Opinion ID: 4538057
Heading Depth: 3
Heading Rank: 2

Heading: Reda’s Profits

Text: Turning to the merits, we must decide in this case whether Reda, who largely failed to persuade a jury that he incurred deductible expenses in constructing a copyright-infringing house, can be liable for almost the full amount of revenue that he earned for selling this house. For the following reasons, we conclude that the jury appeared to abide by statutory law in rendering its monetary award, but common-law principles compel an adjustment of this award. See Singletary Constr., LLC v. Reda Home Builders, Inc, No. 3:17-CV-00374-JPM, 2019 WL 6870354, at  (M.D. Tenn. May 23, 2019) (“While in some ways the jury’s verdict may appear to defy common sense, it is consistent with the law.”). The Copyright Act creates a burden-shifting framework in determining an infringer’s recoverable profits: “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 7 No. 19-5491, Singletary Constr., LLC v. Reda Home Builders, Inc. et al. work.” 17 U.S.C. § 504(b). Singletary correctly argues that, in the context of damages for copyright infringement, well-established Sixth Circuit caselaw permits the jury to disbelieve a defendant’s articulation of deductible expenses and award the plaintiff the full amount of gross revenue that the defendant earned from its infringement. We have explained that “[t]he only statutory requirement on a copyright owner is proving gross revenue, which is presumed to be the infringer’s profits until the infringer proves otherwise.” Balsley v. LFP, Inc., 691 F.3d 747, 768 (6th Cir. 2012); id. at 769 (“If the infringing defendant does not meet its burden of proving costs, the gross figure stands as the defendant’s profits.”) (quoting Andreas v. Volkswagen of Am., Inc., 336 F.3d 789, 797 (8th Cir. 2003)). On this point, “[t]he statute is clear and unambiguous.” Johnson v. Jones, 149 F.3d 494, 506 (6th Cir. 1998).3 In this case, gross revenue was undisputed, and Reda’s evidence as to deductible expenses was far from compelling. Beginning with Reda’s testimony, it appears from the record that he may have seemed reluctant to rely on his own spreadsheet—which supposedly enumerated his expenses—at his deposition, stating to opposing counsel, “I’m going to let you read that, sir. I’m going to make sure I don’t make an error there.” R. 213 (Trial Tr. Vol. 1 at 99) (Page ID #2305). 3 There is no dispute here—unlike in the majority of cases involving disgorgement of profits under 17 U.S.C. § 504(b)—that the profits were attributable to the infringement. Cf. Thoroughbred Software Int’l, Inc. v. Dice Corp., 488 F.3d 352, 360–61 (6th Cir. 2007) (“Although Dice Corp.’s opaque pricing scheme admittedly makes it more difficult for Thoroughbred to meet its burden to show Dice Corp.’s gross revenue, this complication does not relieve Thoroughbred of its obligation to put forth evidence that would allow the trier of fact to determine what portion of Dice Corp.’s monthly customer fee was attributable to the infringing software.”); Grant Heilman Photography, Inc. v. McGraw-Hill Cos., 115 F. Supp. 3d 518, 535 (E.D. Pa. 2015) (addressing defendant’s argument that there was no “causal nexus” between its infringements and the profits sought by plaintiff, because the infringing contents it incorporated in its textbooks “were very minor parts of very large textbooks consisting of hundreds of pages of text and many photographs”). 8 No. 19-5491, Singletary Constr., LLC v. Reda Home Builders, Inc. et al. At trial, Reda was able to provide explanations for most of the expenses listed on the spreadsheet, but occasionally could not, see, e.g., R. 215 (Trial Tr. Vol. 3 at 152) (Page ID #2797) (“Q: Okay. Now, you have a bill here that says various materials. Do you actually know what that is? . . . A: No, ma’am, I don’t.”); id. at 265 (Page ID #2910) (confirming that Reda was “speculating” regarding a $180.00 amount on the Quickbooks spreadsheet), and his identifications of particular expenses were often vague. Furthermore, Reda’s explanation for why the item listed as “Sold to Phillip Walters” read “309,706.19”—and not the amount for which he sold the house ($320,900)— was confusing and inconclusive. Id. at 240 (Page ID #2885). Counsel for Singletary also elicited testimony from Reda that he borrowed approximately $254,000 from Heritage Bank, id. at 259 (Page ID #2904), but confirmed with Reda that the only construction loan appearing on the Quickbooks spreadsheet was for $45,000 (for the purchase of the lot where the house was built), id. at 265 (Page ID #2910). Reda’s documentary proof was similarly vulnerable to attack. First, the Quickbooks spreadsheet—which Reda’s counsel said reflected “every single expense that he had building this house,” R. 216 (Trial Tr. Vol. 4 at 79) (Page ID #3173)—only contained one date (August 18, 2017), which was after the litigation