Update Art, Inc. v. Modiin Pub., Ltd.

• Decision Date: 16 March 1988
• Docket Number: No. 720,D,720
• Citation: 843 F.2d 67
• Parties: 1988 Copr.L.Dec. P 26,254, 10 Fed.R.Serv.3d 877, 6 U.S.P.Q.2d 1784 UPDATE ART, INC., Appellee, v. MODIIN PUBLISHING, LTD. a/k/a Modiin, Ltd. d/b/a "Maariv", "Maariv International Edition", and "Soph Shavua", and Maariv Promotions, Ltd., Appellants. ocket 87-7868.
• Court: U.S. Court of Appeals — Second Circuit

Page 67

843 F.2d 67

1988 Copr.L.Dec. P 26,254, 10 Fed.R.Serv.3d 877,

6 U.S.P.Q.2d 1784

UPDATE ART, INC., Appellee, v. MODIIN PUBLISHING, LTD. a/k/a Modiin, Ltd. d/b/a "Maariv" "Maariv International Edition", and "Soph Shavua" and Maariv Promotions, Ltd., Appellants.

No. 720, Docket 87-7868.

United States Court of Appeals Second Circuit.

Argued Feb. 4, 1988.

Decided March 16, 1988.

Howard M. Squadron, New York City (Neal M. Goldman, Mark H. Jackson, and Squadron, Ellenoff, Plesent & Lehrer, New York City, on the brief), for appellants.

M. Scott Vayer, New York City, for appellee.

Before TIMBERS, WINTER and ALTIMARI, Circuit Judges.

TIMBERS, Circuit Judge:

The essential question presented by this appeal is whether this United States Court intends strictly to enforce sanctions provided for noncompliance with discovery orders. The opinion that follows is a stern warning that we do.

Appellants Modiin Publishing, Ltd. ("Modiin") and Maariv Promotions, Ltd. ("Promotions") appeal from a judgment entered October 1, 1987 in the Southern District of New York, Ruth V. Washington, Magistrate, imposing sanctions pursuant to Fed.R.Civ.P. 37 against them, thereby awarding Update Art, Inc. ("Update") summary judgment and $475,406 damages on its claim of copyright infringement with respect to its poster by appellants' newspaper.

On appeal, Modiin and Promotions contend that the court abused its discretion in imposing sanctions; that, even if sanctions were properly imposed, the award of damages was clearly erroneous; and that the court lacked subject matter jurisdiction over part of the award since some of the infringing newspapers remained abroad.

We hold that the court did not abuse its discretion in imposing sanctions; that the award of damages was not clearly erroneous; and that, based on the record before us, Update's claim was fully cognizable under the copyright laws.

We affirm.

I.

We shall summarize only those facts and prior proceedings believed necessary to an understanding of the issues raised on appeal.

Appellee Update is a New York corporation engaged in the business of manufacturing and distributing graphic art designs imprinted on a variety of products, including posters, greeting cards, t-shirts and puzzles. Under a recorded license agreement dated October 10, 1985, Update owns the exclusive contract rights for worldwide publication and distribution of the art work known as "Ronbo". Update produced a "Ronbo" poster. The "Ronbo" poster is intended to mimic the character "Rambo" portrayed by Sylvester Stallone in several recent movies. "Ronbo" depicts President Reagan's head superimposed on a bare-chested muscular man's body wearing dog tags and carrying a machine-gun in a jungle setting.

Modiin is an Israeli corporation with annual gross revenues of $100 million. Promotions, a New York corporation, is a wholly owned subsidiary of Modiin. Modiin produces a number of publishing enterprises, including Maariv, a newspaper published in Hebrew. Maariv is the largest circulating daily newspaper in Israel. The weekend edition, which includes a magazine supplement, is distributed every Friday and sells approximately 250,000 copies in Israel. An international edition of the weekend edition is distributed in the United States through Promotions.

The grievance at issue arose when the February 28, 1986 ¹ weekend edition of Maariv contained an unauthorized full-page, full-color reproduction of the "Ronbo" poster in the magazine section to illustrate an article. On March 1, after discovering the infringement, Update notified Modiin and Promotions of the infringement and demanded that they cease and desist. They refused.

Update commenced the instant action on March 3 by filing a complaint against appellants and individually against certain managers, officers, employees and owners of Maariv alleging copyright infringement, violation of the Lanham Act, unfair competition, and violations of certain New York State statutes. Update by an order to show cause sought a temporary restraining order ("TRO"), a preliminary injunction, consolidation of the hearing on the injunction with trial on the merits pursuant to Fed.R.Civ.P. 65, and accountability as to the remaining copies of the newspaper and the printing plates used to print the copy of the poster. Subsequently, Update voluntarily discontinued the action against the individual defendants.

