Christopher Phelps & Associates, LLC v. Galloway , 477 F.3d 128 ( 2007 )


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  •                       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
    

Document Info

Docket Number: 05-2266

Citation Numbers: 477 F.3d 128, 2007 WL 438806

Judges: Niemeyer, Motz, Traxler

Filed Date: 2/12/2007

Precedential Status: Precedential

Modified Date: 11/5/2024

Authorities (21)

Graduate Management Admission Council v. Raju , 267 F. Supp. 2d 505 ( 2003 )

Daubert v. Merrell Dow Pharmaceuticals, Inc. , 113 S. Ct. 2786 ( 1993 )

red-baron-franklin-park-inc-fun-factories-of-ohio-inc-v-taito , 883 F.2d 275 ( 1989 )

olan-mills-inc-professional-photographers-of-america-inc-v-linn-photo , 23 F.3d 1345 ( 1994 )

Sony Corp. of America v. Universal City Studios, Inc. , 104 S. Ct. 774 ( 1984 )

Palmetto Builders & Designers, Inc. v. UniReal, Inc. , 342 F. Supp. 2d 468 ( 2004 )

the-platt-munk-co-inc-v-republic-graphics-inc-the-platt-munk , 315 F.2d 847 ( 1963 )

Lois B. Morris v. Business Concepts, Inc., James J. Maher ... , 259 F.3d 65 ( 2001 )

Service & Training, Incorporated Robert J. Montgomery v. ... , 963 F.2d 680 ( 1992 )

xoom-incorporated-aztech-new-media-international-corporation-joined , 323 F.3d 279 ( 2003 )

Hospital Building Company v. Trustees of the Rex Hospital, ... , 791 F.2d 288 ( 1986 )

Duncan McCoy Alex Dorsett, and Alex-Duncan Shrimp Chef, Inc.... , 67 F.3d 917 ( 1995 )

Walt Disney Company v. Carl Powell , 897 F.2d 565 ( 1990 )

national-football-league-and-st-louis-football-cardinals-inc-v-mcbee , 792 F.2d 726 ( 1986 )

educational-testing-service-v-john-katzman-the-princeton-review-inc , 793 F.2d 533 ( 1986 )

Lyons Partnership, L.P., a Texas Limited Partnership v. ... , 243 F.3d 789 ( 2001 )

Stephen L. Bucklew v. Hawkins, Ash, Baptie & Co., Llp, and ... , 329 F.3d 923 ( 2003 )

Wesley M. Walker, Jr. v. Forbes, Incorporated , 28 F.3d 409 ( 1994 )

eBay Inc. v. MERCEXCHANGE, LL , 126 S. Ct. 1837 ( 2006 )

Microsoft Corp. v. Grey Computer , 910 F. Supp. 1077 ( 1995 )

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