Christopher Phelps & Associates, LLC v. Galloway ( 2007 )

Rehearing granted, July 5, 2007
PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
CHRISTOPHER PHELPS & ASSOCIATES, 
LLC,
Plaintiff-Appellant,
v.
R. WAYNE GALLOWAY,
Defendant-Appellee,
v.
SIMONINI BUILDERS, INCORPORATED,  No. 05-2266
Third Party Defendant.
DONALD A. GARDNER ARCHITECTS,
INCORPORATED; DONALD A. GARDNER,
INCORPORATED; FRANK BETZ
ASSOCIATES, INCORPORATED,
Amici Supporting Appellant.

Appeal from the United States District Court
for the Western District of North Carolina, at Charlotte.
Graham C. Mullen, Chief District Judge.
(CA-03-429-3)
Argued: October 24, 2006
Decided: February 12, 2007
Before NIEMEYER, MOTZ, and TRAXLER, Circuit Judges.
Affirmed in part, vacated in part, and remanded by published opinion.
Judge Niemeyer wrote the opinion, in which Judge Motz and Judge
Traxler joined.
2 CHRISTOPHER PHELPS & ASSOC. v. GALLOWAY
COUNSEL
ARGUED: Louis K. Bonham, OSHA & LIANG, L.L.P., Houston,
Texas, for Appellant. W. Thad Adams, III, ADAMS & EVANS, P.A.,
Charlotte, North Carolina, for Appellee. ON BRIEF: Albert P. Allan,
SUMMA, ALLAN & ADDITON, P.A., Charlotte, North Carolina,
for Appellant. Matthew J. Ladenheim, Kathryn A. Gromlovits,
ADAMS & EVANS, P.A., Charlotte, North Carolina, for Appellee.
Wallace K. Lightsey, Frank S. Holleman, III, Troy A. Tessier,
WYCHE, BURGESS, FREEMAN & PARHAM, P.A., Greenville,
South Carolina, for Amici Supporting Appellant.
OPINION
NIEMEYER, Circuit Judge:
After R. Wayne Galloway began construction of his retirement
home on Lake Wylie, near Charlotte, North Carolina, using architec-
tural plans designed and copyrighted by Christopher Phelps & Asso-
ciates, LLC ("Phelps & Associates"), without permission, Phelps &
Associates commenced this action against Galloway for copyright
infringement. Phelps & Associates sought damages, disgorgement of
profits, and injunctive relief. A jury found that Galloway infringed
Phelps & Associates’ copyright and awarded it $20,000 in damages,
the fee that Phelps & Associates traditionally charged for such plans.
The jury also found that Galloway had realized no profits to disgorge.
The district court thereafter declined to enter an injunction, finding
that the jury verdict had made Phelps & Associates "whole," and
entered judgment in favor of Phelps & Associates for $20,000. From
that judgment, Phelps & Associates appeals, requesting a new trial on
damages and the entry of an injunction prohibiting the future lease or
sale of the infringing house and mandating the destruction or return
of the infringing plans.
We agree with Phelps & Associates that the district court erred dur-
ing the damages phase of trial in instructing the jury that Phelps &
Associates’ copyright was a derivative work. As we explain herein,
Phelps & Associates held a copyright in the entire work manifested
CHRISTOPHER PHELPS & ASSOC. v. GALLOWAY 3
in Galloway’s house. We conclude, however, that the error was harm-
less. We also reject Phelps & Associates’ challenges to evidentiary
rulings. Accordingly, we affirm the judgment incorporating the jury’s
verdict.
We agree with Galloway’s contention that the court in the circum-
stances presented here may not issue a permanent injunction, as
requested by Phelps & Associates, prohibiting Galloway from ever
leasing or selling the house. Not only would such an injunction
unduly restrain the alienation of real property, it would violate the
"first sale doctrine" in 17 U.S.C. § 109(a), which we hold authorizes
Galloway to sell or otherwise dispose of the house as a copy for
which the remedies in a copyright action have been paid. Other
injunctive relief, however, might be available in applying the general
principles of equity, as required by eBay Inc. v. MercExchange,
L.L.C., 126 S. Ct. 1837 (2006), which was decided after the district
court’s order denying relief in this case. Accordingly, we vacate por-
tions of the district court’s order denying injunctive relief and remand
for the limited purpose of reconsidering other equitable relief, such as
an order requiring Galloway to destroy the infringing plans or return
them to Phelps & Associates.
I
R. Wayne Galloway, in anticipation of retirement, planned to build
his "dream home" on a lot that he owned on the North Carolina side
of Lake Wylie, southwest of Charlotte, North Carolina. Displeased
with the design work done by an architect whom he had hired, Gallo-
way went with his son-in-law to view the designs of homes on Lake
Norman, an expensive residential area about 30 miles north of Lake
Wylie, where his son-in-law was working as an iron-work subcontrac-
tor. There, Galloway saw a French-country style house that he liked.
His son-in-law approached the builder of the house, Simonini Build-
ers, Inc., and asked the superintendent for a copy of the plans. The
superintendent said that Galloway would have to speak with the
owner, Mrs. Gina Bridgeford, because "she purchased the plans, they
were actually drawn for her." Galloway contacted Mrs. Bridgeford,
who gave Galloway her consent for use of the plans "as long as you
don’t build in our area." As to her authority to give consent, Mrs.
