November 14, 2012

The DC Circuit Vacates A Restitution Order In A Criminal Copyright Case - Or, Making Money Off Pirated Adobe Software Doesn't Necessarily Hurt Adobe As Much As It Helps The Person Making The Money

Gregory Fair was an internet entrepreneur. Of sorts.

Mr. Fair's Criminal Copyright Enterprise

He sold pirated copies of outdated Adobe software on Ebay. His customers could buy this outdated software, then, with an update code Mr. Fair was also able to provide, they could pay Adobe to upgrade their software to the most current version.

1335026_friendly_skull.jpgMr. Fair's customers would then pay, for example, $325 and a little bit of legwork for Adobe software that would cost more than $700 on the open market.

A deal like that sells itself, and over the course of six years his total sales came in around $1.4 million.

All good things must come to an end.

The Postal Service, after hearing complaints from Adobe, launched a sting. Mr. Fair was charged with a criminal copyright offense under 18 U.S.C. ยง 2319. He pled guilty.

Restitution Arguments at the Sentencing Hearing

Though the plea agreement contained a lot of concessions, it did not contain an agreement about any restitution amount.

Before sentencing, the government provided a spreadsheet of the amount of revenue that Mr. Fair made selling software as a part of his software enterprise. His total sales were $767,465.99. The government proposed that this would be an adequate measure of Adobe's loss for restitution purposes.

Mr. Fair disagreed. He argued that

(1) restitution under the MVRA must take the form of "actual loss" to the victim; (2) "actual loss cannot be equated to 'intended loss' or to gain by the defendant"; and (3) the government had offered "no proof . . . of any actual loss by [the victim,] Adobe Systems."

Moreover, in a move that may be genius or chutzpah, he argued that "his piracy might in fact have benefitted Adobe Systems by increasing consumers' awareness and use of its products."

A temperate man, he did not request payment from Adobe for his work as a part of the sentencing proceeding.

The district court agreed with the government. The district court reasoned that

"[i]t's undisputed that [Fair]'s revenue from the sales of pirated Adobe products was at least $767,000," and that "if anyone held the right to collect revenue from the sale of these products, it was Adobe [Systems]," and so it followed that "since the sales did occur and revenue was generated, and the right to the revenue was held by Adobe [Systems] and not by [Fair], that Adobe [Systems] has the right to be restored to the revenue that it lost [in] its right to collect on actual sales that were made."

Mr. Fair appealed.

Mr. Fair Goes To The D.C. Circuit

The D.C. Circuit, in United States v. Fair, reversed the restitution award.

About the district court's reasoning, the D.C. Circuit started by saying that just about no federal appellate court thinks the district court's approach is supported by the law.

The circuit courts of appeals are in general agreement that the defendant's gain is not an appropriate measure of the victim's actual loss in M[andatory Victim Restitution Act] calculations. See Zangari, 677 F.3d at 92-93 (2d Cir.); Arledge, 553 F.3d at 899 (5th Cir.); United States v. Gallant, 537 F.3d 1202, 1247 (10th Cir. 2008); Chalupnik, 514 F.3d at 754 (8th Cir.); United States v. Galloway, 509 F.3d 1246, 1253 (10th Cir. 2007); cf. United States v. Kuo, 620 F.3d 1158, 1164-65 (9th Cir. 2010); United States v. Harvey, 532 F.3d 326, 341 (4th Cir. 2008); United States v. Badaracco, 954 F.2d 928, 942-43 (3d Cir. 1992).

So the amount that Mr. Fair made on the sales of copyright-violating software isn't the right measure of what Adobe lost. Fair enough. What is?

Sometimes, in a criminal copyright case, the copyright violator puts things into the market that completely block the legitimate seller from selling at all.

For example, if I sell bootlegged copies of The Green Bag ("an entertaining journal of law") for a mere $35 a subscription per year, it would prevent The Green Bag from being sold for many consumers.

In a case like that, the D.C. Circuit said, the restitution owed to The Green Bag would be not the cost of its lost sales - so not $40 per subscription I sold - but rather The Green Bag's profits per subscription. Or, as the D.C. Circuit put it,

the actual loss to the displaced (authentic) seller is the profit lost from the displaced sales -- not the retail value of the goods that would have been sold.

Here, though, the government put on no such evidence of Adobe's lost profits

the government offered no evidence of either the number of sales that Adobe Systems likely lost as a result of Fair's scheme or the profit that Adobe Systems would have made on any such diverted sales. The record contains only a spreadsheet tallying Fair's eBay sales and unsubstantiated, generalized assertions of government counsel regarding Adobe Systems' lost sales. . . . There thus was no evidentiary basis on which the district court could find that had Fair's customers not purchased pirated Adobe software from him at a greatly reduced price, all or any portion of them would have purchased full-priced versions from Adobe Systems.

Moreover, to the extent that the government thought that it could simply use the guidelines infringement loss number as a restitution amount, the court of appeals slapped it down

To the extent the government defends the use of gross proceeds as "consistent with the calculation of loss under the Sentencing Guidelines," Appellee's Br. at 15, it ignores the different approaches in the Guidelines and the M[andatory Victims Restitution Act]. Essentially, the government blurs the line between the "infringement amount" calculated under Sentencing Guidelines ยง 2B5.3 in criminal copyright cases, which is derived by multiplying the retail value of the infringed or infringing items by the quantity of infringing items, and the restitution amount calculated under the MVRA, which must reflect the actual, provable loss suffered by the victim.

But that's not all, gentle readers.

No Second Bite on Remand

The government, perhaps seeing which way the wind was blowing, asked the D.C. Circuit to limit the damage. If we lose, the government asked, please at least remand for a new hearing on restitution.

The government wanted another bite at the apple.

The D.C. Circuit was having none of it.

No special circumstances are present that would warrant reopening the record on restitution in Fair's case. The government's burden to prove actual loss under the MVRA was well-established before sentencing. See also Tr. Oct. 22, 2009 at 23 (government counsel stating, "[w]e welcome the burden to prove restitution."). The government was allowed to present evidence . . . . Indeed, whether the government had offered evidence demonstrating actual loss was the central issue addressed during the parties' restitution discussion at the sentencing hearing.

Because the government already had a full and fair opportunity to prove that restitution was appropriate, and it failed to do so, the D.C. Circuit vacated the restitution award and denied the government another chance to meet its burden.

Fair enough.

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