Oracle Corporation et al v. SAP AG et al

Filing 814

Declaration of Tharan Gregory Lanier in Support of 813 Motion for Partial Summary Judgment (FILED PURSUANT TO D.I. 810) filed by SAP AG, SAP America Inc, Tomorrownow Inc. (Attachments: # 1 Exhibit A, # 2 Exhibit B, # 3 Exhibit C, # 4 Exhibit D, # 5 Exhibit E, # 6 Exhibit F, # 7 Exhibit G, # 8 Exhibit H, # 9 Exhibit I, # 10 Exhibit J, # 11 Exhibit K, # 12 Exhibit L, # 13 Exhibit M, # 14 Exhibit N, # 15 Exhibit O, # 16 Exhibit P, # 17 Exhibit Q, # 18 Exhibit R, # 19 Exhibit S, # 20 Exhibit T, # 21 Exhibit U, # 22 Exhibit V, # 23 Exhibit W, # 24 Exhibit X)(Related document(s) 810 ) (Froyd, Jane) (Filed on 8/27/2010) Modified on 8/27/2010 (vlk, COURT STAFF).

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Oracle Corporation et al v. SAP AG et al Doc. 814 Att. 24 EXHIBIT X Dockets.Justia.com INTELLECTUAL PROPERTY V A L U A T I O N , E X P L O I T A T I O N , A N D INFRINGEMENT D A M A G E S GORDON V. SMITH RUSSELL L. PARR WILEY ~ JOHN WILEY & SONS, INC. T h i s book L prio! ' d o n a id- rc p a p e r . (§) . o p y r i hi 2005 h J o h n W i l e y & . o n , I n c . il ('U, I II r i g h l l > ' r v c d . P u b l i hed by J o l l n Pullii 'h d : i l l l U I I I I I l & on:>. In .. B o b o k 'n. ill ;lundll. ew Jc " . fill cnler. arranly: W h i l e III Wil~y a 0 publi~hcs il. h<x>k in 3 ariely llf cl 'clrolli fi mllll-. S i n ' etl/II ' n ! IJ1:11 appellI', in prim rnny nnl he " v a i l a h l · in el 'Ironic tlllllks. Fo mon; inrormalion uheml Wil I>muu'ls. visit (Jur \V 'Il sill: 31 I I ' w \ \ ' . w i l l ' ./'tJlII. librtuy of o"gre,~.~ nlalogillg-;Il-Pllhlicfll;OIl Dala: B. - I . 978-0 71-MlJ2.B -I{ 0 71.6,32J-X niled WI's or meriea Print d ill Ih· lU 9 8 7 6 5 *J 2I 148 Ch. 7 V a l u a t i o n P r i n c i p l e s a n d T e c h n i q u e s Although most managers would prefer not to admit it, capital recovery rates are s o m e times changed to "manage" earnings per share. Therefore it is unlikely that " a c c o u n t i n g " depreciation matches the decline in value over time. Even i f the original c o s t s t a r t i n g p o i n t was representative o f value at some previous moment, depreciated original c o s t is n o t likely to equal current value. Net book value does have relevance to the appraiser in the valuation o f utility p r o p erty under traditional regulation, in that earnings permitted by a regulatory c o m m i s s i o n are a function o f book cost. Book cost is, except for the regulated environment, useful only as a very rough b e n c h mark suitable for "order o f magnitude" comparisons. We occasionally use a permutation o f book value as a surrogate for market value, but the caveats above should b e borne in mind. (i) TAX BASIS. Tax basis is similar to book value as described above except that t h e c a l culation o f capital recovery is in accordance with tax requirements. Capital r e c o v e r y usually is calculated by some form o f accelerated method, and the life is the r e s u l t o f some legislation rather than a value based on actual service life. Tax depreciation methods and lives have been changed so often and so significantly over the years thl1t tax basis is o f no use as a measure o f any form o f value. 7 . 2 VALUATION M E T H O D S T h e r e are three accepted valuation methodologies that utilize the cost, market, a n d income techniques. One can find other methods named and described in articles and texts, but analysis will reveal that these are really forms o f the basic three. In many instances, "new" valuation methods are based on alternative techniques for analyzing o r obtaining ingredient inputs to the core methods named above. (a) COST APPROACH. The cost approach seeks to measure the future benefits o f o w n ership by quantifying the amount o f money that would b e required to replace the future service capability o f the subject property. This was defined above as cost o f replacement. T h e assumption underlying this approach is that the price o f new property is commensurate with the present economic value o f the service that the property can provide during its life. The marketplace is the test o f this equation. If, for example, the price o f a new machine were set at a level far above the present value o f the future economic benefits o f owning the machine, then none would be sold. I f the opposite were true, then d e m a n d would outstrip supply, and presumably the price would rise. The price o f a n e w machine, absent some market aberration, is therefore equal to its market value. (i) Depreciation. One is rarely called upon to render an opinion of value on new property, however, and therefore the use o f the cost approach nearly always brings with it the complexity o f quantifying the reduction from (new) value due to the action o f depreciation. Appraisal depreciation is the result o f physical deterioration, functional obsolescence, and economic obsolescence. The proper reflection o f all three is essential to estimating market value by the cost approach. These factors are discussed in detail in Chapter 8. (b) MARKET APPROACH. T h e market approach is the most direct and the most easily understood appraisal technique. I t measures the present value o f future benefits by obtaining a consensus o f what others in the marketplace have judged it to be. There are two primary requisites: an active, public market and an exchange o f comparable properties contemporaneous to the valuation date. 7.2 Valuation M e t h o d s 149 In essence, we are seeking a population o f transactions from which we c a n select those that best match the description o f the virtual transaction we are constructing. The residential real estate market is a good example o f a market where these conditions are usually present. There is generally some activity in this market in a given area, and selling, asking, and exchange prices are public. O f course not all residential properties are similar, but given enough activity, reasonable comparisons can be made. Where these optimal market conditions do not exist, using this approach involves more judgment, and it may become a less reliable measure o f value. As we will discuss in Chapter 9, this technique is not often used for the valuation o f intangible assets and intellectual property, largely because o f the absence o f the conditions noted below. (i) Active Market. The ideal situation is to have a number o f property exchanges to use in this analysis. One sale does not make a market. There are, for example, publicly traded common stocks in which only a few shares are traded in a year. Their exchange price has much less validity as a measure o f their value than, for instance, that o f General Motors stock, in which thousands o f shares are traded each day, though all the o t h e r requ i s i t e s e x c e p t a c t i v i t y are p r e s e n t . (ii) Public Market. To be useful, the exchange consideration must b e known or discoverable. The prices o f common stock in the primary exchanges are precisely known. For other types o f property, it becomes more and more difficult to discover the exchange price. Even with real estate, the published price may be misleading due to financing a r r a n g e m e n t s b e t w e e n b u y e r and s e l l e r t h a t a r e n o t m a d e p u b l i c . T r a n s a c t i o n s b e t w e e n businesses, such as the sale o f a plant, product line, o r subsidiary, may b e very difficult or impossible to evaluate because competitive pressure motivates the participants to keep the details confidential. ( i i i ) Adjustments for Comparability. The b e s t o f all worlds f o r a real estate appraiser is to find, for a subject property, an arm's-length sale o f an exact replica property, across the street, the day before the appraisal. Unfortunately, this does not happen with enough regularity to eliminate the need to make adjustments when the "comparable sales" are not exactly comparable. Real estate appraisers continually grapple with the problem o f quantifying differences in property, so that the location, amenities, zoning, size, shape, and topography o f comparable sales can be equated to the s u b j e c t ' s and thus provide an indication o f value. Analysts using this approach for other types o f property have the same challenge, but comparability tends to be more o b v i o u s - o n e either has it or n o t and there are fewer nuances. (iv) Adjustments for Time. Sometimes it is necessary to utilize sale information that is not contemporaneous with the appraisal. In this case, the appraiser must adjust for price changes over time. This may necessitate a separate study o f changes in property value in the subject area during a recent period o f time so as to develop some specialized indices to use in the adjustment process. (v) . Summary. With this background, the reader can gain a picture o f the strengths and weaknesses o f the market approach. Where there is a good base o f information about the sales o f properties that are similar to the subject, the market approach can be the strongest indicator o f value. As the number o f comparable sales o r the information about them '''''.