Andrew Leonard photographs stem cells using an electron microscope. Due to the technical skill required, he is one of just a handful of such photographers. Leonard pays a scientific research institution to use its electron microscope. He obtains cell samples from doctors, scientists and researchers. Leonard takes the images in black and white, then uses his artistic judgment to add color to the images.
Stemtech uses distributors to sell the nutritional supplements it formulates. Stemtech distributors sign a contract and must comply with Stemtech’s policies and procedures manual. Leonard licensed two of his stem cell images to Stemtech for limited use. Stemtech failed to pay Leonard the agreed upon licensing fee and exceeded the scope of the license by using the images without a license in its promotional materials. Further, Stemtech allowed some of its distributors to use Leonard’s images on their websites. After Stemtech and its distributors refused to pay Leonard for the unauthorized use of his images, Leonard sued Stemtech and its distributors for copyright infringement. The jury awarded Leonard a $1.6 million verdict against Stemtech on Leonard’s direct, vicarious and contributory infringement claims. The issues on appeal to the Third Circuit were whether the district court should have granted Stemtech’s motion for a new trial on contributory and vicarious liability and damages and whether Leonard should have received prejudgment interest and infringer’s profits.
The district court did not abuse its discretion in denying Stemtech’s motion for a new trial on Leonard’s contributory infringement and vicarious infringement claims.
To demonstrate that the District Court erred in declining to grant it a new trial because the verdict was against the weight of the evidence, Stemtech must establish that (1) the jury reached an unreasonable result, and (2) the District Court abused its broad discretion in not setting the verdict aside.
(Opinion pdf page 12).
Stemtech argued that the jury’s contributory and vicarious liability findings were not supported by substantial evidence and that Stemtech was therefore entitled to a new trial on those issues.
To prove contributory infringement or vicarious infringement by Stemtech, Leonard must first prove that Stemtech’s distributors directly infringed Leonard’s copyrights.
Leonard proved direct infringement by Stemtech distributors. He demonstrated that he owned the copyrights to the infringed images, and that he did not authorize or license the use of his images in Stemtech’s advertising, marketing, and training materials. The materials containing his images ranged from webpages and PDFs to videos and a PowerPoint presentation promoting Stemtech products. This evidence provided a sufficient basis for a jury to reasonably conclude that the distributors directly infringed Leonard’s copyrights.
(Opinion pdf page 14.)
Contributory infringement means intentionally inducing or encouraging direct infringement by a third party. A copyright owner establishes contributory infringement by showing 1) a third party directly infringed the copyright owner’s copyright, 2) the defendant knew that the third party was directly infringing, and 3) the defendant materially contributed to or induced the infringement.
The District Court appropriately denied Stemtech’s motion for a new trial on Leonard’s contributory infringement claim. As discussed above, there was sufficient evidence from which a jury could conclude that third parties, namely Stemtech’s distributors, directly infringed Leonard’s copyrights. Furthermore, the evidence shows that Stemtech knew of the distributors’ infringing activity. Stemtech itself created the materials containing Leonard’s images, provided the materials to its distributors, and required the distributors to use the materials. Thus, Stemtech knew of its distributors’ infringing activities and plainly took steps that were substantially certain to result in such direct infringement.
We also note that the jury had a basis to conclude that Stemtech knew that the images it provided to its distributors were copyrighted. The jury heard evidence that Stemtech had negotiated with Leonard for a limited-use license of one of his images in the HealthSpan magazine. From this evidence, the jury could infer that, despite knowing that Leonard’s images were copyrighted, Stemtech required its distributors to use the images Leonard owned to promote Stemtech’s products and thereby materially contributed to or induced their infringement.
(Opinion pdf pages 15 – 16).
In vicarious infringement, the defendant profits from the direct infringement while declining to exercise a right to stop or limit the direct infringement. A copyright owner establishes vicarious infringement by proving that the defendant had 1) a right and ability to supervise or control the infringing activity and 2) a direct financial interest in the infringing activity. Vicarious infringement does not require the existence of a formal contract, an agency relationship or an employer-employee relationship between the defendant and the direct infringer. All that is required is for the defendant to be in a position to police the direct infringers.
Like the chain store, dance-hall proprietor, and filesharing program operator, Stemtech had the right and ability to control the infringing activities of its distributors. Stemtech created and provided marketing materials to its distributors, and required their use. It also had the contractual right to impose a range of disciplinary sanctions on distributors who violated its policies or engaged in illegal behavior, ranging from withholding compensation to terminating a distributorship agreement. Additionally, Stemtech required its distributors to use official STEMTech replicated templates and websites that it controlled. To the extent infringements occurred on what Stemtech asserts were unauthorized, independent websites, Stemtech still had the ability to induce compliance by distributors operating these websites by withholding compensation and access to back office support. Stemtech thus had the practical ability to police the third-party distributors’ infringing conduct. The evidence of this contractual and financial relationship between Stemtech and its distributors provided a basis for the jury to conclude that Leonard satisfied the right and ability to supervise or control element.
(Opinion pdf pages 18 – 19).
The Third Circuit ruled that Leonard also satisfied the vicarious infringement financial benefit requirement. When the availability of infringing material acts as a draw for customers, there is financial benefit.
