I.C. v. Delta Galil USA

Citations: 135 F. Supp. 3d 196; 116 U.S.P.Q. 2d (BNA) 1904; 2015 U.S. Dist. LEXIS 132052; 2015 WL 5724812Docket: No. 1:14-cv-7289-GHW

Court: District Court, S.D. New York; September 29, 2015; Federal District Court

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Miss Matched, Inc. sponsored a contest in 2011 at a New York elementary school, allowing students to submit original t-shirt designs for a chance to have their design featured. Winners received a $100 gift card and five t-shirts with their design, but the contest rules stipulated that all ownership rights, including copyrights, were assigned to Miss Matched. The rules stated that submissions would be considered "works made for hire," and if not, entrants irrevocably assigned all rights to the company. A second-grade student, I.C., entered the contest with her "Hi/Bye" design and was announced as a winner in February 2012. Although she received her prizes, she did not receive any compensation for the sales of t-shirts featuring her design. Subsequently, I.C., through her mother, filed a lawsuit for copyright infringement and claims of unjust enrichment and quantum meruit against the successor companies of Miss Matched. The court partially granted and partially denied the defendants' motion to dismiss.

Subsequent to the sales of the Hi/Bye t-shirt, the design was expanded into a full range of products under the LittleMissMatched brand, including socks, purses, and headphones. The original seller, Miss Matched, went out of business but sold its assets to defendant Sock Drawer in December 2012, which then transferred the assets to defendant Delta Galil, who continues to market products with the Hi/Bye design. In April 2014, the plaintiff sent a letter to Miss Matched to disaffirm any contract involving I.C. and applied to register the Hi/Bye design with the U.S. Copyright Office, which was rejected due to a lack of sufficient authorship. The plaintiff filed a lawsuit on September 9, 2014, and subsequently served notice of this action to the Register of Copyrights, initially using an incorrect address, but later corrected it. The plaintiff also notified the Department of Justice as required. Defendants filed motions to dismiss the complaint in early January 2015, prompting the Court to allow the plaintiff to amend the complaint, which was filed on January 23, 2015, alleging copyright infringement and state law claims. The defendants submitted motions to dismiss this amended complaint on February 13, 2015, each referring to the arguments made by the other to avoid duplication. The legal standard for surviving a motion to dismiss requires that the plaintiff allege enough facts to state a plausible claim for relief, with the Court permitted to consider the complaint's allegations and any supporting documents.

To establish copyright infringement, a plaintiff must demonstrate ownership of a valid copyright and that original elements of the work have been copied, as outlined in Feist Publications, Inc. v. Rural Tel. Serv. Co. The defendants seek dismissal of the plaintiff's claim based on alleged procedural failures under the Copyright Act, specifically the notice requirement in 17 U.S.C. 411(a) and 37 C.F.R. 205.13. The defendants argue that the plaintiff initially sent the notice and complaint to the wrong address and only corrected this over two months after filing the suit. Additionally, the required notice to the Department of Justice and the U.S. Attorney was sent on the same date as the correction.

However, the Court disagrees with the defendants' position. The notice requirement has been characterized as "undemanding," aimed at allowing the Copyright Office a chance to weigh in on the claim's validity after the suit has commenced. Under 17 U.S.C. 411(a), even if the Copyright Office denies registration, an applicant can still initiate a civil action for copyright infringement if the notice requirement is met. The statute mandates that notice of the civil action, along with a copy of the complaint, be served on the Register of Copyrights, who may then choose to participate in the action regarding the copyright's registrability.

Although the notice requirement is not jurisdictional, it is essential for proceeding with the suit. The Court finds that dismissing the plaintiff's claim based on procedural grounds would be inefficient since the required notice has now been served and the deadline for the Register of Copyrights to enter an appearance has passed without action. Dismissing the claim would not serve a practical purpose at this stage, as the plaintiff could simply refile immediately.

Defendants argue that the plaintiff must provide notice before filing a copyright infringement claim, referencing Brooks-Ngwenya, where the court proceeded with the case despite the plaintiff's failure to meet the notice requirement, as the Register had an opportunity to weigh in. The court concluded that the notice purpose was achieved even without the plaintiff sending the complaint to the Register. This reasoning parallels the Second Circuit's decision in Dalessandro v. Monk, which found that premature filing should lead to staying the proceedings rather than outright dismissal, as long as the waiting period had not expired. In this case, the waiting period has passed, making dismissal inappropriate.

