Wednesday, September 24, 2008
Court: Copyright Infringement Award May Be Dischargeable
By STEVEN M. ELLIS, Staff Writer
A judgment based on “willful” copyright infringement is not necessarily a “willful or malicious” injury that cannot be discharged in bankruptcy, the Ninth U.S. Circuit Court of Appeals ruled yesterday.
Reversing a bankruptcy court’s grant of summary judgment against a pair of debtors who sought to discharge a jury award based on their duplication and sale of copyrighted motion pictures, a panel held that a material issue of fact existed whether the award was a willful or malicious injury under 11 U.S.C. § 523(a)(6) because it could have been based on reckless, rather than intentional, conduct.
Lucia Munguia Albarran and her husband, Antonio Barboza, operated a business duplicating, distributing and selling Spanish language films in 1999, including 10 films known as the “India Maria Pictures,” when New Form Inc. acquired exclusive rights to the films.
New Form sent the pair a letter to advise them of its rights, to which Albarran responded that she and Barboza had not previously known of the exclusive rights, were selling preexisting inventory purchased legally, and were willing to negotiate. However, in the time between the letter and the response, Albarran and Barboza allegedly ordered production of 500 additional copies.
When the pair continued selling the films, New Form filed suit in the U.S. District Court for the Central District of California for willful copyright infringement. After a trial at which the evidence concerned only the additional copies, a jury—on instructions that plaintiff was required to prove by a preponderance of the evidence that the defendants knew they were infringing copyrights or acted with reckless disregard as to whether they were doing so—awarded New Form $893,000 in damages and costs.
Albarran and Barboza then filed for chapter 7 bankruptcy in the U.S. Bankruptcy Court for the Southern District of California, and New Form filed a complaint seeking a determination that the judgment was nondischargeable based on the district court proceedings.
Despite the debtors’ argument that Albarran’s brother had both ordered and ultimately received the additional copies without their knowledge, Bankruptcy Judge Peter W. Bowie concluded that there was uncontroverted evidence the debtors knew of New Form’s copyright and, in combination with the jury finding, that the infringement constituted a willful injury ineligible for discharge.
On appeal, the Bankruptcy Appellate Panel affirmed, implying “maliciousness” from Bowie’s finding of willfulness, and reasoning that “an award of statutory damages based on willful copyright infringement is a debt for an injury to the owner’s property interest.” BAP Judges James M. Marlar, Erithe A. Smith and Jim D. Pappas concluded that the only remaining proof required was awareness of New Form’s copyright at the time of infringement, and found that the uncontroverted evidence of the debtors’ knowledge of New Form’s letter was proof of their “substantial certainty” of resultant harm.
However, on the debtors’ appeal to the Ninth Circuit, Chief U.S. District Judge Roger Hunt of the District of Nevada, sitting by designation, wrote that summary judgment was improper because the bankruptcy court “had no way to determine whether the jury found the willful infringement based on a reckless disregard or a knowing violation” of the copyright.
‘Willful’ Injuries Limited
Noting that the Supreme Court had specifically limited “willful” injuries under Sec. 523(a)(6) to “deliberate or intentional” injuries, and the debtors’ evidence that Albarran’s brother had ordered the additional production, which showed that the jury could alternatively have based its verdict on recklessness, Hunt wrote that a material issue of fact remained, and that remand was required.
He further concluded that the bankruptcy court had erred by failing by examining separately whether the copyright infringement was “malicious” under Sec. 523(a)(6), and that the Bankruptcy Appellate Panel had similarly erred when it based its finding of malice entirely on its conclusion that the debtors’ actions had been willful.
“[T]he malicious injury requirement…must be determined separately from the willful injury requirement,” he wrote.
Ninth Circuit Senior Judge William C. Canby Jr. and Judge Jay S. Bybee joined Hunt in his opinion.
The case is In re Barboza, No. 06-56319.
Copyright 2008, Metropolitan News Company