Copyright Lessons from the Fourth Circuit

The U.S. Court of Appeals for the Fourth Circuit recently affirmed a judgment in excess of $11 million entered against a furniture manufacturer found liable for copyright infringement. Universal Furniture International, Inc. v. Collezione Europa USA, Inc., 618 F.3d 417 (4th Cir. 2010). Following a bench trial in 2007, Collezione Europa USA, Inc. (“Collezione”) was found liable for, among other things, infringing the copyrighted furniture designs of Universal Furniture International, Inc. (“Universal”). See Universal Furniture Int'l, Inc. v. Collezione Europa USA, Inc., 2007 WL 2712926 (M.D.N.C. 2007). Subsequently, Collezione was ordered to pay Universal its entire gross revenues from sales of the infringing furniture ' a remedy provided for by the Copyright Act. See Universal Furniture Int'l, Inc. v. Collezione Europa USA, Inc., 2009 WL 367538 (M.D.N.C. 2009). Although the Fourth Circuit's judgment has not yet become final, unless it is reversed or overruled this opinion establishes, for the first time in that Circuit, certain significant principles of copyright law, as discussed below.

History of the Litigation

The story of this dispute begins at the Fall 2004 International Home Furnishings Market in High Point, NC. During that market, Universal learned that Collezione was displaying in Collezione's showroom certain furniture collections that were strikingly similar to two of Universal's leading collections, called “Grand Inheritance” and “English Manor” (collectively the “Collections”). Upon investigation, Universal's representatives became convinced that Collezione was displaying actual pieces from Universal's English Manor Collection in Collezione's showroom. Universal brought suit against Collezione under the Copyright Act for infringing Universal's copyrighted designs in the Collections, and under the Lanham Act and the North Carolina Unfair and Deceptive Trade Practices Act (the “UDTPA”) for reverse passing off. In 2005, the U.S. District Court for the Middle District of North Carolina denied Universal's request for a preliminary injunction barring Collezione's promotion and sale of Collezione's competing collections. Noting the relative sparsity of the preliminary injunction record, the Fourth Circuit affirmed the district court's denial of the preliminary injunction, agreeing with the determination that the designs compilations “likely were not conceptually separable from the furniture's utilitarian function.” Universal Furniture, 618 F.3d at 426.

However, after a week-long bench trial in May 2007, the district court held that, based on the full record, the designs were in fact entitled to copyright protection. “Although the decorative elements of Universal's designs were derived mostly from the public domain, the court concluded that the designer's compilation of the elements was sufficiently unique to meet the test of originality.” Id. Importantly, the district court “also found the decorative elements conceptually separable from the furniture's utilitarian function, because the designer's functional considerations ended after he had sketched the basic shapes of the pieces and because the designer selectively placed elements on the furniture to achieve a 'new look.'” Id. After finding Collezione liable for copyright infringement, the district court subsequently ordered disgorgement of all of Collezione's gross revenues from the sale of the infringing pieces of furniture. Id. at 427.

Liability Affirmed

In its affirmance, the Fourth Circuit addressed and rejected Collezione's assertions that Universal did not own valid copyrights in the designs appearing in the Collections, that the designs were neither sufficiently original nor conceptually separable from the utilitarian functions of the furniture, and that even if the designs were copyrightable Collezione did not infringe the copyrights. Id. at 428.

Transfers of Copyright Ownership 'By Operation of Law'

In its opinion, the Fourth Circuit recognized a fairly robust presumption of ownership arising out of the introduction into evidence of a certificate of copyright registration, and further recognized that a transfer of copyright ownership “by operation of law” under the provisions of the Copyright Act can occur by means of a corporate merger. Id. at 429. See 17. U.S.C. ” 201(d)(1); 204(a). Collezione had argued that Universal did not establish that it owned the copyright rights in the designs in question. The Fourth Circuit first explained that, because the copyright registrations were prima facie evidence of valid copyrights, the burden was on Collezione to prove that the copyrights were not owned by Universal, and that Collezione did not meet this burden. Collezione failed to prove that Universal did not establish a chain of title linking it to a design services agreement between Universal's predecessor and the company that employed the designer of the Collections at issue and, thus, that Universal did not own the copyrights to the designs. Moreover, while the Copyright Act generally requires that a transfer of copyright ownership be in writing to be valid, there is an exception for transfers accomplished “by operation of law,” which the Fourth Circuit held to include transfers occurring as a result of a merger (citing cases from the Eighth and Ninth Circuits). Universal's proffered documentation of a 1998 merger and a 2001 asset acquisition agreement linked Universal to the design services agreement, and Collezione did not meet its burden in proving that the copyrights were not duly transferred to Universal. Universal Furniture, 618 F.3d at 429.

