USDC, N.D. Texas, January 12, 2018

After granting defendants’ motion to compel arbitration and dismissing plaintiff’s copyright action with prejudice, district court denies defendants’ motion for attorneys’ fees, holding that successfully compelling arbitration did not give defendants “prevailing party” status under Copyright Act.

Plaintiffs Heritage Capital Corp. and related entities, operators of a website that hosts sales and auctions of collectibles, sued Christie’s Inc. and Collectrum for copyright infringement, violations of the Computer Fraud and Abuse Act and the Digital Millennium Copyright Act, and various statutory and common law claims under Texas law. Heritage, which operates the auction website www.HA.com, alleged that Christie’s had downloaded Heritage’s listings from its website using an advanced computer code. Heritage traced the downloading activity to Christie’s and then found that some of the allegedly copied listings had appeared on the Collectrum website.

Defendants moved to dismiss the complaint and compel arbitration, arguing that Heritage’s Website Use Agreement, which contains an arbitration provision, applied. The court agreed, finding that the website terms of use purport to apply to visitors who use HA.com for any reason and that the agreement was broad enough in scope to cover Heritage’s claims, and it granted the motion to compel arbitration and dismissed the action in its entirety with prejudice.

Subsequent to the dismissal, Christie’s moved for an award of attorneys’ fees as a prevailing party under Section 505 of the Copyright Act. Heritage countered that the action was proceeding in the arbitration setting provided for by the website terms of use, despite the end of the federal case.

As the starting point in its analysis, the district court noted that while the “American Rule” that each party in litigation bears its own costs and attorneys’ fees generally applies, a party may recover attorneys’ fees where authorized by statute, and that attorneys’ fees under the Copyright Act are to be awarded “routinely” to the prevailing party, though always within the discretion of the court.

To begin to define the term “prevailing party,” the court first looked to the U.S. Supreme Court’s 2001 decision in Buckhannon Board and Care Home, Inc. v. West Virginia Department of Health and Human Resources, in which the Court found the most important element in the prevailing party inquiry to be “the material alteration of the legal relationship of the parties in a manner which Congress sought to promote in the fee statute.” The district court noted that other U.S. Courts of Appeal, such as the First, Sixth, Ninth and Federal Circuits (as well as other district courts within the Fifth Circuit), had previously applied the Buckhannon “material alteration” test to prevailing party claims under the Copyright Act. The court also cited the Fifth Circuit’s similar interpretation of prevailing party under other, analogous statutes, which requires a prevailing party to “(1) obtain actual relief that (2) materially alters the legal relationship between the parties and (3) modifies the [opposing party’s] behavior in such a way that benefits the [moving party] at the time of the judgment.”

The court ultimately held that successfully compelling arbitration did not “materially alter” the legal relationship between the parties for two primary reasons. First, the court noted that the majority of other courts to address the issue have treated a successful motion to compel arbitration as a “temporary procedural victory,” which does not materially alter the legal relationship between the parties sufficiently to confer prevailing party status. The court found these cases to flow logically from Supreme Court precedent illustrating that a material alteration “disposes of the matter in question with some finality.” Additionally, the court looked to persuasive precedent holding that the granting of a preliminary injunction and dismissals for lack of personal or subject matter jurisdiction are not final enough to confer prevailing party status. All of this weighed against prevailing party status for Christie’s in the present case, according to the court, because Christie’s remained potentially liable to Heritage for copyright infringement; after successfully compelling arbitration, the only difference was that the determination of whether Christie’s was liable would be made by an arbitrator rather than the court.

Second, the district court reasoned that awarding Christie’s attorneys’ fees under the Copyright Act when it could still be found liable under the same statute would “essentially replace a merits-based requirement for recovering attorneys’ fees with a procedural-based requirement.” It was therefore clear to the court that successfully compelling arbitration, what it characterized as a “procedural change of forum,” did not materially alter the legal relationship between the parties in the manner the Copyright Act seeks to advance. Thus, the court held that Christie’s was not a prevailing party under Section 505 of the Copyright Act and was ineligible to recover attorneys’ fees for successfully compelling arbitration.