Bridgeford testified at trial, "I felt with all we had paid, we owned the
4 CHRISTOPHER PHELPS & ASSOC. v. GALLOWAY
plans at that time." Galloway assured Mrs. Bridgeford that he would
not build in the area, telling her that he planned to build on Lake
Wylie about 30 miles away. With Mrs. Bridgeford’s permission, the
superintendent at Simonini Builders gave Galloway a copy of the
plans for "The Bridgeford Residence." Each page of the plans
included the copyright notice, in small print, of the designing architect
as follows:
© 2000 Copyright — Christopher Phelps & Assoc., L.L.C.
These plans are protected under the federal copyright laws.
The original purchaser of this plan is authorized to construct
one and only one home using this plan. Modifications or
reuse of this plan is prohibited.
Galloway altered the plans only to cover the name and address of
"The Bridgeford Residence" with the name and address of "The Gal-
loway Residence," and then he copied them for constructing his
house.
Phelps & Associates, which designed the Bridgeford Residence, is
an architectural firm in Charlotte, North Carolina, that designs ups-
cale custom houses. It created the design for the Bridgeford Resi-
dence as a variation of its earlier design — "The Bell and Brown
Residence." Bell and Brown had commissioned and paid Phelps &
Associates for the earlier design, but ultimately decided not to build
the house. Phelps & Associates modified the Bell and Brown design
somewhat for the Bridgefords by moving a dormer window, changing
the front entry and reconfiguring part of the floor plan, and removing
the basement. The Bridgefords paid Phelps & Associates $20,000 for
The Bridgeford Residence design, and the Bridgefords built their
house on Lake Norman in accordance with that design.
Acting as his own general contractor, Galloway began construction
of his house in September 2001, using the Phelps & Associates plans
for the Bridgeford Residence. During the course of construction,
some of the subcontractors checked back with Phelps & Associates
for clarification, particularly with respect to the windows. Phelps &
Associates did not then know that the construction was being pursued
without permission. Galloway’s framing contractor, who had been
asked to do some work for Galloway’s brother-in-law using pirated
CHRISTOPHER PHELPS & ASSOC. v. GALLOWAY 5
Phelps & Associates plans, surmised that Galloway did not have per-
mission to use the plans and approached Galloway to warn him that
he could "get in trouble constructing a copyright plan." Galloway
"shrugged his shoulders and said something to the effect: ‘They’ve
got to find me, catch me first.’"
Through rumors from subcontractors, Phelps & Associates learned
in early 2003 that Galloway was constructing a house using its
designs. After confirming that fact, Phelps & Associates sent Gallo-
way a cease and desist letter in July 2003. Upon receipt of the letter,
Galloway stopped construction on his house, which was then over
half completed. Thereafter, in August 2003, Phelps & Associates reg-
istered its plans for The Bridgeford Residence with the Copyright
Office and then commenced this action against Galloway for copy-
right infringement.
In its suit, Phelps & Associates sought compensatory damages, dis-
gorgement of Galloway’s profits (claimed as the difference between
the value of Galloway’s house and his provable expenses in construct-
ing it), and injunctive relief. With respect to compensatory damages,
Christopher Phelps, the principal of Phelps & Associates, testified at
trial that if Galloway had come to him and asked Phelps & Associates
to design "a house like the Bridgeford house," Phelps & Associates
would have charged Galloway $20,000 — the same fee that it had
charged Mrs. Bridgeford. Christopher Phelps made clear, however,
that he would not have sold Galloway the actual Bridgeford Resi-
dence design, but something different, as Phelps & Associates prided
itself on designing "custom homes." With respect to Galloway’s prof-
its, Phelps & Associates presented expert testimony that Galloway’s
house would be worth $1.1 million when completed. With this esti-
mated value, Galloway would have realized over $200,000 in profits
if he were to sell the completed house.
Galloway testified at trial that he would have made no profit in the
house had he sold it — he had spent more on the house than it was
worth. He estimated that if he completed the house, he would show
a loss of about $160,000. He introduced into evidence his receipts and
ledger of expenditures for construction to date totaling approximately
$660,000, and he estimated that it would cost an additional $250,000
to $300,000 to complete the house. He estimated that upon comple-
6 CHRISTOPHER PHELPS & ASSOC. v. GALLOWAY
tion, the house itself would be worth $758,000. He also introduced
into evidence the Mecklenburg County tax assessment of his house
when half-completed, which evaluated the house in that state at
$408,100.
At the end of the trial, the jury returned a verdict in favor of Phelps
& Associates, finding that Galloway had infringed Phelps & Asso-
ciate’s architectural design copyright; awarding Phelps & Associates
$20,000 in actual damages; and finding that Galloway had no profits
to disgorge. Thereafter, Phelps & Associates requested injunctive
relief from the court (1) ordering that the infringing copy of the plans
be returned or destroyed; (2) enjoining completion of the house; and
(3) permanently enjoining the lease or sale of the house. The court "in
its discretion" denied all injunctive relief, finding that the $20,000
jury award made Phelps & Associates "whole." Accordingly, the
court entered judgment in favor of Phelps & Associates for $20,000
in damages.
On appeal, Phelps & Associates contends that it is entitled to a new
trial on damages because the district court erroneously instructed the
jury that "The Bridgeford Residence" design was a derivative work
and made certain erroneous evidentiary rulings. It also argues that the
district court’s refusal to enter an injunction was error as a matter of
law because it had proved a past infringement and a likelihood of
future infringement.
Phelps & Associates did not obtain an injunction pending appeal,
and, according to representations made at oral argument, Galloway
has completed the construction of his house, where he now resides.
Galloway has also satisfied the $20,000 money judgment.
II
To obtain a new jury trial on damages, Phelps & Associates argues
that the district court (1) erred in instructing the jury on the scope of
its copyright, telling them erroneously that Phelps & Associates’
design was a derivative work, not an original work in its entirety; and
(2) abused its discretion by making several evidentiary rulings. We
address these contentions in turn.
