Hamil America, Inc., Plaintiff-Appellee-Cross-Appellant, v.
GFI, a Division of Goldtex, Inc., Third-Party
Defendant-Appellant-Cross-Appellee, SGS Studio, Inc. and
J.C. Penney Company, Inc., Defendants-Third-Party
Plaintiffs-Appellants-Cross-Appellees.
Docket Nos. 98-7573, 98-7615
UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT
193 F.3d 92; 1999 U.S. App. LEXIS 24287; 52 U.S.P.Q.2D
(BNA) 1225; Copy. L. Rep. (CCH) P27,956
December 9, 1998, Argued
September 29, 1999, Decided
OAKES, Senior Circuit Judge:
I. INTRODUCTION [**2]
Hamil America, Inc. sued GFI (a Division of Goldtex, Inc.), SGS Studio, Inc.
and J.C. Penney Company, Inc. for copyright infringement. According to Hamil
America, GFI copied one of Hamil America's floral fabric patterns, SGS
manufactured garments using the infringing GFI fabric and sold the garments to
J.C. Penney, and J.C. Penney sold the garments in its retail stores. Hamil
America prevailed at trial and was awarded damages against all three defendants.
GFI, SGS, and J.C. Penney appeal the district court's finding of liability for
infringement and its calculation of damages. Hamil America cross-appeals the
district court's calculation of damages, arguing that the district court should
have awarded damages for profits that Hamil America presumably would have earned
had other customers not purchased GFI's infringing pattern. Because the district
court erroneously prohibited GFI from deducting any overhead expenses [*96] in
the calculation of its profits, we reverse in part and remand for recalculation
of damages. We affirm on all other issues.
II. BACKGROUND
Hamil America and GFI are companies doing business in the garment industry.
Each sells printed fabric to manufacturers [**3] that, in turn, create garments
for sale to wholesalers or retailers.
In 1993, Tabitha Kim created an original floral design for Hamil America
which was designated Pattern No. 96. Kim transferred her copyright rights in the
design to Hamil America. Hamil America produced and sold fabric printed with
Pattern No. 96 in various color combinations, or "colorways." One of the color
combinations, designated colorway 575, featured clusters of small white and
yellow flowers with blue centers on a red background.
SGS is a garment manufacturer. J.C. Penney is a retailer that sells, among
other things, garments made by SGS. In June 1994, SGS purchased fabric samples
of Hamil America Pattern No. 96 in four colorways, including colorway 575. SGS
showed the fabric samples to J.C. Penney, along with other fabric samples
obtained from other fabric vendors, to allow J.C. Penney to choose fabric
patterns to be used for garments that SGS would manufacture for J.C. Penney.
J.C. Penney selected six patterns out of the various patterns shown to it by
SGS, including Hamil America Pattern No. 96 in colorway 575 and five GFI
patterns.
SGS made sample garments from these six fabric patterns and supplied them
[**4] to J.C. Penney. J.C. Penney used the sample garments for intra-company
marketing and outside advertising. It showed a garment made with Hamil America
Pattern No. 96 to buyers in its individual stores and featured a garment made
with Hamil America Pattern No. 96 in its newspaper advertising.
SGS then manufactured garments for J.C. Penney. It was more expensive for SGS
to use Hamil America fabric than GFI fabric: Hamil America fabric in Pattern No.
96 cost $ 5 per yard, whereas GFI fabric cost only $ 3.60 per yard. According to
Hamil America, SGS wanted GFI to develop and manufacture a fabric pattern that
SGS could substitute for Hamil America Pattern No. 96 in colorway 575, so that
SGS could fulfill the J.C. Penney order for garments made from that pattern at a
lower cost to SGS.
In October 1994, GFI hired Jae Wang, a freelance artist frequently employed
by GFI, to create a fabric pattern that GFI would sell to SGS. In the same
month, SGS ordered two yards of Pattern No. 96 in colorway 575 from Hamil
America to be shipped to SGS on a rush basis. According to Hamil America, Wang
copied, or "knocked-off," Hamil America Pattern No. 96. Wang's design was
designated GFI Pattern No. 330. [**5] n1 SGS substituted GFI Pattern No. 330
for Hamil America Pattern No. 96 in the garments it manufactured for J.C.
Penney.
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -
n1 Pattern No. 330 was registered with the United States Copyright Office,
effective date January 17, 1995.
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Hamil America learned of the infringement from Beaver Raymond, one of its
Texas manufacturing customers. Raymond asked Howard Goldstein, Hamil America's
sales manager, why garments made with Hamil America Pattern No. 96 were being
sold at J.C. Penney. Raymond showed Goldstein a garment that Raymond had
purchased at J.C. Penney in Dallas, Texas. The garment was made with GFI Pattern
No. 330, although Raymond believed that the garment was made with Hamil America
Pattern No. 96 because the patterns were so similar. Goldstein then purchased
another garment made with GFI Pattern No. 330 at the J.C. Penney store in
Dallas.
[*97] In April 1995, Hamil America registered Pattern No. 96 with the
United States Copyright Office and was granted a registration number, VA
642-546. n2 Hamil America sued GFI [**6] for copyright infringement, claiming
Hamil America Pattern No. 96 was infringed by GFI Pattern No. 330. Hamil America
also sued SGS and J.C. Penney because they each sold garments manufactured with
GFI's infringing fabric. After a non-jury trial, the district court found that
the defendants willfully infringed Hamil America's copyright. See Hamil America,
Inc. v. SGS Studio, Inc. et al., 1998 U.S. Dist. LEXIS 386, 1998 WL 19991, at *1
(S.D.N.Y. Jan. 21, 1998). In March 1998, the court entered judgment in favor of
Hamil America against all defendants, and awarded damages in the amount of $
201,049 from GFI, $ 28,836 from SGS, and $ 67,106 from J.C. Penney.
