The Relevance Of 'Reasonable Royalties' To Copyright Infringement

Previously published in Bloomberg BNA.

1. Introduction

Recent cases reveal that seeking a reasonable royalty as a copyright remedy can be an uncertain endeavor. Courts have differed regarding which evidentiary factors are relevant and necessary. Parties seeking to apply the reasonable royalty analysis frequently used in the patent litigation arena have sometimes found themselves successful, and other times frustrated.

A study of the development of the reasonable royalty remedy in copyright cases suggests that a party seeking a reasonable royalty needs to pay particular attention to developing a thorough evidentiary basis, and should also research the individual court as much as possible to determine how best to present its case. For parties seeking to avoid a reasonable royalty remedy, case law suggests lines of attack and ways to potentially limit the size of a royalty.

2. Statutory Basis of Copyright Damages

   The Copyright Act of 1976 as amended states at 17 U.S.C. § 504(a):

   An infringer is liable for (1) the copyright owner's actual damages and any additional profits of the infringer. . .; or (2) statutory damages . . . .

   17 U.S.C. § 504(b) addresses actual damages and additional profits:

   The copyright owner is entitled to recover the actual damages suffered by him or her as a result of the infringement, and any profits of the infringer that are attributable to the infringement and are not taken into account in computing the actual damages. 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 re-quired to prove his or her deductible expenses and the elements of profit attributable to factors other than the copyrighted work.

3. Lost Licensing Fees as Part of Actual Damages

   The current reasonable royalty remedy the courts are struggling with is an outgrowth of a lost license fee.

   Several courts have recognized that a lost licensing fee may constitute actual damages to the copyright holder. Courts frequently characterize this lost licensing fee as the ''value of use'' of the copyrighted material, and some courts have gone the next step and determined that the value of use would be equal to what a hypothetical willing licensee would agree to pay a hypothetical willing licensor. However, some of these courts have distinguished these copyright value of use analyses from patent reasonable royalty analyses based on statutory and evidentiary grounds.

   1. Cases Developing a Hypothetical Value of Use Remedy

      In an early case, Deltak Inc. v. Advanced Systems Inc., 767 F.2d 357, 360-362, 226 USPQ 919 (7th Cir. 1985), the court held that there were three factual premises on which actual damages could be awarded:

      (a) ''But for'' the infringement, the copyright holder could have sold more copies of the work to various customers.

      (b) The infringer might have purchased copies of the copyrighted work so as to avoid infringing.

      (c) When the infringer reproduced the infringing copies, it was manufacturing assets and thereby damaged the copyright holder to the extent of the value of use of the assets in terms of acquisition costs saved by the infringer.

      The court held that ''[e]ach of the copies [the infringer] distributed had a value of use to it equal to the acquisition cost saved by infringement instead of purchase, which [the infringer] was then free to put to other uses. This is simply an application of the general principle that value of use amounts to a determination of what a willing buyer have been reasonably required to pay a willing seller for plaintiff's work.'' Id. at 361- 362 (internal citations and quotes omitted).

      However, the Deltak court also noted that while ''there are similarities between the concept of reasonable royalty in patent law and value of use as saved acquisition cost in copyright law . . . the two are not identical. Reasonable royalties are used when actual damages or profits are not provable, but value of use is a form of actual damage, not a substitute to be used when no type of damage or profit can be proved.'' Id. at 363.

      In Davis v. Gap, 246 F.3d 152, 58 USPQ2d 1481 (2d Cir. 2001) (61 PTCJ 575, 4/13/01), the U.S. Court of Appeals for the Second Circuit reversed a district court ruling that a copyright holder cannot recover as actual damages the fair market value of a license fee for the use the infringer made. In reaching its conclusion, the court considered the following hypothetical:

      Assume that the copyright owner proves that the defendant has infringed his work. He proves also that a license to make such use of the work has a fair market value, but does not show that the infringement caused him lost sales, lost opportunities to license, or diminution in the value of the copyright. The only proven loss lies in the owner's failure to...