Fonovisa, Inc. v. Cherry Auction, Inc.

• Citation: 76 F.3d 259
• Decision Date: 25 January 1996
• Docket Number: No. 94-15717,94-15717
• Parties: , 1995 Copr.L.Dec. P 27,487, 37 U.S.P.Q.2d 1590, 96 Cal. Daily Op. Serv. 517, 96 Daily Journal D.A.R. 840 FONOVISA, INC., Plaintiff-Appellant, v. CHERRY AUCTION, INC.; Richard Pilegard, W.D. Mitchell, Margaret Mitchell, Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 259

76 F.3d 259

64 USLW 2465, 1995 Copr.L.Dec. P 27,487,

37 U.S.P.Q.2d 1590,

96 Cal. Daily Op. Serv. 517,

96 Daily Journal D.A.R. 840

FONOVISA, INC., Plaintiff-Appellant, v. CHERRY AUCTION, INC.; Richard Pilegard, W.D. Mitchell, Margaret Mitchell, Defendants-Appellees.

No. 94-15717.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Nov. 13, 1995.

Decided Jan. 25, 1996.

Craig E. Lindberg, J. Craig Williams, Callahan, Blaine & Williams, Irvine, California, for Plaintiff-Appellant.

Stephen R. Cornwell and Bruce William Kelley, McCormick, Barstow, Sheppard, Wayte & Carruth, Fresno, California, for Defendants-Appellees.

Anthony M. Keats, Larry W. McFarland, Rebecca I. Lobl, Baker & Hostetler, Los Angeles, California, for the International Anticounterfeiting Coalition, Inc. as amicus curiae in support of plaintiff-appellant.

Russell J. Frackman, argued, and Robert C. Welsh, Mitchell, Silberberg & Knupp, Los Angeles, California; Jose Zorrilla Jr., Zorrilla Law Corporation, Irvine, California; David A. Gauntlett and Leo E. Lundberg, Jr., Gauntlett & Associates, Irvine, California; Craig E. Lindberg, formerly of Callahan & Gauntlett, Irvine, California, for Plaintiff-Appellant Fonovisa, Inc.

Robert C. Welsh and Russell J. Frackman, Mitchell, Silberberg & Knupp, Los Angeles, California, for the Recording Industry Association of America, Inc., as amicus curiae in support of Plaintiff-Appellant.

Appeal from the United States District Court for the Eastern District of California.

Before: SCHROEDER and ALARCON, Circuit Judges, and PANNER, ^* District Court Judge.

SCHROEDER, Circuit Judge:

This is a copyright and trademark enforcement action against the operators of a swap meet, sometimes called a flea market, where third-party vendors routinely sell counterfeit recordings that infringe on the plaintiff's copyrights and trademarks. The district court dismissed on the pleadings, holding that the plaintiffs, as a matter of law, could not maintain any cause of action against the swap meet for sales by vendors who leased its premises. The district court's decision is published. Fonovisa Inc. v. Cherry Auction, Inc., 847 F.Supp. 1492 (E.D.Cal.1994). We reverse.

Background

The plaintiff and appellant is Fonovisa, Inc., a California corporation that owns copyrights and trademarks to Latin/Hispanic music recordings. Fonovisa filed this action in district court against defendant-appellee, Cherry Auction, Inc., and its individual operators (collectively "Cherry Auction"). For purposes of this appeal, it is undisputed that Cherry Auction operates a swap meet in Fresno, California, similar to many other swap meets in this country where customers come to purchase various merchandise from individual vendors. See generally, Flea Market Owner Sued for Trademark Infringement, 4 No. 3 J. Proprietary Rts. 22 (1992). The vendors pay a daily rental fee to the swap meet operators in exchange for booth space. Cherry Auction supplies parking, conducts advertising and retains the right to exclude any vendor for any reason, at any time, and thus can exclude vendors for patent and trademark infringement. In addition, Cherry Auction receives an entrance fee from each customer who attends the swap meet.

There is also no dispute for purposes of this appeal that Cherry Auction and its operators were aware that vendors in their swap meet were selling counterfeit recordings in violation of Fonovisa's trademarks and copyrights. Indeed, it is alleged that in 1991, the Fresno County Sheriff's Department raided the Cherry Auction swap meet and seized more than 38,000 counterfeit recordings. The following year, after finding that vendors at the Cherry Auction swap meet were still selling counterfeit recordings, the Sheriff sent a letter notifying Cherry Auction of the on-going sales of infringing materials, and reminding Cherry Auction that they had agreed to provide the Sheriff with identifying information from each vendor. In addition, in 1993, Fonovisa itself sent an investigator to the Cherry Auction site and observed sales of counterfeit recordings.

