Court Opinion

ID: 2967367
Source: CourtListenerOpinion
Date Created: 2015-09-22 02:26:44.005644+00
Date Added: 2024-06-11T11:37:29.621243
License: Public Domain

Filed:   March 20, 2001

                   UNITED STATES COURT OF APPEALS

                       FOR THE FOURTH CIRCUIT

                              No. 99-2255
                           (CA-97-256-3-MU)

Lyons Partnership, etc.,

                                                Plaintiff - Appellant,

          versus

Morris Costumes, Inc., et al.,

                                               Defendants - Appellees.

                              O R D E R

     The court amends its opinion filed March 16, 2001, as follows:

     On page 20, second full paragraph, line 2, and page 21, first

paragraph, line 7 -- the references to “Lisa Morris Smith” are

corrected to read “Amy Morris Smith.”

                                          For the Court - By Direction

                                          /s/ Patricia S. Connor
                                                   Clerk
PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

LYONS PARTNERSHIP, L.P., a Texas
Limited Partnership,
Plaintiff-Appellant,

v.                                                             No. 99-2255

MORRIS COSTUMES, INCORPORATED;
PHILIP MORRIS; AMY MORRIS SMITH,
Defendants-Appellees.

Appeal from the United States District Court
for the Western District of North Carolina, at Charlotte.
Graham C. Mullen, Chief District Judge.
(CA-97-256-3-MU)

Argued: December 4, 2000

Decided: March 16, 2001

Before NIEMEYER, WILLIAMS, and TRAXLER, Circuit Judges.

_________________________________________________________________

Affirmed in part, reversed in part, vacated in part, and remanded by
published opinion. Judge Niemeyer wrote the opinion, in which Judge
Williams and Judge Traxler joined.

_________________________________________________________________

COUNSEL

ARGUED: Mack Sperling, BROOKS, PIERCE, MCLENDON,
HUMPHREY & LEONARD, L.L.P., Greensboro, North Carolina, for
Appellant. Jay Scot Bilas, MOORE & VAN ALLEN, P.L.L.C., Char-
lotte, North Carolina, for Appellees. ON BRIEF: Hubert Humphrey,
David Sar, BROOKS, PIERCE, MCLENDON, HUMPHREY &
LEONARD, L.L.P., Greensboro, North Carolina, for Appellant.
George V. Hanna, III, M. James Grode, MOORE & VAN ALLEN,
P.L.L.C., Charlotte, North Carolina, for Appellees.

_________________________________________________________________

OPINION

NIEMEYER, Circuit Judge:

The owner of "Barney," the famous purple dinosaur who speaks in
a distinctive baritone, seeks, through this action for injunctive relief
and damages, to end the marketing of three look-alike costumes that
children allegedly believe are in fact Barney. The district court recog-
nized the plaintiff's intellectual property rights in the Barney charac-
ter but denied their enforcement against a costume rental company
because (1) the first act of infringement occurred outside of the statute
of limitations period; (2) the claims were in any event barred by
laches; and (3) confusion as to one of the costumes existed only
among young children and not among the adults who rented the cos-
tume. After considering the district court's comprehensive rulings, we
affirm in part, reverse in part, vacate in part, and remand. Our reasons
follow.

I. Background

Lyons Partnership, L.P., ("Lyons"), a Texas limited partnership,
owns all of the intellectual property rights to the character "Barney,"
the well-stuffed Tyrannosaurus Rex with a green chest and stomach,
friendly mien, green spots on its back, and yellow "toeballs." Barney
is readily recognizable to young children, who repeatedly parrot his
song, "I Love You,"1
                   1 often testing the patience of nearby adults.
_________________________________________________________________

1 Many can recite only the first three lines of the song:

        I love you.
        You love me.
        We're a happy family.
        With a great big hug and a kiss from me to you,
        Won't you say you love me too?

                  2
Lyons' predecessor developed Barney as a plush stuffed animal in
1988, and in connection with that process, it prepared three video-
tapes featuring the character.

On April 5, 1992, Barney made his debut on the Public Broadcast-
ing System, and, Lyons claims, the result was "absolutely unprece-
dented." Barney became hugely popular with children almost
instantly. At an early appearance of Barney at a mall in Dallas, Texas,
promoters expected a few hundred people to appear to see him.
Instead, people started lining up before the mall opened, and by the
time Barney arrived, 35,000 had formed a line that extended for one
and a half miles. Now, the "Barney and Friends" show is viewed
weekly by 14 million children, and over 50 million copies of Barney-
related videos have been sold. The "Barney and Friends" show enjoys
the number one Nielsen rating for shows directed at young children.
Adults rarely watch the program except with their children.

The live appearance of the Barney character, who is played by
adults in costume, is completely controlled by Lyons, and Lyons does
not license Barney costumes because of its inability to police the
behavior of those who might appear in the costume. It claims that it
would be unable to prevent would-be Barneys from behaving in a
decidedly un-Barney-like manner and tarnishing his wholesome repu-
tation. Cf. Zack Van Eyck, Take a Deep Breath: Barney Has Hit the
Big Screen, Deseret News Today, Apr. 3, 1998, at C2 (describing the
satirical treatment of Barney look-alikes by such notables as Charles
Barkley and the Famous Chicken). Accordingly, every person who
wears the costume -- there are five -- is trained by a single choreog-
rapher how to be Barney. Moreover, Barney's live voice is provided
by only one person. Lyons not only refuses to license Barney cos-
tumes, but also has waged a legal campaign against retailers that have
distributed allegedly infringing costumes. See Brooke A. Masters,
Protecting Barney's Image from Bogus Beasts, Wash. Post, Mar. 25,
1998, at B1. Lyons does, however, license the Barney image on toys,
books, clothing, and the like.

