Jury Award in Copyright Infringement Case May Be Dischargable

By: Gerri L. Elder

The Ninth U.S. Circuit Court of Appeals has ruled that "willful" copyright infringement may not necessarily constitute a "willful or malicious" injury. This is an important ruling because jury awards in personal injury cases for "willful and malicious" injuries cannot be discharged in bankruptcy.

The ruling reversed a bankruptcy court's grant of summary judgment against a pair of debtors who had sought to have a jury award based on their duplication and sale of copyrighted motion pictures discharged. The appeals panel held that a material issue of fact existed in the case on whether the jury award for copyright infringement was based on a willful or malicious injury under 11 U.S.C. § 523(a)(6) or if it could have been based on reckless conduct instead of intentional conduct.

The Metropolitan News-Enterprise reported that Lucia Munguia Albarran and her husband Antonio Barboza had set up a business in 1999 that involved duplicating, distributing and selling Spanish language films. Included in the films that they copied and sold were 10 films known as the "India Maria Pictures." New Form Inc. had acquired exclusive rights to the films and this led to the copyright infringement lawsuit against the couple.

Notification, then Personal Injury Lawsuit Filed

New Form first sent the couple a letter to advise them that it had exclusive rights to the films. Albarran responded to the letter, saying that she and her husband had not been aware of the exclusive rights and were selling preexisting inventory legally, but they were willing to negotiate. However, New Form alleges that between the time they sent their letter and received a response from Albarran, the couple ordered production of an additional 500 copies of the films.

Since Albarran and Barboza continued selling the copyrighted films, New Form filed a personal injury lawsuit against them in the U.S. District Court for the Central District of California, alleging willful copyright infringement.

At the trial, the evidence presented concerned only the additional copies of the films that the couple had produced after they were notified of New Form's exclusive rights. The jury was instructed that the plaintiff was required to prove by a preponderance of the evidence that the defendants knew they were infringing copyrights or acted with a reckless disregard as to whether they were doing so.

After deliberating, the jury decided that New Form was entitled to an award of $893,000 in damages in costs.

Defendants File Bankruptcy to Avoid Paying Jury Award

Albarran and Barboza found the award tough to swallow and even tougher to pay and filed Chapter 7 bankruptcy in the U.S. Bankruptcy Court for the Southern District of California.

Upon hearing that the couple had filed bankruptcy in an attempt not to pay the judgment, New Form filed a complaint seeking a determination that the judgment could not be discharged based on the district court proceedings.

The couple argued that Albarran's brother was the person that had ordered and received the additional copies of the films and had done so without their knowledge. However, Bankruptcy Judge Peter W. Bowie found that there was irrefutable evidence that Albarran and Barboza knew of New Form's rights and that the copyright infringement was a willful injury, and as such was ineligible for discharge.

Albarran and Barboza appealed Bowie's finding and the Bankruptcy Appellate Panel affirmed his decision.

The couple then appealed to the Ninth Circuit with a surprising result. Chief U.S. District Judge Roger Hunt of the District of Nevada, sitting by designation, wrote that summary judgment was not proper because the bankruptcy court "had no way to determine whether the jury found the willful infringement based on a reckless disregard or a knowing violation" of the copyright.

Hunt noted that the Supreme Court had specifically limited the definition of "willful" with regard to injuries in personal injury lawsuits. Under Sec. 523(a)(6) the definition of "willful" is narrowed to "deliberate and intentional" injuries.

He wrote that since the couple introduced evidence that Albarran's brother had ordered the additional production of the films, the jury could have based its verdict on recklessness. Based on this remaining material issue of fact, Hunt determined that a remand was required.

Hunt further found that the bankruptcy court had made an error when it failed to separately examine whether the copyright infringement was "malicious" under Sec. 523(a)(6), and the Bankruptcy Appellate Panel had also erred when it based its finding of malice completely on the conclusion that the couple's actions were willful. According to Hunt's decision, the malicious injury requirement must be decided separately from the willful injury requirement.

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