Opinion ID: 787862
Heading Depth: 4
Heading Rank: 4

Heading: indirect profits

Text: 35 Section 504(b) provides recovery for any profits of the infringer that are attributable to the infringement. 17 U.S.C. § 504(b). On its face, § 504(b) does not differentiate between `direct profits' — those that are generated by selling an infringing product — and `indirect profits' — revenue that has a more attenuated nexus to the infringement.'' Mackie, 296 F.3d at 914. Consequently, we have held that, like its predecessor, § 504(b) is expansive enough to afford parties an indirect profits remedy under certain conditions. Id. 36 We have repeatedly affirmed the availability of this remedy under the Copyright Act of 1976. See, e.g., Mackie, 296 F.3d at 914; Cream Records, 754 F.2d at 828; see also Frank I, 772 F.2d at 517 (Copyright Act of 1909). As we elaborated in Mackie, however, because the amount of profits attributable to the infringement in an indirect profits case is not always clear, we have held that a copyright holder must establish the existence of a causal link before indirect profits damages can be recovered. 7 Mackie, 296 F.3d at 914. When an infringer's profits are only remotely and speculatively attributable to infringement, courts will deny recovery to the copyright owner. 4 NIMMER ON COPYRIGHT § 14.03, 14-34; see also Frank I, 772 F.2d at 517 (a court may deny recovery of a defendant's profits if they are only remotely or speculatively attributable to the infringement). 37 Section 504(b) sets forth the evidentiary burdens for recovery of profits: The copyright owner is entitled to recover ... any profits of the infringer that are attributable to the infringement.... 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 his or her deductible expenses and the elements of profit attributable to factors other than the copyrighted work. 17 U.S.C. § 504(b). Thus, § 504(b) creates a two-step framework for recovery of indirect profits: 1) the copyright claimant must first show a causal nexus between the infringement and the gross revenue; and 2) once the causal nexus is shown, the infringer bears the burden of apportioning the profits that were not the result of infringement. 38 This appeal requires us to apply the fundamental standard articulated in our decision in Mackie: that a copyright infringement plaintiff seeking to recover indirect profit damages must proffer some evidence ... [that] the infringement at least partially caused the profits that the infringer generated as a result of the infringement. Mackie, 296 F.3d at 911 (discussing the standard for summary judgment). From this principle, it is implicit that the profits sought are those that arise from the infringement. Thus, a copyright owner is required to do more initially than toss up an undifferentiated gross revenue number; the revenue stream must bear a legally significant relationship to the infringement. 8 The result is that a plaintiff seeking to recover indirect profits must formulate the initial evidence of gross revenue duly apportioned to relate to the infringement. 4 NIMMER ON COPYRIGHT § 14.03[B], 14-39. 39 Although the statute only references the broad term gross revenue, to conclude that a copyright plaintiff need only provide the company's overall gross revenue, without regard to the infringement, would make little practical or legal sense. Otherwise, the plaintiff in a copyright action against a multidivision, multi-product company such as General Mills, would need to do nothing more than offer an overall gross revenue number — like $11.5 billion — and sit back. See Taylor, 712 F.2d at 1122. But the causation element of the statute serves as a logical parameter to the range of gross profits a copyright plaintiff may seek. This rule of reason obviates a good deal of mischief in claiming profits beyond what might be attributable to the infringement, 4 NIMMER ON COPYRIGHT § 14.03[B], 14-39, without diminishing the benefit § 504(b) confers on plaintiffs. The standard is straightforward: a copyright plaintiff is bound to no more and no less than its statutory obligation to demonstrate a causal nexus between the infringement and the profits sought. See On Davis, 246 F.3d at 160. 40 With these requirements in mind, we address Timex's challenge to the $2.1 million indirect profit award. At trial, Polar Bear estimated that it was entitled to recover between $1.7 and $3.2 million in Timex's profits allegedly gained from its unauthorized use of Polar Bear's copyrighted material. Polar Bear's request was based on the testimony of its expert witness, Professor Robert Hansen, who arrived at his estimate by aggregating the purported profit resulting from three sources: 1) Timex's direct sales at trade shows; 2) its use of a still image in a promotion affiliated with the soft drink Mountain Dew; and 3) the overall enhancement of brand prestige resulting from Timex's association with the sport of extreme kayaking. 