To protect its intellectual property, Lyons has registered approxi-
mately 25 trademarks and obtained hundreds of copyrights with
respect to the name "Barney" and the character's depiction.

                  3
On May 2, 1997, Lyons commenced this action against Morris
Costumes, Inc., Philip Morris, and Amy Morris Smith, alleging copy-
right and trademark infringement, as well as a state law violation.
Morris Costumes is a North Carolina corporation, operating a retail
costume-rental establishment in Charlotte, North Carolina. Philip
Morris and his wife Amy Morris Smith are the principal stockholders
of the corporation and are alleged in the complaint to have partici-
pated in the infringing conduct. The complaint, as amended, alleges
that the defendants rented three different forms of costume to the pub-
lic, each of which looked like Barney and therefore violated Lyons'
proprietary interests in Barney: (1) the "NDC costume," a purple
dinosaur costume manufactured by National Discount Costume Com-
pany and sold to Morris Costumes for rental or resale; (2) "Hillary the
Purple Hippopotamus," an NDC costume that Morris Costumes
altered; and (3) "Duffy the Dragon," a purple reptilian costume manu-
factured by Alinco Costumes, Inc. The complaint requested that the
court grant Lyons injunctive relief, statutory damages, compensatory
damages, treble damages, punitive damages, attorneys fees, and other
"proper relief."

After a four-day bench trial, the district court entered judgment in
favor of the defendants on all claims. In a detailed opinion, in which
the court made 240 separately numbered findings of fact and conclu-
sions of law, the court concluded that the NDC and Hillary costumes
infringed Lyons' copyrights and trademarks. The court, however,
denied Lyons a remedy because it found that the claims with respect
to the NDC and Hillary costumes were barred by the applicable stat-
utes of limitations and by the doctrine of laches. The court held that
the four-year lapse between the time when Lyons first became aware
of Morris' acts of infringement and the commencement date of the
lawsuit was "inexcusable." On the claims relating to the Duffy the
Dragon costume, the court found that the evidence was inadequate to
show that Duffy was substantially similar to or likely to cause confu-
sion with the Barney character. In reaching this conclusion, the court
disregarded as hearsay the first-hand accounts of adults about children
who believed that Duffy was in fact Barney and over 30 newspaper
articles evidencing actual confusion between Duffy and Barney. On
Lyons' state law unfair trade practices claim, the court again found
in favor of the defendants because the "infringing activities were not
undertaken with the intent that the public would be deceived as to the

                  4
true origin of the costumes." Finally, the court found that the action
against Amy Morris Smith was in bad faith because of her minimal
involvement and the untimeliness of claims against her, and, on that
basis, ordered Lyons to pay her attorneys fees.

From the judgment entered for the defendants, Lyons noticed this
appeal.

II. NDC and Hillary costumes

On Lyons' claims relating to Morris Costumes' rentals of the NDC
and Hillary costumes, the court found that the defendants infringed
both Lyons' copyrights and trademarks, though it also found that the
infringements were not willful. The court refused, however, to pro-
vide Lyons with any remedy because it determined that Lyons' claims
were barred by both the applicable statutes of limitations and laches.
The court also concluded that, in any event, Lyons did not prove that
the infringement was willful and that injunctive relief was no longer
necessary because Morris Costumes was no longer renting the
infringing costumes. Lyons challenges each of these rulings, and we
address them in order.

A

The limitations period for bringing copyright infringement claims
is three years after the claim accrues. See 17 U.S.C. § 507(b); Hotal-
ing v. Church of Jesus Christ of Latter-Day Saints, 118 F.3d 199, 202
(4th Cir. 1997). And a claim accrues when "one has knowledge of a
violation or is chargeable with such knowledge." Hotaling, 118 F.3d
at 202 (internal quotation marks and citations omitted).

While the Lanham Act itself does not provide an express period of
limitations for filing a trademark infringement claim, courts generally
assume that Congress intended that courts "borrow" a limitations
period for a federal action at law from an analogous state law. See
Reed v. United Transp. Union, 488 U.S. 319, 323-24 (1989); Wilson
v. Garcia, 471 U.S. 261, 266-67 (1985); Holmberg v. Armbrecht, 327
U.S. 392, 395 (1946); Kason Indus., Inc. v. Component Hardware
Group, Inc., 120 F.3d 1199, 1203 (11th Cir. 1999). In this case, the

                   5
district court borrowed the four-year statute of limitations provided in
the North Carolina Unfair Trade Practices Act, N.C. Gen. Stat. § 75-
16.2, a provision that the parties agree is appropriately analogous.

In applying these statutes of limitations, the district court found
that Lyons "had knowledge of Defendants' actions regarding NDC in
April, 1993, more than four years before it filed the above encap-
tioned matter." Lyons filed its complaint in this case on May 2, 1997.
Because this four-year span exceeded the three- and four-year statutes
of limitations for copyright and trademark claims, the court held that
the statutes of limitations barred all of Lyons' claims involving the
NDC and Hillary costumes.

