Antoinette M. Tease Montana Patent
Intellections
The Potential for Shareholder Liability Under the U.S. Copyright Act

An issue that should be of interest to anyone who holds stock in a corporation is whether and to what extent a shareholder can be held liable for an act of copyright infringement on the part of the corporation. The concept of being held liable for someone else’s acts is commonly referred to as “vicarious” liability. Although the Copyright Act says nothing about vicarious liability, the U.S. Court of Appeals for the Second Circuit laid down the law of vicarious copyright liability as early as 1963. That law has been followed by numerous federal courts in the First, Second, Fourth, Sixth, Seventh, Eighth, Ninth and Eleventh Circuits. It was even cited in both the majority and dissenting opinions in Sony Corporation of American v. Universal City Studios, Inc., 464 U.S. 417 (1984), in which the U.S. Supreme Court held that Sony was not responsible for copyright infringement committed by purchasers of its video recording products. Thus, the notion of vicarious copyright liability is well established under U.S. copyright law.

In Shapiro, Bernstein & Co., Inc. v. H.L. Green Company, Inc, 316 F.2d 304 (2d Cir. 1963), the plaintiffs owned the rights to several musical compositions. They accused the defendants, H.L. Green Co., Inc. (“Green”) and Jalen Amusement Company (“Jalen”), of having infringed their copyrights in a number of songs by manufacturing and selling records that included close copies of these songs. Neither of the defendants had a license agreement with the plaintiffs. Jalen was a concessionaire in Green’s stores, where it operated the record departments and paid Green a royalty based on gross sales. The trial judge held that Jalen was liable for copyright infringement because of its direct role in producing the “bootleg” records and ordered Jalen to pay monetary damages. The judge let Green off the hook, however, because Green had not actually sold any of the infringing records and, according to the judge, had no knowledge of the unauthorized manufacture of the records. The plaintiffs appealed the judge’s ruling as it pertained to Green.

On appeal, the Second Circuit stated that the validity of the plaintiffs’ claim against Green depended on the precise nature of the relationship between Green and Jalen. The court noted that Jalen had been operating the record departments in twenty-three of Green’s stores, some for as long as thirteen years, and that Green received a ten to twelve percent royalty from the sale of all records sold by Jalen. Jalen ordered and purchased all records, was billed for them, and paid for them, but all of the receipts went into Green’s cash registers, and customers purchasing the records received a receipt with Green’s name on it.

In deciding whether Green should be liable for Jalen’s acts, the court acknowledged the long-standing doctrine of respondeat superior, in which an employer is held liable for the acts of its employees performed within the scope of their employment. The Second Circuit stated that the same principles that had led courts to hold employers liable for the acts of their employees can and should be applied in the context of an independent contractor relationship. The test, according to the court, is whether one party has the right and ability to supervise the infringing party, as well as an “obvious and direct financial interest in the exploitation of copyrighted materials.” The court drew a distinction between a landlord who unknowingly leases his property to someone who commits a copyright violation on the leased premises and a dance hall owner who hires a band that performs unauthorized copyrighted music and who profits directly from the infringement. Montana Patent
The court held that Green was more like a dance hall owner than a landlord because it profited directly from Jalen’s infringing activity through the royalty it received, and its agreements with Jalen gave Green the ultimate right of supervision over the conduct of the record concession and its employees.

Significantly, the court held that a party could be held vicariously liable for copyright infringement even without intent to infringe or actual knowledge of the infringement. The court justified this principle by noting that copyright protection would be stripped of much of its value if a defendant could simply refrain from making an inquiry as to whether a particular work was protected by copyright. The court felt that its ruling would prompt would-be infringers to be more diligent in their inquiries, and more particularly, that it would prompt Green to policy Jalen’s activities more closely.

Despite this apparent victory, the plaintiffs were unable to establish the amount of monetary damages for which Green would be liable because, according to the court, their Complaint was inartfully drafted. The court said that although Green could be held vicariously liable for the sale of the records, it could not be held liable for their manufacture. And in order for Green to be held vicariously liable for the acts of Jalen, the plaintiffs had to assert a cause of action against Jalen for the sale of the records (as opposed to their manufacture). Apparently, the plaintiffs had alleged only that Jalen’s manufacture of the records constituted a copyright violation. Because of this oversight, the court declined to decide whether the plaintiffs would be entitled to recover the same amount of damages from both defendants.

Applying the same principles of vicarious liability that were established in Shapiro, in order to hold a shareholder liable for the copyright infringement of a corporation, the copyright holder would have to show (a) that the shareholder had the right and ability to supervise the conduct of the corporation and (b) that the shareholder had an obvious and direct financial interest in the exploitation of the copyrighted work. This two-part test will be easier to satisfy in closely held corporations where the shareholders are also directors and/or on the management team of the corporation.

While courts have differed in their approach to determining when a shareholder has a direct financial interest in acts of copyright infringement, most courts have held that mere stock ownership is not sufficient. This approach has not been universally followed, however, and some courts have held that the financial interest of some parties is obvious, particularly if their ownership percentage is relatively great and the infringing acts can be shown to have impacted the company’s financial situation. To the author’s knowledge, no court has held a shareholder vicariously liable for a corporation’s acts of copyright infringement unless the shareholder was also an officer and/or director of the corporation. The obvious reason for this connection is because it is much easier to satisfy the “control” factor if the shareholder is an officer or director.

The fact that shareholders can be held liable for copyright infringement committed by a corporation highlights the necessity for officer and director indemnification provisions in a corporation’s Bylaws and/or insurance that will cover both the corporation and its officers and directors for copyright violations. It also emphasizes for copyright holders the need to analyze potential vicarious liability claims before filing suit so that the Complaint will properly invoke the vicarious liability doctrine. Montana Patent

Patent Law for the New West
The information in this newsletter is provided for informational purposes only and should not be considered legal advice. Please consult a qualified attorney for advice on a specific legal matter.

© 2004 Antoinette M. Tease, P.L.L.C. All Rights Reserved.

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