Monetary Damages for FOSS License Non-Compliance: OSBC Legal Track Presentation

In Jacobsen v. Katzer, the Federal Circuit held that open source licenses are indeed licenses and not merely contracts.¹ This is an important decision due to the remedies available under the Copyright Act versus contract law. But what do monetary damages under U.S. copyright law look like? More specifically, how much could an OSS license non-compliance action cost a company that loses such a suit? Two lawyers endeavoured to answer just that question in a presentation in mid-May at the Open Source Business Conference in San Francisco. Jeffery Norman and Vladimir Khodosh of Kirkland & Ellis outlined the various sources of monetary remedies for FOSS license non-compliance, with a particular focus on the ability to recover a portion of the infringer's profits.

Under contract law, the non-breaching party may recover actual damages. The general goal is to put the non-breaching party in as good a position as he would have been had the contract been performed. But what reasonably foreseeable damages could be expected to be recovered when the software was obtained for no monetary cost? Under copyright law, the author may recover either statutory damages or actual damages plus the infringer's profits attributable to the infringement.² Statutory damages can be a useful option when the actual damages and profits are too small or too difficult to calculate. In that situation, a plaintiff can recover $750 to $30,000 per infringed work or up to $150,000 if the infringement was wilful.³ However, this remedy is only available if the work was registered prior to the infringement. Alternatively, a plaintiff may recover actual damages suffered as a result of the infringement and "any profits of the infringer that are attributable to the infringement and are not taken into account in computing the actual damages."⁴ If we assume that the actual damages calculated under this standard are similar to actual damages under contract law, then it is the ability to recover a defendant's profits that provides additional ammunition in the copyright remedy arsenal.  This makes sense; otherwise the outcome of an infringement suit could result in an infringer paying in damages about what she would have paid to license the work to begin with (plus the cost of defending the suit, of course). This potential outcome doesn't exactly discourage infringement, so the statute provides an additional remedy beyond actual damages to deter infringing activities. Costs and attorney's fees may also be recovered at the discretion of the court.⁵

So, how much gunpowder does this gun carry? The statute provides guidance: "In establishing the infringer’s profits, the copyright owner is required to present proof only of the infringer’s gross revenue, and the infringer is required to prove his or her deductible expenses and the elements of profit attributable to factors other than the copyrighted work." In other words, once the Plaintiff offers proof of gross revenue, then the burden shifts to the defendant to knock that number down.

In their analysis, Norman and Khodosh surveyed publicly available cases where a defendant's profits were awarded and summarized the award amounts in terms of a percentage of gross profits. The percentages ranged from 6% to 159%, with more than half of the cases awarding 100% of the defendant's gross profits from the infringing work. For the cases involving derivative works, the percentage was lower, ranging from 10% - 50%. Interestingly, this number did not necessarily correlate to the amount of the original work deemed to be included in the derivative, as one might expect. For example, the only derivative work case involving software awarded 50% of the defendant's profits even though the plaintiff's code included in the product was about 16%.⁶ The court reasoned that in spite of the small portion of code used, it was an essential part of the overall work and thus warranted a higher percentage of the total profits.

How might one calculate potential monetary damages? Norman and Khodosh shared some equations for just that task. Now, jokes abound that lawyers hate (or are incapable of) math, but let's get our hands dirty apply these formulas to a hypothetical scenario.

 

D = A + P + F D = the total damages award A = Plaintiff's actual damages P = Defendant's profits F = attorney's fees and costsWhere: A = L + (N * Sp) + M L = loss in fair market value N = number of products sold containing infringing code Sp = Sales or licensing fee charged by Plaintiff for copyrighted code M = miscellaneous (e.g. damage to reputation, loss of "up-sell" revenue, etc.) P = ((N * Sd) - E) * C N = number of products sold containing infringing code Sd = sales or licensing fee charged by Defendant for infringing software product C = percentage of Sd attributable to infringed code E = Defendant's provable expenses for all products N (e.g. manufacturing, shipping, marketing, etc.)

Imagine Defendant sells a Blu-ray DVD player that includes an open source software project called LazyBox. Defendant got LazyBox for free (Sp). Defendant sells each DVD player for $129.99 (Sd) and sold 1,000,000 of these units (N). Plaintiff, the copyright holder of LazyBox, has suffered no loss in market value for the code (L) since there was no charge for it to begin with. Likewise, Plaintiff has no loss of "up-sell" revenue and is unable to prove damage to reputation (M). Because LazyBox comprises a small, yet crucial portion of the code included in the DVD player, the court determines Plaintiff should get 50% of Defendants gross profits (C) from the sale of the DVD player. Defendant is able to show that its total expenses - direct and indirect labor, overhead, shipping, etc. - for these products to be $49,990,000 (E).⁷

A = L + (N * Sp) + M L = 0 (loss in fair market value of LazyBox) N = 1,000,000 (number of DVD players sold containing LazyBox code) Sp = 0 (licensing fee charged by Plaintiff for LazyBox) M = 0 (no damage to Plaintiff's reputation, loss of "up-sell" revenue, etc.)Therefore: A = 0 + (1,000,000 * 0) + 0 = 0 P = ((N * Sd) - E) * C N = 1,000,000 (number of DVD players sold containing LazyBox code) Sd = $129.99 (sales price for Defendant's Blu-ray DVD player) C = 50% (percentage attributable to infringed code, as determined by court) E = $49,990,000 (Defendant's provable expenses for the Blu-ray DVD player) Therefore: P = ((1,000,000 * $129.99) - $49,990,000) * .50 = $40,000,000 D = 0 + $40,000,000 + F

Thus, in this case, the total damages award would be $40 million plus any attorney's fees and costs that may be awarded (undetermined here). Considering the tendency of consumer electronic products to contain similar software across multiple models and model years, it wouldn't be hard to imagine that such a case could involve several products, necessitating this calculation to be done for each infringing product.

Certainly, no CEO is going to be thrilled with a $40 million judgment handed down against her company. Nevertheless, many companies still prioritize (if at all) FOSS license compliance in relation to the probability of having a non-compliance action brought against it. Perhaps your executive management team thinks this probability is low. Will your shareholders, board members, or downstream purchasers find "we probably won't get caught" a good enough explanation to forego license compliance? When a potential acquirer or a lender asks for disclosure of all potential risks, is this a number you want to have to calculate rather than explaining your process for being in compliance?

On the other side of the equation, maybe you are trying to do the right thing, but your bean counter is balking at the up-front cost of determining what open source software you are using, setting up a policy, and getting into compliance. The cost of compliance may suddenly seem like peanuts compared to rolling the dice on a potential $40 million judgment.

The bottom line is that if it comes down to monetary damages, an open source license violation could be quite costly. With the ever-increasing awareness of, educational opportunities around, and tools to assist with license compliance, is such a risk worth it?

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¹ See Jacobsen v. Katzer, 535 F.3d 1373 (2008)
² 17 U.S.C. § 504(a)
³ 17 U.S.C. § 504(c)
⁴ 17 U.S.C. § 504(b)
⁵ 17 U.S.C. § 505
⁶ See Softel, Inc. v. Dragon Medical and Scientific Communications, Inc., 891 F.Supp. 935 (S.D.N.Y. 1995)
⁷ Which accounting method the defendant uses could impact feasibility of proving expenses. For example, the tendency away from activity-based costing may make determining per-unit expenses more difficult.

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