Findings of Originality and Conceptual Separability Upheld

The Fourth Circuit also held that Universal met its burden to show that the designs were protectable by copyright by establishing that they were original and conceptually separable from the utilitarian aspects of the furniture. A basic and important aspect of Universal's case was that the subjects of its copyright registrations were not the furniture pieces themselves ' functional items ' but the “decorative sculptural designs on furniture, the adaptation of preexisting decorative designs, and the compilation of decorative designs on suites of furniture.” Id. at 430. Noting that the originality threshold is low, the Fourth Circuit found that the designer's process in creating the decorative sculptural designs showed “some creative spark” and was not “wholesale copying” from the public domain. Id. (quoting Universal Furniture, 2007 WL 2712926, at *3).

Turning to the “more vexing question” as to whether the designs were conceptually separable from the utilitarian aspects of the furniture, the Fourth Circuit determined the district court had correctly applied the conceptual separability test ' a test under which useful articles can qualify for copyright protection. Id. at 431, 432. The court's discussion as to whether the designs on the furniture were conceptually separable from the utilitarian functions of the furniture is significant. Noting that “[o]ur circuit has not elaborated extensively upon conceptual separability,” Id. at 433, the court addressed the issue at length and, consequently, has clarified an important and complex aspect of Fourth Circuit copyright law. See Id. at 431-35.

Not only must the decorative elements on the furniture pieces be capable of “separate identification from the utilitarian aspect of the furniture,” they must also be able to exist “independently of” those utilitarian aspects. Id. at 434. “This poses somewhat of a metaphysical quandary for decorative elements on furniture. The elements serve no purpose divorced from the furniture ' they become designs in space. But the test is conceptual separability, not physical separability.” Id. After extensive analysis, the Fourth Circuit affirmed the finding that the compilations of design elements were entitled to copyright protection because they were conceptually separable. Id. at 435.

Substantially Similar to What?

Collezione argued that the district court wrongly compared the parties' furniture as a whole, rather than focusing on whether only the compilations of design elements were substantially similar. Id. Although the district court had “mentioned noncopyrightable features” of the furniture in its analysis, the Fourth Circuit held that the district court had “appropriately focused on whether the ordinary, reasonable observer would find the furniture lines, as a whole, to be substantially similar.” The court did not err in finding that most of Collezione's 20000 furniture line infringed Universal's Grand Inheritance Collection and that all of Collezione's 20200 line infringed Universal's English Manor Collection. Id. at 437.

Award of Profits Affirmed

Finally, the Fourth Circuit affirmed the district court's award of profits and rejected Collezione's assertion that the district court had erred in refusing to accept Collezione's proof of deductible expenses. Id. at 441. Under the Copyright Act, the copyright owner is entitled to recover, inter alia, “any profits of the infringer that are attributable to the infringement and are not taken into account in computing the actual damages.” 17 U.S.C. ' 504(b). Universal sought to recover Collezione's profits, rather than Universal's actual damages, and was therefore required “to present proof only of the infringer's gross revenue.” Id. After Universal satisfied this burden by presenting calculations of Collezione's gross revenues, the burden shifted to Collezione “to prove [its] deductible expenses and the elements of profit attributable to factors other than the copyrighted work.” Id.

The district court had held that Collezione failed to establish that any portion of its gross revenues from the infringing items was attributable to factors other than the copyrighted work. Universal Furniture, 618 F.3d at 440-41. Thus, all gross revenues proved by Universal were attributable to Collezione's infringement. The court also found that Collezione's calculations of its deductible costs were unreliable, despite Collezione's several opportunities to present reliable evidence. Id. at 441. The Fourth Circuit held that the district court did not abuse its discretion in rejecting Collezione's calculations. Id. In doing so, the Fourth Circuit made clear: a) that it is a copyright infringer's burden not only to adduce evidence of some deductible expenses but also to prove, reliably, the amount of those deductible expenses; and b) that if the infringer fails to do so, the copyright owner is entitled to an award of all of the gross revenues that it has proved.

Conclusion

In addition to clarifying the Fourth Circuit's positions on conceptual separability and the transfer of copyright ownership “by operation of law,” this decision confirms that valid copyrights can be found in original compilations of pre-existing or noncopyrightable material. It also highlights the importance of credible evidence and precise, consistent calculations in determining deductible expenses from established gross revenues. Copyright owners should carefully weigh their options for monetary recovery early, and consider the relative difficulties of proving their actual damages versus proving the infringer's profits. Those accused of copyright infringement, on the other hand, are advised to keep accurate records of deductible expenses arising out of the creation and marketing of the works in question, and to consider whether to develop testimony, whether through experts or otherwise, that would attribute some or all of the gross revenues to factors other than the copyrighted work, if that approach is factually supported.

William M. Bryner is a partner, and Kristin G. Garris is an associate, in Kilpatrick Stockton LLP. Bryner was co-lead trial counsel, and lead appellate counsel, in the litigation discussed in this article.