~ 1 5 0 Ch. 7 Valuation Principles a n d Techniques dwindles, or when the lack o f comparability makes adjustment speculative, then this approach ceases to be useful. The market approach is then most effective for: · Real e s t a t e · Machinery and equipment in general use · · · · · Vehicles G e n e r a l - p u r p o s e c o m p u t e r software C o m p u t e r hardware Liquor licenses Franchises The market approach is very often useful in the valuation o f capital stock, other types o f securities, or an entire business enterprise. The market approach is typically least effective for: · Special-purpose machinery and equipment · Most i n t a n g i b l e a s s e t s a n d intellectual p r o p e r t y · Properties highly restricted by zoning, environmental restrictions, or other forms o f regulation The market approach takes the analyst right to the bottom line o f market value. The assumption is that other buyers o f comparable property were willing, had knowledge o f all relevant facts, and struck a deal that was fair and, therefore, their transactions represented market value at that time and for that property. It is assumed that the market measures and adjusts for all forms o f appraisal depreciation: physical, functional, and economic. ( c ) INCOME APPROACH. The income approach focuses on a consideration o f the income-producing capability o f the property. This book is about the valuation o f business property whose raison d ' e t r e is to provide a return on and return o f the investment required to create it. As when buying common stock, our puzzle is to estimate the price a virtual buyer would be willing to pay for the anticipated returns from the property. So the underlyingJheory is that the value o f property can be measured by the present value o f the net economic benefit (cash receipts less cash outlays) to be received over its life. This concept was nicely described by Campbell and Taylor: It has often been stated, but bears repeating, that assets (whether bricks and mortar, land, equipment or corporate shares) are only worth in the open market what they can earn, and the true measure o f worth is the assets' earnings when related to the risk inherent in the business situation. 5 Some background is provided here for the reader who may not be familiar with the concept o f the "time value o f m o n e y " - t h a t a dollar to be received in the future is worth less today than a dollar to be received immediately. To assist to explain this concept, we provide the following example: ( i ) P r e s e n t Value C o n c e p t . Let us make the pleasant assumption that, as a result o f some clever basement tinkering, we have designed a putter that unerringly propels a g o l f baIl into the hole. . . . w e have carefully guarded our design and have been awarded a patent. Let us further assume that our decision is to 5. Ian R. Campbell and John D. Taylor. "Valuation o f Elusive Intangibles," Canadian C h a r t e r e d ACCOU~lant (May 1972), p. 41. 7.2 Valuation M e t h o d s 151 exploit this intellectual property by selling it. We have approached the g o l f equipment companies, and two o f them have made offers. Zing G o l f Corporation has offered a cash p a y m e n t o f $550,000. C o u g a r G u b Company has offered $ 3 0 0 , 0 0 0 cash and $ 3 0 0 , 0 0 0 a y e a r from now. T h e choice would b e clear i f the two offers were a n immediate payment o f cash. T h e p r o p o s e d delay in C o u g a r ' s second p a y m e n t complicates the decision. T h e additional fifty thousand dollars is certainly attractive, but we must consider all the uncertainties surrounding the second offer. Will C o u g a r Co. still b e in business a y e a r from now? Will it have the money to make the p a y m e n t ? W h a t i f t h e p u t t e r d e s i g n d o e s not t u m o u t t o b e the a n s w e r t o e v e r y d u f f e r ' s p r a y e r , a n d C o u g a r is unhappy with the deal? W h a t i f t h e design turns o u t to b e very expensive to m a n u f a c ture, and the market w o n ' t accept the high price? We m u s t find a way to put the two offers on the s a m e b a s i s s o t h e y c a n be c o m p a r e d . What is the essential difference between t h e offers o f C o u g a r and Z i n g ? This example presents the concept o f the time value o f money as measured by its " p r e s e n t value." T h e present value o f a cash offer is obvious, a n d the comparison o f two different cash offers c a n b e m a d e without difficulty. When we introduce the element o f time, the complication begins. W h a t is the p r e s e n t v a l u e o f $ 3 0 0 , 0 0 0 t o b e r e c e i v e d in o n e y e a r ? A n d w h a t d o w e n e e d t o k n o w a b o u t t h e s i t uation in order to calculate it? T h e first consideration w e m u s t address is how confident w e feel that the payment will be made, in full and on time. I f w e feel really confident about the b u y e r ' s integrity and ability to pay, o u r reasoning could be as follows: 1. If I had the $300,000 today instead o f in one year, I could put it in my money market fund and earn 2%. At that rate, the $300,000 would be worth $306,055 (compounded montWy). This calculation uses the basic formula that we leamed in early mathematics schooling, I = Prt (Interest equals Principal multiplied by Rate multiplied by Time). To calculate the future amount directly, the formula is transformed to: A m o u n t = p e l + rt) 2. Looking at the other side o f the coin, we ask ourselves, how much would I have to put into my money market fund today in order to have $300,000 in one year? The answer is $294,118. This calculation uses another permutation o f the basic interest formula: P r e s e n t Value = F u t u r e V a l u e / ( l + rt) 3. Therefore, the present value o f the right to receive 300,000 in o n e year is $294,118 at an interest rate o f 2%. I f I feel that Cougar Club Company is as financially reliable as the holder o f my money market fund, then my analysis is complete. If, on the other hand, I am not so confident a b o u t r e c e i v i n g t h e $ 3 0 0 , 0 0 0 p a y m e n t o n t i m e ( o r a t a l l ! ) , I w o u l d w a n t a g r e a t e r return for accepting that additional risk. T h e interest rate in the calculation is the measure o f my perceived risk. The present value o f $300,000 to be received in one y e a r at an interest rate o f 15% is $260,870. At a rate o f 25%, it is only $240,000. A comparison o f the prospective sales is shown in Exhibit 7.2. Armed with this calculation we can see that, depending on the level o f confidence we have in Cougar honoring its commitment to pay the remaining $300,000 in a year, their offer could either be better o r worse than that o f Zing. What do we require in order to make these calculations? We need to know the amount o f the delayed payment, when it is to be made, and how much risk is associated with receiving it. ( i i ) Amount o f Income. In the example above, the amount o f the payments to be received is clear ($300,000 now, $300,000 in one year). In the real world, the " a m o u n t " portion o f the equation c a n be much more obscure, and can comprise payments to be received, as well as expenses to be borne. 