CHRISTOPHER PHELPS & ASSOC. v. GALLOWAY 7
A
Phelps & Associates contends first and principally that the jury was
improperly instructed that its copyright in the Bridgeford Residence
design was a derivative work of the earlier design of the Bell and
Brown Residence and that the scope of Phelps & Associates’ copy-
right consisted only of the minimal difference between the two
designs. The jury was instructed:
[Phelps & Associates’] copyright in the architectural work
known as the Bridgeford Residence is a derivative work of
the architectural work known as the Bell/Brown Residence.
A derivative work is a work that is based upon one or more
preexisting works, including a revision, transformation, or
adaptation of a preexisting work.
[Phelps & Associates’] recovery is limited by the scope of
copyright protection afforded a derivative work. You are
instructed that the copyright protection in a derivative work
covers only the additions, changes, or other new material
appearing for the first time in the work.
It does not extend to any preexisting material and does not
imply a copyright in that material. The copyright in a com-
pilation or derivative work extends only to the material con-
tributed by the author of such work, as distinguished from
the preexisting material employed in the work, and does not
imply any exclusive right in the preexisting material.
The copyright in such work is independent of, and does not
affect or enlarge the scope, duration, ownership, or sub-
stance of any copyright protection in the preexisting mate-
rial.
Phelps & Associates contends that this instruction essentially told the
jury that the copyright consisted of the relocation of a dormer win-
dow, a few floor plan changes, and the lack of a basement, and that
the jury accordingly attributed no profits to the infringement.
8 CHRISTOPHER PHELPS & ASSOC. v. GALLOWAY
Galloway argues that the derivative work instruction was accurate
— that Phelps & Associates’ copyright only extended to the new
material embodied in the Bridgeford Residence — and that its regis-
tration of the Bridgeford Residence design did not effect a registration
of the many elements common to the Bridgeford Residence design
and the Bell and Brown Residence design.
We agree with Phelps & Associates that the instruction was errone-
ous. The Bridgeford Residence was not a derivative work as defined
in the Copyright Act; Phelps & Associates held a copyright in the
entire design. Galloway’s position misunderstands a fundamental pre-
cept of copyright law, that a copyright is independent of its registra-
tion.
Both parties properly recognize that the copyright in a derivative
work extends only to the new elements contributed by the author and
does not extend to the underlying work. See 17 U.S.C. § 103(b). That
provision assures that the author of a derivative work does not acquire
ownership over constituent material that is already in the public
domain or is owned by someone else. But when the author of the
derivative work also has a copyright on the underlying work, there is
no need to protect the public domain or the author of the underlying
work, as the entire work is that of the single author.
Galloway’s emphasis on the scope of Phelps & Associates’ regis-
tration of the Bridgeford Residence design places more emphasis on
the registration than the Copyright Act provides. The copyright itself
does not depend on registration. See 17 U.S.C. § 408(a)
("[R]egistration is not a condition of copyright protection"). It is
obtained without formalities simply when a work has been fixed in a
tangible medium of expression. See id. §§ 102(a), 408(a). Once fixa-
tion of an original work has taken place, the author has a copyright
in the work, and registration with the Copyright Office serves only
supporting roles. For instance, it provides evidence of a copyright, see
id. § 410, and it is required as a condition to bringing suit, see id.
§ 411.
In this case, the undisputed facts are that Phelps & Associates was
the author of the Bell and Brown Residence design and therefore
owned the copyright in that work, even though it never registered that
CHRISTOPHER PHELPS & ASSOC. v. GALLOWAY 9
copyright. Phelps & Associates was also the author of the Bridgeford
Residence design, which was a modification of the Bell and Brown
Residence design. Phelps & Associates did register the Bridgeford
Residence design, but not as a derivative work. It simply registered
the entire design, as it was the author of the entire design.
While Phelps & Associates only registered the Bridgeford Resi-
dence design, that registration satisfied the prerequisite for suit under
17 U.S.C. § 411 for the entire design, even though some of it was cre-
ated earlier in the form of the Bell and Brown Residence design. See
Xoom v. Imageline, Inc., 323 F.3d 279, 283-84 (4th Cir. 2003) (hold-
ing that a party has standing to sue on all components of a registered
work if he owns a copyright on those components, even if the under-
lying components have not been registered); 2 Melville B. Nimmer
& David Nimmer, Nimmer on Copyright § 7.16[B][2][c], at 7-173
(perm. ed., rev. vol. 2006) (same). Therefore, even if Phelps & Asso-
ciates had only registered the Bridgeford Residence design as a deriv-
ative work, it could have sought damages and profits for infringement
of all of the components, including those embodied in the Bell and
Brown Residence design, because it held the copyright in all of the
components. The scope of registration need not precisely trace the
scope of the copyright for the holder to sue. See Educ. Testing Serv.
v. Katzman, 793 F.2d 533, 538-39 (3d Cir. 1986) ("[T]he statutory
premise that the copyright in a compilation extends to the constituent
material contributed by the author is express"); Morris v. Business
Concepts, Inc., 259 F.3d 65, 68 (2d Cir. 2001) (same).
Accordingly, Phelps & Associates was entitled to sue for remedies
based on infringement of the entire Bridgeford Residence design,
even though that design included components of an earlier work cre-
ated by Phelps & Associates; it was the author and therefore owner
of the copyright in all of the copyrightable design elements. The
instruction given by the district court to the jury was therefore errone-
ous.
