Fourth Circuit Upholds Copyright Damages Based on Sales Abroad Under Rarely Applied “Predicate Acts” Doctrine

by Lee Gesmer on June 8, 2012

It is a well-known principle of copyright law that the Copyright Act has no extraterritorial reach.  For example, a U.S. copyright holder cannot bring suit for copyright infringement, in the U.S., against individuals or companies who reproduce and sell, outside the U.S., software, music CDs, DVDs or other copyright-protected works.

What if, however, the initial infringement occurs in the United States, and the infringer distributes infringing copies outside the U.S.?  For example, what if an employee illegally copies an employer’s software program in the U.S., transports it to France (either on physical media or electronically), and sells it in Europe?  May the U.S. copyright holder recover damages based on lost profits or infringer profits in Europe?

Surprisingly, this “infringe locally/sell abroad” issue has rarely come up under copyright case law in the U.S.  Until recently, only two courts have addressed it under the current copyright statute, the Second Circuit in 1988 (Update Art v. Modin) and the Ninth Circuit in 1998 (L.A. News Service v. Reuters).  However, in each of those cases the courts did permit recovery of damages arising from overseas infringing uses as long as the “predicate act” of infringement occurred within the United States, enabling further reproduction abroad.  By a “predicate act,” these courts meant simply that if the initial infringement took place in the U.S. and the foreign violations were directly linked to that infringement, then damages could be based on foreign sales.

This is what happened in Tire Engineering and Distribution, LLC. v. Shandong Linglong Rubber Co., a case decided by the Fourth Circuit in early June 2012.  The facts of this case (somewhat simplified) involved the copying of designs for specialized tires for underground mining vehicles.  The designs were copied in the U.S. by former and current employees of the plaintiff and provided to the foreign defendants, who sold infringing products abroad.  The case proceeded to a jury trial in Virginia, where the trial court instructed the jury that it could find damages based upon infringement that occurred outside the United States, if those infringing acts “were a consequence or result of predicate infringing acts that occurred inside the United States.”  The jury awarded the plaintiff $26 million in damages under this theory.

The Fourth Circuit upheld this verdict, holding that a plaintiff could invoke the predicate act doctrine by showing a domestic violation of the Copyright Act and damages flowing from foreign exploitation of that infringing act.  In this case, the reproduction of the plaintiff’s blueprints in the United States constituted the predicate act necessary to satisfy this standard.

While this case involved a somewhat unusual fact pattern, it points out a legal doctrine that few lawyers are aware of, but which may be applicable in an interconnected world where markets for copyrighted works are international.  The plaintiff’s lawyers in this case might easily have concluded, mistakenly, that their client would be unable to recover damages based on infringing sales outside the U.S.  Instead, they utilized a little-known principle of copyright law, proceeded through trial hoping that it would be applied in their case, and on appeal persuaded the Fourth Circuit (which had never before addressed this issue) to adopt the predicate-act doctrine.

 Tire Engineering and Distribution, LLC. v. Shandong Linglong Rubber Co. (4th Cir. June 6, 2012)

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