Intellectual Property – Discharge of Willful Copyright Infringement Claims in Bankruptcy Court
Software licensing audit lawyers who handle BSA, SIIA and Autodesk audit cases, Bentley software, Corel, Rosetta Stone and other software copyright infringement cases will often use every high pressure technique known to the law to try to get a company or business owner to settle software licensing shortage cases for the highest possible dollar amount, and they will threaten an action for “willful copyright infringement” and claim the company will get their pants sued off in federal court for missing software license receipts or due to some of the other common defenses that are raised in BSA and Autodesk cases. For companies, this can create a tough decision, if the monetary demand of the software company cannot be met, the only other alternative for some companies is to “file bankruptcy” (usually chapter 7, 11 or 13). This blog talks about whether or not willful copyright violation allegations and the debt claimed due can be discharged in a bankruptcy proceeding in federal court, or whether filing an adversary proceeding seeking “non-dischargeability” of the debt will ultimately allow the software company the ability to collect on the bad faith judgment.
What are the elements of “willful copyright infringement”?
In software licensing audit cases, the attorneys for the BSA, SIIA, Autodesk, Bentley, Adobe or some other software entity will usually assert that any license shortage (i.e. you have a copy of Microsoft Office on your computers that is not properly licensed) that this amounts to a “willful copyright infringement.” There really is no basis for this other than them pointing the finger at a business owner and calling them a thief (or usually terming the company a “software pirate”), even though there is no hard evidence of this and there could be valid reasons why there is no proof of purchase – see our list of common defenses in a software license audit.
Certain debts cannot be discharged in bankruptcy
A good primer course for this topic is this blog written which discusses “debts that follow you to the grave.” This is one of the best articles I have read on the topic of certain debts that a person or company might not be able to get rid of (i.e. “discharge”) in bankruptcy proceeding. As this article notes, in instances where there is a debt incurred in “bad faith” or a judgement or debt that is the product of “willful” AND “malicious injury” the debt might not be dischargeable, meaning you can pass through bankruptcy and the debt might not be “discharged” if challenged by a party that follows you into bankruptcy and files an adversary proceeding seeking a determination that the debt cannot be cancelled. Now this takes time and money, and the judge will have to make this decision ultimately.
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Willful and malicious injury requirement under Bankruptcy Code Section 523(a)(6)
In your typical intellectual property or entertainment law case, a judgment will normally be enforceable, and NOT dischargeable in a Chapter 7, 11, or 13 bankruptcy if there is a finding that the injury and damages caused was due to “willful and malicious” conduct. Normally a IP rights holder who is seeking to enforce a judgment, or any other creditor that follows the debtor/infringer into bankruptcy court will have to show BOTH the WILLFUL aspect as well as the MALICIOUS aspect. This legal principle was pointed out in Kawaauhau v. Geiger, 523 U.S. 57, 59, 118 S. Ct. 974, 975-76, 140 L. Ed. 2d 90 (1998) which noted:
“ Section 523(a)(6) of the Bankruptcy Code provides that a debt “for willful and malicious injury by the debtor to another” is not dischargeable. 11 U.S.C. § 523(a)(6). The question before us is whether a debt arising from a medical malpractice judgment, attributable to negligent or reckless conduct, falls within this statutory exception. We hold that it does not and that the debt is dischargeable.”
The Kawaauhua Court discussed the “willful” and “malicious” prong being two separate things a creditor seeking to enforce their judgement must prove to prevail and prevent the debt from being discharged.
“The word “willful” in (a)(6) modifies the word “injury,” indicating that nondischargeability takes a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury. Had Congress meant to exempt debts resulting from unintentionally inflicted injuries, it might have described instead “willful acts that cause injury.” Or, Congress might have selected an additional word or words, i.e., “reckless” or “negligent,” to modify “injury.” Moreover, as the Eighth Circuit observed, the (a)(6) formulation triggers in the lawyer's mind the category “intentional torts,” as distinguished from negligent or reckless torts. Intentional torts generally require that the actor intend “the consequences of an act,” not simply “the act itself.” See Restatement (Second) of Torts § 8A.”
