Proprietary damages for copyright infringement? This judge is not converted

A brush with the law? Merpel
surreptitiously uses the IPKat's toothbrush

When this Kat was but a kitten, British copyright law had a remedial provision which other IP rights lacked and which was so good that we all knew it couldn't last.  That was the statutory right to conversionary damages.  For the benefit of younger British readers and almost all non-British readers, once upon a time there was a tort (delict, civil wrong) of conversion -- a voluntary act done by one person which was inconsistent with someone else's right to their chattel (movable property).  Typical examples of conversion might be eating someone else's chocolate bunny, borrowing their tickets for an Olympic event and returning them afterwards, and -- horror of horrors -- creeping surreptitiously into their bathroom and using their toothbrush without their knowledge.  There's quite a neat entry on conversion in Wikipedia, here.  In the relevant bits of the UK, conversion was largely rebranded in 1977 as "wrongful interference with goods", but its spirit went marching on.

Now,what did this have to do with copyright infringement? Under the Copyright Act 1956, section 18, infringing goods could be regarded as though they were the lawful goods of the copyright owner.  In other words, if an infringer sold records, books, picture postcards or anything else in which copyright vested, the injured copyright owner could claim damages on the basis that those goods were actually his own and not the infringer's.  This rewarding provision was repealed by the Copyright, Designs and Patents Act 1988 in the UK, but this Kat would not be surprised if, somewhere else on the planet, the same or a similar provision lived on -- readers, you may know.

Memories of conversion damages came flooding back when this Kat noted Twentieth Century Fox v Harris, a decision in which it appears that an ingenious attempt was made to resurrect conversionary damages via a non-statutory route.  This is where the excellent Francis Davey -- a noted contributor of wise and generally rectificatory comments on other people's weblogs -- comes in.  Kindly agreeing to have his arm twisted, Francis has penned the analysis below for the edification and education of our readers:

"Does a copyright owner have a proprietary interest in all the proceeds resulting from an infringement? On Tuesday, Mr Justice Newey, giving judgment in the High Court, England and Wales, thought not in Twentieth Century Fox Film Corporation v Harris. 

The case arose in the continuing Newzbin litigation (for which see this IPKat post among many others). Newzbin2 was a phoenix-like successor to the Newzbin file sharing site. A number of Hollywood studios sued someone alleged to be the sole operator, or at least one of the operators, of the site along with a number of associated companies. Late in 2012 the studios succeeded in obtaining freezing injunctions against the defendants. 

There are two ways in which a freezing injunction may restrain a defendant: the order may prevent the defendant from dealing with its own assets to prevent dissipation before judgment or the order may prevent the defendant dealing with assets over which the claimant has a proprietary claim to avoid the claimant's property being lost (see the White Book 25.1.25.1). As far as I can tell from the judgment, the studios had not obtained the proprietary form of order. 

I presume the attraction of a proprietary order is that it would make it more difficult for the defendants to dispose of their assets to, for example, pay for their living expenses or legal costs, which they would otherwise be entitled to do under the example freezing injunctions. 

The studios' case was that a copyright infringer held all the proceeds of their infringement on constructive trust for the copyright owner. They were therefore beneficial owners of all the defendants' property and hence were entitled to an order protecting it in the defendants' hands.
I suspect most property lawyers (intellectual or otherwise) would be surprised at such a bold suggestion. It would certainly be a very powerful weapon in the hands of a copyright owners or indeed property owners in general. It is therefore surprising, thought the judge, that no-one appears to have tried to use it before or even suggested its existence in the literature.
Without success, the studios attempted to find justification for their claim in a number of places:

1. Section 96(2) of the Copyright, Designs and Patents Act 1988 states that, in an action for infringement of copyright, "all such relief by way of damages, injunctions, accounts or otherwise is available to the plaintiff as is available in respect of the infringement of any other property right". The studios argued that "or otherwise" included the right to a proprietary claim over the proceeds of infringement. As the judge observed while "or otherwise" clearly could cover a proprietary claim that did not mean it actually did.