The jury could reasonably have credited the testimony from Stemtech officials indicating that images of stem cells lend legitimacy to products that purportedly enhance stem cell production and from this infer that the images could have drawn customers to buy the product, which would financially benefit Stemtech. Thus, there was sufficient evidence from which the jury could find that the financial benefit element was met. Because the verdict was not against the weight of the evidence, the District Court did not abuse its discretion in denying Stemtech’s motion for a new trial on Leonard’s vicarious infringement claim.
(Opinion pdf page 19).
The Third Circuit upheld the actual damages awarded by the jury.
Stemtech argued that the jury’s award of $1.6 million in actual damages was unconstitutional and grossly excessive. The district court denied Stemtech’s motion to exclude testimony from Leonard’s damages expert. Stemtech did not offer its own damages expert. Leonard’s damages expert, Sedlik, calculated the fair market value of the images, then applied a multiplier to account for the scarcity of stem cell images. Although punitive damages are not authorized by the Copyright Act, 17 U.S.C. §504, neither the district court nor the Third Circuit thought the multiplier applied by Sedlik were punitive.
The jury had sufficient evidence to credit Sedlik’s opinion and conclude that the sum calculated from the stock photo agency rates did not represent a full calculation of the fair market value of Leonard’s images because the rates did not account for scarcity and exclusivity. Put differently, Sedlik’s fair market value calculation in this case had two components: the stock agency quotes and the adjustments to reflect the uniqueness of the images and the impact of Stemtech’s usage. The multipliers here reflected a premium that, according to Sedlik, the market would find acceptable given the scarcity and exclusivity of the images as compared to the images for which he had secured rates for comparative purposes. The unrebutted evidence here showed that the fair market value calculation was complete only after these additional factors were applied.
Since Stemtech presented no evidence or methodology to cast doubt on the use of multipliers to account for factors relevant to a final fair market value, neither the District Court nor the jury had any basis to discount this aspect of Sedlik’s testimony. Because there is no evidence that the scarcity and exclusivity multipliers were punitive rather than valid factors for calculating fair market value, we cannot say that the verdict is based upon an improper consideration.
(Opinion pdf page 28).
The Third Circuit also ruled that the jury’s verdict was not grossly excessive. The jury returned a verdict in the low end of Sedlik’s proposed range.
The Third Circuit affirmed the district court’s order granting summary judgment in Stemtech’s favor on Leonard’s request for infringer’s profits.
Section 504(b) of the Copyright Act allows the copyright owner to recover both actual damages and the infringer’s profits from the infringer. Infringer’s profits are profits that are earned from the infringer’s operations that were enhanced by the infringement.
Under § 504(b), we use a two-step framework for recovery of indirect profits. First, the plaintiff must demonstrate a causal nexus between the infringement and the infringer’s gross revenue, or put differently, show that the infringement contributed to the infringer’s profits. Second, once the causal nexus is shown, the infringer bears the burden of apportioning the profits that were not the result of infringement and may adduce evidence of offsets permitted by the statute.
(Opinion pdf page 31).
The district court ruled that the evidence Leonard presented for infringer’s profits was too speculative for a jury to find in his favor on that issue. The evidence Leonard presented did not show how or why Leonard’s images influenced Stemtech’s profits.
As the District Court correctly found, this evidence did not link customer decisions to purchase Stemtech’s product with Stemtech’s use of his images on its website, or in its videos, HealthSpan publication or other marketing materials, as opposed to any other reason why a customer might purchase those products. We agree with these observations and with the conclusion that, while it is conceivable that the presence of the images in Stemtech’s materials added an air of legitimacy to Stemtech’s product that might not have otherwise existed, and that the images could possibly have had some impact, whether consciously or subconsciously, on consumer purchasing decisions mere conceivability is not enough. Instead, Plaintiff must identify evidence showing that the infringing use was ‘reasonably related to the infringement, and the evidence cited above amounted to mere speculation regarding the causal connection.
(Opinion pdf pages 32 – 33).
The Third Circuit vacated the district court’s order denying Leonard an award of prejudgment interest.
Prejudgment interest makes the claimant whole by addressing the time-value of income derived from the copyright owner’s creation and prevents unjust enrichment. The usual rule in copyright cases in the Third Circuit is that the copyright owner is not fully compensated by a monetary award unless the award includes an interest component. If the district court denies a copyright owner prejudgment interest, the district court must explain why the usual equities in favor of awarding prejudgment interest do not apply.
The District Court here was concerned with the high jury award and denied Leonard’s motion for prejudgment interest because it deemed the $1.6 million actual damages award sufficient to compensate him. However, prejudgment interest serves a different purpose and Leonard was entitled to recompense for the loss of the use of the amount of actual damages. Recoupment of the time-value of a plaintiff’s loss is not confined to the provision of just compensation, but also prevents a losing defendant from retaining a windfall in the form of an interest-free loan. Therefore, denying prejudgment interest on the ground that the damages award sufficiently compensated Leonard constitutes legal error.
(Opinion pdf page 36).
The Third Circuit ruled that the district court’s denial of prejudgment interest was based on an erroneous finding of fact, as well as an erroneous conclusion of law. The district court ruled against Leonard without considering the range of evidence Leonard was prepared to present on the issue.
This case is Leonard v. Stemtech International Inc., Nos. 15-3198 & 15-3247, Third Circuit Court of Appeals.