Nonetheless, we conclude that the error was harmless. Three differ-
ent aspects of the trial — the district court’s other instructions, the
evidence presented at trial, and the jury’s verdict — indicate that the
jury followed the other instructions given by the district court and
10 CHRISTOPHER PHELPS & ASSOC. v. GALLOWAY
understood that they were to award damages based on the entire Gal-
loway house as an infringement of the Bridgeford Residence design.
First, when instructing the jury about the relief it was to consider
if it found infringement, the court correctly stated that Phelps & Asso-
ciates would be entitled to both actual damages for infringement and
to all profits of the infringer resulting from the copyright infringe-
ment. See 17 U.S.C. § 504. In instructing the jury about the actual
damages, the court said:
Actual damages for infringement are measured according to
market value, which means what a willing buyer would have
been reasonably required to pay a willing seller for the
copyright holder’s work.
Stated differently, this amount is what [Phelps & Asso-
ciates] would have received from a willing buyer as a rea-
sonable licensing fee for the use of the Bridgeford
Residence architectural works.
(Emphasis added). On actual damages, Phelps & Associates intro-
duced evidence that it charged Mrs. Bridgeford $20,000 as its fee for
the Bridgeford Residence design. Christopher Phelps testified further
that if Galloway had come to him to create a similar design, Phelps
& Associates would likewise have charged Galloway a $20,000 fee.
There was no other evidence on Phelps & Associates’ actual damages
as they were defined by the court’s instructions. In returning a verdict,
the jury awarded Phelps & Associates $20,000, consistent with the
evidence about the licensing fee for the entire Bridgeford Residence
design. Had the jury paid attention to the court’s instruction on deriv-
ative works, it would have awarded a licensing fee only for the ele-
ments added by the Bridgeford Residence design to the Bell and
Brown Residence design, i.e. a relocated dormer and a slightly recon-
figured floor plan. There was no evidence, however, of the market
value of these design elements, if they had any substantial value at all.
And if the jury speculated on this matter, having no evidence of the
design value of the two elements, it would have given Phelps & Asso-
ciates only a portion of the $20,000 fee that represented the full
licensing fee charged by Phelps & Associates for the entire house.
CHRISTOPHER PHELPS & ASSOC. v. GALLOWAY 11
With respect to the profits for which Phelps & Associates sought
disgorgement, the district court instructed the jury:
In addition to its actual damages, the law allows a copyright
holder to recover all profits of the infringer resulting from
copyright infringement.
An infringer’s profits consist of the amount of the infring-
er’s gross revenues from the infringing activity less the
expenses of producing the infringing work.
Relating this general instruction about profits to the circumstances of
this case, the district court referred the jury to the costs of the entire
house less the expenses incurred in constructing the entire house. The
court stated:
Galloway bears the burden of proving the expenses he
incurred in constructing the house at issue. If he fails to
prove his direct expenses, you must find the amount of his
gross revenues as the amount of his profits.
For an item to be a deductible expense, Galloway must
prove that he actually incurred such amounts in the con-
struction of the house in question, and that such expense
actually assisted in the construction of the house in question.
(Emphasis added). Again, no evidence was introduced to the jury
from which to conclude what the profits were for the minor design
changes between the two works — the addition of the dormer and the
changed configuration of the layout. All of the evidence focused on
the market value of the entire house and the expenses that Galloway
incurred in constructing it. In response to the court’s instructions and
the evidence, the jury found that Galloway realized $0 in profits. If
the jury had believed that Galloway actually had profits from the two
changed elements, it would have allocated some amount to those ele-
ments. Whether that was $2,000 or a nickel, some amount of infringer
profits would be associated with the relevant design changes. Because
$0 was given in profits, the jury apparently credited Galloway’s posi-
tion that there were no profits in the house. This conclusion was
12 CHRISTOPHER PHELPS & ASSOC. v. GALLOWAY
amply supported by the evidence presented, which included Gallo-
way’s own valuation, the county tax assessment, and the loss taken
by the Bridgefords when they sold their identical house.
If the jury had given effect to the court’s instruction relating to
derivative works, it would have applied that instruction to both its
award of actual damages and its finding with respect to infringer prof-
its. Yet such an application is belied by the verdict itself.
Not only does the jury’s verdict of $0 in profits reveal that it con-
sidered profits from the entire house design despite the derivative
work instruction, finding that none were proved, the district court’s
other instructions overrode any prejudicial effect that might have
resulted from the erroneous instruction. The court gave instructions
telling the jury how to apportion damages between conduct that was
infringing and conduct that was not. The instructions imposed the
burden on Galloway to prove any profits attributable to non-
infringing conduct. On a failure of that proof, the jury was instructed
to award all profits realized from the house. As the court stated:
Moreover, if non-infringing factors are so intertwined with
infringing factors that it is impossible to apportion profits,
then no apportionment is allowed.
All profits should be deemed attributable to the infringement
unless Galloway proves by a preponderance of the evidence
that they are not.
If you have any doubts as to the amount of the profits or
whether they resulted solely due to other factors, you must
resolve those doubts in favor of [Phelps & Associates].
Galloway did not present any evidence of apportionment at trial to
give effect to this apportionment instruction or the derivative work
instruction. Consequently, the jury was instructed to award damages
as if the entire house was an infringement of Phelps & Associates’
copyright. It could have awarded $0 in profits only if it concluded
there were no profits at all. While the jury did award Phelps & Asso-
ciates the full amount of actual damages that it claimed and proved,
CHRISTOPHER PHELPS & ASSOC. v. GALLOWAY 13
the jury concluded that Galloway had realized no profits. If the jury
had found any profits and if Galloway had carried his burden on
apportionment, the jury still would have given some amount of the
profits to Phelps & Associates in accordance with both the apportion-
ment instruction and the derivative work instruction. Its failure to do
so satisfies us that the jury did not believe there were any profits.
