Court-Ordered Restitution Vacated in Criminal Copyright Infringement Case, Based on Lack of Relevant Evidence

On November 9, 2012, the United States Court of Appeals for the District of Columbia Circuit (D.C. Cir.) vacated a district court’s decision to impose a restitution penalty against Defendant Gregory Fair (“Defendant Fair”) in favor of Adobe Systems in the amount of $734,098. U.S.A. v. Gregory William Fair, No. 09-3120, slip op. at 2 (D.C. Cir. Nov. 9, 2012) (appealing from Crim. A. No. 1:09-cr-00089-1 (D.D.C.)Pacer login required). The D.C. Circuit concluded that the district court had abused its discretion by awarding restitution, when the government failed to meet its burden to prove the amount of Adobe’s losses.

The Mandatory Victims Restitution Act (18 U.S.C. § 3663A) (“MVRA”) – upon which this restitution award was based – provides that victims of certain crimes may be awarded restitution to compensate them for their actual losses that resulted from the defendant’s crime. In this case, however, the government only introduced evidence of what Defendant Fair’s actual sales were – and based its request for restitution on that amount. It did not introduce any evidence that Adobe Systems had lost sales as a result of this criminal activity, or that its sales were diverted to Defendant Fair.

Underlying Facts

Defendant Fair pled guilty to charges of criminal copyright infringement (18 U.S.C. § 2319, 17 U.S.C. § 506(a)(1)(a)) and mail fraud (18 U.S.C. § 1341), after spending more than six years (Feb. 2001-Sept. 2007) selling counterfeit copies of outdated Adobe software and upgrade codes on eBay, which allowed his customers to obtain full copies of the current versions of these programs at a fraction of the regular price. Opinion at 3. “For example, a customer could first buy a pirated copy of outdated PageMaker software and an upgrade code from [Defendant] Fair for around $125 and then pay around $200 to Adobe Systems to upgrade to the most current version. The total price paid, around $325, would be less than half of the retail price of the authentic up-to-date Adobe program (approximately $700).” Id. at 2.

According to evidence presented at trial of the completed eBay transactions that filtered through PayPal, “[Defendant] Fair received, and he admitted receiving, approximately $1.4 million from his sales of pirated software on eBay.” Id. at 3. When Defendant Fair objected to the restitution claim, he initially sought a reduction to $455,000, the amount which he had actually withdrawn in currency from the PayPal account. Id.
Following the plea agreement, the district court sentenced Defendant Fair to 41 months’ imprisonment and three years’ supervised release – and ordered the $743,098.99 restitution payment to Adobe Systems (the balance of the amount identified on the government’s spreadsheet, less the $24,367 that the Postal Service had already released to Adobe Systems). Id. at 5.

Defendant Fair’s counsel argued that Adobe Systems was capable of distinguishing between its regular customers, and those who sought upgrades as a result of Defendant Fair’s scheme, and instead “chose as a ‘corporate strategy’ to permit [Defendant] Fair’s customers to purchase upgrades but to give no tech support to Fair’s software.” Id. at 5. This suggests two things: 1) that evidence of lost sales could have been available if the government requested it; and 2) that Defendant Fair may have had an argument that Adobe had acquiesced by its conduct (in part) to the so-called “criminal scheme.”

However, the government did not introduce any evidence that Adobe lost any sales due to Defendant Fair’s criminal activities. Instead, the government presented a spreadsheet tallying Defendant Fair’s eBay sales and “unsubstantiated, generalized assertions of government counsel regarding Adobe Systems’ lost sales.” Id. at 11. When presented with the opportunity to present such evidence, the government attorney attempted to shift the burden set forth in the MVRA to the defendant, arguing that because he “created an potential uncertainty in calculating pecuniary harm by selling outdated counterfeit software.” Id. at 12. The government also argued that the lost-profits rationale “makes no sense in the present context because Adobe Systems no longer sells the versions of the software that Fair sold.” Id. The appellate court was unpersuaded.  

