TIMEX TAKES A LICKIN', BUT THE NINTH CIRCUIT ALLOWS IT TO KEEP ON TICKIN'.

By Donald M. Gindy

In a long running squabble with Timex Corporation over its acts of copyright infringement, Polar Bear Productions succeeded at trial, but failed to prove the causal link necessary to sustain the jury's award of damages for "indirect" lost profits pursuant to 17 U.S.C.§504(b).

In a lengthy and wide-ranging decision, the Ninth Circuit judges in Polar Bear Productions vs. Timex Corporation, No. 03-35188 and 03-35245 (9th Cir. 2004), touched on many areas of copyright law that are not often the subject of discussion and settled some issues that had been festering as areas of statutory dispute. In the process, they overturned a jury verdict awarding Polar Bear $2.4 million dollars, because the verdict contained an award for indirect lost profits commingled with awards for non-speculative, but unauthorized use of copyrighted materials. As the tribunal was unable to severe the award for indirect profits from the balance, it was compelled to reverse the damage award in its entirety.

The action arose from a film entitled "PaddleQuest." This saga about kayaking was the copyrighted material of Polar Bear Productions. Polar Bear had entered a license agreement with Timex for the purpose of allowing the latter to market its new line of watches called "Expedition." The fact the licensing period had expired did not hinder Timex from unlawfully using the film in promotional materials. It was undisputed that Timex had no right to use the material, but the real issues involved rulings on the statute of limitations, damages, and prejudgment interest.

Images from the full film had been reduced to a "loop tape" which played continuously at trade shows. In its most egregious acts, Timex used the loop tape at 12 different trade shows between 1995 and 1998; Timex also used images from the film in a promotion with the soft drink, Mountain Dew; and, finally, Timex deleted Polar Bear's copyright designation from the film. All these acts took place beyond the license period and without the knowledge and consent of the plaintiff. Polar Bear did not learn of the infringement until long after the license had expired.

Polar Bear filed its lawsuit almost three years after first learning of the infringement. The first issue for the court was to decide whether Polar Bear was entitled to damages which accrued prior to the three year period. Under the Copyright Act, at 17 U.S.C. 507(b), a claim for infringement must be "commenced within three years after the claim accrued."

Timex attempted to prevent Polar Bear from recovering damages by arguing a copyright holder is entitled solely to those damages which accrue during the statutory period. The tribunal disagreed. In doing so, the court distinguished the case of Roley vs. New World Pictures, Ltd., 19 F.3d 479 (9th Cir 1994) from the matter before them. In Roley, it was determined that knowledge or reason to know of an infringement and not take action prevents a plaintiff from recovery for transgressions incurred prior to the running of the statutory period. The action by Polar Bear was decidedly different from Roley. Sutton Roley was a screenwriter, who was aware of at least one infringement prior to the three year statute of limitations. The Roley case interpreted the word "accrue" to mean when the plaintiff knows or has reason to know by reasonable investigation that an infringement has occurred. To do otherwise, the decision concluded, would present an unduly "harsh" result for a plaintiff who had no real way of learning that his intellectual property was being used in an unauthorized manner by another. In an effort to deter future misconduct and prevent an infringer from capitalizing upon his misdeeds, the court adopted the holding of the Seventh Circuit in Taylor vs. Meirick, 712 F.2d 1112, 1117-18 (7th Cir. 1983) and "tolled" the statute of limitations "until the moment of discovery."

In straightforward manner, the court stated that unless the copyright holder knew or by reasonable investigation should have known of the infringement, it was entitled to those damages accruing prior to the statutory period. This marks a significant departure from prior holdings in the Ninth Circuit.

This appeal marked the second time that the parties had been before the Ninth Circuit. For a second time, a jury had awarded Polar Bear damages in excess of $2 million dollars. But the court had great difficulty in sustaining the award as it appeared most of the damages were the result of lost "indirect damages," which upon further analysis revealed a missing causal link.

Under 17 U.S.C. § 504(b), recovery of actual damages and profits require that the loss be attributable to the infringement. It was emphasized repeatedly in the decision that the link between the infringement and the lost profit must be clear and unmistakable. It cannot be based on speculation.

The U.S.Code does not aid in distinguishing between direct and indirect profits. "Direct profits" may be defined as generated by selling an infringing product. "Indirect profits" are those usually created by using the copyrighted material to sell another product. Ibid. at 12743. Courts have concluded that since indirect profits are typically more attenuated from the act of infringement, proof of a causal link between the unauthorized act and the profit gained by the defendant becomes "particularly important for the plaintiff …"

"…a district court must conduct a threshold inquiry into whether there is a legally sufficient causal link between the infringement and subsequent indirect profits. Such an approach dovetails with common sense-there must first be a demonstration that the infringing acts had an effect on profits before the parties can wrangle about apportionment. To do otherwise would be inconsistent with both rudimentary principles of tort law, to which copyright law is often analogized, …" Mackie vs. Rieser, 296 F.3d 909, 915 (9th Cir. 2002).

The finding of the loss as direct or indirect becomes especially important as the plaintiff is entitled to recover "any profits of the infringer attributable to the infringement…(and) 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). Before shifting the burden of proof to the defendant to prove that his profits did not derive from infringement, the plaintiff must succeed in demonstrating the causal link between the alleged infringement and the profit plaintiff is attempting to recoup. This duty of a copyright plaintiff to establish a causal connection must be established by a "modicum of proof."