152 Ch. 7 Valuation Principles and Techniques ZING'S O F F E R C O U G A R ' S OFFER C a s h upfront Cash in 1 year Total C o u g a r advantage EXHIBIT $550,000 $550,000 $ 550,000 $300,000 @2% 294,118 $594,118 $ 44,118 @15% $300,000 260,870 $560,870 $ 10,870 @25% $ 300,000 240,000 $ 540,000 $(10,000) 7.2 PRESENT VALUE COMPARISON When the Income Is to Be Received. Sometimes the "when" o f receipts or obligations is clear (as when they are to be made according to a prearranged schedule), but more often it is dependent on other events . . . . T h e "when" is a very important element in a present value calculation. The present value o f the $300,000 payment to be received at different times in the future can vary as shown in Exhibit 7.3. As illustrated in Exhibit 7.3, the relative effect o f "when" is also greatly altered by the rate o f interest assumed. At high interest rates, the deterioration in value is accelerated as receipt is delayed. The present value concept is applicable to any pattern o f cash flow as well. At a rate o f 15% compounded monthly, both o f the following payment schemes have a present value o f $300,000: (iii) 12 monthly payments o f $27,077 $100,000 in cash plus 12 monthly payments o f $18,052 (iv) Risk of Achieving the Income. A difficult ingredient is the quantification o f risk, as measured by the rate o f interest, or discount rate. We will use the term "discount r a t e " henceforth, because expressing the receipt o f future benefits in current terms is a process o f discounting. There are a number o f methods used to estimate an appropriate discount rate and many o f these are discussed in Appendix A. T h e essence o f these, however, is a consensus o f returns required by investors on investments o f different types in the marketplace. As an example, investors in U.S. government securities typically accept rates o f return at the lowest e n d o f the range o f possible investment returns, currently around"4%. At the other end o f the range, investors in the common stock o f a start-up, high-technology enterprise may require a rate o f return o f 30%, 40%, or 50%. Discount Rate 2% 15% 25% EXHIBIT 1 Year $294,118 $260,870 $240,000 2 Years $288,462 $230,769 $200,000 5 Years $272,727 $171,429 $133,333 10 Years $250,000 $120,000 $85,714 7.3 EFFECT OF TIME AND RATE ON PRESENT VALUE ---------_._--_ .. 7.2 V a l u a t i o n M e t h o d s (v) D i s c o u n t e d C a s h F l o w E x a m p l e . 153 A calculation o f the present value o f future income is often referred to as a discounted cash flow (DCF) modeL T h a t is, o n e "discounts" the amount o f future income to reflect its loss in value due to the delay in receiving it. The classic illustration o f this technique is the purchase o f a security, such as a share o f common stock. Assume the following: 1. 2. 3. 4. Today's market price o f one share o f the stock is $45.00. The company currently pays a quarterly dividend o f $.56 per share. Earnings o f the company are currently $3.75 per share, and are expected to grow at 8% annually. We expect to hold the stock for 3 years. U n d e r these conditions, we could expect that the dividends paid by the company will grow at 8% per year and, i f no market aberrations are expected, the price o f the stock will also grow at that rate. I f we purchase a share o f this stock, the transaction will produce a series o f positive and negative cash flows. First, there will b e a negative cash flow when we reduce our savings and p a y o u t the $45.00. Then, there will be a series o f positive quarterly cash flows starting at $.56 and growing. Finally, when we sell the share o f stock in 3 years, there will be a positive cash flow o f $56.69 ($45.00 grown at an 8% annual compound rate for 3 years). I f all this were to go according to plan, what rate o f return would we have achieved on this investment? To calculate this, we need to calculate the summation o f the present values o f the negative and positive cash flows, using different discount rates until they net to zero. Some refer to this as a calculation o f the internal rate of return (IRR). This is a trial-and-error process best left to a computer o r financial calculator. The result o f this is the rate o f return we would achieve i f we entered into this transaction and i f the dividends and future stock price were as expected. In this example, the discount rate is 12.37%. As an investor, we must decide whether that rate o f return is appropriate relative to what we perceive as the risk o f the investment. I f it is, we purchase the stock. I f i t is higher than we require, we purchase it eagerly. I f lower, we wait for the price to come d o w n o r l o o k for a n a l t e r n a t i v e i n v e s t m e n t . I f we apply these principles to the valuation o f intangible assets or intellectual property, we can observe that the three essential ingredients o f the income approach are: 1. 2. 3. The economic benefit that can be reasonably expected from the exploitation o f the property T h e pattern by which that economic benefit will be received An assumption as to the risk associated with realizing the amount o f e c o n o m i c benefit in the expected pattern. These elements can be related to one another by means o f a simple formula, V = l / r, where: V = P r e s e n t value o f the economic benefit attributable to the property I Economic benefit derived from employment o f the property, representing the net o f cash inflows and outflows r = Capitalizativn rate reflecting all the business, economic, and regulatory conditions affecting the risk associated with employing the property and achieving the prospective earnings .... ~ P---$ on 154 Ch. 7 Valuation Principles a n d Techniques For example, i f an income o f $100 will be received in perpetuity, and t h e appropriate rate o f capitalization is 10%, then the value o f that income is: $ 1 0 0 = $1000 .10 This is obviously the simplest o f examples and one that never occurs i n r e a l life. Property ownership is rarely expected to produce income perpetually. Therefore, the calculation is always more complex, and the determination o f an appropriate c a p i t a l i z a t i o n rate is more complex as well. Because business property is owned for the e x p r e s s purpose o f earning a return on investment, the income approach is the strongest i n d i c a t o r o f value for t h i s t y p e o f p r o p e r t y . A number o f methods can assist analysts in estimating the amount o f i n c o m e that c a n be realized from the ownership o f an asset and an appropriate discount rate (risk factor). These are discussed at length in Chapter 10 and in Appendix A. As to the e x p e c t e d durat i o n o f income, o n e m a y b e a g a i n r e l y i n g o n a c o n s i d e r a t i o n o f t h e t h r e e f o r m s o f d e p r e ciation. T h a t is, the assets that are the source o f the income may be subject t o a d e c l i n e in both value and earning power. The income that they are capable o f p r o d u c i n g may decline proportionately, and this decline would become part o f the calculation by the i n c o m e approach. T h e income approach is best suited for the appraisal o f the following: · Contracts · Licenses and r o y a l t y agreements · Patents, t r a d e m a r k s , a n d c o p y r i g h t s · Franchises · Securities · Business e n t e r p r i s e s T h e i n c o m e a p p r o a c h i n d i c a t e s fair m a r k e t v a l u e d i r e c t l y a n d w i t h o u t i n t e r m e d i a t e c a l c u l a t i o n s involving t h e t h r e e forms o f a p p r a i s a l d e p r e c i a t i o n . (d) CORRELATION. Valuation practice suggests that all three methods b e e m p l o y e d when possible and appropriate. At the very least they should each be considered. Circumstances are often such that one or more o f the methods is obviously inappropriate and should not be pursued, but it is not unlikely that an appraiser will have to reconcile two or three indications o f value. Even more indications o f value may be present i f multiple assumptions were employed in the use o f one method or another. This process is often referred to as "correlation." In this process, the appraiser considers such factors as: · T h e a p p r o p r i a t e n e s s o f the m