On Appeal

The appellate court reviewed the record – and particularly the absence of any evidence of Adobe Systems’ actual losses, and agreed with the analysis of a Tenth Circuit opinion that commented, “we are very skeptical of the implicit suggestion that customers’ purchase of a certain number of copies of low-priced counterfeit software proves that those customers would have agreed to purchase the same number of copies from the legitimate seller for many times more.” Id. at 11 (quoting United States v. Hudson, 483 F.3d 707, 710 (10th Cir. 2009)) (internal quotations omitted). The Fair court also concluded that the government’s evidence in support of its claim for retribution was “merely speculative.” Id. at 12.

The appellate court also recognized that there were other avenues of recovery of restitution: specifically, under the “actual damages” provision for copyright infringement, the copyright owner can recover both actual damages 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). These damages were not claimed in this (criminal) case.

Finally, the appellate court also considered whether a remand of any degree was warranted in this case – and concluded that it was not. The appellate court declined to give the government “‘a second bite at the apple’ absent special circumstances,” especially in light of the fact that the government had the explicit opportunity to introduce this type of evidence, and had declined to do. Id. at 15-16.

In summary, it appears that the prison sentence (and 3 years of supervised release) remains, but that the award of restitution alone has been vacated.

Awards of Attorney Fees in Copyright Infringement Cases Are Justified for “Vexatious Conduct” by Attorney

In FM Industries, Inc. v. Citicorp Credit Services, Inc., the U.S. Court of Appeals for the Seventh Circuit (“Seventh Circuit”) affirmed an award of attorneys’ fees to a prevailing defendant in a copyright infringement action, explaining that plaintiff’s attorney’s conduct was “vexatious,” “amateurish and absurd”. FM Indus., Inc. v. Citicorp Credit Svcs., Inc., No. 08-3184, 2010 U.S. App. LEXIS 15057 at *4, *13 (7th Cir. July 22, 2010). Written by Chief Judge Easterbrook, this is a colorful opinion that richly deserves reading (as his opinions usually are).

Prevailing parties (whether plaintiffs or defendants) in copyright infringement actions can be awarded attorneys’ fees pursuant to 17 U.S.C. § 505 (“the court may also award a reasonable attorney’s fee to the prevailing party as part of the costs”). The Seventh Circuit explained that this provision “vindicates the public’s interest in the use of intellectual property” and that in the absence of such a provision, prevailing defendants would have “only losses to show for the litigation.” FM Indus., 2010 U.S. App. LEXIS 15057 at *12.

In this case, after the district court dismissed all of plaintiff’s claims for failure to prosecute, the court ordered plaintiff to pay attorneys’ fees of $750,000 to defendant pursuant to 17 U.S.C. § 505. The court also ruled that plaintiff’s counsel (Wayne D. Rhine) “vexatiously multiplied the proceedings and is liable for attorneys’ fees under 28 U.S.C. § 1927.” The court concluded that another lawyer, William T. McGrath (“a copyright specialist who Rhine engaged to assist him”) was jointly and severally liable for the attorneys’ fees awarded under § 1927. The total award, for which the two attorneys were jointly and severally liable, was $35,000 (“because the district judge deemed only a subset of the filings sanctionable under § 1927). The court made a separate award against Rhine for $2,694 (although the Seventh Circuit did not explain why).

The Seventh Circuit affirmed all of the attorney’s fee awards except for one: the joint and several liability award against McGrath, concluding that McGrath’s only sanctionable conduct was “making the mistake of agreeing to help a careless lawyer (Rhine) who put his name to frivolous and malicious documents drafted by a self-interested layman [the client], and then not reviewing all of the documents that [the client] prepared for Rhine’s signature.” Id. at *15.

