By Thomas Long, J.D.
Business owner had "reason to know" of website developer’s direct infringement, but derived no direct financial benefit from it. In addition, the mere "reason to know"—a negligence standard—could not support a finding of willfulness.
A business owner contributorily infringed a photographer’s copyrighted works by employing a website developer that directly infringed the photos by incorporating them into the business’s website without payment or permission, the U.S. Court of Appeals in San Francisco has held, partially affirming a district court’s judgment. The district court did not plainly err in instructing the jury that the requisite "knowledge" for contributory infringement purposes included having a "reason to know" of the infringement. The district court erred, however, in finding the business owner liable for vicarious infringement because there was no evidence that the business owner had a direct financial interest in the infringing activity. The website developer’s avoidance of licensing fees for the photos did not confer a direct financial benefit on the business owner, the appellate court said. The appellate court also vacated the jury’s willfulness finding, explaining that merely negligent conduct was not "willful" (Erickson Productions, Inc. v. Kast, April 16, 2019, Hawkins, M.).
Defendant Kraig Kast owned and operated various businesses, including Atherton Trust, a real estate wealth management company. Kast hired a website developer, Only Websites, to redevelop the Atherton Trust website. Kast closely managed the development process. To facilitate the website development project, Kast completed a questionnaire outlining his goals for the revamped site. Kast identified Wells Fargo Private Bank as one of Atherton Trust’s competitors and highlighted certain features of Wells Fargo’s website he found appealing. Kast also stated in emails that he wanted to mimic Wells Fargo’s website. He also told Only Websites that he needed the developer to provide photos for the website.
Three photos from Wells Fargo’s website—which were taken by plaintiff Jim Erickson and licensed to Wells Fargo through his company, plaintiff Erickson Productions, Inc.—were incorporated into Atherton Trust’s developmental website, without a license. After discovering the photos on the site, Erickson demanded that Atherton Trust "cease and desist infringing its copyright" and pay damages. Kast promptly directed Only Websites to remove the photos, which was done the next morning, but refused to pay. Erickson filed suit against Kast, asserting claims for direct, vicarious, and contributory infringement. The jury found that Kast vicariously and contributorily (but not directly) infringed Erickson’s copyright on each of the photos and did so willfully. Pursuant to 17 U.S.C. §504(c)(2), the jury awarded Erickson $150,000 in damages per photograph, for total damages of $450,000. Kast appealed.
Vicarious liability. To prevail on a vicarious liability claim, the plaintiff must prove that the defendant has (1) the right and ability to supervise the infringing conduct and (2) a direct financial interest in the infringing activity. Kast argued that Erickson presented no evidence that could constitute a direct financial benefit as a matter of law. The Ninth Circuit agreed and vacated the jury’s vicarious liability verdict. A "direct financial benefit" requires a causal relationship between the infringing activity and any financial benefit a defendant reaps, the court explained. According to Erickson, Kast received three "direct financial benefits" from Only Websites’ infringement: (1) the photographs drew customers to purchase his services; (2) he avoided paying licensing fees to Erickson; and (3) he was able to "rush" the launch of his website. The first argument failed because Erickson did not contend that anyone visited Kast’s website in order to view his photographs or purchased his services because they saw the photographs. The second—Only Websites’ avoidance of license fees—failed because the direct infringer’s avoidance of fees alone cannot satisfy the requirement of a direct financial benefit to the vicarious infringer. In addition, there was no evidence that Only Websites lowered the price for its services to Kast as a result of avoiding the license fees. Finally, the argument that the photographs enabled Kast to "rush" the launch of his website failed because Kast received no money, clients, business inquiries, or website visitors by rushing the website’s completion before removing Erickson’s photos.
Contributory liability. A party engages in contributory copyright infringement when it (1) has knowledge of another’s infringement and (2) either (a) materially contributes to or (b) induces that infringement. On appeal, the "knowledge" element was in dispute. Kast asserted that the trial judge erred by instructing the jury that "knowledge" for contributory infringement purposes included having a "reason to know" of the infringement. According to Kast, only "actual knowledge" or "willful blindness" were sufficient. The appellate court disagreed and affirmed the contributory liability verdict. Because Kast did not raise this objection at trial, it was reviewed for plain error, and the Ninth Circuit stated that even if the "should have known" instruction was erroneous, the error was not plain. Ninth Circuit case law on the "should have known" instruction was inconsistent, according to the court. Without resolving the apparent tension between cases with contradictory holdings, the court held that Kast did not demonstrate that the jury instructions were plainly erroneous.
Willfulness. Kast argued that the district court erred when it instructed the jury that it could find that Kast’s infringement was willful if Kast "should have known that [his] acts infringed plaintiffs’ copyright." The Ninth Circuit agreed and remanded the issue of willfulness to the district court on the existing record, as well as the issue of statutory damages based on the willfulness finding. A "should have known" standard is a negligence standard, and negligence is a less culpable mental state than actual knowledge, willful blindness, or recklessness, the three mental states that properly support a finding of willfulness. Therefore, the district court permitted the jury to find willfulness on the basis of a lesser mental state than Ninth Circuit cases demanded, the appellate court said. Because the erroneous willfulness instruction was likely prejudicial to Kast, remand was required.
This case is No. 15-16801.
Attorneys: Kevin P. McCulloch (The McCulloch Law Firm PLLC) for Erickson Productions, Inc. Christopher J. Cariello (Orrick Herrington & Sutcliffe LLP) for Kraig Rudinger Kast.
Companies: Erickson Productions, Inc.
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