in this case had begun. R. 1 (Complaint at 1) (Page ID #1) (complaint filed Feb. 17, 2017). Singletary’s counsel argued that this showed that the sheet was “manufactured” for trial, R. 216 (Trial Tr. Vol. 4 at 64) (Page ID #3158); Reda’s counsel, rejecting that assertion, responded that August 18, 2017, was simply the date the document was printed, id. at 79 (Page ID #3173). But Reda never attested to entering the numbers on the spreadsheet at the time he paid the bills. Indeed, the spreadsheet actually contained Reda’s legal fees in connection with the litigation, see R. 215 (Trial Tr. Vol. 3 at 245) (Page #2890), indicating that the document 9 No. 19-5491, Singletary Constr., LLC v. Reda Home Builders, Inc. et al. was an unreliable, after-the-fact record. See R. 216 (Trial Tr. Vol. 4 at 64) (Page ID #3158) (“So remember how Mr. Reda testified that this is an accurate document? Do you remember some of the inaccuracies? It included his own legal fees. That’s not a cost related to the construction of this house.”). Second, as Reda acknowledged on the stand, expense amounts listed on the spreadsheet for CEMC, Clarksville Gas & Water, Jason Hall, Kennedy’s Septic Tank Service, Inc., TBC Concrete, and Thomas Boyd Home Repair were inconsistent with amounts appearing on corresponding receipts and invoices in an accompanying exhibit. R. 215 (Trial Tr. Vol. 3 at 251– 58) (Page ID #2896–2903); see R. 216 (Trial Tr. Vol. 4 at 65) (Page ID #3159) (“There’s no way to verify that these are moneys actually spent. Did you see the invoices that we looked at yesterday? Remember, some of those. And those invoices, they did not total up -- we saw discrepancies.”). Third, Singletary’s counsel demonstrated to the jury that in Reda’s application to Montgomery County for a Single Family Dwelling Permit, he estimated that his costs would be $135,000, which was significantly less than the costs he ended up claiming at trial that he had incurred, see R. 216 (Trial Tr. Vol. 4 at 111) (Page ID #3205) (“Look what he put as his estimated cost, $135,000. Was he that far off budget? This is a man who builds a hundred houses a year.”). In light of these flaws in Reda’s defense, one could not fault the jury for concluding that Reda failed to carry his burden in demonstrating deductible expenses. In assessing the jury award, however, we are guided not only by the procedures set forth in the Copyright Act § 504(b), but also by the common law. See Wallace v. FedEx Corp., 764 F.3d 571, 591 (6th Cir. 2014). Under the Seventh Amendment, “no fact tried by a jury, shall be otherwise reexamined in any Court of the United States, than according to the rules of the common 10 No. 19-5491, Singletary Constr., LLC v. Reda Home Builders, Inc. et al. law.” U.S. CONST. amend. VII. As we summarized in Lulaj v. Wackenhut Corp., 512 F.3d 760 (6th Cir. 2008), “[t]here are two sources of authority whereby a judge may reduce an award of damages rendered by a jury without violating the Seventh Amendment.” Id. at 766. “First, a judge may offer a prevailing plaintiff the option of either a new trial or a reduced award in a process known as remittitur.” Id. (citing Farber v. Massillon Bd. of Educ., 917 F.2d 1391, 1395 (6th Cir. 1990)). “Second, a court may render judgment as a matter of law as to some portion of a jury award if it is compelled by a legal rule or if there can be no genuine issue as to the correct calculation of damages.” Id. We consider only the first source of authority here, as Reda presents no argument that a portion of the award is compelled by legal rule or that there is no genuine issue about how to calculate it. Under the first source of authority, “[a] court should not reduce an award unless it is: 1) beyond the range supported by proof; 2) so excessive as to shock the conscience; or 3) the result of mistake,” and on appeal, we do not reverse a district court’s application of this standard unless the district court abused its discretion. Denhof v. City of Grand Rapids, 494 F.3d 534, 547 (6th Cir. 2007). Reversal is therefore appropriate only when we have “a definite and firm conviction” that the district court made a clear error of judgment. Mich. First Credit Union v. Cumis Ins. Soc’y, Inc., 641 F.3d 240, 245 (6th Cir. 2011) (citation omitted); see Lewis v. Sears, Roebuck & Co. (In re Lewis), 845 F.2d 624, 635 (6th Cir. 1988) (“Where a jury grants a particular damage award and the district court refuses to disturb that finding, an appellate court should be certain indeed that the award is contrary to all reason before it orders a remittitur or a new trial.”). Even when the award rendered is based on statutory disgorgement of profits, such as in the Copyright Act § 504(b), our common-law standard for evaluating such an award—and whether remittitur is appropriate— 11 No. 19-5491, Singletary Constr., LLC v. Reda Home Builders, Inc. et al. applies. See