Sullivan, Amy v. Flora, Inc. et al

Filing 261

OPINION AND ORDER on Damages. Signed by District Judge William M. Conley on 4/24/2017. (kwf)

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF WISCONSIN
AMY LEE SULLIVAN,
Plaintiff,

OPINION AND ORDER

v.
15-cv-298-wmc

FLORA, INC.,
Defendant.

While the jury was deliberating on the phase II liability verdict, the court heard
evidence and argument on issues concerning plaintiff’s damages case. The court then
issued certain rulings, which resulted in the exclusion of specific expert testimony and
argument on certain of plaintiff’s damages theories in keeping with defendant’s pending
motions in limine. The purpose of this order is simply to formalize those rulings.
I. Plaintiff’s Damages Theory Based on Defendant’s Profits
Title 17 U.S.C. § 504(b) sets forth remedies for copyright infringement, including
that the “copyright owner is entitled to recover . . . any profits of the infringer that are
attributable to the infringement and are not taken into account in computing the actual
damages.” The purpose of allowing an award of defendant’s profits in addition to the
plaintiff’s actual damages is to “prevent the infringer from unfairly benefiting from a
wrongful act.” 4 Melville B. Nimmer & David Nimmer, Nimmer on Copyright § 14.03
(Matthew Bender, Rev. Ed.); see also McRoberts Software, Inc. v. Media 100, Inc., 329 F.3d
557, 568 (7th Cir. 2003) (“by disgorging any net profits from the infringer, lost profit
damages eliminate a major incentive to steal the copyright instead of fairly negotiating for
its use with the owner”).

To be entitled to such an award, however, plaintiff must, at minimum, prove a
causal connection or nexus between the infringement and defendant’s gross revenues. See
Bell v. Taylor, 827 F.3d 699, 710 (7th Cir. 2016) (“[A] plaintiff must show a causal nexus
between the infringement and the gross revenues.”); Taylor v. Meirick, 712 F.2d 1112, 1122
(7th Cir. 1983) (“If General Motors were to steal your copyright and put it in a sales
brochure, you could not just put a copy of General Motors’ corporate income tax return in
the record and rest your case for an award of infringer's profits.”).
Here, where the sales are not of the infringing products themselves, like a t-shirt,
book cover or poster with the copyrighted work on it, but rather of infringing advertising,
plaintiff’s burden to prove a casual nexus is admittedly much more challenging, because it
involves proof based on indirect profits. See O’Connor v. Cindy Gerke & Assocs., Inc., 300 F.
Supp. 2d 759, 771-72 (W.D. Wis. 2002) (discussing Mackie v. Rieser, 296 F.3d 909, 915
(9th Cir. 2002)); see also Univ. of Colo. Found. v. Am. Cyanamid Co., 196 F.3d 1366, 1375
(Fed. Cir. 1999) (holding that plaintiff has “burden” to demonstrate a nexus between the
infringement and the indirect profits before apportionment can occur).

As a result,

“modern cases more frequently deny profits earned from advertising.” Nimmer on Copyright
§ 14.03[B][2][b] (citing Deltak, Inc. v. Advanced Sys., Inc., 574 F. Supp. 400 (N.D. Ill. 1983)
(Posner, J., sitting by designation), vacated on other grounds, 767 F.2d 357 (7th Cir. 1985)
(explaining that increased sales arising from infringing advertising to be too speculative on
the facts, while acknowledging that, in theory, an award may be appropriate in certain
cases).
In a recent case, Bell v. Taylor, 827 F.3d 699 (7th Cir. 2016), the Seventh Circuit
considered whether an award of defendant’s profits was appropriate in a case involving
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defendant’s use of plaintiff’s photograph in an online website advertising defendant’s real
estate services in the context of a motion to compel certain damages discovery. Affirming
the district court’s order, the Seventh Circuit expressly denied plaintiff’s motion to compel
certain damages discovery because “[t]here is no evidence suggesting that Cheatham
attracted more clients because of Bell’s photo.” Id. at 710-11; see also Eagle Servs. Corp. v.
H2O Indus. Servs., Inc., 532 F.3d 620, 623 (7th Cir. 2008) (“It is doubtful that profits from
the sale of noninfringing goods or services . . . can be attributed to a copyright infringement
with enough confidence to support a judgment.”); Mackie, 296 F.3d at 916 (rejecting
plaintiff’s request for defendant’s profits based on defendant’s use of an authorized
photograph of plaintiff’s sculpture in a promotional brochure, reasoning that “we can
surmise virtually endless permutations to account for an individual’s decision to subscribe
to the Pops series, reasons that have nothing to do with the artwork in question”).
Unlike in Bell, plaintiff, here, was actually allowed this discovery, and still she has
no evidence that her illustrations attracted more customers or drove more sales of
defendant’s products, other than the fact that they continued to be used in subsequent
videos made by Designomotion or by defendant itself, or individual illustrations otherwise
appeared in online or other displays.1 As the court described in its opinion on the parties’
motions in limine, this general indication of value is not evidence supporting a causal nexus
between the infringing use and defendant’s revenues, even if limited to revenues for the
products advertised. Instead, plaintiff would have had the jury infer that the portion of

