Prejudgment Interest Can’t Be Denied on the Ground That the Verdict Is Generous Enough — That Gives Windfall to Defendant: An Interest-Free Loan — Difficulty in Calculating Is Not A Basis to Deny

Leonard v. Stemtech Int’l Inc., 2016 U.S. App. LEXIS 15565 (3d Cir. Aug. 24, 2016):

Andrew Leonard, a stem cell photographer, and Stemtech International, Inc., a company that sells nutritional supplements through independent distributors, cross appeal various rulings in the copyright infringement lawsuit Leonard brought against Stemtech in the District of Delaware. For the reasons discussed herein, we will affirm the District Court's pretrial, trial, and post-trial rulings, except the order denying prejudgment interest to Leonard, which we will vacate and remand.

I

A. Andrew Leonard's Images

Leonard takes [*2]  photographs of stem cells using electron microscopes. Only a few photographers engage in this highly technical type of photography. Leonard obtains cell samples from doctors, scientists, and researchers and pays a scientific research institution to use an electron microscope to photograph the cells. The images first appear in black and white, and Leonard uses his "artistic judgment" to enhance the photos in color. J.A. 822-23.

Leonard created the images at issue in this case in the 1990s. ***

Leonard markets his photographs through his business, APL Microscopic, and, during the relevant time period, used a stock photography agency known as Photo Researchers, Inc., to license his images.2 He only allows limited licenses of his images because, in his view, unlimited usage licenses decrease the value of his work.

2   Photo Researchers, Inc., is now known as Science Source.

The licensing fee Leonard charges varies depending on [*3]  whether his images are used for commercial, editorial, or educational purposes. Licensing fees are also impacted by the size, color, and the medium in which the images will appear.

During the 1990s and through the period at issue in this case, stem cell images were rare. At that time, Leonard's images were unique and sought after because there were very few photographers who had the technical skill necessary to produce such work. Even Stemtech's Chief Scientific Officer, Christian Drapeau, testified that Leonard's images were "extremely valuable." J.A. 1544.

In licensing his stem cell photographs, Leonard has received a range of fees, including a $4,000 fee for a non-exclusive license to use his image at trade shows for one year, $6,500 for a one-time, non-exclusive license to use one of his images on a university website for four years, and $1,325 for a one-time, non-exclusive license to use his image in a brochure with a print run of 5,000. He also received $1,500 from Time magazine, which featured one of his images of a human bone marrow stem cell on its August 7, 2006 cover. Between 2007 and 2012, Photo Researchers licensed Leonard's images for fees ranging from less than $100 to [*4]  several thousand dollars.

B. Stemtech and its Distributors

Stemtech "formulates" and sells nutritional supplement products through thousands of distributors, J.A. 1387, who form the backbone of the company. Each distributor signs an agreement and is subject to Stemtech's policies and procedures manual. According to the manual, distributors are required to use only Stemtech marketing materials and its self-replicated websites. Specifically, the manual provides:

   To promote both the products and the tremendous opportunity STEMTech offers, distributors must use the Marketing Materials and support materials produced by STEMTech. . . . Because the Internet recognizes no geographic borders (Domestic or Foreign), information on the Internet may be legal in one State or Country and illegal in another. Therefore, Distributors desiring to utilize an Internet web page to promote his/her distributorship must do so through the Company's official website, using official STEMTech replicated [*5]  templates.

J.A. 2173-74 (emphasis and capitalization in original). Stemtech owns the domain and sub-domains of at least some of its distributors' websites, and Stemtech's vendor operates the server that hosts the Stemtech-supplied sites. Distributors who purchase a website from Stemtech may customize the site only to provide the distributor's name, phone number, email address, and a biography.

C. Leonard and Stemtech's Initial Discussions

In May 2006, Stemtech contacted Leonard about using Image 4 for the "company['s] internal magazine," J.A. 869-70, and for use on its website. After discussing usage and color terms, Leonard provided Stemtech with a quote of $950 for a "one-year usage" of Image 4 in two places in Stemtech's HealthSpan magazine and a separate quote of $300 for a "one-year usage" of the image on the HealthSpan website. J.A. 871; 2120. Stemtech declined to license the image for website use because "the price was too high," J.A. 872, but chose to use the image twice in its magazine.

Leonard sent Stemtech an invoice for $950 for the two magazine placements, but was only paid $500. After multiple unsuccessful attempts to collect the $450 balance, Leonard abandoned his collection [*6]  effort. Not only did Stemtech fail to pay Leonard in full, but it used his images without a license in its other promotional materials.