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -
n2 As Goldstein testified at trial, Hamil America did not regularly register
a copyright as soon as it created a design; instead, it registered its
copyrights after it suspected that a design was being infringed. Hamil America
has since supplemented its registration to indicate that Tangiers International
Ltd. was the author rather than Hamil America.
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GFI, SGS, and J. [**7] C. Penney appeal the district court's finding of
liability for infringement and its calculation of damages. Hamil America
cross-appeals the district court's calculation of damages, arguing that the
district court should have awarded damages for profits that Hamil America
presumably would have earned had other customers not purchased GFI's infringing
pattern.
III. DISCUSSION
A. Standard of Review
We review findings of substantial similarity for the purposes of determining
copyright infringement de novo. See Folio Impressions, Inc. v. Byer California,
937 F.2d 759, 766 (2d Cir. 1991) ("In considering substantial similarity between
two items, we review the district court's findings de novo -- not on the
clearly erroneous standard -- because what is required is only a visual
comparison of the works, rather than credibility, which we are in as good a
position to decide as was the district court.") (citing Business Trends
Analysts, Inc. v. Freedonia Group, Inc., 887 F.2d 399, 402-03 (2d Cir. 1989)).
By contrast, we review the district court's determination of willful
copyright infringement for clear error, and in doing so give [**8] particular
deference to determinations regarding witness credibility. See Twin Peaks
Prods., Inc. v. Publications Int'l, Ltd., 996 F.2d 1366, 1382 (2d Cir. 1993)
(citing Anderson v. City of Bessemer City, 470 U.S. 564, 575, 84 L. Ed. 2d 518,
105 S. Ct. 1504 (1985); Fitzgerald Publ'g Co. v. Baylor Publ'g Co., 807 F.2d
1110, 1115 (2d Cir. 1986)). "The standard is simply whether the defendant had
knowledge that its conduct represented infringement or perhaps recklessly
disregarded that possibility." Id. (citing Fitzgerald Publ'g, 807 F.2d at
1115).
We review the method of calculation of damages de novo, and the actual
calculation of damages for clear error. See Bartlett v. New York State Bd. of
Law Examiners, 156 F.3d 321, 331-32 (2d Cir. 1998) (citing Wolff & Munier v.
Whiting-Turner Contracting Co., 946 F.2d 1003, 1009 (2d Cir. 1991); United
States Naval Inst. v. Charter Communications, 936 F.2d 692, 697-98 (2d Cir.
1991)).
B. Liability
Appellants GFI, SGS, and J.C. Penney maintain that the district court
incorrectly determined that they infringed Hamil [**9] America's copyright.
They first argue that Hamil America failed to establish that it owned a valid
copyright in Pattern No. 96. They further contend that the district court
compared the two patterns under the wrong standard and erred when it found
infringement. We address each argument in turn.
[*98] 1. Hamil America's Copyright Registration
As we stated in Folio Impressions, copyright protection extends to fabric
designs:
The right of an author under the common law to have the sole right of
first printing and publishing his work was settled early in England by
Lord Mansfield writing for the majority in Millar v. Taylor, 4 Burrows
2303 (1769). This common law concept was adopted in our Constitution
which authorized Congress "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."
U.S. Const. art. I, § 8. The word "writings" is broadly construed; it
includes all its forms that may be used to the end that the author's
ideas are tangibly expressed. . . . Among those forms of "writings"
now recognized as entitled to copyright protection are [**10] fabric
designs . . . .
Folio Impressions, 937 F.2d at 762 (citing Millworth Converting Corp. v.
Slifka, 276 F.2d 443 (2d Cir. 1960); Peter Pan Fabrics, Inc. v. Martin Weiner
Corp., 274 F.2d 487 (2d Cir. 1960)). To establish a copyright infringement cause
of action, a plaintiff must show both ownership of a copyright and unauthorized
copying by the defendant. See 937 F.2d at 763.
The appellants contend that the district court's finding of liability must be
reversed because Hamil America never proved that it owned a valid copyright for
the allegedly infringed pattern. They argue that no valid copyright registration
statement for Hamil America's Pattern No. 96 had been issued from the copyright
office, and no valid certificate was ever entered into evidence.
We disagree. The parties stipulated below that Hamil America registered
Pattern No. 96 with the United States Register of Copyrights in April 1995 and
that Hamil America received a certificate of registration. A certificate of
registration from the United States Register of Copyrights constitutes prima
facie evidence of the valid ownership of a copyright, although that presumption
[**11] of ownership may be rebutted. See Rogers v. Koons, 960 F.2d 301, 306 (2d
Cir. 1992); Folio Impressions, 937 F.2d at 763. The party challenging the
validity of the copyright has the burden to prove the contrary. See Hasbro
Bradley, Inc. v. Sparkle Toys, Inc., 780 F.2d 189, 192 (2d Cir. 1985).
The appellants argued below that there was no valid registration because
different companies were variously named as owners of the copyright for Pattern
No. 96. As we noted above, Hamil America supplemented its registration after it
received the certificate of registration for Pattern No. 96. It first corrected
the registration to indicate that the artist who designed the pattern was
actually employed by Hamil America's sister company, Hamil Textiles (U.S.A.),
Ltd., rather than Hamil America. It later amended the registration to indicate
that Tangiers International Ltd. was the author. These amendments to the
registration simply clarified the ownership of the copyright in light of the
relationships between the relevant companies: Hamil America and Hamil Textiles
(U.S.A.) Ltd. were sister companies that shared a design studio; Hamil Textiles
merged [**12] into Tangiers International; and Hamil America and Tangiers
International are both owned by The Algo Group, a Canadian publicly traded
corporation. Hamil America's corrections did not invalidate the copyright
registration. See Eckes v. Card Prices Update, 736 F.2d 859, 861-62 (2d Cir.
1984) (stating that "only the knowing failure to advise the Copyright Office of
facts which might have occasioned a rejection of the application constitutes
reason for holding the registration invalid and thus incapable of supporting an
infringement action") (quoting Russ Berrie & Co. v. Jerry Elsner Co., 482 F.
