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SUNSET LAMP CORP. v. ALSY CORP.

October 22, 1990

SUNSET LAMP CORP., PLAINTIFF,
v.
ALSY CORP., ALSY MANUFACTURING INC., CYCLE II CORP. AND S & M INDUSTRIES CORP., DEFENDANTS.



The opinion of the court was delivered by: Mukasey, District Judge.

OPINION AND ORDER

Defendant has objected to the Memorandum and Order dated June 7, 1990 of the Honorable Leonard Bernikow, United States Magistrate, permitting plaintiff to seek, as damages for copyright infringement of a floor lamp, the value of lost sales on non-infringed items marketed as part of the line of merchandise that included the infringed item. For the reasons set forth below, the Memorandum and Order of the Magistrate is affirmed, but with the admonition that plaintiff may be assessed costs and attorneys fees if it fails to present credible evidence demonstrating a factual basis for recovering damages under this theory.

I.

The facts of this case are set forth in detail in an earlier reported opinion at 698 F. Supp. 1146, familiarity with which is assumed. In brief, the plaintiff, Sunset Lamp Corp., and defendants, Alsy Corp., et al., compete in the manufacture and distribution of table and floor lamps. In May 1987, Sunset secured copyrights for table and floor lamps ornamented with a banana leaf design. Sunset claimed that beginning in or about May 1988, Alsy manufactured and distributed lamps that infringed both the table and floor models of the banana leaf lamp, and that bore a false copyright notice in Alsy's name. Sunset charged that such manufacture and distribution infringed its copyright in violation of 17 U.S.C. § 501, and constituted unfair competition in violation of Section 43(a) of the Lanham Act, 15 U.S.C. § 1125(a) and New York State law. In the earlier opinion, it was determined, inter alia, that Alsy had willfully infringed Sunset's copyright with respect to the floor lamp. However, because the evidence at trial showed that Sunset omitted the required copyright notice from more than a relatively small number of its table lamps and then failed to take reasonable steps to add notice to all copies distributed to the public after the omission was discovered, the copyright on the table lamp was declared invalid. After the parties were unable to agree on a method of presenting the damages issue, the matter was referred to Magistrate Bernikow to determine and report.

Not surprisingly, after referral to the Magistrate, counsel for the opposing parties disputed the method for calculating both damages to Sunset and profits of Alsy allegedly resulting from Alsy's infringement of the floor lamp. The principal dispute involved Sunset's contention that it was entitled to recover as damages lost sales on its entire line of merchandise, allegedly resulting from Alsy's infringement of the floor lamp. Sunset's banana leaf floor lamp was part of a new line of original designs, see Sunset Lamp Corp. v. Alsy Corp., 698 F. Supp. at 1149, which Sunset contends was intended as a breakthrough or "door opener," to enable the company to sell its entire product line through major department store chains, something it had not previously achieved. See Sunset's Reply to Alsy's Objections to Magistrate's Memorandum and Order at 6-7. According to Sunset, it is common practice in the lamp business for department stores to purchase an entire line from a manufacturer, and defendants' sale of an infringing version of the floor lamp at a lower price disrupted Sunset's plans to penetrate this market. Claiming that it lost a major market advantage as a result of Alsy's infringement of the floor lamp, Sunset seeks to establish its damages based on those accounts in which it successfully sold the entire Sunrise line. See Plaintiff's Supplemental Memorandum of Law on the Issue of Damages at 3-4 & n. 2.; Plaintiff's Memorandum of Law on the Issue of the Appropriate Monetary Amount to be Awarded at 12.

Alsy contends that Sunset's inability to sell other items in its line was due entirely to factors other than the infringement of the floor lamp. See Defendant's Objection to the Magistrates Memorandum and Order at 7. After the exchange, over a period of approximately 18 months, of numerous briefs and letters discussing each side's contentions as to the scope of damages, the Magistrate issued a Memorandum and Order, dated June 7, 1990, which held that Sunset may expand the scope of its damage request, subject to proof at trial, to include lost sales on other items in the Sunrise line.

Pursuant to the Federal Magistrates Act, 28 U.S.C. § 631-639 (1988), the district court retains ultimate responsibility for a matter referred to a magistrate. 28 U.S.C. § 636(b)(1)(C). It was determined in a conference telephone call among counsel for the respective parties and the Magistrate that objections to the June 7, 1990 order were to be filed by June 25, 1990. Alsy filed a timely objection to the Magistrate's Memorandum and Order.

II.

Section 504 of the Copyright Act provides for the recovery of "actual damages suffered . . . as a result of the infringement."

Actual damages consist "primar[ily]" of "the extent to which the market value of the copyrighted work at the time of the infringement has been injured or destroyed by the infringement." Fitzgerald Pub. Co. v. Baylor Pub. Co., 807 F.2d 1110, 1117 (2d Cir. 1986) (citing 3 Nimmer on Copyright § 14.02 at 14-6 (1st ed. 1986), on remand, 670 F. Supp. 1133, 1138 (E.D.N.Y. 1987), aff'd, 862 F.2d 304 (2d Cir. 1988)(table)). However, the scope of actual damages is not to be "narrowly focused." Id.

To prove the amount of damages suffered as a result of the infringement, the copyright owner may rely on indirect evidence. Fitzgerald, 807 F.2d at 1118. For example, the copyright owner may recover "the profits which . . . [it] might have earned were it not for the defendant's infringement," id. (citing Kenbrooke Fabrics Inc. v. Holland Fabrics Inc., 602 F. Supp. 151, 155 (S.D.N.Y. 1984)), and "is competent to testify as to the extent to which the copyright's value has been injured or destroyed by defendant's action." Id. At the same time, actual damages must bear a "necessary, immediate and direct causal connection" to the defendant's infringement. Big Seven Music Corp. v. Lennon, 554 F.2d 504, 509 (2d Cir. 1977). Furthermore, courts will not allow speculation as to the amount of actual damages suffered. Abeshouse v. Ultragraphics, Inc., 754 F.2d 467, 470 (2d Cir. 1985).

Although there do not appear to be any reported copyright cases that have allowed, as actual damages for infringement, lost sales on non-infringed items, neither does there appear to be any case that forbids such recovery as a matter of law. Additionally, a Supreme Court case under the Copyright Act of 1909, F.W. Woolworth Co. v. Contemporary Arts, Inc., 344 U.S. 228, 73 S.Ct. 222, 97 L.Ed. 276 (1952), suggests that the evidence to prove actual damages is not limited to evidence showing lost sales on the infringed product. In Woolworth, the Supreme Court decided only the scope of the district court's discretion in awarding statutory damages instead of the lesser amount of the infringer's proven profits. However, in commenting on the district court's decision to exclude evidence of actual damages because it was granting only statutory damages, the Supreme Court noted:

    "Respondent proved loss of some customers and
  offered, but was not allowed, to show complaints
  from sales outlets about the Woolworth
  competition, decline in respondent's sales, and
  eventual abandonment of the line with an
  unsalable stock on hand. The trial judge excluded
  or struck most of this testimony on the ground
  that authority to allow statutory damages
  rendered proof of actual damages unnecessary. It
  might have been a better practice to have
  received the evidence, even if it fell short of
  establishing the measure of liability; for when
  recovery may be awarded ...

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