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Design Basics, LLC v. Heller & Sons, Inc.

United States District Court, N.D. Indiana, Fort Wayne Division

September 3, 2019

DESIGN BASICS, LLC, and, W.L. MARTIN HOME DESIGNS, LLC, Plaintiffs,
v.
HELLER & SONS, INCORPORATED d/b/a Heller Homes; and HELLER DEVELOPMENT CORPORATION, Defendants.

          OPINION AND ORDER

          HOLLY A. BRADY JUDGE.

         This matter is one of dozens of lawsuits brought by Design Basics and its associated entities alleging violations of their copyrighted home designs. On June 24, 2019, this Court entered summary judgment in favor of Defendants, determining that Defendants had not violated any of the five home designs identified by Design Basics. Having determined that Defendants were the “prevailing parties” in this litigation, this Court invited Defendants to file a request for attorneys' fees pursuant to 17 U.S.C. § 505, and further invited Design Basics to file a response in opposition. Those filings have now been submitted (see ECF Nos. 95, 97), and the issue of attorneys' fees is now ripe for determination.

         I. JURISDICTION TO DETERMINE FEE AWARD

         On July 19, 2019, Design Basics filed its Notice of Appeal (ECF No. 91). Generally, the filing of a notice of appeal divests the district court of further jurisdiction over the case. However, the Seventh Circuit has recognized that there is an exception to this general rule permitting a district court to enter an attorney fee award while the merits of the case are on appeal. Terket v. Lund, 623 F.2d 29, 33-34 (7th Cir. 1980).

         II. DEFENDANTS' ENTITLEMENT TO ATTORNEYS' FEES

         The Copyright Act provides that the district court may, in its discretion, permit the recovery of all costs of litigation in any copyright civil action, including the award of reasonable attorneys' fees. 17 U.S.C. § 505. In determining whether to award attorneys' fees, district courts consider the nonexclusive list of factors identified in Fogerty v. Fantasy, Inc., 510 U.S. 517, 534 n. 19 (1994), which include: (1) frivolity of the claim; (2) motivation in filing the claim; (3) objective reasonableness of the claim; and (4) considerations of compensation and deterrence. Attorneys' fees cannot be awarded as “a matter of course”; rather, a court must make the determination based upon a particularized, case-by-case assessment. Id. at 533. Unlike many other fee-shifting statutes, a court may not treat prevailing plaintiffs and prevailing defendants any differently; defendants should be “encouraged to litigate [meritorious copyright defenses] to the same extent that plaintiffs are encouraged to litigate meritorious claims of infringement.” Id. at 527.

         The objective reasonableness of the losing position is given “substantial weight” in determining whether attorney fees are warranted. Kirtsaeng v. John Wiley & Sons, Inc., 136 S.Ct. 1979, 1986 (2016). However, the Supreme Court has made it clear that objective reasonableness is “only an important factor in assessing fee applications-not the controlling one.” Id. at 1988.

As we recognized in Fogerty, § 505 confers broad discretion on district courts and, in deciding whether to fee-shift, they must take into account a range of considerations beyond the reasonableness of litigating positions. That means in any given case a court may award fees even though the losing party offered reasonable arguments (or, conversely, deny fees even though the losing party made unreasonable ones). For example, a court may order fee-shifting because of a party's litigation misconduct, whatever the reasonableness of his claims or defenses. Or a court may do so to deter repeated instances of copyright infringement or overaggressive assertions of copyright claims, again even if the losing position was reasonable in a particular case. Although objective reasonableness carries significant weight, courts must view all the circumstances of a case on their own terms, in light of the Copyright Act's essential goals.

Id. at 1988-89 (citations omitted).

         A. Frivolousness

         Defendants advance two arguments in support of their assertion that Design Basics' claims were frivolous. First, Defendants assert that “a modicum of due diligence pre-suit” would have revealed that Design Basics' claims regarding the Baisden design were frivolous, because Defendants built the home allegedly based on the Baisden claim before the Baisden plan was ever published. (ECF No. 95 at 5). Design Basics does not specifically respond to this argument in its Response in Opposition. However, after reviewing the record this Court concludes that sufficient evidence existed for Design Basics to pursue the Baisden claim even in the face of the calendar issue.

         This Court addressed the Baisden issue in its Opinion and Order dated May 3, 2018 (ECF No. 54). Defendants moved for summary judgment on the Baisden claim arguing that Design Basics' original copyright application stated that the Baisden plan was not published until August 18, 2000, while construction on the allegedly infringing home finished on July 18, 2000. (Id. at 13). This Court determined that Design Basics had failed to designate admissible evidence to overcome the presumption that the information on the copyright application was correct, and therefore granted summary judgment on the Baisden claim in Defendants' favor. (Id. at 13-16).