Balsley, 691 F.3d at 771 (asking whether the amount of profits awarded to the plaintiffs, pursuant to the Copyright Act § 504(b), “clearly exceed[s] the maximum or shock[s] the conscience”). In our view, the jury was entitled by statute to disbelieve Reda’s evidence regarding his deductible expenses, but if our analysis concluded there, we would be left with a result that would stand “contrary to all reason.” In re Lewis, 845 F.2d at 635. Put simply, the jury’s verdict represents a determination that Reda spent only $24,691.25 in deductible expenses in constructing a house that he sold for $320,900.4 The only discrete expense that we can infer from the record is $5,447.69 for closing costs, which Singletary conceded was reliable. R. 216 (Trial Tr. Vol. 4 at 67–68) (Page ID #2161–62); Pl.’s App’x, Trial Ex. 3. This means that, according to the jury— and the district court, in subsequently upholding the jury verdict—the remaining $19,243.56 was sufficient for Reda to construct the house. Alternatively, the jury may not have believed that this amount realistically represented Reda’s net profit, but heeded Singletary’s counsel’s statement that the jurors “cannot use [their] common sense . . . to say, well, of course he had costs.” R. 216 (Trial Tr. Vol. 4 at 65) (Page ID #3159). Either way, we are asked to uphold a profit amount that is plainly absurd, particularly in light of Reda’s estimated costs of $135,000 as submitted to Montgomery County—a number that Singletary did not challenge as unreasonable. See R. 216 (Trial Tr. Vol. 4 at 111) (Page ID #3205). 4 The jury found Reda’s profits to be $296,208.75. R. 216 (Trial Tr. Vol. 4 at 176) (Page ID #3270). The parties agree that $320,900 was the sales price. Id. at 67 (Page ID #3161); R. 215 (Trial Tr. Vol. 3 at 225) (Page ID #2870); Pl.’s App’x, Trial Ex. 8. The difference between the two—$24,691.25—thus represents deductible expenses as found by the jury. 12 No. 19-5491, Singletary Constr., LLC v. Reda Home Builders, Inc. et al. This conclusion is supported by deeper examination of the rationales provided in our caselaw for requiring copyright infringers to prove their deductible expenses with specificity, and the inapplicability of these rationales to the case at hand. The first rationale, as we explained in Johnson v. Jones, 149 F.3d 494 (6th Cir. 1998), is that allowing an infringer to resort to proof of average costs would often overlook the primary advantage of infringement: “It is axiomatic that an architect who steals another architect’s drawings and uses them as his own will not incur the same expenses that he would if he were forced to start from scratch.” 149 F.3d at 506. The Johnson axiom, even taken to an extreme, makes sense when there are not substantial, inherent costs incurred by an infringer who unlawfully reproduces a copyrighted work. For example, if one author steals another author’s 800-page, copyrighted manuscript and successfully self-publishes the book, earning substantial revenue in the process, the infringing author clearly has not incurred the same expenses as the original author and may have incurred almost no expenses at all. The statute accordingly places the burden on the infringing author to prove any costs that she or he incurred. Second, when defendants operate in an industry that allows infringing products to be created without incurring additional costs specific to those products, it makes sense to require defendants “to prove their deductible expenses with particularity.” Singletary, 2019 WL 6870354, at . Otherwise, the defendant can inappropriately profit by claiming that already-existing costs were attributable to the infringement, and deducting those from the profits awarded to the plaintiff. See Sheldon v. Metro-Goldwyn Pictures Corp., 309 U.S. 390, 406 (1940) (“Where there is a commingling of gains, [a defendant] must abide the consequences, unless he can make a separation of the profits so as to assure to the injured party all that justly belongs to him.”). For example, in 13 No. 19-5491, Singletary Constr., LLC v. Reda Home Builders, Inc. et al. Frank Music Corp. v. Metro-Goldwyn-Mayer, Inc., 772 F.2d 505 (9th Cir. 1985), the Ninth Circuit considered the infringement of a musical stage production of Kismet by Defendant MGM, whose 100-minute-long Hallelujah Hollywood musical revue included an 11.5-minute Act IV entitled “Kismet,” which mirrored the plaintiffs’ original play. Id. at 510. MGM argued that, even if it profited from the infringement, it should be permitted to deduct from gross revenue certain expenses associated with production. The Ninth Circuit disagreed. In assessing deductible expenses, the court held that MGM had “offered no evidence of what costs were included in general categories such as ‘general and administrative expenses,’ nor did they offer any evidence concerning how these costs contributed to the production