The U.S. Court of Appeals for the Fourth Circuit recently affirmed a judgment in excess of $11 million entered against a furniture manufacturer found liable for copyright infringement. Universal Furniture International, Inc. v. Collezione Europa USA, Inc. , 618 F.3d 417 (4th Cir. 2010). Following a bench trial in 2007, Collezione Europa USA, Inc. (“Collezione”) was found liable for, among other things, infringing the copyrighted furniture designs of Universal Furniture International, Inc. (“Universal”). See Universal Furniture Int'l, Inc. v. Collezione Europa USA, Inc., 2007 WL 2712926 (M.D.N.C. 2007). Subsequently, Collezione was ordered to pay Universal its entire gross revenues from sales of the infringing furniture ' a remedy provided for by the Copyright Act. See Universal Furniture Int'l, Inc. v. Collezione Europa USA, Inc., 2009 WL 367538 (M.D.N.C. 2009). Although the Fourth Circuit's judgment has not yet become final, unless it is reversed or overruled this opinion establishes, for the first time in that Circuit, certain significant principles of copyright law, as discussed below.

History of the Litigation

The story of this dispute begins at the Fall 2004 International Home Furnishings Market in High Point, NC. During that market, Universal learned that Collezione was displaying in Collezione's showroom certain furniture collections that were strikingly similar to two of Universal's leading collections, called “Grand Inheritance” and “English Manor” (collectively the “Collections”). Upon investigation, Universal's representatives became convinced that Collezione was displaying actual pieces from Universal's English Manor Collection in Collezione's showroom. Universal brought suit against Collezione under the Copyright Act for infringing Universal's copyrighted designs in the Collections, and under the Lanham Act and the North Carolina Unfair and Deceptive Trade Practices Act (the “UDTPA”) for reverse passing off. In 2005, the U.S. District Court for the Middle District of North Carolina denied Universal's request for a preliminary injunction barring Collezione's promotion and sale of Collezione's competing collections. Noting the relative sparsity of the preliminary injunction record, the Fourth Circuit affirmed the district court's denial of the preliminary injunction, agreeing with the determination that the designs compilations “likely were not conceptually separable from the furniture's utilitarian function.” Universal Furniture, 618 F.3d at 426.

However, after a week-long bench trial in May 2007, the district court held that, based on the full record, the designs were in fact entitled to copyright protection. “Although the decorative elements of Universal's designs were derived mostly from the public domain, the court concluded that the designer's compilation of the elements was sufficiently unique to meet the test of originality.” Id. Importantly, the district court “also found the decorative elements conceptually separable from the furniture's utilitarian function, because the designer's functional considerations ended after he had sketched the basic shapes of the pieces and because the designer selectively placed elements on the furniture to achieve a 'new look.'” Id. After finding Collezione liable for copyright infringement, the district court subsequently ordered disgorgement of all of Collezione's gross revenues from the sale of the infringing pieces of furniture. Id. at 427.

Liability Affirmed

In its affirmance, the Fourth Circuit addressed and rejected Collezione's assertions that Universal did not own valid copyrights in the designs appearing in the Collections, that the designs were neither sufficiently original nor conceptually separable from the utilitarian functions of the furniture, and that even if the designs were copyrightable Collezione did not infringe the copyrights. Id. at 428.

Transfers of Copyright Ownership 'By Operation of Law'

In its opinion, the Fourth Circuit recognized a fairly robust presumption of ownership arising out of the introduction into evidence of a certificate of copyright registration, and further recognized that a transfer of copyright ownership “by operation of law” under the provisions of the Copyright Act can occur by means of a corporate merger. Id. at 429. See 17. U.S.C. ” 201(d)(1); 204(a). Collezione had argued that Universal did not establish that it owned the copyright rights in the designs in question. The Fourth Circuit first explained that, because the copyright registrations were prima facie evidence of valid copyrights, the burden was on Collezione to prove that the copyrights were not owned by Universal, and that Collezione did not meet this burden. Collezione failed to prove that Universal did not establish a chain of title linking it to a design services agreement between Universal's predecessor and the company that employed the designer of the Collections at issue and, thus, that Universal did not own the copyrights to the designs. Moreover, while the Copyright Act generally requires that a transfer of copyright ownership be in writing to be valid, there is an exception for transfers accomplished “by operation of law,” which the Fourth Circuit held to include transfers occurring as a result of a merger (citing cases from the Eighth and Ninth Circuits). Universal's proffered documentation of a 1998 merger and a 2001 asset acquisition agreement linked Universal to the design services agreement, and Collezione did not meet its burden in proving that the copyrights were not duly transferred to Universal. Universal Furniture, 618 F.3d at 429.

