Curbing damage awards in copyright infringement cases

The monetary remedy in the Copyright Law is designed to restore the plaintiff to a state had infringement not occurred. It is not meant to be ideal so as to punish scandalous or insidious behaviours. A recent draft amendment to the Copyright Law does consider punitive damage awards for wilful infringement of copyright, but the draft is still in its early stages and is far from being passed into law. The statute is clear that only the copyright owner's actual loss is compensable through litigation, not losses that are incidental, speculative or simply theoretical. This compensatory form of damages is equivalent to the extent of which the market value of a copyrighted work has been injured or destroyed due to infringement. The amount of actual loss requires case-specific evidentiary support, far more than the universally-applied Advisory Opinion offers.

A frequent argument to support damage awards based on the Advisory Opinion is the inadequate amount of royalty or licence fees that literary authors receive in practice. This argument blurs the boundaries between the executive branch of government in charge of policy directives and strategic planning and courts whose constitutional authority is limited to adjudicating disputes according to the law. An agency like the National Copyright Administration is free to set non-binding suggested royalty or licence fees higher than what can be negotiated between the literary authors and the publishers in order to influence market behaviour. But courts should base damage awards on how much copyright owners of literary works can receive in the market, not on how much they should have received if their efforts in creating the works are completely paid off.

Failing to reflect market reality

The Advisory Opinion was issued in response to the prevailing view that the literary authors are not adequately paid by the publishers. For example, some scholars drew comparison between royalty payment obtained by literary authors and the average salary for workers over the years. They concluded that royalties for literary works increase at a much slower pace than an average worker's salary. The Beijing Higher People's Court even takes the view that the Rmb30 to Rmb100 range is not sufficient to compensate for the authors' work, so much so that a three to five times increase is necessary.

This argument highlights the practical inability of many contemporary authors to receive a royalty of Rmb30 to Rmb100 per one thousand characters from the publishers. Given the competitive nature of the market and the large volume of literary works available to the public each year, it is only reasonable that royalty or licence fees for numerous literary works are not as much as what the authors would hope to receive. On the other hand, popular authors whose works are in high demand may be able to command much higher fees for the right to publish their works. For example, for works of famous authors such as the newly minted Nobel laureate Mo Yan, publishers may be willing to pay several times more than the upper threshold set up by the Advisory Opinion. What drives this vast variation of royalty payment for different works certainly is not the length of the works, but the familiarity of the authors to the relevant public and the popularity and quality of the works.

This Advisory Opinion disregards the unique nature of copyright licence arrangements. Each licence is a contract with multiple terms and conditions and cannot be analysed based on any single payment term. Furthermore, analysis of a multi-dimensional licence through a single payment term would be inadequate and misleading. For example, a licence can be exclusive or non-exclusive, it could concern first publication rights or simply a reprint of existing publications, and it may or may not provide residual rights to the publisher after the initial publication or cover derivative rights to future compilations, sequels or translations. Then considering royalty payments, the literary author may prefer a front-loaded arrangement with a one-time payment. Alternatively, they may elect a back-loaded arrangement with less money upfront in exchange for a higher percentage of royalty fees for each book printed or sold.

The actual loss incurred by the copyright owner due to infringement can be ascertained only if the quality of the infringing works and the licence practice of the owner are properly considered. For example, the copyright owner may have signed an exclusive agreement with a publisher to licence away all the rights associated with a copyrighted book. In exchange, the copyright owner received a one-time payment and a cut for every book sold for the duration of the copyright protection. If a third party disseminates the book over an ISP's website without authorisation, the number of sales of the authorised books may suffer due to infringement, contributing to decreased royalty income to the owner. However, the owner does not lose any potential one-time payment from a second publisher since it does not have such a right in the first place. If the court awards damages calculated based on the number of characters in the book, it is equivalent to allowing the copyright owner to take a second bite at the apple to which they no longer have the legitimate rights for.

Creating negative incentives

Partly driven by rigid application of the Advisory Opinion in determining infringement damages, the number of digital copyright infringement cases involving literary works has doubled in the last three years. A few organisations have sprung up whose sole mission is to obtain licences from literary authors, skim the internet for infringing works, and bring lawsuits against the relevant ISPs for damages. This business model has so far proven lucrative as these organisations have achieved near overwhelming success in recovering damages against ISPs. But as the amount of damages is largely unrelated to the content or quality of the works, authors that are productive in churning out words undoubtedly are favoured by these organisations over authors who produce less voluminous, but much higher quality works.

The active litigation strategy of these organisations has discouraged copyright owners from working directly with the ISPs to tackle infringement issues. Even though ISPs may be able to claim safe harbour exemption from liability in these lawsuits by following the notice-and-take-down procedure, the cost of civil litigation and the potentially large damage award may force the ISPs to accept settlement in an amount far greater than what the copyright owner can get for the infringing works on the market. The ISPs may also feel obliged to remove works in dispute from their websites without having the opportunity to verify the claims of infringement.

These litigations may also have the effect of distorting the market for copyrighted works. As the Advisory Opinion only covers literary works, owners of other forms of copyright, such as photos, drawings and audio and video recordings, are unable to recover damages similar to copyright owners of literary works. The litigation-oriented organisations also have little appetite to collaborate with these copyright owners for protection and enforcement of their copyright. It is thus unsurprising that most of the copyright infringement cases with high damage awards concern literary works even though other forms of copyrightable arts require no less effort to create and have no less impact for the enrichment of society.

Moving forward

Damages from copyright infringement cannot be assessed on the basis of speculation. As the United States circuit judge Richard Posner once declared in a decision: “We repeat previous reminders to the bench and bar of this circuit that proof of damages [in copyright infringement cases] requires – proof.” While it is important for copyright owners of literary works to be properly compensated, it is equally important that the damage awards reflect the copyright owners' actual loss or the infringer's illegal gain, and are not set arbitrarily with little relevance to the market value of the underlying copyrighted works.

Fang Qi, Fangda Partners, Beijing