JCW Investments Inc v. Novelty Incorporated

Citation: Not availableDocket: 05-2498

Court: Court of Appeals for the Seventh Circuit; March 20, 2007; Federal Appellate Court

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The United States Court of Appeals for the Seventh Circuit ruled on case No. 05-2498, involving JCW Investments, Inc. (d/b/a Tekky Toys) as the plaintiff-appellee against Novelty, Inc. as the defendant-appellant. The appeal arose from the Northern District of Illinois, where Judge Robert W. Gettleman presided. Tekky Toys created a plush doll named Pull My Finger® Fred, which emits fart noises and humorous phrases when its finger is squeezed. Novelty, Inc. produced a similar doll called Fartman, which shares physical characteristics and some identical jokes with Fred. 

Tekky sued Novelty for copyright infringement, trademark infringement, and unfair competition, winning all claims. The district court awarded Tekky $116,000 for lost profits from copyright infringement, $125,000 for trademark infringement, and $50,000 in punitive damages for unfair competition, along with $575,099.82 in attorneys' fees. Novelty challenged its liability for copyright infringement, argued that Illinois's punitive damages for unfair competition are preempted by federal law, and contended that the attorneys' fees should be limited by Tekky's contingent-fee agreement with its lawyers. The court affirmed the district court's decision.

Tekky Toys, founded by Jamie Wirt and Geoff Bevington, began developing Fred in 1997 and received copyright registration in 2001, subsequently assigning it to Tekky. By the time of litigation, Tekky had expanded its product line to include several other farting plush toys and had sold over 400,000 units. Novelty, led by owner Todd Green, admitted to emulating ideas from competitors, including visiting trade shows to photograph products for inspiration.

Green testified in his deposition that he may have photographed Fred, as it was common for him to photograph everything. He acknowledged that his concept for Fartman was inspired by Fred and described this idea to Mary Burkhart, Novelty’s art director, who created a drawing based on his description. Burkhart noted that Green envisioned a plush doll resembling a hillbilly that would fart and shake, activated by pulling its finger. Novelty typically assigned product drawings to artists like Burkhart, who then sought Green's approval for the design. Production of plush farting dolls began on October 8, 2001, with the initial release being Pull-My-Finger Santa, followed by Fartman in stores by November 5, 2001. Tekky became aware of Fartman in March 2002 and filed a lawsuit three months later. The district court issued a preliminary injunction in September 2002, stopping Novelty’s sales of Fartman and Fartboy. Following cross-motions for partial summary judgment, the court found Novelty liable for copyright infringement for copying Fred. The case proceeded to trial on issues of copyright and trademark infringement as well as state law claims. The jury ruled against Novelty for trademark infringement regarding the phrase "Pull My Finger," deeming its actions willful and justifying punitive damages. Damages awarded included $116,000 for copyright infringement, $125,000 for trademark infringement, and $50,000 in punitive damages. The district court later granted Tekky prejudgment interest and full attorneys’ fees, appointing a special master who recommended $596,399.82, later reduced to $575,099.82 after Novelty's objection. Novelty filed a timely notice of appeal post-award. The district court's ruling on copyright infringement was subject to de novo review, requiring proof of valid copyright ownership and copying of original work elements. Copyright protection begins upon the creation of original works fixed in a tangible medium, as defined under 17 U.S.C. § 102(a) and § 101.

The owner of a copyright can obtain a certificate that serves as prima facie evidence of its validity, according to 17 U.S.C. § 410(c). Once a valid copyright is established, the key inquiry shifts to whether another party has copied the work. Direct evidence of copying is rare; therefore, it may be inferred if the alleged infringer had access to the original work and if the two works are substantially similar. If the works are sufficiently similar, proving access becomes unnecessary, as access is presumed if copying is highly probable. The degree of similarity to the copyrighted work, contrasted with works in the public domain, affects the likelihood of independent creation. A defendant may counter the inference of copying by demonstrating independent creation, which can occur if the defendant creates its own work without using the plaintiff’s work or copies from a different source. 

In the case at hand, Novelty challenges the district court’s conclusions regarding the extent of copyright protection for Tekky’s toy, claiming that the court overreached by protecting common elements or ideas known as scènes faire. Novelty disputes findings that it had access to the copyrighted work, that Burkhart copied rather than independently created Fartman, and that Fred and Fartman are substantially similar. However, the court is unpersuaded by these arguments, affirming that Tekky holds a valid copyright in Fred, that Novelty had access to Fred, and that the similarities between the two dolls strongly suggest copying, even without direct access. Furthermore, Novelty does not contest the validity of Tekky's copyright or claim that Fred lacks creativity, reinforcing the conclusion that Fred is a creative work eligible for copyright protection. The level of creativity in Fred and the ideas it represents are relevant for assessing the inference of copying based on substantial similarity.

Green, the president of Novelty, acknowledged that he observed Fred and possibly photographed him, and that Fred inspired the creation of Fartman. Although Burkhart, the artist, claims she has not seen Fred, she created the Fartman model at Green's direction. Fred was already available in the U.S. market when Fartman was developed. The Eighth Circuit's corporate receipt doctrine establishes that if one employee of a corporation has access to a plaintiff's work, other employees may be presumed to have access as well. In this case, Green's direction to Burkhart to create a figure resembling Fred indicates that Novelty had access to Fred during Fartman's production. 

To substantiate a claim of copying, substantial similarity between the two works must be demonstrated. This is determined objectively, evaluating whether an ordinary person would conclude that the defendant unlawfully appropriated the plaintiff’s expression. An analysis of the dolls shows significant similarities, including their overall appearance and specific features like crooked smiles, balding heads, and identical clothing colors. Although Fartman has some distinct features, these differences do not outweigh the overall similarities, leading to the conclusion that they are substantially similar. 