Additionally, the question of whether the plaintiff's Hi/Bye design is copyrightable hinges on her standing to sue. Under the Copyright Act, only the 'legal or beneficial owner' of a copyright can initiate an infringement lawsuit. Defendants claim the plaintiff lacks ownership rights because her contest submission was a 'work for hire' or because she assigned her rights to Miss Matched. Without ownership, she cannot sue. The submission form, which both the plaintiff and her mother signed, is presented by defendants as a binding contract under New York law, which governs many contractual issues despite the federal nature of copyright law.

Plaintiff argues that the contest terms, including the copyright assignment, are unenforceable, primarily due to a lack of mutual assent. Under New York law, mutual assent is essential for contract validity. The plaintiff contends that I.C., a second-grade student at the time of signing, could not comprehend the contest rules, thus preventing her from agreeing to the material terms. While acknowledging the existence of other contract elements (offer, acceptance, consideration, intent), the plaintiff claims I.C.'s age inhibits her understanding and assent.

However, the court notes that the complaint does not adequately allege that I.C. lacked assent due to her age, as both she and her mother signed the agreement. New York law presumes that a minor who signs a written contract assents to its contents unless fraud or a wrongful act is present. The court cites precedent stating that contracts signed by minors are voidable, not void, meaning minors can disaffirm agreements but do not lack the capacity to enter into them. Since the plaintiff fails to demonstrate any fraud or mistake and concedes that the submission form was signed, the court concludes that the complaint does not plausibly allege a lack of mutual assent, and therefore an enforceable contract exists.

The plaintiff asserts that the contract is voidable due to I.C.'s status as a minor at the time of signing, allowing her to disaffirm it under New York law, which recognizes an infant's absolute right to disaffirm contracts. The court refutes the defendants' incorrect arguments, including the claim that I.C. is bound by her mother's signature on the contract, clarifying that a minor is not obligated by a parent’s release. The defendants also argue that I.C. ratified the contract by delaying nearly three years before initiating a lawsuit; however, the law stipulates that a minor must disaffirm within a reasonable time after reaching the age of majority, not after signing. The defendants incorrectly suggest that the contest rules cannot be disaffirmed because they are reasonable, referencing N.Y. Gen. Oblig. Law § 3-101. This statute does not apply to I.C. as she was under eighteen and not engaged in business at the time of her submission. While it is recognized that a minor cannot disaffirm a contract if it would result in an unfair advantage, the privilege of infancy is designed to protect minors, not to allow them to profit from contractual repudiation. Thus, the court emphasizes that a minor cannot keep benefits from a contract once disaffirmed, reiterating that the disaffirmance privilege serves to protect rather than exploit the minor's status.

A minor must generally restore any benefits received from a repudiated contract to avoid retaining an advantage. Under CPLR § 3004, while a minor is not required to tender restoration before disaffirmance, a court may condition its judgment on such restoration to prevent unjust enrichment. Courts have held that minors are responsible for wear and tear on returned goods. For example, a minor who demands a refund for airfare after using the ticket may be unable to disaffirm the contract since they cannot return the benefits received. In this case, the plaintiff is barred from disaffirming the contract related to a contest because doing so would unjustly benefit her. Although she claims to have returned a $100 gift card and t-shirts, repudiating the contract would allow her to reclaim ownership of a design that has since been developed into a clothing line, giving her an advantage over her pre-contract position. This principle aligns with legal precedents, such as Mutual Milk, Cream Co. v. Prigge, where a minor could not disaffirm a restrictive covenant, as it would put him in a superior position by using knowledge gained from the prior employment. Thus, New York law prohibits a minor from using the privilege of infancy to gain an unfair advantage through disaffirmance.

Unconscionability is raised as a defense by the Plaintiff, arguing that the contest rules are void due to their unconscionable terms under New York law. An unconscionable contract is defined as one that is grossly unreasonable or shocks the conscience, rendering it unenforceable. Both procedural and substantive unconscionability must be demonstrated by the alleging party. The court determines unconscionability as a matter of law, and if significant facts are undisputed, it can rule without a hearing. However, when uncertainty exists regarding unconscionability, a hearing is required to examine the context of the contract's signing and its terms.

