In another Ninth Circuit case involving Microsoft Corporation, a district court ruled last fall that a software company is entitled to recover statutory damages under both the Copyright and Lanham Acts against those who sell and distribute counterfeit software, where the software maker suffers distinct injuries to different interests as a result of the infringement. Microsoft v. Evans, 2007 U.S. Dist. LEXIS 77088 (E.D. Cal. Oct. 17, 2007). This Eastern District of California decision reflects what may be a growing trend regarding the issue of awarding statutory damages under both copyright and trademark law for a single act that violates aspects of both statutes.

Copyright Act

The origin of U.S. copyright law is found in the United States Constitution. Article One, Section 8, clause 8, which delegates to Congress the power to "promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries." Congress has passed and amended a number of copyright laws effectuating this Constitutional mandate, with the modern iteration being embodied primarily in the Copyright Act of 1976, 17 U.S.C. §101 et seq., and its subsequent amendments.

Section 504 of the Copyright Act, entitled "Damages and Profits," is applicable in cases involving both statutory and actual damages. Subsection (a) states, in pertinent part, that an infringer of copyright may be liable for either: 1) the copyright owner's actual damages and any additional profits of the infringer; or 2) statutory damages. Under subsection (b), the statute further explains that the copyright owner is entitled to recover actual damages that arose as a result of the infringement, as well as any profits of the infringer not accounted for in calculating the actual damages. Alternatively, subsection (c) allows the copyright owner to elect, "at any time before final judgment is rendered, to recover, instead of actual damages and profits," an award of statutory damages for all infringements "for which any one infringer is liable individually, or for which any two or more infringers are liable jointly and severally" in an amount up to $30,000. Further, if a court finds that infringement was committed willfully, it may increase the statutory award, in its sole discretion, to any amount less than or equal to $150,000.

Lanham Act

The Lanham Act provides the foundation and basis for understanding monetary awards in trademark cases. In particular, 15 U.S.C. §1117 serves as the main framework and statutory authority for awards and is divided into four subparts, (a)-(d). Subdivision (a) pertains to profits, damages and costs, and attorney fees; subdivisions (b) and (c) pertain to damages for the use of counterfeit marks; and subdivision (d) addresses statutory damages with respect to violations of the Anticybersquatting Consumer Protection Act of 1999.

Lanham Act Section 35(a), 15 U.S.C. §1117(a) provides that a plaintiff shall be entitled to: 1) defendant's profits; 2) any damages sustained by the plaintiff; and 3) the costs of the action when a plaintiff successfully establishes a violation of Section 1125(a) or (d). Lanham Act Sections 35(b) and (c), 15 U.S.C. §1117(b) and 15 U.S.C. §1117(c) of the Act address monetary relief in counterfeiting cases. Section 1117(b) concerns treble damages relating to the use of a counterfeit mark and Section 1117(c) addresses statutory damages involving the use of a counterfeit mark.

In 1984, Congress passed the Trademark Counterfeiting Act, which provides several remedies for trademark owners to more effectively impede the increasing incidents of counterfeiting of their trademarked goods and services. Among the remedies under Section 1117(b) of the Act were new types of civil actions and the addition of an award of treble damages and attorneys fees, except in rare cases, under Section 1117(b). Subsection (b) is triggered once the court has assessed damages under subsection (a).

In the absence of "extenuating circumstances," the court will enter judgment for three times the profits or damages (as found under section (a)), whichever is greater, along with reasonable attorney fees in cases involving counterfeited goods, provided the necessary intent requirements of the statute are satisfied. The intent requirement is two-pronged, mandating that the defendant intentionally dealt in the goods, and knew that the goods were counterfeited. See Senate-House Joint Explanatory Statement on Trademark Counterfeiting Legislation, 130 Cong. Rec. H12076 at 12083 (Oct. 10, 1984).

