Thomas M. Gilbert Architects, P.C. v. Accent Builders & Developers, LLC

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 08-2103
THOMAS M. GILBERT ARCHITECTS, P.C.,
Plaintiff - Appellee,
v.
ACCENT BUILDERS AND DEVELOPERS, LLC, a Virginia limited
liability company; DESIGN CUSTOM BUILDERS, INCORPORATED, a
Virginia corporation; MICHAEL TUMMILLO,
Defendants - Appellants.
Appeal from the United States District Court for the Eastern
District of Virginia, at Richmond. James R. Spencer, Chief
District Judge. (3:07-cv-00699-JRS)
Argued: October 28, 2009 Decided: May 6, 2010
Before MICHAEL, Circuit Judge, HAMILTON, Senior Circuit Judge,
and Jane R. ROTH, Senior Circuit Judge of the United States
Court of Appeals for the Third Circuit, sitting by designation.
Affirmed by unpublished per curiam opinion.
ARGUED: James Edward Moore, CHRISTIAN & BARTON, LLP, Richmond,
Virginia, for Appellants. Christopher E. Gatewood, HIRSCHLER
FLEISCHER, PC, Richmond, Virginia, for Appellee. ON BRIEF:
David B. Lacy, CHRISTIAN & BARTON, LLP, Richmond, Virginia, for
Appellants. R. Webb Moore, HIRSCHLER FLEISCHER, PC, Richmond,
Virginia, for Appellee.
Unpublished opinions are not binding precedent in this circuit.
2
PER CURIAM:
Thomas M. Gilbert Architects, P.C. (Gilbert) sued
Accent Builders and Developers, LLC (Accent), Design Custom
Builders, Inc., and Michael Tummillo alleging infringement of a
copyright in certain architectural plans (Plans). The district
court granted summary judgment to Gilbert on liability. After a
bench trial on damages, the district court awarded Gilbert
$5,300 in actual damages, $224,894 in profits, and a permanent
injunction enjoining defendants’ further use of the Plans. On
appeal defendants argue that the district court improperly
granted summary judgment on their affirmative defenses and
improperly refused to subtract their operating expenses when it
awarded damages for profits. We reject defendants’ arguments
and affirm.
I.
The Plans were originally created pursuant to a
written agreement between a third party, Aspect Properties, LLC
(Aspect), and Gilbert. The agreement, entered into on July 26,
2002, required Gilbert to provide the Plans to Aspect in two
stages for the purpose of constructing 42 townhouses. In the
first stage Gilbert would provide schematic drawings for three
model townhouses for a fee of $7,500. In the second phase
Gilbert would provide any remaining architectural documents
3
necessary for construction, including floor plans, front and
rear elevations, and three foundation plans, all for a fee of
$17,700. The agreement specified that all documents comprising
the Plans “remain the property of Thomas M. Gilbert, Architect,
P.C.” J.A. 316. It also specified that “[t]he fee for reuse of
the documents will be two hundred fifty dollars (250.00) per
unit and any changes requested will be on an hourly basis.”
J.A. 315. Gilbert delivered the Plans pursuant to the
agreement, and Aspect paid Gilbert in full. The documents
Aspect received contained the following copyright notice:
THOMAS M. GILBERT, ARCHITECT, P.C. EXPRESSLY RESERVES
ITS COMMON LAW COPYRIGHT OR OTHER PROPERTY RIGHTS IN
THESE PLANS. THESE PLANS ARE NOT TO BE REPRODUCED,
CHANGED, OR COPIED IN ANY FORM OR MANNER WHATSOEVER,
NOR ARE THEY TO BE ASSIGNED TO ANY THIRD PARTY,
WITHOUT FIRST OBTAINING THE EXPRESS WRITTEN PERMISSION
AND CONSENT OF THOMAS M. GILBERT, ARCHITECT, P.C.
J.A. 566-76.
Sometime in 2002 Tummillo partnered with Aspect to
pursue the townhouse project. On May 29, 2003, Aspect’s owners
formed Accent as a vehicle to complete the project, and Tummillo
acquired an ownership interest in Accent the same year. In 2004
Tummillo acquired complete ownership of Accent and the project.
