USDC W.D. Virginia, November 7, 2008

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For his activities as a “high-level member of an Internet piracy organization known as ‘Elite Torrents’” during 2004 and 2005, defendant Daniel Dove was convicted of criminal copyright infringement and conspiracy to commit the same in the Western District of Virginia. The court sentenced defendant to eighteen months in prison and ordered him to pay a $20,000 fine. Two victims of defendant’s piracy, the Recording Industry Association of America (“RIAA”) and Lionsgate Entertainment, Inc. (“Lionsgate”), submitted requests for restitution.

Because there is no special restitution statute for copyright infringement, the court considered whether the federal Mandatory Victims Restitution Act of 1996 (the “MVRA”) applied to the present case. Under the MVRA, restitution is required when there is (1) “an offense against property under [Title 18],” in which (2) “an identifiable victim or victims have suffered a … pecuniary loss,” and (3) “the court has not found that the number of identifiable victims or the complexity of determining causation or the amount of the victims’ losses would make restitution impracticable.” See 18 U.S.C. § 3663(A). With respect to the third element, “[t]he government must prove the amount of the loss sustained by a victim as a result of the offense by a preponderance of the evidence.” After concluding the first two requirements were applicable to Dove’s criminal conviction, the court ultimately concluded that, because the government failed in its burden to prove each victim’s actual loss, it did not satisfy the third prong of the MVRA test.

Both victims based the amount of restitution requested on the “diverted profits” (or “diverted sales”) theory of loss. The “diverted profits” theory of loss, as applied to this case, is “that for each illegal download of music or movies on the Elite Torrents network, profits were diverted from legitimate sales the copyright holders could have otherwise made.” In this case, RIAA alleged that its member companies suffered economic losses of $124,768.82 as a result of defendant’s piracy. RIAA arrived at this figure by multiplying the 17,281 times that a sound recording album was transferred through defendant’s server by $7.22, the average wholesale price of a digital album in 2005. However, RIAA agreed to accept only $47,000, in exchange for defendant’s agreement to appear in a public service announcement designed to discourage unlawful music piracy. Lionsgate, which owns the copyrights to 28 of the 700 movies defendant infringed, estimated that defendant “sold over a million units” of the 700 movies “at $19 per unit,” resulting in a $22 million loss to the movie industry. Lionsgate claimed its 4% share (its 28 out of 700 movies) as $880,000.

In rejecting both victims’ request for restitution, the court indicated that, although each victim had suffered harm, the government failed to meet its burden of proving the victims’ actual losses by a preponderance of the evidence. The court harshly criticized the “diverted profits” theory, primarily on the ground that the victims’ application of the theory ignored the “basic principle of economics that as price increases, demand decreases.” Both victims’ application of diverted profits theory assumed that each illegal download of a copyrighted work represented a legitimate sale that would have been consummated at full price. But the court found that they did not assess how many Elite Torrents downloaders would have used the various alternatives, such as buying the works over the Internet, renting them, borrowing them from the library or purchasing them at full price. The court rejected this “faulty assumption,” stating that “[c]ustomers who download music and movies for free would not necessarily spend money to acquire the same product.” The court found the logical underpinnings of the “diverted profits” theory of loss, as applied in this case, dubious. Reinforcing the basic reasoning of the decision, the court stated, “I am skeptical that customers would pay $7.22 or $19 for something they got for free.” Nonetheless, the court acknowledged that “[t]here has certainly been some harm to the victims.”