d Cir.1986) (finding of originality of allegedly infringing article is a finding of fact), cert. denied, 484 U.S. 820, 108 S.Ct. 79, 98 L.Ed.2d 42 (1987). If this kind of simple application of law to fact were the kind of statutory interpretation that eliminated the need to comply with the administrative remedies, the exception would swallow the rule, for every case involves this kind of statutory interpretation. 40 In contrast to those cases in which the exception has been applied, here there is no question regarding the scope or interpretation of the Copyright Act in any way that would set a broad legal rule applicable to other cases. See, e.g., T.I.M.E.-DC, 756 F.2d at 945 (question presented was whether provisions operated as condition precedent to assessment of liability, which was question of statutory interpretation not connected to any resolution of questions of fact); Diapulse Corp., 500 F.2d at 77-78 (dispute over whether Freedom of Information Act authorized the FDA to charge high fees for release of information was a question that could be resolved without development of factual record or exercise of discretion); Beard v. Gen. Serv. Admin., 801 F.2d 1318, 1321 (Fed.Cir.1986) (whether Civil Service Reform Act of 1978 required Merit Systems Protection Board to determine independently the proper penalty for violations of agency rules was a question of law that did not require development of a factual record). Thus, the statutory exception does not apply in the case at hand. B. Inadequate Protection 41 The second exception to the exhaustion doctrine may be termed the inadequate protection exception. If  'an immediate appeal is necessary to give realistic protection to the claimed right' ... a court may properly carve an exception to the [exhaustion] doctrine. Bristol-Myers Co. v. F.T.C., 469 F.2d 1116, 1118 (2d Cir.1972) (quoting L. Jaffe, Judicial Control of Administrative Action 429 (1965)); T.I.M.E.-DC v. N.Y. State Teamsters Conference Pension & Retirement Fund, 580 F.Supp. 621, 633 (N.D.N.Y.1984) (exhaustion is not required 'when the nonjudicial remedy is clearly shown to be inadequate to prevent irreparable injury' ) (quoting Republic Indus., Inc. v. Central Pennsylvania Teamsters Pension Fund, 693 F.2d 290, 293 (3d Cir.1982)). It is only in a rare circumstance that the preliminary or procedural agency action will threaten so irreparable an injury as to justify interlocutory resort to corrective judicial process. Bristol-Myers, 469 F.2d at 1118. Having to litigate an issue is not the sort of injury adequate to justify the application of this exception. Id. 42 The parties disagree as to what kind of harm plaintiffs are facing and whether it is irreparable. It is plaintiffs' belief that the entire success of the line of dolls depends on the success of its launch, and that if they are not in a position to deliver the dolls soon, their orders will drop off and they will be locked out of the trade. They argue that the administrative procedure is inadequate to protect them from this harm because the procedure itself is time consuming and because there was no time limit within which Customs was required to issue a decision. Even were it to succeed in its infringement dispute after judicial review of the Customs order finding a copyright infringement, Kenner argues, it would then be too late to rectify the harm befalling it. Appellants insist additionally that the reputations of Miss America title holders will be damaged because of their association with a commercial failure, and that the Miss America organization would suffer a loss of reputation and reduced scholarship funds. 43 Defendants respond that, at bottom, this claim is that delay will cost appellants grievous economic loss, and that this type of loss is not irreparable damage. See Johnpoll v. Thornburgh, 898 F.2d 849, 851 (2d Cir.) (per curiam) (economic loss does not in and of itself generally constitute 'irreparable injury' which might excuse requiring a plaintiff to exhaust administrative remedies and justify preliminary injunctive relief), cert. denied, --- U.S. ----, 111 S.Ct. 63, 112 L.Ed.2d 38 (1990). The cases upon which defendants rely in support of this argument--Petroleum Exploration, Inc. v. Public Serv. Comm'n, 304 U.S. 209, 220-22, 58 S.Ct. 834, 840-41, 82 L.Ed. 1294 (1938), and Myers, 303 U.S. at 47-48, 53, 58 S.Ct. at 461-62, 464--involved preliminary agency action. The injuries alleged in all of these cases were either simple delay, the cost of litigation, loss of reputation or, in Myers, an increased potential for labor disturbances. While these cases demonstrate that delay, loss of business reputation, and the cost of litigation alone are insufficient to establish irreparable harm, they leave open the question of what degree of harm will be sufficient to trigger the exception when the agency has taken or is about to take some substantive action such as seizing the plaintiff's goods--that is, some agency action that goes beyond the investigatory stage. 