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Guest Blog Post by Michael Einhorn: Establishing Indirect Lost Profits Resulting from Copyright Infringement
Posted By Michael Einhorn On July 27, 2012 @ 12:06 pm In blog,Copyright,Copyright Litigation,Protecting Intellectual Property | No Comments
Introduction by Andrew Berger
I am pleased to introduce Michael Einhorn to IP In BRIEF.
Michael (http://www.mediatechcopy.com) is an economic consultant and expert witness in the areas of intellectual property, media, entertainment, and product design. He is the author of Media, Technology, and Copyright: Integrating Law and Economics (2004) and over seventy related professional articles in intellectual property, economic analysis, and damage valuation. He is also a former professor of economics at Rutgers University. A shorter version of this article appears in the January/February 2014 version of LANDSLIDE Magazine, a publication of the American Bar Association. That article may be found here (subscription required). Michael can be reached at email@example.com, 973-618-1212 and his LinkedIn profile is here .
First, here’s some background.
Section 504  of the Copyright Act provides that the copyright owner may recover the profits made by the infringer resulting from its use of the copyrighted work. To establish the infringer’s profits, the copyright owner must present proof only of the infringer’s gross revenue arising from the infringement. The burden then shits to the infringer. It must prove its deductible expenses and the elements of profit attributable to factors other than the copyrighted work.
Where defendant appropriates the copyrighted work and sells it, a court will assume that the work triggered the purchase. The court then focuses on how much of the gross revenue generated by the sale is actually profit.
But how do you determine a defendant’s profits where it never sells the work it has appropriated and instead incorporates that work into another product, like a movie, a musical or an advertisement, which generates profits. Michael Einhorn, a noted economist and expert provides some guidance below.
Guest Post by Michael Einhorn
Imagine you are a young photographer and you’ve just taken a wonderfully creative shot and are selling it in a gallery. A prominent soft drink company buys the photo and modifies it with a new mission – in a commercial to promote a new brand of soft drinks. The company then registers the copyright in its unauthorized derivative work in its name, thereby enhancing its control over their infringing photo.
When the commercial reaches national attention, you find shoppers in every supermarket now recognize your dramatic photo, but that photo seems lost irretrievably to you.
When you hire an attorney to recover copyright damages, your infringing soft drink company generously offers you $3,000, which an expert presents as a reasonable royalty that covers the actual damages lost by a non-distinguished person (you). Because you failed to register timely your copyright with the Copyright Office, you cannot recover statutory damages of $30,000 (or more) that would be otherwise payable for a willful infringement, nor can you recover your attorney’s fees.
When you seek to recover the soft drink company’s profits arising from the sale of the drink, you are faced with the reality that your photo generated only indirect profits; that is, no consumer actually paid for the photo itself or for its use in any composite product (such as an album or movie). Instead, the photo was incorporated and used to sell another product, the new brand of soft drinks. Are you out of luck?
Thankfully, the answer is no. You can still recover a portion of the profits from the sales of the soft drink if you can demonstrate that the photo contributed to those profits. Here are some suggestions for how you might do so.
Causation is Key
The critical element you must prove is causality — that the infringement caused or contributed to at least a portion of the profits defendant made. You will most effectively demonstrate causality through circumstantial evidence showing that the infringing use has such a secure nexus to the sales that a court may reasonably infer that the infringement actually enhanced or contributed to those sales.
Examples of Indirect Profits Attributable to the Infringement
Here are two examples where courts were able to make the reasonable inference between infringement and sales. In Andreas v. Volkswagen , plaintiff demonstrated a casual nexus between defendant’s use of his infringing text in an Audi commercial for a new coupe and Audi’s profits. The court noted that the infringement was the centerpiece of the commercial which essentially showed only the coupe with the copyrighted text in voiceover. Audi promoted the commercial as an integral part of the launch of the coupe and sales of the coupe during the period the commercial aired so exceeded Audi’s expectations that it paid a bonus to its ad agency.
Frank Music v. Metro-Goldwyn-Mayer  is another example where a court was able to draw the reasonable inference. There defendant infringed plaintiff’s musical composition by including it in a revue performed in its Las Vegas hotel. The appellate court held the defendant liable for a portion of the increased profits from its hotel and gaming operations that may have resulted from the increased patronage generated by the infringing show.
No Nexus Established
The Estate of Vane v. The Fair is an example of failure by plaintiff to show the required nexus. In that case, defendant used plaintiff’s photographs without permission in defendant’s advertising campaign. But the court awarded plaintiff no portion of the profits that campaign may have produced.
The court noted that the photos, as a component in the advertisement, may indeed have helped generate interest in the defendant’s product. But the expert could not prove that the use of the work within the advertisement actually increased defendant’s revenues. The Court stated that “a lump sum figure for profits attributable to the television commercials that contained infringed material as a whole without accounting for the fact that the infringed material constituted only a fraction of the given commercial” was too speculative to compel the disgorgement of defendant’s profits. In fact, sales may have been no less had there been no infringement.
In other words, the photographer in my opening hypothetical can’t simply give a court the soft drink company’s annual report and demand the profits disclosed there arising from the sales of the new brand of drinks. Revenues result from many factors; the copyright holder and its expert need to show that at least one of those factors was defendant’s use of the infringing photo.
But once you jump this hurdle and establish the required causal nexus, the burden then shits to defendant to show its deductible expenses and any portion of its profits that defendant claims are attributable to factors other than the infringement. So plan your strategy accordingly and your reward may justify your effort.
Thanks Michael; want to read more about proving damages in copyright litigation? Click here  to read about why it is so difficult to predict an award of statutory damages in copyright litigation. And click here  for a primer for non lawyers interested in learning more the availability and amount of statutory damages in copyright litigation.
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 Image: http://www.ipinbrief.com/wp-content/uploads/2012/07/michael-einhorn.jpg
 here : http://bit.ly/LHzI2J
 here: http://linkd.in/OqNwMk
 Section 504: http://www.ipinbrief.com/wp-content/uploads/2012/07/lost-profits-section-504.pdf
 Andreas v. Volkswagen: http://www.ipinbrief.com/wp-content/uploads/2012/07/Andreas_v_Volkswagen_of_Ameri_.pdf
 Frank Music v. Metro-Goldwyn-Mayer: http://www.ipinbrief.com/wp-content/uploads/2012/07/Frank_Music_Corp_v_Metro_Gold_-2.pdf
 Estate of Vane v. The Fair : http://www.ipinbrief.com/wp-content/uploads/2012/07/Estate_of_Vane_v_The_Fair__In_.pdf
 here: http://www.ipinbrief.com/whyitsdifficultpredictstatutorydamages/
 here: http://www.ipinbrief.com/a-primer-for-non-lawyers-explaining-statutory-damages-in-copyright-litigation/
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© 2010 Andrew Berger.