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Can officers and directors be held liable for software infringement?

Posted by Steve Vondran | Mar 11, 2015 | 0 Comments

Personal civil & criminal liability in copyright software infringement cases

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Introduction

What happens if a company is guilty of intentional, willful and malicious copyright infringement?  Obviously the company can be sued in federal court and if illegal copying or pirated software is found a judgment can be entered.  But companies can just file for bankruptcy protection right?  Well what happens if the software company comes after an officer or a director?  Can Plaintiff's “pierce the corporate veil” or can they just sue the officers and directors for knowingly or recklessly participating in copyright infringement? This blog explores this topic.

When are officers and directors personally liable for copyright infringement?

Some companies mistakenly assume that if a person does not directly participate in a copyright infringement, that they cannot be held personally liable.  This is not a correct statement of the law.  For example, in Gershwin Pub. Corp. v. Columbia Artists Mgmt., Inc., 443 F.2d 1159, 1161-62 (2d Cir. 1971) the Second Circuit held:

“Section 1(e) of the Copyright Act bestows upon the copyright proprietor ‘the exclusive right to perform the copyrighted work publicly for profit,' an interest which is protected by § 101 of the Act which holds accountable ‘any person (who) shall infringe the copyright. Although the Act does not specifically delineate what kind or degree of participation in an infringement is actionable,  it has long been held that one may be liable for copyright infringement even though he has not himself performed the protected composition. The Court continued: “For example, a person who has promoted or induced the infringing acts of the performer has been held jointly and severally liable as a ‘vicarious' infringer, even though he has no actual knowledge that copyright monopoly is being impaired. See Shapiro, Bernstein & Co. v. H. L. Green Co., 316 F. 2d 304 (2 Cir. 1963)…….Although vicarious liability was initially predicated upon the agency doctrine of respondeat superior, this court recently held that even in the absence of an employer-employee relationship one may be vicariously liable if he has the right and ability to supervise the infringing activity and also has a direct financial interest in such activities.” So an officer or director of a business might be held vicariously liable for copyright infringement.

What if a Officer or Director has “reason to know” there is infringing activity occurring?

As the Court noted in Gershwin:

“Similarly, one who, with knowledge of the infringing activity, induces, causes or materially contributes to the infringing conduct of another, may be held liable as a ‘contributory' infringer. For example, in Screen Gems-Columbia Music, Inc. v. Mark Fi Records, Inc., 256 F.Supp. 399 (S.D.N.Y.1966), the district court held that an advertising agency which placed non-infringing advertisements for the sale of infringing records, a radio station which broadcast such advertisements and a packaging agent which shipped the infringing records could each be held liable as a ‘contributory' infringer if it were shown to have had knowledge, or reason to know, of the infringing nature of the records. Their potential liability was predicated upon ‘the common law doctrine that one who knowingly participates or furthers a tortious act is jointly and severally liable with the prime tortfeasor. A corporate officer (especially of smaller companies) or media companies or other types of companies where the officers or directors work intimately with the employees can often be found to have a “reason to know.”  These are something we look for in every copyright infringement case to see if these facts are present or not.  For example, where a corporate director works hands on with the architects at a small architecture firm, it will be tough to say they had no reason to know there were 10 unlicensed copies of Autodesk software on various network servers or computers.  This could lead to copyright infringement liability.

Other Circuits have discussed personal liability for software piracy

For example, in  Pinkham v. Sara Lee Corp., 983 F.2d 824, 834 (8th Cir. 1992) the *the 8th circuit Court held – “We begin with the general standard for personal liability: An individual, including a corporate officer, who has the ability to supervise infringing activity and has a financial interest in that activity, or who personally participates in that activity, is personally liable for the infringement.” This casts a pretty wide net in the eighth circuit. The Court continued: “In this circuit, we have also spelled out the elements of “ vicarious liability”: (1) The right and ability to supervise the infringing activity; and (2) An obvious and direct financial interest in exploitation of copyrighted materials.” See also RCA/Ariola Int'l Inc. v. Thomas & Grayston Co., 845 F. 2d 773, 781 ( 8th Cir.1988).

Corporate officers are not shielded from suit in their individual capacity when they direct, control, ratify, participate in, or are the moving force behind the infringing activity.  See Committee for Idaho's High Desert, Inc. v. Yost, 92 f.3d 814, 823 (9th Cir. 1996) (company officers who direct and authorize infringing activities can be held personally liable).

As these cases illustrate, where you have closely held corporations, and the officers and directors have reason to know, or ability to supervise “turning a blind eye” will not insulate one from liability.  D&O policies should be reviewed to see if there is any coverage for this potential liability where a BSA or SIIA software audit is pending.

What to do if you get a BSA software audit letter and you know you have infringement of Microsoft, Adobe, Autodesk or other copyrighted software?

The first and most important thing is to retain software copyright counsel to assist you.  We have handled cases for both copyright holders and Defendants in BSA audits.  Before you destroy all your computers and throw them in a lake, call us for advice.  You need to retain counsel and have your case reviewed.  There may be defenses to copyright infringement available, or issues with the so-called “informant” so we can discuss these with you once retained.  In other cases, it comes down to hiring us to apply our strong negotiation skills that we have honed over the last decade as a ciivl litigation law firm.