The images appeared on Stemtech websites, its distributors' websites, marketing DVDs, and other promotional and recruitment materials. Several Stemtech officials and employees explained that using these images was important to Stemtech's business. Chief Scientific Officer Drapeau explained: "If you talk about stem cells, you need [ ] support for the discussion, so you . . . show a cell showing what it's about . . . . It's a marketing thing. I understand [Leonard's images'] value totally. I mean, it's a good representation." J.A. 1539, 1544. George Antarr, Stemtech's Director of North American Sales, produced the DVD in which one of Leonard's images appeared, and explained the importance of a visual depiction of a stem cell in the video: "[W]e talked about stem cells in the product movie, so [ ] it would be good to show that, what one looks like . . . [b]ecause [a] visual [is] part of every sentence. A picture tells a thousand words." J.A. 1510. Thus, as Antarr noted, using a photograph was important to Stemtech's marketing efforts.

D. Stemtech's Unauthorized Use

 [*7] To make sure his images were not used for unauthorized purposes, Leonard "periodically" conducted internet searches for images of stem cells. J.A. 879-80. In October 2007, Leonard discovered his images on numerous Stemtech and Stemtech-affiliated websites. He took screenshots of and archived the webpages on which his images appeared and retained copies of emails he sent to the contacts on various sites.

For example, Leonard found his images on "yourstems.com," a website selling a Stemtech product called Stem Enhance and in a Stemtech e-book featured on the website. J.A. 881, 889. He contacted the site operator, informed him of the infringing uses, requested an accounting of how long the operator used the images, and sought payment for their use. The website operator informed Leonard that he and other distributors were using materials received from Stemtech. Thereafter, Leonard contacted Stemtech's Chief Compliance Officer, Donna Serritella, requesting that Stemtech stop using his images. Serritella told Leonard that she thought that one of the images "was on the cover of a major publication, and that made it public for usage." J.A. 898.

Despite being on notice of Leonard's claim that [*8]  Stemtech and its distributors were using his images without permission, Stemtech did not notify its distributors of his assertion, which it could have done via company-wide email, its weekly newsletter, or monthly communications. In fact, Leonard continued to discover and document unauthorized uses of his photographs on Stemtech-affiliated websites and in its materials. For example, in May 2008, Leonard's friend ordered a Stemtech sales kit from a distributor. The sales kit, intended for marketing the Stemtech product and training distributors, included DVDs with covers featuring one of Leonard's images, and videos of "The Stemtech Story" and "Stem Cells and Stem Enhance with Christian Drapeau," which also contained one of the images. J.A. 905-10, 161. Leonard continued to take screenshots of the websites and infringing materials, connecting them to Stemtech via website addresses, Stemtech-branded materials such as videos and PowerPoint presentations, distributor ID numbers, and even references and links encouraging website visitors to join the Stemtech distribution team. Additionally, Leonard discovered his images on Stemtech's website system, stemtechbiz.com, which involved "websites [*9]  that Stemtech owned and operated," as well as websites of individual distributors. J.A. 945-46.

E. The Civil Suit

Leonard demanded that Stemtech and several of its distributors pay him for the unauthorized use of his images. When Stemtech refused, Leonard filed the instant action, alleging numerous claims of copyright infringement. Following discovery and motion practice, a jury trial commenced on Leonard's claims against Stemtech for direct, vicarious, and contributory infringement.4 The jury heard testimony from Leonard, a Photo Researchers employee, and Stemtech officials and distributors.

4   Stemtech does not appeal the jury's verdict finding it liable for direct copyright infringement and Leonard does not appeal the order granting summary judgment to Stemtech on his claims for statutory damages and alleged infringement of other images.

In addition, the jury heard testimony from Leonard's damages expert, Jeffrey Sedlik. Sedlik estimated the fair market value of a license to use the images. To this end, he contacted two of the largest stock photo agencies and two agencies that specialize in scientific images to ascertain the fair market value of microscopic photography images when licensed [*10]  for various forms of media comparable to those Stemtech used in its marketing materials. From the quotes provided by these agencies, he generated a benchmark licensing fee of between $1,277.10 and $2,569.46. He then applied the average of these fees to the 92 infringing uses identified at trial, which yielded a fee of $215,767.66.

Sedlik then adjusted this figure upward to account for the "scarcity or rarity" of Leonard's images. J.A. 1315-17. In other words, Sedlik attempted to capture "the market value of stem cell photographs in general, and then the scarcity or rarity of particular stem cell images, [which] is a factor that is considered in licensing."5 J.A. 1313. Sedlik recommended a premium of three to five times the benchmark to reflect the scarcity of the images.6 In addition, he adjusted the benchmark figure for "exclusivity," which accounts for "overuse or broad use" of an image, which diminishes the value of other uses, by adding a premium of 3.75 to 8.75 times the benchmark. J.A. 1317-19. After adding the adjustments together, he opined that the appropriate damages would range from $1.4 million to nearly $3 million. Stemtech neither cross-examined Sedlik about his use of these [*11]  premiums nor presented its own expert, and asserted that Leonard's past licensing history supported an award of only $1,804.