Plaintiff complained that the defendant was uncooperative during discovery, but the court gave
plaintiff relief for defendant’s failures to respond appropriately, and never followed up with an
additional motion to compel, much less a motion for sanctions.
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defendant’s advertising budget spent on an entire video containing plaintiff’s copyrighted
illustrations, then multiplied by the number of other videos containing those same
illustrations as a substitute for what defendant would have theoretically been willing to
pay, combined with a series of additional assumptions of varying dubiousness, correlates
to the revenues defendant obtained from the infringing use. (See 4/12/17 Op. & Order
(dkt. #203) 16 (explaining that a damages theory based on defendant’s profits that jumps
“from a calculated portion of the advertising budget Flora would have spent on the alleged
infringing use to an assumption that its advertising expense is directly proportional to net
profits strikes the court as too speculative”).) In addition, plaintiff failed to account for:
other drivers of consumer sales, including general demand for alternative, health-related
products generally and defendant’s products in particular; further demand built by
defendant’s authorized use of plaintiff’s illustrations in the English-language 7 Sources and,
at least original, Flor-Essence videos; demand driven by other, non-infringing advertising;
and a myriad of other factors.
At the proffer hearing before the damages phase of trial, plaintiff was unable to
address the court’s concern about these evidentiary gaps. In particular, plaintiff was unable
to offer any evidence of customer surveys concerning what drove purchasing decisions, a
marketing or damages expert discussing the role of two-dimensional art, like plaintiff’s
illustrations, in advertising as a driver of revenue, or earlier statements by defendant,
customers or competitors about the value of those infringing illustrations in driving sales.
Those rare cases awarding defendant’s indirect profits as a supplement to actual damages
appear to all offer this or similar evidence. See, e.g., Frank Music Corp. v. Metro–Goldwyn–
Mayer, Inc., 772 F.2d 505, 517 (9th Cir. 1985) (finding sufficient causal nexus between
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profits and infringement demonstrated by casino’s annual report, which stated that the
operations of the casino were “materially enhanced” by the popularity of the infringing
stage show (internal quotation marks omitted)); Thornton v. J Jargon Co., 580 F. Supp. 2d
1261, 1268 (M.D. Fla. 2008) (allowing plaintiff to pursue indirect profits where evidence
that actor’s union required distribution of program containing infringing poem for play to
go on); Andreas v. Volkswagon of Am., Inc., 336 F.3d 789, 796-97 (8th Cir. 2003) (affirming
award of defendant’s profits for infringing advertising where plaintiff offered, among other
evidence, that “Audi enthusiastically presented the commercial to its dealers as an
important and integral part of its launch of the TT coupe into the U.S. market; [and] sales
of the TT coupe during the period that the commercial aired were above Audi’s
projections”).
In response to the court’s concern, plaintiff would instead repeatedly point to Davis
v. The Gap, Inc., 246 F.3d 152 (2d Cir. 2001), for the proposition that plaintiff’s limiting
of defendant’s profits to those involving the product lines promoted by the advertising
containing infringing illustrations (7 sources, Flo-Essence and Floradix) created a sufficient
causal nexus. In Davis, the Second Circuit considered whether plaintiff had appropriately
apportioned the revenues from all sales by Gap, Inc., to just those implicated by the
infringing advertisement. In finding that he had not, the court stated, “it was incumbent
on Davis to submit evidence at least limited to the gross revenues of the Gap label stores,
and perhaps also limited to eyewear or accessories. Had he done so, the burden would
then have shifted to the defendant under the terms of § 504(b) to prove its deductible
expenses and elements of profits from those revenues attributable to factors other than the
copyrighted work.” Id. at 160. Plaintiff reads this aside to be the equivalent of her limiting
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revenues only to the designated product sales in order to shift the burden to defendant to
demonstrate its costs.
Even if this were a fair reading of Davis, the plaintiff in that case did more by putting
forth evidence of a spike in sales after the publication of the infringing advertisement. Id.
at 159 (“Davis submitted evidence that, during and shortly after the Gap’s advertising
campaign featuring the ‘fast’ ad, the corporate parent of the Gap stores realized net sales
of $1.668 billion, an increase of $146 million over the revenues earned in the same period
of the preceding year.”).

