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Calculating damages in software infringement cases (the 3x multiplier)

Posted by Steve Vondran | Mar 20, 2015 | 0 Comments

Copyright Infringement – Software settlement essentials (calculating money damages)

Introduction

For companies and businesses facing a BSA (Business Software Alliance audit), Autodesk, SIIA or other software piracy audit it is important to understand how these holders to the rights of published software may seek to penalize your business if you are found to be infringing on their software (for example, making improper simultaneous use, over-installation, using software downloaded illegally and using crack codes, using educational software for "commercial purposes), etc.  When this happens, the process usually gets kick-started with either a phone call from a "compliance executive" or a letter, possibly from a software compliance law firms.  This is where we come in to defend companies facing an AUDIT, whether it is a random-EULA audit or a formal piracy investigation.  These pursuing parties will often seek damages, attorney fees (aka "pursuit fees") and "multiplier" penalties as a means to resolve the matter/

Legal Precedent establishing a multiplier is appropriate in piracy cases

A multiplier is basically an added fee on to the cost of settlement. For example, say you settle your case by agreeing to purchase 2 AutoCAD and 2 Revit, or Microsoft Office copies for example.  Say the cost to settle is 10k to acquire new software to replace infringing software.  The vendor or their representative may be seeking 25k to settle the matter by adding on an "infringement multiplier."  Some of my clients ask if this is legal and they can do that.  My typical response is this is a line item of damages that are common in software licensing litigation and usually, we negotiate this matter amongst counsel.  Here is some case law that hits on this point:

The intent of the federal Copyright Act is to compensate the copyright holder for unpaid license fees, to punish the infringer for unlicensed software installations and use, and to deter the infringer and others from again engaging in future copyright infringement. See, e.g., F.W. Woolworth Company v. Contemporary Arts, Inc., 344 U.S. 228, 234 (1952) (“[a statutory damage award] not merely compels restitution of profit and reparation for injury, but also is designed to discourage wrongful conduct.”); see also, Kamar International v. Russ Berrie ., 829 F.2d 783, 786 (9th Cir. 1987) (the statutory purpose is to provide “adequate compensation to the copyright holder and to discourage wrongful conduct and deter infringements.”); see also, Warner Brothers, Inc. v. Dae Rim Trading, Inc., 677 F.Supp. 740, 768 (S.D.N.Y. 1988) (statutory damages awarded to deter infringer and compensate copyright holder).

A circuit by circuit analysis demonstrates that a multiplier of unpaid licensing fees is common in copyright infringement actions to compensate the copyright-holder for unpaid licensing fees, to punish the infringer, and to deter the infringer and others from future infringement. See, e.g., Marvin Music Company v. BHC Ltd. Partnership, 830 F.Supp. 651 (D.Mass. 1993) (over two times unpaid licensing fees awarded as damages); see also, Golden Torch Music Corp. v. Pier III Café, Inc., 684 F.Supp. 772 (D.Conn. 1988) (awarding approximately five times unpaid licensing fees as damages); see also, Broadcast Music, Inc. v. DeGallo, Inc., 872 F.Supp. 167 (D.N.J. 1995) (five times unpaid licensing fees awarded to compensate plaintiff and penalize defendants); see also, Jasperilla Music Company v. Wing’s Lounge Association, 837 F.Supp. 159 (S.D.W.Va. 1993) (awarding 2.5 times unpaid licensing fees to send the message that “it costs less to obey the copyright laws than to violate them”); see also, Golden Torch Music Corp. v. Lichelle's Inc., 2 U.S.P.Q.2d 1795 (W.D.Tex. 1987) (awarding over 2.5 times unpaid licensing fees); see also, Sailor Music v. IML Corp., 867 F.Supp. 565 (E.D.Mich. 1994) (noting that “courts typically award three times the amount of a properly purchased license for each infringement”); see also, Broadcast Music, Inc. v. Star Amusements, Inc., 44 F.3d 485 (7th Cir. 1995) (awarding approximately two times unpaid licensing fees to “insure that violation of the copyright laws is a more expensive option than compliance”); see also, Polar Bear Productions, Inc. v. Timex Corporation, 04 C.D.O.S. 8234 (9th Cir. 2004) (“having taken the copyrighted material, [the defendant] is in no better position to haggle over the license fee than an ordinary thief and must accept the jury's valuation unless it exceeds the range of the reasonable market value”); see also, Dream Dealers Music v. Parker, 924 F.Supp. 1146 (S.D.Ala. 1996) (awarding nearly three times unpaid license fees where defendant had notice of need for license).

In general, it may be safe to say that every federal circuit uses a multiplier of unpaid licensing fees to send a message that it costs more to infringe than acquire licenses when appropriate.