In short, the erroneous derivative work instruction had no operative
effect on the jury’s award and therefore was harmless. Accordingly,
we reject Phelps & Associates’ request for a new jury trial on dam-
ages based on the district court’s erroneous instruction.
B
Phelps & Associates also contends that it is entitled to a new trial
on damages because of erroneous evidentiary rulings made by the dis-
trict court during the course of trial. We have reviewed each of the
court’s rulings and conclude that the district court did not abuse its
discretion.
First, Phelps & Associates challenges the district court’s admission
of Galloway’s receipts and ledger which he offered to prove expenses
incurred in constructing his house, contending that these documents
were inadmissible hearsay evidence. We conclude, however, that they
could appropriately have been admitted under the business records
exception, see Fed. R. Evid. 803(6), or the residual hearsay exception,
see Fed. R. Evid. 807.
Phelps & Associates also challenges the admission of a Mecklen-
burg County tax assessment, offered to prove the value of Galloway’s
property. It argues that the assessment contained undisclosed expert
testimony, i.e., a real estate appraisal, subject to the gatekeeper provi-
sions of Federal Rule of Evidence 702 and Daubert v. Merrell Dow
Pharmaceuticals, Inc., 509 U.S. 579 (1993). We conclude, however,
that the assessment could appropriately have been admitted under the
agency records exception to the hearsay rule, Fed. R. Evid. 803(8),
which holds such documents sufficiently reliable because they repre-
sent the outcome of a governmental process and were relied upon for
non-judicial purposes.
14 CHRISTOPHER PHELPS & ASSOC. v. GALLOWAY
Next, Phelps & Associates challenges the district court’s admission
of Galloway’s own testimony on the value of his property. Lay opin-
ion testimony, however, may appropriately be admitted if it is helpful
to the jury; if it is based on the perception of the witness; and if it is
not expert testimony under Federal Rule of Evidence 702. See Fed.
R. Evid. 701. Courts indulge a common-law presumption that a prop-
erty owner is competent to testify on the value of his own property.
See, e.g., North Carolina State Highway Comm’n v. Helderman, 207
S.E.2d 720, 725 (N.C. 1974); Fed. R. Evid. 701 advisory committee’s
note ("[M]ost courts have permitted the owner or officer of a business
to testify to the value or projected profits of the business, without the
necessity of qualifying the witness as an [expert] . . . . The amend-
ment does not purport to change this analysis").
Finally, Phelps & Associates complains that its expert witness
should have been allowed to testify to rebut the tax assessment and
Galloway’s testimony on the value of his property. The expert pro-
posed to testify on the reliability of the Mecklenburg County tax
appraisal. The court listened to Phelps & Associates proffer of the
expert’s testimony out of the presence of the jury and concluded that
it was "unhelpful" and "potentially misleading." The district court has
broad discretion to regulate the admissibility of such testimony, and
our review of the record indicates that the court did not abuse its dis-
cretion. See Hosp. Bldg. Co. v. Trustees of Rex Hosp., 791 F.2d 288,
291 (4th Cir. 1986).
In sum, we reject Phelps & Associates’ arguments for a new trial
on damages and affirm the jury’s verdict.
III
After the jury returned its verdict, Phelps & Associates filed a
motion under 17 U.S.C. §§ 502, 503(b) for injunctive relief (1) to pro-
hibit the completion of the house; (2) to enjoin permanently the lease
or sale of the house; and (3) to require the destruction or return of the
infringing plans. The district court denied the motion and all of the
relief requested, stating:
After trial in this matter, the jury awarded the Plaintiff
$20,000 in actual damages. The court finds that the Plaintiff
CHRISTOPHER PHELPS & ASSOC. v. GALLOWAY 15
has been made whole, and in its discretion, declines to order
Defendant to destroy all copies of the plans at issue. More-
over, the court declines to enjoin further construction of the
house, alteration of the house, or the future lease or sale of
the house. Evidence at trial revealed that the house is sub-
stantially constructed and that only interior finish work
remains to be done. Thus, there is no likelihood that comple-
tion of the house will result in further infringement. Taking
into account equitable considerations, the court refuses to
grant the relief requested by the Plaintiff.
Phelps & Associates contends that in denying injunctive relief, the
district court erred as a matter of law. It argues that the court denied
injunctive relief simply because Phelps & Associates received dam-
ages and thereby had been made "whole." It maintains that "the mere
fact that a copyright owner may recover damages does not negate his
right to injunctive relief." See Lyons P’ship, LP v. Morris Costumes,
Inc., 243 F.3d 789, 801 (4th Cir. 2001) (remanding for the entry of
a permanent injunction and a determination of the amount of damages
award). Phelps & Associates argues affirmatively that when copyright
infringement has been proved and there is a threat of continuing
infringement, the copyright holder is "entitled to an injunction." Walt
Disney Co. v. Powell, 897 F.2d 565, 567 (D.C. Cir. 1990); see also
Harolds Stores, Inc. v. Dillard Dep’t Stores, Inc., 82 F.3d 1533, 1555
(10th Cir. 1996); Olan Mills, Inc. v. Linn Photo Co., 23 F.3d 1345,
1349 (8th Cir. 1994); Nat’l Football League v. McBee & Bruno’s,
Inc., 792 F.2d 726, 732 (8th Cir. 1986). Because Phelps & Associates
says that it made that showing, it claims that it was entitled to injunc-
tive relief.