         The key word in the foregoing sentence is “admissible.” Design Basics did designate evidence that the date on the copyright application was incorrect in the form of an affidavit from its principal, Pat Carmichael, and a supplemental registration application that was filed with the Copyright Office on October 4, 2017. The Court found that the Carmichael declaration was not made upon his own personal knowledge, and therefore disregarded Carmichael's statements. (Id. at 15). This determination does not preclude the Court from considering the affidavit for the purposes of the attorney fee determination. See Whimsicality, Inc. v. Rubie's Costume Co., 836 F.Supp. 112, 120 (E.D.N.Y 1993) (finding that otherwise inadmissible affidavit could be considered “for the limited purpose of deciding the fees question”). In addition, the Court also found that its determination might be different if the supplemental registration application was granted and invited the parties to file a motion for reconsideration if the application was granted. (Id. at 16, n. 4). Thus, while the evidence designated by Design Basics was insufficient to overcome summary judgment, it is sufficient for the Court to find that there was a factual basis to maintain the Baisden claim. See, e.g., Felton v. City of Chi., 827 F.3d 632, 635 (7th Cir. 2016) (defining frivolous as “lacking an arguable basis either in fact or law”).

         Defendants' second argument asserts that this litigation, and in fact all of Design Basics' copyright cases, were rendered frivolous no later than the Seventh Circuit's decision in Design Basics, LLC v. Lexington Homes, Inc., 858 F.3d 1093 (7th Cir. 2017).[1] To be sure, Lexington is not favorable to Design Basics or its claims. It described Design Basics' copyright as “thin, ” required “very close copying” before alleged infringement is actionable, compared Design Basics' designs to the mass-produced homes of William Levitt, and ascribed a motivation for Design Basics' litigation that was less copyright protection and more copyright trolling. It is certainly possible to read Lexington and conclude that it is difficult, if not impossible, for Design Basics to ever succeed on any copyright infringement suit.

         That being said, the Court does not believe that Lexington is the magic bullet that is described by Defendants. While Lexington sets forth the legal standard by which Design Basics' claims must be evaluated, it does not mandate a result in any specific case. As Design Basics notes, this Court has denied summary judgment for a different defendant alleged to have violated Design Basics' copyrights even after applying the Lexington standard. See Design Basics, LLC v. Big C Lumber, Cause No. 3:16-CV-53, ECF No. 78. Since each case requires a court to compare different designs of Design Basics to different designs of a defendant, Lexington can only make Design Basics' cases difficult, not frivolous.

         Nor does the Court believe that Design Basics' act of retaining Matthew McNicholas is evidence of frivolousness, as Defendants further assert. (ECF No. 95 at 7-8). It is true, as Defendants note, that McNicholas used an incorrect legal test in determining the issue of substantial similarity. However, McNicholas' report must be viewed in the context of Design Basics' arguments generally. McNicholas' report reflects more closely the analysis used by the First Circuit in T-Peg, Inc. v. Vermont Timber Works, Inc., 459 F.3d 97 (1st Cir. 2006), and that used by the D.C. Circuit in Sturdza v. United Arab Emirates, 281 F.3d 1287 (D.C. Cir. 2002). Design Basics recognizes that Lexington controls, but nonetheless asserts that T-Peg and Sturdza more properly analyze the Copyright Act in the context of architectural works. (ECF No. 75 at 12, n.2). Given this assertion, the Court views the hiring of McNicholas as little more than part of Design Basics' effort to overturn Lexington. That will be a tall task, but the attempt to complete the task in this case is not frivolous.

         B. Motivation

         There is conflicting evidence in the record regarding Design Basics' motivation in filing this and other similar actions. Design Basics claims that the sole reason for its copyright violation suits is “to protect its valuable intellectual property, which it invested considerable resources to design and market over many years.” (ECF No. 97 at 7). In support of this claim, Design Basics notes that the revenues from the licensing of their designs has fallen more than 75%, which they attribute to “the widespread theft of its valuable home designs from the internet.” (Id.).

         Defendants, on the other hand, assert that Design Basics is “motivated by proceeds from litigation, rather than a desire to keep control over its intellectual property.” (ECF No. 95 at 8). This is certainly the view taken by the Seventh Circuit in Lexington. Judge Hamilton referred to Design Basics' litigation tactics as “the Art of the Intellectual Property Shakedown, ” stating that firms like Design Basics “try to extract rents from market participants who must choose between the cost of settlement and the costs and risks of litigation.” Lexington, 858 F.3d at 1097. Carmichael has acknowledged that potential litigation income “influenced his decision to become an owner of Design Basics, ” id. at 1096-97, and the cases have been extraordinarily lucrative for Design Basics' owners: the owners realized approximately $5 million in net litigation profits in 2016 and 2017 alone, while the gross revenues for Design Basics during the same period of time were approximately $2.5 million. Big C Lumber, ECF No. 78 at 4. Where Design Basics was once an architectural firm that occasionally litigated copyright issues, it now appears to be copyright litigation firm that occasionally licenses one of its designs.

         While the Court believes that Design Basics' motivation for filing this and other similar suits hues more closely to Defendants' explanation, it nonetheless finds that the truth is likely somewhere in the middle. There is no question in the Court's mind that some of Design Basics' designs have been copied. This Court found actual evidence of copying in the Big C Lumber case. Id., ECF No. 78 at 11-15. The widespread distribution of Design Basics' plans, [2] and the apparent ease of turning those plans into construction drawings, all ...


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