Judge Cacheris Permits Vicarious Copyright Infringement Claim to Proceed

Recovering damages for copyright infringement may be difficult in situations where the infringing party is “dummy” or “shell” corporation with no assets that can be used to satisfy a judgment. Sometimes, however, there may be a parent corporation or other entity that may be held liable on a theory of “vicarious liability.” As demonstrated by a recent decision of Judge Cacheris of the District Court for the Eastern District of Virginia, this doctrine may be utilized to pursue a contractor for the infringing activities of its subcontractor, even if the contractor knows nothing about the alleged infringement.

In Softech Worldwide, LLC v. Internet Technology Broadcasting Corp., Fedstore Corporation entered into a contract with the United States Department of Veterans Affairs (the “VA”) to develop various software, including software relating to the Digital-Media-Architecture (“DMA”) Pilot Project–a platform for scaling electronic media to various electronic devices. Fedstore subcontracted the work to Internet Technology Broadcasting Corporation (“ITBC”), who in turn hired the Plaintiff, Softech Worldwide, LLC, to perform various software services under the VA contract. Softech claims it performed these services from 2002 until early 2010, and that in early 2010, ITBC stopped making regular payments. Shortly thereafter, Softech claims it delivered the DMA source code and other proprietary information to ITBC at its request, and that ITBC refused to return the materials while continuing to use, maintain, and update Softech’s products.

Softech sued both ITBC and Fedstore for copyright infringement and violation of Virginia’s Uniform Trade Secrets Act. Fedstore moved to dismiss the case for failure to state a claim. Fedstore’s position was essentially that the claims pertained to actions allegedly taken by ITBC, not by Fedstore. Softech responded that Fedstore should be held responsible under theories of contributory liability and vicarious liability.

Normally, to state a claim for copyright infringement, a plaintiff must allege both (1) ownership of a valid copyright and (2) copying of the original elements of the material by the defendant. However, even if a defendant does not itself copy the material, a Shell.jpgdefendant may be found liable for “contributory infringement” where it “with knowledge of the infringing activity, induces, causes or materially contributes to the infringing conduct of another.” CoStar Group, Inc. v. LoopNet, Inc., 373 F.3d 544, 550 (4th Cir. 2004).

The Federal Rules permit knowledge of a defendant to be pled generally, and it is sufficient to allege that the defendant had reason to know. Here, although Softech did allege in its complaint that Fedstore infringed its copyrights “with full knowledge of Softech’s rights,” other allegations in the complaint (which must be accepted as true when ruling on a motion to dismiss) were that ITBC represented to the world–including Fedstore–that ITBC, and not Softech, possessed the copyright to the software. Therefore, the factual allegations were insufficient to establish knowledge of infringement and therefore insufficient to establish contributory copyright infringement.

The question then became whether Fedstore might be held liable on a theory of vicarious liability. To establish vicarious liability, a copyright owner must demonstrate that the vicarious infringer possessed: (1) the right and ability to supervise the infringing activity; and (2) an obvious and direct financial interest in the exploited copyrighted materials. “[L]ack of knowledge that the primary actor is actually engaged in infringing activity is not a defense where both elements are satisfied.” EMI April Music, Inc. v. White, 618 F. Supp. 2d 497, 507 (E.D. Va. 2009). The court found that Softech did plead vicarious liability adequately. Softech alleged that Fedstore was a general contractor, which gave it the right and ability to supervise the infringing activities of ITBC, its subcontractor. Softech also alleged that Fedstore sought to sell the allegedly copyrighted software, which demonstrated a direct financial interest. Therefore, the court denied the motion to dismiss the copyright infringement claims, but granted dismissal of the trade-secret misappropriation claim on the ground that Softech failed to plead the requisite knowledge.

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