Polar Bear attempted to present through its expert a theory called "brand premium analysis." It posits that any increase in the sale of Expedition watches was due to the excitement and prestige acquired by Timex as the result of association with PaddleQuest. "Somehow" this increased excitement generated consumer enthusiasm and translated into greater sales of the watches which, in turn, generated more revenue and ultimately profit for Timex.

Although a valid theory, it must be first supported by facts demonstrating that the association led to profit. As the excitement was experienced at Trade Shows, consumer reaction could not be extrapolated from the wholesale transaction which took place between Timex and retailers. Consumers were not exposed to the film at trade shows, nor was proof presented that retailers communicated excitement and prestige to their customers. Without establishing the link between the film and the ultimate consumer, "brand premium analysis" failed to establish that indirect profits derived from the infringement. The buffer of the retailer stood between what plaintiff hoped to demonstrate and the proof that it needed.

The court did not spell out how the plaintiff should go about proving excitement led to greater sales, but implied it is akin to consumer survey evidence exploring the purchasing habits of those in the relevant consuming universe. "We conclude indirect profits…are recoverable if ascertainable." Id., at 12754.

Seeing that it had no choice in the matter, the appellate court found Polar Bear's reasoning untenable and mere speculation. And since it was unable to severe the indirect lost profits from the non-speculative licensing fees and renewal fees lost, the court was required to negate the entire jury award.

The case of Andreas vs. Volkswagen of America, Inc., 336 F.3d 789 (8th Cir. 2003), provided a more suitable example of a plaintiff who was able to prove that indirect profits were attributable to the infringement. Andreas had produced a drawing and accompanying text which stated, "Most people don't know that there are angels whose only job is to make sure you don't get too comfortable & fall asleep & miss your life." Audi and its advertising agency used very similar language in a television commercial to sell the TT Audi coupe. Andreas claimed that the indirect profits derived from the commercial were the result of using his copyrighted work. As in Polar Bear's case, the commercial was enthusiastically received by car dealers; sales of the vehicles during the ad period were higher than projected; and, surveys revealed that consumer's had recall of the commercial.

Irrespective of the proof presented and the jury's verdict in favor of Andreas, the District Court granted Judgment As A Matter of Law and reversed the jury's finding. The trial judge was convinced that it was Andreas' burden rather than Audi's to demonstrate that any profits derived from the infringement. This is contrary to the procedure found in the Code.

Often there is confusion as to when the burden of proof shifts to the defendant in an indirect profits case. "We agree that in an indirect profits case the profits "attributable" to the infringement are more difficult to quantify. But that difficulty does not change the burden of proof established by the statute.... The plaintiff has the 'burden' to demonstrate a nexus between the infringement and the indirect profits before apportionment can occur." Mackie vs. Rieser, 296 F.3d 909, 914 (9th Cir.2002), cert. denied, 123 S. Ct. 1259, 154 L.Ed.2d 1022 (2003).

"The nexus requirement exists in both direct and indirect profits cases." Andreas, at 796, citing Taylor vs. Meirick. "Once the nexus is established in either a direct or indirect profits case, …an apportionment of profits is proper. The burden of proving apportionment, … is the defendants." Frank Music Corp. vs. Metro-Goldwyn-Mayer, Inc. 772 F.2d 505, 518 (9th Cir. 1985).

Unfortunately for Polar Bear Productions, it was not able to shift the burden and get to that second step of apportionment of profits. Polar Bear failed to present what Andreas succeeded in doing, i.e., showing consumer access to the copyrighted film, which leads one to logically conclude that indirect profits were ascertainable.

Finally, the novel issue of whether the plaintiff is entitled to prejudgment interest on his award was presented to the court. After reviewing the decisions of other circuits on this issue, it was noted that although Congress was silent on the question, courts have found it appropriate to award prejudgment interest, particularly where there is willful harm. Thus, precedent existed for its award elsewhere.

The reasoning used by the Ninth Circuit looked at why interest ought to be awarded. The award of damages and profits compensates for the loss, but does not necessarily make one whole. There is delay inevitably in identifying infringement, bringing an action and recovery. The award of prejudgment interest discourages this delay and compensates the copyright holder not only for the infringement, but also allowing him to maximize his recovery. After all, he did not have the use of the money that the law grants him during the period of infringement. As Judge McKeown stated in mitigating the harm caused by delay, "…the remedy of prejudgment interest is uniquely tailored. Simply put, prejudgment interest is a different remedy for a different harm." at 12761.

In one decision, the Ninth Circuit propounded new principles of law in areas reasonably untouched by previous cases. A plaintiff may recover damages which accrue prior to the three year statutory period applicable to copyright infringement so long as it is demonstrated plaintiff did not know nor have reason to know that infringement was taking place; emphasis was placed on the "nexus" or causal link that must be satisfied in the indirect lost profits case before there is a shift of the burden of proof to defendant to apportion his profits; and, finally, the award of prejudgment interest is appropriate to remedy the unique problem of delay in infringement cases.

New ground has been broken by this decision. Practitioners in this area of law will now have greater understanding of the requirements of proof and the items of recovery heretofore unavailable to them. Many of the questions practitioners posed over the years have now been answered.