IP Law Daily Nutritional supplement seller liable for $1.6 million in infringement damages
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Thursday, August 25, 2016

Nutritional supplement seller liable for $1.6 million in infringement damages

By Jody Coultas, J.D.

A Wilmington, Delaware court properly upheld a jury verdict finding Stemtech Health Sciences, Inc., liable for vicarious and contributory infringement of copyrighted pictures owned by Andrew P. Leonard, according to the U.S. Court of Appeals in Philadelphia. The appellate court affirmed the damages award, evidentiary issue rulings, and refusal to grant a new trial, but reversed the lower court’s refusal to award prejudgment interest (Leonard v. Stemtech Health Sciences, Inc., August 24, 2016, Shwartz, P.).

Leonard owned APL Microscopic, a sole proprietorship he started in 1990. Leonard specialized in creating images of microscopic subject matter, using a scanning electron microscope (SEM) as his camera. At issue in this case were photographs of human bone marrow stem cells that Leonard created using a SEM, at various times before 2002. Each of the images was first published between 1999 and 2002 and registered with the U.S. Copyright Office on December 20, 2007.

Stemtech marketed and sold nutrition supplements, including StemEnhance. Stemtech’s marketing policy required its independent distributors to use marketing and support materials produced by Stemtech in marketing the company’s products; distributors were not permitted to create their own websites, but instead had to use Stemtech’s official template.

Leonard filed a copyright infringement suit against Stemtech after discovering that his copyrighted images had been posted on various websites operated by Stemtech distributors.

A jury found Stemtech liable for direct, vicarious, and contributory copyright infringement with respect to two of Leonard's copyrighted images and awarded Leonard $1.6 million. A Delaware district court affirmed the award and denied Stemtech’s motion for a new trial on contributory and vicarious liability and damages. Both parties appealed.

Direct infringement. Leonard demonstrated that he owned the copyrights to the infringed images, and that he did not authorize or license the use of his images in Stemtech’s advertising, marketing, and training materials. This was a sufficient basis for a jury to reasonably conclude that the distributors directly infringed Leonard’s copyrights.

Contributory infringement. The district court properly upheld the jury’s finding that Stemtech was liable for contributory infringement, according to the court. To establish a claim of contributory infringement, a plaintiff must show: (1) a third party directly infringed the plaintiff’s copyright; (2) the defendant knew that the third party was directly infringing; and (3) the defendant materially contributed to or induced the infringement. There was sufficient evidence that Stemtech’s distributors directly infringed Leonard’s copyrights, and that Stemtech knew of the distributors’ infringing activity. Stemtech created the materials containing Leonard’s images, provided the materials to its distributors, and required the distributors to use the materials. The jury also had a basis to conclude that Stemtech knew that the images it provided to its distributors were copyrighted.

Vicarious infringement. The verdict was not against the weight of the evidence and the district court did not abuse its discretion in denying Stemtech’s motion for a new trial on Leonard’s vicarious infringement claim, according to the court. To establish vicarious infringement, a plaintiff must prove that the defendant had the right and ability to supervise or control the infringing activity and a direct financial interest in such activities. Stemtech created and provided marketing materials to its distributors, and required their use. It also had the contractual right to impose a range of disciplinary sanctions on distributors who violated its policies or engaged in illegal behavior. Images of stem cells lend legitimacy to products that purportedly enhance stem cell production and from this infer that the images could have drawn customers to buy the product, which would financially benefit Stemtech. Therefore, a reasonable jury could have reasonably found both elements of vicarious liability were met.

Damages. The jury’s $1.6 million actual damages award was neither unconstitutionally or grossly excessive, according to the court. There was no error in allowing the jury to consider evidence about damages based on the fair market value approach. Leonard correctly noted that the case did not involve the use of a multiplier to penalize unauthorized use, but rather that the multiplier here was used to calculate fair market value. The jury had sufficient evidence to credit Leonard’s expert’s opinion and conclude that the sum calculated from the stock photo agency rates did not represent a full calculation of the fair market value of Leonard’s images because the rates did not account for scarcity and exclusivity.

The court also affirmed the court’s order granting summary judgment in Stemtech’s favor on Leonard’s request for infringer’s profits because there was no evidence upon which a reasonable juror could have calculated infringer’s profits.

Prejudgment interest. Leonard correctly argued that the district court abused its discretion in denying his motion for prejudgment interest, according to the court. Prejudgment interest addresses harmed caused by delay in making reparations, and is available in copyright cases where a court decides it to be a fair remedy. The district court denied prejudgment interest because it felt the verdict "sufficiently compensated" Leonard, and because calculating the prejudgment interest would be difficult. Denying prejudgment interest on the ground that the damages award sufficiently compensated Leonard constituted legal error. Also, difficulty in calculating prejudgment interest is generally not a basis to deny an interest award. Leonard offered to provide information to calculate the award, and the court overlooked this offer. The belief about the difficulty in calculation may have been misplaced.

The cases are Nos. 15-3198 & 15-3247.

Attorneys: Christine R. Arnold (Hollins Law) and Thomas P. Leff (Casarino Christman Shalk Ransom & Doss) for Stemtech Health Sciences, Inc. Jan I. Berlage (Gohn Hankey Stichel & Berlage) and James S. Green, Sr. and Jared Green (Seitz Van Ogtrop & Green) for Andrew Paul Leonard.

Companies: Stemtech Health Sciences, Inc.

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