The Seventh Circuit explained that liability under § 1927 is direct, not vicarious (Id.), and nothing required one attorney to take responsibility for another attorney’s filings in the same case. “Section 1927 does not require every lawyer who files an appearance to review and vet every paper filed by every other lawyer. Neither the text of § 1927, nor any decision of which we are aware, imposes on any lawyer a duty to supervise or correct another lawyer’s work.” Id. at *15-*16. As a result, the Seventh Circuit reversed the district court’s award of sanctions against McGrath.  Id. (“We appreciate that the judge was disgusted by the behavior of FM Industries and its counsel, but personal responsibility remains essential to an award of sanctions under § 1927.”).

Summarized below is the conduct that the Seventh Circuit cited in its opinion as supporting the various awards of attorneys’ fees in this case (“There is more, but extending this recitation would not serve much purpose” Id. at *12.):

Problems with the Complaint

  • The client’s (plaintiff’s) repeated demands for $15 billion in statutory damages (notwithstanding the statute’s limitation of $150,000 in statutory damages per copyrighted work (not per use of a copy). Rhine argued that the figure $15 billion never appeared in plaintiff’s papers. Labeling these arguments as “quibbles,” the Seventh Circuit noted that “A complaint that demands $150,000 (the statutory cap) times 100,000 (the complaint’s estimate of the number of times computers copied the software into random access memory) is demanding $15 billion. Even lawyers can multiply two numbers.” Id. at *13 (emphasis added). It seems the Seventh Circuit has a sense of humor.
  • Plaintiff also sought a separate item of damage of $7.2 million (“$150,000 times 48, the number of outside law firms that used the software” at issue in this case), which was “no more tenable than $15 billion.” Id.
  • Plaintiff also sought $ 235 million in actual damages – which plaintiff never attempted to prove. Id.

Problems with Litigation Conduct

  • The Seventh Circuit called plaintiff’s litigation tactics “extortionate” – including the subpoenaing of several law firms who were not parties to the suit, but completely ignoring the requirements of Fed. R. Civ. P. 45 (regulating the manner and extent of discovery to be sought from non-parties), and thus causing the recipients to engage in expensive efforts to respond to improperly served subpoenas. On top of that, plaintiff failed to serve proper subpoenas after being informed of the deficiencies. The Seventh Circuit labeled these efforts as “extortionate discovery, the kind a litigant undertakes when it hopes to be paid to go away.” Id. at *12.
  • Filing motions for sanctions against defendants when they missed one discovery deadline, by a single day, seeking sanctions in the amount of $ 815 million. “The defendants and district judge were not amused, but defendants had to devote substantial time (and thus expense) to responding, because if the judge were prepared to award even a tiny fraction of the request the outlay would be considerable.” Id. at *10.
  • Attempting to “force” the current and former chairs of Citigroup’s board of directors to appear for deposition “even though they had nothing to do with Citigroup’s use of [the software at issue], is further evidence that FM Industries and its lawyers were engaged in the abuse of legal process.

One of the particularly notable points the Seventh Circuit made was that Rhine had only recently returned to private practice (in 2006) after 24 years as a judge of the Circuit Court of Cook County, Illinois (which I understand to be the trial level in Illinois state court). With regard to his handling of this case, the Seventh Circuit admonished, “The problem here, and in much else that went wrong with this case, is that Rhine allowed Friedman [the client], a non-lawyer, to draft many of the papers that were filed over Rhine’s name. Rhine insists that he did not simply rent out his law license but instead reviewed and edited the documents before filing them. We accept that representation, but it also means that Rhine, who resumed legal practice in 2006 after 24 years as a judge . . . bears the responsibility for amateurish and absurd filings.” Id. at *4.

The take away? If you permit your clients to prepare the first draft of any pleading – especially where they may be inspired to vent their spleens on their opponents – be sure to really edit the result to ensure that what is ultimately filed is professional, meritorious, respectful and complies with the applicable rules of civil procedure. Ultimately, the attorney must take full responsibility for the accuracy and propriety of any filing that bears his or her signature. Such responsibility cannot be abdicated to the client, even though the client may ultimately have to pay the sanctions.