Opinion
05 Civ. 9646 (JFK).
January 24, 2007
OPINION and ORDER
Defendants have filed motions for attorneys' fees and costs under the Copyright Act against Plaintiff Ariel (UK) Limited ("Ariel"). For the reasons that follow, Defendants' motions are denied.
The defendants ("Defendants") fall into three groups: the Reuters Group (comprising Reuters Group PLC, Reuters C LLC, and Reuters Transaction Services Limited); the NASDAQ Group (comprising NASDAQ Stock Market, Inc., Norway Acquisition Corp., and Instinet Group, Inc.); and the Silver Lake Group (comprising Silver Lake Partners II, L.P., Instinet Inc., Instinet Holdings, Inc., and Instinet LLC). Each group has submitted a separate notice of motion and supporting materials. Defendants have submitted a joint memorandum of law in support of the applications for attorneys' fees and costs.
Prior Proceedings
Ariel commenced this action for copyright infringement, vicarious copyright infringement, breach of contract, and declaratory relief on November 16, 2005. In an opinion of October 31, 2006 ("Opinion"), the Court dismissed with prejudice Ariel's copyright claims, on the ground that the defendants were valid licensees of the intellectual property that Ariel claimed to own and thus, as a matter of law, could not be held liable for infringement. That Opinion discussed the facts of this case in considerable detail, and familiarity is assumed. See Ariel v. Reuters, No. 05 Civ. 9646, 2006 U.S. Dist. LEXIS 79319 (S.D.N.Y. Oct. 31, 2006). In brief, the Court found that the 1975 Agreement ("Agreement") entered into between Ariel and Instinet, a corporate predecessor of the defendants, gave Instinet the express right to sublicense without temporal or geographical limitation the intellectual property in which Ariel claimed to hold British copyright ownership. The Court also found that, according to Ariel's pleadings, Instinet was free to sublicense the works at issue to Defendants, whom Ariel alleged to be acquirers of Instinet, acquirers of elements of Instinet, or successors to Instinet. The Court concluded that "under the clear terms of the 1975 Agreement and according to Ariel's own allegations and arguments, the defendants are licensees of the works in which Ariel claims to hold U.K. copyrights." Id. at *20. The Court declined to exercise jurisdiction over the remaining state law claims and dismissed those claims without prejudice. Judgment was entered on November 2, 2006. Ariel's appeal from that judgment is pending.Discussion
Legal Standard
The Defendants seek an award of attorneys' fees and costs pursuant to Section 505 of the Copyright Act. Under Section 505, this Court "in its discretion may allow the recovery of full costs by or against any party other than the United States or an officer thereof. Except as otherwise provided by this title, the court may also award a reasonable attorney's fee to the prevailing party as part of the costs." 17 U.S.C. § 505. An award of attorneys' fees is at the discretion of the district court, and prevailing defendants and plaintiffs are be to treated alike.Fogerty v. Fantasy, Inc., 510 U.S. 517, 534 (1994)). While there is no precise formula for determining whether an award of fees is appropriate, courts exercising their discretion consider the equitable factors of "`frivolousness, motivation, objective unreasonableness (both in the factual and in the legal components of the case) and the need in particular circumstances to advance considerations of compensation and deterrence.'"Crescent Publ'g Group, Inc. v. Playboy Enters., 246 F.3d 142, 147 (2d Cir. 2001) (quoting Fogerty, 510 U.S. at 534 n. 19)). The Second Circuit has recognized that "objective reasonableness is a factor that should be given substantial weight in determining whether an award of attorneys' fees is warranted" because "the imposition of a fee award against a copyright holder with an objectively reasonable litigation position will generally not promote the purposes of the Copyright Act." Matthew Bender Co. v. West Publ'g Co., 240 F.3d 116, 121-22 (2d Cir. 2001); see also Baker v. Urban Outfitters, Inc., 431 F. Supp. 2d 351, 357 (S.D.N.Y. 2006). "This is because such attorney fee awards may chill litigation of close cases, preventing the clear demarcation of the boundaries of copyright law." Hofheinz v. AMC Prods., No. 00 Civ. 5827, 2003 U.S. Dist. LEXIS 16940, at *17 (E.D.N.Y. Sept. 1, 2003) (citing Fogerty, 510 U.S. at 527).
