Inc. ("Limited") is the self-styled "indirect" corporate parent of Express. The corporate parent is said to be Express Holding Corporation, not a party to the action.
Plaintiff claims that Limited and Express have infringed upon its trade dress and copyright by selling an alleged knockoff of plaintiff's Aran fisherman's sweater ("Banff sweater"). Plaintiff seeks a permanent injunction barring defendants from infringing its copyright and trade dress, as well as damages and costs resulting from the alleged infringements.
While both of the sweaters at issue here are of recent creation, the style from which they derived has a storied history. The Aran style of knitting is believed to date back as far as the Middle Ages, when Irish seamen and their families would create clothing that was not only practical, but which also served to identify their background and relationship to their environment. The typical Aran design "consists of a centre panel with two side panels bordered with cable, signifying the ropes or lifelines on which a fisherman's life might depend." Hollingworth, The Complete Book of Traditional Aran Knitting, at 6. The body of the sweater is made up of a variety of standard stitches, such as the Basket Stitch (meant to symbolize the fisherman's basket and an abundant catch) and the Cable Stitch (meant to symbolize the fisherman's rope and its attendant virtues of safety and good luck). It is apparent that there are innumerable ways in which these standard stitches may be and have been combined to create a design that is unique while conforming to the traditional Aran style. Aran Stitches.
The Banff sweater was designed by one of its employees, Jeffrey Gray. It incorporates a combination of cabled patterns, traditional stitches and crocheted flowers. The defendants make much of the fact that Gray consulted books on Aran stitching and crocheting in arriving at the sweater design, in the hopes of suggesting a lack of originality in Gray's efforts. Banff does not dispute that the elements of its sweater are standard and well-known, but contends that Gray combined them in a unique design. Banff's sweater was sold by a variety of retailers, including Bergdorf Goodman and Bloomingdale's. Defendants sold their sweater at a chain of outlets operated and managed by Express.
Following extensive discovery, both Limited and Express have moved for partial summary judgment on the trade dress infringement claim. Limited has moved for a dismissal of both the trade dress and copyright claims for failure to state a claim upon which relief can be granted, arguing that it was not the perpetrator of the alleged infringements and thus cannot be held liable. Limited's motion to dismiss relies on information outside of the pleadings, and therefore, pursuant to Rule 12(c) of the Fed.R.Civ.Proc., I will treat the motion as a motion for summary judgment, governed by Rule 56 of the Fed.R.Civ.Proc.
The Standard for Summary Judgment
Under Fed. R. Civ. P. 56(c), the moving party is entitled to summary judgment if the papers "show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." On such a motion, "a court's responsibility is to assess whether there are any factual issues to be tried, while resolving ambiguities and drawing reasonable inferences against the moving party." Coach Leatherware Co., Inc. v. AnnTaylor, Inc., 933 F.2d 162, 167 (2d Cir. 1991) (citing Knight v. U.S. Fire Insurance, 804 F.2d 9 (2d Cir. 1986), cert. denied, 480 U.S. 932, 94 L. Ed. 2d 762, 107 S. Ct. 1570 (1987)) (citation omitted). The responding party "must set forth specific facts showing that there is a genuine issue for trial." Fed. R. Civ. P. 56(e). "The non-movant cannot 'escape summary judgment merely by vaguely asserting the existence of some unspecified disputed material facts, '. . . or defeat the motion through 'mere speculation or conjecture.'" Western World Ins. Co. v. Stack Oil, Inc., 922 F.2d 118, 121 (2d Cir. 1990) (citations omitted). While the party resisting summary judgment must show a dispute of fact, it must also be a material fact in light of the substantive law. "Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986).
Limited's Motion for Judgment as to Both Claims
Limited claims that it maintains a separate and autonomous corporate existence in relation to Express, and that it cannot be held liable for the acts of its subsidiary. In support of this contention, Limited asserts that the day-to-day decisions of Express are made by Express officers and employees; that the two entities operate out of different headquarters; that Express maintains its own financial records and files its own franchise tax returns; that decisions about which products to sell are made exclusively by Express; and that Limited does not directly operate any retail stores or directly sell or manufacture any products.
Banff maintains that Limited and Express are sufficiently linked so that Limited may be held liable for the acts of its subsidiary. In support of its claim, Banff contends that Express does not prepare its own income tax return or issue an annual financial report, but rather consolidates its financial results with those of Limited's financial statements and tax returns. It further contends that Express derived profits from the manufacture and sale of the allegedly infringing sweater, that those profits were reflected on Limited's financial statements and tax returns, and thus, that Limited benefitted financially from Express' acts of infringement. This interrelationship between the two entities, according to Banff, renders Limited a "vicarious infringer", even if it had no knowledge of the infringement.