How to calculate damages for intentional software piracy (Case example)

Okay, so you nabbed another company using your copyrighted software without paying for it. Your copyrights in the software are registered and protected.  Now what do you do?  The first thing most people want to know is what can I recover for intentional software licensing infringement?  Failure to properly license software and intentionally using it for their own personal gain?  Here is one way to look at a damages calculation:

1.  Cost to properly license a copy of your software for all laptops, PC's, and networks that use your software.  For example, if you have 10 unlicensed copies on 10 different platforms, you have 10 copyright infringements.  Each one is a separate infringement of a copyrighted work.  If your software costs $1,000 to license that is $10,000 in actual damages.

2.  Standard in the industry is to use a 2-4X (often seen as a “triple”) multiplier if you can settle the case without going to trial.  While this is sometimes deemed an “arbitrary” standard, it is understood to be an industry standard, while also negotiable.  There is precedent (watch the video below for case citations) for even as much as a 5x statutory multiplier.  However, keep in mind that what you will find when examining the case law is Courts trying to award enough to award the Plaintiff for their losses and deter future misconduct with the defendant and third parties, but to provide no more than a “just” and adequate award.  In the above example, the damages for piracy have now reached $30,000.

3.  Profits earned by Defendants.  In many cases, the Defendants in a software piracy case are using the software to increase their bottom line, improve profits, etc.  There is case law establishing that if you can prove what the Defendant's profits are using your software (ex. Microsoft, Autodesk software can help businesses make money), you have a right to seek those profits of defendants damages if the case goes to copyright Court.  For example, let's say there is a 10 person architect firm using Autodesk AutoCad software, obviously this helps them make money. If you have prove that each architect brings in $250,000 per year at their work station, using unlicensed copies of your software, you can seek to recover the $250,000 X 10 ($2,500,000).  The architect firm would not have made this money without the use of the Autodesk software is how the argument might go.

So, adding all this up, you now have $2,530,000 in monetary damages.

4.  If the software/copyright infringement is deemed willful and malicious, the Plaintiff in a copyright lawsuit can also seek its attorney fees.  For example, a federal copyright lawsuit could cost a Plaintiff $200,000 or more to prosecute.  These damages can be requested in an infringement case.  So now you are up to $2,730,000 using our example above.

5.  Punitive damages – Can you recover punitive damages on top of all the above damages in a software piracy/infringement case?  This is a common question.  The copyright law is silent as to punitive damages.  Typically you cannot recover punitive damages in a copyright infringement case, (but see this article that argues for punitive damages in a infringement case) but you can seek up to $150,000 statutory damages per (willfully) infringed work.  If not willful the statutory damages is $30,000 per infringed work.  So this can add up either way.  Here is another good article on the availability for punitive damages in a copyright infringement case.

Some Plaintiffs look to state law and “unfair competition” statutes to try to recover punitive damages, this has also not met with a lot of success in California and Arizona where our firm practices.  For example, in Yanting Zhang v. Superior Court, 57 Cal. 4th 364, 376, 304 P.3d 163, 171 (2013) the Court held:

“The injunctive and restitutive remedies authorized under the [ UCL] … are of very limited utility. They are designed to prevent unfair business practices and to require disgorgement of money or property obtained by means of such practices. Damages are not available under Business and Professions Code section 17203. [Citation.] That means that no claim for compensatory or punitive damages can be recovered in a[ UCL] action.”

Video – Calculating damages for shortages of Microsoft Office (“unbundling” explained)

Bonus materials: Steve Vondran, Esq. explains how the business software alliance may seek to “unbundle” when calculating damages in a software licensing shortage case.  Make sure to SUBSCRIBE to free legal updates by clicking on the RED “V” (for Victory). NOTE:  Here is a link to the code section 17 U.S.C. 504 damages in a copyright infringement case.  Note that a Plaintiff can recover actual damages plus Defendants profits OR statutory damages of $750-$150,000 if willful.  A Plaintiff CANNOT get statutory damages PLUS Defendants profits, PLUS actual damages. If the infringement is deemed innocent, the damages could be as low as $200 per infringement. So, for best results, the case facts have to be examined closely by your litigation attorneys. 

Bonus materials:  Click on the picture to watch Attorney Steve discuss copyright damages.  You can subscribe to free video law updates by clicking on the Red “V” in the top right hand corner of the video.  Feel free to share our video on your social media networks.

What type of proof do you need to succeed in a software infringement case

In order to file a federal copyright lawsuit, you need to have registered your software with the U.S. Copyright Office. That is a pre-requisite to filing suit and seeking attorney fees.  You also need enough good faith evidence of infringement to meet the standards of FRCP Rule 11 (all legal filings must have merit and not be frivolous). You need to have some proof (EVIDENCE) of infringement.  For example common forms of evidence of infringement may include:

1.  Informant who has been inside the infringing company and witnessed the willful infringement firsthand and is willing to provide a declaration

2.  Corporate whistleblower willing to testify about unlicensed software usage by officers and directors of a company

3.  A “crash report” that proves unlicensed copies of software are installed on the computer, servers, or other networks devices of the company

4.  An email that admits to infringing software (ex. telling a vendor you don't have a license after they ask you about your product key code)

5.  Posting job listings advertising for certain software job skills (ex. on LinkedIn) and yet when they look up your company you have no licensing for the product you are seeking skills for.