The Court further noted: “Subsequent decisions of this Court are in accord with our construction. In McIntyre v. Kavanaugh, 242 U.S. 138, 37 S.Ct. 38, 61 L.Ed. 205 (1916), a broker “deprive[d] another of his property forever by deliberately disposing of it without semblance of authority.” Id., at 141, 37 S.Ct., at 39. The Court held that this act constituted an intentional injury to property of another, bringing it within the discharge exception. But in Davis v. Aetna Acceptance Co., 293 U.S. 328, 55 S.Ct. 151, 79 L.Ed. 393 (1934), the Court explained that not every tort judgment for conversion is exempt from discharge. Negligent or reckless acts, the Court held, do not suffice to establish that a resulting injury is “wilful and malicious.” See id., at 332, 55 S.Ct., at 153.
Applying the law to software licensing shortage cases, in most cases the company using the Autocad, Microsoft, Adobe or other software is NOT INTENTIONALLY seeking to injure the software company, the BSA, or the SIIA. There is no intent to injure them, especially where valid facts and circumstances demonstrate the software shortage is due to inadvertence, rapid corporate growth, an IT director or contractor that installed the software inadvertently, or thinking it was a licensed copy, or some other legitimate defense as to why their is software on a corporate network, laptop, server, etc. The facts of the case, and the legal arguments need to be made by your counsel to prevent any findings, conclusions or allegations of “willful and malicious” conduct in case the software representative force the case into federal copyright court and then into federal bankruptcy court if they get their judgement for copyright infringement.
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In re Barboza – 9th Circuit chimes on dischargeability of willful copyright infringement claims.
A landmark 9th circuit case involving willful copyright infringement and a debtor ultimately filing a chapter 7 bankruptcy seeking to wipeout (discharge) the debt in bankruptcy court is In re Barboza, 545 F.3d 702, 706 (9th Cir. 2008). In this Case the Court noted as was noted above:
“Section 523(a)(6) of the Bankruptcy Code provides that an individual debtor may not discharge a debt “for willful and malicious injury by the debtor to another entity or to the property of another entity.” (emphasis added). The malicious injury requirement is separate from the willful injury requirement. Carrillo v. Su (In re Su), 290 F.3d 1140, 1146–47 (9th Cir.2002) ( conflating the two requirements is grounds for reversal); see also Jett v. Sicroff (In re Sicroff), 401 F.3d 1101, 1105 (9th Cir.2005) (“We analyze the willful and malicious prongs of the dischargeability test separately.”).
A “willful” injury is a “deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.” See Kawaauhau v. Geiger, 523 U.S. 57, 61, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998) (emphasis in original). “A ‘malicious' injury involves'
(1) a wrongful act,
(2) done intentionally,
(3) which necessarily causes injury,
(4) is done without just cause or excuse.
In re Su, 290 F.3d at 1146–47 (quoting Petralia v. Jercich (In re Jercich), 238 F.3d 1202, 1209 (9th Cir.2001)).”
Thus, we are left with a software company that wants to seek to avoid having a judgment creditor avoid a debt in bankruptcy has a high burden of proof.
To sum it up, companies like the BSA, SIIA, Autodesk, Microsoft, Corel, Rosetta Stone, Siemens, Vero software, Solidworks, Adobe or other company must prove:
1. The infringing company intentionally sought to cause harm or injury,
2. The must prove the 4 elements of:
a. Wrongful act
b done intentionally
c. causing injury
d. lack of a just cause or excuse
This is a high burden of proof and one that the debtor-friendly bankruptcy Courts (that believe in “fresh starts”) should not jump to welcome without very strong evidence.
In one case from the U.S. Court of Appeals for the Sixth Circuit affirmed that a finding of “willful and malicious injury” in connection with the misappropriation of trade secrets and found that the award was non-dischargeable. See In re Hill, Case No. 19-5861 (6th Cir. May 4, 2020).
What if the software infringement is only deemed “reckless” in nature?