Insofar as Phelps & Associates suggests that it is entitled to injunc-
tive relief, we reject the argument. See eBay Inc. v. MercExchange,
L.L.C., 126 S. Ct. 1837, 1839 (2006). In eBay, the Supreme Court
rejected any notion that "an injunction automatically follows a deter-
mination that a copyright has been infringed." 126 S. Ct. at 1840(reversing the Federal Circuit, which had articulated "a ‘general rule,’
unique to patent disputes, ‘that a permanent injunction will issue once
infringement and validity have been adjudged’"). The Supreme Court
reaffirmed the traditional showing that a plaintiff must make to obtain
16 CHRISTOPHER PHELPS & ASSOC. v. GALLOWAY
a permanent injunction in any type of case, including a patent or
copyright case:
A plaintiff must demonstrate: (1) that it has suffered an
irreparable injury; (2) that remedies available at law, such as
monetary damages, are inadequate to compensate for that
injury; (3) that, considering the balance of hardships
between the plaintiff and defendant, a remedy in equity is
warranted; and (4) that the public interest would not be dis-
served by a permanent injunction.
Id. at 1839. Moreover, the Court reiterated that even upon this show-
ing, whether to grant the injunction still remains in the "equitable dis-
cretion" of the court.
Rejecting Phelps & Associates’ claim to an automatic injunction or
an "entitlement" to one, we now apply traditional equity principles to
each of Phelps & Associates’ requests for injunctive relief to deter-
mine whether the district court abused its discretion.
A
Phelps & Associates’ first request, that Galloway be enjoined from
completing the house, appears to be moot. At oral argument, the par-
ties represented that the house had been completed.
B
Phelps & Associates’ second request for equitable relief, that Gal-
loway be enjoined from leasing or selling the completed house, is
argued with the following syllogism: First, the completed house is an
infringing copy of Phelps & Associates’ copyrighted work. See 17
U.S.C. § 101. Second, as the copyright holder, Phelps & Associates
has the exclusive right to lease or sell its copyrighted work. See id.§ 106(3). Therefore, Galloway may never lease or sell the house with-
out infringing Phelps & Associates’ copyright. See id. § 501(a).
Because it is likely that Galloway will lease or sell his house, it is
likely that he will infringe Phelps & Associates’ copyright, and this
likely infringement should be foreclosed by a permanent injunction.
CHRISTOPHER PHELPS & ASSOC. v. GALLOWAY 17
We agree with Phelps & Associates’ argument that an award of
damages that fully compensates a plaintiff for all damages suffered
does not categorically preclude injunctive relief. The damages in this
case were awarded for past conduct and the injunctive relief requested
is forward-looking, addressing claimed future injury. Although future
injury of an economic nature can often be reflected in an award of
damages, the requested injunction to prohibit a future lease or sale of
Galloway’s house could not have been addressed by an economic
award. When and in what market condition Galloway would be leas-
ing or selling his house cannot be surmised with the necessary cer-
tainty for a damages award. Accordingly, such injury, if redressable,
would either be "irreparable" or any damages, "inadequate." See
eBay, 126 S. Ct. at 1839. Therefore, injunctive relief is not foreclosed
by the award of damages in this case.
The bigger question is whether a future lease or sale of a house, the
construction of which has already been subject to a copyright
infringement action, will cause an injury for which the Copyright Act
provides a remedy in addition to that already provided for the con-
struction of the house. Phelps & Associates claims that such a lease
or sale of the house would constitute an additional copyright infringe-
ment in that it would violate its exclusive right to lease and sell con-
ferred by 17 U.S.C. § 106(3) (providing that copyright owner has
exclusive rights to sell, rent, lease, or lend copies). It contends that
while it would ordinarily be entitled to profits resulting from any such
lease or sale, the inability to determine profits at the present time
leaves it no recourse but to seek equitable relief. In sum, Phelps &
Associates argues that it is entitled to the perpetual stream of profits
from the infringing copy — presumably for the 95-year life of the
copyright, see 17 U.S.C. § 302(c) — and that an injunction is the only
practical way to ensure that it may capture that stream of profits.
While the lease or sale of an infringing copy is generally a viola-
tion of the exclusive rights given to a copyright holder, the "first sale
doctrine" of 17 U.S.C. § 109(a) creates an exception as it applies to
the particular copy in this case, Galloway’s house. Section 109(a) pro-
vides that "notwithstanding [the copyright holder’s exclusive rights],
the owner of a particular copy . . . lawfully made under this title, or
any person authorized by such owner, is entitled, without the author-
ity of the copyright owner, to sell or otherwise dispose of the posses-
18 CHRISTOPHER PHELPS & ASSOC. v. GALLOWAY
sion of that copy." The construction of the Galloway house, as an
infringement of Phelps & Associates’ copyright, has been subjected
to the remedies of the Copyright Act in this action. Accordingly, Gal-
loway may, after satisfying the judgment for his unlawful construc-
tion of the house, "sell or otherwise dispose" of it without further
liability to Phelps & Associates.
Contending that the first sale doctrine does not apply in this case,
Phelps & Associates focuses our attention on the requirement of
§ 109(a) that the first sale be "lawfully made" or be authorized by it.
It argues that since Galloway’s house was not a copy "lawfully
made," any future lease or sale of the house would be an infringe-
ment. In other words, Phelps & Associates contends that the tainted
original acquisition and use of the Bridgeford Residence design per-
manently disables the alienability of Galloway’s house until Phelps &
Associates, as copyright holder of the house’s design, releases its
claim.