41 As to the trade show booth calculation, Hansen reviewed Timex's sales records from the twelve trade shows where it showed the unauthorized PaddleQuest materials. Hansen calculated that Timex yielded an average of $30,000 in sales per show, for a total of $360,000 in gross revenue. Based on his experience evaluating trade shows, he concluded that approximately 10% to 25% of trade show sales are the result of excitement created by the booth promotion, of which the PaddleQuest materials were a substantial part. 42 Hansen's testimony established the requisite causal connection between the category of profits sought-revenue from trade booth sales — and the infringement. Thus, Polar Bear's request is a reasonable approximation of the profit related to infringement. Under § 504(b), Polar Bear was not required to separate the gross profits resulting from the infringement from the profits resulting from other sources, but it undertook to do so anyway. Using a profit margin determined from Timex's invoices, Hansen estimated that Timex gained between approximately $20,000 and $50,000 in net profit from the infringement. In claiming only a portion of the $360,000 in gross revenues from booth sales, Polar Bear recognized the impropriety of awarding [Polar Bear] all of[Timex's] profits on a record that reflects beyond argument that most of these profits were attributable to elements other than the infringement. Cream Records, 754 F.2d at 829. Polar Bear more than satisfied the sole requirement of a reasonable approximation in assessing the amount of profits attributable to the infringing material. Id. (quoting Sheldon v. Metro-Goldwyn Pictures Corp., 309 U.S. 390, 408, 60 S.Ct. 681, 84 L.Ed. 825 (1940)). 43 Sufficient circumstantial evidence also supports Polar Bear's argument that the use of PaddleQuest images contributed to sales of Expedition watches in Timex's promotional efforts with Mountain Dew. The Mountain Dew promotional materials offered consumers the opportunity to purchase a Timex Expedition watch at a discounted price. Polar Bear demonstrated a sufficient causal nexus through evidence that the Mountain Dew booklet contained an advertisement featuring the infringing material, that customers who ordered Timex Expedition watches through the Mountain Dew promotion would have seen the advertisement, and that Timex profited from the promotion. Polar Bear satisfied its burden of establishing the infringer's relevant gross revenue, as required by § 504(b), by presenting sales figures from Timex's press releases stating that the Mountain Dew promotion generated $564,000 in sales. Although it was not required to apportion the gross profit figure, Polar Bear claimed only $242,520 in Timex's profits, based on an estimated profit rate of 43%. Under § 504(b), the primary responsibility for further apportionment of profits fell to Timex. 44 Because the jury did not delineate the individual components of its total indirect profits award, it is impossible to tell whether the portion of the award related to the Mountain Dew promotion was duly apportioned. See Cream Records, 754 F.2d at 828-29 (stating that apportionment necessary where an infringer's profits are not entirely due to the infringement). In the absence of evidence to the contrary, we presume that the jury fulfilled its duty to apportion profits. See MOORE'S FEDERAL PRACTICE 3d § 52.34[2a] (noting that the amount and apportionment of damages is given great deference). 45 Our deferential review of the verdict cannot, however, insulate the basis for the overwhelming bulk of the indirect profits claim, namely, Timex's purported revenue derived from the enhanced prestige of the Expedition line of watches. Substantial evidence does not support the required causal link between the infringement and the revenue derived from enhanced brand prestige. Because the other damages claims — trade show sales and the Mountain Dew promotion — cannot total to the overall $2.1 million verdict, nor can they be fairly segregated from the total, we are left with no choice but to vacate the award. 46 Using a method called brand premium analysis, Hansen posited that a significant portion of the price increase for Expedition watches during a four-year period was the result of customers' favorable feelings generated by Timex's promotional efforts involving PaddleQuest materials. Multiplying the increase in the average watch price with the number of watches sold, Hansen determined that Timex's enhanced brand premium was worth approximately $10 million in gross revenue, translating to a $6 million gain in net profits. Finally, Hansen attributed between one-quarter and one-half of that profit to the cumulative effect of the copyright infringement at the twelve trade shows, resulting in approximately $1.5 million and $3 million in indirect profits. 