Defendants argue that they should be awarded attorneys' fees and costs because (i) Ariel's copyright claims were objectively unreasonable, (ii) Ariel's motivation for bringing the claims was improper, and (iii) the goals of compensation and deterrence are served by an award of fees and costs. Each equitable factor will be considered in turn. Objective Unreasonableness
In the copyright context, "the courts of this Circuit have generally concluded that only those claims that are clearly without merit or otherwise patently devoid of legal or factual basis ought to be deemed objectively unreasonable." Penguin Books U.S.A., Inc. v. New Christian Church of Full Endeavor, Ltd., No. 96 Civ. 4126, 2004 U.S. Dist. LEXIS 5648, at *7 (S.D.N.Y. Apr. 6, 2004). The mere fact that a defendant has prevailed "does not necessarily equate with an objectively unreasonable claim." Ann Howard Designs, L.P. v. Southern Frills, 7 F. Supp. 2d 388, 390 (S.D.N.Y. 1998). "To hold otherwise would establish a per se entitlement of attorney's fees whenever issues pertaining to judgment are resolved against a copyright plaintiff. . . . This is not a correct construction of the law." Nicholls v. Tufenkian Import/Export Ventures, Inc., No. 04 Civ. 2110, 2005 U.S. Dist. LEXIS 16715, at *9 (S.D.N.Y. Aug. 11, 2005) (internal quotations and citation omitted). Similarly, the fact that a defendant has prevailed on a motion to dismiss or on summary judgment does not require the court to award fees. See, e.g., Brown v. Perdue, No. 04 Civ. 7417, 2006 U.S. Dist. LEXIS 66563 (S.D.N.Y. Sept. 15, 2006); Harris v. Wu-Tang Prods., No. 01 Civ. 3157, 2006 U.S. Dist. LEXIS 40527 (S.D.N.Y. June 15, 2006); Hoepker v. Kruger, 200 F. Supp. 2d 340, 355 (S.D.N.Y. 2002); CK Co. v. Burger King Corp., No. 92 Civ. 1488, 1995 U.S. Dist. LEXIS 823 (S.D.N.Y. Jan. 24, 1995).
According to Defendants, Ariel's copyright claims were objectively unreasonable because (i) Ariel's pleadings unambiguously established that Defendants were licensed to use the works that Ariel alleged were infringed and "Ariel conceded the existence of that license in the Amended Complaint, in its opposition brief and at oral argument" (Joint Memorandum in Support of Defendants' Motion for Attorneys' Fees ("Def. Mem."), at 2); (ii) Ariel's sole argument against Defendants' license defense, that the Agreement was subject to rescission, was improperly presented to the Court and was "easily dispensed with" and "meritless" (Id. at 3); and (iii) Ariel's pleading was so defective as to warrant dismissal of the copyright claims with prejudice.
Ariel counters that it had an objectively reasonable belief that its copyright claims were viable despite the fact that the Agreement expressly granted to the corporate predecessor of the defendants unlimited licensing and sub-licensing rights in the intellectual property at issue. Ariel argues that it reasonably believed, at the action's outset, that Reuters, which had acquired a controlling position in Instinet, was not and did not consider itself to be a valid licensee under the Agreement and that none of the Defendants, in fact, possessed valid sublicenses to exploit the works in which Ariel claimed to own a copyright. In support of this contention, Ariel has submitted affidavits from its director, Michael J. Little, and two attorneys, Colm MacKernan and Peter J. Langley (collectively, the "Affidavits"). The Affidavits recount in detail several pre-action communications between the affiants, as representatives of Ariel, and Instinet and Reuters. Specifically, the Affidavits establish that Ariel sought but never received Reuters' acknowledgment that it was a valid licensee under the Agreement and that Reuters explicitly stated, through counsel, that it did not consider itself bound by the Agreement. The Affidavits also establish that Instinet did not respond to several pre-action inquiries from Ariel regarding Ariel's licensing rights, leading Ariel to believe that Instinet would disavow the existence of any license under the Agreement. Ariel contends that "[a]fter Instinet and Reuters rejected and rebuffed Ariel, Ariel was left with no choice but to pursue its rights before the Court in this action. Such a decision was objectively reasonable in light of Instinet's and Reuters' obstructionist tactics. After Ariel filed its complaint and amended complaint, it was surprised to see Defendants, including Instinet and Reuters, reverse course and argue that they were indeed licensees under the Agreements." (Plaintiff's Memorandum of Law in Opposition to Defendants' Motion for Attorneys' Fees ("Pl. Mem."), at 11-12.) Ariel characterizes the defendants' assertion that they were valid licensees and thus immune from copyright suit as "entirely unexpected." (Id. at 12.)