While Phelps & Associates’ argument would be well taken with
respect to any lease or sale that was threatened or occurred before the
judgment in this case, see Palmetto Builders & Designers, Inc. v. Uni-
real, Inc., 342 F. Supp. 2d 468, 473 (D.S.C. 2004), its bringing of this
action and obtaining relief from the district court for the construction
of the house provides authorization that satisfies § 109(a). When the
district court entered judgment that awarded Phelps & Associates
damages and infringer’s profits, if any, and that declined to order the
destruction or other disposition of the house, the house became a law-
fully made copy. This is because the illegal character of the copy was
fully redressed by the remedies requested and granted with respect to
the making of the copy.
Just as a converter of property obtains good title to the converted
property after satisfying a judgment for conversion, so does an
infringer obtain good title to the physical copy after satisfaction of the
judgment under the Copyright Act. See Restatement (Second) of Torts
§ 222A, cmt. c ("When the defendant satisfies the judgment in the
action for conversion, title to the chattel passes to him, so that he is
in effect required to buy it at a forced judicial sale"). The Second Cir-
cuit reached this very conclusion in the context of a patent or copy-
right:
CHRISTOPHER PHELPS & ASSOC. v. GALLOWAY 19
[T]he "first sale" which terminates the exclusive right to
vend patented or copyrighted objects need not be a truly vol-
untary one, but can consist of some reasonable and recog-
nized form of compulsory transfer, such as a judicial sale or
court-compelled assignment. In such cases the ultimate
question embodied in the "first sale" doctrine — "whether
or not there has been such a disposition of the article that it
may fairly be said that the patentee (or copyright proprietor)
has received his reward for the use of the article" — is
answered in the affirmative . . . . If rationalization is needed,
this can be in terms of involuntary "sale," of a presumed
"consent" by the proprietor or patentee to the rights and
remedies that are normally applicable to material objects in
the course of trade. . . . [W]e [ ] reject plaintiff’s extreme
position that copyrighted goods are immune from the nor-
mal remedies . . . until the proprietor has had one truly vol-
untary "sale."
Platt & Munk Co. v. Republic Graphics, Inc., 315 F.2d 847, 854 (2d
Cir. 1963) (citations omitted); see also Bourne v. Walt Disney Co., 68
F.3d 621, 632-33 (2d Cir. 1995) (holding that certain licenses can be
a "first sale" authorizing owner of copy to sell it); McCoy v. Mitsu-
boshi Cutlery, Inc., 67 F.3d 917, 921-23 (Fed. Cir. 1995) (holding that
patent holder’s nonpayment of debts is authorization to sell patented
copies).
The legislative history of the Copyright Act of 1976 similarly sug-
gests that the copyright owner need not voluntarily authorize a sale
for the first sale doctrine to apply. "To come within the scope of Sec-
tion 109(a), a copy . . . must have been ‘lawfully made under this
title,’ though not necessarily with the copyright owner’s authoriza-
tion. For example, any resale of an illegally ‘pirated’ phonorecord
would be an infringement, but the disposition of a phonorecord
legally made under the compulsory licensing provisions of section
115 would not." H.R. Rep. No. 94-1476, at 79 (1976), reprinted in
1976 U.S.C.C.A.N. 5659, 5693 (emphasis added). Thus, under the
first sale doctrine, an infringer is entitled to sell, or otherwise dispose
of any copy that the court does not order destroyed or otherwise dis-
posed of, without further obligation, once he satisfies the judgment
20 CHRISTOPHER PHELPS & ASSOC. v. GALLOWAY
that remedied the infringement, even if the copy was originally
pirated.
By bringing an infringement action against Galloway, Phelps &
Associates essentially sold him its interest in the house in exchange
for the appropriate remedies under the Copyright Act. Once those
remedies have been sought and a judgment has been rendered, the
copyright holder loses his right to sell that particular manifestation of
his copyright.
Phelps & Associates argues that this understanding of the first sale
doctrine amounts to a judicially-created compulsory license, which is
disfavored. See Sony Corp. of Am. v. Universal City Studios, Inc., 464
U.S. 417, 446 n.28 (1984). The reliance on Sony, however, is mis-
placed. The remedies under the Copyright Act do not resemble a
license because the Copyright Act remedies are far broader than sim-
ply requiring a defendant to make license payments. Under the Copy-
right Act, a copyright holder is entitled to both actual damages — the
market price of the license — and disgorgement of the infringer’s
profits, which might be immensely greater than the price of a license.
See 17 U.S.C. § 504. Moreover, the infringer takes the risk that the
district court will order, in its discretion, the destruction or other dis-
position of the infringing article. See id. § 503(b). In the garden-
variety piracy case, such orders are routinely issued. See, e.g., Loud
Records, LLC v. Lambright, Civ. No. 1:05-0171, 2006 U.S. Dist.
LEXIS 38016 (S.D. W. Va., March 30, 2006); Graduate Mgmt.
Admission Council v. Raju, 267 F. Supp. 2d 505 (E.D. Va. 2003);
Microsoft Corp. v. Grey Computer, 910 F. Supp. 1077 (D. Md. 1995).
Given the risks attendant to infringement, the interest in having poten-
tial infringers negotiate with copyright holders is adequately secured.
See Walker v. Forbes, Inc., 28 F.3d 409, 412 (4th Cir. 1994) ("By
stripping the infringer not only of the licensing fee but also of the
profit generated as a result of the use of the infringed item, the law
makes clear that there is no gain to be made from taking someone
else’s intellectual property without their consent").