To further combat the counterfeiting of trademarked goods, Congress passed the Anti-counterfeiting Consumer Protection Act in 1996, which allows a plaintiff to elect statutory damages in counterfeiting cases. Under the Act, a plaintiff must choose statutory damages in lieu of actual damages and profits prior to the court's rendering of a final judgment; otherwise, he or she will have to prove actual damages. The court may award damages ranging from $500 to $100,000 per counterfeit mark for each type of goods or services sold, offered for sale, or distributed or, if the violation is willful, not more than $1,000,000 per counterfeit mark for each type of goods or services sold, offered for sale or distributed. Often, a plaintiff will elect statutory damages when it is unable to prove actual damages because of certain situations, such as destruction of the counterfeit goods, or poor or unreliable record keeping by the defendant.

Prior Rulings

Prior to the Evans ruling, the Eastern District of California, in Microsoft v. Hargadon Computer, Inc., Case No. CIV S-03-1486 LKK/GGH (E.D. Cal. Jul. 15, 2004), addressed the issue of dual statutory recovery in an unreported order. In Hargadon, Microsoft accused the defendant, a computer software and hardware distributor, of distributing unauthorized copies of Microsoft software that infringed various Microsoft copyrights and trademarks. Two months after receiving a letter from Microsoft notifying it of the alleged infringement, the defendant distributed counterfeit software and a Certificate of Authenticity Labels to a Microsoft investigator. The court, without any discussion of "dual recovery," determined that the defendants had in fact distributed the infringing software, and awarded Microsoft statutory damages of $60,000 under the Copyright Act and $30,000 under the Lanham Act. Id.

Three years later, Microsoft once again found itself at the winning end of a copyright and trademark infringement matter in a case heard in the Central District of California. In Microsoft v. Image & Business Solutions, Inc., et al., 2007 U.S. Dist. LEXIS 76519 (C.D. Cal. May 4, 2007), Microsoft alleged that the defendants distributed counterfeit software with Microsoft's Certificate of Authenticity Label attached. Microsoft notified the defendants through several letters that trafficking in such sales was illegal. Despite Microsoft's warnings, the defendants distributed counterfeit software to a Microsoft investigator as well as several different customers. Ultimately, Microsoft commenced an action against the defendants and the court awarded $270,000 in statutory damages under the Copyright Act, and $500,000 under the Lanham Act. Id. at **23-24. As in Hargadon, the district court simply made its award based on liability without addressing the appropriateness of a dual recovery.

The Evans Decision

In Evans, the defendant, Matthew Evans, advertised, marketed, and distributed software bearing Microsoft's copyrights and distributed counterfeit Windows XP Pro software components. Despite Microsoft's demands, Evans did not refrain from distributing the counterfeit software, and eventually sold the software to an investigator. In addressing the issue of dual recovery, the court first turned to the copyright claim, noting that an "infringer of copyright is liable for actual damages and any additional profits of the infringer attributable to the infringement," 2007 U.S. Dist. LEXIS 77088 at *6, and ruled that the complaint adequately stated a claim for copyright infringement.

With respect to the trademark claim, Microsoft alleged that: 1) it registered various trademarks in the U.S. Patent and Trademark Office; and 2) Evans advertised, marketed and distributed software bearing such marks. Microsoft further alleged that Evans was intentionally deceiving potential customers, hoping they would rely on the Microsoft trademark as reason to buy the counterfeited products. Ultimately, the court determined that Microsoft had adequately stated a claim for infringement, finding that a "person is liable in a civil action by a registrant of a registered mark for various remedies if the person ... uses any ... counterfeit ... of a registered mark in connection with the sale ... distribution, or advertising of any goods ... " Id. at **8-9.

Microsoft requested statutory damages under both copyright and trademark law given that Evans' default made it difficult — if not impossible — to calculate actual damages. The court, exercising its discretion in determining statutory awards, awarded Microsoft $10,000 under the Copyright Act and $100,000 under the Lanham Act.