Although Morris Costumes' liability for at least some of the
alleged acts of infringement appears to have been shielded by the stat-
ute of limitations, the district court ruled that this fact barred even
claims based on infringing activity shown to have occurred within the
limitations period. In doing so, it assumed that Morris Costumes' "ac-
tions regarding NDC and Hillary comprise one act of infringement."
This assumption, however, is contrary to our holding in Hotaling, see
118 F.3d at 202, in which we made clear that each sale or rental
should be considered separately under an infringement analysis. We
held that a "party does not waive the right to sue for [copyright]
infringements that accrue within three years of filing by not asserting
related claims that accrued beyond three years." Id. at 202. This well
established rule recognizes that the statute of limitations does not
shield the defendant from liability for wrongful acts actually commit-
ted during the limitations period, and its rationale applies equally to
trademark infringement claims brought under the Lanham Act.

Thus, although the district court was correct to hold that Lyons
could not "recover for claims that accrued outside the limitations peri-
od[s]," Hotaling, 118 F.3d at 202, it erred to the extent that it dis-
missed Lyons' claims that were premised upon acts that occurred
within the applicable periods. Because the parties agree that numerous
rentals occurred within the relevant limitations periods, we reverse the
district court's ruling that all claims based on the NDC and Hillary
costumes were barred by the applicable statutes of limitations.

                  6
B

In its brief on appeal, Morris Costumes does not make a serious
attempt to defend the district court's statute of limitations analysis.
Instead, it relies most heavily on its alternative theory that Lyons'
claims were barred by laches because the four-year delay between
Lyons' initial contact with Morris and its filing of the lawsuit was
unreasonable, inexcusable, and prejudicial. Lyons responds with the
argument that the district court misapplied the standards governing
the laches doctrine. See generally A.C. Aukerman Co. v. R.L. Chaides
Constr. Co., 960 F.2d 1020, 1032-33 (Fed. Cir. 1992) (setting out one
statement of the standards); see also Potter Instrument Co. v. Storage
Tech. Corp., 641 F.2d 190, 191 (4th Cir. 1981) (noting that "invoca-
tion of . . . laches . . . is within the sound discretion of the district
court and will be reversed only if clearly erroneous").

While we agree with Lyons that the district court erred as a matter
of law when it found that laches barred Lyons' claims, both legal and
equitable, we do so for more fundamental reasons. First, laches is a
doctrine that applies only in equity to bar equitable actions, not at law
to bar legal actions. Second, we note that, in any event, in connection
with the copyright claims, separation of powers principles dictate that
an equitable timeliness rule adopted by courts cannot bar claims that
are brought within the legislatively prescribed statute of limitations.
Finally, even in equity under the Lanham Act, laches does not bar a
claim for prospective injunctive relief.

The doctrine of laches is based on the maxim that equity aids the
vigilant, not those who sleep on their rights.22 See Ivani Contracting
Corp. v. City of New York, 103 F.3d 257, 259 (2d Cir. 1997). Laches
may be applied by a court to bar a suit in equity that has been brought
so long after the cause of action accrued that the court finds that
bringing the action is unreasonable and unjust. See id. The fuzziness
of these equitable principles and the softness of their application, see
Weinberger v. Romero-Barcelo, 456 U.S. 305, 312 (1982); Holmberg,
327 U.S. at 396 (Frankfurter, J.) ("Equity eschews mechanical rules;
_________________________________________________________________

2 Vigilantibus non dormientibus aequitas subvenit. But also note,
aequitas ignorantiae opitulatur, oscitantiae non item (equity assists igno-
rance, but not carelessness).

                   7
it depends on flexibility"), while maybe apropos for the apparently
soft and fuzzy Barney, nonetheless provide no defense of laches for
his actions at law. See County of Oneida v. Oneida Indian Nation, 470
U.S. 226, 244 n.16 (1985) ("[A]pplication of the equitable defense of
laches in an action at law would be novel indeed"); United States v.
Mack, 295 U.S. 480, 489 (1935) (Cardozo, J.) ("Laches within the
term of the statute of limitations is no defense at law"); Ivani Con-
tracting, 103 F.3d at 260; Ashley v. Boyle's Famous Corned Beef Co.,
66 F.3d 164, 168-69 (8th Cir. 1995). And the fact that Federal Rules
of Civil Procedure 1 and 2 merged law and equity for procedural pur-
poses -- Rule 2, for example, provides that "[t]here shall be one form
of action to be known as `civil action'" -- does not alter the substan-
tive rights inherent in law and equity. See Commercial Nat'l Bank v.
Parsons, 144 F.2d 231, 240-41 (5th Cir. 1944) (noting that despite the
rules' merger of law and equity as to form, the substantive difference
in federal judicial power between law and equity remains embedded
in federal law).