Supp. 980, 988 (S.D.N.Y. 1990)); see also 17 U.S.C. § 408(d) (1996) (stating
that information [*99] contained in a supplementary registration, submitted to
correct or to amplify the information in an earlier registration, augments but
does not supersede the information in the earlier registration).
Moreover, even if Hamil America's recordation was initially inadequate, this
alleged shortcoming did not justify dismissal of its copyright action. "Courts
have consistently permitted a plaintiff to correct a defective recordation, and
to go forward [**13] with the suit as of the date of the filing of the action."
Northern Songs, Ltd. v. Distinguished Prods., Inc., 581 F. Supp. 638, 641
(S.D.N.Y. 1984); see also Kenbrooke Fabrics, Inc. v. Soho Fashions, Inc., 690 F.
Supp. 298, 302 (S.D.N.Y. 1988) (denying defendant's motion for summary judgment
that was predicated in part on plaintiff's alleged failure to record transfer of
copyright properly). The appellants have not shown that they were prejudiced in
any way by Hamil America's alleged failure to obtain a valid copyright. See
Northern Songs, Ltd., 581 F. Supp. at 641 (declining to dismiss copyright action
on grounds that plaintiff improperly recorded memorandum of transfer of
copyright where defendants did not demonstrate that they were prejudiced by
plaintiff's alleged errors). The appellants have failed to rebut the presumption
that Hamil America validly owned the copyright for Pattern No. 96.
2. The Finding of Copyright Infringement
We next consider whether the district court properly found that GFI Pattern
No. 330 infringed Hamil America's copyright for Pattern No. 96. "To prove
infringement, a plaintiff with a valid copyright [**14] must demonstrate that:
'(1) the defendant has actually copied the plaintiff's work; and (2) the copying
is illegal because a substantial similarity exists between the defendant's work
and the protectible elements of plaintiff's.'" Knitwaves, Inc. v. Lollytogs Ltd.
(Inc.), 71 F.3d 996, 1002 (2d Cir. 1995) (quoting Fisher-Price, Inc. v.
Well-Made Toy Mfg. Corp., 25 F.3d 119, 122-23 (2d Cir. 1994)) (emphasis in
original). We address each prong in turn.
a. Actual copying
The first part of this test addresses whether the defendant actually copied
the work. Actual copying may be shown by direct or indirect evidence; indirect
evidence of copying includes proof that the defendants had access to the
copyrighted work and similarities that are probative of copying between the
works. See Repp v. Webber, 132 F.3d 882, 889 (2d Cir. 1997).
Here, there was no question that SGS had access to Hamil America Pattern No.
96, and there was circumstantial evidence that GFI had access to Hamil America
Pattern No. 96. The appellants stipulated below that SGS purchased the pattern
to show to J.C. Penney. They further acknowledged that Hamil America [**15]
sent SGS an additional two yards of the pattern in the colorway chosen by J.C.
Penney when SGS asked that it do so.
The district court found that the defendants willfully infringed Hamil
America's copyright. It determined that the accounts provided by the defendants'
witnesses as to the creation of GFI Pattern 330 were not credible. The court
relied in particular on the trial testimony of Wang, who denied that he copied
Hamil America Pattern No. 96. On cross-examination, however, Wang admitted at
trial that he had made "knock-off" designs (i.e., copies of existing designs) in
the past. He defined a "knock-off" as the redesign of another design with
sufficient changes so that the redesigner does not get sued for copyright
infringement. In finding willful infringement, the court relied on Wang's
testimony and noted that when Wang "sets out to knock something off, he . . .
tries to put in enough differences that he thinks they will get away with it.
They didn't in this case." Moreover, as Hamil America points out, neither Wang
nor GFI produced a bill showing Wang billed Pattern No. 330 as an original
design, as he had in [*100] the past when making other original designs for
GFI. The court [**16] also stated that
I am offended by the attempt that your client has made to come up with
a phony excuse as to how this pattern was made. . . . The evidence
that your clients have access to [photographs of Hamil America Pattern
No. 96] indicates there was not only an opportunity but a need to
steal [Hamil America's] design in order to avail a commitment to J.C.
Penney.
The court concluded that Hamil America "established not simply by a
preponderance of the evidence but by . . . clear and convincing evidence that
the defendants set out to copy an original design that had been produced by the
plaintiff and that had been requested by J.C. Penney."
Because the "actual copying" prong of the infringement test requires a
fact-intensive inquiry, the district court's determination as to whether the
defendant actually copied the plaintiff's copyright material warrants our
deference. This is particularly true when the district court must make a
credibility determination. See Twin Peaks Prods., 996 F.2d at 1382. The court
below was well-situated to gauge the credibility of the witnesses who testified
as to whether the appellants willfully copied Hamil America's [**17] pattern.
In addition, as we discuss below, the many similarities between the patterns are
probative of copying. The district court's finding of willful infringement was
not clearly erroneous, and the first part of the infringement test was
satisfied.
b. Substantial similarity
i. The ordinary observer standard
The second part of the test for infringement addresses whether a substantial
similarity exists between the two works to be compared. See Knitwaves, 71 F.3d
at 1002. In most cases, the test for substantial similarity is the "ordinary
observer test," which queries whether an average lay observer would recognize
the alleged copy as having been appropriated from the copyrighted work. See id.;
Folio Impressions, 937 F.2d at 766. In the words of Judge Learned Hand, the
ordinary observer test is whether "the ordinary observer, unless he set out to
detect the disparities, would be disposed to overlook them, and regard their
aesthetic appeal as the same." Peter Pan Fabrics, Inc. v. Martin Weiner Corp.,
274 F.2d 487, 489 (2d Cir. 1960).
The appellants maintain that the district court erred when it applied the
"ordinary observer" [**18] standard in comparing the two patterns at issue in
this case. They contend that two artistic renderings of an item found in nature
are bound to be similar, and that such designs are protected by only a weak
copyright. They urge us to employ a more rigorous standard when we compare the
fabric patterns because they depict objects, namely, flowers, that appear in
nature. According to the appellants, there can be no finding of infringement
unless there is a showing of "near-exact copying" or "striking similarity."
