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Global Freezing: Issue of Disgorgement

Global Freezing: Issue of Disgorgement

July 19, 2013
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" In order to limit the harsh effect of denying a plaintiff a damage award even though the defendant infringed his widget design, the Copyright Act allows the court to order the infringing defendant to turn over to the plaintiff any profit he earned from selling the infringing copies of the plaintiff’s widgets. "

By now, everyone remotely engaged in the adult entertainment industry is aware of the devastating toll digital piracy has extracted on copyright holders. Evidence suggests that piracy has disproportionally affected the adult film industry. Adult content producers, unlike their mainstream counter parts, cannot rely on box office sales to make up for losses caused by shrinking DVD and web subscription sales. Porn movie houses are mostly a relic of the past, and video arcades rarely pay producers for the right to publicly display their works, even though unauthorized public display is a clear copyright violation. Some people pirate adult content to avoid having charges appear on a credit card statement a disapproving spouse may see — generally not a factor in mainstream piracy.

Like the mainstream recording and film industries, adult film producers share the responsibility for the scale of the piracy problem. Similar to record producers, the industry was slow to adopt lower price point business models. Hidden cross-billing and other unscrupulous business practices left potential customers reluctant to offer up credit card information. Most of the industry did not bother to explore antipiracy measures until they were already bleeding and could no longer afford to pay for the necessary prophylactic measures. More recently, some producers embraced unethical attorneys from outside the industry who promised fast money by bringing mass lawsuits against bit torrent infringers with no long-term strategy and no thought about the lasting affect of their actions. As a result bit torrent infringers have been emboldened rather than deterred.

But within this half-empty glass of disappointment and despair, a recent case before the 9th U.S. Circuit Court of Appeals offers a glimmer of hope.

Generally, litigants cannot take measures to recover money or secure assets of a defendant until after a court makes a final determination on liability. There are some exceptions and some of those exceptions specifically apply to intellectual property claims. For example, a provision of the Lanham Act, which deals with trademark infringement, provides for seizing infringing goods at the outset of litigation. Manufacturers of luxury goods often use this procedure to seize counterfeit goods in order to prevent infringers from moving illicit goods. This can prevent the destruction of evidence — or worse the continued selling of the counterfeit goods into the market.

The Copyright Act contains a similar provision that allows for the impoundment of infringing articles, “[a]t any time while an action under [the Act] is pending.” However, as the value of DVDs plummeted and piracy shifted from counterfeit DVDs to online digital distribution, so plummeted the value of the seizure provision, at least with regard to movies. The copyright seizure provision may still be a valuable tool for toy and novelty manufactures. However, with online digital copyright infringement there usually is nothing physical to seize, except perhaps the servers hosting the infringing works. When a U.S. copyright holder sues an Eastern European infringer, with servers in Holland, the Copyright Act’s seizure provision is generally not a practical device.

The result is that even when copyright holders have solid copyright infringement claims, they often end up with an unenforceable, high-dollar, default judgment but no real means of recovery. By the time the plaintiff secures the judgment, the infringers usually have moved any assets, including cash and domain name registrations, from the U.S. to distant jurisdictions where those assets are impractical, if not impossible, to reach.

In one recent case, gay production studios TitanMen, Channel One, and Corbin Fisher sued the operators of the gay tube sites, GayForIt.com, ItsAllGay.com, and JerkYourTube.com. The operators initially defended against the action, but as soon as they shifted their websites to .eu domains, they stopped defending. The studios eventually obtained a $5.3 judgment, but the prospects of collecting on the judgment are probably slim.

The only solution to this dilemma would be to freeze assets belonging to the pirates at the beginning of litigation so they do not have time to move the assets beyond the reach of U.S. litigators and U.S. courts.

That is precisely what Corbin Fisher recently did by filing an ex parte motion for a temporary restraining order (TRO) freezing the assets of Oron.com, a Hong Kong based cyber locker. DataTech Enterprises LLC, the parent company of Falcon and Raging Stallion Studios also filed for a TRO to freeze assets in a second lawsuit against Oron. After Oron received notice of the TRO freezing its assets, the court held a hearing and converted the TRO into a preliminary injunction. The injunction would keep the assets frozen until the court’s final determination on liability. The Corbin Fisher case followed a slightly similar path.