5   On the rarity point, Sedlik noted that "[s]tem cell [photographs] [are] not Sasquatch; however, every photographer, everybody in the industry that saw that 2006 cover of Time, that was kind of a turning point where people realized that microscopy can be an art form," J.A. 1313, and "in 2006 and before, there were fewer images available." J.A. 1314.

6   Sedlik testified that the multipliers were not applied as punishment for Stemtech's unauthorized use of the images. J.A. 1307 (noting "in actual damages, the damages that [Sedlik] come[s] up with can't be of a kind that punish the defendant").

The jury returned a $1.6 million verdict in Leonard's favor on his direct, vicarious, and contributory infringement claims against Stemtech. The District Court denied Stemtech's motion for a new trial on contributory and vicarious liability and damages.

In these cross appeals, we are asked to review whether the District Court abused its discretion in denying Stemtech's motion for a new trial by finding that the jury's contributory and vicarious infringement findings were supported by substantial [*12]  evidence, and affirming the jury's damages award, which Stemtech contends is unconstitutionally and grossly excessive. We are also asked to review the District Court's ruling that Leonard's counsel's conduct and certain evidentiary rulings did not warrant a new trial. In addition, we are asked to consider whether the District Court abused its discretion in declining to award Leonard prejudgment interest, erred in not permitting the jury to consider awarding Leonard infringer's profits under 17 U.S.C. § 504(b), and correctly decided two fee awards.

***

3. Prejudgment Interest

Leonard argues that the District Court abused its discretion in denying his motion for prejudgment interest. An award of actual damages under the Copyright Act alone "does not mitigate harm caused by delay in making reparations--a [*42]  harm the remedy of prejudgment interest is uniquely tailored to address. Simply put, prejudgment interest is a different remedy for a different harm." Polar Bear Prods., 384 F.3d at 718 (cited with approval in Graham II, 646 F.3d at 144-45). Prejudgment interest "mak[es] the claimant whole and prevent[s] unjust enrichment." Graham II, 646 F.3d at 145. As we noted in Graham II, we "favor[ ] permitting prejudgment interest awards" to make a plaintiff whole in copyright cases, id. at 144 (emphasis omitted), because "as between a copyright owner and an infringer, the former has the stronger equitable claim to the time-value of income derived from his creation," id. at 145; see Booker v. Taylor Milk Co., 64 F.3d 860, 868 (3d Cir. 1995) (describing general presumption in favor of prejudgment interest awards). For this reason, our Court subscribes to "our usual rule," Graham II, 646 F.3d at 145, that "a monetary award does not fully compensate for injury unless it includes an interest component," Kansas v. Colorado, 533 U.S. 1, 10 (2001).

Accordingly, "prejudgment interest is available in copyright cases at the District Court's discretion, exercised in light of 'considerations of fairness.'" Graham II, 646 F.3d at 145-46 (affirming District Court's grant of nearly $5 million in prejudgment interest) (quoting Pignataro v. Port Auth. of N.Y. and N.J., 593 F.3d 265, 274 (3d Cir. 2010)). In Booker, our Court ruled that it is an abuse of discretion for a district court to deny an award for prejudgment interest based on the conclusion that the [*43]  actual damages award "alone wholly compensated Plaintiff, and that, because Plaintiff's conduct contributed to an inflated [damages] claim, the equities weighed against prejudgment interest." 64 F.3d at 868-69 (emphasis in original) (awarding prejudgment interest on a back pay award). A district court "may exercise its discretion to depart from th[e] presumption [of awarding interest] only when it provides a justification that reasonably supports the departure." Id. at 868. In other words, "[i]f prejudgment interest is denied, the District Court must explain why the usual equities in favor of such interest are not applicable." Pignataro, 593 F.3d at 274.

The District Court here denied prejudgment interest, explaining that it viewed such an award in this case as "inequitable and unfair" because the verdict "sufficiently compensated" Leonard "for the misappropriated value of his property" and "the award of interest would constitute a windfall to Leonard." J.A. 1737-38 (internal quotation marks omitted). In this regard, the District Court observed that the verdict represented a per-use licensing fee far greater than the per-use fees Leonard previously received for use of the infringed images. It also noted that awarding "sums on top of the $1.6 million [*44]  already awarded is not necessary to ensure that . . . [Stemtech] is adequately deterred," J.A. 1739, and emphasized that there was no jury finding of willful conduct on Stemtech's part. As an additional ground for denying prejudgment interest, the District Court cited the difficulty of calculating the "appropriate amount" of interest due to numerous infringements. J.A. 1739.

