A REPUTATION OF SUCCESS IN INTELLECTUAL PROPERTY LAW AND BUSINESS LITIGATION
Contribution And Indemnification Among Multiple Infringers
**Initially Published in The Colorado Lawyer, May 2015 Issue, Vol. 44, No. 5, P. 49
The Copyright Act’s strict liability scheme often leaves accused infringers with few viable defenses. Liability can attach for infringements occurring without fault or even knowledge. A party can be held liable for unknowingly participating in copyright infringement perpetrated by others. This liability risk is especially high in industries such as software resale and development, which routinely involve the transfer of intellectual property among multiple parties. For instance, a resale vendor who unintentionally buys and sells counterfeit software is liable for copyright infringement even if the vendor used its best efforts to avoid trading in pirated materials. A business owner may innocently rely on a third party web developer’s false (or merely inaccurate) representation that the developer’s work is original. One way or another, infringing intellectual property is increasingly likely to change hands many times in today’s economy. These situations can lead to copyright infringement liability among multiple defendants. The implications for co-defendants are harsh: the Copyright Act does not require a Plaintiff to apportion damages among defendants. While each defendant is individually liable for his or her own illegal profits, co-defendants are jointly and severally liable for statutory damages and all other actual damages. 1 Litigators counselling defendants in this situation will naturally consider potential third-party claims against the other responsible parties. Unfortunately, traditional third-party remedies can come up short in the copyright infringement context. The main obstacle is the Copyright Act itself. First, only the “legal or beneficial owner” of an exclusive right under the Copyright Act has standing to sue for injuries arising from the infringement of the copyrighted work. 2 This means copyright defendants generally lack standing to bring infringement claims against co-infringers for injuries arising from the co-infringer’s copyright infringement. 3 Second, and complementing its restriction on standing, the Copyright Act also preempts any remedy considered a functional “equivalent” of a copyright infringement suit. 4 These principles pose a big obstacle to third party contribution and indemnification claims, sometimes for reasons that are not entirely clear. This article will discuss the viability of these remedies among defendants facing joint and several copyright infringement liability. What are Indemnification and Contribution? Common-law indemnification is generally available for defendants who are without fault themselves but are nonetheless liable to the plaintiff due to a third party’s wrongful conduct. At common law, the defendant can seek indemnification for the entire judgment amount once the Plaintiff’s judgment has been satisfied. A defendant can potentially seek indemnification as a matter of common law or a statute codifying common law, or as a matter of other statutory law providing a basis for indemnification claims. Contractual indemnification is similar and more common. It often arises in the context of insurance and indemnity agreements. The uniform commercial code, where applicable, can also impose “contractual” warranty obligations which can, in turn, serve as a basis for indemnification claims. Like indemnification, contribution claims allow a defendant to seek compensation from a third party once the plaintiff’s judgment has been satisfied. Unlike indemnification, contribution is available to defendants who acted with at least some degree of “fault,” but were nonetheless not the only parties at fault. A defendant can generally seek contribution when that defendant has paid more its “fair share” in satisfying the Plaintiff’s judgment. Procedurally, court rules generally allow the defendant to seek indemnification against the third party during the underlying lawsuit. 5 Unless substantive law provides otherwise, however, contribution and indemnification judgments generally do not mature until the plaintiff’s judgment has been at least partially satisfied. 6 “De Facto” Preemption of State Common Law Indemnification and Contribution Claims Federal courts agree that neither contribution nor indemnification are available under the Copyright Act or federal common law. 7 But what about state law claims? State law contribution and indemnification are generally available in federal court because they are considered substantive remedies. 8 Thus, the question becomes: are these state law claims federally preempted in the copyright context? The leading case on this issue is Foley v. Luster, in which the Eleventh Circuit determined the Copyright Act did not preempt a Florida common law indemnification claim. 