Opinion
No. C-01-1241 EDL
July 22, 2002
FINDINGS OF FACT AND CONCLUSIONS OF LAW FOLLOWING BENCH TRIAL
INTRODUCTION
On March 27, 2001, Plaintiff Pieter Arend Folkens ("Folkens") filed this action against Defendants, Wyland (NFN), and individual Wyland Galleries, Inc. ("Defendants") alleging copyright infringement, unfair trade practices, and violation of the Lanham Act. In October 2001, the parties settled this action subject to a determination of profits, as defined and allowed under 17 U.S.C. § 504, realized from Defendants' artwork, Love in the Sea. Pursuant to the Settlement Agreement, the parties agreed that a Magistrate Judge would make a final, unappealable determination of the amount of profits which Defendant would pay to Plaintiff pursuant to the settlement agreement.
At the June 26, 2002 trial, in this matter, Karl Folkens represented Plaintiff and Robert Helfing represented Defendants. Both parties consented to a court trial by magistrate judge pursuant to 28 U.S.C. § 636 and waived their right to appeal. Prior to the June 26, 2002 trial, the Court received written direct testimony from Laura Danni, Julie Edwards, Pieter Arend Folkens, Christa Hotz, Steven King, Barbara O'Neill, Ernest Saddeh and William Spazante. At the trial, the Court heard cross-examination of Barbara O'Neill, Pieter Arend Folkens and William Spazante and received. exhibits.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
A successful copyright plaintiff may recover profits attributable to infringement. 17 U.S.C. § 504 (b); Three Boys Music Corp v. Bolton, 212 F.3d 477, 487 (9th Cir. 2000). "In establishing the infringer's profits, the copyright owner is required to present proof only of the infringer's gross revenue, and the infringer is required to prove his or her deductible expenses and the elements of profit attributable to factors other than the copyrighted work." 17 U.S.C. § 504 (b). A plaintiff presents a prima facie case for gross revenue by establishing the number of works sold and their price. In Design v. K-Mart Apparel Corp., 13 F.3d 559, 564 (2d Cir. 1994) ("The copyright holder cannot realistically be required to offer more proof than this since the facts and figures of the sales and markdowns is a subject exclusively within the infringer's knowledge.").
After a plaintiff presents a prima facie case, the burden shifts to the infringing defendant to prove deductible direct and indirect costs. 17 U.S.C. § 504 (b). In discharging that burden, the defendant's proof need not be precise and perfect "because, absent bad faith, reasonable approximations constitute satisfactory evidence." In Design, 13 F.3d at 564 (citing 4 Melville B. Nimmer David Nimmer, Nimmer on Copyright, § 14.03[B], at 14-35 to -36). "Any doubts resulting from an infringer's failure to present adequate proof of its costs are resolved in favor of the copyright holder." In Design, 13 F.3d at 564; Frank Music Corp. v. Metro-Goldwyn-Mayer, Inc., 772 F.2d 505, 514 (9th Cir. 1985) ("Frank I") 4 Nirnmer on Copyright, § 14.03[B] at 14-37. If the infringing defendant does not meet its burden of proving costs, the gross figure stands as the defendant's profits. Cream Records. Inc. v. Joseph Schlitz Brewing Co., 864 F.2d 668, 669 (9th Cir. 1989); Frank I, 772 F.2d at 514.
A. Gross Revenues
To establish profits, Plaintiff has the burden of proving Defendants' gross revenue attributable to Love in the Sea. According to Plaintiff, Defendants created an edition size of 940 prints of Love in the Sea, comprised of 750 Signed and Numbered prints, 95 Printer's Proofs, and 95 Artist's Proofs. When the Court ordered Defendants on March 6, 2002 to produce all unsold prints during discovery, they produced two prints, one of which turned out to be sold. Therefore, Plaintiff argues that Defendants sold 939 prints of Love in the Sea. To determine the gross revenue for the 939 prints, Plaintiff used the discounted prices listed on Defendants' web site. According to the web site, Signed and Numbered prints sold for $2,570.00, Printer's Proofs sold for $2,995.00, and Artist's Proofs sold for $3,395.00. Direct Testimony of Pieter Arend Folkens ¶ 4. Therefore, Plaintiff urges the Court to find gross revenues in the amount of $2,531,980.00. The record, however, does not support Plaintiff's calculations.