Moreover, because laches is a judicially created doctrine, whereas
statutes of limitations are legislative enactments, it has been observed
that "[i]n deference to the doctrine of separation of powers, the
[Supreme] Court has been circumspect in adopting principles of
equity in the context of enforcing federal statutes." Oneida Indian
Nation, 470 U.S. at 262 n.12 (Stevens, J., dissenting in part) (relying
generally on Weinberger, 456 U.S. 305); see also Holmberg, 327 U.S.
at 395 ("If Congress explicitly puts a limit upon the time for enforcing
a right which it created, there is an end of the matter. The Congressio-
nal statute of limitation is definitive"). Consequently, when consider-
ing the timeliness of a cause of action brought pursuant to a statute
for which Congress has provided a limitations period, a court should
not apply laches to overrule the legislature's judgment as to the
appropriate time limit to apply for actions brought under the statute.
Separation of powers principles thus preclude us from applying the
judicially created doctrine of laches to bar a federal statutory claim
that has been timely filed under an express statute of limitations. See
Ivani Contracting, 103 F.3d at 260; Ashley, 66 F.3d at 168-69; Miller
v. Maxwell's Int'l, Inc., 991 F.2d 583, 586 (9th Cir. 1993). And this
principle is equally relevant when Congress creates a cause of action
for traditional equitable remedies, such as injunctions, and specifies
a statute of limitations for that action. Thus, when Congress creates

                  8
a cause of action and provides both legal and equitable remedies, its
statute of limitations for that cause of action should govern, regardless
of the remedy sought.

A relevant example is provided by the Copyright Act, where Con-
gress created a civil action by which plaintiffs may seek both dam-
ages and injunctive relief. See 17 U.S.C. §§ 502, 504. And in a
limitations provision, it provides, "No civil action shall be maintained
under the provisions of this Title unless it is commenced within three
years after the claim accrued." Id. § 507(b) (emphasis added). In view
of such a provision, a court is not free to shorten the limitations
period, even when a plaintiff seeks equitable relief.

But, of course, the doctrine of laches may be applied to equitable
claims brought under the Lanham Act, which contains no express lim-
itations provision. See Holmberg, 327 U.S. at 395. When federal
courts, in the exercise of their equitable power, consider laches, they
are guided by the limitations period that they would borrow for
actions at law and presume that if an equitable claim is brought within
the limitations period, it will not be barred by laches. See Sara Lee
Corp. v. Kayser-Roth Corp., 81 F.3d 455, 461 (4th Cir. 1996); Hot
Wax, Inc. v. Turtle Wax, Inc., 191 F.3d 813, 821 (7th Cir. 1999); Con-
opco, Inc. v. Campbell Soup Co., 95 F.3d 187, 191 (2d Cir. 1996);
Tandy Corp. v. Malone & Hyde, Inc., 769 F.2d 362, 365-66 (6th Cir.
1985). But if the claim is one for injunctive relief, laches would not
apply. A prospective injunction is entered only on the basis of current,
ongoing conduct that threatens future harm. Inherently, such conduct
cannot be so remote in time as to justify the application of the doc-
trine of laches. See Sara Lee, 81 F.3d at 461 ("[I]n consideration of
the public interest, estoppel by laches may not be invoked to deny
injunctive relief if it is apparent that the infringing use is likely to
cause confusion" (citing 4 J. Thomas McCarthy, McCarthy on Trade-
marks and Unfair Competition, § 31.04[1] (3d ed. 1995))).

C

Because not all of the claims relating to the NDC and Hillary cos-
tumes are time-barred, we must consider whether Lyons is entitled to
a remedy in connection with these claims.

                   9
At trial, Lyons did not seek to prove actual damages and does not,
therefore, press any claim for such damages. It did, however, elect
statutory damages under the Copyright Act, which provides that the
copyright owner is entitled to either actual damages or "statutory
damages." See 17 U.S.C. § 504(a). The election for statutory damages
must be made before final judgment is rendered. See id. § 504(c)(1).
In its complaint, Lyons demanded statutory damages, and it appar-
ently never abandoned that claim, because at trial it not only chose
not to present evidence of actual damages, but it also sought to prove
that the defendant's conduct was willful, thereby entitling it to
enhanced statutory damages. See id. § 504(c)(2).

Under 17 U.S.C. § 504(c)(1), a copyright owner is entitled to statu-
tory damages of not less than $500 or more than $20,000 for infringe-
ment of "any one work," "as the court considers just." If the copyright
owner, however, is able to prove that infringement was committed
willfully, the court is given discretion to increase the award of statu-
tory damage to a sum not more than $100,000. See id. § 504(c)(2). On
the other hand, if the copyright owner is only able to prove that "such
infringer was not aware and had no reason to believe that his or her
acts constituted an infringement of copyright, the court, in its discre-
tion, may reduce the award of statutory damages to a sum not less
than $200." Id. While we review for clear error any factual finding
that would determine the appropriate level of statutory damages, we
would review an award of those damages within the statutory range
for abuse of discretion. See Superior Form Builders, Inc. v. Chase
Taxidermy Supply Co., 74 F.3d 488, 496 (4th Cir. 1996).

In this case, the district court found that the defendant's infringe-
ment was not willful, and we conclude that the court's finding is not
clearly erroneous. Although the Copyright Act does not define willful
infringement, other circuits have held that infringement is willful if
the defendant "has knowledge," either actual or constructive, "that its
actions constitute an infringement," Fitzgerald Publ'g Co. v. Baylor
Publ'g Co., 807 F.2d 1110, 1115 (2d Cir. 1986), or recklessly disre-
gards a copyright holder's rights, see N.A.S. Import Corp. v. Chenson
Enterprises, 968 F.2d 250, 252 (2d Cir. 1992); see also RCA/Ariola
Int'l, Inc. v. Thomas & Grayston Co., 845 F.2d 773, 779 (8th Cir.
1988) (holding that a defendant does not act willfully within the
meaning of the statute if he believes in good faith that his conduct is

