Hamil America v. GFI

• Decision Date: 01 August 1998
• Docket Number: Docket Nos. 98-7573,-7615
• Citation: 193 F.3d 92
• Parties: (2nd Cir. 1999) 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
• Court: U.S. Court of Appeals — Second Circuit

Page 92

193 F.3d 92 (2nd Cir. 1999)

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, -7615

August Term, 1998

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Argued: December 9, 1998

Decided: September 29, 1999

Fabric designer brought copyright infringement action against another fabric designer and manufacturer, garment manufacturer, and retailer, alleging that they willfully infringed plaintiff's copyright in floral pattern. The United States District Court for the Southern District of New York (John S. Martin, Jr., Judge) held that defendants willfully infringed plaintiff's valid copyright and awarded damages. Defendants appeal the finding of liability for copyright infringement and the calculation of damages, claiming that district court failed to permit proper deduction for overhead expenses. Plaintiff cross-appeals the district court's calculation of damages on grounds it should have been awarded lost profits.

Affirmed in part; reversed and remanded in part for recalculation of damages. [Copyrighted Material Omitted]

[Copyrighted Material Omitted] Michael Delikat, New York, NY (John F. Olsen, Orrick, Herrington & Sutcliffe LLP, of counsel), for all Appellants-Cross-Appellees.

Kenneth R. Schachter, New York, NY (Silverberg Stonehill & Goldsmith, P.C., of counsel), for Appellee-Cross-Appellant.

Before: OAKES, JACOBS, and POOLER, Circuit Judges.

OAKES, Senior Circuit Judge:

I. INTRODUCTION

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 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 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 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. 330.¹ SGS substituted GFI Pattern No. 330 for Hamil America Pattern No. 96 in the garments it manufactured for J.C. Penney.

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.

In April 1995, Hamil America registered Pattern No. 96 with the United States Copyright Office and was granted a registration number, VA 642-546.² Hamil America sued GFI 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 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.

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.

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 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 (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 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.

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 "[t]o 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...