Court Opinion

ID: 146017
Source: CourtListenerOpinion
Date Created: 2010-05-06 17:59:38+00
Date Added: 2024-06-11T15:01:09.047510
License: Public Domain

UNPUBLISHED

                  UNITED STATES COURT OF APPEALS
                      FOR THE FOURTH CIRCUIT

                             No. 08-2103

THOMAS M. GILBERT ARCHITECTS, P.C.,

                Plaintiff - Appellee,

           v.

ACCENT BUILDERS AND DEVELOPERS, LLC, a Virginia limited
liability company; DESIGN CUSTOM BUILDERS, INCORPORATED, a
Virginia corporation; MICHAEL TUMMILLO,

                Defendants - Appellants.

Appeal from the United States District Court for the Eastern
District of Virginia, at Richmond.   James R. Spencer, Chief
District Judge. (3:07-cv-00699-JRS)

Argued:   October 28, 2009                    Decided:   May 6, 2010

Before MICHAEL, Circuit Judge, HAMILTON, Senior Circuit Judge,
and Jane R. ROTH, Senior Circuit Judge of the United States
Court of Appeals for the Third Circuit, sitting by designation.

Affirmed by unpublished per curiam opinion.

ARGUED: James Edward Moore, CHRISTIAN & BARTON, LLP, Richmond,
Virginia, for Appellants.    Christopher E. Gatewood, HIRSCHLER
FLEISCHER, PC, Richmond, Virginia, for Appellee.      ON BRIEF:
David B. Lacy, CHRISTIAN & BARTON, LLP, Richmond, Virginia, for
Appellants.   R. Webb Moore, HIRSCHLER FLEISCHER, PC, Richmond,
Virginia, for Appellee.
Unpublished opinions are not binding precedent in this circuit.

                                2
PER CURIAM:

            Thomas       M.    Gilbert       Architects,     P.C.     (Gilbert)     sued

Accent    Builders      and     Developers,        LLC    (Accent),    Design     Custom

Builders, Inc., and Michael Tummillo alleging infringement of a

copyright in certain architectural plans (Plans).                        The district

court granted summary judgment to Gilbert on liability.                          After a

bench    trial    on    damages,       the    district      court    awarded     Gilbert

$5,300 in actual damages, $224,894 in profits, and a permanent

injunction enjoining defendants’ further use of the Plans.                             On

appeal    defendants          argue    that    the    district      court   improperly

granted    summary       judgment       on    their      affirmative    defenses       and

improperly refused to subtract their operating expenses when it

awarded damages for profits.                  We reject defendants’ arguments

and affirm.

                                              I.

            The    Plans        were    originally        created     pursuant    to     a

written agreement between a third party, Aspect Properties, LLC

(Aspect), and Gilbert.            The agreement, entered into on July 26,

2002, required Gilbert to provide the Plans to Aspect in two

stages for the purpose of constructing 42 townhouses.                            In the

first stage Gilbert would provide schematic drawings for three

model townhouses for a fee of $7,500.                         In the second phase

Gilbert    would       provide    any    remaining        architectural     documents

                                              3
necessary      for    construction,      including      floor    plans,     front    and

rear elevations, and three foundation plans, all for a fee of

$17,700.       The agreement specified that all documents comprising

the Plans “remain the property of Thomas M. Gilbert, Architect,

P.C.”    J.A. 316.      It also specified that “[t]he fee for reuse of

the documents will be two hundred fifty dollars (250.00) per

unit and any changes requested will be on an hourly basis.”

