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Energy Intelligence Group, Inc. v. Kayne Anderson Capital Advisors, L.P.

United States Court of Appeals, Fifth Circuit

January 15, 2020

ENERGY INTELLIGENCE GROUP, INCORPORATED;ENERGY INTELLIGENCE GROUP (UK) LIMITED, Plaintiffs-Appellants Cross-Appellees
v.
KAYNE ANDERSON CAPITAL ADVISORS, L.P.; K.A.FUND ADVISORS, L.L.C., Defendants-Appellees Cross-Appellants ENERGY INTELLIGENCE GROUP, INCORPORATED;ENERGY INTELLIGENCE GROUP (UK) LIMITED, Plaintiffs - Appellants
v.
KAYNE ANDERSON CAPITAL ADVISORS, L.P.; K.A. FUND ADVISORS, L.L.C., Defendants-Appellees

          Appeals from the United States District Court for the Southern District of Texas

          Before KING, HIGGINSON, and DUNCAN, Circuit Judges.

          STEPHEN A. HIGGINSON, CIRCUIT JUDGE

         Plaintiffs Energy Intelligence Group, Inc. and Energy Intelligence Group (UK) Limited ("EIG") collectively publish information and news relevant to the global energy industry. One of EIG's publications is Oil Daily, a daily newsletter that provides news and analysis about the North American petroleum industry.

         Defendants Kayne Anderson Capital Advisors, LP and Kayne Anderson Fund Advisors, LLC ("KA") collectively are a boutique investment firm. Energy securities make up a substantial part of KA's business. In 2004, KA began purchasing an annual Oil Daily subscription for KA partner James Baker. Between 2004 and 2014, Baker routinely shared his Oil Daily access with fellow KA employees and other third parties in violation of his subscription agreements and copyright law. KA attempted to keep EIG from discovering these activities, including by saving and sending Oil Daily as a file named "123."

         In July 2014, EIG filed suit alleging numerous instances of copyright infringement and violations of the Digital Millennium Copyright Act ("DMCA"). As relevant to this appeal, KA's defense rested on two theories: (1) EIG learned of KA's infringement in 2007 but did nothing to investigate or dissuade KA; and (2) EIG knew that many of its subscribers improperly distributed its newsletters but consciously declined to crack down on such sharing because litigating copyright claims against large clients was more profitable. The district court rejected KA's equitable estoppel and unclean hands defenses at summary judgment but allowed KA to proceed with a mitigation defense. The district court held that "a reasonable fact-finder could infer . . . that the subsequent alleged infringement could have been avoided."

         In March 2017, EIG confirmed to KA that it would seek statutory damages on all claims. EIG then filed a pretrial memorandum arguing that KA could not invoke mitigation as a complete defense-in other words, regardless of whether EIG could reasonably have avoided or prevented KA's acts, EIG should receive damages within the mandated ranges for each infringed work and each DMCA violation.[1] On December 6, 2017, during trial, the district court orally overruled EIG's argument. In May 2017, KA moved for referral to the Copyright Office, alleging that EIG's copyright registrations were based on inaccurate applications. In July 2017, the district court denied KA's referral motion after finding no inaccuracies in EIG's applications.

         At trial in December 2017, KA persuaded the jury that EIG could reasonably have avoided almost all the copyright and DMCA violations at issue. EIG took nothing for those violations and received $15, 000 in statutory damages for 39 infringed works, which amounted to approximately half a million dollars. Based on the Copyright Act's and DMCA's fee-shifting provisions, as well as KA's Rule 68 motion, the district court awarded EIG $2.6 million in attorney's fees and $21, 000 in costs.[2] Both parties timely filed notices of appeal and their appeals were consolidated.

         The issue presented in EIG's appeal is one of first impression: whether failure to mitigate is a complete defense to liability for statutory damages under the Copyright Act and the DMCA. The parties agree that EIG's failure to mitigate is a relevant factor in deciding what statutory damages ought to be imposed, but they disagree over whether failure to mitigate can preclude liability altogether. EIG says it cannot and urges the court to instate an award of $25, 752, 500 ($15, 000 for each of 1, 646 works infringed plus $2, 500 for each of 425 DMCA violations) in EIG's favor. KA counters that mitigation is a complete defense to liability and that the district court's award of $585, 000 in statutory damages was appropriate.

         Two other issues are raised in KA's appeal. First, KA contends that the district court erred in denying its § 411 motion for referral to the Copyright Register. Second, KA argues that it should have received post-offer attorney's fees under Rule 68.

