Fonovisa, Inc. v. Cherry Auction, Inc. Richard Pilegard, W.D. Mitchell, Margaret Mitchell
Docket: 17-73379
Court: Court of Appeals for the Ninth Circuit; January 25, 1996; Federal Appellate Court
Fonovisa, Inc., a California corporation owning copyrights and trademarks for Latin music recordings, appealed a district court's dismissal of its copyright and trademark enforcement action against Cherry Auction, Inc. and its operators. The case arose from the operators' management of a swap meet in Fresno, California, where third-party vendors were selling counterfeit recordings. The district court had ruled that Fonovisa could not maintain a cause of action against Cherry Auction for the vendors' sales. However, the Ninth Circuit Court reversed this decision.
Cherry Auction operated a flea market where vendors paid a rental fee for booth space and were aware of ongoing sales of counterfeit recordings. The operators had the authority to exclude vendors for trademark infringement and received entrance fees from customers. Evidence indicated that law enforcement had previously seized over 38,000 counterfeit recordings from the swap meet and had notified Cherry Auction about the continued sale of infringing materials. Fonovisa also conducted its own investigation at the site, confirming the sale of counterfeit items. The case emphasizes the liability of swap meet operators for trademark and copyright infringements occurring on their premises.
Fonovisa filed a complaint in the district court on February 25, 1993, which led to the dismissal of its direct copyright infringement claim on March 22, 1994, under Federal Rule of Civil Procedure 12(b)(6). Fonovisa appeals the dismissal of its claims for contributory copyright infringement, vicarious copyright infringement, and contributory trademark infringement. The copyright claims are based on 17 U.S.C. 101 et seq. Although the Copyright Act imposes liability primarily on direct infringers, courts recognize vicarious and contributory liability under certain conditions, as illustrated in Sony Corp. of America v. Universal City Studios, Inc. The district court rejected reasoning from the Seventh Circuit regarding contributory trademark infringement claims, while contributory and vicarious copyright infringement had not been previously addressed in similar contexts.
Vicarious copyright liability originated from agency principles, particularly in the Second Circuit, as established in Shapiro, Bernstein and Co. v. H.L. Green Co., where a department store owner was held liable for a concessionaire's sale of counterfeit recordings. The court sought to apply liability principles against defendants with economic ties to direct infringers, even if they did not employ them. The court examined landlord-tenant cases, where landlords without knowledge or control of tenant infringements were not liable, and "dance hall cases," where venue operators could be held liable if they had control of the premises and financially benefited from infringing performances.
The Shapiro court established that the relationship between a store owner and a concessionaire resembles a dance-hall model rather than a landlord-tenant model, leading to vicarious liability for copyright infringement even if the store owner was unaware of the infringement. The court justified this liability on the basis that the store owner had the ability to stop the concessionaire's infringing activities and received a clear financial benefit from them. This principle was later refined in Gershwin Publishing Corp. v. Columbia Artists Management, where it was articulated that vicarious liability can arise from the right to supervise infringing activities and having a financial interest in them, regardless of an employer-employee relationship.
In the current case, the district court found that Cherry Auction did not satisfy the control or financial benefit criteria for vicarious copyright infringement as established in Gershwin, likening Cherry Auction's position to that of an absentee landlord without oversight or profit from vendors' sales. However, the appellate review indicates that the allegations suggest Cherry Auction exercised control over the vendors, as they operated within premises controlled by Cherry Auction, which had the authority to terminate vendors and managed customer access to the swap meet area. This level of control aligns with the precedents set in Shapiro and Gershwin, particularly highlighting the formal agreements that allowed for oversight and compliance, similar to the relationship between the department store and its concessionaire in Shapiro.
In Gershwin, the court established that a defendant can be held vicariously liable for copyright infringement despite lacking formal contractual control over direct infringers, provided they demonstrate significant involvement in promoting and directing those infringers. Similarly, Cherry Auction, as the organizer of a swap meet, is seen to exert comparable control over direct infringers due to its promotional activities and oversight. The district court's dismissal of the vicarious liability claim was improper, as the complaint adequately alleged sufficient control.
Regarding financial benefit, the plaintiff identified various revenue sources for Cherry Auction, such as daily rental fees from vendors, admission fees from customers, and additional payments for parking and concessions. Cherry Auction argued that only a direct commission from sales could satisfy the financial benefit requirement, suggesting it should be treated like a mere landlord due to low rental fees. However, the plaintiff's allegations indicate substantial financial gains linked to the infringing activities, asserting that these benefits stem directly from customers drawn to the sale of counterfeit recordings.
The analysis is supported by precedents which hold operators liable when infringing activities enhance the venue's appeal, such as in the dance hall and trade show cases. The sale of pirated recordings at Cherry Auction serves as a significant draw for customers, paralleling the scenarios in earlier case law where infringing performances contributed to increased patronage and revenue.
Plaintiffs have successfully asserted a claim for vicarious copyright infringement, establishing the basis for contributory copyright infringement rooted in tort law. This principle holds that individuals who knowingly contribute to another's infringement can be held liable, as supported by case law, including Sony v. Universal City and Gershwin. The concept of contributory infringement reflects the idea that one who induces or materially contributes to infringing activities, with knowledge of those activities, may be liable.
The critical issue in this case is whether Cherry Auction materially contributed to the infringement. The court finds that the allegations sufficiently demonstrate this contribution, noting that the scale of the infringing activities could not exist without the support services provided by Cherry Auction, such as space, utilities, and advertising. Cherry Auction's attempts to minimize its role to merely renting space are rejected; its active facilitation of an environment conducive to counterfeit sales indicates more than passive involvement.
The district court's interpretation that liability requires explicit promotion or protection of infringers is challenged. Evidence that Cherry Auction failed to comply with a lawful request from law enforcement to provide vendor information suggests it may indeed protect the identities of infringers. Additionally, aligning with the Third Circuit's ruling in Columbia Pictures Industries, the court recognizes that merely providing the site and facilities for infringing activities is sufficient for establishing contributory liability.
Contributory trademark infringement liability can extend to those who assist others in direct infringement, as established in Inwood Laboratories. The Supreme Court identified two criteria for liability: (1) intentional inducement of infringement or (2) knowledge that a product is being used for infringement. Inwood involved a distributor aware that a pharmacist was mislabeling drugs; similarly, Cherry Auction is implicated for creating a marketplace for the sale of infringing recordings. In Hard Rock Cafe, the Seventh Circuit applied the Inwood standard, ruling that a flea market operator could be liable even without actual knowledge of counterfeit sales if it was willfully blind to them. The court emphasized that businesses are accountable for the actions of those they allow on their premises if they have reason to know of tortious conduct. The application of the Inwood test to the flea market situation was deemed appropriate, leading to the conclusion that Fonovisa has established a claim for contributory trademark infringement. Consequently, the district court's judgment has been reversed and the case remanded for further proceedings.