Findings of Originality and Conceptual Separability Upheld

The Fourth Circuit also held that Universal met its burden to show that the designs were protectable by copyright by establishing that they were original and conceptually separable from the utilitarian aspects of the furniture. A basic and important aspect of Universal's case was that the subjects of its copyright registrations were not the furniture pieces themselves ' functional items ' but the “decorative sculptural designs on furniture, the adaptation of preexisting decorative designs, and the compilation of decorative designs on suites of furniture.” Id. at 430. Noting that the originality threshold is low, the Fourth Circuit found that the designer's process in creating the decorative sculptural designs showed “some creative spark” and was not “wholesale copying” from the public domain. Id. (quoting Universal Furniture, 2007 WL 2712926, at *3).

Turning to the “more vexing question” as to whether the designs were conceptually separable from the utilitarian aspects of the furniture, the Fourth Circuit determined the district court had correctly applied the conceptual separability test ' a test under which useful articles can qualify for copyright protection. Id. at 431, 432. The court's discussion as to whether the designs on the furniture were conceptually separable from the utilitarian functions of the furniture is significant. Noting that “[o]ur circuit has not elaborated extensively upon conceptual separability,” Id. at 433, the court addressed the issue at length and, consequently, has clarified an important and complex aspect of Fourth Circuit copyright law. See Id. at 431-35.

Not only must the decorative elements on the furniture pieces be capable of “separate identification from the utilitarian aspect of the furniture,” they must also be able to exist “independently of” those utilitarian aspects. Id. at 434. “This poses somewhat of a metaphysical quandary for decorative elements on furniture. The elements serve no purpose divorced from the furniture ' they become designs in space. But the test is conceptual separability, not physical separability.” Id. After extensive analysis, the Fourth Circuit affirmed the finding that the compilations of design elements were entitled to copyright protection because they were conceptually separable. Id. at 435.

Substantially Similar to What?

Collezione argued that the district court wrongly compared the parties' furniture as a whole, rather than focusing on whether only the compilations of design elements were substantially similar. Id. Although the district court had “mentioned noncopyrightable features” of the furniture in its analysis, the Fourth Circuit held that the district court had “appropriately focused on whether the ordinary, reasonable observer would find the furniture lines, as a whole, to be substantially similar.” The court did not err in finding that most of Collezione's 20000 furniture line infringed Universal's Grand Inheritance Collection and that all of Collezione's 20200 line infringed Universal's English Manor Collection. Id. at 437.

Award of Profits Affirmed

Finally, the Fourth Circuit affirmed the district court's award of profits and rejected Collezione's assertion that the district court had erred in refusing to accept Collezione's proof of deductible expenses. Id. at 441. Under the Copyright Act, the copyright owner is entitled to recover, inter alia, “any profits of the infringer that are attributable to the infringement and are not taken into account in computing the actual damages.” 17 U.S.C. ' 504(b). Universal sought to recover Collezione's profits, rather than Universal's actual damages, and was therefore required “to present proof only of the infringer's gross revenue.” Id. After Universal satisfied this burden by presenting calculations of Collezione's gross revenues, the burden shifted to Collezione “to prove [its] deductible expenses and the elements of profit attributable to factors other than the copyrighted work.” Id.

The district court had held that Collezione failed to establish that any portion of its gross revenues from the infringing items was attributable to factors other than the copyrighted work. Universal Furniture, 618 F.3d at 440-41. Thus, all gross revenues proved by Universal were attributable to Collezione's infringement. The court also found that Collezione's calculations of its deductible costs were unreliable, despite Collezione's several opportunities to present reliable evidence. Id. at 441. The Fourth Circuit held that the district court did not abuse its discretion in rejecting Collezione's calculations. Id. In doing so, the Fourth Circuit made clear: a) that it is a copyright infringer's burden not only to adduce evidence of some deductible expenses but also to prove, reliably, the amount of those deductible expenses; and b) that if the infringer fails to do so, the copyright owner is entitled to an award of all of the gross revenues that it has proved.

Conclusion

In addition to clarifying the Fourth Circuit's positions on conceptual separability and the transfer of copyright ownership “by operation of law,” this decision confirms that valid copyrights can be found in original compilations of pre-existing or noncopyrightable material. It also highlights the importance of credible evidence and precise, consistent calculations in determining deductible expenses from established gross revenues. Copyright owners should carefully weigh their options for monetary recovery early, and consider the relative difficulties of proving their actual damages versus proving the infringer's profits. Those accused of copyright infringement, on the other hand, are advised to keep accurate records of deductible expenses arising out of the creation and marketing of the works in question, and to consider whether to develop testimony, whether through experts or otherwise, that would attribute some or all of the gross revenues to factors other than the copyrighted work, if that approach is factually supported.

William M. Bryner is a partner, and Kristin G. Garris is an associate, in Kilpatrick Stockton LLP. Bryner was co-lead trial counsel, and lead appellate counsel, in the litigation discussed in this article.