                  10
innocent). In this case, substantial evidence supports the district
court's finding that Morris Costumes neither knew nor should have
known that it was infringing Lyons' copyrights. For example, an
investigator hired by Lyons was repeatedly told by a Morris Costumes
employee that Morris Costumes did not rent Barney costumes. Per-
haps more significantly, evidence in the record established that Morris
Costumes ceased distribution of the NDC costumes in 1994 and
replaced that costume with the modified version-- the Hillary cos-
tume -- a work that, while eventually found to be infringing, was also
found by the district court to "reflect a serious attempt to create a new
work with clearly identifiable female characteristics," such as a dress,
red cheeks, and long eyelashes. Despite the presence of evidence
pointing toward the opposite conclusion, such as Morris Costumes'
receipt of Lyons' cease-and-desist letter, the district court did not
clearly err when it held that the distribution of the NDC and Hillary
costumes was not willful infringement.

Even with our affirmance of the district court's willfulness ruling,
however, in view of our rulings on limitations and laches, the district
court is left with the determination of whether lesser statutory dam-
ages should be awarded under 17 U.S.C. § 504(c).

D

Lyons also appeals the district court's decision not to issue an
injunction prohibiting Morris Costumes from distributing infringing
costumes in the future. The court wisely did not rely on laches to bar
injunctive relief because laches may not be invoked to deny injunctive
relief that otherwise would appear appropriate. Rather, the district
court concluded that Morris Costumes' "voluntary cessation of all
activities concerning the costumes at issue" rendered the injunction
unnecessary. We believe that this statement misconstrues the legal
principles applicable to the issuance and denial of injunctions.

As we have noted in the past, "it is well established that the volun-
tary discontinuance of challenged activities by a defendant does not
necessarily moot a lawsuit." United States v. Jones, 136 F.3d 342, 348
(4th Cir. 1998) (citing Iron Arrow Honor Soc'y v. Heckler, 464 U.S.
67, 71-72 (1983) (per curiam)). That rule is subject to the caveat that
an injunction is unnecessary when "there is no reasonable expectation

                  11
that the wrong will be repeated." United States v. W.T. Grant Co., 345
U.S. 629, 633 (1953) (emphasis added) (quotation marks and footnote
omitted); see also County of Los Angeles v. Davis, 440 U.S. 625, 631
(1979). But this exception is just that -- an exception -- and defen-
dants "face a heavy burden to establish mootness in such cases
because otherwise they would simply be free to `return to [their] old
ways' after the threat of a lawsuit has passed." Iron Arrow, 464 U.S.
at 72 (alteration in original) (quoting W.T. Grant, 345 U.S. at 632).

In the case before us, the defendants did not meet this heavy bur-
den. Philip Morris testified that the reason why he stopped renting the
Hillary costume several months before this action was commenced
was because of the suit that Lyons filed against the manufacturer of
the NDC costume, the costume on which Hillary was based. Even
though he stopped renting to see how that litigation fared, he contin-
ued to maintain that the Hillary costume was in fact not an infringing
costume. Morris Costumes did not make an affirmative showing that
continuing infringement was, practically speaking, nearly impossible.
Despite this state of the record, the district court, in finding an injunc-
tion unnecessary, required no more than the defendants' bald asser-
tions that they would cease distributing the costumes and would hand
over those costumes remaining in their possession following the ter-
mination of the litigation. In the context of an infringement action,
such assertions, standing alone, cannot eliminate the plaintiff's "rea-
sonable expectation that the alleged violation will recur" in the
absence of a court order. Davis, 440 U.S. at 631 (internal quotation
marks omitted). Accordingly, Lyons was entitled to an injunction.

We therefore reverse the district court's ruling denying Lyons an
injunction in the face of its findings of infringement and remand with
instructions that the district court enter an injunction prohibiting the
illegal conduct.

III. Duffy the Dragon costume

The district court held that, in contrast to the NDC- and Hillary-
based claims, Lyons' causes of action with respect to the Duffy the
Dragon costume were not time-barred under either a statute of limita-
tions or laches theory, but the court found that Morris Costumes did
not infringe Lyons' copyrights and trademarks in Barney when it dis-

                   12
tributed the Duffy costume. Lyons contends that the court's findings
were based on legal error because it (1) applied an inappropriate legal
standard for finding "substantial similarity" under the Copyright Act
claim; and (2) wrongly excluded as hearsay evidence of children's
reactions to the Duffy costume, as well as newspaper articles evidenc-
ing confusion, in considering the Lanham Act claim. We address
these points in order.

A

The district court found that Morris Costume's distribution of the
Duffy costume did not infringe Lyons' copyrights because, in its
words, Duffy "is not subjectively, intrinsically similar to the Barney
character" when viewed from the perspective of"the average adult
renter or purchaser of these costumes." We agree with Lyons that this
exclusive focus upon the average adult's perspective is too narrow
and fails to apply the established copyright principles of this circuit.