47 Timex argues that the brand premium analysis is per se invalid, as it does not speak to the issue of causation and does not directly measure gross revenue resulting from sales. We agree the award must be vacated, but for the narrower and more run-of-the-mill reason that Polar Bear failed to establish the required causal nexus between the infringement and the profits sought. Although brand premium analysis may be, in certain cases, a valid method of calculating the impact of advertising on the profitability of a product, the use of this methodology does not alleviate the obligation of establishing a causal nexus between the infringement and profits sought. We do not address the question of whether the brand premium analysis arrives at a reasonable estimate of the profits because Polar Bear failed to satisfy its antecedent obligation of demonstrating causation. 9 See Mackie, 296 F.3d at 915 ([T]here must first be a demonstration that the infringing acts had an effect on profits before the parties can wrangle about apportionment.). 48 To recover indirect profits under its brand premium theory, Polar Bear shoulders the burden of demonstrating that the infringement is causally linked to the revenues from the sales of all Expedition watches. Id. at 916 (requiring plaintiff in copyright infringement to demonstrate causal link to revenue sought). Polar Bear's theory of the causal link between Timex's infringement and its increased revenue is that the infringement at the trade shows created excitement about the product and an association between Expedition watches and outdoor sports, that the excitement and association generated at the trade shows somehow translated into consumers purchasing Timex's products, and that consumer enthusiasm permitted Timex to increase prices and generate more revenue. According to Polar Bear, the necessary causal link is evidenced by Timex's statement that the PaddleQuest promotion was an unqualified success, as well as evidence that PaddleQuest images formed a significant part of Timex's promotion at the twelve trade shows. Unfortunately, even taking this circumstantial evidence in the light favorable to the jury verdict, we conclude as a matter of law that evidence of the requisite causal connection is woefully insufficient. 10 Polar Bear's theory stretches the causation rubber band to its breaking point. 49 A comparison of indirect profits cases illustrates why the evidence fails to support this element of the award. In its recent decision in Andreas, which both parties cite in support of their causation arguments, the Eighth Circuit held that a copyright plaintiff adequately established the causal nexus between an automobile manufacturer's use of infringing material in a widely-aired commercial and a portion of profits from the sale of the automobile. Andreas, 336 F.3d at 797-98. Reversing the district court's grant of a motion for judgment as a matter of law, the Eighth Circuit relied on evidence that the infringing material was the centerpiece of a commercial that essentially showed nothing but [the advertised product] ... that [the infringer] enthusiastically presented the commercial to its dealers as an important and integral part of its launch of [the product] ... sales of the [product] during the period that the commercial aired were above [infringer's] projections; the [ ] commercials received high ratings on... surveys that rated consumer recall of the commercials; and [infringer] paid [the advertising company that created the commercial] a substantial bonus based on the success of the commercials. Id. at 796-97. 50 Although Andreas does not necessarily set the bar for what is sufficient evidence of a causal nexus, comparing Polar Bear's claim vividly highlights its deficiencies. Missing is the link between the infringement and revenue resulting from sales. 11 In contrast to Andreas, no evidence establishes that the infringement may have actually influenced the purchasing decisions of those that bought Timex's watches at retail stores or other outlets — the decisions that lead to increased sales revenue, which is the foundation of profits recoverable under § 504(b). 