e t h o d u s e d · The quantity and quality o f information available as input to each method · The extent to which j u d g m e n t or alternative assumptions were employed · The sensitivity o f the value indication to various inputs and their relative reliability · Whether the results o f a single method should be relied upon or whether some weighting o f results is appropriate PART II LICENSING In the Valuation section o f this new volume, we explored the means for determining an absolute, fee-simple value for intellectual property. T h e s e values are a walk away p r i c e the amount at which the o w n e r transfers all rights to intellectual property. This section delves into a n o t h e r measure o f value. Royalty rates are another form o f value. They repr e s e n t the e c o n o m i c f o u n d a t i o n o f l i c e n s i n g a n d c o n s e q u e n t l y d e s e r v e t h e i r own s e c t i o n . Royalty r a t e s are a form o f value in t h a t they set the price at which licensors will allow others to use a limited portion o f their intellectual property rights. Instead o f the prices b e i n g s e t a s l u m p - s u m a m o u n t s , t h e y a r e s e t on a p a y - a s - y o u - g o basis. Joint ventures also require special attention, because such alliances require the establishment o f methods for appropriately sharing the economic benefits o f intellectual property rights contributed to alliances. Sometimes royalties are involved in these transactions, but sometimes an allocation o f ownership in the j o i n t venture turns on the value o f the intellectual property rights contributed. Subtle c h a n g e s to the valuation m e t h o d s already established in the first section o f this volume are presented in this second section o f this book. 311 ------------------------ PART III INFRINGEMENT DAMAGES Infringement damages are yet another measure o f value under unique circumstances. T h e question -arises in matters relating to infringement as to what value was lost by the injured party due to the actions o f an infringer. It can be an absolute amount or a running royalty translated into a lump sum. This third section o f o u r volume delves into the methods recognized by the Courts for measuring intellectual property infringement damages. T h e law and methods for determining damages for patent, trademark, trade secret and copyright misappropriation are different, and we attempt to address the methods appropriate for quantifying damages for these different properties. 615 CHAPTER 43 RECENT D E C I S I O N : C O P Y R I G H T I N F R I N G E M E N T DAMAGES C A N BE BASED O N VALUE O F LICENSES d , . ~, :: 43.1 INTRODUCTION This chapter is derived from the opinion o f the U.S. Court o f Appeals for the Second Circuit, August Term, 1999, Docket No. 99-9081 regarding On Davis (Plaintiff-Appellant) v. : The Gap, Inc. (Defendant-Appellee). Before: Leval, Parker, and Katzmann, Circtrit Judges . . 43.2 O N D A VIS v. THE GAP, I N C The U.S. Court o f Appeals for the Second Circuit has ruled in On Davis v. The Gap, Inc. that the owner o f a copyrighted product design can sue an advertiser for infringement when the advertiser displays the product in its ads without a license. In this case Gap included a jewelry prop in an advertisement without a license to use the prop. The decision reversed a lower court summary judgment ruling. The lower court had ruled that no such s u i t could be brought unless the copyright holder could prove actiJal damages. The Second Circuit concluded that copyright law allows damages to be awarded based on a provable analysis o f the fair market value o f a prop license. (a) B A C K G R O U N D . Davis is the c r e a t o r and designer o f nonfunctional j e w e l r y worn over the eyes. The Gap, Inc. is an international retailer o f clothing and accessories marketed largely to a young customer base. It operates several chains o f retail stores, largely under the names o f GAP and OLD NAVY. Gap, without Davis's permission, used a photograph o f an individual wearing Davis's copyrighted eyewear in an advertisement for the GAP trademarked stores. The photograph was widely displayed throughout the United States. Davis filed a copyright infringement lawsuit seeking a declaratory judgment o f infringement and damages, including $2.5 million in unpaid licensing fees, a percentage o f the G a p ' s profits, punitive damages o f $ 1 0 million, and attorney's fees. The district court granted summary j u d g m e n t for the Gap on the grounds that: · Davis's claims for actual damages and profits under I7 U . s . c . § 504(b) (1994) were too speculative to support recovery, or were otherwise barred by a prior ruling o f this court. · Davis was not eligible for statutory damages or attorney's fees because he had not registered his copyright on a timely basis. · The Copyright Act does not permit recovery o f punitive damages. 732 43.2 O n D a v i s v. t h e Gap, Inc. 733 Davis has created many different designs o f eye jewelry, which he markets under the name ONOCULII DESIGNS. Davis describes Onoculii eyewear as "sculptured metallic ornamental wearable art." Each piece is made o f gold, silver, or brass. T h e eyewear is constructed in a manner similar to eyeglasses (a frame hinged to templates that hook over the ears), but with a very different effect. The frames support decorative, perforated, metallic discs in the place that would be occupied by the lenses. T h e discs effectively conceal the wearer's eyes, although the perforations permit the wearer to see through them. Some o f Davis's designs are o f flowery o r abstract shapes, and s o m e are crescents with protruding spokes or wings. The specific piece that was the subject o f the infringement lawsuit consists o f a horizontal bar at the level o f the eyebrows from which are suspended a pair o f slightly convex, circular discs o f polished metal covering the eyes, perforated with dozens o f tiny holes. Davis registered his copyright for the design at issue, effective May 16, 1997. Davis sought to gain recognition for his Onoculii line by promoting and marketing his designs "in carefully chosen media settings." As part o f his marketing plan, Davis encouraged "known stylish and popular entertainers" to wear his creations in public. Entertainers who have worn Onoculii designs while appearing on stage, o n MTV, in magazine photographs, or in other media include Vernon Reid, Thomas Mapfumo, Don Cherry, Sun Ra, Ryo Kawasaki, Cat Coore, Mr. Pepper Seed, Chuck Johnson, and Jack and Jill. Various fashion designers have also featured Davis's eyewear as accessories in runway shows or photographs. His work has been noted in such publications as Vogue, Women's Wear Daily, Fashion Markel, In Fashion, the New York Times, the New York Post, and the Village Voice. Since 1995 Davis has marketed his merchandise through boutiques and optical stores. The eyewear sold at wholesale prices o f approximately $ 3 0 to $45 a pair and retailed for between $65 and $100 in 1995. Davis asserts he has earned approximately $10,000 from sales. H e testified that on one occasion he received a $50 license fee from Vibe magazine for the use o f a photograph depicting the musician Sun Ra wearing an Onoculii piece. In May 1996, prior to Davis's 1997 registration o f his copyright, the defendant created a series o f advertisements showing photographs o f people o f various lifestyles wearing Gap clothing. T h e campaign was designed to promote the concept that all kinds o f people wear Gap merchandise. The ad, which bears the caption " f a s t " emblazoned in red (the " f a s t " ad), depicts a group o f seven young people o f Asian appearance, standing in a loose V formation staring at the camera. They are dressed primarily in black, exhibiting bare arms and partly bare chests, several with goatees (accompanied in one case by bleached, streaked hair), large-brimmed, Western-style hats, and distinctive eye shades, worn either over their eyes, on their hats, or cocked over the top o f their heads. The central figure, at the top o f the V formation, is wearing D a v i s ' s highly distinctive eyewear and peers over the metal disks into the camera lens. The " f a s