To establish a claim for copyright infringement, a plaintiff must
prove that it owned a valid copyright and that the defendant copied
the original elements of that copyright. See Ale House Mgmt., Inc. v.
Raleigh Ale House, Inc., 205 F.3d 137, 143 (4th Cir. 2000) (citing
Feist Publ'ns, Inc. v. Rural Tel. Serv. Co., 499 U.S. 340, 361 (1991)).
When the plaintiff possesses no direct evidence that the defendant
copied its protected work, it may create a presumption of copying by
indirect evidence establishing that the defendant had access to the
copyrighted work and that the defendant's work is "substantially simi-
lar" to the protected material. See Towler v. Sayles, 76 F.3d 579, 581-
82 (4th Cir. 1996). Proof of substantial similarity requires resort to yet
another two-part analysis. First, the court must determine whether the
two works are "extrinsically similar because they contain substan-
tially similar ideas that are subject to copyright protection." Id. at 583.
And second, the court must ask whether the works are "intrinsically
similar" in the sense that they express those ideas in a substantially
similar manner from the perspective of the intended audience of the
work. See id. at 583-84. The notion of intrinsic similarity can be a
slippery one because it requires the court to inquire into "the `total
concept and feel' of the works," but only as seen through the eyes of
the ordinary observer. Dawson v. Hinshaw Music, Inc., 905 F.2d 731,
733 (4th Cir. 1990). This ordinary observer is to be a member of "the

                   13
intended audience of the plaintiff's work." Id. at 736. In most cases,
when a copyrighted work will be directed at the public in general, the
court need only apply a general public formulation to the intended
audience test. See id. at 736-37. But when it is clear that the work is
intended for a more particular audience, the court's inquiry must be
focused upon the perspectives of the persons who comprise that
group. See id.

In determining that Morris Costumes' sales of the Duffy costume
did not violate the Copyright Act, the district court found that Barney
and Duffy were extrinsically similar but not intrinsically similar. That
finding was based upon the court's conclusion that the intended audi-
ence of the Duffy costumes was "the average adult renter or purchaser
of those costumes because that person is the one who would actually
decide whether to obtain the costumes." The court reasoned that the
perspectives of children were irrelevant because"there is no evidence
in the record that children directly influenced any purchase or rental
decisions regarding Defendants' costumes." Rather, "[c]hildren were
only able to view Defendants' costumes after an adult obtained them."
Accordingly, the district court held, because the average adult would
not believe that Duffy and Barney were intrinsically similar, Lyons
had not proven that Morris had engaged in copying, and thus had not
established a claim under the Copyright Act.

The evidence of actual confusion among children, however, which
the court disregarded, was substantial. An elementary school adminis-
trator testified that her school rented the Duffy costume for a school
rally called "Character Counts," because Barney exemplified the qual-
ities that the rally intended to communicate. When the administrator
appeared without advance notice before 500 children in the Duffy
costume, the children saw Barney. As she testified, "the kids just went
wild. They went crazy and they were just going,`Barney. Barney.
Barney.'" Also, various parents testified that they rented Duffy know-
ing that it would be perceived by children as Barney, and in each case
the children so perceived Duffy as Barney. In addition to this evi-
dence of actual confusion among children, Lyons offered over 30
newspaper clippings from around the country in which persons wear-
ing the Duffy costume were depicted but the newspaper reported them
as "Barney." None of the papers reported an awareness of its error.

                  14
We conclude that the district court's limiting of the intended audi-
ence to the adult renters and purchasers directly conflicts with our
decision in Dawson, in which we first articulated the "intended audi-
ence" rule. In Dawson, we held that, in evaluating whether two works
of music were intrinsically similar, the district court should have con-
sidered whether the works' intended audience possessed "specialized
expertise, relevant to the purchasing decision, that lay people would
lack," and if so, whether that specialized audience, rather than the
ordinary lay observer, would find the works to be substantially simi-
lar. 905 F.2d at 736. Likewise, the similarity of child-oriented works
"must be viewed from the perspective of the child audience for which
the products were intended." Id. at 735; Atari, Inc. v. N. Am. Phillips
Consumer Electronics Corp., 672 F.2d 607, 619 (7th Cir. 1982); Sid
& Marty Krofft Television Prods. v. McDonald's Corp. , 562 F.2d
1157, 1166-67 (9th Cir. 1977).

The Dawson court adopted the "intended audience" rule, as
opposed to an "ordinary observer" rule, because copyright law, at its
core, is intended only to protect the creator's economic market and
resulting financial returns. See Dawson, 905 F.2d at 733-34 (citing
Arnstein, 154 F.2d at 473). Accordingly, the relevant question that
courts must ask in determining whether a work has been copied is not
whether society as a whole would perceive the works to be similar in
an aesthetic sense, but rather whether the works are so similar that the
introduction of the alleged copy into the market will have an adverse
effect on the demand for the protected work. Put more directly, copy-
right law is concerned with those "knock-offs" that could actually
diminish a copyright owner's profits, and that threat only arises when
the owner's customers or potential customers believe that the new
work is in fact a "copy."

In this case, all of the relevant evidence tended to show that the tar-
get for both the Barney and Duffy characters was an audience consist-
ing of young children. Lyons states more particularly that it targets
children from ages two to five. Accordingly, the economically impor-
tant views are those of the young children who watch Barney on tele-
vision, wear t-shirts bearing his likeness, and desperately hope that
the purple dinosaur will make an appearance at their birthday parties.
Even if adults can easily distinguish between Barney and Duffy, a
child's belief that they are one and the same could deprive Barney's

                  15
owners of profits in a manner that the Copyright Act deems imper-
missible. We can only surmise the economic impact that would be felt
by Lyons in its future sales of copyrighted materials if Duffy, mis-
taken by children for Barney, were to conduct himself (outside of a
parodic context) in a manner that undermined the image that Lyons
had created in Barney. Such a "Barney" at the mall, at school, or at
local promotions might quickly erode the good will of the true Barney
on PBS and adversely affect Lyons' sales of copyrighted toys,
clothes, and videotapes.

