Wednesday, April 02, 2008

An expensive lesson in losing a lawsuit

Contractual Obligation Productions, LLC v. AMC Networks, Inc., 2008 WL 793603 (S.D.N.Y.)

Plaintiff produced a TV series for defendants. The relationship soured, and plaintiff sued for copyright and trademark infringement and related California state law violations notwithstanding the existence of a work-for-hire agreement between the parties. The Lanham Act claims alleged that (1) defendants falsely obtained subsidies from the Canadian government by incorrectly designating it as a Canadian series and (2) defendants wrongfully failed to credit plaintiff. Unsurprisingly, plaintiff lost, and defendants sought to recover attorneys’ fees.

A prevailing defendant in a copyright infringement case can get attorneys’ fees if it was objectively unreasonable to sue, which means the claim was clearly without merit or otherwise patently devoid of a legal or factual basis. The court determined that the unambiguous work-for-hire provision of the parties’ agreement made the copyright claim objectively unreasonable. Plaintiff’s continued pursuit of the claim after an earlier judge’s order holding that plaintiff lacked standing only worsened the problem, as did plaintiff’s noncompliance with discovery obligations. (The work-for-hire/assignment agreement deprived plaintiff of standing because plaintiff had no copyright interest to assert.)

Plaintiff argued that the assignment was invalid, because the work at issue was not fixed when the agreement was made, and there can be no copyright without fixation. However, the Copyright Act specifically provides for work-for-hire status for commissioned works, and courts have repeatedly enforced assignments of copyright in work yet to be created. Thus, plaintiff’s legal theories were all objectively unreasonable, and defendants were entitled to reasonable fees and costs.

The standard for awarding fees in Lanham Act cases is more stringent, requiring an “exceptional” case, including cases of fraud or bad faith. When a plaintiff knows or should know a legal theory is untenable, that can imply bad faith. Here, when a prior judge denied plaintiff’s motion for preliminary injunction, plaintiff was unequivocally instructed that Dastar barred any false designation of origin claim.

Plaintiff, however, continued to argue that Dastar was distinguishable because the underlying work in that case was in the public domain. Though many legal scholars have complained that Dastar’s result far outstrips its rationale, the court found no “meaningful explanation” of why public domain status would be distinguishable. Other courts have expressly applied Dastar to copyrighted works, and no court has accepted the public domain distinction.

Plaintiff then argued that it had false advertising claims. Quoting McCarthy, argued that “‘[a]fter Dastar, to trigger Lanham Act § 43(a) claims, false claims of creation of the intellectual property content of a product must fit within the false advertising prong of § 43(a)(1)(B).’” However, plaintiff’s claim that labeling the TV program a Canadian production constituted false advertising was merely a different iteration of its theory that it created the program in the US. The plaintiff couldn’t circumvent Dastar by recasting its creative origin claim as a false advertising claim.

Comment: Um, why not? Though nobody else seems to remember this, Dastar explicitly mentioned the prospect of false advertising claims, which would be subject to (1) the commercial advertising or promotion requirement, making them more limited in scope than §43(a)(1)(A) claims, (2) the judicially imposed materiality requirement, with like effects, and (3) the judicially imposed standing requirement, ditto. Moreover, the court’s conclusion seems particularly odd when plaintiff’s formal claim is one for geographic misrepresentation. If “Made in the USA” is actionable, why not “Made in Canada”? Indeed, the court went on to say that plaintiff couldn’t bring a false advertising claim because it had failed to show that it had standing as a competitor. The court then reasoned that plaintiff’s failure to present facts establishing standing was evidence that it didn’t pursue Lanham Act claims in good faith.

Because the Lanham Act claims were completely lacking in legal merit, and plaintiff knew it, the court found exceptional circumstances warranting a fee award, but only after the first ruling in the case, because there was no evidence that plaintiff knew about Dastar when it filed its complaint and motion for preliminary injunction.

Because the California state-law claims were so intermingled with the Lanham Act claims, the fee award could cover them, too.

The court allowed the award despite the significant financial disparities between the parties, and despite plaintiff’s affidavit that it had lost money in every year since filing the case and that its primary asset was its (nonexistent) rights in the TV series. Plaintiff didn’t offer any documentation to support its claims, and thus there was no showing of inability to pay.

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