J.A.    315.         Gilbert    delivered      the      Plans    pursuant     to     the

agreement,      and    Aspect   paid     Gilbert     in   full.       The   documents

Aspect received contained the following copyright notice:

       THOMAS M. GILBERT, ARCHITECT, P.C. EXPRESSLY RESERVES
       ITS COMMON LAW COPYRIGHT OR OTHER PROPERTY RIGHTS IN
       THESE PLANS.   THESE PLANS ARE NOT TO BE REPRODUCED,
       CHANGED, OR COPIED IN ANY FORM OR MANNER WHATSOEVER,
       NOR ARE THEY TO BE ASSIGNED TO ANY THIRD PARTY,
       WITHOUT FIRST OBTAINING THE EXPRESS WRITTEN PERMISSION
       AND CONSENT OF THOMAS M. GILBERT, ARCHITECT, P.C.

J.A. 566-76.

            Sometime      in    2002    Tummillo     partnered     with     Aspect    to

pursue the townhouse project.              On May 29, 2003, Aspect’s owners

formed Accent as a vehicle to complete the project, and Tummillo

acquired an ownership interest in Accent the same year.                       In 2004

Tummillo acquired complete ownership of Accent and the project.

By   that   time      Gilbert    had    already      delivered    the     Plans,     and

Aspect’s    owners      required       Tummillo    to     pay   the   balance       owed

Gilbert and to reimburse them for the amounts already paid.

                                           4
               Tummillo later asked Gilbert to make certain changes

to the Plans.           The changes consisted mainly of moving the rear

wall    of   the    townhouses          back   three       feet    and    relocating     the

fireplace from the corner to the rear wall.                             Gilbert had known

of Tummillo’s association with the project for some time prior

to the request, but it was not until Tummillo made the request

for changes that he became aware that Tummillo had acquired full

ownership.         On September 11, 2006, Gilbert sent a proposal to

Tummillo offering to make the requested changes and conduct a

building     code    review       for    $14,000.          Gilbert       included   a    code

review in his offer because, in his opinion, the original Plans

could    not    have      been    used    because      of    recent      changes    to    the

building code.           Tummillo believed that Gilbert’s price was too

high and made the changes himself by hand without further input

from Gilbert.           When Tummillo submitted the Plans for approval

with the County, he removed all references to Gilbert on the

Plans, including the copyright notice.

               After the County approved the Plans, defendants began

construction        of      the     townhouses.              Over        the    course     of

construction, defendants made copies of the Plans for various

suppliers and contractors.                 In June 2007 Gilbert learned that

construction        had    commenced       using       the    modified         Plans.     He

registered his original plans with the United States Copyright

Office    and,     on     September      14,       2007,    sent    a    cease-and-desist

                                               5
letter to defendants.             After Gilbert was unable to resolve the

dispute, he filed this lawsuit for copyright infringement on

November 9, 2007.

              The district court granted Gilbert summary judgment on

infringement,        rejecting      defendants’         affirmative        defenses    of

implied license, fair use, and copyright misuse.                          In the summary

judgment      order     the     district        court      excluded       the    proposed

testimony      of     defendants’       architect-expert,           who     would     have

testified     that      Gilbert    made     an       excessive     fee     proposal   for

modifying     the     Plans.      The     parties      stipulated        that    Gilbert’s

actual damages were $5,300 and agreed to a bench trial on the

remaining     issues     pertaining       to     relief.      At    trial       defendants

introduced       testimony      from    Kevin     Perlowski,       their     accountant.

Although    42      townhouse     units    were      planned,      only    one    six-unit

building had been completed and only two of those units had been

sold.   Perlowski testified that defendants had incurred $181,659

in direct costs and $8,795 in closing costs for the first unit,

which sold for $328,000.                Similarly, defendants had incurred

$189,620 in direct costs and $22,982 in closing costs for the

second unit, which sold for $299,950.                      If profit is calculated

by   simply      subtracting      direct       and    closing      costs     from   gross

revenues, defendants’ profit on the two units would be $224,894.

Defendants       also     incurred        significant         operating          expenses,

however, during construction.              Perlowski testified that pursuant

                                            6
to generally accepted accounting principles (GAAP) the entirety

of   these     operating     expenses,    along   with      direct    and   closing

costs,    must    be   subtracted       from   gross    revenue      to   calculate

profit.      After subtracting these operating expenses, defendants’

profits    on    the   two   units   is    reduced     to   zero,    according   to

Perlowski.