t " photograph was taken by the Gap in May 1996 during a photo shoot in Manhattan. The defendant provided the subjects with Gap apparel to wear for the shoot and a trailer in which to change. The Gap claims that it did not furnish e y e w e a r to any o f the subjects, and that the subjects were told to wear their own eyewear, wristwatches, earrings, nose rings, or other incidental items. The Gap claims that it wanted the subject models to "permit each person to project accurately his or her own personal image and appearance." The Gap's "fast" advertisement was published in a variety o f magazines, including lV, Vanity Fair, Spin, Details, and £,llertainmenl Weekly. Davis claims that the total circulation o f these magazines was over 2.5 million. For five weeks during August and September - 734 Ch. 4 3 C o p y r i g h t I n f r i n g e m e n t Damages Can Be Based on Value o f Licenses 1996, the advertisement was displayed on the sides o f buses in New York, B o s t o n , Chicago, San Francisco, Atlanta, Washington, DC, and Seattle. Davis submitted evidence showing that during the fourth quarter o f 1996, t h e period that Davis asserts is relevant to the "fast" advertisement, the net annual sales o f t h e pare n t company, Gap, Inc., increased by about 10%, compared to the fourth q u a r t e r o f 1995, to $1.668 billion. There was no evidence o f what portion o f the parent c o m p a n y ' s revenues were attributable to the stores operated under the Gap label, much less w h a t portion was related to the ad in question. Shortly after seeing the " f a s t " advertisement in October and November 1 9 9 6 , Davis contacted the Gap by telephone and in writing. T h e Gap's advertising campaign, which apparently ran during August and September 1996, had been completed by t h e time Davis wrote. Davis stated that he had not authorized the use o f his design a n d inquired whether the Gap might b'e interested in selling a line o f his eye wear. Davis filed this action on November 19, 1997. T h e Gap then filed a motion for summary j u d g m e n t , arguing that Davis had no entitlement to damages and that his claims were barred b y the de minimis and fair use doctrines. (b) SUMMARY J U D G M E N T GRANTED: 17 U . S . c . § 504. On April 9, 1999, the district court granted summary j u d g m e n t to the Gap. The district court first noted that D a v i s was not eligible for "statutory damages" under 17 V . S . c . § 504(c) due to the fact t h a t he had not registered his copyright within 3 months o f his first "publication" o f his work or prior to the allegedly infringing use by the Gap. As regards damages under 17 V . S . c . § 504(b), the court rejected D a v i s ' s claim as unduly speculative and, insofar as i t sought damages for D a v i s ' s failure to receive a license fee from the Gap, precluded by a prior decision o f the court. Since the court also found Davis ineligible for punitive damages, it concluded that he was not entitled to any form o f damages, and thus dismissed his claims. On appeal, Davis argued that (1) the district court erred by granting s u m m a r y j u d g m e n t without ruling on the merits o f his claim for declaratory relief, and (2) he was e n t i t l e d t o b o t h c o m p e n s a t o r y and p u n i t i v e d a m a g e s . The statute 17 V.S.c. § 504 imposes two categories o f compensatory damages. Taking care to specify that double recovery is n o t permitted where the two categories overlap, the statute provides for the recovery o f both the infringer's profits and the c o p y r i g h t owner's "actual damages." I t is important that these two categories o f compensation have different justifications and are based on different financial data. T h e award o f the infringer's profits examines the facts only from the infringer's point o f view. I f the infringer has earned a profit, this award makes it disgorge the profit to ensure that it not benefit from its wrongdoing. The award o f the o w n e r ' s actual damages looks at the facts from the point o f view o f the copyright owner; it undertakes to compensate the o w n e r for any harm suffered by reason o f the infringer's illegal act. See generally Fitzgerald P u b l ' g Co. v. Baylor P u b l ' g Co., 807 F.2d 1110, 1118 (2d Cir. 1986); Walker v. Forbes, Inc., 28 F.3d 4 0 9 , 4 1 2 (4th Cir. 1994). The district c o u r t granted summary j u d g m e n t dismissing Davis's claims for damages. As for D a v i s ' s claim o f entitlement to a part o f the " i n f r i n g e r ' s profits," the district court believed Davis failed to show any causal connection between the infringement and the d e f e n d a n t ' s profits. With respect to Davis's claim o f entitlement to "actual damages" based on the license fee he should have been paid for the G a p ' s unauthorized use o f his copyrighted material, the district court believed that his evidence was too speculative and that the Court o f Appeal's decision in Business Trends Analysts, Inc. v. Freedonia Group, Inc., 887 F.2d 399 (2d Cir. 1989), precluded any such award. -'~: 43.2 O n D a v i s v. t h e Gap, I n c . 735 Davis submitted evidence that, during and shortly after the G a p ' s advertising campaign featuring the "fast" ad, the corporate parent o f the Gap stores realized net sales o f $1.668 billion, an increase o f $146 million over the revenues earned in the same period o f the preceding year. T h e district court considered this evidence inadequate to sustain a j u d g m e n t i n the plaintiff's favor because the overall revenues o f the Gap, Inc. had no reasonable relationship to the act o f alleged infringement. Because the ad infringed only with r e s p e c t to Gap label stores and eyewear, the Appeals Court agreed with the district court t h a t it was incumbent on Davis to s u b m i t evidence at least limited to the gross revenues o f the Gap label stores, and perhaps also limited to e y e - w e a r o r accessories. Had D a v i s done so, the burden would then have shifted to the defendant under the terms o f § 504(b) to prove its deductible expenses and elements o f profits from those revenues attributable to factors other than the copyrighted work. It is true that a highly literal interpretation o f the statute would favor Davis. It says that " t h e copyright owner is required to present proof only o f the infringer's gross revenue," 17 U . s . c . § 504(b), leaving it to the infringer to prove what portions o f its revenue are not attributable to the infringement. Nonetheless, the court found that the term "gross revenue" under the statute means gross revenue reasonably related to the infringement, not unrelated revenues. T h e court presented a publishing example. I f a publisher published an anthology o f poetry that contained a poem covered by the plaintiff's copyright, the court did not believe the plaintiff's statutory burden would be discharged by submitting the publisher's gross revenue resulting from its publication o f hundreds o f titles, including trade books, textbooks, cookbooks, and so on. In the court's view, the owner's burden would require evidence o f the revenues realized from the sale o f the anthology containing the infringing poem. The publisher would then bear the burden o f proving its costs attributable to the anthology and the extent to which its profits from the sale o f the anthology were attributable to factors other than the infringing poem, including particularly the other poems contained in the volume. The point would be clearer still i f the defendant publisher were part o f a conglomerate corporation that also received income from agriculture, canning, shipping, and real estate development. While the burden-shifting statute undoubtedly intended to ease the plaintiff's burden in proving the d e f e n d a n t ' s profits, the court did not believe it would shift the burden so far as to permit a plaintiff in such a case to satisfy his o r her burden by showing gross revenues from agriculture, canning, shipping, and real estate where the infringement consisted o f the unauthorized publication o f a poem. The facts o f this case are less extreme; nonetheless, the point remains the same: The statutory term "infringer's gross