9 Analyzing the three potential bases for federal preemption generally, the court first determined no “explicit preemption” existed because nothing in the Act expressly barred indemnification suits. Next, the court ruled out “conflict preemption” because the claims did not conflict with one another. The court found “it is certainly permissible for a plaintiff to sustain a copyright infringement suit while the defendants litigate an indemnity suit as a cross-claim.” Finally, the court found no “field preemption” because it determined common law indemnity claims did not intrude upon the exclusive rights guaranteed by the Copyright Act. In evaluating preemption, the court in Foley also considered (but did not apply) the “extra element test,” which courts also use to consider whether the Copyright Act preempts particular state law causes of action. 10 Under this test, courts determine whether the state law claim requires an element instead of or in addition to “the acts of reproduction, performance, distribution or display” of copyrighted works. 11 If the answer is yes, the cause of action is not preempted. 12 For example, many courts have applied this test in upholding breach of contract actions (such as indemnification agreements) where copyright infringement is an element of liability. 13 In such cases, breach of the promise between the parties supplies the extra element. 14 Even so, a breach of contract action is still likely to be preempted if the contract merely involves a promise by one party not to infringe the other party’s copyrights. 15 While the holding in Foley might appear to open the door for state law contribution and indemnification claims, these claims continue to meet very limited success when pled as a matter of state common law. Courts have considered indemnification and contribution as matters of federal common law even while apparently acknowledging that federal copyright law does not actually preempt these state law claims. 16 For example, in Equity Builders and Contractors, Inc. v. Russell, the Northern District of Illinois rejected an Illinois common law contribution claim on these grounds. 17 The court distinguished the question of preemption from “whether substantive law authorizes such a claim for indemnification (or contribution)”. 18 The court then denied the claim on the grounds that contribution and indemnification were governed (and precluded) by federal common law interpreting the Copyright Act. 19 The above case law does not clarify how federal common law can override state law indemnification and contribution claims if they are not preempted. 20 If federal law does not preempt these state law claims, their unavailability under federal law does not appear relevant. In any event, the federal courts seem to recognize a de facto “field preemption” for state common law indemnification and contribution claims. Federal courts have generally treated these claims as remedies “for violation of a federal statute”. 21 As such, holdings on this subject at least imply that the federal statute and associated remedies occupy the “field” of available remedies, and state common law remedies would intrude on federal law if permitted. State law indemnification and contribution claims have seen more success when pled under state statutes. For example, in Pure Country Weavers, Inc. v. Bristar, Inc., a textile product distributor was accused of copyright infringement and crossclaimed for indemnification against the importer from which it purchased infringing goods. 22 The Western District of North Carolina rejected a Georgia common law indemnification claim while allowing a statutory indemnification claim under the warranty provisions of Section 2-312 of the Georgia Uniform Commercial Code. 23 Section 2-312(3), which the court held applicable indemnification for copyright claims, reads as follows: Unless otherwise agreed a seller who is a merchant regularly dealing in goods of the kind warrants that the goods shall be delivered free of the rightful claim of any third person by way of infringement or the like but a buyer who furnishes specifications to the seller must hold the seller harmless against any such claim which arises out of compliance with the specifications. 24 This statutory indemnification claim was considered a “remedy for violation of state statutory law, not for violation of a federal statute.” 25 The Uniform Commercial Code imposed a contractual warranty of non-infringement between buyer and seller, specifically allowing for indemnification as a matter of substantive contract law. 26 This holding is also congruent with a Copyright defendant’s well-recognized ability to seek indemnification or contribution based on a contract with another party. 27 Similarly, in Frank Betz Associates, Inc. v. Signature Homes, Inc., the Middle District of Tennessee rejected common law indemnification but recognized “third party claims for indemnification may sometimes be asserted on a statutory basis.” 28 In Frank Betz, an architectural firm had been sued for allegedly publishing, marketing, and distributing infringing architectural designs. 29 The defendant filed a third party complaint against the designers from whom it purchased the designs, seeking indemnification at common law and under the Tennessee Consumer Protection Act. 30 Applying the “extra element” test, the court found the Consumer Protection Act claim was not preempted because [t]he Tennessee Consumer Protection Statute is designed to ‘protect consumers and legitimate business enterprises from those who engage in unfair or deceptive acts or practices in the conduct of any trade or commerce.’ While the right protected by copyright is the right of the author to exclusive reproduction of the protected work, the right asserted here is that of fair dealing in the [defendant’s] purchase of the alleged reproduction of the protected work. The right of the buyer is qualitatively different from the right of the author as envisioned by Congress under the Copyright Act. Therefore the Copyright Act does not preempt this cause of action. 31 The state “statutory” claims in Frank Betz and Bristar implicated rights distinct from copyright. It is important to note that the statutes did not merely provide for indemnification in the event of tort liability, but assigned liability based on violation of additional substantive rights. Statutes that merely codify common law contribution and indemnification principles have not fared as well. In Too, Inc. v. Kohl’s Dept. Stores, Inc., the Southern District of New York also allowed a contribution claim based on a New York contribution statute, 32 but it later rejected the same cause of action in KBL Corp. v. Arnouts, pointing out that the holding in Too did not “squarely address” whether such a claim was permissible. 33 The above cases indicate Federal Courts have determined state common law contribution and indemnification claims, as well as statutes codifying these common law claims, are not sufficiently independent of Copyright law to serve as stand-alone claims. This view is controversial. It has been argued that state common law contribution and indemnification claims should still be allowed under the “extra element” standard. 34 At common law, a claim for contribution or indemnification generally does not accrue until the plaintiff’s claim has been satisfied and discharged. 35 If the copyright plaintiff has been satisfied, there is arguably no further federal interest in the controversy. 36 Under this view, if a defendant paid more than its fair share in satisfying the plaintiff’s judgment, the remaining defendants’ failure to reimburse the defendant should supply the “extra element” required for liability. In any event and for all intents and purposes, a co-defendant will have few available avenues to recover against another co-defendant unless the claim is based on a contractual relationship. The available case law precludes common law contribution and indemnification claims in copyright infringement suits. On the other hand, courts generally accept statutory indemnification claims if they are based on independent areas of law such as the Uniform Commercial Code or consumer protection statutes. Third party claims based on contracts between co-defendants are also available. 37 This author has not located any state cases directly evaluating whether a former copyright defendant can file a contribution or indemnification suit as a matter of tort law. 38 However, if such defendants have satisfied the plaintiff’s judgment and the federal interest has been extinguished, such claims may have a better chance of surviving dismissal. 39 Such suits would not interfere with the rights of the copyright plaintiff, nor could they be considered state law defenses to federal claims. Preemption of Tort Reform Statutes that Apportion Tort Liability Among Multiple Defendants In addition to the remedies above, a Copyright defendant may be inclined to look to “tort reform” state statutes which apportion liability among multiple defendants. These statutes, such as Colorado’s C.R.S. § 13-21-111.5, generally prohibit joint and several liability for defendants liable in tort and require assessment of liability according to each defendant’s relative fault. C.R.S. § 13-21-111.5, enacted in 2007, provides in pertinent part: “In an action brought as a result of a death or an injury to person or property, no defendant shall be liable for an amount greater than that represented by the degree or percentage of the negligence or fault attributable to such defendant that produced the claimed injury, death, damage, or loss…” Under this statute, a defendant may attempt to reduce liability by claiming other parties (including non-parties) are at fault for the injury in question. 40 No court has yet addressed preemption of Colorado’s tort reform statute in the Copyright infringement context. However, in Design Basics, LLC v. Chelsea Lumber Co., the Eastern District of Michigan ruled that the Copyright Act preempted a similar Michigan tort reform statute. 41 Denying the Defendants’ attempt to provide notice of non-parties at fault, the court found that applying the statute could limit the defendant’s federal liability under the Copyright Act. The court held: Defendants’ notice of non-party fault is preempted by the federal Copyright Act. The Copyright Act provides that, “all legal and equitable rights that are equivalent to any of the exclusive rights within the general scope of copyright … are governed exclusively by this title.”17 U.S.C. § 301(a). As the Supreme Court has explained, “It is familiar doctrine that the prohibition of a federal statute may not be set at naught, or its benefits denied, by state statutes or state common law rules.” Sola Elec. Co. v. Jefferson Elec. Co., 317 U.S. 173, 176, 63 S.Ct. 172, 87 L.Ed. 165 (1942). See also Cipollone v. Liggett Group, Inc., 505 U.S. 504, 516, 112 S.Ct. 2608, 120 L.Ed.2d 407 (1992) (noting that under the Supremacy Clause of the Constitution, “state law that conflicts with federal law is without effect.” (citations and quotation marks omitted). 