         We hold that failure to mitigate is not a complete defense to copyright or DMCA claims for statutory damages; the district court properly denied KA's referral motion; and the district court properly denied KA's post-offer attorney's fees under Rule 68. Remand is necessary to determine copyright damages because we cannot determine whether the jury intended to award EIG $15, 000 per infringed work. Remand is also necessary to re-calculate appropriate awards, attorney's fees, and costs. If total damages ultimately amount to more than $5 million (KA's Rule 68 offer), KA may no longer be eligible to recover post-offer costs.

         We AFFIRM the district court's denial of KA's § 411(b) referral motion. We VACATE the judgment in full and instate an award of $1, 062, 500 for EIG's DMCA claims. We REMAND as to copyright damages, attorney's fees, and costs, with the clarification that non-prevailing copyright and DMCA defendants may not recover post-offer attorney's fees under Rule 68.

         I.

         A. Pre-Suit Factual Background

         Baker started working for KA in 2004 and began subscribing to Oil Daily shortly thereafter. At the time, approximately four other professionals worked in Baker's office. Baker initially accessed Oil Daily by logging in to EIG's website with a username and password, which he shared with his co-workers so that they could also access the publication.

         Oil Daily was always marked with copyright notices and warnings compliant with the notice requirements of 17 U.S.C. § 401. Each newsletter contained a copyright notice on the front cover and masthead.

         In January 2007, KA employee Ron Logan had trouble accessing Baker's EIG account. On January 3, 2007, Baker's assistant Diana Lerma emailed EIG representative Deborah Brown for assistance, forwarding a KA internal email stating, "Ron . . . was not able to access your [Baker's] oil daily." Brown noticed the reference to "Ron" accessing Baker's account. She testified in her deposition that this "would send up a red flag that more than the authorized user was accessing it" and recalled that she "probably escalated the issue" to her supervisors at EIG.

         Just a few hours later that day, EIG employee Peter Buttrick called Lerma to discuss KA's subscription. After the call, Buttrick indicated by email to Mark Hoff, EIG's Vice President of Sales, that he had just spoken with Lerma "[o]n the copyright issue - I discussed the severity of the issue and advised her to schedule a call with her boss, Jim Baker[, ] . . . and I as soon as possible to discuss options." On KA's side, Lerma emailed Baker:

One hiccup: they want to know how many users we have. They said that we need to confirm that you'd be the only [sic] accessing the information; otherwise we would be "sharing" and that is against their policy. Each additional user is $1554 annually. They have recently found multiple users on one account and then gone back to charge that company for the excess. So they want to give us a heads up to avoid this happening to us. What do you propose? Say 3 users so that you can continue your access and then add myself and Ron? Or just you and I and just tell the others not to go online to avoid tracking anything back to us via the email addresses.

         Baker instructed Lerma to "[h]ave them [EIG] email the document to me on a daily basis. No web-based access. Please forward the document to the rest of the group." Thereafter, Baker began receiving Oil Daily as an emailed PDF, which his assistants regularly forwarded to other KA employees.

         KA upgraded its subscription in 2013 to allow five authorized users and continued subscribing to Oil Daily through 2014. However, the number of KA employees accessing Oil Daily far exceeded five. By 2014, 20 people in the office regularly received the newsletter.

         Besides sharing Oil Daily internally within KA, Baker's assistants also sometimes forwarded Oil Daily to third party non-subscribers. For example, KA employee Jennifer Rodgers regularly emailed copies of Oil Daily to a company called Crestwood Midstream Partners. In doing so, she named each file "123," seemingly at both Lerma's instruction and Crestwood's request to avoid detection by EIG.[3] By contrast, when EIG emails Oil Daily as a PDF to its subscribers, the PDF is named in the format "DE" followed by the date in YYMMDD format. At trial, EIG identified 425 instances where KA had sent Oil Daily files named "123" to other entities.

         On February 5, 2014, in response to a request for information by EIG, KA employee Ana Pope ingenuously informed EIG Account Manager Derrick Dent,

The Oil Daily is sent to one person in the office, Jim Baker. He usually gets it the night before it is published for and forwards it to me that night. When I get into the office that next morning the first thing I do, around 7:40am, is email it out to the 20 or so people in the office who have elected to receive the oil daily every morning.

         EIG did not immediately reply. On February 21, 2014, Pope emailed Dent again, requesting, "Would you mind sending the oil daily that usually goes to James Baker directly to me today? James is out of town on the Pacific coast and probably won't wake up for another few hours." Dent then responded,

According to Kayne Anderson's site license agreement, only five employees are granted access to Oil Daily as Authorized Users. The agreement states that it is not permissible to forward our publications to anyone who is not an Authorized user. This kind of activity is in violation of our license agreements and of our copyrights.