Given Green's access and the substantial similarity of the dolls, an inference of copying arises, which could be established even without evidence of access. Novelty argues that the resemblance stems from a shared comic archetype rather than copying, claiming both dolls are based on the same humorous concept rather than a specific expression.

The district court determined that Novelty attempted to incorporate too many elements into the concept of a plush doll that produces a farting sound and tells jokes. The plaintiff's character, Fred, is described in detail: a balding, smiling Caucasian male doll in a tank top and blue pants, which makes farting sounds and utters phrases upon activation of its finger. Under copyright law, while ideas themselves are not protected, the original expression of those ideas is. The court emphasized that the creativity in the combination of elements that make up Fred, including his specific appearance and setting, constitutes protectable expression. Novelty's argument that Fred's attributes were merely common elements was rejected, as the details themselves represent creative expression. The court noted that Novelty could have produced a distinctly different plush doll without infringing on Fred’s expression.

In a separate finding, the jury ruled Novelty liable for trademark infringement for using the phrase "Pull My Finger" in its marketing of farting Santa dolls, recognizing this use as willful and awarding $50,000 in punitive damages under Illinois law. Novelty appealed, arguing that the Lanham Act preempts state punitive damages, though it acknowledged this would represent a legal extension. The court highlighted previous concerns about punitive damages in trademark cases, noting that while the Lanham Act allows for the trebling of damages, it does not provide for additional penalties. The district court found Illinois law authorized punitive damages, despite lacking a clear source for this authority, and referenced earlier cases that have supported punitive damages in trademark disputes.

The magistrate judge identified the case as an "issue of first impression," noting that while other courts have permitted punitive damages for unfair competition alongside compensatory damages under the Lanham Act, none have addressed the availability of punitive damages directly. Federal law preempts state law in three scenarios, with only the third option relevant here: when state law obstructs congressional objectives. The Lanham Act allows recovery of defendant's profits, damages sustained by the plaintiff, and costs of action, emphasizing that such awards are compensatory rather than punitive. Although punitive damages could be seen as a means to achieve a "just sum," they are fundamentally penalties and federal law does not explicitly allow them, nor does it preempt state law remedies. The text references the case of California v. ARC America Corp., which states that state causes of action are not preempted simply because they impose greater liability than federal law. The treatise by McCarthy on Trademarks suggests that punitive damages may be permissible under state law for trademark infringement, even though the Lanham Act does not explicitly provide for them. The First Circuit case, Attrezzi, LLC v. Maytag Corp., further illustrates the differences between federal and state remedies, particularly regarding attorneys' fees and enhanced damages, which are awarded differently under the respective laws.

The First Circuit addressed whether New Hampshire's more lenient standard for awarding attorneys’ fees and mandatory enhanced damages conflicted with federal law. The court recognized that the state law incentivizes plaintiffs to pursue unfair competition claims more aggressively than the Lanham Act, which Congress designed with a less favorable incentive structure. However, the court concluded that Congress did not intend to prohibit state laws that provide slightly more favorable terms for plaintiffs when they align with federal law. New Hampshire's law was found to be substantively similar to the Lanham Act, despite its more generous remedial framework. The court emphasized that using minor deviations in state remedial benefits to challenge state law would be unreasonable.

The decision contrasted the Lanham Act's function as a federal forum for common-law claims with other comprehensive federal regulations, affirming that state law remedies are permissible. The First Circuit noted that preemption of state law in trademark cases is rare, citing that recent amendments to federal trademark laws did not displace state remedies. The court also highlighted that punitive damages and attorneys’ fees are distinct, and while the Lanham Act specifies that federal compensation should not be considered a "penalty," it does not preclude state laws allowing punitive damages under certain conditions. 

Regarding the district court's award of $575,099.82 in attorneys’ fees, the court affirmed that such awards are at the court's discretion under both the Copyright Act and the Lanham Act. Novelty contested the amount based on a contingent-fee agreement, arguing that it limited recovery to $436,000 based on a two-thirds allocation of the jury's award. The district court, however, utilized the traditional lodestar method, calculating fees based on the actual hours worked, tasks performed, and hourly rates of Tekky's attorneys, instead of adhering strictly to the terms of the fee agreement.

A special master was appointed by the district court to resolve disputes over a fee petition, resulting in a report recommending a total award of $596,399.82. The court criticized Novelty for inflating the fees by contesting nearly every issue and stated that without evidence of time record manipulation by the plaintiff’s attorneys, there was no justification to reduce the fees deemed reasonable. The special master made some reductions to Tekky Toys’ fee request, which the court found acceptable. Additionally, the court lowered the expenses awarded between the two fee petitions from $80,000 to $60,000 and reduced reimbursement for foam boards. Novelty's argument to replace the lodestar with the fee agreement was based on City of Burlington v. Dague, which disallowed contingency enhancements under fee-shifting statutes. The lodestar figure is considered a standard for reasonable fees, placing the burden on the fee applicant to justify any higher amount. However, the Supreme Court’s ruling in Blanchard v. Bergeron established that fees awarded under 42 U.S.C. § 1988 are not confined to contingent-fee amounts. This principle was affirmed in Fogerty v. Fantasy, Inc., which mandated equal treatment for fee awards in copyright cases. The court noted Dague does not contradict Blanchard's principles, and despite the high fees being approximately double the damages, the review of the special master's report showed no abuse of discretion. The judgment of the district court was affirmed.