In 2010, the U.S. Court of Appeals for the Federal Circuit held that the government was liable for infringing the copyright held by sculptor Frank Gaylord for some of his sculptures in the Korean War Veterans Memorial, known as The Column. Gaylord v. U.S., 595 F.3d 1364 (Fed. Cir. 2010) (see Intellectual Property Newsletter Summer 2010). The government had used thirdparty photographs of Gaylord’s work on postage stamps, without his permission, which the Federal Circuit concluded was not fair use. The Court of Federal Claims subsequently awarded Gaylord $5,000 in compensation for that infringement. The Federal Circuit vacated that decision and sent the case back to determine the fair market value of (1) the stamps used to send mail, (2) commercial merchandise featuring an image of the stamp, and (3) unused stamps purchased by collectors. Gaylord v. U.S., 678 F.3d 1339 (Fed. Cir. 2012).

The parties agreed that no damages would be awarded for stamps used to send mail and that a per-unit royalty of 10% was appropriate for the commercial merchandise (about $33,000). After a two-day trial, the Court of Federal Claims determined that a 10% per-unit royalty was also appropriate to calculate the damages for stamps bought by collectors. As the court found that the Postal Service received $5.4 million in revenue from stamps sold to collectors, it awarded Gaylord $540,000 in damages for those stamps, plus prejudgment interest.

Once again on appeal to the Federal Circuit, the government argued that the court wrongly calculated the fair market value of the collectors’ stamps by using a reasonable royalty based on what a willing buyer and willing seller hypothetically would have negotiated for the infringing use. The Federal Circuit noted that a court is not required to allow owners to charge what they would like to have charged if not constrained by reality, nor to shield infringers from paying the fair market value of what they took. The hypothetical negotiation must be tied to the particular infringed work and its value in the marketplace.

The Federal Circuit approved use by a court of past arms-length licensing practices by the copyright owner or infringer for similar uses or “benchmark” licenses by others in the industry. However, the Federal Circuit noted that courts must always take into account the economically relevant differences between the circumstances of those past licenses and the matter at issue, where the unique features of a particular work (including its recognized stature and symbolic value) might be important in determining the ultimate significance of past licensing practices for other works.

The Federal Circuit approved the trial court’s use of a per-unit royalty rather than a one-time lump-sum payment, because it is a logical way to tie the amount paid to the marketplace success of the infringing work. A per-unit royalty also avoids overvaluing or undervaluing the asset before its market performance has occurred. In this case, there was no difficulty in monitoring the number of sales or amount of revenue that would make a per-unit royalty inefficient. Although the government argued that its past practices show that it would not have agreed to a per-unit royalty in a negotiation with Gaylord, but would have offered a flat fee, the trial court was entitled to discount the significance of potential alternative arrangements because Gaylord’s work was unique as a distinctively recognized symbol of the Korean War. The government wanted an image of The Column on the stamp and could not have replaced such an image with an image of a less recognizable portion of the Memorial. Noting that there is only one nationally recognized Korean War memorial, the Federal Circuit found that the trial court appropriately took into account that an image of The Column was a distinctively valuable subject for a commemoration of Korean War veterans. Accordingly, the per-unit license was reasonable.

In addition, the 10% per unit royalty was also reasonable. Gaylord’s other licenses for works incorporating The Column charged a 10% per-unit royalty on the revenue collected or on the gross proceeds, which the government accepted for the merchandise bearing images of the stamps. The photographer whose images of The Column the government used for the stamps also paid Gaylord 10% of his net retail sales for his photograph. As the government’s revenue from the collectors’ purchases of the stamps was almost pure profit, the 10% royalty still left the government with 90% of the profits.

The Federal Circuit also approved the trial court’s use of $5.4 million as the revenue figure, rejecting the government’s argument that patent law principles involving multi-component products should have been applied. Unlike the situation where only a small component of a product is covered by a patent, the stamp consisted essentially of the image of Gaylord’s work.

This analysis of copyright damages is heavily based on similar awards in patent cases and succeeded because the author of the copyrighted work could show other licenses he had negotiated in the past, and it was fairly easy to obtain the government’s figures on unit sales and revenues for the stamps. In situations where the author of a copyrighted work has registered the copyright within three months after first publication of the work, it may be easier to rely on the statutory damages provision in the Copyright Act. 17 U.S.C. § 504(c). The Act provides for $750- 30,000 for infringement of any one work, which can be increased to $150,000 for willful infringement. In this case, proof of actual damages far exceeded what Gaylord could have recovered in statutory damages, but the reverse is often the case.

Source: Gaylord v. U.S., U.S. Court of Appeals for the Federal Circuit, No. 2014-5020, February 4, 2015