               The district court’s findings of fact and conclusions

of law included (1) an award to Gilbert of $5,300 in statutory

damages and $224,894 in infringing profits from defendants’ use

of the Plans and (2) a permanent injunction against defendants’

further use of the Plans.            In rejecting defendants’ calculation

of zero profits, the district court held that defendants had

failed    to    meet   their   burden     of   establishing     their     operating

expenses with sufficient precision.             This appeal followed.

                                         II.

               Defendants argue that they should not be liable for

infringement because the district court, at the summary judgment

stage, improperly dismissed their affirmative defenses of (1)

implied license, (2) fair use, and (3) copyright misuse.                         We

review de novo the grant of summary judgment dismissing these

defenses.       Stonehenge Eng’g Corp. v. Employers Ins. of Wausau,

201 F.3d 296, 301 (4th Cir. 2000).

                                          7
                                             A.

               Defendants’         primary        argument   is        that       “Gilbert

implicitly granted a nonexclusive license to use, modify, copy

and distribute the Plans as necessary to complete the Project.”

Br.     of    Appellants      at    21.       “The     existence       of    an   implied

nonexclusive license . . . constitutes an affirmative defense to

an allegation of copyright infringement.”                    Nelson-Salabes, Inc.

v. Morningside Dev., LLC, 284 F.3d 505, 514 (4th Cir. 2002).

The grant of a nonexclusive license is essentially a promise not

to sue for infringement.             See U.S. Philips Corp. v. Int’l Trade

Comm’n, 424 F.3d 1179, 1189 (Fed. Cir. 2005).                               When such a

promise is implied, courts generally enforce it according to the

rules    governing     quasi-contract            and   contracts   implied-in-fact.

See Wrench v. Taco Bell Corp., 256 F.3d 446, 456-57 (6th Cir.

2000)        (noting   that    Michigan          law   governs     a    contract      for

copyrighted material that was implied-in-fact as distinguished

from one that was implied-in-law); I.A.E., Inc. v. Shaver, 74
F.3d 768, 776 (7th Cir. 1996).                   In this circuit an implied non-

exclusive license exists and is enforceable when:

      (1) a person (the licensee) requests the creation of a
      work, (2) the creator (the licensor) makes that
      particular work and delivers it to the licensee who
      requested it, and (3) the licensor intends that the
      licensee copy and distribute his work.

Nelson-Salabes, Inc., 284 F.3d at 514 (quoting I.A.E., Inc., 74
F.3d at 776).

                                             8
             The case law does not make clear whether the source of

these rules is state or federal law.                Nelson-Salabes is our only

published decision to address the implied license defense to

copyright infringement, and it does not trace the rules’ source

to either body of law.               The absence of citation to state law

suggests that we assumed federal law applied.                     However, in Foad

Consulting Group, Inc. v. Azzalino — a case cited in Nelson-

Salabes and applying the same rule — the Ninth Circuit expressly

declared     that    state    law     governed     “so     long   as     it    does   not

conflict with the Copyright Act.”                  270 F.3d 821, 827 (9th Cir.

2001).     Judge Kozinski, a member of the panel in Foad, concurred

in the result, drawing a distinction between contracts implied-

in-fact    and    those     implied-in-law.          He    believed      that      implied

licenses generally fell into the latter category as “incident[s]

of copyright” and therefore should be governed by federal law.

Id. at 832.

             We need not resolve the source-of-law issue to decide

the case before us.          First and foremost, we see nothing in state

law   that    conflicts       with    the    three-element        test    adopted         in

Nelson-Salabes.           In evaluating the test’s third element when a

written    contract        exists,    we    conclude      the   applicable         rule    —

whether under Virginia law or federal common law — is that:                            (1)

quasi-contract principles do not govern, Nedrich v. Jones, 429
S.E.2d 201,     207    (Va.   1993);     WRH    Mortgage,     Inc.        v.   S.A.S.