Can I just discharge my personal liability in a Chapter 7 bankruptcy?

This is a common misconception that any judgement that anyone gets against you in regard to federal software piracy can just be wiped out in bankruptcy. While there is always a chance, this could go either way, and in some instances our legal battles can head into federal bankruptcy Court.  We have experience in bankruptcy adversary proceedings (see our Federal Pacer page) and where debts are incurred in bad faith or on other grounds, they might not be automatically dischargeable.

One of the best articles I have read on this topic is “Debts that follow you to the grave.” put out by the American Bar Association.  Give this a read.  This article states one type of debt that may not be dischargeable in bankruptcy is:

“Willful and malicious injury. Whether an injury to another person or to the property of another person is the result of “willful and malicious” conduct has been the subject of substantial litigation. Both elements are necessary. Willful means that the debtor acted purposefully. Malicious has been defined as knowing that the act is likely to or will cause an injury or harm. The injury or harm does not need to be substantial or severe to fall under the definition of maliciousness; the mere knowledge that the action is likely to cause an injury has generally been deemed sufficient. If the debtor knew what she was doing, did it on purpose, and knew it would probably cause some type of injury or damage, the resulting debt is non-dischargeable.”

We have talked on other blog posts how software companies will assert that copyright infringement or software piracy is “willful” under the Copyright laws, so this is definitely one legal issue that can come into focus in any case involving theft of software.

At what point does intentional copyright infringement by an officer or a director of a company amount to Criminal copyright infringement.

This is also not always an easy test to articulate.  Where there is trafficking or distributing copyrighted software (ex. making fake products for Adobe or Microsoft, or Autodesk and trying to sell them online), this would make a pretty clear case for criminal prosecution of the offender and would also warrant a possible raid of the business or even an individuals home using a search warranted granted by a judicial officer.  In the case of software licensing shortages (i.e. unpaid software) there are some other tests that might be looked at.

For example, in re U.S.'s Application For A Search Warrant To Seize & Search Elec. Devices From Edward Cunnius, 770 F. Supp. 2d 1138, 1141 (W.D. Wash. 2011) the Court discussed:

“Specifically, criminal copyright infringement includes “willfully infringing a copyright” if that infringement was committed “for purposes of commercial advantage or private financial gain … by the reproduction or distribution, including by electronic means … of 1 or more copies or phonorecords of 1 or more copyrighted works, which have a total retail value of more than $1,000.” See also 17 U.S.C. § 506(a).

 As you can see, copyright law in the United States is very powerful.  There are remedies for software piracy and criminal deterrents  where a prosecutor has reason to bring a prosecution.  This makes it all the more important to seek out intellectual property attorneys when your business needs to bring suit to stop infringing activity, or else you need legal representation as an officer or director of a corporation, separate and apart from legal counsel that may only be representing the interests of the company itself.

Tips to prevent officers and directors from being name personally for intellectual property theft or infringement

  1. Adopt and follow policies and procedures relating to software, copyright, and trademark infringement
  2. Hold frequent meetings to discuss intellectual property issues (document the comments from the meeting)
  3. Conducting annual software audits
  4. Consider maintaining a general liability insurance policy that covers intellectual property infringement (sometimes infringement can be purely accidental and innocent, such as the case of hiring a blogger who posts of copyrighted photo on your website, or a consultant that inadvertently installs Microsoft or Autodesk software on your computer networks without a valid license)
  5. Make sure you are “clearing” all your copyrights, trademarks and “rights of publicity” for all online and offline marketing and advertising.
  6. Immediately act on all infringement, cease and desist letters, notice of copyright or trademark infringement, and hire legal counsel to discuss your rights, and potentially settle the dispute without having it turn into a federal lawsuit.
  7. Make sure you are saving all copies, proofs, receipts, email confirmations, for all products your company licenses (this includes videos, film, music, songs, lyrics, comics, jingles, slogans, software products, photographs etc.).  The proof of licensing is often your BEST defense.

Second Circuit Case Law – Officer and Director Liability for Software Piracy

Case: Personal Liability of Abel De Luna 1.

Under 17 U.S.C. § 501(a),

“[a]nyone who violates any of the exclusive rights of the copyright owner … is an infringer of the copyright….” While the Copyright Act does not expressly create any form of liability for infringement by a third party, the absence of express language in the statute does not preclude liability for infringement on parties who have not themselves engaged in the infringing activity. Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417, 434–35, 104 S.Ct. 774, 784–85, 78 L.Ed.2d 574, reh'g denied, 465 U.S. 1112, 104 S.Ct. 1619, 80 L.Ed.2d 148 (1984).

Two types of third-party liability in copyright law have developed: vicarious liability, with roots in the tort doctrine of respondeat superior, and contributory infringement, which holds liable “

‘[o]ne who, with knowledge of the infringing activity, induces, causes, or materially contributes to the infringing conduct of another” Demetriades v. Kaufmann, 690 F.Supp. 289, 292–93 (S.D.N.Y.1988) (quoting Gershwin Publishing Corp. v. Columbia Artists Management, Inc., 443 F.2d 1159, 1162 (2d Cir.1971)).