of Hallelujah Hollywood.” Id. at 516. Thus, when a jury cannot determine whether creation of the infringing product would necessarily require additional costs, it must give the plaintiffs “the benefit of every doubt” and decline to deduct these expenses from gross revenue. Sheldon, 309 U.S. at 408. Based on these rationales, most decisions rejecting defendants’ attempts to demonstrate deductible expenses have awarded the full amount of revenue to the plaintiff. See, e.g., Johnson, 149 F.3d at 506 (reversing district court’s award of 15% of revenue to the plaintiff when defendantarchitect testified that he “averaged” a 15% profit and awarding the full amount of revenue as profits; the defendant “provided no evidence of his deductible expenses”); Universal Furniture Int’l, Inc. v. Collezione Europa USA, Inc., 618 F.3d 417, 441 (4th Cir. 2010), as amended (Aug. 24, 2010) (district court did not commit error in rejecting defendant’s attempts to show deductible expenses, which were “confusing, unreliable, and internally inconsistent” (quoting district court)); Blackman v. Hustler Magazine, Inc., 800 F.2d 1160, 1163 (D.C. Cir. 1986) (rejecting “the learned district judge’s attempt to do justice and avoid what may be a windfall to Blackman,” when 14 No. 19-5491, Singletary Constr., LLC v. Reda Home Builders, Inc. et al. defendant made a “feeble effort” to establish attributable expenses); Williams v. Arndt, 626 F. Supp. 571, 582 (D. Mass. 1985) (“Arndt kept no credible records. He claimed to have recalculated his expenses and income from the numerous checks he claimed were available to him and to his brother in Chicago, an accountant. The income statements . . . were completely unsupported, were prepared for use in this litigation and, in short, were completely unreliable. The defendants have not proven any deductible expenses and, therefore, I award the gross revenue from the sale of the infringing programs.”); Gaste v. Kaiserman, 683 F. Supp. 63, 65–66 (S.D.N.Y. 1988) (“At the trial, Fermata deliberately chose not to produce a single document from its books and records to substantiate any alleged expenses. It submitted only the face sheet of its tax return for each year involved. Having produced nothing more, the Court has no basis for ruling that the jury acted unreasonably when it found that Fermata failed to prove, by a preponderance of the evidence, that all of the costs which it sought to deduct as expenses were actually attributable to ‘Feelings.’”). The foregoing rationales and caselaw, however, have questionable applicability to this case. First, the rationale of Johnson—that courts should reject infringers’ proof of “average margin[s] of profit” because infringement inherently allows infringers to cut costs, 149 F.3d at 506—has limited relevance when, as here, the infringer does not primarily rely on averages in attempting to demonstrate deductible expenses but rather on evidence of specific costs. Nor is the concern about defendants improperly deducting generalized overhead expenses present here; the bulk of Reda’s purported costs were related to the construction of this specific house, not expenses that Reda would have incurred anyway in the general operation of his business. See Pl.’s App’x, Trial Ex. 3. 15 No. 19-5491, Singletary Constr., LLC v. Reda Home Builders, Inc. et al. Furthermore, the few Sixth Circuit cases addressing the calculation of profits for purposes of the Copyright Act § 504(b) have not involved awards that ignored significant costs that the defendant must have incurred in creating the infringing product. The closest case is Johnson, in which an infringing architect admitted to making $16,560 in gross revenue and improperly testified about his “average” costs. 149 F.3d at 506. In reversing the district court’s award and granting the plaintiffs the full amount of the architect’s gross revenue, this court ignored any possible costs that the architect may have incurred in working on the infringing project. Yet, as his relatively small amount of revenue indicates, the architect’s involvement in the project was limited to his role as architect, and he likely did not incur significant construction costs; indeed, a different party was retained to build the house. Id. at 499. The other principal Sixth Circuit case on profit calculation under the Copyright Act § 504(b), Balsley v. LFP, Inc., 691 F.3d 747 (6th Cir. 2012), addressed only whether the defendant’s profits were attributable to its infringing activity; the defendant did not argue that it was entitled to deduct expenses related to the infringement. Id. at 770–71. The same is true of the two lower-court cases cited by Singletary on appeal: Neither involved district courts or juries ignoring significant costs that the defendants argued they must have incurred and awarding the plaintiffs the full (or nearly full) amount of gross revenue. See