By that time Gilbert had already delivered the Plans, and
Aspect’s owners required Tummillo to pay the balance owed
Gilbert and to reimburse them for the amounts already paid.
4
Tummillo later asked Gilbert to make certain changes
to the Plans. The changes consisted mainly of moving the rear
wall of the townhouses back three feet and relocating the
fireplace from the corner to the rear wall. Gilbert had known
of Tummillo’s association with the project for some time prior
to the request, but it was not until Tummillo made the request
for changes that he became aware that Tummillo had acquired full
ownership. On September 11, 2006, Gilbert sent a proposal to
Tummillo offering to make the requested changes and conduct a
building code review for $14,000. Gilbert included a code
review in his offer because, in his opinion, the original Plans
could not have been used because of recent changes to the
building code. Tummillo believed that Gilbert’s price was too
high and made the changes himself by hand without further input
from Gilbert. When Tummillo submitted the Plans for approval
with the County, he removed all references to Gilbert on the
Plans, including the copyright notice.
After the County approved the Plans, defendants began
construction of the townhouses. Over the course of
construction, defendants made copies of the Plans for various
suppliers and contractors. In June 2007 Gilbert learned that
construction had commenced using the modified Plans. He
registered his original plans with the United States Copyright
Office and, on September 14, 2007, sent a cease-and-desist
5
letter to defendants. After Gilbert was unable to resolve the
dispute, he filed this lawsuit for copyright infringement on
November 9, 2007.
The district court granted Gilbert summary judgment on
infringement, rejecting defendants’ affirmative defenses of
implied license, fair use, and copyright misuse. In the summary
judgment order the district court excluded the proposed
testimony of defendants’ architect-expert, who would have
testified that Gilbert made an excessive fee proposal for
modifying the Plans. The parties stipulated that Gilbert’s
actual damages were $5,300 and agreed to a bench trial on the
remaining issues pertaining to relief. At trial defendants
introduced testimony from Kevin Perlowski, their accountant.
Although 42 townhouse units were planned, only one six-unit
building had been completed and only two of those units had been
sold. Perlowski testified that defendants had incurred $181,659
in direct costs and $8,795 in closing costs for the first unit,
which sold for $328,000. Similarly, defendants had incurred
$189,620 in direct costs and $22,982 in closing costs for the
second unit, which sold for $299,950. If profit is calculated
by simply subtracting direct and closing costs from gross
revenues, defendants’ profit on the two units would be $224,894.
Defendants also incurred significant operating expenses,
however, during construction. Perlowski testified that pursuant
6
to generally accepted accounting principles (GAAP) the entirety
of these operating expenses, along with direct and closing
costs, must be subtracted from gross revenue to calculate
profit. After subtracting these operating expenses, defendants’
profits on the two units is reduced to zero, according to
Perlowski.
The district court’s findings of fact and conclusions
of law included (1) an award to Gilbert of $5,300 in statutory
damages and $224,894 in infringing profits from defendants’ use
of the Plans and (2) a permanent injunction against defendants’
further use of the Plans. In rejecting defendants’ calculation
of zero profits, the district court held that defendants had
failed to meet their burden of establishing their operating
expenses with sufficient precision. This appeal followed.
II.
Defendants argue that they should not be liable for
infringement because the district court, at the summary judgment
stage, improperly dismissed their affirmative defenses of (1)
implied license, (2) fair use, and (3) copyright misuse. We
review de novo the grant of summary judgment dismissing these
defenses. Stonehenge Eng’g Corp. v. Employers Ins. of Wausau,
201 F.3d 296, 301 (4th Cir. 2000).
7
A.
Defendants’ primary argument is that “Gilbert
implicitly granted a nonexclusive license to use, modify, copy
and distribute the Plans as necessary to complete the Project.”
Br. of Appellants at 21. “The existence of an implied
nonexclusive license . . . constitutes an affirmative defense to
an allegation of copyright infringement.” Nelson-Salabes, Inc.
v. Morningside Dev., LLC, 284 F.3d 505, 514 (4th Cir. 2002).
The grant of a nonexclusive license is essentially a promise not
to sue for infringement. See U.S. Philips Corp. v. Int’l Trade
Comm’n, 424 F.3d 1179, 1189 (Fed. Cir. 2005). When such a
promise is implied, courts generally enforce it according to the
rules governing quasi-contract and contracts implied-in-fact.