The district court attempted to skirt the problem by stressing the
unique nature of the allegedly infringing work in this case: the evi-
dence in the record showed that unlike, say, a toy, the adult-sized cos-
tumes at issue were always bought or rented outside the presence of
children. Thus, the court held, the child's perspective was irrelevant
because the adult "is the one who would actually decide whether to
obtain the costumes." We find this distinction unpersuasive on two
levels. First, such logic would practically obliterate the consideration
of children's viewpoints in any case involving protected works that
are directed towards children, as many such works are purchased as
"surprise" gifts -- and thus necessarily outside of the child's pres-
ence. More fundamentally, the district court's distinction ignores the
fact that, even though children were not present during any of the pur-
chases or rentals testified to at trial, their impressions and views were
the primary influences on the purchase decision. As the district court
explicitly found, "many of these adults rented these costumes with the
intent of confusing their young children." Thus, the fact that the adults
were the nominal purchasers of the costumes is irrelevant for the pur-
poses of the substantial similarity inquiry; the adults' actions only
confirm that children are the intended audience with respect to both
the Barney character and the Duffy costume. Moreover, the entertain-
ment of the children with the costumes could have a direct economic
impact on later wishes, later purchases, and general good will in an
economic sense -- a potentially detrimental impact against which the
Copyright Act seeks to protect.

We recognize the risk that by considering the perspectives of
young children in the substantial-similarity analysis, the potential lia-
bility for infringement might tend to broaden, given the reduced abil-
ity of young children to distinguish between objectively different

                  16
items and concepts. But this concern is largely ameliorated by the
first, objective prong of the substantial similarity inquiry, which
requires the court to find, as a matter of law, that the works are extrin-
sically similar. Moreover, to the extent that liability is broadened, it
represents the reality of the confusion and actual economic loss to the
copyright owner.

In sum, in conducting its infringement analysis with respect to
works targeted at children, the district court should have considered
the perspectives of those children. The fact that children were not
actually present when their parents purchased or rented the costumes
did not eliminate the need to consider the children's perspectives
because both Morris Costumes and those parents foresaw that the cos-
tumes would be used to entertain children. Accordingly, we vacate the
court's judgment on this copyright issue and remand with instructions
that the district court reevaluate the disregarded evidence in light of
this opinion.

B

For similar reasons, we also vacate the district court's finding
against Lyons on its trademark claims brought under 15 U.S.C.
§§ 1114 and 1125. A plaintiff asserting an infringement claim under
the Lanham Act must prove that it has a valid, protectable trademark
and that the defendant is infringing its mark by creating confusion, or
a likelihood thereof, by causing mistake, or by deceiving as to the
attributes of its mark. See 15 U.S.C. §§ 1114, 1125; Petro Stopping
Ctrs., L.P. v. James River Petroleum, Inc., 130 F.3d 88, 91 (4th Cir.
1997). In determining whether the plaintiff has proven a likelihood of
confusion, we consider, among other factors, "(1) the strength or dis-
tinctiveness of the plaintiff's mark, (2) the similarity of the two par-
ties' marks, (3) the similarity of the goods and services the marks
identify, (4) the similarity of the facilities the two parties use in their
businesses, (5) the similarity of advertising used by the two parties,
(6) the defendant's intent, and (7) actual confusion." Petro Stopping
Ctrs., 130 F.3d at 91 (citing Pizzeria Uno Corp. v. Temple, 747 F.2d
1522, 1527 (4th Cir. 1984)). The importance and relevance of each
factor will, of course, vary from case to case. See id. Nevertheless, we
have indicated that the seventh factor -- actual confusion -- is often
paramount. When the plaintiff's mark is strong and the defendant's

                   17
use of a similar mark "has actually confused the public, our inquiry
ends almost as soon as it begins." Sara Lee, 81 F.3d at 467.

The district court found that Lyons owned valid trademarks in the
Barney character. But it determined, after undertaking an analysis of
each of the Pizzeria Uno factors, that Lyons had not demonstrated a
likelihood of confusion between the Duffy costume and the Barney
character. It reached its conclusion, however, only after disregarding
most of the evidence of actual confusion, the paramount factor in the
analysis. Although the court stated that "[t]here is no evidence on
which to support a finding concerning actual confusion of children,"
ample evidence presented at trial would have supported such a find-
ing. As we noted above, the principal at an elementary school testified
that when she wore the Duffy costume at a school rally, the children
shouted "Barney. Barney. Barney," and parents testified that when
they rented the Duffy costume for their children's birthday parties, the
children believed that the person dressed as Duffy was in fact Barney.
In addition, Lyons offered newspaper clippings that evidenced actual
confusion between Duffy and Barney, not only by the children who
were the subject of the articles, but by the reporters themselves, who
erroneously described Duffy as "Barney."