Absent any established appellate authority directly on point in the Ninth Circuit, the court relied in part on the two prior district court orders, Hargadon and Image & Business Solutions (see above), in finding that a successful plaintiff is entitled to statutory damages under both Acts. The court stated that "there is no double recovery in awards of statutory damages under both statutes because distinct injuries to different interests have been suffered by the Plaintiff." Id. at *26. Since calculating actual damages in this case would have been difficult, given Evans' own conduct, an award of statutory damages under the Copyright and Lanham Acts did not violate the rule against double recovery. Generally speaking, the rule against a double recovery forbids a plaintiff from recovering under both acts when "copyright infringement and violation of the Lanham Act serve [] as alternate legal bases for imposing liability and obtaining the recovery of what [is] essentially the same measure of damages." See Murray v. Shaw Industries, Inc., 990 F. Supp. 46, 47 (D. Mass. 1997). Indeed, double recovery may be possible when damages under copyright represent "different theories of harm or punishment" from those under trademark. Id.

Perhaps most notably, the court turned beyond Hargadon and Image & Business Solutions to reach its conclusion, initially highlighting the dual purpose behind dual recovery when it stated that "statutory damages serve not only as a substitute for compensation, but also as a penalty and a deterrent to future violations." 2007 U.S. Dist. LEXIS 77088 at *27.

First, the court looked to Nintendo of America, Inc. v. Dragon Pacific International, 40 F.3d 1007 (9th Cir. 1994), in which it was established that awarding statutory damages under one Act and actual damages under the other is permissible. In Nintendo, the defendant allegedly sold video cartridges for Nintendo's system that contained multiple games, while Nintendo's cartridges only contained one game. The defendant was accused of copyright and trademark infringement and Nintendo was awarded statutory damages under the Copyright Act and actual damages under the Lanham Act.

On appeal, the defendant claimed that "when Nintendo was awarded damages under each act individually, it received double recovery." Id. at *1010. However, the court determined that "one plus one does not necessarily equal two in this case," reasoning that the award was permissible because multiple wrongs were committed even though selling the cartridges may have only been one act. Id. Further, the court added, "statutory damages may serve completely different purposes than actual damages." Id. at *1011.

The Evans court also relied on Microsoft v. Tierra Computer, Inc., 184 F. Supp. 2d 1329 (N.D. Ga. 2001), where Microsoft alleged that the defendant computer company sold counterfeit software and infringed on Microsoft's trademarks in violation of a stipulated permanent injunction preventing such activity. In Tierra Computer, the court determined that Microsoft's "request for statutory damages under both acts is not an impermissible 'double recovery.'" Id. at *1331. Citing Nintendo, the court found that the defendants committed two wrongful acts, noting: "Had defendants sold plaintiff's computer programs without representing that they were Microsoft products, defendants would have committed only copyright infringement. If defendants had represented that the computer programs were Microsoft's, when in fact they were not, then defendants violated the Lanham Act. While there was one act, there were two wrongs." Id. As a result, the Evans court found that Evans also committed one act that resulted in two wrongs. "Insofar as the Lanham Act and Copyright Act provide separate remedies for distinct injuries, [a plaintiff] may seek damages under each act." Id.

Conclusion

Microsoft's involvement in these dual recovery cases has been prominent, perhaps opening the door for other companies or individuals to pursue statutory damages under both the Copyright and Trademark Acts. With just two orders and one decision to date in the Ninth Circuit, it remains unclear whether these rulings will be followed by other jurisdictions. However, one thing is clear: there is now precedent that plaintiffs should be entitled to statutory damages under both Acts, at least if actual damages are not ascertainable, so long as there are distinct injuries.

©2008 by Thelen LLP. This article is published as an information service for clients and friends. Please recognize that the information is general in nature and must not be relied upon as legal advice. We would be pleased to discuss the information in this article, and its application to your specific situation, in greater detail. We welcome your comments and suggestions.

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Originally published in the July 2008 issue of the ALM Law Journal Newsletter "The Intellectual Property Strategist".

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