January_2008 Page 1

THE PARTICULAR COST SAVING ADVANTAGES OF USING THE FED. R. CIV. P. RULE 68 "OFFER OF JUDGMENT" IN COPYRIGHT ACTIONS

Executive Summary

Due to the expense surrounding the defense and damage awards in intellectual property cases (potentially falling under the "advertising injury" provisions of business liability policies), insurers should strongly consider the use of the Federal Rule 68 "offer of judgment" as a tool for reducing exposure and facilitating early settlement of such actions, especially in the copyright context.

Background

Many commercial general liability policies contain advertising injury provisions, potentially covering policy holders with regard to infringement allegations made by purported owners of, among other things, intellectual property rights. Intellectual property rights refer collectively to an owner’s rights in intangible property, such as patents, trademarks (including trade dress),^{1 trade names and/or
copyrights. In many instances, such policies contain
exclusions for patent claims and, in fewer instances,
trademark and trade name claims, leaving copyright
infringement as the most common potentially covered
intellectual property claim. Often the coverage determination
hinges on whether the particular violation occurred within the
context of an "advertisement."2 Defending against advertising
injury claims often proves expensive, even putting aside the
plaintiff’s damages claim. Any tool or approach that has a
reasonable chance of terminating such actions early should be
carefully considered.}

While there are numerous nuances beyond the scope of this article, this article addresses, in brief, the advantages of and strategy considerations surrounding the use of "offers of judgment," under the Federal Rules of Civil Procedure,3 in the defense of intellectual property claims made against an insured and highlights the particular advantages in the context of copyright claims.

The Anatomy of the Various Intellectual Property Claims and Associated Remedies

At the outset, what follows is a quick primer on the specific claims that fall under the intellectual property umbrella. A trademark is a word, phrase, symbol or design, or a

1 The term "trade dress" refers to characteristics of the visual appearance of a product or its packaging (or even the facade of a building such as a restaurant) that may be registered and protected from being used by competitors in the manner of a trademark. These characteristics can include the three-dimensional shape, graphic design, color, or even smell of a product and/or its packaging. (Definition adapted from Wikipedia). Thus for purposes of this article, the term trademark shall include trade dress.

2 Coverage issues and assessments are beyond the scope of this article.

3 Intellectual property claims are typically adjudicated in Federal Court and are determined under federal law.

combination of words, phrases, symbols or designs, that identifies and distinguishes the source of the goods of one party from those of others.4 An owner of a trademark may use the TM symbol to provide notice to the public of the mark while an owner of a federally registered trademark may use the ® symbol to denote its status as such. Stated another way, trademark and trade name actions usually involve some claim for injury to reputation.

A utility patent is the grant of a property right by the United States Patent and Trademark Office to the inventor of any new and useful process, machine, article of manufacture, or composition of matter.5 Design patents may be granted to anyone who invents a new, original and ornamental design for an article of manufacture.6 Many courts have held that utility patents are not typically covered under advertising injury provisions, but in certain instances assertions against the insured for infringing design patents may be covered. ^{See, e.g., Homedics Inc. v Valley Forge Insurance Co.,
315
F.3d 1135 (9th Cir. 2003) (utility patents;

EKCO Group, Inc. v. Travelers Indemnity Company of Illinois,
273 F.3d 409 (1st Cir., 2001) (design patents).}

A copyright is a form of protection provided by the laws of the United States to authors of "original works of authorship," including literary, dramatic, musical, artistic, and certain other intellectual works.7 Copyrighted materials may bear a notice with the symbol © along with the author’s identity and year of publication, i.e. © 2007 Disney or some variation thereof.