51 Polar Bear concedes that the PaddleQuest images were only shown at trade shows and in the Mountain Dew promotion. Actual retail purchasers were never exposed to the infringing images from the trade shows, nor did the evidence link retail consumers to the trade show promotion. Nor was there evidence that vendors at the trade shows somehow transmitted enthusiasm to retail customers. While there is no requirement that Polar Bear put Timex customers on the witness stand to testify that they purchased watches because of Timex's use of PaddleQuest images, see Andreas, 336 F.3d at 797 (rejecting notion that copyright plaintiff required to have customer testify that infringement caused purchase decision), a copyright plaintiff must present a modicum of proof linking the infringement to the profits sought. Here, too many question marks remain between the promotional infringement, the purported enthusiasm generated among wholesalers and retailers by the advertising, the increased prices, and Timex's ultimate profits. Timex's statement of satisfaction with the initial PaddleQuest promotion and its use of PaddleQuest images do not suffice as the links because they do not explain how the infringement influenced the purchasing decisions that lead to increased prices and ultimately to increased profits. 52 Polar Bear's claim to the profits Timex allegedly derived from brand prestige is less like Andreas, which dealt with revenue from actual sales, and is more like cases involving claims to indirect profits purportedly resulting from enhanced good will, a theory generally rejected by courts. See, e.g., Deltak Inc. v. Advanced Sys., Inc., 574 F.Supp. 400 (N.D.Ill.1983), vacated on other grounds, 767 F.2d 357 (7th Cir.1985) (rejecting as speculative claim for defendant's profits on increased product sales due to infringing sales pamphlet); 53 Roy Export Co. Establishment v. Columbia Broad. Sys., Inc., 503 F.Supp. 1137 (S.D.N.Y.1980), aff'd, 672 F.2d 1095 (2d Cir.1982) (rejecting as speculative profits derived from prestige allegedly resulting from broadcasting infringing motion picture); Orgel v. Clark Boardman Co. Ltd., 128 U.S.P.Q. 531 (S.D.N.Y.1960), modified, 301 F.2d 119 (2d Cir.1962) (rejecting as speculative a claim for collateral profits based upon defendant's increased income from law practice, allegedly derived from status as author of infringed treatise). Polar Bear's claim to the infringer's profits is similar: Timex's infringement enhanced prestige, and that prestige generated profits. And like those cases, it is impossible to connect the dots of Polar Bear's theory because there is a gap between the infringement and actual sales revenue — and thus, the alleged profits. The stretch between the infringing material and the ultimate price increase resulting in substantial revenues is simply that — a stretch. 54 Additionally, Polar Bear claimed a portion of Timex's profits from all Expedition watch sales, even though the evidence could, at best, only support a far narrower universe of profits. Thus, even if we suspect that Timex derived some quantum of profits from the infringement because its infringement was part of promotional efforts, it nevertheless remains the duty of the copyright plaintiff to establish a causal connection between the infringement and the gross revenue reasonably associated with the infringement. See On Davis, 246 F.3d at 160. Only then would Timex bear the responsibility for apportioning profits. Id. But instead, Polar Bear sought profits beyond the scope the evidence could support, and thus the gains reflected through enhanced brand prestige is speculative. Cf. Frank Music Corp. v. Metro Goldwyn-Mayer, Inc., 886 F.2d 1545, 1554 (9th Cir.1989) (holding that percentage increase in stock value of parent company too speculative and attenuated). 55 Because Polar Bear failed to demonstrate a nonspeculative causal link between the trade show promotion and the increased revenue from Expedition watches, we conclude that the district court erred in allowing the jury to consider the claim of profits associated with the brand premium calculation. 56 The jury did not detail how it arrived at the $2.1 million indirect profits figure. We are therefore unable to determine how much of the award the jury attributed to the brand premium effect. It is evident from the record, however, that the elements of the award that were supported by substantial evidence-namely, the booth sales and the Mountain Dew promotion-could conceivably comprise only a small fraction of the $2.1 million total for indirect profits. At most, these elements total to no more than approximately $333,000 under Polar Bear's theory of liability. Under any scenario, the invalid portion of the indirect profit award far eclipses the legitimate portion. Like the actual damages award, the indirect profits award exceeds the maximum amount sustainable by the probative evidence. Los Angeles Mem'l Coliseum Comm'n, 791 F.2d at 1366. Because the total award cannot be supported in light of the evidence as a whole, and because the record does not provide a sufficient basis for appellate review of specific portions of the award, we vacate the entire indirect profits damages award.