This was also addressed in the in Re Barboza case:
“ Even though recklessness is sufficient for a finding of willful copyright infringement, the Supreme Court has clearly held that injuries resulting from recklessness are not sufficient to be considered willful injuries under § 523(a)(6) of the Bankruptcy Code and are therefore insufficient to merit an exemption to dischargeability. Geiger, 523 U.S. at 60–61, 118 S.Ct. 974. In Geiger, the Supreme Court specifically limited “ willful” injuries under § 523(a)(6) to “deliberate or intentional” injuries. Id. at 61, 118 S.Ct. 974. Therefore, if a finding of “ willful” copyright infringement is based merely on reckless behavior, the resulting statutory award would not fit within the § 523(a)(6) exemption.” This is really critical to understand in BSA audit cases. What this means is that if a company is “reckless” in infringing software, this may satisfy the requirements to make the copyright infringement “willful” (possibly allowing an attorney fee award and other damages), but if the debtor flees into bankruptcy court to discharge the debt, this same “recklessness” will not allow a software company to enforce the debt as dischargeable.
More copyright cases
See Peter Pan Fabrics, Inc. v. Jobela Fabrics, Inc., 329 F.2d 194, 195-96 (2d Cir. 1964) (stating that statutory damages allow "the owner of a copyright some recompense for injury done him, in a case where the rules of law render difficult or impossible proof of damages or discovery of profits"). Additional motives for imposing statutory damages might include deterring future infringements or punishing infringers. However, Congress labeled these damages as "statutory" rather than "punitive" which suggests that they are not solely awarded for the sake of punishment, but also as compensation for unproven harm. By allowing the recovery of statutory damages, Congress decided that it is appropriate to award damages in the absence of proven injury. This decision signals that an act of copyright infringement causes harm by its very nature. The court based its award of sanctions in Zelis on the similar premise that frivolous lawsuits necessarily cause harm, and the bankruptcycourt found that the debt was attributed to a willful and malicious injury. Statutory damages for copyright infringement are also indicative of injury and, therefore, are nondischargeable in bankruptcy
Star's Edge, Inc. v. Braun (In re Braun), 327 B.R. 447, 450 (Bankr. N.D. Cal. 2005)
In another quite recent decision, the Ninth Circuit held that a judgment for libel could be attributed to a willful and malicious injury within the meaning of section 523(a)(6). Jett v. Sicroff (In re Sicroff), 401 F.3d 1101, 1107 (9th Cir. 2005). Since the debtor conceded that his actions were willful, the Sicroff court only determined that the debtor had caused a malicious injury to plaintiff. Id. In its findings, the court did not explicitly ascertain the existence of an actual, proven injury to the plaintiff. The court stated that, for an action to be malicious, it must necessarily cause injury, and that, since "Sicroff's statements were directed at Jett's professional reputation" they would "necessarily harm him in his occupation." Id. at 1106. The Ninth Circuit must have reasoned that if conduct necessarily causes harm, an independent finding of injury is unnecessary
Star's Edge, Inc. v. Braun (In re Braun), 327 B.R. 447, 451 (Bankr. N.D. Cal. 2005)
What is a “bad faith” debt that cannot be discharged in bankruptcy?
As the excellent article from the American Bar Association (link provided above) indicates, many types of debts might be determined to be “non-dischargeable” in a Court of law. For example:
1. Criminal restitution orders
2. Debts incurred by “willful and malicious injury” (ex. financial elder abuse injuries to an elder over 65 in California)
3. Alimony and child support awards
4. Certain tax liens
5. DUI related deaths or personal injury
6. Government fines, penalties, forfeitures
7. Student loans (unless “undue hardship” exists)
8. Intellectual property infringement (ex. photo infringement, video infringement, jewelry, design infringement)
9. Debts incurred by fraud
10. Bad faith or fraudulent debts incurred by fiduciary duty breach
This is just a short list. There might be others, and certain factors will apply in most cases that require the close scrutiny of qualified litigation counsel. Fill out the contact form below.
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