42 With state tort reform statutes preempted in this manner, a Copyright co-defendant cannot expect to apportion liability by naming non-parties at fault. So How do I Proceed? No reported cases in the Tenth Circuit take any position on whether Copyright law precludes state common law contribution or indemnification claims. However, if a federal court in the 10 th Circuit were to permit such claims as third-party complaints or crossclaims, how might they be litigated? At common law, indemnification and contribution claims traditionally require an assessment of “fault.” This can be somewhat problematic in a strict liability context. Generally, a party seeking common law indemnification must be “without fault,” while an indemnification defendant must have some degree of fault. That said, a finding of strict liability does not automatically equate to “fault” because it is not based on negligence. 43 A strict liability defendant can generally prevail on an indemnification claim if the defendant demonstrates a) lack of active negligence on the part of the party claiming indemnification, and b) active negligence of the party from whom indemnification is being sought. 44 Put another way, a faultless or “passively” negligent can seek indemnification against an “actively” negligent defendant. Common law indemnification, if allowed, would seem most feasible in cases where a faultless copyright defendant seeks indemnification due to another party’s active negligence or willful misconduct. On the other hand, common law indemnification appears to be much less helpful if neither party was actively negligent. Under those circumstances, contribution, which allows for an equitable apportionment of damages according to fault (and presumably lack thereof), would be the better remedy. As such, common law indemnification is likely unavailable if it involves a claim between two “faultless” parties. Contribution is technically the better remedy, as it involves equitable apportionment of liability. Courts evaluating these claims would be required to apportion “fault” for the Copyright Infringement even though the underlying infringement is determined under strict liability. The table below illustrates a defendant’s basic options when faced with a copyright infringement suit potentially implicating multiple defendants.
|Type of State Law Claim||How Asserted?||Allowed?||Level of Protection to Defendant if the Court allows the Claim?|
|Common Law Contribution or Indemnification||Crossclaim or Third Party Complaint in Federal Copyright Infringement Suit||Generally not allowed: considered a question of federal common law even though there has been no finding that these claims are actually preempted.||Defendant can generally obtain relief once Plaintiff’s judgment has been at least partially satisfied, depending on the governing substantive state law.|
|Common Law Contribution or Indemnification||State Court Claim in After Federal Lawsuit Decided||Greater chance, especially if Defendant Seeking relief has Fully Satisfied Plaintiff’s Judgment||Defendant can generally obtain relief once Plaintiff’s judgment has been satisfied.|
|Statutory Indemnification or Contribution||Crossclaim or Third Party Complaint in Federal Copyright Infringement Suit||Generally allowed if statute creating indemnification or contribution rights involves independent area of substantive law. Less likely to be allowed if state statute merely codifies common law indemnification rights.||Added advantage of indemnification judgment at the same time as copyright infringement judgment. Timing of collectability depends on rights provided by the state statute.|
|Contractual Indemnification||Crossclaim or Third Party Complaint in Federal Copyright Infringement Suit||Allowed as a parallel breach of contract action.||Availability of relief will vary depending on nature of contract. Relief may depend on the legal availability of consequential damages if the contract does not directly provide for indemnification.|
|State statute requiring apportionment of liability among multiple defendants.||Raised as defense in Federal Copyright Infringement Suit.||Preempted.||Best potential level of protection if Defendant is not at fault, but other defendants are at fault.|
Conclusion Third party claims provide very limited protection to copyright defendants. Business owners should consider this in assessing their overall risk. With allocation of liability unavailable, defendants risk chasing third party claims while facing joint and several liability for the infringement. Even if indemnification and contribution remedies are available, a defendant generally cannot collect on an indemnification or contribution judgment until after the plaintiff’s judgment has been satisfied. Contractual indemnification clauses and state statutory claims generally have a much better chance of surviving dismissal, but their ultimate effectiveness still depends on collectability. Businesses with sufficient risk should strongly consider purchasing business liability policies that provide protection for copyright infringement.