The Plaintiff claims procedural unconscionability based on the power imbalance between I.C., a second grader, and Miss Matched, a sophisticated business. The Plaintiff argues that the school’s involvement in the contest exploited its authority to encourage I.C.'s participation. The court, without an evidentiary hearing, finds sufficient allegations for a plausible claim of procedural unconscionability. Factors assessed to determine procedural unconscionability include the transaction's size, the claimant's lack of meaningful choice, their experience and education, and any disparity in bargaining power, along with potential deception or high-pressure tactics utilized in the contract formation process.

Plaintiff's complaint raises concerns about potential unconscionability in a contract related to a contest, citing disparities in bargaining power, age, and education of I.C. An evidentiary hearing is deemed necessary to examine the contract formation process. It is noted that I.C.’s mother signed the submission form, implying she read the terms, which could bind her to them under precedent. The Court will consider whether the contract was procedurally unconscionable in light of both I.C. and her mother’s involvement. Additionally, the plaintiff claims substantive unconscionability due to a lack of compensation for merchandise sales featuring the design. However, the Court expresses skepticism regarding the plaintiff's ability to prove this claim, given the context of the contest and the modest nature of the prizes. Since both procedural and substantive unconscionability are interrelated, the Court will defer judgment on substantive issues until after the evidentiary hearing. The complaint is sufficient to warrant the hearing, particularly regarding ownership rights associated with the design. Furthermore, the defendants argue that the rejection of the plaintiff's copyright application by the Copyright Office should significantly influence the Court's review. However, the defendants incorrectly mix standards applicable to different types of copyright actions, prompting the Court to clarify the appropriate standard of review.

An individual whose copyright registration application is denied by the Copyright Office has two potential avenues for recourse. First, under 701(e) of the Administrative Procedure Act, an applicant can seek to overturn the denial, with the court applying a deferential standard of review that allows for the agency's decision to be set aside only if deemed arbitrary, capricious, or not in accordance with the law. Second, under 411(a), the applicant may file an infringement action, notifying the Register of Copyrights. In this scenario, the denial of registration affects only the presumption of validity under Section 410(c), and courts typically evaluate copyright validity independently of the Copyright Office's decision.

In the case at hand, defendants argue that the plaintiff's hand-drawn design lacks originality because it consists of common words and public domain symbols, which are not copyrightable. However, the court finds that the arrangement and selection of these elements display some creativity. The plaintiff's claim of independent creation supports the argument for originality, which under copyright law requires a work to be independently created and exhibit a minimal degree of creativity. The court emphasizes that originality does not necessitate novelty or uniqueness; it simply requires that the work is a product of the author’s intellectual effort. The low threshold for creativity means that most works qualify. 

Originality is typically a factual question for trial, but since the plaintiff attached her design to the complaint, the court can assess its eligibility for copyright protection. The plaintiff does not claim that the individual elements of the design—such as the words “Hi” and “bye” or familiar emoticons—are original. Common phrases and designs generally do not qualify for copyright protection.

Words, short phrases, names, titles, slogans, common symbols, and mere typographic variations are not eligible for copyright protection, as established in Edwards v. Raymond and other cases. Common phrases, geometrical shapes, and ubiquitous designs, like a smiley face, also lack copyright eligibility. However, an artist can protect the selection, coordination, and arrangement of uncopyrightable elements if they exhibit originality, as seen in cases like Knitwaves, Inc. v. Lollytogs Ltd. and Feist. A specific arrangement of elements, such as a smiley face with "hi" on the front of a shirt and a frowning face with "bye" on the back, may achieve the necessary creativity. The court found that the plaintiff’s design met the low threshold for originality, countering the defendants' reliance on Oriental Art Printing, Inc. v. Goldstar Printing Corp., where photographs lacked creative intent. The plaintiff's design was created with creativity in mind, satisfying the originality requirement for copyright protection at the motion to dismiss stage.

To establish a copyright infringement claim, a plaintiff must demonstrate that the defendant has copied the plaintiff's work and that the copying is illegal due to substantial similarity between the two works. Defendants argue that the LittleMissMatched clothing line does not infringe on the plaintiff's design, claiming no actual copying occurred. While direct evidence of copying is rare, it can be inferred if the defendant had access to the copyrighted work and the allegedly infringing material exhibits substantial similarity. In this case, the plaintiff alleges direct evidence, noting that Miss Matched offered a t-shirt with the Hi/Bye design shortly after recognizing the contest winners.