The appellants' argument is grounded in cases such as First American
Artificial Flowers, Inc. v. Joseph Markovits Inc., 342 F. Supp. 178 (S.D.N.Y.
1972), in which the court compared plastic sculptured reproductions of tea
roses. The court asserted that "any two devices purporting to represent a
natural prototype or archetype are likely to be similar, quite apart from any
copying," and that "a copyright on a work which bears practically a photographic
likeness to a natural article, as here, is likely to prove a relatively weak
copyright." Id. at 186. We similarly observed in Folio Impressions that, "though
playwrights and poets from William [**19] Shakespeare to Gertrude Stein have
extolled the beauty of this five-petaled flower, by the rose's very nature one
artist's rendering of it will closely resemble another artist's work." 937 F.2d
at 766. Cf. Samara Bros., Inc. v. Wal-Mart Stores, Inc., 165 F.3d 120, 132 (2d
Cir. 1998) (citing [*101] Folio Impressions and stating that the depiction of
a "familiar object" enjoys only a narrow copyright).
These considerations notwithstanding, and contrary to the appellants'
assertions, the courts in Folio Impressions and First American Artificial
Flowers did in fact apply the ordinary observer standard. See Folio Impressions,
937 F.2d at 765-66; First American Artificial Flowers, 342 F. Supp. at 186. The
appellants argue that we applied a more "discerning" ordinary observer test in
Folio Impressions because the fabric pattern at issue depicted flowers. They
misinterpret our holding in that case. As we discuss below, we applied a "more
discerning" test in Folio Impressions not because the pattern featured items
that appeared in nature, but because the allegedly infringed pattern featured a
background that was copied [**20] from a design in the public domain. See
Knitwaves, 71 F.3d at 1003; Folio Impressions, 937 F.2d at 765-66. Thus, the
fact that the designs at issue in this case portrayed flowers does not preclude
the use of the ordinary observer standard.
In any event, it should be noted that the designs of Hamil America Pattern
No. 96 and GFI's Pattern No. 330 do not bear "practically a photographic
likeness" to real flowers. First American Artificial Flowers, Inc., 342 F. Supp.
at 186. Rather, the floral patterns are stylized and not lifelike. Wang, who
designed the infringing floral pattern, stated at trial that he "made . . . up"
the flower. In its findings of fact, the district court stated that "the pattern
is not simply the depiction of a flower as it would appear in nature. It is an
artistic rendering that has its own unique qualities . . . ."
We conclude that the district court reviewed the two fabric designs under the
appropriate "ordinary observer" standard.
ii. The "more discerning" ordinary observer standard
The appellants contend that we should apply the "more discerning" ordinary
observer standard that we enunciated in Folio Impressions, 937 F.2d at 765-66.
[**21] This test is applied when a work contains both protectible and
unprotectible elements, and requires the court to eliminate the unprotectible
elements from its consideration and to ask whether the protectible elements,
standing alone, are substantially similar. See Knitwaves, 71 F.3d at 1002; Folio
Impressions, 937 F.2d at 765-66. For example, in Folio Impressions, we
considered the alleged copying of a fabric design that consisted of stylized
roses arranged on a complex background. Testimony at trial revealed that the
pattern's designer had copied the background from a document which was in the
public domain, and "contributed nothing, not even a trivial variation" to the
design. Folio Impressions, 937 F.2d at 764. Since the background design lacked
originality, it was not copyrightable, and consequently the copyright extended
only to the roses which were superimposed on top of the background, and to the
arrangement of those roses. See id. at 763-65; see also Knitwaves, 71 F.3d at
1003. Having narrowed the scope of the copyright, we applied a "more discerning"
ordinary observer test and compared [**22] only the protected portion of the
design -- that is, the roses and the way they were arranged, rather than their
display against the background -- to the allegedly infringing fabric design.
Folio Impressions, 937 F.2d at 765-66; see also Knitwaves, 71 F.3d at 1003.
As we have subsequently cautioned, Folio Impressions featured "rather
specialized facts" and provides no authority for the broad proposition that "in
comparing designs for copyright infringement, we are required to dissect them
into their separate components, and compare only those elements which are in
themselves copyrightable." Knitwaves, Inc., 71 F.3d at 1003; see also
Mastercraft Fabrics Corp. v. Dickson Elberton Mills Inc., 821 F. Supp. 1503,
1512 (M.D. Ga. 1993) (describing the "more discerning" test in Folio [*102]
Impressions as predicated on the fact that "the entire background design of the
fabric came from a public domain source"). Here, there is no contention that
either party imported unprotectible material from the public domain into its
floral fabric design. We therefore need not apply the "more discerning" ordinary
observer standard. [**23]
iii. Liability
Application of the ordinary observer standard requires us to scrutinize the
two patterns for substantial similarity: would an average lay observer recognize
GFI Pattern No. 330 as having been appropriated from Hamil America's Pattern No.
96? See Knitwaves, Inc., 71 F.3d at 1002. In comparing works for infringement
purposes, we examine the works' "total concept and feel." Id. at 1003 (citing
Eden Toys, Inc. v. Marshall Field & Co., 675 F.2d 498, 500 (2d Cir. 1982)). When
discussing how to apply the ordinary observer standard, we have endorsed the
notion that, "good eyes and common sense may be as useful as deep study of
reported and unreported cases, which themselves are tied to highly
particularized facts." Soptra Fabrics Corp. v. Stafford Knitting Mills, Inc.,
490 F.2d 1092, 1093 (2d Cir. 1974) (quoting Couleur Int'l Ltd. v. Opulent
Fabrics Inc., 330 F. Supp. 152, 153 (1971)). And, as noted above, we review the
district court's finding of substantial similarity de novo, because "what is
required is only a visual comparison of the works, rather than credibility,
which we are [**24] in as good a position to decide as was the district court."