                                            9
Assocs., 214 F.3d 528, 534 (4th Cir. 2000); and (2) the parties’

intent    “should         be    ascertained,         whenever      possible,     from    the

language the parties employed in the contract,” Virginia Elec.

and Power Co. v. Norfolk S. Ry. Co., 683 S.E.2d 517, 525 (Va.

2009).    See also United States v. Kimbell Foods, Inc., 440 U.S.
715, 728 (1979) (“[W]hen there is little need for a nationally

uniform    body      of    law,    state    law      may     be    incorporated    as    the

federal rule of decision.”).                We note that in Nelson-Salabes we

held     that     courts         “should        examine      the     totality     of     the

circumstances” when determining intent.                           Id. at 515.      But on

this point Nelson-Salabes is distinguishable because there was

no written agreement between the parties in that case.                                  While

the Nelson-Salabes standard for determining intent is eminently

reasonable      in    the      absence     of    a   written       agreement,    the     same

cannot be said when one exists, as it did between Gilbert and

Aspect.

             We      first      examine    whether         Gilbert   granted     Aspect    a

nonexclusive         license      to     modify      the    Plans    and   use    them    as

modified.       The parties raise and discuss in varying detail the

possibility       that,        because    the    original      agreement    was    between

Gilbert and Aspect, only Aspect could have had such a license.

If, however, Aspect did not have a license to modify the Plans,

defendants could not have had one.                          Accordingly, we consider

whether Aspect had non-exclusive license.

                                                10
              The parties dispute only the third element of the test

adopted in Nelson-Salabes:            whether Gilbert intended to grant

Aspect a nonexclusive license to modify the Plans and use them

as modified.        As discussed above, the threshold question we must

answer is whether Gilbert and Aspect’s intent can be ascertained

from the text of the agreement.               We conclude that it can and

that Aspect’s license extended only to copying and using the

original Plans for construction of the townhouses.                   Reading the

document as a whole, it is clear that Gilbert must have at least

granted Aspect a limited license to copy and use.                        The Plans

would be utterly useless to Aspect unless it had permission to

use the Plans for construction of the townhouses and to make

copies for its contractors as needed.                See Effects Assocs., Inc.

v.   Cohen,    908 F.2d 555,    558-59    (9th    Cir.   1990)   (finding    an

implied   license      when   the    absence    of     one   would   render     the

author’s contribution “of minimal value”).                   Moreover, to read

the agreement as requiring Aspect to pay $25,200 in fees for

useless   documents      would     threaten    the     enforceability      of   the

contract for failure of consideration.                 See Waskey v. Thomas,

235 S.E.2d 346, 349 n.2 (Va. 1977).

              The    agreement      does,     however,       expressly     reserve

ownership of Gilbert’s copyright in the Plans by declaring that

they “remain the property of Thomas M. Gilbert, Architect, P.C.”

J.A. 316.       While an express reservation of ownership in the

                                        11
Plans’ copyright is not dispositive of the licensing issue, see

Foad Consulting Group, Inc., 270 F.3d at 830, at a minimum it

evinces an intent to grant, at best, a limited license.                        Indeed,

the limited nature of the license is evident in the agreement’s

provision on reuse and changes:                    “The fee for reuse of the

documents will be two hundred fifty dollars (250.00) per unit

and any changes requested will be on an hourly basis.”                            J.A.

315.

              The   reuse     and       changes    provision       clearly      evinces

Gilbert and Aspect’s intent that Aspect not have permission to

modify the Plans and use the Plans as modified without Gilbert’s

involvement.        Were    it    not    intended    to    circumscribe        Aspect’s

license to use the documents, it would have no meaning.                        If, for

example,      Gilbert   had      not    intended    to    retain    its    rights     to

derivative works based on the Plans, it would not have needed to

include a clause providing for changes.                   Aspect could have hired

Gilbert to make the changes or not, but the choice would have

been   left    entirely     with       Aspect.      Similarly,     it     is   hard   to

imagine that Gilbert would charge a fee for reuse of the Plans —

as for construction of townhouses besides the original 42 — but

not expect compensation for modifications.