Remedies available for a successful plaintiff in a copyright infringement action consist of:

• an injunction against future infringements (preliminary and/or permanent)

• delivery and destruction of the infringing goods

• actual damages suffered by the copyright owner

• disgorgement of infringer’s profits (not taken into account in computing the actual damages)

• statutory monetary damages (in lieu of actual damages and profits -- innocent infringement: not less than $200; non-willful infringement: $750 - $30,000; willful infringement: no more than $150,000)

• costs of the action, including, in many instances, reasonable attorney’s fees8

4 http://www.uspto.gov/web/offices/tac/doc/basic/trade_defin.htm

5 http://www.uspto.gov/web/offices/pac/doc/general/index.html#patent

6 Id.

7 http://www.copyright.gov/circs/circ1.html#wci

8 17 USC §§502 et seq.

Of particular note, here, the Copyright Act defines "costs"9 to include attorney’s fees in cases where the plaintiff registered the work-in-suit prior to the defendant’s infringement or within three (3) months of first publication.. Specifically, 17 U.S.C. §505 provides that "[i]n any civil action under this title, the court in its discretion may allow the recovery of full costs…Except as otherwise provided by this title, the court may also award a reasonable attorney’s fee to the prevailing party as part of the costs." This fee-shifting provision is equally available to prevailing plaintiffs and defendants.

In light of the potentially daunting remedies – including the recovery of attorney’s fees as a cost – threatening a defendant-insured in an action for copyright infringement, it is essential to undertake measures throughout the action to reduce the insured’s exposure, including, in many instances, the use of the offer of judgment pursuant to Federal Rule of Civil Procedure 68.

Advantages of the Fed. R. Civ. P. Rule 68 "Offer of Judgment"

While the advantages of an offer of judgment pursuant to Federal Rule of Civil Procedure 68 ("Rule 68") apply to all actions, including trademark and other intellectual property claims, the particular advantages of this procedure in the copyright claim context are manifest.

Under Rule 68, a defendant may serve the plaintiff with a Rule 68 offer of judgment for a specified dollar amount, essentially conceding liability and accepting an injunction. For reasons detailed below, in a copyright action the offer needs to specify that costs and fees are included within the offered amount. If plaintiff accepts the offer, judgment in the amount offered by defendant is entered against it but, if the plaintiff declines to accept the Rule 68 offer within ten (10) days after its made and the final judgment ultimately entered in the action is not more favorable than the amount of the rejected offer, then the plaintiff is required to "pay [defendant’s] costs incurred after the making of the offer." Fed. R. Civ. P. 68 (emphasis added). Normally, under Fed. R. Civ. P. 54(d), a court has some discretion in awarding court costs but an award of costs under Rule 68 is mandatory, not discretionary. Moreover, in a copyright action, the plaintiff is precluded from recovering his costs and attorney’s fees incurred after the making of the offer if the offer is rejected and plaintiff later obtains a less favorable judgment (when added together with the fees and costs incurred by the plaintiff as of the date of the offer).

Ultimately, the goal of the Rule 68 offer is to force plaintiff to evaluate the merits of his case from a clear baseline, relative to the value of the offer, with serious consequences in either accepting or rejecting it. Obviously, in order to maximize its benefits and be effective, the Rule 68 offer should be made prior to plaintiff incurring significant fees, include plaintiff’s costs (including fees) to date, and take into account the plaintiff’s

9 Usually, taxable "costs" consist of filing fees, service of process fees, transcripts, deposition fees, witness fees, interpreter and translator’s fees, certification fees, etc. See, Central District of California Local Rule 54.

anticipated monetary recovery against the defendant were plaintiff to prevail at trial. Factors such as the strength of the plaintiff’s case, the number of works-in-suit, the complexity of the case and the degree of defendant’s culpability play important roles in this calculation. Of particular importance in the copyright context is plaintiff’s attorney’s fees incurred to date, since the Copyright Act defines costs to include attorney’s fees. Nevertheless, a well-grounded Rule 68 offer may not immediately halt a determined plaintiff’s prosecution, but it will lay the groundwork for establishing the consequences of rejecting a reasonable offer.