Folio Impressions, 937 F.2d at 766.
Viewed under the ordinary observer standard, it is clear to us that GFI's
Pattern No. 330 and Hamil America's Pattern No. 96 are substantially similar.
Both patterns depict small clusters of flowers and leaves. The shapes of the
flower petals and the leaves are virtually identical, and feature similar
defining line work and highlights in the flowers and leaves. Both patterns
depict leaves that do not appear to be attached to any of the flowers. Both
patterns are "tossed," which means that they have no top or bottom and are
non-directional, and appear in repeat.
The intended uses of both fabric patterns further support a finding of
substantial similarity. As we stated in Soptra Fabrics, a district court
comparing two textile designs must give "due weight to 'the uses for which the
design is intended, especially the scrutiny that observers will give to it as
used.'" 490 F.2d at 1093-94 (alteration in original) (quoting Peter Pan Fabrics,
274 F.2d at 489). The fabric designs at issue in Soptra Fabrics "were to be used
in dresses, [**25] and although small differences between the designs might be
found to exist under courtroom scrutiny, those differences fade away within a
few feet or absent sharp scrutiny." 490 F.2d at 1094. Likewise, Hamil America
Pattern No. 96 and GFI Pattern No. 330 were to be used in garments, and the
slight differences between the two patterns fade away when they are viewed from
a distance. Giving due weight, as we must, to the scrutiny that observers would
give to the patterns as used, we conclude that the patterns are substantially
similar. This conclusion is substantiated by the fact that when Raymond saw the
garment made with GFI Pattern No. 330, he immediately assumed that it was made
with Hamil America Pattern No. 96.
The similarities become even more obvious when we compare Hamil America
Pattern No. 96 in colorway 575 with the GFI fabric that was used in the garments
for J.C. Penney. Both fabrics use the exact same colors in the same manner,
featuring small yellow and white clusters of flowers with blue centers on a red
ground, surrounded by similarly shaped olive green leaves with dark green
shading. As we stated in Soptra Fabrics, "the appearance in one of defendant's
fabrics [**26] of colors identical to plaintiff's is additional evidence of
actual copying, as well as another factor leading to the conclusion that the
aesthetic [*103] appeal of the fabrics is the same . . . ." Soptra Fabrics
Corp., 490 F.2d at 1094 (quoting Couleur Int'l, 330 F. Supp. at 154). We note,
however, that the copyright for Pattern No. 96 is for the design itself, and is
not limited to a specific color arrangement. Thus, the fact that Hamil America
did not make all of the colorways used by GFI for Pattern No. 330 does not limit
the scope of GFI's infringement. n3 The similarity of design in the two patterns
is such that we see an identity of design when we look at the patterns in the
various colorways available in the record. n4
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n3 But it is worth noting that when we compare the various colorways for
Hamil America's pattern and GFI's pattern that are reproduced in the record, we
observe that other colorways feature similar color combinations.
n4 The district court reached the same conclusion. It observed that while the
similarity is most obvious when comparing the two colorways with a red
background, the similarity occurs in the "other colorways" that it had examined:
The pattern is not simply the depiction of a flower as it would appear
in nature. It is an artistic rendering that has its own unique
qualities and those qualities are what the defendants set out to copy
and did, in fact, copy. You see it in the spacing, the number of
flowers used, the way the leaves are presented, leaves not attached to
the flowers at all but floating in the spaces between flowers, the
fact that often the flowers are presented next to a depiction of buds.
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - - [**27]
When we compared the "total concept and feel" of two items in Knitwaves,
Inc., we focused on the original way the author "'selected, coordinated and
arranged' the elements of his or her work." 71 F.3d at 1004 (quoting Feist
Publications, Inc. v. Rural Tel. Serv. Co., 499 U.S. 340, 358, 113 L. Ed. 2d
358, 111 S. Ct. 1282 (1991)). Here, GFI has duplicated Hamil America's selection
of clustered flowers and leaves, its coordination of these elements in
particular spatial combinations, and its arrangement of these design elements on
a tossed pattern that appears in repeat. Given the similarity of the "total
concept and feel" of the fabric patterns, we are not convinced by the appellants
' recitation of differences. See Knitwaves, Inc., 71 F.3d at 1003 (citing Eden
Toys, 675 F.2d at 500); see also Lauratex Textile Corp. v. Allton Knitting Mills
Inc., 517 F. Supp. 900, 902-03 (S.D.N.Y. 1981) (holding that fabric design was
copied where ordinary observer of garments made with the two fabrics at issue
who was not searching for differences would have concluded that fabrics were
same design, despite slight changes in detail). [**28]
Because GFI Pattern No. 330 is substantially similar to Hamil America Pattern
No. 96, we affirm the district court's holding that the appellants infringed
Hamil America's copyright.
C. Damages
We next turn to the issue of damages. Under the current Copyright Act, a
copyright owner can elect to recover either "actual damages and profits" under
17 U.S.C. § 504(b), or "statutory damages" under 17 U.S.C. § 504(c). 17 U.S.C.
§ 504(c)(1). At Hamil America's request, the district court awarded damages
under 17 U.S.C. § 504(b). See Hamil America, Inc., 1998 WL 19991, at * 1. Hamil
America could recover "the actual damages suffered by [it] as a result of the
infringement, and any profits of the infringer that are attributable to the
infringement and are not taken into account in computing the actual damages." 17
U.S.C. § 504(b) (emphasis added). These two methods of recovery available under
§ 504(b) serve two distinct purposes: "damages are awarded to compensate the
copyright owner for losses from the infringement, and profits are awarded to
prevent [**29] the infringer from unfairly benefitting from a wrongful act."