44 Plaintiffs point to two cases in which a court has found irreparable harm allowing a party to bypass an administrative remedy. First, in B. Wilmsen, Inc. v. Consolidated Novelty Co., 251 F.Supp. 874, 875-77 (S.D.N.Y.1965), irreparable injury was found in the loss of customer orders and lay-off of employees. To the extent that this case suggests that such calculable damages may form the basis for a finding of irreparable injury, we think it was wrongly decided in light of the Supreme Court precedents discussed earlier. 45 The second case upon which plaintiffs rely is better authority. In T.I.M.E.-DC, it was found that, because of a strike, the company had lost ten million dollars in shareholder equity, all of its general commodities customers, and most of its terminal employees. 580 F.Supp. at 631-32. The uncontradicted testimony of a top company official was that if plaintiffs were allowed to pursue their claims against the company, it would not survive because it would create the perception that the company would be closed and because competitors would trumpet its difficulties to take away customers. Id. at 631. 46 Having outlined these circumstances, the court held that threats of diminished consumer confidence and elimination of business opportunities are clearly consequences constituting irreparable harm. Id., citing Doran v. Salem Inn, Inc., 422 U.S. 922, 932, 95 S.Ct. 2561, 2567, 45 L.Ed.2d 648 (1975) (uncontradicted allegation that bankruptcy would result meets standards for granting interim relief) and Jacobson & Co., Inc. v. Armstrong Cork Co., 548 F.2d 438, 444-45 (2d Cir.1977) (party's ample evidence of threatened loss of goodwill and customers supported finding of irreparable harm that could not be rectified by money damages); see B. & R. Choiniere Ltee. v. Art's-Way Mfg. Co., Inc., 207 U.S.P.Q. 969, 972 (N.D.N.Y.1979) (court that had extensive knowledge of the case credited testimony that detention of goods would threaten to put company out of business and testimony that detention would imperil profitable operation of the company); see also Reuters Ltd. v. United Press Int'l, Inc., 903 F.2d 904, 907-08 (2d Cir.1990) (loss of customers and goodwill can constitute irreparable harm). The parties in T.I.M.E.-DC went into extensive detail in arguing the financial prospects of the company, 580 F.Supp. at 631-32, and the court held that the threat was one presently existing, rather than a possibility of a remote future injury, because the evidence has established beyond any doubt that TIME-DC would suffer a devastating blow were the Fund permitted to assert withdrawal liability. Id. at 632 (citation omitted). 47 In the instant case, plaintiffs' dolls were not, and would not have been, held indefinitely. Because the dolls were found to infringe upon Mattel's copyright, the plaintiffs suffered no legally cognizable harm from the detention of the dolls. If, upon administrative reconsideration or judicial review, the Customs' decision is overturned, then any loss due to orders cancelled within the period of time within which the dolls were detained may, like any lost scholarship funds, be calculated in money damages. 48 As to the claims of loss of business opportunities and market, plaintiffs are required to make a clear showing of harm by virtue of the delay, M.G. Davis & Co. v. Cohen, 369 F.2d 360, 363 (2d Cir.1966), and the proof offered in this case does not match the proof of harm shown in T.I.M.E.-DC, Doran, and Jacobson. In those cases there was more than ample proof credited by the court of the broad effect of the action at issue, while here Kenner and the Miss America Organization have submitted only a single affidavit, from Kenner's Vice President for Marketing, that repeats the allegations of harm but furnishes no actual proof that the delay involved in waiting for the Customs infringement decision will have caused such great loss of goodwill or market that the total harm would not be compensable through monetary damages, much less any proof that Kenner will go bankrupt. See Wales Indus. Inc. v. Hasbro Bradley, Inc., 612 F.Supp. 507, 508-09 (S.D.N.Y.1985) (plaintiff claimed that unless a court made an early determination of the validity of defendant's copyrights its shipments might be delayed or detained by Customs, it might lose prospective sales and, as a new company, would be severely damaged in its business and reputation if it were forced to cancel pending purchase orders; court held that greatest risk of loss--inability to fill orders--could be calculated in money damages, and loss of future business opportunities claims unsupported, so no irreparable harm shown). Mattel has submitted a similar affidavit that counters at least some of plaintiffs' unsupported assertions regarding the effect of the timing of a product introduction in the toy industry. Moreover, any connection between commercial harm to the sale of a line of dolls called Miss America dolls and harm to the reputations of Miss America contest winners is at best tenuous. 49 Because we hold that plaintiffs have failed to demonstrate that they will suffer any irreparable harm, we need not address whether the Customs process would provide inadequate protection were plaintiffs to submit sufficient proof of irreparable harm. Under the existing circumstances we are satisfied that the district court properly exercised its discretion when it declined to interfere with what continues to be an ongoing administrative proceeding.