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IP/Entertainment Case Law Updates

Pearson Education Inc. v. Almgren

Eighth Circuit affirms bankruptcy court’s order striking textbook publishers’ demand for jury trial on copyright infringement damages, granting minimum statutory damages of $14,250 and denying award of attorney fees.

While pursuing an MBA degree at Augsburg College in Minneapolis, Joel Almgren obtained unlicensed copies of instructors’ solution manuals over the Internet. After using the manuals for his coursework, Almgren decided to try to make a profit for himself. Holding himself out as a professor, he contacted textbook publishers to obtain more manuals. He sold the manuals over the Internet for a gross profit of $5,000. About a month after Almgren began selling the manuals, the publishers, in the course of routinely policing the internet to prevent the trafficking of unlicensed solution manuals, discovered Almgren. Without sending a preliminary cease-and-desist letter, the publishers filed copyright infringement claims against Almgren in the district court in New York. Although Almgren initially denied that he sold the manuals, claiming in an affidavit and in a deposition that his roommate was the culprit, he eventually admitted he made the sales. The cost of defending against the claims forced Almgren to file for Chapter 7 bankruptcy protection in Minnesota. After filing proofs of claim in the bankruptcy action, the publishers brought an adversarial proceeding against Almgren, seeking a finding of willful infringement, requesting a jury trial on the issue of damages, asking that the damages not be dischargeable in bankruptcy and seeking $90,000 in attorneys’ fees. Although it found Almgren liable for willful infringement, the bankruptcy court struck the publishers’ request for a jury trial and awarded only minimal statutory damages of $14,250, which the court deemed non-dischargeable. The court also denied the publishers’ request for $90,000 in attorneys’ fees, finding that the publishers could have taken a more conciliatory (and less expensive) approach with Almgren to stop the infringing activity but instead chose to make an example of him through litigation. On appeal, the district court affirmed the bankruptcy court’s decision, ruling that by filing proofs of claim in bankruptcy court, the publishers had waived their right to a jury trial on liability and damages and that the bankruptcy court’s denial of attorneys’ fees was appropriate. The publishers then filed an appeal with the Eighth Circuit, which also affirmed the district court’s decision.

Acknowledging the publishers’ general right to have a jury determine the amount of statutory damages, if any, awarded to a copyright owner, the Eighth Circuit found that, under Supreme Court precedent, the publishers relinquished that right when they filed claims against Almgren’s bankruptcy estate. The bankruptcy court, a court of equity, exercises exclusive control over claims “integral to the restructuring of the debtor-creditor relationship.” Because no Seventh Amendment right to a jury trial exists in a court of equity, the publishers were not entitled to a jury trial in bankruptcy court on the issue of damages. The Eighth Circuit likewise rejected the publishers’ contention that their case was distinguishable from the Supreme Court precedent because those cases involved a trustee’s action to recover a voidable preference rather than a creditor’s action. The court had not limited its rationale to preference actions and, according to the appeals court, the publishers had failed to explain why their claims of non-dischargeability were any less “integral to the restructuring of the debtor-creditor relationship.” The court also noted that the Second, Third, Seventh and Ninth Circuits, and the Maryland bankruptcy court, had applied the Supreme Court’s reasoning in non-dischargeability actions.

The court of appeals also affirmed the lower court’s denial of the publishers’ request for prevailing party attorneys’ fees. The bankruptcy court determined that a fee award would be inappropriate because (1) prior to bringing an action, the publishers could have used the less-expensive cease-and-desist letter to stop Almgren’s conduct; (2) the publishers purposely chose to file the action in the largest, busiest and furthest court from Almgren to “scare” him, (3) the publishers resisted the bankruptcy court’s efforts to encourage settlement prior to litigation; and (4) the publishers’ “spare-no-expense” strategy was “unreasonable” because of “no actual damages.” The Eighth Circuit rejected the publishers’ argument that the bankruptcy court abused its discretion by both discounting their need to act forcefully to deter willful infringement and leaving them with a financial loss from enforcing their rights against a willful infringer who prolonged the litigation and perjured himself. The publishers had the freedom to employ whatever litigation strategy they desired within the bounds of law but were not “guaranteed that the attorney’s fees generated by their strategy of choice would be compensated.” Noting that while a different court might have weighed the factors differently, the court concluded the bankruptcy court had not made a clear error in judgment in holding that an award of attorneys’ fees in this case would not “advance considerations of compensation and deterrence.”

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