Fonovisa filed its original complaint in the district court on February 25, 1993, and on March 22, 1994, the district court granted defendants' motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6). In this appeal, Fonovisa does not challenge the district court's dismissal of its claim for direct copyright infringement, but does appeal the dismissal of its claims for contributory copyright infringement, vicarious copyright infringement and contributory trademark infringement.

The copyright claims are brought pursuant to 17 U.S.C. §§ 101 et seq. Although the Copyright Act does not expressly impose liability on anyone other than direct infringers, courts have long recognized that in certain circumstances, vicarious or contributory liability will be imposed. See Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417, 435, 104 S.Ct. 774, 785, 78 L.Ed.2d 574 (1984) (explaining that "vicarious liability is imposed in virtually all areas of the law, and the concept of contributory infringement is merely a species of the broader problem of identifying circumstances in which it is just to hold one individually accountable for the actions of another").

Similar principles have also been applied in the trademark field. See Inwood Laboratories v. Ives Laboratories, 456 U.S. 844, 844-46, 102 S.Ct. 2182, 2184, 72 L.Ed.2d 606 (1982). The Seventh Circuit, for example, has upheld the imposition of liability for contributory trademark infringement against the owners of a flea market similar to the swap meet operated by Cherry Auction. Hard Rock Cafe Licensing Corp. v. Concession Services, Inc., 955 F.2d 1143 (7th Cir.1992). The district court in this case, however, expressly rejected the Seventh Circuit's reasoning on the contributory trademark infringement claim. Contributory and vicarious copyright infringement, however, were not addressed in Hard Rock Cafe, making this the first case to reach a federal appeals court raising issues of contributory and vicarious copyright infringement in the context of swap meet or flea market operations.

We analyze each of the plaintiff's claims in turn.

Vicarious Copyright Infringement

The concept of vicarious copyright liability was developed in the Second Circuit as an outgrowth of the agency principles of respondeat superior. The landmark case on vicarious liability for sales of counterfeit recordings is Shapiro, Bernstein and Co. v. H.L. Green Co., 316 F.2d 304 (2d Cir.1963). In Shapiro, the court was faced with a copyright infringement suit against the owner of a chain of department stores where a concessionaire was selling counterfeit recordings. Noting that the normal agency rule of respondeat superior imposes liability on an employer for copyright infringements by an employee, the court endeavored to fashion a principle for enforcing copyrights against a defendant whose economic interests were intertwined with the direct infringer's, but who did not actually employ the direct infringer.

The Shapiro court looked at the two lines of cases it perceived as most clearly relevant. In one line of cases, the landlord-tenant cases, the courts had held that a landlord who lacked knowledge of the infringing acts of its tenant and who exercised no control over the leased premises was not liable for infringing sales by its tenant. See e.g. Deutsch v. Arnold, 98 F.2d 686 (2d Cir.1938); c.f. Fromont v. Aeolian Co., 254 F. 592 (S.D.N.Y.1918). In the other line of cases, the so-called "dance hall cases," the operator of an entertainment venue was held liable for infringing performances when the operator (1) could control the premises and (2) obtained a direct financial benefit from the audience, who paid to enjoy the infringing performance. See e.g. Buck v. Jewell-LaSalle Realty Co., 283 U.S. 191, 198-199, 51 S.Ct. 410, 411-12, 75 L.Ed. 971 (1931); Dreamland Ball Room, Inc. v. Shapiro, Bernstein & Co., 36 F.2d 354 (7th Cir.1929).

From those two lines of cases, the Shapiro court determined that the relationship between the store owner and the concessionaire in the case before it was closer to the dance-hall model than to the landlord-tenant model. It imposed liability even though the defendant was unaware of the infringement. Shapiro deemed the imposition of vicarious liability neither unduly harsh nor unfair because the store proprietor had the power to cease the conduct of the concessionaire, and because the proprietor derived an obvious and direct financial benefit from the infringement. 316 F.2d at 307. The test was more clearly articulated in a later Second Circuit case as follows: "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." Gershwin Publishing Corp. v. Columbia Artists Management, Inc., 443 F.2d 1159, 1162 (2d Cir.1971). See also 3 Melville Nimmer & David Nimmer, Nimmer on Copyright § 1204(A), at 1270-72 (1995). The most recent and comprehensive discussion of the evolution of the doctrine of vicarious liability for copyright infringement is contained in Judge Keeton's opinion in Polygram Intern. Pub., Inc. v. Nevada/TIG, Inc., 855 F.Supp. 1314 (D.Mass.1984).

The district court in this case agreed with defendant Cherry Auction that Fonovisa did not, as a matter of law, meet either the control or the financial benefit prong of the vicarious copyright infringement test articulated in Gershwin, supra. Rather, the district court concluded that based on the pleadings, "Cherry Auction neither supervised nor profited from the vendors' sales." 847 F.Supp. at 1496. In the district court's view, with respect to both control and financial benefit, Cherry Auction was in the same position as an absentee landlord who has surrendered its exclusive right of...