As authority for its position, Limited cites Williams v. McAllister Bros., 534 F.2d 19, 21 (2d Cir. 1976), which stands for the proposition that in order to pursue a claim against a parent corporation for the acts of its subsidiary, a plaintiff must establish that the subsidiary is a "mere instrumentality" of the parent. A subsidiary is a "mere instrumentality" when the parent "actually dominates [the subsidiary] such that the subsidiary has no existence of its own and . . . [the parent] uses the corporate existence of [the subsidiary] to perpetrate a fraud, resulting in an unjust loss to the [plaintiff]." Id., at 21.
Limited's reliance on Williams is misplaced. Williams deals with the general proposition that the liability of a corporation's shareholders is limited, and that a shareholder such as a parent corporation cannot ordinarily be held liable for the acts of its subsidiary. The common law recognizes, however, that where one has used the corporate form solely to perpetrate a fraud, such that the corporation is really the alter ego of another entity, that entity can be reached to answer for the liabilities of the corporation. See Robert Charles Clark, Corporate Law, at 71 (1986).
Liability for copyright and trade dress infringement, however, flow from Acts of Congress, specifically, the Copyright Act and the Lanham Act. These Acts, rather than the common law, define the scope of liability. The Supreme Court has held that both statutes allow for the imposition of liability upon parties other than those who directly commit the wrongful act. See, Inwood Laboratories, Inc. v. Ives Laboratories, Inc., 456 U.S. 844, 72 L. Ed. 2d 606, 102 S. Ct. 2182 (1982); Sony Corp. v. Universal City Studios, Inc., 464 U.S. 417, 78 L. Ed. 2d 574, 104 S. Ct. 774 (1984). The "alter ego" analysis employed by Williams thus is inapplicable here.
The Supreme Court has also made it clear, however, that the standards for third-party liability in copyright law and trademark law differ. Sony, 464 U.S. at 439, n. 19 ("Given the fundamental differences between copyright law and trademark law, in this copyright case we do not look to the standard set forth in Inwood Laboratories. . . which was crafted for application in trademark cases."). I will therefore discuss separately the issues of whether Limited may be held liable for its subsidiary's acts under the Copyright Act, and whether it may be held so liable under the Lanham Act.
A. Liability Under the Copyright Act
17 U.S.C. § 501(a) declares that "anyone who violates any of the exclusive rights of the copyright owner . . . is an infringer of the copyright." The language of the statute thus raises the question of when such rights have been "violated", a formulation that by its terms does not limit liability to direct actors. Indeed, as noted above, the Supreme Court has made it clear that one may be held liable for the infringing acts of another. Sony, 464 U.S. at 435.
The leading case on vicarious copyright infringement is Shapiro, Bernstein & Co. v. H.L. Green Co., 316 F.2d 304 (2d Cir. 1963). Shapiro involved a store owner who had leased a part of his premises to a record album seller who proceeded to sell infringing products. The Court explored the relationship between the store owner and the seller and found that the owner received a percentage of the seller's profits; that the owner was responsible for managing the payroll for the employees working for the seller; that the record seller's employees had to abide by the rules promulgated by the owner; and that the employees could be dismissed in the unreviewable discretion of the owner. Shapiro, 316 F.2d at 306. Given the nature of their relationship, the Court found the owner vicariously liable for the record seller's infringement, concluding:
"When the right and ability to supervise, coalesce with an obvious and direct financial interest in the exploitation of copyrighted materials- even in the absence of actual knowledge that the copyright monopoly is being impaired . . . the purposes of copyright law may be best effectuated by the imposition of liability upon the beneficiary of that exploitation." Id., at 307.
The Shapiro standard for vicarious infringement thus creates a two-part test for determining whether a parent corporation can be vicariously liable for its subsidiary's acts: (1) the parent must have "the right and ability to supervise"; and (2) the parent must have "a direct financial interest" in the profits from the infringing activity. As the sole shareholder of Express, Limited undoubtedly benefits financially from the profits Express might earn from sales of the sweater. In addition, such total ownership provides Limited with both the legal and practical opportunity to influence and control the activities of personnel and the decisions made by its subsidiary. Limited thus seems to be a vicarious infringer based on the language of Shapiro.
