United States: Supreme Court Clarifies Test For Fee-Shifting In Copyright Cases

The Supreme Court on June 16 issued a unanimous ruling clarifying the test for awarding attorneys' fees to successful copyright litigants.  The decision, in Kirtsaeng v. John Wiley & Sons, Inc., is sure to have lasting impact on how both plaintiffs and defendants weigh the risk of litigating a copyright case to completion.

BACKGROUND

The underlying facts are fairly straightforward.  Kirtsaeng was a Cornell graduate student who learned that foreign versions of certain textbooks were sold at lower prices than identical versions in the U.S.  Seeing an opportunity, Kirtsaeng bought lawful copies of the books overseas and then shipped them to the U.S., where he sold them for less than the publisher's U.S. price, pocketing a nice profit.

John Wiley & Sons, a textbook publisher, sued Kirtsaeng for copyright infringement in the Southern District of New York.  Kirtsaeng argued that he was protected under the U.S. Copyright Act's "First Sale" doctrine.  In general terms, that doctrine holds that once a copyright holder sells a copy of his work, that copy may be resold without restriction.  When the Kirtsaeng case was tried, the circuit courts were divided over whether the First Sale doctrine applied to copies of works first sold outside the U.S.  The Supreme Court had deadlocked 4-4 on the issue as recently as 2010.  Thus, the contrary positions advanced by Kirtsaeng and Wiley & Sons were both objectively reasonable.

In a 2013 decision ( Kirtsaeng I), the Supreme Court revisited the First Sale question, and this time reached a decision, agreeing with Kirtsaeng that the First Sale doctrine does apply to lawful copies first sold outside the U.S.  Therefore, Kirtsaeng's U.S. resale of foreign-purchased copies was entirely lawful.

On remand, the district court, and later the Second Circuit, denied attorneys' fees to Kirtsaeng as the prevailing party.  Supreme Court precedent, set forth in Fogarty v. Fantasy, Inc., established multiple "nonexclusive" factors to be considered in fee-shifting decisions, including: the "frivolousness, motivation, objective unreasonableness[,] and the need in particular circumstances to advance consideration of compensation and deterrence."  Kirtsaeng argued that his victory achieved the resolution of an unsettled, important legal question – here, the First Sale doctrine – which promoted the purposes of the Copyright Act and so warranted his recovery of fees.  The lower courts rejected this view, though, instead giving the greatest weight to the fact that plaintiff Wiley & Sons' litigation position, although ultimately rejected, was objectively reasonable.

Thus, the question on appeal in Kirtsaeng II was how a court, exercising its discretion to award fees, should consider and apply the various relevant factors.

WEIGHTING "OBJECTIVE REASONABLENESS"

Section 505 of the Copyright Act provides that a district court "may ... award a reasonable attorney's fee to the prevailing party" in a copyright infringement action, but as noted in an earlier blog post, the circuit courts have applied Fogarty's fee-shifting factors in varying ways.  The Second Circuit, from which Kirtsaeng appealed, held that "substantial weight" should be given to the objective reasonableness of the losing party's position. Since Wiley & Sons' position was objectively reasonable, the Second Circuit affirmed the lower court's refusal to award fees to Kirtsaeng despite his victory on the merits.

On appeal, the Supreme Court – which had earlier sided with Kirtsaeng on the First Sale doctrine – now sided with Wiley & Sons on attorneys' fees, affirming that district courts should give "substantial weight to the objective reasonableness of the losing party's position."  The Court emphasized that this is not to be treated as the determinative or overriding criterion, and that an informed weighing of all the pertinent factors may justify a fee award against a party in a given case even though its arguments were objectively reasonable.  Because it was unclear whether the Second Circuit had given such due consideration to all the relevant factors, the Court remanded for further proceedings.

But the Court expressly disagreed with Kirtsaeng's contention that the purposes of the Copyright Act are best served by awarding fees to a prevailing party whose case produced an important advance in copyright law even though the defendant's claims were objectively reasonable.  In her opinion for a unanimous Court, Justice Kagan concluded that Kirtsaeng's approach could "just as easily discourage as encourage parties to pursue the kinds of suits that meaningfully clarify copyright law," depending on how risk-averse the party may be.

IMPACT

For a plaintiff with a strong position, Kirtsaeng II offers further incentive to fight the good fight and pursue vindication.  Likewise, an accused infringer with a strong defense will be encouraged not to throw in the towel, but to seek his day in court.  As Justice Kagan wrote for the Court, "[w]hen a litigant – whether plaintiff or defendant – is clearly correct, the likelihood that he will recover fees from the opposing (i.e., unreasonable) party gives him an incentive to litigate the case all the way to the end."

To be sure, while "substantial weight" means that a party's reasonableness will be a factor in assessing fee-shifting in most copyright cases, it will not be a dispositive factor.  All other pertinent factors in a given case must be considered.  For example, the Court cited litigation misconduct as one circumstance that might, on its own, override the strength of a party's position.

Kirtsaeng II provides much more clearly delineated guideposts for courts evaluating a claim for attorneys' fees in copyright cases. This, in turn, will enable litigants to better assess the likelihood of recovering (or suffering) fees in a given case, and also better define the ground rules for appellate review of such awards.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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