Business Trends Analysts, Inc. v. Freedonia Group, Inc.

• Decision Date: 05 October 1989
• Docket Number: D,No. 1178,1178
• Citation: 887 F.2d 399
• Parties: , 1989 Copr.L.Dec. P 26,482, 12 U.S.P.Q.2d 1457 BUSINESS TRENDS ANALYSTS, INC., Plaintiff-Appellee, v. The FREEDONIA GROUP, INC. and the Freedonia Group, Incorporated, Defendants-Appellants. ocket 89-7156.
• Court: U.S. Court of Appeals — Second Circuit

Page 399

887 F.2d 399

58 USLW 2246, 1989 Copr.L.Dec. P 26,482,

12 U.S.P.Q.2d 1457

BUSINESS TRENDS ANALYSTS, INC., Plaintiff-Appellee, v. The FREEDONIA GROUP, INC. and the Freedonia Group Incorporated, Defendants-Appellants.

No. 1178, Docket 89-7156.

United States Court of Appeals Second Circuit.

Argued May 26, 1989.

Decided Oct. 5, 1989.

James L. Stengel, New York City (Jeffrey A. Conciatori, Nicole van Ackere, Donovan Leisure Newton & Irvine, New York City, of counsel), for defendants-appellants.

Michael T. Cornacchia III, Melville, N.Y. (John L. Ciarelli, Ciarelli Dempsey & Cornacchia, Melville, N.Y., of counsel), for plaintiff-appellee.

Before VAN GRAAFEILAND, MESKILL and WINTER, Circuit Judges.

WINTER, Circuit Judge:

This copyright action involves the infringement of a study of the robotics industry. The principal issue on appeal concerns the appropriate measure of damages where a late-registering plaintiff fails to prove out-of-pocket losses to itself or conventional profits to the infringer.

Appellee Business Trends Analysts, Inc. ("BTA"), the successor to Predicasts, Inc. ("Predicasts"), claims that Predicasts' study of the robotics industry was infringed by a publication of appellants The Freedonia Group, Inc., now dissolved, and The Freedonia Group, Incorporated (collectively "TFG"). Judge Conboy held that TFG had infringed BTA's copyright in the Predicasts study. Because BTA registered its copyright only after the infringement, it was limited to a damage award for its losses or TFG's profits and was not entitled to statutory damages. Judge Conboy's damage award included TFG's actual profits and also included an amount for lost market share or, alternatively, the "value of use." We affirm the award of actual profits, but we vacate the award for lost market share or value of use as not authorized by the Copyright Act of 1976, 17 U.S.C. Secs. 101-914 (1982).

BACKGROUND

Until 1984, Predicasts was in the business of publishing economic and marketing research reports on various industries. A pioneer in the business, Predicasts had an established reputation and customer list. Late in 1984, Predicasts began disbanding its Research Group, the division responsible for industry studies. As of January 1, 1985, Predicasts ceased publishing such studies, transferring its inventory and licensing the use of its name to BTA.

Earlier, in April 1982, William Weiss, then president of Predicasts' Research Group, had left Predicasts. After the expiration of a non-competition agreement in 1983, Weiss had formed The Freedonia Group, Inc., now dissolved. The Freedonia Group, Incorporated was formed in early 1985, when two other former Predicasts employees, T. Kevin Swift and Robert Baumgartner, joined Weiss. In May 1985, TFG hired another Predicasts employee, Andrea Fetsko-Louie.

Throughout 1985 and early 1986, TFG and BTA competed in the industry studies market, each trying to capitalize on its Predicasts connections. BTA thus marketed studies under the Predicasts name, while TFG publicized the connections of its personnel to Predicasts. Throughout 1985, BTA marketed, at a price of $1,500, a Predicasts study entitled 3547 Robotics (Markets and Competitors), produced by Neil Digeronimo in December of 1984. Meanwhile, Swift and Fetsko-Louie composed a similar robotics study for TFG, entitled Industry Study 113: Robotics. After TFG began marketing its study in August 1985, BTA applied for federal copyright registration of the Predicasts study and received a certificate of registration.

Initially, the TFG study was priced at $1,500, the same price charged for the Predicasts study. In January 1986, confronted with negligible sales, TFG offered the TFG study, along with two other studies, for $150 each during a special two- or three-month offer period. The purpose of this price-cutting was to expand TFG's customer base by exposing as many prospective customers as possible to TFG's work. The $150 price was a nominal one designed only to ensure that purchasers had a serious interest in industry studies and were thus potential customers. TFG eventually sold 37 of its robotics studies at or near the discount price. ¹

On May 5, 1986, BTA filed this action in the Southern District, alleging copyright infringement, misappropriation of Predicasts' customer list and other proprietary information, and violations of the Lanham Act, 15 U.S.C. Sec. 1125(a), as well as violations of New York's Anti-Dilution Statute, Sec. 368-d of the New York General Business Law. BTA sought a preliminary injunction and damages.