As in Booker, the District Court here was concerned with the high jury award and denied Leonard's motion for prejudgment interest because it deemed the $1.6 million actual damages award sufficient to compensate him. However, prejudgment interest serves a different purpose and Leonard was "entitled" to recompense "for the loss of the use of the amount" of actual damages. Booker, 64 F.3d at 869; see Graham II, 646 F.3d at 145 (emphasizing that "recoup[ment] [of] the time-value of [a plaintiff's] loss . . . is not . . . confined to the provision of just compensation," but also prevents a "losing defendant" from "retain[ing] . . . a windfall in the form of an interest-free loan"). Therefore, denying prejudgment interest on the ground that the damages award sufficiently compensated Leonard constitutes legal error.

Moreover, while we are not unmindful of the challenges related to calculating [*45]  prejudgment interest in this case, with the 92 separate infringements that occurred on different dates, difficulty in calculating prejudgment interest is generally not a basis to deny an interest award. See, e.g., Hutchison v. Amateur Elec. Supply, Inc., 42 F.3d 1037, 1047 (7th Cir. 1994) (holding that "uncertainty" in calculating prejudgment interest does not "defeat the presumption in favor of prejudgment interest" and "[i]t is not within the district court's discretion to deny the whole award of interest because of . . . calculational ambiguities"); Williamson v. Handy Button Mach. Co., 817 F.2d 1290, 1299 (7th Cir. 1987) ("No purpose would be served by allowing the wrongdoer to keep the entire time value of the money, just because the exact amount is subject to fair dispute. Once we know that [damages are] at least some minimum, it is safe to award interest on that amount."). We note that a prevailing party moving for an award of prejudgment interest must provide the district court with sufficient information to calculate the interest or inform the court of the evidence it needs (such as information within the other party's control) to make its application. Where a prevailing party fails to provide the district court with this information, such an award may be denied.19

19   An award may also be denied if the prevailing party engages [*46]  in dilatory tactics during litigation or unnecessarily protracts the proceedings. Cf. City of Milwaukee v. Cement Div., Nat'l Gypsum Co., 515 U.S. 189, 196 (1995) (citing "undue delay" as "the most obvious example" justifying the denial of prejudgment interest (internal quotation marks omitted)); Gen. Motors Corp. v. Devex Corp., 461 U.S. 648, 656-57 (explaining that in the patent infringement context, "it may be appropriate to limit prejudgment interest, or perhaps even deny it altogether, where the patent owner has been responsible for undue delay in prosecuting the lawsuit"). Consistent with Devex, we note that "[t]here may be other circumstances in which it may be appropriate not to award prejudgment interest," but "[w]e need not delineate those circumstances in this case." 461 U.S. at 657.

Here, the District Court stated that Leonard did not adequately address Stemtech's assertion that the interest should be calculated based on "perhaps 92 different accrual dates and interest rates." J.A. 1739. However, Leonard in fact offered to provide information on this topic if the Court deemed his proposed approach to use a single infringement date inadequate. Thus, Leonard was apparently ready to provide the information, including the dates on which he discovered each infringement. The District Court seems to have overlooked this offer, and [*47]  therefore its views about the difficulty in calculation may have been misplaced.

Because the District Court denied prejudgment interest based upon its view that Leonard was sufficiently compensated, its order "rest[ed] upon . . . errant conclusion[s] of law." Pineda v. Ford Motor Co., 520 F.3d 237, 243 (3d Cir. 2008). Moreover, because it found that calculating the interest was too difficult without fully considering the material Leonard was prepared to provide, its order rested on an erroneous finding of fact. We therefore will vacate the order denying an award of prejudgment interest and remand for the District Court to award prejudgment interest in the amount it deems appropriate under the governing law.20

20   The District Court has discretion in selecting the appropriate interest rate and date(s) of infringement from which the interest begins to accrue. See Graham II, 646 F.3d at 146-51 (holding that prejudgment interest "may be awarded in appropriate cases from the initial accrual date" but leaving open the possibility that other cases may warrant alternate approaches); see also Kansas, 533 U.S. at 11 (concluding special master did not err in determining that "considerations of fairness . . . supported the award of at least some prejudgment interest" (emphasis added) (internal quotation marks omitted)).

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