See Wrench v. Taco Bell Corp., 256 F.3d 446, 456-57 (6th Cir.
2000) (noting that Michigan law governs a contract for
copyrighted material that was implied-in-fact as distinguished
from one that was implied-in-law); I.A.E., Inc. v. Shaver, 74
F.3d 768, 776 (7th Cir. 1996). In this circuit an implied non-
exclusive license exists and is enforceable when:
(1) a person (the licensee) requests the creation of a
work, (2) the creator (the licensor) makes that
particular work and delivers it to the licensee who
requested it, and (3) the licensor intends that the
licensee copy and distribute his work.
Nelson-Salabes, Inc., 284 F.3d at 514 (quoting I.A.E., Inc., 74
F.3d at 776).
8
The case law does not make clear whether the source of
these rules is state or federal law. Nelson-Salabes is our only
published decision to address the implied license defense to
copyright infringement, and it does not trace the rules’ source
to either body of law. The absence of citation to state law
suggests that we assumed federal law applied. However, in Foad
Consulting Group, Inc. v. Azzalino — a case cited in Nelson-
Salabes and applying the same rule — the Ninth Circuit expressly
declared that state law governed “so long as it does not
conflict with the Copyright Act.” 270 F.3d 821, 827 (9th Cir.
2001). Judge Kozinski, a member of the panel in Foad, concurred
in the result, drawing a distinction between contracts implied-
in-fact and those implied-in-law. He believed that implied
licenses generally fell into the latter category as “incident[s]
of copyright” and therefore should be governed by federal law.
Id. at 832.
We need not resolve the source-of-law issue to decide
the case before us. First and foremost, we see nothing in state
law that conflicts with the three-element test adopted in
Nelson-Salabes. In evaluating the test’s third element when a
written contract exists, we conclude the applicable rule —
whether under Virginia law or federal common law — is that: (1)
quasi-contract principles do not govern, Nedrich v. Jones, 429
S.E.2d 201, 207 (Va. 1993); WRH Mortgage, Inc. v. S.A.S.
9
Assocs., 214 F.3d 528, 534 (4th Cir. 2000); and (2) the parties’
intent “should be ascertained, whenever possible, from the
language the parties employed in the contract,” Virginia Elec.
and Power Co. v. Norfolk S. Ry. Co., 683 S.E.2d 517, 525 (Va.
2009). See also United States v. Kimbell Foods, Inc., 440 U.S.
715, 728 (1979) (“[W]hen there is little need for a nationally
uniform body of law, state law may be incorporated as the
federal rule of decision.”). We note that in Nelson-Salabes we
held that courts “should examine the totality of the
circumstances” when determining intent. Id. at 515. But on
this point Nelson-Salabes is distinguishable because there was
no written agreement between the parties in that case. While
the Nelson-Salabes standard for determining intent is eminently
reasonable in the absence of a written agreement, the same
cannot be said when one exists, as it did between Gilbert and
Aspect.
We first examine whether Gilbert granted Aspect a
nonexclusive license to modify the Plans and use them as
modified. The parties raise and discuss in varying detail the
possibility that, because the original agreement was between
Gilbert and Aspect, only Aspect could have had such a license.
If, however, Aspect did not have a license to modify the Plans,
defendants could not have had one. Accordingly, we consider
whether Aspect had non-exclusive license.
10
The parties dispute only the third element of the test
adopted in Nelson-Salabes: whether Gilbert intended to grant
Aspect a nonexclusive license to modify the Plans and use them
as modified. As discussed above, the threshold question we must
answer is whether Gilbert and Aspect’s intent can be ascertained
from the text of the agreement. We conclude that it can and
that Aspect’s license extended only to copying and using the
original Plans for construction of the townhouses. Reading the
document as a whole, it is clear that Gilbert must have at least
granted Aspect a limited license to copy and use. The Plans
would be utterly useless to Aspect unless it had permission to
use the Plans for construction of the townhouses and to make
copies for its contractors as needed. See Effects Assocs., Inc.
v. Cohen, 908 F.2d 555, 558-59 (9th Cir. 1990) (finding an
implied license when the absence of one would render the
author’s contribution “of minimal value”). Moreover, to read
the agreement as requiring Aspect to pay $25,200 in fees for
useless documents would threaten the enforceability of the
contract for failure of consideration. See Waskey v. Thomas,
235 S.E.2d 346, 349 n.2 (Va. 1977).
The agreement does, however, expressly reserve
ownership of Gilbert’s copyright in the Plans by declaring that
they “remain the property of Thomas M. Gilbert, Architect, P.C.”