In the DataTech case, Oron argued that the law did not permit the court to freeze its assets, because as stated earlier in this article, parties generally cannot seize assets until the court enters a final judgment. However, every rule has an exception. The exception here roots itself in anachronistic subtleties that precede the enactment of the U.S. Constitution.

English common law had two separate courts – courts of law and the Court of Chancery which was a court of equity. Courts of law provided for money damages. Courts of equity followed a set of loose rules to avoid the slow pace of change and possible harshness (or “inequity”) of the common law. Courts of equity provided for various non-monetary remedies, such as injunctions, writs, and specific performance. These differences carried over to our legal system even after the courts of law and equity merged into what is our current federal court system. Still, courts can only issue injunctions that relate to forms of equitable relief – not money damages. Therefore, Oron argued, DataTech cannot use an injunction to freeze assets in order to secure money for paying any eventual award of money damages, which is a legal remedy.

However, in addition to seeking money damages, DataTech also sought a different form of relief.

The Copyright Act allows the court to order an infringer to turn over any profits it made from its infringing activity as long as the court did not already consider those profits in determining the amount of damages. For example, if a plaintiff sells widgets, it might prove that it lost profit it could have earned if not for the infringing copies of widgets the defendant sold. However, to be eligible for such an award, the plaintiff has to prove it would have made those sales in the absence of the defendant’s infringement. Unless the plaintiff can point to specific customers who purchased infringing widgets from the defendant instead of legitimate widgets from the plaintiff, lost sales can be very difficult to prove. As harsh as this might seem, the plaintiff is not entitled to recover loses it cannot prove it suffered. (There is an exception to this rule in the form of statutory damages, but that discussion is beyond the scope of this article.)

In order to limit the harsh effect of denying a plaintiff a damage award even though the defendant infringed his widget design, the Copyright Act allows the court to order the infringing defendant to turn over to the plaintiff any profit he earned from selling the infringing copies of the plaintiff’s widgets. The law generally refers to this remedy as the disgorgement of illicit profits.

DataTech argued that disgorgement of illicit profits is a type of restitution, which was an equitable remedy available in the courts of equity. Oron argued that even if DataTech can prove liability, any illicit profits are paid in currency and therefore it is a form of money damages historically only available in courts of law. If the disgorgement of illicit profits is a form of money damages as Oron argues, then the court cannot freeze assets to cover the eventual award. District Court Judge Charles Breyer agreed with DataTech writing, “disgorgement of illicit profits is a classic example of an equitable remedy.” Therefore, he held ruled that he could issue the injunction freezing Oron’s assets.

Oron appealed the preliminary injunction to the 9th Circuit and a three-judge panel heard oral argument in early May. This will be the first time the Ninth Circuit will rule on this specific issue, although it previously ruled that a similar provision of the Lanham Act permits asset freezing injunctions in trademark cases.

Judge Paul J. Watford, the first judge to speak from the bench at the oral argument, stated that, “the Supreme Court has expressly held ... that disgorgement of profits is equitable.” Judge M. Margaret McKeown, jumped in to point out that Amylin Pharmaceuticals, a case upon which Oron relied, dealt with profits that the plaintiff lost as opposed to the disgorgement of illicit profits earned by the infringer. A bit later, Judge Algenon L. Marbley echoed that there is a distinction between damages and the disgorgement of profits, further stating “disgorgement is still an equitable remedy.” Commentators agree that it appears the three-judge panel seemed to concur with DataTech and Judge Breyer.

The 9th Circuit’s opinion in this case should resolve the question of whether courts can freeze assets in copyright infringement cases where plaintiffs seek to disgorge profits infringers earn by reproducing, selling, or distributing copyright protected movies.

Certainly, there are other hurdles a plaintiff must overcome before obtaining an asset freeze injunction. Most importantly, the copyright holder must convince the court it will ultimately prove its copyright infringement claims. Before filing lawsuits, plaintiffs suing foreign defendants should carefully investigate whether the defendant has assets in the U.S. and whether a TRO freezing those assets might be appropriate in their specific case.

D. Gill Sperlein is a San Francisco-based attorney who represents many adult entertainment industry clients. He represents DataTech Enterprises LLC in its case against Oron.com.


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