1 17 U.S.C. § 504(c)(1) provides that co-defendants sharing responsibility for infringement of a single work are jointly and severally liable for any statutory damages assessed. However, should a plaintiff elect to recover actual damages and profits realized from the infringement under 17 U.S.C. § 504(b), one co-defendant cannot be held jointly and severally liable for profits realized by another co-defendant. MCA, Inc. v. Wilson, 677 F.2d 180, 186 (2nd Cir. 1981); Frank Music Corp. v. Metro-Goldwyn-Mayer, Inc., 772 F.2d 505, 519 (9 th Cir. 1985). 2 17 U.S.C. 501(b). See Righthaven LLC v. Wolf, 813 F.Supp.2d 1265 (D.Colo.2011); Swarovski America Ltd. v. Silver Deer Ltd., 537 F.Supp. 1201, 1205 (D.Colo.1982); see also Viesti Associations, Inc. v. Pearson Education, Inc., No. 12-cv-01431, 2013 WL 1229534, at *2 (D.Colo. March 26, 2013): “[O]nly parties with a legally recognized interest in copyright as delineated in [17 U.S.C.] § 106 (‘legal owners’), and parties who stand to benefit from the legal dissemination of copyrighted material (‘beneficial owners’) have the right to sue for infringement under § 501(b) of the Copyright Act.” Righthaven, 813 F.Supp.2d 1265, 1271-72 (footnote omitted). 3 Under certain limited scenarios, a copyright defendant may have standing to sue for copyright infringement. For instance, a copyright owner may sue an exclusive licensee for improperly sublicensing the work to a third party. The exclusive licensee may then have standing to sue the third party for improperly using the work in violation of the exclusive licensee’s license. See Nafal v. Carter, 540 F.Supp.2d 1128, 1137 (C.D.Cal. 2007) (an exclusive licensee has standing to sue for copyright infringement). 4 17 U.S.C. § 301(a); Computer Associates Intern., Inc. v. Altai, Inc., 982 F.2d 693, 716 (2nd Cir. 1992). 5 See e.g. Fed. R. Civ. P. 14 (“[t]he plaintiff may assert against the third-party defendant any claim arising out of the transaction or occurrence that is the subject matter of the plaintiff’s claim against the third-party plaintiff”); see also Colo. R. Civ. P. 14 (“[a] third-party defendant may proceed under this Rule against any person not a party to the action who is or may be liable to him for all or part of the claim made in the action against the third-party defendant”). 6 See e.g. Holzhauser v. Container Corp. of America, 93 F.R.D. 837, 839 (D.C.Ark., 1982) (allowing indemnification third party complaint even though indemnitee had not paid the claim, finding that “the Court may grant either a conditional judgment against the third-party defendant that does not become enforceable until the third-party plaintiff satisfies the original judgment or may permit judgment to be entered but stay execution until the third-party plaintiff can demonstrate that it paid.”) See also A. Tenenbaum & Co., Inc. v. Colantuno, 117 P.3d 20, 24 (Colo.App. 2004) (finding that “once an obligation has become joint and several, any debtor who pays more than his proportionate share has a right of contribution from the remaining debtors”). 7 KBL Corp. v. Arnouts, 646 F.Supp.2d 335, 339 (S.D.N.Y. 2009). 8 See Patten v. Knutzen, 646 F.Supp. 427, 429 (D. Colo. 1986). 9 Foley v. Luster, 249 F.3d 1281, 1289 (11 th Cir. 2001). The court analyzed the three bases for preemption under the supremacy clause: explicit, conflict, and field preemption. 10 Foley at 1285; see also Mayer v. Josiah Wedgwood & Sons, Ltd., 601 F.Supp. 1523, 1535 (S.D. N.Y. 1985). 11 Id. 12 Id. 13 See e.g. A. Brod, Inc. v. SK & I Co., 998 F.Supp. 314, 323 (S.D.N.Y.1998); Torah Soft Ltd. v. Drosnin, 224 F.Supp.2d 704, 716-717 (S.D.N.Y.2002). 14 A. Brod, Inc., 998 F.Supp. at 322. As discussed below (infra at 4-5), contractual indemnification claims based under the UCC or on written indemnification agreements are widely recognized in federal court. 