              Defendants’ arguments to the contrary rest primarily

on what the agreement does not say rather than what it does say.

They rely largely on the factors mentioned in Nelson-Salabes for

                                           12
assessing intent in the totality of the circumstances.                     As we

have     noted,    Nelson-Salabes’s      totality     of   the     circumstances

analysis does not apply when there is a valid, written agreement

between the parties.            The only argument that defendants make

based on the text of the agreement is that it “lack[s] any . . .

provision    forbidding      Aspect,    or   anyone   else,   from    using   the

Plans to complete the Project without Gilbert’s involvement or

express consent.”           Br. of Appellants at 25.             In making this

argument, defendants appear to assume, wrongly, that a broad

implied    license     is    presumed   in    contracts    for     architectural

plans.      No such presumption exists, and even if it did, the

agreement’s       restrictive    language    concerning    reuse    and   changes

would overcome it.

            Because Gilbert and Aspect’s intent is clear from the

language of the agreement, no genuine issue of material fact

exists.     Aspect did not have a license to modify the Plans and

use them as modified, and therefore could not have had such a

license.     Accordingly, we affirm summary judgment on defendants’

implied license defense.

                                        B.

            Defendants’ fair use and copyright misuse defenses are

more easily dispatched.           Long a common law doctrine, fair use

was codified in the Copyright Act of 1976 under 17 U.S.C. § 107.

Cambell v. Acuff-Rose Music, 510 U.S. 569, 577 (1994).                    Section

                                        13
107 lists four factors for courts to consider in determining

whether a particular use is fair use:

      (1) the purpose and character of the use, including
      whether such use is of a commercial nature or is for
      nonprofit educational purposes;

      (2) the nature of the copyrighted work;

      (3) the amount and substantiality of the portion used
      in relation to the copyrighted work as a whole; and

      (4) the effect of the use upon the potential market
      for or value of the copyrighted work.

17 U.S.C. § 107.        In their briefs defendants make no attempt to

consider the first three factors, relying exclusively on the

fourth.      Defendants      argue     that   a     jury   could     have    reasonably

concluded     that    the    changes    Tummillo      made     to    the    Plans      were

“minor    field   changes.”           Reply   Br.     of     Appellants      at    14-15.

Because     Gilbert    admitted        that    it     does     not     expect     to    be

compensated for minor field changes, defendants contend that a

jury could have concluded that there was no potential market

upon which Tummillo’s changes could have had an effect.                             Based

on this factor alone, defendants argue that the district court

erred.

            We reject this argument and adopt the district court’s

more careful analysis.           We agree with the district court that

the   first    three        factors    weigh      against       fair       use    because

defendants’ use of the Plans was entirely commercial, because

architectural plans are generally regarded as creative works,

                                         14
and   because      defendants’      use    of     the       Plans    was     admittedly

substantial.        As   for    defendants’       argument        that   there     was   no

potential market for the changes Tummillo made, defendants point

to no evidence that these changes were in fact “minor field

changes.”         Bald   characterizations         are      not     evidence.         What

evidence does exist suggests that Gilbert regularly charged for

the kind     of    changes     Tummillo    made    and      that    Tummillo     himself

described them as “structural changes” for which he could be

held liable if something went wrong.                J.A. 225.        Accordingly, we

affirm     the    district     court’s     grant       of     summary      judgment      on

defendants’ fair use defense.