Plaintiff relies heavily on Defendants' warehouse log as proof that Defendants produced 940 prints. The log is a list on which each row corresponds to an edition number, and each column contains information pertaining to that edition number, such as date inventoried, date sold, customer name, gallery name, invoice number and date pulled. The log for the Signed and Numbered prints is numbered from 1 to 750. Pl.'s Ex. 1 The log contains entries from edition number, 1 to 196 and numbers 198, 200, 234, 242, 318, 321, 420, 597, 600, 708, 710 and 741-750. Id. Plaintiff also submitted the warehouse log for the Artist's Proofs, which contains space for 95 prints, and which indicates that edition numbers 1 — 61, 66 — 68 and 95 were sold. Id. Similarly, the Printer's Proof warehouse log reflects that edition numbers 1 — 5, 24 and 95 were sold and eleven gallery proofs were sold. Id.
Barbara O'Neill, Defendants' controller for two years, testified, however, that the "edition size does not reflect the number of prints that were manufactured, rather the edition size simply refers to the maximum number of prints that might issue for each edition." Direct Testimony of Barbara O'Neill ("O'Neill Direct Test.") ¶ 13. Particularly in the absence of any evidence to the contrary, the Court is persuaded by O'Neill's testimony that the "edition size" for Love in the Sea was 940, but that the "edition size" does not necessarily reflect the number of prints that were actually manufactured. Further, O'Neill testified at trial that occasionally buyers will request a specific edition number even if it is not the lowest number available. While the warehouse log shows that Defendants sold prints with higher numbers, the Court is unable to infer from the evidence that Defendants produced and sold 939 prints.
Plaintiff testified that he believes that Defendants altered the warehouse log based on two versions of the log produced during discovery. Compare Pl.'s Ex. 1 with Def.'s Ex. Q-29. The only differences between these documents is a series of checkmarks on the later copy. Substantively, the logs are identical. The Court credits O'Neill's testimony that she only used the later-produced log as a checklist when looking for documents and made checkmarks on it as she located documents.
Even so, the Court does not find all of O'Neill's testimony wholly credible. Particularly, O'Neill was evasive when asked certain direct questions at trial about her actions and instead testified that she was given instructions by a senior Vice President who is no longer with Wyland. O'Neill's testimony regarding why Defendants did not use Crystal Reports, a computer system that apparently would have summarized sales of Love in the Sea in a more complete and comprehensible manner, was also vague and not fully persuasive. Nonetheless, the substance of her detailed testimony on accounting matters held up under scrutiny.
Plaintiff's expert, William Spazante, testified at trial and in his direct testimony to the inadequacy of the sales records provided to Plaintiff by Defendants. Spazante testified that some individual transactions were combined and recorded in the general ledger in batches and therefore the information was incomplete and unusable for Plaintiff's purposes. Direct Testimony of William Spazante ("Spazante Direct Test.") ¶ 15. He found it inconsistent that the general ledger accounts were detailed for periods outside the scope of the transaction in question and batched for the periods of time in question. He also testified that six invoice numbers could not be found in the general ledger and that therefore Defendants' records were insufficient. Spazante DirectTest. ¶ 19. On cross-examination, however, Defendants' counsel submitted painstaking and convincing evidence of the existence of two of those six invoice numbers in the general ledger and represented that he could do so with respect to the other four. In the end, although Spazante found what initially appeared to be several suspicious transactions, on closer examination they were reconcilable. Spazante was a credible witness, but his assignment with respect to this case was very limited, specifically, to determine the adequacy of Defendants' records. According to his own testimony, Spazante was not retained to determine Defendants' gross revenue. Therefore, his testimony was of little help to the Court in determining the gross revenue.