H.R. Rep. No. 94-1476, at 161 (1976), reprinted in 17 U.S.C.A. § 504 at 146
(West 1996).
The parties contend that the district court erred with respect to both
damages calculations permitted under § 504(b). The appellants argue that the
court erred [*104] by disallowing deductions for overhead and other fixed
expenses from the profits generated from the sales of the infringing fabric.
Hamil America cross-appeals the calculation of its own actual damages, arguing
that it was entitled to recover profits that it presumably would have earned had
other customers not purchased GFI's infringing pattern. We address each issue in
turn.
1. Calculation of the Infringers' Profits
Section 504(b) of the Copyright Act authorizes a copyright owner to recover
the infringer's profits. That section expressly provides that "in establishing
the infringer's profits, the copyright owner is required to present proof only
of the infringer's gross revenue, and the infringer is required to prove his or
her deductible expenses and the elements of profit attributable to factors other
than the copyrighted work." 17 U.S.C. § 504 [**30] (b). Put another way, the
infringer's profits are calculated as the gross sales of infringing goods minus
the costs that the infringer proves are attributable to the production and sale
of those goods.
In compliance with this statutory procedure, Hamil America submitted proof of
GFI's gross revenue from the sale of the infringing dress patterns, and GFI
submitted a schedule of its deductible expenses that included both the actual
costs of production of the infringing pattern as well as its general, or "fixed,
" overhead expenses. The district court rejected GFI's submission to the extent
that it sought deductions for overhead expenses, stating that GFI "would have
had general administrative expenses of 'X' amount whether [it] sold [the
infringing] goods or not." The court also rejected certain specific expenses,
such as country club dues, on the ground that they were not "incremental costs
of producing [the infringing] fabric." The court asked GFI to adduce the "actual
cost of the goods, what it actually cost [GFI] to manufacture [the] specific
items." The district court accepted GFI's amended cost schedule, which showed
only the variable costs of producing and selling the [**31] infringing pattern,
and which excluded general overhead items such as rent, insurance, and
depreciation. See Hamil America, Inc., 1998 WL 19991, at * 3.
GFI argues that the district court erred in excluding an allocation of
general overhead expenses in its calculation of GFI's profits and that we must
remand for recalculation of damages. We agree.
Our analysis begins with Sheldon v. Metro-Goldwyn Pictures Corp., 106 F.2d 45
(2d Cir. 1939) (L. Hand, J.), in which a motion picture studio infringed the
copyright on a certain play. The district court allowed a deduction for overhead
expenses based on the ratio that the cost of producing the infringing movie bore
to the total costs of the movie studio. See id. at 54. On appeal, the copyright
holder argued that the infringers should not have been permitted any deduction
for overhead expenses absent a showing that the overhead had been increased by
the production of the infringing movie, which was only one of forty produced by
the studio. See id. This court affirmed, noting generally that, "'overhead'
which does not assist in the production of the infringement should not be
credited [**32] to the infringer; that which does, should be; it is a question
of fact in all cases." Id.
Turning to the specific facts of the Sheldon case, the court applied its
general rule as follows:
In the case at bar the infringing picture was one of over forty made
by the defendants, using the same supervising staff and organization,
which had to be maintained if the business was to go on at all.
Without them no picture could have been produced; they were as much a
condition upon the production of the infringing picture as the
scenery, or the plaintiffs' play itself.
Id. The court thus concluded that certain categories of general overhead
expenses -- [*105] in this case, those relating to creating and maintaining a
"supervising staff and organization" -- were appropriately deducted from gross
revenue. The court then considered various methods of allocating those overhead
expenses to the production of the infringing movie, and selected the method that
was most fair, accurate, and practical in light of the infringing company's
structure and products. Given the impossibility of determining the overhead
costs that were directly related to the production of the infringing [**33]
motion picture, the court permitted a deduction of a portion of overhead
expenses based on the cost of production of the motion picture:
To make a perfect allocation one would have to examine what part of
the time of all the employees whose pay went into the "overhead", was
given to each picture; and so of the other expenses. That was
obviously impossible. It is on the whole more likely that a given
picture required that proportion of the general services represented
by its cost of production, than that each picture shared those
services equally. . . . The [cost of production] solution appears to
us as nearly right as was practically possible.
Id. at 52-53.
The court therefore affirmed the district court's use of an estimate of
overhead expenses based on the cost of production -- notwithstanding the absence
of particularized findings as to the use of those expenses for things that
specifically contributed to the infringing picture -- because of the
"extravagant labor" necessary to determine the incremental contribution of
individual property to the infringing picture:
It was better . . . to compute this item by assuming that the
infringing [**34] picture used that proportion of the whole plant
which its cost of production bore to the cost of production of all
pictures made that year, than to attempt any allocation of buildings
and other property according to their actual use for the picture. The
second method would have been incredibly difficult in application,
involving as it would a different proportional use of each bit of
property concerned.
Id. at 54. In adopting this pragmatic approach, the court implicitly rejected
the need for a detailed analysis of an infringer's ledgers.
Sheldon thus contemplates a two-step procedure for deducting overhead
expenses from an infringer's profits. The first step is to determine what
overhead expense categories (such as rent, business, entertainment, personnel
and public relations) are actually implicated by the production of the
infringing product. Once a sufficient nexus is shown between a category of
overhead and the production or sale of the infringing product, a court need not
scrutinize for inclusion or exclusion particular items within the overhead
category. For example, if "entertainment expenses" is a category of overhead
implicated in the line of [**35] business that produced or sold the infringing
product, then country club dues included within that category should not be
singled out for exclusion, as they were by the district court here. Rather, the
court should limit its inquiry to the sufficiency of the nexus between the
expense category and production of the infringing product.