Ariel also argues that the copyright claims were not objectively unreasonable, despite the undisputed existence of the license granted to Instinet by the Agreement, because Ariel did not believe that the Defendants had acquired sublicenses from Instinet. Ariel points to the fact that Defendant Reuters C LLC, a successor of Instinet, stated to Ariel before the action commenced, through counsel, that it was incorrect of Ariel to consider Reuters to be bound by the terms of the Agreement. According to Ariel, if Reuters was not bound by the Agreement, Reuters' use of Ariel's works constituted infringement, regardless of Instinet's rights under the Agreement to sub-license the works at issue to whomever it wished. Ariel also argues that, "[b]ased upon pre-litigation communications as well as the record to date, Ariel has no reasonably objective basis to believe that any sublicenses pursuant to [the Agreement] exist or ever existed insofar as the other [non-Reuters] defendants are concerned." (Id. at 9.) In essence, Ariel claims that the right of Instinet to grant non-exclusive sublicenses without limitation did not necessarily mean that Defendants actually received sublicenses and that it was not objectively unreasonable for Ariel to bring its claims under the belief that no sublicenses had been conferred on the defendants.
The Court sees no reason not to credit the sworn statements contained in the Affidavits. Although, as the Court held in its prior Opinion, the valid-licensee defense appeared on the face of Ariel's pleadings and thus should have been anticipated by the plaintiff, the Affidavits establish that, as a result of the pre-action communications between Ariel and Defendants, Ariel reasonably believed that Instinet and Reuters disclaimed their status as licensees under the Agreement and therefore would not assert a license defense. In addition, it was not objectively unreasonable for Ariel to believe that, although Instinet possessed a license under the Agreement, Defendants did not necessarily possess sublicenses that would render them immune from copyright suit. Thus, the Court finds that the factual basis for Ariel's claims was not objectively unreasonable.
The Court notes that the Affidavits contain factual allegations that, with very few exceptions, were not included in Ariel's pleadings and thus are before the Court for the first time. Ariel's Amended Complaint, for example, contained no allegations regarding any of the defendants' refusals to acknowledge their status as valid licensees or sublicensees under the Agreement, or regarding any affirmative statements made by the defendants to the effect that they did not consider themselves to be bound under the Agreement. In their Reply Memorandum, Defendants do not address the Affidavits except to state that "Ariel's newly-presented `facts' . . . are not properly before the Court, and should be disregarded entirely." (Joint Reply Memorandum in Support of Motion for Fees ("Reply Mem."), at 1.) However, nothing prevents the Court from considering the Affidavits to the extent that they shed light on whether Ariel's copyright claims were objectively unreasonable when the action commenced, for the sole purpose of determining whether to award fees and costs under 17 U.S.C. § 505.
Ariel also contends that it did not have an objectively unreasonable basis for believing that its copyright claims were legally sufficient. Ariel argues, in essence, that it reasonably believed that the Court would infer that a right to rescission of the license, sufficient to withstand Defendants' license defense, had been created in Ariel as a result of the breaches of the Agreement that were alleged in the Amended Complaint. Ariel claims that its "belief regarding seeking the remedy of rescission was based on the routine of New York courts" and that "New York law appears to permit plaintiffs to seek the remedy of rescission based on allegations of predicate conduct, such as fraud or material breach." (Id. at 14.) Of course, the Court disagreed and discarded Ariel's rescission argument after finding that Ariel had failed to plead rescission or any facts that could give rise to an inference that a right of rescission had been created as a result of the alleged breaches of the Agreement. Ariel's pleading defects, though fatal to its copyright claims, were not objectively unreasonable. The Court credits Ariel's assertion that "Ariel believed that its amended complaint was sufficient to entitle it to a remedy of rescission based on Ariel's averments regarding Defendants' conduct." (Id. at 14) The issue of whether Ariel's allegations were sufficient to make out a claim for rescission and thus overcome the defendants' license defense is sufficiently complex to militate against a finding that Ariel's claims were patently without merit. See Hoepker, 209 F. Supp. 2d at 355 (declining to award attorneys' fees to defendant where dismissed claims involved complicated legal issues). Accordingly, the Court finds that the legal basis for Ariel's copyright claims was not objectively unreasonable.
In sum, the Court finds that the dismissed claims were not so "clearly without merit or otherwise patently devoid of legal or factual basis" as to be deemed objectively unreasonable." Penguin Books U.S.A., 2004 U.S. Dist. LEXIS 5648, at *7. However, a finding of objective reasonableness does not necessarily preclude the award of attorney's fees, if other factors justify such an award. See Matthew Bender Co., 240 F.3d at 122-23. Therefore, the Court must determine whether Ariel's improper motivation or bad faith, or the goals of compensation and deterrence, support an award of attorneys' fees.
