A recent decision from the U.S. Court of Appeals for the Third Circuit upheld a $1.6 million award of actual damages in a copyright infringement case, affirming the “premium” price a federal jury in Delaware placed on the defendants’ extensive use of the plaintiff’s rare stem cell images.
The plaintiff, photographer Andrew Paul Leonard, takes highly technical black-and-white photographs of stem cells obtained from doctors, scientists, and researchers using an electron microscope, which he then artistically enhances to appear in color. The two images at issue in this case, depicted below, were created by Leonard in the 1990s – a time when Leonard’s images were unique and highly sought after because there were very few photographers who had the technical skill necessary to produce such work. Leonard made his stem cell images available for license at prices ranging from under $100 to several thousand dollars, including a $1,500 license fee for use of one of the images at issue on the cover of Time magazine.
This case arises from the unauthorized use of Leonard’s stem cell images by Stemtech International, Inc. and its distributors. Stemtech, a company that sells nutritional supplements through independent distributors, used two of Leonard’s stem cell images on its websites, marketing DVDs, and other promotional and recruitment materials without permission, and required its distributors to do the same. Stemtech had contacted Leonard to inquire about licensing the stem cell images in May 2006, but ultimately only licensed them for two placements in its internal company magazine because Leonard’s “price[s] [were] too high.” By October 2007, not only had Stemtech failed to pay Leonard in full for the two magazine placements, but Leonard discovered that Stemtech was using the images online in ways that far exceeded the scope of the partially unpaid magazine license.
Leonard brought a copyright infringement lawsuit against Stemtech in the U.S. District Court for the District of Delaware, where a jury found Stemtech liable for direct, contributory, and vicarious copyright infringement. Leonard’s late registration of the images with the Copyright Office precluded recovery of statutory damages, leaving Leonard with the burden of proving actual damages – which he did, in large part, through the expert testimony of photography and damages expert Jeffrey Sedlik. The jury returned a verdict for $1.6 million in actual damages. Stemtech appealed the judgment arguing, among other things, that the jury award was unconstitutionally and grossly excessive, and therefore should be reduced or vacated and remanded for a new damages trial. Stemtech’s appeal focused on the damages calculation proffered by Leonard’s damages expert, Sedlik.
The Copyright Act permits a copyright owner to recover any “actual damages” suffered as a result of the infringement. The statute does not define the term “actual damages,” but courts have described two permissible methods for calculating actual damages. The first, and generally accepted, method involves a calculation of the “fair market value” of the copyrighted work at the time of the infringement – that is, the license fee that a willing buyer would have been reasonably required to pay a willing seller to use the work as it did. The second method involves a calculation of actual damages based primarily on the copyright owner’s own past licensing fees.
In this case, Leonard’s damages expert, Mr. Sedlik, adopted the well-accepted “fair market value” approach to actual damages, but with a unique twist. Typically, the fair market value is established through objective evidence of “benchmark” licenses for comparable uses of comparable works. To this end, Sedlik surveyed four stock photo agencies, including two agencies specializing in scientific images akin to Leonard’s stem cell images, and obtained a range of licensing fees for uses similar to the various types of infringing uses made by Stemtech. The quotes provided by the stock photo agencies averaged between $1,277.10 and $2,569.46 per use, which accounted for factors such as the image size, form of media, size of the potential audience, geographical scope of the use, placement, number of appearances in a particular medium, and length of the license term. To arrive at the benchmark license fee, Sedlik selected a figure within this range and multiplied it by Stemtech’s 92 infringements adjudged at trial. The result: $215,767.75.
In Sedlik’s opinion, however, this benchmark license fee did not wholly compensate Leonard for his loss due to the rarity of the stem cell images at issue and the breadth of Stemtech’s infringing use. In an effort to more closely approximate the value of Leonard’s damages, Sedlik introduced a set of “multipliers” to the calculation of fair market value. Sedlik applied a multiplier of three to five times the benchmark to account for the “scarcity” or “rarity” of Leonard’s stem cell images at the time of the infringements, and a multiplier of 3.75 to 8.75 to account for the “exclusivity” of Leonard’s images during the infringement period. Applying these multipliers, Sedlik concluded that Leonard’s actual damages ranged from $1.4 million to nearly $3 million. The jury’s $1.6 million verdict fit comfortably within Sedlik’s range.
On appeal, Stemtech argued that the multipliers Sedlik applied and the jury adopted were effectively impermissible penalties akin to punitive damages, which the Copyright Act does not authorize. Stemtech also noted that the few courts to consider the use of punitive multipliers have concluded that such use is improper under the Copyright Act. Here, however, the Third Circuit upheld the use of multipliers designed to capture the scarcity and exclusivity of Leonard’s images, finding that they were not used to penalize Stemtech’s unauthorized use, but rather to calculate the fair market value. The Third Circuit described Sedlik’s fair market value calculation as having “two components: the stock agency quotes and the adjustments to reflect the uniqueness of the images and the impact of Stemtech’s usage.”
The Third Circuit explained that Stemtech did not present any evidence at trial to cast doubt on the use of multipliers to account for factors relevant to fair market value. Stemtech did not cross-examine Sedlik on the topic of multipliers at trial nor did it present its own damages expert, and, in fact, it impermissibly raised the multipliers issue for the very first time on appeal. Because the jury had a sufficient evidentiary basis for its calculation of actual damages – including its use of scarcity and exclusivity multipliers – through Sedlik’s expert testimony, and because Stemtech did nothing to challenge this method of calculation at trial, the Court upheld the jury’s $1.6 million award for actual damages.
Although this decision, like all damages decisions, is highly fact-specific, it may pave the way for copyright owners to use multipliers in the calculation of actual damages for the infringement of truly rare photographs. This decision also serves as a cautionary tale for content users to obtain the proper licenses, especially with regard to images that may be considered out of the ordinary. At a time when statutory copyright damages seem to be taking center-stage, this case should remind copyright owners that actual damages can, in the right circumstances, be substantial, and remind content users that the absence of statutory damages does not rule out the possibility of a hefty damages award.
Filed in: Legal Blog
September 26, 2016