The appropriate analysis of Abel De Luna's liability in his capacity as president of Luna is under the standard of vicarious liability.

Vicarious Liability for Software Infringement

Vicarious liability exists

“[w]hen the right and ability to supervise coalesce with an obvious and direct financial interest in the exploitation of copyrighted materials.…” Shapiro, Bernstein & Co. v. H.L. Green Co., 316 F.2d 304, 307 (2d Cir.1963); see RSO Records, Inc. v. Peri, 596 F.Supp. 849, 858 (S.D.N.Y.1984) (same); Lauratex Textile Corp. v. Allton Knitting Mills Inc., 517 F.Supp. 900, 904 (S.D.N.Y.1981) (corporate officer held vicariously liable); see also, Sygma Photo News, Inc. v. High Society Magazine, Inc., 778 F.2d 89, 92 (2d Cir.1985)

(“All persons and corporations who participate in, exercise control over, or benefit from the infringement are jointly and severally liable as copyright infringers”); Southwestern Bell Telephone Co. v. Nationwide Indep. Directory Serv., 371 F.Supp. 900, 906 (W.D.Ark.1974)

(“Officers or directors of a corporation guilty of infringement are individually liable if … they are sole shareholders”) (citing General Elec. Co. v. Wabash Appliance Corp., 93 F.2d 671, 674 (2d Cir.1938)); see generally, 3 Melville B. Nimmer & David Nimmer, Nimmer on Copyright § 12.04[A] (1994) [hereinafter Nimmer].

Thus, “benefit and control are the signposts of vicarious liability.” Demetriades, 690 F.Supp. at 293. Individuals who have the right and ability to supervise infringing copyright activities and a direct financial interest in such activities are not shielded from liability even though they have no actual knowledge of the infringement.

The Second Circuit has held that the imposition of vicarious liability, even in the absence of actual knowledge, on those who fail to supervise the conduct of primary infringers better effectuates the policies of federal copyright law. Gershwin, 443 F.2d at 1162; Shapiro, 316 F.2d at 307.

The statements Abel De Luna made while being deposed indicate that he is vicariously liable, jointly and severally with Luna, for any copyright infringement committed by Luna. He is president of Luna, and he concedes that he “determine[s] what is done and what isn't done in the corporation.”  He is also Luna's sole shareholder and director. De Luna Dep. at 12–13, 21.

Moreover, Abel De Luna admits that he did nothing to stop the distribution of the compositions at issue after he was served with the Complaint in this action. De Luna Dep. at 66–68, 154–55.  I therefore find that Abel De Luna is individually liable for Luna's copyright infringement because he had the right and ability to supervise Luna's activities and a financial interest in the exploitation of the copyrighted materials.

How to prove Copyright Infringement

The Infringements. In order to prevail on a claim for copyright infringement, plaintiffs must prove two elements: first, that plaintiffs own valid copyrights in their respective compositions, and second, that defendants copied original elements of such compositions without authorization. Feist Publications, Inc. v. Rural Tel. Serv. Co., 499 U.S. 340, 361, 111 S.Ct. 1282, 1295, 113 L.Ed.2d 358 (1991).

Defendants have not challenged plaintiffs' ownership of valid copyrights in the compositions, and before me are certificates of registration issued by the United States Copyright Office to plaintiffs or their predecessors-in-interest for each composition.

A certificate of registration constitutes “prima facie evidence of the validity of the copyright.” 17 U.S.C. § 410(c); Rogers v. Koons, 960 F.2d 301, 306 (2d Cir.), cert. denied, 506 U.S. 934, 113 S.Ct. 365, 121 L.Ed.2d 278 (1992). The remaining issue, therefore, is whether defendants copied the musical compositions at issue without authorization. Peer Int'l Corp. v. Luna Records, Inc., 887 F. Supp. 560, 564–65 (S.D.N.Y. 1995)

Contact a copyright software infringement lawyer

To discuss hiring our firm to represent you as Copyright Counsel, call us at (877) 276-5084.  We handle both Plaintiff and Defendant cases.  We offer flexible legal fees, and tenacious legal representation.  Fill out the contact form below for more information or to have one of our Copyright lawyers contact you.  Please leave your name and phone number.

About the Author

Steve Vondran

Thank you for viewing our blogs, videos and podcasts. As noted, all information on this website is Attorney Advertising. Decisions to hire an attorney should never be based on advertising alone. Any past results discussed herein do not guarantee or predict any future results. All blogs are written by Steve Vondran, Esq. unless otherwise indicated. Our firm handles a wide variety of intellectual property and entertainment law cases from music and video law, Youtube disputes, DMCA litigation, copyright infringement cases involving software licensing disputes (ex. BSA, SIIA, Siemens, Autodesk, Vero, CNC, VB Conversion and others), torrent internet file-sharing (Strike 3 and Malibu Media), California right of publicity, TV Signal Piracy, and many other types of IP, piracy, technology, and social media disputes. Call us at (877) 276-5084. AZ Bar Lic. #025911 CA. Bar Lic. #232337

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