J.A. 316. While an express reservation of ownership in the
11
Plans’ copyright is not dispositive of the licensing issue, see
Foad Consulting Group, Inc., 270 F.3d at 830, at a minimum it
evinces an intent to grant, at best, a limited license. Indeed,
the limited nature of the license is evident in the agreement’s
provision on reuse and changes: “The fee for reuse of the
documents will be two hundred fifty dollars (250.00) per unit
and any changes requested will be on an hourly basis.” J.A.
315.
The reuse and changes provision clearly evinces
Gilbert and Aspect’s intent that Aspect not have permission to
modify the Plans and use the Plans as modified without Gilbert’s
involvement. Were it not intended to circumscribe Aspect’s
license to use the documents, it would have no meaning. If, for
example, Gilbert had not intended to retain its rights to
derivative works based on the Plans, it would not have needed to
include a clause providing for changes. Aspect could have hired
Gilbert to make the changes or not, but the choice would have
been left entirely with Aspect. Similarly, it is hard to
imagine that Gilbert would charge a fee for reuse of the Plans —
as for construction of townhouses besides the original 42 — but
not expect compensation for modifications.
Defendants’ arguments to the contrary rest primarily
on what the agreement does not say rather than what it does say.
They rely largely on the factors mentioned in Nelson-Salabes for
12
assessing intent in the totality of the circumstances. As we
have noted, Nelson-Salabes’s totality of the circumstances
analysis does not apply when there is a valid, written agreement
between the parties. The only argument that defendants make
based on the text of the agreement is that it “lack[s] any . . .
provision forbidding Aspect, or anyone else, from using the
Plans to complete the Project without Gilbert’s involvement or
express consent.” Br. of Appellants at 25. In making this
argument, defendants appear to assume, wrongly, that a broad
implied license is presumed in contracts for architectural
plans. No such presumption exists, and even if it did, the
agreement’s restrictive language concerning reuse and changes
would overcome it.
Because Gilbert and Aspect’s intent is clear from the
language of the agreement, no genuine issue of material fact
exists. Aspect did not have a license to modify the Plans and
use them as modified, and therefore could not have had such a
license. Accordingly, we affirm summary judgment on defendants’
implied license defense.
B.
Defendants’ fair use and copyright misuse defenses are
more easily dispatched. Long a common law doctrine, fair use
was codified in the Copyright Act of 1976 under 17 U.S.C. § 107.
Cambell v. Acuff-Rose Music, 510 U.S. 569, 577 (1994). Section
13
107 lists four factors for courts to consider in determining
whether a particular use is fair use:
(1) the purpose and character of the use, including
whether such use is of a commercial nature or is for
nonprofit educational purposes;
(2) the nature of the copyrighted work;
(3) the amount and substantiality of the portion used
in relation to the copyrighted work as a whole; and
(4) the effect of the use upon the potential market
for or value of the copyrighted work.
17 U.S.C. § 107. In their briefs defendants make no attempt to
consider the first three factors, relying exclusively on the
fourth. Defendants argue that a jury could have reasonably
concluded that the changes Tummillo made to the Plans were
“minor field changes.” Reply Br. of Appellants at 14-15.
Because Gilbert admitted that it does not expect to be
compensated for minor field changes, defendants contend that a
jury could have concluded that there was no potential market
upon which Tummillo’s changes could have had an effect. Based
on this factor alone, defendants argue that the district court
erred.
We reject this argument and adopt the district court’s
more careful analysis. We agree with the district court that
the first three factors weigh against fair use because
defendants’ use of the Plans was entirely commercial, because
architectural plans are generally regarded as creative works,
14
and because defendants’ use of the Plans was admittedly
substantial. As for defendants’ argument that there was no
potential market for the changes Tummillo made, defendants point
to no evidence that these changes were in fact “minor field
changes.” Bald characterizations are not evidence. What
evidence does exist suggests that Gilbert regularly charged for
the kind of changes Tummillo made and that Tummillo himself
described them as “structural changes” for which he could be
held liable if something went wrong. J.A. 225. Accordingly, we
affirm the district court’s grant of summary judgment on
defendants’ fair use defense.
