U.S. Naval Institute v. Charter Communications, Inc.

United States Court of Appeals for the Second Circuit · 1991 · Contracts

ContractsCopyright licensingDamagesPrejudgment interestexclusive licensecopyright licensebreach of contractcopyright infringement

Facts

Naval, assignee of the copyright in The Hunt For Red October, granted Berkley an exclusive license in September 1984 to publish the paperback edition, with the agreement stating that the license term began on the date of the agreement and that Berkley was to publish the paperback 'not sooner than October 1985.' Berkley shipped early, and retail sales began on September 15, 1985, with substantial sales before October. In the prior appeal, the court held that although early shipment itself did not breach the agreement, Berkley breached by causing substantial pre-October retail sales. On remand, the district court treated the conduct as copyright infringement and awarded both Naval's lost hardcover profits and a portion of Berkley's paperback profits.

Issue

Whether Berkley's premature paperback sales constituted copyright infringement or only breach of contract under an exclusive license agreement, and if only contract, what damages Naval could recover. The court also considered whether prejudgment interest and attorney's fees were available.

Rule

An exclusive license transfers ownership of the licensed copyright rights to the licensee to the extent conveyed, so the licensee cannot infringe those rights while it owns them; violation of a covenant in the license is therefore a contract breach unless the licensor retained the pertinent copyright interest. For breach of contract, damages are generally measured by the injured party's actual loss, not the breaching party's profits unless those profits define the plaintiff's loss, because contract remedies are compensatory rather than punitive. Under New York law, prejudgment interest is recoverable as of right on breach-of-contract damages, while attorney's fees are not ordinarily recoverable on a simple contract claim.

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In Seattle, author Lena Ortiz granted Harbor Pine Books an exclusive license on March 1, 2024, to publish and sell the English-language audiobook of her novel in the United States. The agreement stated that the license term began on March 1, 2024, but also required Harbor Pine not to release the audiobook before September 1, 2024. Harbor Pine began consumer downloads in August 2024.

If Ortiz sues over the August releases, which is the strongest characterization of Harbor Pine's liability?

Explanation. The majority rule is that an exclusive license transfers ownership of the licensed copyright right to the licensee to the extent conveyed. Because Harbor Pine already owned the exclusive audiobook publication right when it released the work early, it could not infringe a right it owned. Its violation of the release-date covenant sounds in contract, not infringement. (Derived from U.S. Naval Institute v. Charter Communications, Inc. (n.d.).)