revenue" should not be construed so broadly as t o include revenue from lines o f business that were unrelated to the act o f infringement. ( c ) RElATED CASE: fA YLOR v. ME/RICK. T h e district c o u r t relied on the Seventh C i r c u i t ' s ruling in Taylor v. Meirick, 712 F.2d I I 12 O t h Cir. 1983). In that case the defendant was a mapmaker who copied and sold three o f the plaintiff's copyrighted maps. During the relevant time period, the defendant sold 150 maps, as well as other merchandise. The plaintiff submitted evidence o f gross revenues and profits deriving from the defendant's overall sales. T h e court rejected the plaintiff's claim, reasoning: "all [the burden-shifting language o f § 504(b) J means is that [the plaintiff] could have made out a prima facie case for an award o f infringer's profits by showing [the defendant's) gross revenues from the sale o f the infringing maps. It was not enough to show [the defendant's) gross revenues from the sale o f everything he sold . . . . " 736 Ch. 4 3 C o p y r i g h t I n f r i n g e m e n t D a m a g e s Can Be Based o n Value o f Licenses A p p l y i n g t h i s r e a s o n i n g to t h e D a v i s c a s e , t h e A p p e a l s C o u r t f o u n d t h a t t h e d i s t r i c t court was correct in ruling that Davis failed to discharge his burden by submitting the Gap, Inc.'s gross revenue o f $1.668 b i l l i o n - r e v e n u e derived in part from sales under other labels within the Gap, Inc.'s corporate family that were in no way promoted by the a d v e r t i s e m e n t , n o t to m e n t i o n s a l e s u n d e r t h e " G a p " l a b e l o f j e a n s , k h a k i s , s h i r t s , u n d e r wear, cosmetics, c h i l d r e n ' s clothing, and infant wear. A m o n g the elements Davis s o u g h t to prove as damages was the failure to receive a reasonable license fee from the Gap for its use o f his copyrighted eyewear. T h e complaint asserted an entitlement to a $2.5 million licensing fee. T h e district court rejected t h e c l a i m o n two g r o u n d s . F i r s t , t h e c o u r t f o u n d t h a t D a v i s ' s c l a i m w a s t o o s p e c u l a t i v e that is, insufficiently supported by evidence. Second, the c o u r t believed that the Appeals Court decision in Business Trends, 887 F.2d 399, bars a c o p y r i g h t owner's claim for actual damages consisting o f the infringer's failure to pay the fair market value o f a license fee for the use the infringer made. (d) FAIR MARKET VALUE. While there was no evidence to support D a v i s ' s wildly inflated c l a i m o f entitlement to $2.5 million, the court decided that his evidence did support a much more modest claim o f a fair market value f o r a license to use his design in the ad. In addition to his evidence o f numerous instances in which rock music stars wore Onoculii eyewear in photographs exhibited in music publications, Davis testified that on one occasion he was paid a royalty o f $ 5 0 for the publication by Vibe magazine o f a photo o f the deceased rock star Sun Ra wearing D a v i s ' s eyewear. On the basis o f this evidence, the court found that a j u r y could reasonably find that Davis established a fair market value o f at least $50 as a fee for the use o f an image o f his copyrighted design. This evidence was sufficiently concrete to support a finding o f fair market value o f $50 for the type o f use made by Vibe. And i f Davis could show at trial that the Gap used the image in a wider circulation than Vibe, that might justify a finding that the market value for the Gap's use o f the eyewear was higher than $50. Therefore, to the extent the district court dismissed the case because Davis's evidence o f the market value o f a license fee was too speculative, the Appeals Court believed that the district court was in error. (e) BUSINESS TRENDS DECISION. T h e district court believed that the Appeals Court decision in Business Trends interprets § 504(b) to foreclose "actual damages" to compensate a plaintiff for the d e f e n d a n t ' s failure to pay for the reasonable value o f what the defendant took. T h e court believes this was a misreading o f the holding in Business Trends. T h e district court decision under review in that case had not made an award o f "actual damages" u n d e r this theory. T h e award that the court reviewed and rejected in t h a t c a s e was f a s h i o n e d u n d e r t h e o t h e r p r o n g o f § 5 0 4 ( b ) - t h e i n f r i n g e r ' s p r o f i t s . ( S e e Business Trends, 887 F.2d at 402.) While there is indeed s o m e language in the Business Trends decision expressing disfavor for D a v i s ' s theory o f actual damages, i t was not at issue in that case. Furthermore, the c o u r t ' s decision did not p u r p o r t to lay down an absol u t e r u l e ; t h e d e c i s i o n m a d e c l e a r t h a t t h e r u l i n g d e p e n d e d o n the p a r t i c u l a r f a c t u a l c i r c u m s t a n c e s - - c i r c u m s t a n c e s that are not present in the Davis case. Finally, the Appeals C o u r t h a s e i t h e r a w a r d e d s u c h d a m a g e s o r i m p l i e d t h a t they w e r e a p p r o p r i a t e . S e e R o g ers v. Koons, 960 F.2d 301, 310-13 (2d Cir. 1992); Abeshouse v. Ultragraphics. Inc., 754 F.2d 4 6 7 , 4 7 0 - 7 2 (2d Cir. 1985); Szekely v. EagLe Lion Films. Inc., 242 F.2d 266, 268-69 (2d Cir. 1957). Moreover, other courts have adopted the s a m e analysis, and the Supreme Court has suggested, albeit obliquely, that such a measure o f damages is appropriate. See Harper & Row PubLishers. Inc. v. Nation Enters., 471 U.S. 539, 562 (1985). 43.2 O n D a v i s v. t h e G a p , I n c . 737 In Business Trends, the p l a i n t i f f a n d t h e d e f e n d a n t w e r e c o m p e t i t o r s in the p u b l i c a t i o n o f e c o n o m i c a n a l y s e s and f o r e c a s t s - n o t a r e l a t i o n s h i p w h e r e t h e d e f e n d a n t w a s a p o t e n t i a l l i c e n s e e o f the plaintiff. E a c h p r o d u c e d a s t u d y o f t h e r o b o t i c s industry. T h e p l a i n t i f f , B u s i n e s s T r e n d s A n a l y s t s , I n c . ( B T A ) , m a r k e t e d c o p i e s o f its s t u d y f o r $ 1 , 5 0 0 . T h e d e f e n d a n t p r o d u c e d a s i m i l a r s t u d y , w h i c h it i n i t i a l l y o f f e r e d a t t h e s a m e p r i c e as BTA's study. In r e s p o n s e to slow sales, t h e d e f e n d a n t c u t its p r i c e by 9 0 % to $ 1 5 0 d u r i n g a 3 - m o n t h s p e c i a l - o f f e r p e r i o d . I t s o l d 37 c o p i e s a t t h e r e d u c e d p r i c e . P l a i n t i f f BTA r e g i s t e r e d its s t u d y w i t h t h e U . S . C o p y r i g h t O f f i c e , b u t o n l y a f t e r t h e d e f e n d a n t h a d b e g u n s e l l i n g its version. S e e Business Trends, 887 F.2d a t 401. BTA s u e d t h e d e f e n d a n t , a l l e g i n g that t h e d e f e n d a n t ' s r e p o r t i n c l u d e d p o r t i o n s t h a t w e r e c o p i e d f r o m BTA's. T h e d i s t r i c t c o u r t f o u n d c o p y i n g and substantial similarity, a n d a w a r d e d d a m a g e s o f $ 5 4 , 0 2 8 . 3 5 . T h e d a m a g e s w e r e found s o l e l y for the i n f r i n g e r ' s p r o f i t s u n d e r the s e c o n d p r o n g o f § 504(b). N o d a m a g e s w e r e a w a r d e d u n d e r t h e first p r o n g for the " a c t u a l d a m a g e s " s u f f e r e d by the owner. In fact, the d i s t r i c t c o u r t e x p r e s s l y f o u n d t h a t t h e p l a i n t i f f " f a i l e d t o e s t a b l i s h a c t u a l d a m a g e s as a c o n s e q u e n c e o f d e f e n d a n t ' s i n f r i n g e m e n t o f BTA's r o b o t i c s study." S e e Business Trends Analysts, Inc. v. Freedonia Group, Inc., 700 F. S u p p . 