Bad Faith Improper Motivation
The presence of improper motivation in bringing a lawsuit or other bad faith conduct weighs heavily in favor of an award of costs and fees. See Matthew Bender Co., 240 F.3d at 125-27. Defendants claim that Ariel's suit was improperly motivated because "the facts here clearly suggest that Ariel improperly invoked the judicial process in an attempt to extract a settlement." (Def. Mem., at 4.) Defendants point to the fact that Ariel commenced this action shortly before the closing of the merger between Defendants NASDAQ and Instinet Group, Inc., and the related sale, by NASDAQ, of Instinet Group, Inc.'s institutional brokerage division. The suit, Defendants argue, was accompanied "by the publicity campaign Ariel immediately commenced to create the impression that this lawsuit could derail those transactions." (Id. at 5.) In support of this argument, Defendants submit two contemporaneous British newspaper articles that reported Ariel's copyright claims, quoted Ariel's director, and observed that the suit threatened to upset the imminent merger.
Ariel counters that, rather than seek to extort a quick settlement, "[w]hat it always wanted was an ability to exploit its licensing rights under the Agreements in respect of software that it created." (Pl. Mem., at 21.) Ariel points to the fact that, prior to commencement of this action, it attempted in good faith but failed to obtain from Instinet and Reuters a confirmation of Ariel's rights under the Agreement to grant a license to Bloomberg. Ariel also submits as evidence of its good faith its pre-action proposal to Defendants that the parties engage a Court-appointed neutral expert to examine the works at issue in this case and to determine whether Defendants' alleged use of Ariel's works constituted infringement.
There is no indication that Ariel undertook this action in bad faith or with improper motivation. Ariel believed that Defendants' refusal to confirm Ariel's licensing rights under the Agreement rendered Defendants' continued use of the works at issue to be infringing on Ariel's copyright. Ariel's action appears to be motivated by a desire to protect its copyrights and its purported rights under the Agreement. While it is true that Ariel brought this action while significant corporate transactions were pending between various defendants, that fact alone is not sufficient for the Court to find that Ariel brought this action in bad faith.
Defendants' claim that Ariel attempted to publicize the suit in order to extort settlement is also unavailing. Contrary to Defendants' assertion, the publication of two articles in the British press that reported the copyright claims and contained limited quoted remarks by Ariel's director do not constitute a "publicity campaign." (Def. Mem., at 5.) In any event, a party's attempt to publicize its belief that its copyright is being infringed upon does not demonstrate bad faith or improper motivation. See Brown v. Perdue, No. 04 Civ. 7417, 2006 U.S. Dist. LEXIS 85167, at *13-14 (S.D.N.Y. Aug. 30, 2006), rep. and rec. adopted by 2006 U.S. Dist. LEXIS 66563, at *5 (S.D.N.Y. Sept. 15, 2006). The timing of Ariel's lawsuit and the publication of two articles in the British press related to the copyright claims simply do not constitute the sort of conduct that rises to the level of bad faith or improper motivation. See Caffey v. Cook, 409 F. Supp. 2d 484, 510 (S.D.N.Y. 2006).
Deterrence and Compensation
An award of attorneys' fees in this case would not further the goals of compensation and deterrence. As discussed above, Ariel's copyright claims were not patently meritless, as Ariel had an objectively reasonable factual and legal basis for bringing its copyright claims. Although Ariel's claims were dismissed on the pleadings, this case "involved complicated issues of fact and law and an award of attorneys' fees and costs in such a complex case would chill future lawsuits, rather than beneficially deter frivolous or objectively unreasonable lawsuits." Ackoff-Ortega v. Windswept Pac. Entertainment Co., 99 Civ. 11710, 2001 U.S. Dist. LEXIS 2187, at *12 (S.D.N.Y. Mar. 1, 2001); see also P G v. Colgate-Palmolive Co., No. 96 Civ. 9123, 1999 U.S. Dist. LEXIS 10749, at *15 (S.D.N.Y. July 14, 1999). The Court recognizes that Defendants incurred considerable expense in defending the copyright claims. Nevertheless, an award of fees and costs would tend to prohibit potential future claimants from litigating questions of fact and law that are not objectively unreasonable and therefore would be contrary to the policies that underlie the Copyright Act. See Fogerty, 510 U.S. at 526. Thus, the Court finds that the goals of compensation and deterrence do not militate in favor of an award of fees.