The second step is to arrive at a fair, accurate, and practical method of
allocating the implicated overhead to the infringement. The infringer has the
burden of "offering a fair and acceptable formula for allocating a given portion
of overhead to the particular infringing items in issue." 4 Melville B. Nimmer
and David Nimmer, Nimmer on Copyright § 14.03[B], at 14-39 (1996); see also In
Design v. K-Mart Apparel Corp., 13 F.3d 559, 565-66 (2d Cir. 1994). The
reasonableness of the proffered overhead allocation formula is a question of
fact in all cases. See Sheldon, 106 F.2d at 54. n5
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -
n5 Some methods of allocating overhead to the infringement proffered in
previous cases include: the production cost of the infringing product as a
percentage of the total production costs, see Sheldon, 106 F.2d at 52-52; the
number of infringing products as a percentage of total products, see Wilkie v.
Santly Bros., Inc., 139 F.2d 264, 265 (2d Cir. 1943); and the dollar sales from
the infringing product as a percentage of total dollar sales, but see Gaste v.
Kaiserman, 863 F.2d 1061, 1071 (2d Cir. 1988) (rejecting the dollar sales
method).
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - - [**36]
[*106] Sheldon's approach has been consistently applied by this Court. In
subsequent cases, we have assumed that general overhead expenses were deductible
and reviewed only the sufficiency of the nexus between the expense and the
infringing product and/or the adequacy of the adduced formula for allocating
overhead costs to the production of the infringing product. In Design, for
example, concerned a copyright holder's challenge to the district court's
conclusion that certain overhead expenses (including rent, advertising, payroll,
shipping, and store supplies) were deductible from gross profits. See In Design,
13 F.3d at 565-66. Applying the Sheldon rule, we affirmed and held that overhead
expenses were appropriately deducted because such expenses are generally
deductible, because the expenses were sufficiently related to the sale of the
infringing product, and because the allocation formula offered by the infringer
was reasonable. See id. at 566.
In another case, we rejected an infringer's allocation of company overhead,
which was based on the percentage of the company's net sales to the infringing
line of goods, on the ground that the proffered [**37] allocation was not the
most reliable method available to the infringer. See Manhattan Indus. v. Sweater
Bee by Banff, Ltd., 885 F.2d 1, 7-8 (2d Cir. 1989). We reasoned that although an
infringer "need not prove its overhead expenses and their relationship to the
production of the contemptuous goods in 'minute detail,' it must still carry its
burden of demonstrating a sufficient nexus between each expense claimed and the
sales of the unlawful goods." Id. (emphasis added) (quoting Frank Music Corp. v.
Metro-Goldwyn-Mayer, Inc., 772 F.2d 505, 516 (9th Cir. 1985)). See also Gaste v.
Kaiserman, 863 F.2d 1061, 1071 (2d Cir. 1988) (rejecting a 90 percent allocation
of overhead to an infringing song that represented 90 percent of the infringer's
sales); Wilkie v. Santly Bros., Inc., 139 F.2d 264, 265 (2d Cir. 1943) (holding
that general allocation formula should allocate overhead equally to each song
produced by the infringer because there was no evidence that the infringing song
contributed more to the overhead costs than the publisher's other 47 songs).
Despite the clear precedent on the deduction of overhead expenses [**38]
established by Sheldon and its progeny, the district court here prohibited GFI
from deducting any overhead whatsoever unless GFI could show that its overhead
was actually increased by its production of Pattern No. 330. See Hamil America,
Inc., 1998 WL 19991, at * 3 ("The Court must examine the facts to determine
those incremental costs of the infringer that were increased as a direct result
of the production and sale of the infringing goods . . . and to separate them
from those fixed costs that would have been incurred in any event."). The court
appears to have based its holding at least in part on the fact that the
infringement by GFI was willful, relying on cases from other jurisdictions
suggesting that willful or deliberate infringers may not deduct overhead when
calculating the profit the plaintiff is entitled to recover. See id. at * 1
(citing Jarvis v. A & M Records, 827 F. Supp. 282, 294 (D.N.J. 1993)). See also
Saxon v. Blann, 968 F.2d 676, 681 (8th Cir. 1992); Frank Music Corp., 772 F.2d
at 515.
Unlike the district court, we are not prepared to abandon the teachings of
Sheldon in favor of a hard [**39] and fast rule denying all overhead deductions
to willful infringers. But we share the district court's concern that willful
infringers should not be permitted to subsidize the sale of legitimate goods
with the sale of infringing goods by "passing part of its fixed cost on [*107]
to the copyright holder." See id. at * 2. We also recognize that "a rule of
liability which merely takes away profits from an infringement would offer
little discouragement to infringers." F.W. Woolworth Co. v. Contemporary Arts,
Inc., 344 U.S. 228, 233, 97 L. Ed. 276, 73 S. Ct. 222 (1952). We therefore
conclude that Sheldon's two-step approach must be applied with particular rigor
in the case of willful infringement.
Every infringer shoulders the burden of demonstrating a "sufficient nexus
between each expense claimed and the sales of the unlawful goods," Manhattan
Indus., 885 F.2d at 8, before it may deduct any overhead expenses from its
profits. When infringement is found to be willful, the district court should
give extra scrutiny to the categories of overhead expenses claimed by the
infringer to insure that each category is directly and validly connected to the
sale [**40] and production of the infringing product. Unless a strong nexus is
established, the court should not permit a deduction for the overhead category.
See Kamar Int'l Inc. v. Russ Berrie & Co., 752 F.2d 1326, 1332 (9th Cir. 1984)
(allowing overhead deduction "only when the infringer can demonstrate it was of
actual assistance in the production, distribution or sale of the infringing
product." (citing Sheldon)).
An infringer also bears the burden of proposing a fair and acceptable formula
for allocating a portion of overhead expenses to the infringing items at issue.