Defendants also contend that the designs are not substantially similar. The standard for assessing substantial similarity involves whether an ordinary observer would overlook differences and perceive the aesthetic appeal as the same. However, if the work incorporates uncopyrightable elements, a more nuanced analysis is required, focusing on the copyrightable elements. Courts are cautioned against dissecting works into separate components and should instead compare the overall concept and feel. Defendants highlight minor differences between the designs, such as variations in the eyes of the faces depicted, but these may not suffice to negate claims of substantial similarity.

The comparison between the smiley face designs highlights key differences such as the shape of the mouth, the frequency and placement of the phrases "hi" and "bye," and the absence of colored sleeves in the Litt-leMissMatched design. Despite these differences, the overall concept and feel of the designs are sufficiently similar to survive a motion to dismiss. The defendants' emphasis on non-copyrightable variations does not negate the substantial similarity between the two works, as established in Knitwaves, where a detailed listing of differences did not diminish the viewer's impression of similarity.

Regarding Sock Drawer, the defendants contend that the complaint does not allege any sales to the public, only transactions involving the sale of Miss Matched’s assets to Delta Galil. However, the Court finds that the complaint adequately alleges that Sock Drawer and Delta Galil sold merchandise with the Hi/Bye design directly to the public, satisfying the distribution requirement under 17 U.S.C. § 106(3). The complaint asserts that both parties continued the Miss Matched business and sold products from former retail locations.

Additionally, the defendants argue that the state law claims for unjust enrichment and quantum meruit are merely rephrased copyright infringement claims and should be dismissed due to preemption by the Copyright Act. The Court concurs with this view. Consequently, the motion to dismiss the copyright infringement claim is denied, while the state law claims are dismissed as preempted.

The complete-preemption doctrine allows certain federal statutes to preempt state-law claims, transforming them into federal claims for jurisdictional purposes. The Copyright Act is identified as one such statute, with Section 301 providing that a state law claim is preempted if (i) it pertains to a work within copyright’s subject matter and (ii) asserts rights equivalent to exclusive rights under copyright law. The subject matter requirement is met when a claim relates to a work of authorship fixed in a tangible medium, and claims involving fixed ideas in writing qualify, even if the writing itself is not in dispute.

In this case, the plaintiff's claim for compensation regarding a design, which was "fixed in writing" in her contest submission, aligns with the Copyright Act's preemption. Even if the design lacks copyright protection, the Act preempts state law claims about uncopyrightable material, indicating a broader preemptive scope than that of copyright protection itself.

To satisfy the "general scope requirement," the state law claim must involve rights that could be infringed by acts such as reproduction or distribution. If a state law claim introduces extra elements that differentiate it from a copyright infringement claim, it is not preempted. Under New York law, unjust enrichment and quantum meruit claims are treated as a single quasi-contract claim, where unjust enrichment is a necessary element. To succeed in an unjust enrichment claim, a party must demonstrate that the other party was enriched at their expense.

To recover under quantum meruit in New York, a claimant must demonstrate: (1) performance of services in good faith, (2) acceptance of those services by the recipient, (3) a reasonable expectation of compensation, and (4) the reasonable value of the services provided. Courts in this jurisdiction have generally held that unjust enrichment claims do not require additional elements beyond these criteria. While unjust enrichment is not a prerequisite for copyright infringement, claims of unjust enrichment related to copyrighted material are usually preempted by the Copyright Act. The plaintiff’s allegations of unjust enrichment and quantum meruit are based on the defendants' alleged benefits from the plaintiff’s design without fair compensation, which do not significantly differ from her copyright infringement claim. Despite the plaintiff's assertion of being induced to submit her design, this does not alter the fundamental nature of her claims. The Court concluded that the unjust enrichment and quantum meruit claims are fully preempted by the Copyright Act, granting the defendants' motion to dismiss these claims. The Court also noted that while it accepts the allegations in the complaint as true for this motion, it does not accept legal conclusions as facts. Finally, a new argument raised by the defendants in a reply brief regarding the originality of the plaintiff's design was dismissed as it was not properly introduced during the initial stages of the motion. The Court granted the defendants' motion to dismiss in part and denied it in part, with directions to terminate the related motions on record.