On March 3, the parties appeared before the court (Hon. David N. Edelstein). ² The court declined to consider a TRO but directed that an evidentiary hearing be held on March 4 to determine whether it would issue a preliminary injunction. At the evidentiary hearing on March 4, in response to questioning by the court, counsel for both Update and appellants agreed that a stipulation could be entered into as to the location and securing of the newspapers and printing plates. Although initially there was some confusion over whether Update would forego damages, counsel for Update finally indicated that damages would be pursued. The court thereupon stated that there would be a limited hearing on damages which could be referred to a magistrate upon the parties' consent. Update's counsel replied, "We would agree to a reference." Appellants' counsel did not respond. The court then directed the parties to prepare papers on damages, and stated that the parties had consented to go before a magistrate.

The court entered an order on March 14 reflecting its oral determination. Trial on the merits was advanced and consolidated with the preliminary injunction hearing which was held on March 4. Appellants were found jointly and severally liable and were permanently enjoined from infringing the "Ronbo" copyright. Appellants were ordered to turn over the infringing negatives. The order provided that the magistrate would determine damages.

In an order entered May 12, the court amended its March 14 order, limiting liability to the copyright claim since the other claims were not addressed at the hearing. Update Art, Inc. v. Maariv Israel Newspaper, Inc., 635 F.Supp. 228, 229-30 (S.D.N.Y.1986). The court rejected appellants' defense of "fair use" and their forum non conveniens claim. Id. at 231-32. Although appellants did not expressly admit liability at the hearing, the court found that Update presented a prima facie case of infringement to which appellants did not respond. Id. at 230. The court stated at the hearing that it expressly referred the issue of damages to a magistrate, and that appellants' counsel could not have been mistaken as to why the case was being referred to a magistrate.

What should have been a rather straightforward proceeding--presentation of evidence to the magistrate on the amount of damages--instead turned into a protracted dragging of feet on the part of appellants and their counsel. There were innumerable discovery conferences resulting in a series of court orders compelling appellants to respond to discovery requests. Appellants repeatedly failed to comply with the discovery orders, despite numerous extensions of time to respond which were granted. Appellants repeatedly were warned that sanctions would be imposed if they continued their noncompliance.

On March 31, 1987, these proceedings culminated with the magistrate imposing Rule 37 sanctions against appellants and their trial counsel. ³ The magistrate concluded that appellants had acted in bad faith and their production was deficient. Moreover, the magistrate concluded that neither appellants' precise profits nor their alleged deductible expenses could be determined from their limited production. Accordingly, the magistrate granted summary judgment to Update on the issue of damages with respect to its claim of copyright infringement. She accepted Update's calculation of appellants' gross income of $475,406 from the infringement based on documentary evidence. ⁴ She also accepted Update's calculation of its lost profits of $380,686. The magistrate awarded Update damages of $475,406 plus interest by adding to Update's lost profits of $380,686 that portion of appellants' income from the infringement that was not duplicative of Update's lost profits ($94,720). The magistrate also imposed $2,000 in sanctions against appellants' trial counsel of record for their part in the delay.

On April 28, 1987, the magistrate granted appellants' motion for reconsideration. At oral argument before the magistrate on May 14, 1987, appellants argued for the first time that Update's claim did not apply to the newspapers in Israel because American copyright laws had no extraterritorial application. In a memorandum decision and order dated September 16, 1987, the magistrate affirmed her prior decision in all respects except she vacated the sanction against appellants' trial counsel, on a finding that counsel was not to blame for appellants' contumacious conduct. The magistrate did not make findings as to appellants' extraterritoriality claim since she erroneously concluded that Judge Edelstein had ruled on this claim.

Further facts will be referred to in our discussion of the applicable law that follows.

II.

The Supreme Court recently has reaffirmed its determination to uphold preclusion sanctions for willful discovery violations. Taylor v. Illinois, 108 S.Ct. 646 (1988) (upheld preclusion of defense witness in attempted murder case from testifying when defense counsel willfully failed to identify witness in response to pretrial discovery request). The Court stated:

" 'The need to develop all relevant facts in the adversary system is both fundamental and comprehensive.... The very integrity of the judicial system and public confidence in the system depend on full disclosure of all the facts, within the framework of the rules of evidence.' "

Id. at 652 (quoting United States v. Nixon, 418 U.S. 683, 709 (1974)). The Court continued that "[d]iscovery ... minimizes the risk that a judgment will be predicated on incomplete,...