1. Copyright could be the subject of a constuctive trust. Again, the judge accepted that this was true, but noted that the fact that copyright may be the subject of a constructive trust, does not mean that a constructive trust is imposed as a remedy for copyright infringement. The two are logically different.

1. Copyright is like theft and, on the authority of a dictum of Lord Browne-Wilkinson's in Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669, stolen property is subject to a constructive trust in favour of the rightful owner. The judge pointed out that Lord Browne-Wilkinson's dictum had been the subject of much subsequent criticism [not least because it is hard to see how a thief can be a constructive trustee when he or she is not the legal owner] but anyway copyright infringement was not like theft in the sense that the copyright owner remains in possession of its property (the copyright) whereas the owner of stolen property no longer has it (the judge avoided saying "non rivalrous" for some reason).

1. In the Spycatcher case (Attorney-General v Guardian Newspapers Ltd (No. 2) [1990] 1 AC 109) and later in Attorney-General v Blake [1997] Ch 84 it was suggested that the Crown might have a constructive trust over the copyright in the two spys' books. The judge thought there were various ways in which these authorities did not helpt the studios the most fundamental being that they were about a claim for a constructive trust over copyright as a remedy for a breach of duty not a constructive trust over other property as a remedy for copyright infringement. In other words they were about something completely different.

1. An even more hopeless attempt (in my view) was made to rely on Magical Marking Ltd v Holly [2008] EWHC (Ch) 2428 for assistance. Reading Magical Marking is much like watching a one-hour crime drama. In particular it is about the removal (arguably theft) in a "raid" of some CDs and a DAT tape by the villain in breach of fiduciary duty to his employer. It is therefore unsurprising that a proprietary right to information held on that media was found by the court. Newey J rejected this argument as well.

The studios difficulty was not simply an inability to find any support in statute or the authorities, but with the idea itself. The judge was influenced by a thought experiment:

a market trader sells infringing DVDs, among other goods, from a stall he has set up on someone else's land without consent. The owner of the land could not, as I see it, make any proprietary claim to the proceeds of the trading or even the profit from it. There is no evident reason why the owner of the copyright in the DVDs should be in a better position in this respect.

But the killer point was that, if the studios were right, they would beneficially own property the value of which might be more than they could recover at trial:

a copyright owner's claim would not even be limited to the infringer's profits: in principle, the entire proceeds of sale would be held on trust for the copyright owner. That might both be unfair and stultify enterprise. The proceeds of an infringement might be out of all proportion to the profits generated (e.g. because of the cost of raw materials used in the infringing product). It might not seem just for even a deliberate wrongdoer to have to pay the copyright owner the amount of his gross receipts, and an infringer need not have known that he was breaching copyright. Further, were Mr Spearman's submissions correct, a person might be deterred from pursuing an activity if he perceived there to be even a small risk that the activity would involve a breach of copyright or other intellectual property rights. As was submitted by Miss Lambert, that could have a chilling effect on innovation and creativity.

I think this must be right. While in some cases copyright owners may have a genuine concern about recovering in full their loss, in others, especially where infringement is innocent, the existence of a constructive trust over the proceeds of the infringement could lead to punishing losses for the infringer and a windfall for the copyright owner. For example if one of the studios inadvertently failed to clear a single song or quotation in one of their films it could hardly be right that the entire gross proceeds of that film would be held on constructive trust for the author of the song or work quoted". 

The Miss Lambert mentioned in the "killer point" bit is none other than Jane Lambert, of NIPClaw fame, whose own selection of FAQs and further reading on this fascinating litigation can be enjoyed here.

Merpel notes that the Directive 2004/48 (the IP Enforcement Directive) doesn't explicitly rule out proprietary claims of this nature, though it does somewhat unsportingly require that damages be appropriate ...

She's a Twentieth Century Fox here