See In Design, 13 F.3d at 565-66. The district court must determine that the
particular allocation formula is optimal and sound, and all presumptions are
drawn against the infringer. See id. at 564 ("Any doubts resulting from an
infringer's failure to present adequate proof of its costs are resolved in favor
of the copyright holder.") (citing Gaste, 863 F.2d at 1070-71); see also Nimmer
on Copyright, § 14.03[B], at 14-40 ("[If] the computation of profits and costs
is uncertain due to the failure of the [infringer] to keep adequate records of
[**41] costs, any doubt in the evidence will be resolved in favor of the
plaintiff."). The allocation formula of a willful infringer should be held to a
particularly high standard of fairness, and the court should not hesitate to
reject a formula which allows the willful infringer to deduct more of its
overhead than was directly implicated in the manufacture of the infringing
product.
Because the district court erred under Sheldon in applying a blanket
prohibition of all overhead deductions, we reverse on this issue and remand for
a recalculation of GFI's profits. In that proceeding, GFI, as a willful
infringer, must demonstrate a direct and valid nexus between each claimed
overhead expense category and the production of GFI Pattern No. 330 and propose
a fair and acceptable formula for allocating a portion of overhead to the
pattern's production. The district court, applying the heightened scrutiny
appropriate in cases of willful infringement, will have the latitude to adopt or
reject certain categories of overhead, and to accept, reject, or amend GFI's
overhead allocation formula. Of course, if the resulting calculation causes the
district court to reconsider its finding that Hamil [**42] America "will be
fully compensated on its claims," see Hamil America, Inc., 1998 WL 19991, at *
3, the court could award Hamil America its "actual damages" in lieu of, or in
addition to, GFI's recalculated profits. See 17 U.S.C. § 504(b).
2. Hamil America's Lost Profits
Hamil America raises one issue on cross-appeal: whether the district court
erred when it determined that Hamil America could not recover for lost profits
that it might have earned from sales to those of its customers who purchased GFI
's infringing design. It relies on three facts: (1) Hamil America and GFI had
several shared customers; (2) the shared customers bought samples of Hamil
America Pattern No. 96 with the probable intention to purchase more Hamil
America fabric; and (3) the shared customers did not purchase the fabric from
Hamil America [*108] after the less expensive version offered by GFI appeared
on the market. Hamil America reasons that it is entitled to damages for lost
profits, as it would have sold Pattern No. 96 to the shared customers had GFI
not made the infringing pattern. It argues that it is entitled to a total
judgment against GFI in the amount of [**43] $ 240,782, rather than the $
201,049 that was awarded by the district court.
GFI argued below that Hamil America should not recover lost profits, because
the shared customers would not have purchased the fabric at Hamil America's
above-market prices. GFI also pointed out that those customers purchased GFI's
fabric several months after they had purchased Hamil America's samples, and
concluded that the commercial failure of Hamil America's pattern "had nothing to
do with the availability of [GFI's] pattern."
The district court agreed that the shared customers may well have declined to
purchase Hamil America's fabric, due to its higher price, and held that Hamil
America could not recover the alleged lost profits. See Hamil America, Inc.,
1998 WL 19991, at * 3. n6 The court further noted that Hamil America could not
recover both for its hypothetical sales to the shared customers and for GFI's
actual sales to those same customers. n7 See id. The court elected to measure
GFI's actual profits from sales to the shared customers, rather than speculate
as to what Hamil America might have earned had it sold Pattern No. 96 to the
shared customers. See id. ("In these [**44] circumstances, it appears more
accurate to measure plaintiff's lost profit on these [alleged sales to the
shared customers] by looking to the incremental profit that defendant actually
realized on its sales to these accounts.").
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -
n6 In so deciding, the district court may have also relied upon the testimony
of Hamil America's sales manager, who conceded that not every customer who
sampled Hamil America's patterns ultimately placed a larger production order.
n7 Hamil America properly conceded below that "it may not recover its profit
on these alleged sales and defendants' profit on the sale to these companies."
Hamil America, Inc., 1998 WL 19991, at *3. A copyright plaintiff may recover its
own lost profits, which are part of the plaintiff's "actual damages," as well as
the defendant's profits. But a "plaintiff may not recover damages that have
already been taken into account in computing its actual damages." Nimmer on
Copyright, § 14.03, at 14-29. Thus, "[a] plaintiff may not recover its full lost
profits plus all of the defendant's profits, for this would constitute a
forbidden double recovery." Id. § 14.02[A], at 14-10 (citing Taylor v. Meirick,
712 F.2d 1112 (7th Cir. 1983)). Thus, if Hamil America were in fact entitled to
recover lost profits, it would have had to set off its recovery for GFI's
profits by those profits already taken into account to determine Hamil America's
lost profits, because Hamil America could not recover twice. Hamil America
properly performed this analysis below, when Hamil America contended that it had
lost profits of $ 149,823, and that GFI's profits not taken in account in
computing Hamil America's lost profits were $ 90,959, for a total judgment
against GFI in the amount of $ 240,782.
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - - [**45]
As Nimmer states, "in the absence of convincing evidence as to the volume of
sales that plaintiff would have obtained but for the infringement, the measure
of lost profits may be rejected as too speculative." Nimmer on Copyright § 14.02
[A], at 14-11 (citing Odegard, Inc. v. Costikyan Classic Carpets, Inc., 963 F.
Supp. 1328, 1341 (S.D.N.Y. 1997)). The district court rejected Hamil America's
request for lost profits as too speculative. In our view, this conclusion was
not clearly erroneous. See also Odegard, Inc., 963 F. Supp. at 1340 ("When
seeking an award of damages for lost sales, the burden is on the plaintiff to
demonstrate that it would have made the sales but for the infringing activity.
"). In the absence of more reliable evidence of Hamil America's lost profits,
the district court was entitled to rely on the less abstract calculation of
damages from GFI's sales to the shared customers. We therefore affirm on this
issue.
IV. CONCLUSION
Because the district court erroneously prohibited GFI from deducting any
overhead [*109] expenses in the calculation of its profits, we reverse in part
and remand for recalculation of damages. We [**46] affirm on all other issues.