Defendants’ copyright misuse argument amounts to a
claim that Gilbert demanded too high a price for the changes
Tummillo requested. Defendants cite no authority for this
proposition apart from a passage, taken out of context, from the
Ninth Circuit’s decision in Foad. Nowhere in Foad does the
Ninth Circuit discuss the defense of copyright misuse, and we
have found no precedent lending support to defendants’ argument.
Accordingly, we affirm the district court’s grant of summary
judgment on defendants’ copyright misuse defense. *
*
We note that defendants’ copyright misuse defense would
fail regardless of the testimony of their expert J. Baxter
Bailey because the defense is legally incoherent in these
circumstances. Because Bailey’s testimony was relevant only to
(Continued)
15
III.
The sole issue that the parties dispute with regard to
damages is whether the district court should have deducted
defendants’ operating expenses from gross revenue when
calculating the award for infringing profits. Section 504 of
the Copyright Act provides that
In establishing the infringer’s profits, the copyright
owner is required to present proof only of the
infringer’s gross revenue, and the infringer is
required to prove his or her deductible expenses and
the elements of profit attributable to factors other
than the copyrighted work.
17 U.S.C. § 504(b). We have previously held that § 504 “creates
an initial presumption that the infringer’s profits . . .
attributable to the infringement are equal to the infringer’s
gross revenue.” Bouchat v. Baltimore Ravens Football Club,
Inc., 346 F.3d 514, 520 (4th Cir. 2003) (internal quotations and
citations omitted). “Once the copyright owner has established
the amount of the infringer’s gross revenues, the burden shifts
to the infringer to prove either that part or all of those
revenues are deductible expenses . . . .” Id. (internal
quotations and citations omitted). If the infringer wishes to
establish that its operating expenses are deductible expenses,
defendants’ copyright misuse defense, we also affirm the
district court’s exclusion of his testimony.
16
it has the “burden of proving that each item of general expense
contributed to the production of the infringing items, and of
further offering a fair and acceptable formula for allocating a
given portion of overhead to the particular infringing items in
issue.” In Design v. K-Mart Apparel Corp., 13 F.3d 559, 565-66
(2d Cir. 1994) (quoting 3 Melville B. Nimmer & David Nimmer,
Nimmer on Copyright § 14.03[B] (1993)).
We agree with the district court that defendants
simply failed to carry their burden of allocating that portion
of their operating expenses attributable to the two units that
were sold. In fact, Perlowski specifically admitted that he
made “no attempt to allocate operating expenses to a particular
unit.” J.A. 469. Defendants respond that Perlowski was merely
following GAAP in deducting the entirety of defendants’
operating expenses from their revenues on the two units sold.
GAAP, however, is not the law here. There are likely many good
reasons why the GAAP rules are as they are, but those reasons do
not necessarily coincide with the reasons bearing on assessing
damages for copyright violations. As Gilbert notes, for
example, some of defendants’ operating expenses went towards
developing the land on which the 42 townhouses were to be built
and have no relation to defendants’ infringing acts. Because
each item of deductible expense must contribute to the
17
infringing products, at least some of defendants’ operating
expenses as calculated cannot be deducted from gross revenues.
Finally, we reject defendants’ argument that the
district court should have assumed the burden of allocation
itself. Section 504 is clear that the burden of proving
deductible expenses lies with defendants. Despite defendants’
assertions, the Second Circuit’s decision in In Design does not
hold otherwise. In that case, the infringers did provide a
formula for allocating overhead, and the Second Circuit affirmed
the district court’s acceptance of that formula. In Design, 13
F.3d at 566. While we do not go so far as to hold that it would
have been error for the district court to have allocated on its
own initiative, we cannot say that failing to do so was error.
Accordingly, we affirm the district court’s award of infringing
profits in the amount of $224,894.
IV.
For the reasons stated above, the judgment of the
district court is
AFFIRMED.
18