ABSTRACT
Along with lost profits damages that are designed to put copyright owners in the position they would have occupied in the absence of infringement, copyright law entitles rightsholders to seek disgorgement of any additional profits elicited by infringers. The disgorgement remedy is designed to infuse principles of unjust enrichment into copyright doctrine, allowing owners to collect any ill-gotten gain creditable to the infringement. Despite its prominence, this Article reveals a hitherto overlooked problem in applying the disgorgement remedy to copyright infringement. As a baseline for the analysis, the Article embraces the canonic distinction between two types of infringements: imitations and improvements. Imitation involves opportunistic copying that allows infringers to compete with the rightsholder just by offering the same product for a reduced price. Improvement, by contrast, refers to follow-on users that draw on the copyrighted content for the sake of introducing a better or differentiated product. Conventional wisdom draws a normative distinction between the two, as imitation is morally egregious whereas improvement is socially beneficial.
Against this backdrop, the present Article asks under what circumstances do infringers actually manage to elicit ‘disgorgable profits’, namely, additional earnings that do not originate from the rightsholder’s lost profits. Offering an economic analysis of copyright infringement, the Article shows that disgorgable profits emerge when infringing products create a new marketplace, be it by attracting ‘inframarginal consumers’ that would not have purchased the original product, or by introducing quality enhancements that substantially increase incumbent consumers’ willingness to pay for the follow-on product. Either scenario may only occur if infringing products are transformative and divergent compared to the original one, and not in cases of opportunistic copying. When imitators manage to profit, this invariably comes at the expense of rightsholders and, therefore, falls within the owner’s lost profits. Thus, imitation would normally not provide an infringer with earnings that are independent of the owner’s losses; only improvers can elicit disgorgable profits. Although commentators routinely highlight the need to eradicate imitations without severely penalizing improvements, the disgorgement remedy – as demonstrated and documented throughout this Article – does the exact opposite. Disgorgement is only good for deterring improvements.
Equipped with this understanding, the Article proceeds to study a broader tension: not only between the availability of disgorgable profits and the moral culpability of the defendant’s conduct, but also between the magnitude of disgorgable profits and whether the defendant’s conduct should in fact qualify as infringement. Given that the key determinant of copyright infringement is the level of similarity between the original product and the accused one, the Article suggests that higher disgorgable profits imply more substantial differentiation between the two products, and consequently lower similarity. It advances to propose a normative test for copyright infringement that estimates the degree of market similarity between two products based on the magnitude of disgorgable profits elicited by the alleged infringer. Finally, the entire analysis is illustrated using two major case studies: one in the technology sector and one in the entertainment industry. Potential exceptions are discussed, and a possible extension to patent law is considered.
Baharad, Roy, The Uneasy Case for Copyright Disgorgement (January 6, 2025), University of Chicago Coase-Sandor Institute for Law & Economics Research Paper No 25-02.
Leave a Reply