As stated above, unlike trademark actions and other intellectual property actions, in many cases, a successful plaintiff in a copyright action may be awarded attorney’s fees and costs – as a cost – by virtue of prevailing in the action. The issue, then, becomes whether a defendant making a Rule 68 offer that is rejected by plaintiff is entitled to its attorney’s fees from the plaintiff – in the event that the plaintiff – even if it ultimately prevails on the merits – obtains a less favorable monetary amount at trial. Stated another way, since fees are within the definition of costs when read in conjunction with the Copyright Act and the Rule 68 defendant is entitled to recover its costs in cases where the plaintiff failed to recover more than the Rule 68 offer made by the defendant, is the defendant now entitled to recover attorney’s fees as a cost – as the putative prevailing party under the Copyright Act?

For example, if a plaintiff rejects a Rule 68 offer made by defendant for $10,000 ($3,000 for attorney’s fees + $7,000 for plaintiff’s alleged damages and costs, to date) but obtains a final judgment at trial for $5,000 (less than the Rule 68 offer), is defendant entitled to fees as a cost, since the plaintiff was not awarded an amount more favorable than the Rule 68 offer? Or, must the defendant prevail on the merits of the copyright claim itself for defendant to be considered the "prevailing party" under 17 U.S.C. §505, entitling the defendant to recover its fees as costs against the plaintiff?

As recently as 1997, the Eleventh Circuit (along with some district courts from other jurisdictions) agreed with the former and held that when a plaintiff recovers less than the defendant’s Rule 68 offer, Rule 68 requires an award to defendant of its fees incurred after that offer.10 Other courts, however, have followed the Seventh Circuit’s lead and have held that the plaintiff continues to be the "prevailing party" even under these circumstances.11 Accordingly, courts following the Seventh Circuit’s analysis will not award attorney’s fees as costs to a defendant where the plaintiff is successful on the merits, even though the plaintiff failed to obtain a more favorable award vis-à-vis the

10 Jordan v. Time, Inc. 111 F.3d 102, 104-5 (11th Cir. 1997); see also, Baker v. Urban Outfitters, Inc., 431 F. Supp. 2d 351 (S.D.N.Y. 2006) (Unsuccessful plaintiff pursuing copyright action in bad faith ordered to pay defendant $ 388,424.54 in fees and costs.)

11 Harbor Motor Co. v. Arnell Chevrolet-Geo, Inc., 265 F.3d 638, 645-7 (7th Cir. 2001); Bruce v. Weekly World News, Inc., 203 F.R.D. 51, 55 (D. Mass. 2001) (a prevailing party is "one who obtains an enforceable judgment on the merits or a court-ordered consent decree.")

rejected Rule 68 offer, since the Copyright Act provides reasonable attorney’s fees only to a prevailing party.

The 9th Circuit agrees with the Seventh Circuit to the extent that Rule 68 "costs" do not include a non-prevailing defendant’s post-offer attorney’s fees when the underlying statute awards attorney’s fees to a prevailing party.12 Regardless, even in these jurisdictions, the potential advantages of recovering defendant’s post-offer costs (excluding attorney’s fees) taken together with the lure of freezing the amount of plaintiff’s own recoverable post-offer costs and attorney’s fees (to the extent they are available to the plaintiff)13 should encourage any copyright-action-defendant (and its insurer) to consider a Rule 68 offer at some point – preferably early on – in an action.

Conclusion

No matter what the jurisdiction, the advantages of the Federal Rule 68 "offers of judgment" as a tool for reducing exposure and facilitating early settlement of copyright actions ought to be seriously considered by adjusters and the attorneys defending their insureds .

12 Champion Produce, Inc. v. Ruby Robinson Co., Inc., 342 F.3d 1016, 10030-31 (9th Cir. 2003).

13 As stated above, the prevailing plaintiff is only entitled to recover attorney’s fees under 17 U.S.C. §505 if the plaintiff registered its work prior to the defendant’s infringement or within three (3) months of first publication.

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