15 Wrench LLC v. Taco Bell Corp., 256 F.3d 446, 458 (6 th Cir. 2001). 16 Equity Builders and Contractors, Inc. v. Russell, 406 F.Supp.2d 882, 886 (N.D. Ill. 2005); Crispin v. Christian Audigier, Inc., 839 F.Supp.2d 1086, 1099 (C.D. Cal. 2011). 17 Equity Builders, 406 F.Supp.2d at 886. 18 Id. 19 Id. 20 See 6 Patry on Copyright §§ 18:32- :33 for further discussion. Patry contends that if these claims are not preempted, no other basis for their preclusion is apparent. 21 Equity Builders, 406 F.Sup.2d at 885; see also Lehman Brothers, Inc. v. Wu, 294 F.Supp.2d 504, 505, n. 1 (S.D.N.Y. 2003); and Zero Tolerance Entertainment, Inc. v. Ferguson, 254 F.R.D. 123, 126 (C.D.Cal. 2008); but see SUA Ins. Co. v. Odom Investments, Inc., 2010 WL 936729, at *2 (D.S.C. 2010) (upholding claim for common law “equitable indemnity” in reliance on holding in Foley v. Luster). 22 Pure Country Weavers, Inc. v. Bristar, Inc., 410 F.Supp.2d 439, 441 (W.D.N.C. 2006). 23 Id; see also Frank Betz Associates, Inc. v. Signature Homes, Inc., 2009 WL 2151304, at *4 (M.D. Tenn. 2009) (citing Bristar). 24 West’s Code of Georgia Ann. § 11-2-312. Section 2-312 of the Colorado UCC contains the same provision. C.R.S. § 4-2-312(3). 25 Bristar, 410 F.Supp.2d at 448. 26 Id. at 449. 27 See infra at 3. 28 Frank Betz Associates, Inc. v. Signature Homes, Inc., 2009 WL 2151304, at *4 (M.D. Tenn. 2009). 29 Id. at *1. 30 Id. 31 Id. at *4. 32 Too, Inc. v. Kohl’s Dept. Stores, Inc., 213 F.R.D. 138, 141 (S.D.N.Y. 2003). 33 KBL Corp. v. Arnouts, 646 F.Supp.2d 335, 342, 2009 WL 302060, at *5 (S.D.N.Y. 2009). 34 See 6 Patry on Copyright §§ 18:32- :33. 35 Id. 36 Id. Nonetheless, a federal interest may still exist if a plaintiff’s judgment against one defendant does not encompass all of the plaintiff’s available “damages” against all the defendants. Consider, for example, a copyright plaintiff who has obtained a judgment against a defendant for statutory damages and that judgment is fully “satisfied.” The statutory damages judgment would necessarily not cover an “actual” damages claim against a second defendant, especially if the second defendant wrongfully profited on its own from the copyright infringement. Copyright defendants are not jointly and severally liable for their own wrongful profits. See supra at n. 1. 37 See supra at 3. 38 On the other hand, state law breach of contract and insurance cases arising from copyright infringement suits are common. See e.g. Lee v. Mt. Ivy Press, L.P., 827 N.E.2d 727, 738, 63 Mass.App.Ct. 538, 552 (Mass.App.Ct.,2005) 39 See 6 Patry on Copyright § 18:32, raising the possibility that third-party complaints brought in federal court “as an adjunct to the infringement claim” might be given “short shrift under such circumstances.” 40 C.R.S. § 13-21-111.5(3)(b). 41 Design Basics, LLC v. Chelsea Lumber Co., 2013 WL 3471142, at *2-3 (E.D. Mich. 2013). The laws at issue were Mich. Comp. Laws §§ 600.2957 and 600.2959. § 600.2957(1) provides: [i]n an action based on tort or another legal theory seeking damages for personal injury, property damage, or wrongful death, the liability of each person shall be allocated under this section by the trier of fact and, subject to section 6304, in direct proportion to the person’s percentage of fault. In assessing percentages of fault under this subsection, the trier of fact shall consider the fault of each person, regardless of whether the person is, or could have been, named as a party to the action. (Internal footnote removed.) 42 Id. at *3. 43 See Bendix-Westinghouse Automotive Air Brake Co. v. Latrobe Die Casting Co., 427 F.Supp. 34, 39 (D.C.Colo. 1976). 44 Pyramid Condominium Ass’n v. Morgan, 606 F.Supp. 592, 596 (D.C.Md. 1985); Kuziw v. Lake Engineering Co., 385 F.Supp. 827, 830 (D.C.Ill. 1974).