A recent Law 360 article by Hugh Marbury and Molly Shaffer, “A Defense Strategy For Addressing Copyright Fee-Shifting”, reports on case strategy in copyright fee-shifting litigation. This article was posted with permission. The article reads:
Unlike in Europe, litigants in the U.S. are generally responsible for paying their own attorney fees. Limited exceptions to the American rule exist. For example, subject to the court's discretion, prevailing parties in Section 1983 patent and copyright litigation are eligible to recover attorney fees.
Although permissive fee-shifting is not isolated to copyright matters, copyright defendants face unique challenges because of the outsized impact Section 505 of the Copyright Act has on the economic incentive structure in all copyright litigation. Federal Rules of Civil Procedure, Rule 68 could neutralize the omnipresent threat of Section 505 and serve as a mechanism for copyright defendants to recover post-offer attorney fees incurred.
In 2014, the American Law Institute launched a project for developing the first Restatement of the Law, Copyright. More than 175 elected American Law Institute members — consisting of judges, law professors and experienced copyright practitioners — have spent several years drafting the restatement. The restatement surveys copyright law as it is applied today, including the conflicting case law regarding fee-shifting and Rule 68. In addition to the impending restatement, the U.S. Supreme Court has demonstrated some interest in copyright issues.
In Warner Chappell Music Inc. v. Sherman Nealy, the U.S. Supreme Court heard oral argument Feb. 21 to determine the relationship between the discovery accrual rule and the statute of limitations provision contained in Title 17 of the U.S. Code, Section 507(b). The intersection between Rule 68 and Section 505 is another unclear area of copyright law where copyright lawyers could benefit from the Supreme Court's guidance.
The Intersection Between Rule 68 and Section 505
The U.S. Congress and courts have struggled with economic drivers in copyright cases, the subject matter of which can range anywhere from a single infringing photograph to massive copyright disputes regarding new and emerging software algorithms. In December 2020, Congress addressed one end of the economic spectrum in the copyright ecosystem by establishing the Copyright Claims Board.
The CCB is a three-member tribunal, which serves as an alternative forum for smaller copyright disputes up to $30,000. The CCB, while still in its infancy, does nothing to address the pressures associated with fee-shifting in all federal copyright cases, however. Section 505 permits the "prevailing party" to recover its reasonable attorney fees as part of costs incurred. Unlike in patent cases, where fee-shifting is limited to exceptional cases, there is no such statutory limitation in Section 505.
Without any guidance as to when attorney fees may be awarded under Section 505, copyright plaintiffs threaten attorney fees early and often in settlement negotiations. The threat of fee-shifting significantly affects the alleged infringer's bargaining power and resolve in defending the case. Regardless of whether Congress intended Section 505 to provide significant leverage to plaintiffs and shift the focus from the merits of the litigation to the costs associated therewith, the reality is that Section 505 heavily affects settlement negotiations.
Rule 68 was designed to encourage settlement. Enacted in 1946, Rule 68 permits a defendant to serve an offer of judgment on an opposing party at any point until 14 days before the trial date. The offeree then has 14 days to accept the offer. If the offeree does not accept the offer within 14 days, the offer is considered withdrawn. If the final judgment is not more favorable than the unaccepted offer, the offeree must pay the defendant's costs incurred after the offer was made.
Rule 68 is overlooked and underutilized because costs are often insubstantial in most litigation. However, where costs may be inclusive of attorney fees — in Section 505 — Rule 68 is a powerful tool that could minimize the threat of Section 505 in settlement negotiations by weakening the copyright holder's claim to its fees and allow defendants to collect attorney fees incurred after the offer.
In Marek v. Chesny in 1985, the Supreme Court interpreted Rule 68 in connection with a Section 1983 fee-shifting claim. In Marek, the Supreme Court confirmed that all costs "properly awardable under the relevant substantive statute" fall within the scope of Rule 68. Where the underlying statute includes attorney fees in its definition of costs, attorney fees are properly awardable under Rule 68. Section 505 expressly provides that "the court may also award a reasonable attorney's fee to the prevailing party as part of the costs."
The forthcoming restatement of the law copyright has addressed this topic. Although not yet published, the American Law Institute has approved various chapters of the restatement, including the chapter discussing remedies. Comment (h) to the restatement's chapter on remedies acknowledges that Rule 68 affects Section 505. The restatement discusses the Supreme Court's decision in Marek and presents the competing case law regarding when a copyright defendant is eligible to collect its post-offer attorney fees under Rule 68.