As such, the Second Circuit could have been considering that

evidence in stating that plaintiff’s evidence of a limited revenue base would shift the burden
to defendant to prove its costs. Regardless, given that the plaintiff in Davis did not put
forth sufficient evidence to prove his indirect profits claim, the quote language is essentially
dicta.
More importantly, plaintiff’s reading of Davis would be inconsistent with Seventh
Circuit cases requiring a copyright infringement plaintiff to put forth evidence of causation
in the case of indirect profits beyond simply limiting the revenue basis to the indirect sales
implicated by infringing advertising. See, e.g., Bell, 827 F.3d at 710-11 (requiring the
plaintiff to put forth evidence that the infringing photo drove clients to defendant before
permitting discovery of defendant’s revenues); Eagle Servs. Corp., 532 F.3d at 623 (“[I]f
Eagle had proved that H2O would have shut down had it not copied Eagle’s manual, it
could have obtained the profits that H2O obtained as a result of not having to shut down.
It is doubtful that profits from the sale of noninfringing goods or services (in this case,
H2O’s clean-up services) can be attributed to a copyright infringement with enough
confidence to support a judgment.”); see also Mackie, 296 F.3d at 916 (Ninth Circuit case
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cited widely by the Seventh Circuit; requiring evidence that infringing artwork in
Symphony brochure caused individuals to subscribe to the Symphony).

Absent some

evidence tying defendant’s revenues from the promoted product lines to the infringing
videos, much less to plaintiff’s copyrighted illustrations in those videos, a reasonable jury
had no basis to award damages based on defendant’s profits. Accordingly, the court
excluded that damages theory.
II. Mager’s Expert Testimony on Royalty or Licensing Fee
In its motions in limine, defendant also challenged plaintiff’s expert Danny Mager’s
testimony on several basis, although the court rejected each, finding that: (1) he was
qualified to testify based on his experience in the advertising industry; (2) defendant’s
specific challenges to the reliability of Mager’s testimony could be addressed through crossexamination; and (3) Mager did not repudiate his 3 to 15% royalty rate opinion in
testifying that such an analysis would not apply to a subcontractor relationship, given that
Sullivan’s damages theory was not based on the authorized use arrangement she had with
Designomotion. (4/12/17 Op. & Order (dkt. #203) 9-13.)
While defendant offered an array of challenges, its challenge to the reliability of the
3 to 15% royalty rate was based on claimed contradictions in Mager’s deposition
testimony. In reviewing plaintiff’s opposition to the motion, the court initially credited
Mager’s claimed reliance on industry standards set forth in his affidavit, particularly
guidelines on pricing models issued by the American Institute of Graphic Arts. (See Mager
Decl. (dkt. #193) ¶ 3; id., Ex. 1 (dkt. #193-1).) However, upon further review of those
guidelines, and Mager’s inability to explain the reasons for his reliance on those percentages
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during his proffer before the damages phase of trial, the court ultimately found that his
testimony as to a “royalty range” was not sufficiently well-founded by experience, or traderecognized practice to put before a lay jury. Indeed, Mager’s testimony implicates many
of the same concerns raised by Federal Circuit in rejecting a 25% “rule of thumb” royalty
rate in the patent context. See Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292, 1316
(Fed. Cir. 2011).
In his report, Mager simply states: “Standard royalty rates can vary quite a bit based
on the product category (furniture, gift items, stationary, etc.). They may be as low as 3
percent or as high as 15 percent.” (Mager Rept. (dkt. #132) 8.) Mager then goes on to
explain how the range may vary further based on sales or the position of the licensor, and
describes how some arrangements may guarantee a minimum amount. Mager then states,
“If Flora were to pay Sullivan on a royalty basis, rather than a per use basis, it would
typically be expected to pay her between 3% and 15% of net profit.” (Id.)
There are several, significant short-comings with this superficial analysis. First, the
range is quite significant. Mager offered the jury no basis for arriving at a number within
this range to ground a damages award based on a royalty rate at least in part because he
could offer no comparables. Second, Mager testified that the range varies based on product
category, but then failed to explain where or why the health supplement product category
would typically fall within this range. Third, Mager failed to provide any guidance on how
the other factors he identified would apply in this case, including: the reputation or past
performance of the licensor, the use of sales targets to guide a royalty rate, or whether a
minimum guarantee would be in place. Fourth, Mager states in the body of his opinion
that royalties are based on net sales (e.g., gross sales adjusted for any returns or discounts),
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but then states that the jury should award Sullivan a royalty based on “net profit.” Even
if this last were explained away as a simple error when he intended to say “net sales,” this
slip generally reflects the cursory treatment Mager provided in his report and proffer at
trial.
There is, however, an even more fundamental shortcoming to Mager’s opinion as to
the award of a license based on a percentage of net sales, which was underscored during
his proffer and that of plaintiff’s counsel at trial: all of the examples of a payment based
on a percent of sales revenues of products involved situations where the product itself
infringed. This makes sense since a copyright is, at least arguably, directly driving sales,
whether because of a registered design on a t-shirt, the label bottle or the illustration on a
book jacket. Again, that is not the situation here at all, and Mager’s, as well as plaintiff’s,
failure to offer a single example of a royalty paid as a percent of sales for advertising that
might (or might not) indirectly affect sales of a non-infringing product is fatal to this theory
of damages. As such, the court struck Mager’s testimony as to the 3 to 15% royalty fee as
unreliable.
Entered this 24th day of April, 2017.
BY THE COURT:
/s/
__________________________________
WILLIAM M. CONLEY
District Judge

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