         KA continued its normal practice of sharing Oil Daily until May 2014, when EIG formally sent KA's general counsel a letter complaining of infringement.

         B. Relevant Pre-Trial Motions

         EIG filed suit against KA for copyright infringement on July 8, 2014. After filing suit and obtaining discovery, EIG learned of KA's practice of sending Oil Daily as a file named "123" to third parties. EIG amended its complaint in October 2015 to add allegations that KA had altered Oil Daily's "copyright management information" ("CMI") in violation of the DMCA, 17 U.S.C. § 1202(b).

         KA's answer to the operative complaint asserted various affirmative defenses, including that EIG's claims were barred in whole or in part by its failure to mitigate damages, equitable estoppel, and unclean hands or entrapment. In January 2017, the district court granted EIG summary judgment on KA's defenses of equitable estoppel and unclean hands/entrapment, but denied EIG summary judgment on KA's mitigation defense. KA does not directly appeal the dismissal of its other defenses.[4]

         Under each defensive theory, KA argued that EIG pursued a litigious business strategy of waiting for infringements to pile up and then seeking outsized statutory damages. The district court concluded that such conduct could support an affirmative defense of mitigation, but not of equitable estoppel or unclean hands.

         In March 2017, EIG confirmed to KA that it would seek statutory damages on all claims. In April 2017, EIG filed a pretrial memorandum arguing that KA could not rely on mitigation as a complete defense. As jury instructions were being finalized, EIG conceded that mitigation could be a "limiting factor" in assessing statutory damages, but continued to argue that mitigation should not be submitted as an "absolute defense" to liability for statutory damages. The district court orally overruled EIG's objection and decided that the verdict form would include questions about whether EIG had failed to mitigate its damages, and if so, how many acts of infringement EIG could have avoided.

         Registration of a copyright is a prerequisite to obtaining statutory damages for infringement. 17 U.S.C. §§ 411(a), 412. EIG's original and amended complaints attached the copyright registrations for the Oil Daily works at issue. In April 2017, after being notified by email of EIG's intent to seek statutory damages, KA stipulated to the validity of EIG's copyright registrations in the parties' joint pretrial order. However, in May 2017-nearly three years after EIG filed suit, one week before the final pretrial hearing scheduled for May 11, 2017, and six weeks prior to the June 19, 2017 trial date-KA moved for a referral to the Copyright Office and a stay of district court proceedings, arguing under § 411(b) that EIG's copyright registrations were invalid. The district court postponed trial to consider the motion. Relying on DeliverMed Holdings, LLC v. Schaltenbrand, 734 F.3d 616, 625 (7th Cir. 2013), the district court found no referral was needed because KA failed to establish that EIG knowingly included inaccurate information in its registration materials.

         C. Jury Trial

         The district court presided over a four-day jury trial from December 4 to 7, 2017. In its opening statement, EIG argued that KA had a "systematic" practice of sharing Oil Daily internally and with other companies, and had wrongfully shared at least 1, 646 separate issues. KA's opening conceded that KA had improperly shared Oil Daily and concealed its sharing from EIG. But, over the course of trial, KA argued that EIG had a "wait, don't warn" business model. KA argued that EIG knew in January 2007 that Baker was sharing his EIG credentials, yet sat on its hands by conducting no investigation and by failing to warn Baker of the Copyright Act's hefty statutory damages provision. KA admitted evidence that made it difficult for EIG witnesses to dispute that copyright litigation is an important component of EIG's overall business strategy. For example, KA elicited an admission from EIG's Director for Sales and Marketing that he had written in 2014, "My number one priority [is] contributing to litigation efforts."

         At the close of trial, the district court instructed the jury to set statutory damages in light of factors including (1) benefits obtained by KA from infringement, (2) EIG's lost revenues, (3) the difficulty of proving EIG's actual damages, (4) the circumstances of KA's infringement, (5) deterrence, and (6) the actions taken by EIG to mitigate their damages. Separately, the district court instructed the jury that EIG had a duty "to use reasonable diligence to mitigate its damages, that is, to avoid or minimize those damages," and could "not recover for any item of damage that they could have avoided through reasonable effort."

         The jury was presented with a special verdict form consisting of fifteen questions. The key takeaways from the jury verdict are:

(1) KA infringed 1, 646 individual Oil Daily works between December 29, 2004 and July 8, 2014 and should pay $15, 000 in statutory ...

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