6.  Trade publications that tout creating projects by use of software, for example, an architect or engineering firm that created a new highly touted project using Autocad, Revit, Solidworks, CNC Mastercam, etc.

7.  Illegal downloads of software (such as Microsoft Office, Windows, Visio) using (busted by an internet spy for the software company)

8.  Illegally selling unlicensed software or decoupled product keys online (ex. Amazon, eBay, Craigslist)

9.  There are many other types of evidence that can arise, call us to discuss.

Bonus materials:  Click here to view “How did Autodesk find out about my unlicensed software usage.”

Are copyright infringement cases filed in state court or federal court or some other copyright court?

Copyright law is exclusive federal jurisdiction.  For this reason, most software infringement cases will be filed in federal court.  If they are filed in state court, the case will likely be removed to federal court by the Defendant or kicked out for lack of subject matter jurisdiction by the state court judge.

However, that being said, keep in mind there are instances when a copyright holder may want to sue in state court.  For example if there was intentional fraud involved in obtaining the copyrighted works a state court fraud action might be preferable to suing for copyright infringement.  One reason might be that if you can prove intentional fraud you may be able to recover PUNITIVE DAMAGES for the fraudulent acquisition of software.  Fraud would require some type of false promise made to induce the Plaintiff to induce the Plaintiff to transmit software licenses to the Defendant. The potential to recover punitive damages should thus be reviewed with your litigation counsel before deciding on the proper venue to file suit.

Copyright Infringement of Software Damages argument

Here is some legal argument from one case I reviewed in regard to the issue of money damages and penalties in software piracy cases:

Damages Software Company is entitled to lost-licensing revenue and Defendants' profits, which will be established by providing proof of the Defendants' gross revenue derived from their use of the pirated software. 17 U.S.C. § 504(b).

The Defendants then have the burden of establishing their deductible expenses and “what percentage of the infringer's profits” were not attributable to copying the infringed work. See Three Boys Music, 212 F.3d at 487. But if infringed portions are so suffused and intertwined with non-infringing portions as to render an apportionment impossible no apportionment is appropriate.  See Business Trends Analysts, Inc. v. Freedonia Group, Inc., 887 F.2d 399, 407 (2d Cir. 1989).

In this Circuit, “[t]he rule is that one deducts from the gross sales price the costs that are directly attributable to the items in question. But general overhead, such as management, rent, telephones, designers, and the like are not to be deducted, since they are, by hypothesis, there whether the particular item is sold or not.

Only if a particular ‘overhead' item can be specifically related to the goods in question can it be deducted. This is true even if overhead increases losses or decreases gains for the enterprise as a whole.” JBJ Fabrics, Inc. v. Mark Industries, Inc., 1987 U.S. Dist. LEXIS 13445 (C.D. Cal. Nov. 4, 1987); see also Judge Posner's discussion in Taylor v. Meirick, 712 F.2d 1112 (7th Cir. 1983); 3 NIMMER ON COPYRIGHT § 14.02. “The Ninth Circuit is in accord with this view.”

The software publisher is also entitled to statutory damages if it so elects before a final judgment. 17 U.S.C. § 504(c). The statutory damages awarded need not coincide with actual dollar loss caused by the infringement. See Lowry's Reports, Inc. v. Legg Mason, Inc., 302 F. Supp. 2d 455 (D. Md. 2004).

Factors considered in awarding statutory damages include:

“(1) expenses saved and profits reaped by the defendant,

(2) revenues lost by the plaintiffs,

(3) the deterrent value of the award,

and

(4) whether the infringement was willful or innocent.” See Broadcast Music, Inc. v. C.B.G., Inc.,

If the Court finds that the infringement was willful, it may increase the award of statutory damages up to $150,000 per infringed copyright. 17 U.S.C. § 504(c)(2).

Willfulness can be proven by showing either:

“(1) that the defendant was actually aware of the infringing activity,

or

(2) that the defendant's actions were the result of ‘reckless disregard' for, or ‘willful blindness' to, the copyright holder's rights.” See Louis Vuitton Malletier, S.A. v. Akanoc Solutions, Inc., 658 F.3d 936, 944 (9th Cir. 2011).

VIDEO:  How do Courts determine what “willful infringement" is?

 

Contact a Software Piracy Defense Law Firm

If you have received an infringement letter from a software publisher such as Vero, Siemens, Solidworks, Microsoft, Autodesk, or some other publisher, contact us to discuss your case.  Companies will usually vigorously enforce their intellectual property and you may find yourself involved in a federal copyright infringement lawsuit if the case is not handled at the early stages.  We have vast experience helping both small and medium-sized businesses across the United States in these cases which are brought as copyright infringement matters.  Call us at (877) 276-5084 or email us through our contact form.

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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