The Court's analysis cannot end there, however, for it is clear that such a finding has serious implications in greatly expanding the reach of the Copyright Act. To apply Shapiro in such a way would be to attach liability to every parent corporation for the infringing acts of its subsidiaries, solely because of the parent-subsidiary relationship. Every parent will benefit from its subsidiary's profit-generating activities, and every parent will have the opportunity to guide the affairs of its subsidiary. Indeed, one court has explicitly recognized this and held that the legal relationship between parent and subsidiary, by itself, always satisfies the test for vicarious infringement. Broadcast Music, Inc. v. Hartmarx Corp., 1988 U.S. Dist. LEXIS 13298, 9 U.S.P.Q.2d 1561, 1562 (N.D.Ill. 1988).
Such a conclusion, however, is of sufficiently potent import that it should not be accepted in the absence of clear authority to that effect. See Sony, 464 U.S. at 431 ("The judiciary's reluctance to expand the protections afforded by the copyright without explicit legislative guidance is a recurring theme.") I do not read Shapiro to have spoken directly to this issue, nor have other cases in this Circuit that have subsequently confronted the matter.
This is not because the issue has not presented itself. In Artists Music, Inc. v. Reed Publishing, 1994 U.S. Dist. LEXIS 6395, 1994 WL 191643 (S.D.N.Y. 1994), Judge Keenan considered whether trade show organizers could be liable for the infringing activities of their exhibitors. The plaintiff claimed that the exhibitors were in a position to police the exhibitors for infringing conduct and therefore satisfied the "supervision and control" prong of the Shapiro test. In refusing to hold the organizers liable, Judge Keenan, relying on Shapiro, wrote that "the mere fact that they could have policed the exhibitors at great expense is insufficient to impose vicarious liability." Artists Music, 1994 U.S. Dist. LEXIS 6395, 1994 WL at 6. Thus, while squarely rejecting the notion that the mere opportunity to supervise, without something more, was insufficient for grounding vicarious liability, the Court did not address the fact that the test articulated by Shapiro appears to allow for liability in just such a situation. Similarly, in Singer v. Citibank, 1993 U.S. Dist. LEXIS 6907, 1993 WL 177801 (S.D.N.Y. 1993), Judge Keenan refused to hold two defendants vicariously liable in the absence of evidence that they had "exercised the requisite supervision or control over the infringing work." Singer, 1993 U.S. Dist. LEXIS 6907, 1993 WL at 5 (emphasis added).
There is one early case, predating Shapiro, that seemed to suggest that merely being the parent corporation was not enough to make one vicariously liable. In Peter Pan Fabrics, Inc. v. Acadia Company, 173 F. Supp. 292 (S.D.N.Y. 1959), aff'd, 274 F.2d 487 (2d Cir. 1960), a corporation that owned 70% of the stock of its subsidiary sought to avoid vicarious liability on the grounds that the infringing fabric had been sold by its subsidiary. In holding the parent liable, the Court examined the evidence of the connections between the two companies and found ten significant pieces of evidence that indicated that the two companies' activities were closely intertwined.
Peter Pan, 173 F. Supp. at 298. The Court concluded: "The cumulative proof points . . . to the conclusion that [the parent] was substantially connected with the infringing transaction and the course of conduct sought to be enjoined." Id. The Court was thus not content to rest its holding on the parent's ownership of 70% of the subsidiary's stock, suggesting that a showing of involvement with the infringement beyond one's mere status as a parent was required. The Shapiro Court did not cite to Peter Pan.
In the absence of Second Circuit precedent directly on point, it is instructive that two other circuits have ruled that the mere potential to influence inherent in the parent-subsidiary relationship is inadequate to ground vicarious liability for infringement. The Ninth Circuit has held that "a parent corporation cannot be held liable for the infringing actions of its subsidiary unless there is a substantial and continuing connection between the two with respect to the infringing acts." Frank Music Corp. v. Metro-Goldwyn-Mayer Inc., 886 F.2d 1545 (9th Cir. 1989), cert. denied, 494 U.S. 1017, 108 L. Ed. 2d 496, 110 S. Ct. 1321 (1990) (emphasis added). The Eleventh Circuit has also adopted this standard. See Howard Johnson Co., Inc. v. Khimani, 892 F.2d 1512, 1518 (11th Cir. 1990). Under this formulation, there must be indicia beyond the mere legal relationship showing that the parent is actually involved with the decisions, processes, or personnel directly responsible for the infringing activity. See Also, Nimmer on Copyright, § 134, and the cases cited therein.