Defensive Strategy: Reining in Overly Aggressive Copyright Plaintiffs
Rule 68 can prevent plaintiffs from recovering attorney fees under Section 505. Neutralizing the threat of Section 505 shifts the economic structure of the litigation and refocuses the parties' attention on the merits of the action.
Courts are granted broad discretion to award attorney fees under Section 505 and should engage in a "particularized, case-by-case assessment." Nonexclusive factors for consideration include frivolousness, motivation, objective unreasonableness, and the need in particular circumstances to advance considerations of compensation and deterrence. Courts should give substantial weight to the objective reasonableness of the losing party's position, while still giving "due consideration to all other circumstances relevant to granting fees."
Unfortunately, the Supreme Court recently rejected the opportunity to clarify further the appropriate standard for awarding attorney fees under Section 505 in Hasbro Inc., et al. v. Markham Concepts Inc. A reasonable but unaccepted Rule 68 offer does not operate a wholesale bar to a plaintiff's recovery of fees, but defendants should urge courts to consider an offer of judgment as a "circumstance relevant to granting fees."
An unaccepted offer of judgment may trigger several of the nonexclusive factors. For example, failing to accept a reasonable Rule 68 offer could indicate that a plaintiff's motivation in the litigation is to obtain a windfall.
Relatedly, a plaintiff's failure to come down to a realistic settlement figure could show that the plaintiff presented an unreasonable litigation position. Moreover, prolonged litigation — a result of an unaccepted Rule 68 offer — could reflect a plaintiff's intent to rack up attorney fees for both parties. Each of these arguments could serve as a basis for the court to reject a plaintiff's Section 505 request.
Although the exact impact of Rule 68 is unclear in the copyright fee-shifting context, defendants could benefit from making creative arguments grounded in Rule 68 principles in attempt to equalize the bargaining power in copyright infringement negotiations.
Offensive Strategy: Maximize Recovery Opportunity
Circuits are split on the more difficult questions regarding when a defendant may recover attorney fees after an unaccepted offer of judgment.
The U.S. Court of Appeals for the Eleventh Circuit held in Jordan v. Time Inc. in 1997 that the copyright defendant was entitled to costs, including attorney fees, following an unaccepted offer of judgment that was more favorable than the damages awarded. The court relied upon the mandatory language in Rule 68 and determined that the mandatory costs included attorney fees incurred after the Rule 68 offer.
Other circuits, however, have rejected Jordan, and require that the defendant also be the prevailing party to earn attorney fees incurred after the Rule 68 offer. Applying Marek, those circuits have generally concluded that attorney fees must be properly awardable under the substantive statute to fall within Rule 68.
Under Section 505, attorney fees are only available to the prevailing party, and therefore, some courts have held that the defendant must be the prevailing party to recover post-offer attorney fees. What exactly a prevailing party is remains elusive. Because of the interplay between Rule 68 and Section 505, it seems possible that a defendant could recover post-offer attorney fees. The Eleventh Circuit considered this argument in February in Affordable Aerial Photography Inc. v. Trends Realty USA Corp.
In that case, the defendant served an offer of judgment, which was not accepted, and the plaintiff later voluntarily dismissed the case without prejudice pursuant to Federal Rule of Civil Procedure 41(a)(2). Although the court held that Rule 68 was inapplicable, it is conceivable that a copyright defendant could recover post-offer attorney fees under different facts.
What's Next?
Rule 68 and Section 505 certainly overlap, but exactly how they interact is less than clear.
Copyright practitioners would benefit from the Supreme Court's guidance on if and how Rule 68 affects permissive fee-shifting. The Supreme Court has shown renewed interest in copyright cases generally, having reviewed fair use in Andy Warhol Foundation for the Visual Arts v. Goldsmith last May and the timing of damages in Warner Chappell Music Inc. v. Sherman Nealy in February.
Given the Supreme Court's recent interest in copyright issues and the many billions of dollars potentially at stake in attorney fees — particularly in the massive artificial intelligence copyright cases being filed in all circuits — the Supreme Court should give guidance on the relationship between Rule 68 and Section 505. But all copyright defendants should seriously consider the role of Rule 68 in their litigation strategy.
Hugh Marbury is a partner and co-chair of the copyright practice at Cozen O'Connor. Molly Shaffer is an associate at the firm.