As additional evidence of the number of prints sold, Plaintiff relies on an email sent on October 25, 2000 by Wyland's Senior Art Consultant, Davia C. Friedrich to Christa Hotz, a friend of Plaintiff's who posed as a potential customer. Direct Testimony of Christa Hotz ¶ 7. According to the email, Friedrich stated that "Wyland did 95 Artist's Proofs, 95 Printer's Proofs, and 750 Signed and Numbered." Pl.'s Ex. 5. From this evidence, Plaintiff wants the Court to infer that Defendants actually manufactured 940 prints. Neither party presented direct testimony of Freidrich, who has since left the company. Friedrich's email does not persuade the Court that as a salesperson she knew that all 940 prints had actually been manufactured. Her potential customer's interest, rather, lay in the potential maximum size of the addition. Whether her or Defendant's sales tactics were strictly ethical is another question, distinct from reasonable profits in this case. The Court is therefore unable to draw the inference that Defendants manufactured 940 prints.
Although Defendants' behavior during discovery was recalcitrant, neither party acted in a very professional manner. It is impossible for the Court to know exactly what went on, and there appear to have been problems on both sides. The discovery issues do not establish that Defendant sold 939 prints of Love in the Sea. For example, although Plaintiff showed that Defendant did not acknowledge certain profits from sales in Hawaii until Plaintiff made clear he knew about them, which was improper and understandably frustrating to Plaintiff, by the time of trial Defendant accounted for those profits in a proper manner. Accordingly, the Court must look at the evidence provided by both Plaintiff and Defendants to determine the actual calculation of profits. See In Design, 13 F.3d at 565.
O'Neill testified that Defendants produced 300 prints of Love in the Sea. O'Neill Direct Test. ¶ 11. To reach this number, O'Neill testified that she first searched for all the source documents relating to Love in the Sea. She testified that Defendants produced source documents for 271 separate sales of cibachrome prints. Id. ¶ 10. Next, O'Neill confirmed that Defendants had their vendor manufacture a total of 300 cibachrome prints. During the time in question, the vendor that manufactured Love in the Sea was known as Photobition, Wace and Seven. Id. ¶ 11. O'Neill reviewed the general ledger for the years 1997 through 2001 and highlighted every invoice issued to Defendants by Photobition. Id. ¶ 11. Photobition issued ten invoices to Defendants referring to Love in the Sea reflecting production of 300 cibachrome prints. Def.'s Exs. R-29 — Y-29.
After this analysis, O'Neill determined that Defendants actually sold 292 prints of the 300 produced. O'Neill Direct Test. ¶ 16. Defendants produced source documents relating to the sale of 271 prints. Id. O'Neill was not able to locate source documents for the sale of 17 more prints, even though the inventory records showed a customer name for each one of them. Id. This evidence established a total of 288 sold prints. Id. O'Neill was unable to account for four of the prints, so she assumed they were sold, which brought the total to 292 prints sold. Id. O'Neill testified that there were seven unsold prints and one destroyed print, which accounted for all 300 prints produced by Defendants. Id. ¶ 18.
Next, to determine the revenue of the sold prints, O'Neill added up the amounts found on the 271 invoices, for a total revenue of $316,992.20. Many of the invoices however, reflected a sale price of zero because the invoices reflected consignment sales and sales to Wyland Enterprises Hawaii, LLC, a company affiliated to Wyland Galleries, LLC. O'Neill Direct Test. ¶ 19. For example, O'Neill pointed to 37 prints shipped to distributors and one print given as a sales bonus to an art consultant. Id. These sales were represented with a zero on the individual invoices. Id. Another 37 prints were sold to Wyland Enterprises Hawaii, LLC at wholesale, but these sales were also represented by a zero on the invoice. Id. ¶ 20. O'Neill adjusted the zero prices of these 74 prints to reflect retail prices. Id. To calculate the revenue generated by the documented sales, O'Neill $434,417.97. Id. ¶ 22. According to her calculations, the average sales price was $1,603.02. Id. ¶ 23. O'Neill multiplied this average sales price amount by the number of undocumented sales (21) for a total of $33,663.42. Id. ¶ 24. She added the revenue generated by 21 undocumented sales ($33,663.42) to the revenue of the documented sales ($434,417.97) for a total profit of $468,081.39. Id.