I believe that the standard articulated by the Ninth and Eleventh Circuits is the proper one, and that such a rule is consistent with Shapiro. In so finding, I am guided by three considerations: (1) the language of Shapiro; (2) the principles behind Shapiro; and (3) a recent elucidation by the Second Circuit of the Shapiro standard. I will consider each of these factors in turn.
With regard to the language of Shapiro, in defending its decision to impose vicarious liability upon the store owner, the Shapiro Court wrote:
"[the owner] has the power to police carefully the conduct of its concessionaire . . .; our judgment will simply encourage it to do so, thus placing responsibility where it can and should be effectively exercised. [The owner's] burden will not be unlike that quite commonly imposed upon publishers, printers, and vendors of copyrighted materials." Shapiro, 316 F.2d at 308.
This language can fairly be read to suggest that the formal relationship between parties is not the driving force behind liability; rather, the parties' paths must cross on a daily basis, and the character of this intersection must be such that the party against whom liability is sought is in a position to control the personnel and activities responsible for the direct infringement. See, e.g., Demetriades v. Kaufmann, 690 F. Supp. 289 (S.D.N.Y. 1988) ("Courts relying on this theory of third-party liability repeatedly have emphasized that some degree of control or supervision over the individual(s) directly responsible for the infringement is of crucial importance."); Singer, 1993 U.S. Dist. LEXIS 6907, 1993 WL at 5.
The second factor that supports my conclusion is an examination of the considerations that motivated the Shapiro Court. In its thorough discussion of the principles behind vicarious liability, the Shapiro Court noted that the doctrine of respondeat superior clearly placed vicarious liability for an employee's infringement upon the employer. Shapiro, 316 F.2d at 307. The record seller in Shapiro, however, was not technically an employee of the store owner. Confronted with this, the Shapiro Court noted that the "elements which have given rise to the doctrine of respondeat superior . . . may also be evident in factual settings other than that of a technical employer-employee relationship." Shapiro, 316 F.2d at 307.
In the typical employer-employee relationship, it is reasonable to presume that the employer is intimately linked with and responsible for an employee's acts of infringement. Indeed, when acting within the scope of employment, an employee is presumed to be the employer's agent. In Shapiro, the Court clearly felt that on the facts before it, the store owner could be presumed to have the same control over the seller as an employer over an employee, even if the formal relationship did not exist. Indeed, the Shapiro Court cited with approval a line of cases finding no vicarious liability for landlords leasing property at fixed rates to tenants engaged in infringing activities. Shapiro, 316 F.2d at 307. Unlike the employer-employee relationship, there is no presumption in the landlord-tenant relationship that one party's acts are attributable to the other. Such a presumption can arise, however, upon a factual showing like that in Shapiro, where the landlord is more intimately involved with the affairs of the tenant than might typically be the case.
Like the landlord-tenant relationship, the parent-subsidiary relationship is not marked by a presumption that the acts of the one are intimately associated with the other. A subsidiary possesses an independent legal existence; it may organize its affairs and make its decisions completely independently of its parent. Of course, it may also do the opposite and organize its affairs and make its decisions according to the direction of its parent. That parent's influence, however, is characteristic only of that particular parent-subsidiary relationship, and is not inherent in the nature of the relationship in either legal or practical terms. Given that the actual exercise of control cannot be presumed from the mere power to control, it is logical to require evidence of actual control and supervision before holding the parent liable.
Finally, the last factor that guides my conclusion is the fact that a more recent Second Circuit case on vicarious infringement appears to have modified the language of Shapiro to require actual control, rather than simply the power to control. Sygma Photo News, Inc. v. High Society Magazine, Inc., 778 F.2d 89 (2d Cir. 1985), involved an attempt to hold a parent publisher liable for copyright infringement engaged in by its subsidiary. The facts of Sygma did not present an especially troubling issue with regard to liability- the subsidiary corporation responsible for the direct infringement was found to be a sham corporation, with no employees, operated by the parent solely to avoid liability. Sygma, 778 F.2d at 92. There was thus ample evidence that the parent actually controlled the infringing activity, such that the court did not need to address whether the status of being a parent corporation, by itself, was enough to ground vicarious liability for the actions of the subsidiary.
The case is useful, however, for its description of the relevant standard:
"All persons and corporations who participate in, exercise control over, or benefit from the infringement are jointly and severally liable as copyright infringers. See, e.g., Shapiro, Bernstein & Co. v. H.L. Green Co., 316 F.2d 304, 308-9 (2d Cir. 1963); 3 M. Nimmer, Nimmer on Copyright § 12.04[A], at 12-34 (1985)." Sygma, 778 F.2d at 92.