On January 5, 1987, Judge Weinfeld denied BTA's motion for a preliminary injunction. See Business Trends Analysts v. Freedonia Group, Inc., 650 F.Supp. 1452 (S.D.N.Y.1987). After Judge Weinfeld's death, a bench trial was conducted before Judge Conboy. In addition to presenting evidence of infringement, BTA called witnesses who testified that BTA had suffered sales losses as a result of TFG's study.

In ruling in BTA's favor on the copyright infringement issue, Judge Conboy reviewed in detail the similarities between various passages in the Predicasts study and corresponding passages in the TFG study. See Business Trends Analysts v. Freedonia Group, Inc., 700 F.Supp. 1213 (S.D.N.Y.1988). He also noted that a copy of the Predicasts study found in TFG's files contained handwritten notations by Fetsko-Louie that corrected erroneous or outdated information and that stated, inter alia, "delete" and "start here". This document was understandably described by Judge Conboy as a "smoking gun" demonstrating direct copying of the Predicasts study by TFG. Judge Conboy found that there was substantial similarity in the respective discussions of "the phenomenon, characteristics, utility and potential of robots, and more to the point, of particular kinds of robots." Id. at 1218-19. He also found, however, that there was no substantial similarity between the two studies in their respective discussions of "highly generalized aspects of economic conditions, historical development and trends in industrial automation, and the role of government in the industrial arena." Id. at 1218. Because the TFG study included elements of substantial originality, he held against BTA on its Lanham Act, state law unfair competition, and misappropriation of trade secrets claims.

Because TFG published its study before BTA's copyright was registered, Section 412(2) of the Copyright Act barred recovery of statutory damages as provided in Section 504(c). BTA was thus limited to actual damages or TFG's profits calculated under Section 504(b). Judge Conboy calculated those damages to be $54,028.35. He found that BTA had failed to establish any actual damages from lost sales of the Predicasts study but determined that TFG's gross profits on the sale of its robotics study were $9,745.00. From this, he deducted TFG's proven expenses in the amount of $5,666.65. He then went on to consider the "novel" question of whether a competitor like TFG, which had engaged in drastic price-cutting in order to gain market advantage "can inferentially be held to have made non-cash profit which, if quantifiable, can be awarded to the infringed competitor." Id. at 1237. He answered that question affirmatively and held that TFG had gained market advantage or "value of use," id. at 1238, in the amount of $1,500, the full list price, less $150 for each copy sold. Thus, TFG's market advantage or value of use per copy was $1,350. Multiplying $1,350 by 37, the number of copies he found had been sold at the discount price, he arrived at a damages figure of $49,950 in market advantage or value of use. Adding gross profits ($9,745) to lost market advantage ($49,950) and subtracting TFG's expenses ($5,666.65), he arrived at a total damage award of $54,028.35. Finally, Judge Conboy declined to apportion TFG's profits between the infringing and noninfringing segments of the TFG study.

DISCUSSION

Only the copyright issues are before us on this appeal, as BTA has not cross-appealed on its Lanham Act, state law unfair competition, and misappropriation of trade secrets claims. We agree that TFG's study infringed the Predicasts study. We also agree with the award of TFG's actual profits less expenses. However, we reverse the award of damages for lost market advantage or "value of use."

Copyright plaintiffs can prove infringement by demonstrating the defendants' access to the copyrighted work and a substantial similarity between the two works. See Reyher v. Children's Television Workshop, 533 F.2d 87, 90 (2d Cir.), cert. denied, 429 U.S. 980, 97 S.Ct. 492, 50 L.Ed.2d 588 (1976); 2 M. Nimmer, Nimmer on Copyright Sec. 141.2 at 613 (1988). Access is conceded in the instant case. Whether there has been infringement thus depends on whether the two studies exhibit substantial similarity.

In reviewing a determination of substantial similarity in copyright appeals, we apply a de novo standard of review. See Malden Mills, Inc. v. Regency Mills, Inc., 626 F.2d 1112, 1113 (2d Cir.1980). Such de novo review is appropriate because "[w]here ... the determination of similarity rests solely on a comparison of the works in issue rather than on credibility of witnesses or other evidence only for the factfinder, 'we are in as good a position as the trial judge' to determine the issue." Reyher, 533 F.2d at 90 (quoting Millworth Converting Corp. v. Slifka, 276 F.2d 443, 446 (2d cir.1960)).

Our comparison of the two texts confirms the finding of infringement. Indeed, the evidence of direct copying is unmistakable. Judge Conboy's opinion includes a lengthy analysis, with which we agree, of a large number of "accused passages." 700 F.Supp. at 1221-29. For illustrative purposes, we reproduce here only the passage designated as representative in the briefs of both parties. The relevant paragraph in the Predicasts study reads:

Modern CAD uses analytical software to conduct the analyses and utilizes its graphic...