Previously and in response to the Court's Order, Defendants produced only one unsold print. During the time period between the document production on March 6, 2002 where Defendants produced one unsold print, and the trial, O'Neill apparently discovered six additional unsold prints. Because Defendants did not produce the six unsold prints at the March 6, 2002 disclosure, or at any time thereafter prior to trial, these late-discovered unsold prints will not be excluded from the calculation of prints sold. Therefore, the total number of prints sold, for the purposes of trial, is 298. To account for the additional excluded prints, the Court multiplied the average sales price by the number of additional prints (6) for a total revenue of $9,618.12 for those six prints. Therefore, the total gross revenue for the 298 prints of Love in the Sea is $477,699.51.
B. Direct and Indirect Costs
Defendants have the burden of proving direct and indirect costs to be deducted from Defendants' gross revenue. 17 U.S.C. § 504 (b). O'Neill testified that Defendants incurred a total of $165,508.74 in direct costs for the sale of Love in the Sea. O'Neill Direct Test. ¶ 47. The direct costs include framing and printing costs, freight costs and sales commissions. Accordingly, Defendants' gross revenue is reduced by this amount for an adjusted gross profit of $312,190.77.
Indirect costs deducted may only include expenses attributable to the infringing product. Frank I, 772 F.2d at 514-517. O'Neill testified to numerous indirect costs for Love in the Sea that she contends should be deducted from the revenue amount. O'Neill calculated the deductible amounts of indirect costs by: (1) determining the net revenues for sales of Love in the Sea for each year they were sold; (2) determining the percentage borne by those totals to the company-wide revenues for each year and then (3) taking the percentage and applying it to the total indirect costs for each year. O'Neill Direct Test. ¶ 90. For example, in 1997, net revenues for Love in the Sea were $19,368.13, which represents 0.18% of the company-wide net revenues of $10,643,582.26. Id. ¶ 92. The total indirect costs during 1997 were $5,823,115.23. Id. ¶¶ 57, 72, 87. Applying 0.18% to the total indirect costs figure yields $10,481.61. Id. ¶ 92. Therefore, O'Neill subtracted $10,481.61 in indirect costs for 1997 from the total gross revenue. O'Neill made similar calculations for 1998-2001. Id. ¶¶ 93-96.
While this pure allocation process of overhead costs is appealing, it has been specifically rejected in the Ninth Circuit in the absence of a showing that the costs are attributable to the infringing product. See Frank I, 772 F.2d at 516 (citing Kamar Int'l. Inc. v. Russ Berrie Co., 752 F.2d 1326, 1332 (9th Cir. 1984) (holding beyond allocation, deduction for overhead should be allowed "only when the infringer can demonstrate that [the overhead expense] was of actual assistance in the production, distribution or sale of the infringing product."). An infringer need not prove overhead expenses and their relationship to the infringing production in minute detail, but must explain at least in general terms how claimed overhead actually contributed to the production of the infringing work. Frank I, 772 F.2d at 516 (citing Sheldon v. Metro-Goldwyn-Mayer Pictures, Inc., 106 F.2d 45, 54 (2nd Cir. 1939); Kamar, 752 F.2d at 1333); see also Playboy Enters., Inc. v. Dumas, 831 F. Supp. 295, 318-20 (S.D. N.Y. 1993) mod. on other grounds 840 F. Supp. 256 (S.D. N.Y. 1993), aff'd in part and rev'd in part on other grounds, 53 F.3d 549 (2nd Cir. 1995); see also 4 Nimmer on Copyright, § 14.03[B] at 14-34. The Frank I court concluded:
We do not doubt that some of defendants' claimed overhead contributed to the production of [the infringing work]. The difficulty we have, however, is that defendants offered no evidence of what costs were included in general categories such as "general and administrative expenses," nor did they offer any evidence concerning how these costs contributed to the production of [the infringing work]. The defendants contend that their burden was met when they introduced evidence of their total overhead costs on an allocated basis. . . . That is not the law of this circuit. Under Kamar International a defendant additionally must show that the categories of overhead actually contributed to sales of the infringing work.