1213, 1233 (S.D.N.Y. 1988). T h e i n f r i n g e r ' s profits a w a r d e d w e r e d e r i v e d f r o m t w o c o m p o n e n t s : a s m a l l e r c o m p o n e n t c o n s i s t i n g o f the d e f e n d a n t ' s c a s h p r o f i t ( r e v e n u e s m i n u s e x p e n s e s ) o n i t s s a l e o f t h e r o b o t i c s study, a n d a l a r g e r a m o u n t c o n s i s t i n g o f n o n c a s h p r o f i t a t t r i b u t e d i n p a r t t o t h e v a l u e o f a c q u i r e d g o o d w i l l (a " v a l u e o f u s e " ) d e r i v i n g in p a r t from t h e d e f e n d a n t ' s givi n g the r e p o r t to c u s t o m e r s a t a 9 0 % m a r k d o w n . S e e Business Trends, 7 0 0 F. S u p p . at 1237-41. In j u s t i f y i n g the p r o p o s i t i o n t h a t the profits o f the i n f r i n g e m e n t c o u l d p r o p e r l y i n c l u d e n o n c a s h b e n e f i t s t o t h e i n f r i n g e r r e s u l t i n g f r o m the i n f r i n g e m e n t , t h e d i s t r i c t c o u r t referred to the Seventh C i r c u i t ' s c o n c l u s i o n in Deltak, Inc. v. Advanced Sys., Inc., 7 6 7 F.2d 3 5 7 O t h Cir. 1985), t h a t ' ' ' s a v e d a c q u i s i t i o n c o s t is a m e a s u r e o f d a m a g e s o r p r o f i t ' when c a l c u l a t i n g v a l u e o f u s e u n d e r t h e s t a t u t e , w h e r e c a s h was not g e n e r a t e d . " S e e Business Trends, 7 0 0 F. S u p p . a t 1238 ( q u o t i n g Deltak, 7 6 7 F.2d a t 362 n. 3). T h e A p p e a l s C o u r t a f f i r m e d t h e a w a r d i n s o f a r as i t w a s b a s e d o n t h e d e f e n d a n t ' s c a s h p r o f i t f r o m t h e s a l e o f t h e i n f r i n g i n g r e p o r t . H o w e v e r , i n s o f a r as t h e d i s t r i c t c o u r t h a d a t t r i b u t e d p r o f i t s t o the d e f e n d a n t b a s e d o n n o n c a s h e l e m e n t s c o n s i s t i n g o f e i t h e r g o o d will a c h i e v e d b y g i v i n g t h e i n f r i n g i n g s t u d y t o c u s t o m e r s a t a h e a v i l y d i s c o u n t e d p r i c e o r t h e " v a l u e o f u s e " t h e d e f e n d a n t a c h i e v e d b y a c q u i r i n g f o r f r e e m a t e r i a l f o r w h i c h it m i g h t o t h e r w i s e h a v e paid t h e p l a i n t i f f , the c o u r t f o u n d s u c h attribution o f profit t o t h e d e f e n d a n t inappropriate. S e e Business Trends, 887 F.2d a t 404--407. T h e A p p e a l s C o u r t n o t e d t h a t t h e D i s t r i c t C o u r t h a d b a ~ e d its a n a l y s i s o f t h e n o n c a s h e l e m e n t s o f the d e f e n d a n t ' s profits in part on Deltak's reasoning. S e e Business Trends, 887 F.2d at 404--405. T h e court declined to a d o p t Deltak's approach, r e l y i n g primarily o n two reasons. First, the court believed the instructions o f § 504(b) relating to t h e p r o o f o f the " i n f r i n g e r ' s profits" indicated " t h a t C o n g r e s s means ' p r o f i t s ' in the lay s e n s e o f g r o s s reve n u e less o u t - o f - p o c k e t c o s t s , n o t t h e f i c t i v e p u r c h a s e p r i c e t h a t t h e d e f e n d a n t h y p o t h e t i cally chose not to pay to BTA." S e c o n d , given the d e f e n d a n t ' s larcenous i n t e n t a n d the c o m p e t i t i v e r e l a t i o n s h i p b e t w e e n t h e p l a i n t i f f a n d the d e f e n d a n t , the c o u r t b e l i e v e d i t w a s unreasonable to fi nd that the d e f e n d a n t profited within the meaning o f the s t a t u t e by c o p y ing for free r a t h e r than p a y i n g the p r i c e it m i g h t have negotiated with t h e plaintiff. T h e s o l e i s s u e b e f o r e t h e c o u r t w a s w h e t h e r e i t h e r t h e e x p e n s e s s a v e d by t h e i n f r i n g e r resulting from its d e c i s i o n to i n f r i n g e r a t h e r than p u r c h a s e o r t h e goodwill the d e f e n d a n t g e n e r a t e d by o f f e r i n g t h e i n f r i n g i n g m a t e r i a l t o i t s c u s t o m e r s a t a g r e a t l y r e d u c e d p r i c e can be c o n s i d e r e d " i n f r i n g e r ' s p r o f i t s " r e c o v e r a b l e u n d e r § 5 0 4 ( b ) . T h e d e c i s i o n d i d not 738 Ch. 43 C o p y r i g h t I n f r i n g e m e n t Damages Can Be Based on Value o f Licenses 1 involve the question under consideration in the Davis c a s e - w h e t h e r the a m o u n t t h e o w n e r failed to collect as a r e a s o n a b l e royalty o r l i c e n s e fee could be considered as c o n s t i t u t i n g t h e o w n e r ' s a c t u a l d a m a g e s u n d e r § 5 0 4 ( a ) a n d (b). I t is true t h a t the Business Trends decision, in a digression, observed " t h a t [ a c t u a l damages] is hardly a reasonable description o f the entirely hypothetical sales t o t h e defendant lost by BTA." F o r two reasons, the court believes Business Trends does not foreclose t h e use o f t h e o w n e r ' s loss o f a reasonable royalty as its "actual d a m a g e s " under § 5 0 4 ( a ) and (b). F i r s t , as noted, that issue was not b e f o r e the court. Second, t h e c o u r t went to pains in Business Trends to make c l e a r that it was n o t laying down an absolute rule, but r a t h e r m a k i n g a ruling that was heavily i n f l u e n c e d by the p a r t i c u l a r facts o f that case. T h e court rejected the d e f e n d a n t ' s argument t h a t a " v a l u e o f use" s t a n d a r d is always impermissible, s a y i n g " w e see no legal barrier to such an award under S e c t i o n 504(b) so long as the a m o u n t o f the award is based on a factual basis rather than ' u n d u e speculation.'" Again at the conc l u s i o n o f t h e o p i n i o n t h e c o u r t " e m p h a s i z e [ d ] t h a t w e a r e not r e j e c t i n g a s a m a t t e r o f l a w " a recognition o f the " v a l u e o f u s e " theory. T h e c o u r t held "only t h a t the p r o o f in the instant case is inadequate to s u p p o r t such an award." To the e x t e n t that the Business Trends decision was based on its observation t h a t the defendant before it was no m o r e inclined to negotiate a purchase price than a " p u r s e snatcher," the facts o f the D a v i s c a s e are significantly different. T h e G a p was n o t s e e k ing, like the Business Trends defendant, to surreptitiously steal material owned by a c o m petitor. T h e r e is no reason to s u p p o s e that the G a p ' s u s e o f D a v i s ' s c o p y r i g h t e d e y e w e a r without first receiving his p e r m i s s i o n was attributable to anything o t h e r than o v e r s i g h t o r mistake. To the contrary, the facts o f this c a s e s u p p o r t the view that the G a p and D a v i s c o u l d h a v e h a p p i l y d i s c u s s e d t h e p a y m e n t o f a fee, a n d t h a t D a v i s ' s c o n s e n t , i f s o u g h t , c o u l d h a v e b e e n o b t a i n e d f o r v e r y l i t t l e money, s i n c e s i g n i f i c a n t a d v a n t a g e s m i g h t f l o w to h i m from having his e y e w e a r displayed in the G a p ' s ad. Alternatively, i f D a v i s ' s demands had been excessive, the Gap would in all likelihood have simply e l i m i n a t e d D a v i s ' s eyewear from the photograph. W h e r e t h e Business Trends decision was m o t i vated by its perception o f the unrealistic nature o f a suggestion that the infringer m i g h t have bargained with the o w n e r (see 887 F.2d at 405), such a scenario was in no way unlikely in the present case. (f) REASONABLE LICENSE FEE. B e c a u s e Business Trends did not rule on, much less foreclose, the use o f a reasonable license fee t h e o r y a s the measure o f damages suffered by Davis when the Gap used his material w i t h o u t payment, we p r o c e e d to c o n s i d e r w h e t h e r that measure o f damages is permissible u n d e r the § 504(a) a n d (b) statute. T h e question is as follows: A s s u m e that the c o p y r i g h t owner proves that the defendant h a s i n f r i n g e d h i s w o r k . H e p r o v e s a l s o t h a t a l i c e n s e t o m a k e such u s e o f t h e w o r k h a s a fair market value, but does n o t show that the i n f r i n g e m e n t c a u s e d h i m lost sales, lost opportunities to license, o r d i m i n u t i o n in the value o f the copyright. T h e only proven loss lies in the o w n e r ' s failure to receive p a y m e n t by the infringer o f the fair m a r k e t v a l u e o f the u s e illegally a p p r o p r i a t e d . S h o u l d t h e o w n e r ' s c l a i m f o r " a c t u a l d a m a g e s " u n d e r § 5 0 4 ( b ) be d i s m i s s e d ? O r s h o u l d t h e c o u r t a w a r d d a m a g e s c o r r e s p o n d i n g t o t h e fair market value o f the use appropriated by the i n f r i n g e r ? Neither answer is entirely satisfactory. I f the c o u r t dismisses the c l a i m by reason o f t h e o w n e r ' s f a i l u r e to p r o v e t h a t the a c t o f i n f r i n g e m e n t c a u s e d e c o n o m i c h a r m , the i n f r i n g e r w i l l g e t i t s i l l e g a l t a k i n g for f r e e , a n d t h e o w n e r w i l l b e l e f t u n c o m p e n s a t e d f o r the illegal taking o f something o f value. However, an award o f damages m i g h t be s e e n as 43.2 O n D a v i s v. t h e G a p , I n c . 