Caseflicks

United States Court of Federal Claims • 2013

Frank Gaylord v. United States

112 Fed. Cl. 539 | 2013 U.S. Claims LEXIS 1375

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Takeaway

In short, this case shows that copyright damages against the United States may be measured by the fair market value of a hypothetical license, with an established running royalty applied to the revenues most directly attributable to the infringing use.

Background

Frank Gaylord owned the copyright in “The Column,” the group of nineteen stainless-steel soldier sculptures at the center of the Korean War Veterans Memorial. In 1996, photographer John Alli took a snowy photograph of the memorial, titled “Real Life.” The Postal Service later used that photograph on a 37-cent commemorative stamp released in 2003, without Gaylord’s permission.

The Postal Service sold 47,910,587 Korean War Veterans Memorial stamps before retiring the stamp in 2005. Some were used to mail letters, while others were retained by collectors. The Postal Service projected that at least 14.5 million stamps would be kept by collectors, producing an estimated $5.4 million in largely pure profit. It also earned $330,919.49 from retail merchandise displaying the stamp image.

After a 2008 trial, the Court of Federal Claims held that the Postal Service had made fair use of Gaylord’s work. The Federal Circuit reversed in 2010, holding that the stamp did not qualify as fair use and that the Postal Service infringed with respect to used stamps, collector-retained stamps, and retail merchandise. On the first damages remand, the trial court awarded $5,000, based on the largest amount the Postal Service had previously paid to use an image on a stamp.

The Federal Circuit vacated that award in Gaylord II. It directed the trial court to determine the fair market value of a license covering the full scope of the infringement through a hypothetical arm’s-length negotiation. On this second remand, Judge Wheeler awarded $684,844.94, including delay compensation.

Issues

Issue #1

Whether the Federal Circuit’s remand required damages based on the fair market value of a hypothetical license for the Postal Service’s full infringing use.

Holding

Yes. The Court had to determine the license price that Gaylord and the Postal Service would have reached in a hypothetical arm’s-length negotiation as of July 27, 2003, while considering the full scope of the infringement.

Reasoning

The mandate rule required the Court to follow both the letter and the spirit of the Federal Circuit’s instruction. Gaylord II specifically required calculation of the fair market value of a license for the Postal Service’s full infringing use, rather than reliance on the Postal Service’s past maximum payment for a stamp image.

A hypothetical-license inquiry asks what the copyright owner and infringer would have agreed to had they negotiated before the infringement. The Court treated July 27, 2003—the stamp’s release date—as the negotiation date, but applied the “Book of Wisdom” approach to consider later sales and market information that illuminated what the parties’ bargain would fairly have been.

The Federal Circuit identified three distinct infringement categories: stamps used to send mail, unused stamps retained by collectors, and commercial merchandise bearing the stamp image. The Court therefore evaluated the appropriate compensation for each category separately.

Issue #2

Whether Gaylord should receive damages for stamps that consumers used to send mail.

Holding

No. The Court awarded no damages for stamps used to send mail.

Reasoning

It was not possible to determine reliably whether buyers selected stamps used for postage because they displayed Gaylord’s sculpture or simply because buyers needed stamps to mail letters. That uncertainty made a license value tied to ordinary postal-use stamps difficult to establish.

Gaylord’s counsel did not seek damages for this category. Given both the evidentiary difficulty and that litigation position, the Court awarded nothing for stamps used to send mail.

Issue #3

Whether a 10 percent running royalty represented the fair market value of a license for unused stamps retained by collectors.

Holding

Yes. A 10 percent running royalty on the Postal Service’s estimated $5.4 million collector-stamp revenue was the proper measure, producing $540,000 in damages.

Reasoning

Gaylord’s actual licensing history strongly supported a running royalty. He had consistently licensed images of “The Column” for retail and commemorative items, including items such as T-shirts and miniature statues, at approximately a 10 percent royalty rate.

Collector-retained stamps generated nearly pure profit because the Postal Service kept the stamp price without having to provide postal service in return. That profit opportunity gave the Postal Service a substantial incentive to obtain a license rather than forego use of the image.

The evidence also showed that the Postal Service expected this particular commemorative stamp to perform well with collectors. Military-themed stamps sold well, the Korean War Veterans Memorial stamp ranked in the top quarter of comparable 37-cent commemorative stamps for projected retention revenue, and the Postal Service printed 86 million copies—well above the usual 50- to 60-million print run for commemorative stamps.

Applying the established 10 percent rate to the expected $5.4 million in collector-retention revenue yielded $540,000. The Court concluded that this running royalty, rather than a lump-sum payment, best captured the fair market value of the hypothetical license.

Issue #4

Whether Gaylord should receive a 10 percent running royalty on Postal Service merchandise featuring the stamp image.

Holding

Yes. The Court awarded $33,092 for commercial merchandise sales.

Reasoning

The Postal Service received $330,919.49 in revenue from retail products featuring the Korean War Veterans Memorial stamp. These products were commercial and commemorative goods closely analogous to the types of merchandise for which Gaylord had previously licensed “The Column.”

Because Gaylord’s established licensing practice used an approximately 10 percent royalty for such retail and commemorative uses, the Court found that the same rate would have been agreed upon in the hypothetical negotiation. Ten percent of the merchandise revenue resulted in an award of $33,092.

Issue #5

Whether Gaylord was entitled to prejudgment delay compensation on the license-value damages.

Holding

Yes. The Court added stipulated delay compensation of 19.5 percent, or $111,752.94, to make Gaylord’s compensation complete.

Reasoning

The Federal Circuit had already held that prejudgment interest, characterized here as delay compensation, was necessary to provide complete compensation for the Postal Service’s taking of Gaylord’s copyrighted work. The trial court was therefore required to include it in the award.

The parties stipulated to a 19.5 percent delay-compensation factor. Applying that percentage to the combined $573,092 in damages for collector-retained stamps and merchandise produced $111,752.94, bringing the total judgment to $684,844.94.