The alternative to giving Galloway rights under the first sale doc-
trine of § 109(a) would inappropriately expand the scope of Copyright
Act remedies in circumstances such as those before us. A house or
building, as an expression of the architect’s copyrighted plans, usually
CHRISTOPHER PHELPS & ASSOC. v. GALLOWAY 21
has a predominantly functional character. This functional character
was the reason American copyright law, pre-Berne Convention,
denied protection to constructed architectural works altogether. See 1
Nimmer & Nimmer, supra, § 2.08[D][2][b], at 2-126 ("an architec-
tural structure ordinarily constitutes a ‘useful article’ . . . . For that
reason, such structures remained unprotected by United States copy-
right law from passage of the current [Copyright] Act until enactment
of an amendment, the Architectural Works Copyright Protection
Act"). This is the same reason that Congress manifested an expecta-
tion that injunctions will not be routinely issued against substantially
completed houses whose designs violated architectural copyrights.
H.R. Rep. No. 101-735, at 13-14 (1990), reprinted in 1990
U.S.C.C.A.N. 6935, 6944 (explaining that buildings "are the only
form of copyrightable subject matter that is habitable"). Those consid-
erations are at their strongest when the architectural structure is com-
pleted and inhabited, as here.
Moreover, such an injunction would be overbroad, as it would
encumber a great deal of property unrelated to the infringement. The
materials and labor that went into the Galloway house, in addition to
the swimming pool, the fence, and other non-infringing features, as
well as the land underneath the house, would be restrained by the
requested injunction. As such, the injunction would take on a funda-
mentally punitive character, which has not been countenanced in the
Copyright Act’s remedies. See Bucklew v. Hawkins, Ash, Baptie &
Co., 329 F.3d 923, 931 (7th Cir. 2003) (noting that the Copyright Act
does not authorize punitive damages); cf. 17 U.S.C. §§ 504, 505
(specifying the remedies available under the Copyright Act). In a sim-
ilar vein, the requested injunction would undermine an ancient reluc-
tance by the courts to restrain the alienability of real property. See,
e.g., Williams v. First Fed. Sav. & Loan Ass’n, 651 F.2d 910, 919
n.18 (4th Cir. 1981); Jiggets v. Davis, 28 Va. 368 (1829); Howard v.
Earl of Shrewsbury, (1867) 2 Ch. App. 760.
While Galloway has title to the house that is free and clear of
restrictions arising from his infringement, he has not obtained any
rights in the house’s design. His ownership is limited to the house as
a single manifestation of the design. Like the owner of a book, he will
have the power to lease or sell the house, but not to copy its design
in another house or engage in any other activity that remains the
22 CHRISTOPHER PHELPS & ASSOC. v. GALLOWAY
exclusive right of the copyright holder. See Red Baron-Franklin Park,
Inc. v. Taito Corp., 883 F.2d 275, 280 (4th Cir. 1989) (first sale doc-
trine diminished copyright holder’s distribution right, but not other
exclusive rights such as the right of publication). In short, Phelps &
Associates retains its copyright, albeit not the one-house manifesta-
tion of it. See 2 Nimmer & Nimmer, supra, § 8.12[B][1][d] ("the first
sale inquiry examines ownership of the tangible property in which the
copyrighted work has been embodied, not ownership of the copyright
itself").
For all of these reasons, we affirm the district court’s order denying
an injunction against the future lease or sale of Galloway’s house.
C
Finally, Phelps & Associates contends that the district court erred
as a matter of law in refusing to grant injunctive relief to require the
return or destruction of the infringing plans. See 17 U.S.C. § 503(b).
Again, any relief granted in equity is at the discretion of the district
court, and a petitioner cannot claim that it was entitled to injunctive
relief. See eBay, 126 S. Ct. at 1839. Nonetheless, the district court,
without the benefit of eBay, may have denied equitable relief categor-
ically, rather than basing its analysis on the traditional principles of
equity.
In denying Phelps & Associates’ motion for an injunction, the dis-
trict court stated:
The court finds that the Plaintiff has been made whole, and
in its discretion, declines to order Defendant to destroy all
copies of the plans at issue.
Being made whole in the circumstances of this case, however, could
only have referred to the jury award of damages for the cost of a
license and its finding that Galloway realized no profits for disgorge-
ment. It could not have related to other questions, such as the exis-
tence of infringing plans or future acts of infringement.
To explain its ruling, the court stated only,
CHRISTOPHER PHELPS & ASSOC. v. GALLOWAY 23
Evidence at trial revealed that the house is substantially con-
structed and that only interior finish work remains to be
done. Thus, there is no likelihood that completion of the
house will result in further infringement.
It does not follow, however, that because the plans were not needed
to complete the house, they should not therefore be returned or
destroyed, as authorized by 17 U.S.C. § 503(b). The risk of future
infringement includes the possible use of plans to build another
house, publication of the plans, or other violations of the exclusive
rights conferred by 17 U.S.C. § 106. See Serv. & Training, Inc. v.
Data Gen. Corp., 963 F.2d 680, 690 (4th Cir. 1992) (affirming the
entry of a preliminary injunction against further unauthorized use and
copying of copyrighted software).
When Phelps & Associates requested the return or destruction of
the infringing plans, the district court was obligated to consider the
traditional factors for equitable relief. Yet it appears that the court did
not do so. At most, it stated without explanation that it declined "in
its discretion . . . to order defendant to destroy all copies of the plans
at issue." Considering the court’s ruling in the context of the admoni-
tions given in eBay, we cannot conclude that the district court prop-
erly performed its equitable functions. See eBay, 126 S. Ct. at 1839.
Therefore, we vacate that portion of its order as an abuse of discre-
tion.
In sum, while we affirm the jury’s verdict and the district court’s
order refusing to enjoin the future leasing or sale of Galloway’s
house, we remand this case for further consideration, in light of eBay,
of Phelps & Associates’ request for injunctive relief with respect to
the return or destruction of the infringing plans.
AFFIRMED IN PART,
VACATED IN PART, AND REMANDED