Frank Betz Assocs., Inc. v. Signature Homes, Inc., No. 3:06-CV-00911, 2012 WL 13041831, at  (M.D. Tenn. Apr. 23, 2012) (“Defendants contend that the sales prices are not sufficient because they include revenue ‘attributable to a litany of elements’ other than the houses themselves, such as the value of the lot, landscaping, paving driveways and sidewalks, and HVAC systems.”); Wilcom Pty. Ltd. v. Endless Visions, No. 98-71421, 1999 WL 33229745, at  (E.D. Mich. June 17, 1999) (“The Defendants 16 No. 19-5491, Singletary Constr., LLC v. Reda Home Builders, Inc. et al. claim only that because the copyright at issue was obtained on March 20, 1998 that Plaintiffs cannot recover for any acts of infringement that occurred before the registration date.”). Thus, these cases—which Singletary suggests stand for applying the Copyright Act § 504(b) rigidly when the plaintiff has demonstrated gross revenue and the defendant has failed to demonstrate deductible expenses with specificity—do not offer much guidance here. In a handful of cases, courts have recognized the problem of completely ignoring inherent expenses that an infringing defendant has incurred. Perhaps most directly, in a case involving a gross revenue amount of approximately $1 million, and inconsistent, incomplete evidence of deductible expenses, one district court explained: [I]t is difficult to fault the jury for declining to take this evidence [of deductible expenses] at face value. But this does not settle the question of what would constitute an “egregious” jury verdict in light of the evidence—there is a limit to how deeply the jury could reasonably have disbelieved defendants’ testimony. Had the jury concluded that, contrary to defendants’ evidence, defendants had incurred no expenses at all, or only one or two hundred thousand dollars over five years, it would be clear that the court should vacate the verdict on damages. There is simply no support for so deep a skepticism of the defendants’ evidence. Keeling v. New Rock Theater Prods., LLC, No. 10 CIV 9345, 2013 WL 2257072, at  (S.D.N.Y. May 23, 2013); see also Neal v. Thomas Organ Co., 241 F. Supp. 1020, 1022 (S.D. Cal. 1965) (“After reviewing the evidence, and particularly the testimony of Mr. Silliman, the court believes it is fair and reasonable to find that said per cent [14.7%] for indirect costs should be deducted from the gross receipts. It is common knowledge that any business has indirect costs and this per cent should apply in the selling and handling of the courses by defendant the same as it would 17 No. 19-5491, Singletary Constr., LLC v. Reda Home Builders, Inc. et al. apply in the handling of any other items.”). Although most courts addressing this issue tend to rest their conclusions on the unambiguous text of the Copyright Act § 504(b), Blackman, 800 F.2d at 1164 (“In sum, we see this as a simple case. Plaintiff carried its burden; defendant did not.”), there is thus some support within copyright law for a commonsense approach to excessive awards of profits. Whether or not Reda’s burden was easy or difficult to carry, it cannot be interpreted to permit the plaintiff to collect the full amount of gross revenue when such a result simply defies common sense. The need for a common-law backstop to profit disgorgement under the Copyright Act § 504(b) is all the more evident in comparing this provision, which deals with “Actual Damages and Profits,” to the provision of the Copyright Act setting forth—and, importantly, capping— “Statutory Damages” at absolute dollar amounts. See 17 U.S.C. § 504(c). Unlike in the statutorydamages provision (§ 504(c)), there is no safeguard in the actual-damages-and-profits provision (§ 504(b)) that restricts the amount of disgorged profits that a plaintiff can receive. As one district court has explained, “in the specific context of statutory damages,” the presence of an “upper bound on the damages that a jury can award” has the effect of “mitigat[ing] the risk of a truly untethered award.” Agence France Presse v. Morel, No. 10-CV-2730 AJN, 2014 WL 3963124, at  (S.D.N.Y. Aug. 13, 2014). This counsels against finding an award of statutory damages to be excessive, because the statute itself provides the limit. Id. The opposite is true of an award of profits, in which the only safeguard against an unreasonable verdict is the court’s determination that the award is contrary to all reason. In re Lewis, 845 F.2d at 635. For the foregoing reasons, we conclude that the jury’s award shocks the conscience, and the district court erred in denying Reda’s motion for a new trial, or, in the alternative, a remittitur. 18 No. 19-5491, Singletary Constr., LLC v. Reda Home Builders, Inc. et al. We remand to the district court, as to Reda, for a calculation of an appropriate remittitur, or to retry the damages issue. See Lentz v. City of Cleveland, 333 F. App’x 42, 50 (6th Cir. 2009).