            Defendants’        copyright       misuse    argument        amounts    to    a

claim that Gilbert demanded too high a price for the changes

Tummillo    requested.         Defendants       cite     no    authority      for     this

proposition apart from a passage, taken out of context, from the

Ninth Circuit’s decision in Foad.                   Nowhere in Foad does the

Ninth Circuit discuss the defense of copyright misuse, and we

have found no precedent lending support to defendants’ argument.

Accordingly, we affirm the district court’s grant of summary

judgment on defendants’ copyright misuse defense. *

      *
       We note that defendants’ copyright misuse defense would
fail regardless of the testimony of their expert J. Baxter
Bailey because the defense is legally incoherent in these
circumstances.  Because Bailey’s testimony was relevant only to
(Continued)
                                          15
                                       III.

            The sole issue that the parties dispute with regard to

damages    is   whether   the    district     court    should      have    deducted

defendants’       operating     expenses      from     gross       revenue       when

calculating the award for infringing profits.                     Section 504 of

the Copyright Act provides that

        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).       We have previously held that § 504 “creates

an   initial    presumption     that    the   infringer’s        profits     .    .   .

attributable to the infringement are equal to the infringer’s

gross    revenue.”     Bouchat    v.    Baltimore      Ravens     Football       Club,

Inc., 346 F.3d 514, 520 (4th Cir. 2003) (internal quotations and

citations omitted).       “Once the copyright owner has established

the amount of the infringer’s gross revenues, the burden shifts

to the infringer to prove either that part or all of those

revenues    are   deductible     expenses     .    .   .   .”      Id.    (internal

quotations and citations omitted).                If the infringer wishes to

establish that its operating expenses are deductible expenses,

defendants’ copyright misuse defense, we                        also   affirm     the
district court’s exclusion of his testimony.

                                        16
it has the “burden of proving that each item of general expense

contributed to the production of the infringing items, and of

further offering a fair and acceptable formula for allocating a

given portion of overhead to the particular infringing items in

issue.”     In Design v. K-Mart Apparel Corp., 13 F.3d 559, 565-66

(2d Cir. 1994) (quoting 3 Melville B. Nimmer & David Nimmer,

Nimmer on Copyright § 14.03[B] (1993)).

            We     agree         with    the   district      court   that    defendants

simply failed to carry their burden of allocating that portion

of their operating expenses attributable to the two units that

were sold.        In fact, Perlowski specifically admitted that he

made “no attempt to allocate operating expenses to a particular

unit.”     J.A. 469.             Defendants respond that Perlowski was merely

following       GAAP        in     deducting        the   entirety   of     defendants’

operating expenses from their revenues on the two units sold.

GAAP, however, is not the law here.                       There are likely many good

reasons why the GAAP rules are as they are, but those reasons do

not necessarily coincide with the reasons bearing on assessing

damages     for    copyright            violations.         As   Gilbert    notes,     for

example,    some       of    defendants’       operating      expenses     went   towards

developing the land on which the 42 townhouses were to be built

and have no relation to defendants’ infringing acts.                              Because

each     item     of    deductible          expense       must   contribute       to   the

                                               17
infringing    products,      at   least   some   of    defendants’      operating

expenses as calculated cannot be deducted from gross revenues.

           Finally,     we    reject      defendants’       argument    that     the

district   court   should     have    assumed    the    burden   of    allocation

itself.      Section   504    is     clear   that     the   burden     of   proving

deductible expenses lies with defendants.                   Despite defendants’

assertions, the Second Circuit’s decision in In Design does not

hold otherwise.        In that case, the infringers did provide a

formula for allocating overhead, and the Second Circuit affirmed

the district court’s acceptance of that formula.                 In Design, 13
F.3d at 566.     While we do not go so far as to hold that it would

have been error for the district court to have allocated on its

own initiative, we cannot say that failing to do so was error.

Accordingly, we affirm the district court’s award of infringing

profits in the amount of $224,894.

                                       IV.

           For   the   reasons     stated    above,     the   judgment      of   the

district court is

                                                                        AFFIRMED.

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