739 a windfall for an o w n e r who received no less than he would have i f the infringer had refrained from the illegal taking. T h e more reasonable approach seems to b e to allow such an award in appropriate circumstances. (g) ACTUAL DAMAGES. S e c t i o n 504(a) and (b) employ the broad term " a c t u a l damages." Courts and commentators agree it should be broadly construed to favor victims o f infringement. See William F. Patry, Copyright Law a n d Practice 1167 (1994) ("Within reason, any ambiguities should be resolved in favor o f the copyright owner."); 4 Nimmer § 14.02[A], at 14-12 ("[U]ncertainty will not preclude a recovery o f actual damages i f the uncertainty is as to amount, but not as to the fact that actual damages are attributable to the infringement."); Fitzgerald Publ 'g Co., 807 F.2d at 1118 ("[A]ctual damages are not . . . narrowly focused."); S y g m a Photo News, Inc. v. High Society Magazine, 778 F.2d 8 9 , 9 5 (2d Cir. 1985) (stating that when courts are confronted with imprecision in calculating damages, they " s h o u l d e r r on the side o f guaranteeing the p l a i n t i f f a full recovery"). Cf. Tn Design v. K - Mar t A p p a r e l Corp., 13 F.3d 559, 564 (2d Cir. 1994) (noting that any doubts in c a l c u l a t i n g profits that result from the infringer's failure to present adequate proof o f its costs are to be resolved in favor o f the copyright holder), abrogated on o t h e r grounds by Fogerty v. Fantasy, Inc., 510 U.S. 517 (1994). A principal objective o f the copyright law is to e n a b l e creators to earn a living either by s e l l i n g o r by licensing o t h e r s to sell c o p i e s o f the c o p y r i g h t e d work. S e e U.S. Const. Art. I, § 8, cl. 8 ( " C o n g r e s s shall have the p o w e r . . . [ t l o p r o m o t e t h e P r o g r e s s o f Science a n d useful Arts, by s e c u r i n g for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries."); S t a t u t e o f Anne, 1709, 8 Anne, ch. 19 (Eng.), reprinted in IIJ Patry, supra, at 1461 (first establishing copyright protection for authors because "Printers, Booksellers, and o t h e r Persons, have o f late freq u e n t l y taken the l i b e r t y o f p r i n t i n g , r e p r i n t i n g , a n d p u b l i s h i n g . . . b o o k s , a n d o t h e r writings, without the consent o f the authors o r proprietors o f such books and writings, to their very great detriment, and too often to the ruin o f them and their families"). I f a copier o f protected work, instead o f obtaining permission and paying the fee, proceeds without permission and without compensating the owner, it seems entirely reasonable to conclude that the o w n e r has suffered damages to the extent o f the infringer's taking without paying what the owner was legally entitled to exact a fee for. T h e r e seems to be no reason why, as an abstract matter, the statutory term "actual d a m a g e s " should not cover the owner's failure to obtain the market value o f the fee the o w n e r was entitled to charge for such use. T h e problem is roughly analogous to illegal takings o r uses in other c o n t e x t s outside the r e a l m o f copyright. F o r example: D, who lives on property adjacent to P, without authorization regularly s w i m s and canoes in P's lake and uses a road c r o s s i n g P ' s land because it provides more direct access to town. T h e right to lise P ' s property for such purposes has a fair market value. P proves neither harm to his property nor loss o f opportunity to license others to use the property for such recreation. Nonetheless, P has lost the revenue he would have recovered i f D had paid the fair market value o f what he took. In this case, the d e f e n d a n t has surreptitiously taken a valuable right, f o r which the plaintiff could have c h a r g e d a reasonable fee. T h e p l a i n t i f f ' s revenue is thus smaller than it would have been i f the defendant had paid for what he took. However, the plaintiff's revenue is no less than i t would have been i f the d e f e n d a n t had refrained from the taking. Between leaving the victim o f the illegal taking with nothing and c h a r g i n g the illegal taker with the reasonable cost o f what he took, the latter, at least in some circumstances, seems to be the preferable solution. 740 Ch. 43 C o p y r i g h t I n f r i n g e m e n t Damages Can Be Based on V a l u e o f Licenses It is important to note that under the terms o f § 504(b), unless such a forgone p a y m e n t can b e considered "actual damages," in some circumstances victims o f infringement will go uncompensated. I f the infringer's venture turned out to be unprofitable, the o w n e r can receive no recovery based on the statutory award o f the "infringer's profits." A n d in some instances, there will be no harm to the market value o f the copyrighted work. The owner may be incapable o f showing a loss o f either sales or licenses to third parties. To rule that the owner's loss o f the fair market val ue o f the license fees that might have been exacted o f the defendant does not constitute "actual damages" would mean that in such circumstances an infringer may steal with impunity. In the Davis case, the Appeals Court could not see reason why this should be so. O f course, i f the terms o f the statute compelled that result, the c o u r t ' s perception o f inequity would make no difference; the statute would control. But in the c o u r t ' s view, the statutory term "actual damages" is broad enough to cover this form o f deprivation suffered by infringed owners. (h) DETERMINING FAIR MARKET VALUE. T h e Appeals Court recognized in the Davis case that awarding the copyright owner the l o s t license fee can risk abuse. O n c e the defendant has infringed, the owner may claim unreasonable amounts as the license f e e to wit, Davis's demand for an award o f $2.5 million. The law therefore exacts that the amount o f damages may not b e based on "undue speculation." (See Abeshouse, 7 5 4 F.2d at 470.) The question is not what the owner would have charged, but rather w h a t is the fair market value. In order to make out a c l a i m that one has suffered actual damage because o f the infringer's failure to pay the fee, the owner must show that the thing taken had a fair market value. B u t i f the plaintiff o w n e r has done so, and the defendant is thus protected against an unrealistically exaggerated claim, the court could see little reason not to consider the market value o f the uncollected license fee as an element o f "actual d a m a g e s " u n d e r § 504(b). The court recognized also that finding the fair market value o f a reasonable license fee may involve some uncertainty. But that is not sufficient reason to refuse to c o n s i d e r this as an eligible measure o f actual damages. Many o f the accepted methods o f calculating copyright damages require the court to make uncertain estimates in the realm o f contrary to fact. See 4 Nimmer § 14.02[A], at 14-9. A classic element o f the p l a i n t i f f ' s copyright damages is the profits the plaintiff would have earned from third parties were i t not for the infringement. See 4 Nimmer § 14.02[A], at 14-9 to 10. This measure requires the court to explore the counterfactual hypothesis o f the contracts and licenses the plaintiff would have made absent the infringement and the costs associated with them. See Fitzgerald Publ'g, 807 F.2d at 1118 (actual damages measured by " t h e profits which the plaintiff might have earned were it not for the infringement"); Steve

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