Hamil America, Inc. v. GFI

Majority - Oakes, Senior Circuit Judge

Yes, a willful copyright infringer may deduct a portion of its general overhead expenses from its gross revenue when calculating the profits attributable to the infringement, provided there is a direct and valid nexus between the expense category and the infringing product's production and sale, and the allocation formula is fair and acceptable, though such claims require heightened scrutiny in cases of willful infringement. No, the district court was not erroneous in rejecting Hamil America's claim for lost profits as too speculative, given the absence of convincing evidence. The court affirmed the district court's finding of copyright liability. It found that Hamil America owned a valid copyright for Pattern No. 96, as established by a prima facie certificate of registration, and amendments to the registration did not invalidate it. The court also affirmed the finding of actual copying, deferring to the district court's credibility determinations regarding GFI's designer, Jae Wang, and noting circumstantial evidence of access and intent to create a 'knock-off' design. Regarding substantial similarity, the court applied the 'ordinary observer' test, determining that an average lay observer would recognize GFI Pattern No. 330 as appropriated from Hamil America’s Pattern No. 96. It noted the patterns depicted similar small clusters of flowers and leaves, with virtually identical shapes, line work, and highlights. Both patterns were 'tossed' and non-directional. The court emphasized that the intended use in garments, where small differences fade, and actual customer confusion, supported this finding. The court rejected the 'more discerning' ordinary observer standard because Hamil America’s design was stylized and original, not incorporating unprotectible elements from the public domain. However, the court reversed the district court's blanket prohibition on GFI deducting any overhead expenses from its profits. Citing Sheldon v. Metro-Goldwyn Pictures Corp., the court reiterated that general overhead expenses are deductible if they assist in the production of the infringement. It established a two-step procedure: (1) determine overhead expense categories actually implicated by the infringing product, showing a sufficient nexus; and (2) apply a fair, accurate, and practical method of allocating the implicated overhead. For willful infringers, this process must be applied with 'particular rigor' and 'extra scrutiny,' requiring a 'direct and valid nexus' for each claimed expense and an 'optimal and sound' allocation formula, with all presumptions against the infringer. Finally, the court affirmed the district court's rejection of Hamil America's cross-appeal for lost profits. It found Hamil America's claim for profits it presumably would have earned from other customers too speculative, given the lack of convincing evidence that those customers would have purchased Hamil America’s higher-priced fabric. The district court was entitled to rely on the less abstract calculation of damages from GFI’s actual profits from those sales.