Frank I, 772 F.2d at 516 (emphasis added).
Although Defendants provide specific information regarding indirect costs, Defendants did not show that many of the indirect costs were attributable to Love in the Sea. For this reason, the following indirect costs are excluded:
1. Repair and replacement of damaged framing or framing that does not conform to the customer's order.
2. Repairing damaged art itself, or modifying or accompanying materials.
3. "Scrap" which is damaged artwork that Defendants must discard.
4. Inventory variance which refers to difference between physical inventory of Defendants' artwork and the book inventory or what the records reflect should be the physical inventory.
5. General advertising costs incurred by Defendants (as Defendant admits no advertising was done for Love in the Sea).
6. The maintenance of Defendants' gallery aquariums and the fish in them in.
7. The cost of using corporate vans to deliver artwork from corporate warehouse to galleries, from one gallery to another, and from galleries back to the warehouse for shipping or touch-up modifications.
8. Defendants' depreciating assets including aquariums and corporate vans.
9. "Other" sales expense associated with the coffee shop at Defendants' galleries.
10. Company arranged tours and special events to promote Wyland's work generally.
11. The "advertising" costs associated with gallery administration such as help wanted ads for administrative staff.
12. G A expenses related to bad debt expense, charitable contributions, royalties, subscriptions to publications, employee education, entertainment, finance charges, internet expenses, moving expenses, postage, repairs and maintenance on corporate buildings, equipment and vehicles, training, interest expenses, loss on sales of fixed assets and referral payments.
The remaining indirect costs include packaging and shipping expenses, salaries, benefits, commissions, rent and other gallery expenses, painting supplies, sales expenses, travel expenses, taxes, utilities, outside services and insurance. While not specifically attributable to Love in the Sea, the Court can infer that these categories of costs contribute to Love in the Sea. Using O'Neill's calculations of indirect costs, which the Court has no reason to disbelieve, the Defendants' attributable indirect costs equal $254,110.92. Therefore, after subtracting the indirect costs from the adjusted gross profits of $312,190.77, the total pre-tax amount attributable to Love in the Sea prints is $58,079.85.
Defendants also seek to deduct income tax paid relating to the infringement. The Ninth Circuit adopted the Second Circuit's analysis in In Design v. K-Mart Apparel Corp., 13 F.3d 559, 567 (2d Cir. 1994), which found that non-willful infringers can deduct the income taxes that they pay relating to the infringing work. See also 4 Nimmer on Copyright, § 14.03[B] at 14-33. Defendants' infringement was not willful, therefore Defendants' income tax attributable to Love in the Sea could be deducted. The Court, however, is unable to determine how O'Neill calculated the income tax attributable to Love in the Sea as described in her direct testimony, and is therefore unable to adjust the income tax to reflect the Court's adjusted calculated net profit. Defendants have not shown that the income tax amount as stated by O'Neill is attributable to Love in the Sea. Therefore, the profit attributable to Love in the Sea is $58,079.85.
SANCTIONS
On February 28, 2002, the Court ordered Defendants to "make their best efforts to obtain supporting documents from Arthur Anderson as soon as possible and in any event no later than March 11, 2002, and promptly provide them to Plaintiff." Nevertheless, Defendants failed to produce the financial statements. Defendants' argument that these documents were not responsive to the Court's Order is unavailing. Plaintiff was prejudiced by not having these documents sufficiently in advance of the trial. Pursuant to Federal Rule of Civil Procedure 37(b), Defendants are subject to sanctions for violating a Court Order. Defendants' serious violation of the Court's Order requires more than nominal sanctions. Accordingly, Defendants must pay sanctions in the amount of $l0,000 to the Plaintiff.
CONCLUSION
The Court HEREBY AWARDS judgment on the merits in favor of Plaintiff in the amount of $68,079.85.
IT IS SO ORDERED.