Despite initially admitting that evidence, the district court's final
opinion dismissed it as "unreliable hearsay." If the district court disre-
garded this evidence because it was hearsay, we believe that this con-
clusion was erroneous. Lyons did not offer the children's statements
or the newspaper articles to prove the truth of the matter asserted --
i.e., that the persons wearing the Duffy costume were in fact Barney
-- but rather merely to prove that the children and the newspaper
reporters expressed their belief that those persons were Barney. This
was direct evidence of the children's and the reporters' reactions and
not hearsay. Accordingly, it could not have been excluded as such.
See Fed. R. Evid. 801(c) (limiting the definition of hearsay to state-
ments offered "to prove the truth of the matter asserted"); cf. Fed. R.
Evid. 803(1) (creating an exception to the hearsay rule, regardless of
the availability of the declarant, for a statement about "an event or
condition made while the declarant was perceiving the event or condi-
tion, or immediately thereafter").

Because such evidence was highly probative of actual confusion
and the existence of actual confusion is often dispositive to a trade-

                   18
mark infringement analysis, see Sara Lee, 81 F.3d at 467, we also
vacate the district court's judgment as to the Duffy-related trademark
claim.

IV. State law claim

On its state law claim, Lyons contends that federal trademark and
copyright infringement amount to per se violations of the North Caro-
lina Unfair and Deceptive Trade Practices Act (the"UDTPA"), N.C.
Gen. Stat. § 75-1.1, and that the district court's failure to find such a
per se violation was error. The UDTPA provides a cause of action to
competitors for "[u]nfair methods of competition in or affecting com-
merce." N.C. Gen. Stat. § 75-1.1(a). But to read the statute to create
per se liability for violations of federal law would expand its scope
beyond the apparent intent of the North Carolina legislature. Cf.
HAJMM Co. v. House of Raeford Farms, Inc., 403 S.E.2d 483, 492
(N.C. 1991) ("[T]he Act is not intended to apply to all wrongs in a
business setting"). To be sure, the North Carolina statutes do render
a violation of state trademark law a per se violation of § 75-1.1, see
N.C. Gen. Stat. § 80-12, but Lyons has not proven such a violation,
as the North Carolina trademark statute forbids infringement only of
marks registered with the State, see id. § 80-11. And given that the
legislature saw fit to state explicitly that state-law trademark infringe-
ment is a per se violation of the UDTPA, it surely would have enacted
a similar provision relating to federal-law trademark and copyright
infringement if it had believed that violations of those acts also con-
stituted per se violations of the UDTPA.

Lyons contends, in the alternative, that the district court clearly
erred when it found that Morris Costumes had not committed unfair
trade practices in attempting to deceive the public into believing that
the NDC, Hillary, and Duffy costumes were in fact representations of
the Barney character. See generally Harrington Mfg. Co. v. Powell
Mfg. Co., 248 S.E.2d 739, 746 (N.C. Ct. App. 1978) (noting that one
method of unfair competition that falls within the meaning of the
North Carolina statute is "the `passing off' of one's goods as those of
a competitor").

While sufficient evidence exists in the record to support the district
court's finding that the infringing activities were not taken with the

                  19
intent that the public would be deceived as to the true origin of the
costumes,33 that finding alone does not appear to immunize the defen-
dants from the UDTPA claim. See Marshall v. Miller, 276 S.E.2d
397, 403 (N.C. 1981) ("If unfairness and deception are gauged by
consideration of the effect of the practice on the marketplace, it fol-
lows that the intent of the actor is irrelevant. Good faith is equally
irrelevant. What is relevant is the effect of the actor's conduct on the
consuming public. Consequently, good faith is not a defense to an
alleged violation of G.S. 75-1.1"); accord Gray v. N.C. Ins. Under-
writing Ass'n, 529 S.E.2d 676, 681 (N.C. 2000).

Accordingly, we vacate the district court's judgment on the
UDTPA claim and remand for further proceedings.

V. Attorneys fees

Finally, Lyons contends that the district court abused its discretion
in awarding Amy Morris Smith attorneys fees under§ 505 of the
Copyright Act, 17 U.S.C. § 505, and § 35(a) of the Lanham Act, 15
U.S.C. § 1117(a). The decision to award fees in "exceptional" cases
is generally committed to the "considered discretion" of the district
court. See Ale House Mgmt., 205 F.3d at 144. But in this case, the dis-
trict court appears to have based its fee award at least in part upon the
proposition that Lyons' claims were time-barred. Because we have
held that determination to be erroneous, at least in part, we also vacate
the district court's award of fees to Smith. We leave to the court on
remand the task of determining whether, in light of our discussion of
the applicable statutes of limitations and laches, an award of fees to
Smith remains appropriate.

VI. Summary

In sum, with regard to the NDC and Hillary costumes, we reverse
the district court's ruling that all of the claims were barred by the stat-
ute of limitations; we reverse the ruling that any claims were barred
_________________________________________________________________

3 As we noted above, employees of Morris Costumes told Lyons'
investigator that the store did not have a Barney costume. Morris Cos-
tumes also placed a sign at the store explicitly stating that Hillary
"should not be confused with Barney."

                    20
by laches; we affirm the finding that the infringements were not will-
ful; and we reverse the denial of injunctive relief. On the Duffy-
related claims, we vacate the district court's judgment and remand for
further consideration in light of the legal principles set out in this
opinion. With respect to the state-law unfair competition claim, we
vacate and remand. And finally, we vacate the district court's award
of attorneys fees to Amy Morris Smith and remand for further consid-
eration.

AFFIRMED IN PART, REVERSED IN PART,
VACATED IN PART, AND REMANDED

                  21