D.C. Circuit Rejects Restitution Order Under MVRA In Sentencing For Copyright Infringement

Posted On Tuesday, November 13, 2012
By: James W. Kraus

On November 9, 2012, The U.S. Court of Appeals for the District of Columbia Circuit vacated a restitution order by the U.S. District Court for the District of Columbia in a copyright infringement case, finding that the government failed to offer evidence of the victim’s (Adobe Systems, Inc.) actual loss, instead offering evidence only of defendant’s gain.  U.S. v. Fair, No. 1:09-cr-00089-1, slip. op. (D.C. Cir., November 9, 2012). 

Gregory Fair entered a plea of guilty to copyright infringement, 17 U.S. § 506(a), 18 U.S.C. § 2319, and mail fraud, 18 U.S.C. § 1341, acknowledging a criminal scheme that involved high-volume sales of pirated Adobe Systems’ software on eBay.  He admitted that he received approximately $1.4 million from his sales of pirated software on eBay.  The plea agreement stated, for purposes of calculating the offense levels, that “the infringement amount” was greater than $400,000, but less than $1 million.  As part of his agreement to plead guilty, Mr. Fair acknowledged that the Mandatory Victims Restitution Act (MVRA), 18 U.S.C. §3663(A), mandated restitution.  The agreement, however,  did not specify an agreed-to amount.

At sentencing, the government provided a spreadsheet that showed over 7,000 sales with total sales revenue of $767,465.99, which the government advanced as “a reasonable calculation of the restitution.”  Slip. op. 3.  Fair argued that restitution under the MVRA must take the form of “actual loss” to the victim, which cannot be equated to intended loss or gain by the defendant.  He further argued that the government had offered no proof of any actual loss by [the victim], Adobe Systems.  Id.  The district court sentenced Fair to 41 months imprisonment, three years supervised release and ordered him to pay Adobe Systems restitution of $743,098.99, an amount representing the total sales listed on the spreadsheet ($767,465.99), less the forfeited funds turned over to Adobe Systems by the Postal Inspection Service ($24,367.00).

Mr. Fair challenged the restitution order on appeal, arguing that the government had failed to prove any actual loss to Adobe Systems, Inc.  In laying the groundwork for its decision, the D.C. Circuit indicated that circuit courts of appeals are in general agreement that the defendant’s gain is not an appropriate measure of the victim’s actual loss in MVRA calculation, citing U.S. v. Zangari, 677 F.3d 86, 92-93 (2nd Cir. 2006); U.S. v. Arlege, 553 F.3d 881, 889 (5th Cir. 2008); U.S. v. Chalupnik, 514 F.3d 748, 754 (8th Cir. 2008); United States v. Galloway, 509 F.3d 1246, 1253 (10th Cir. 2007); U.S. v. Kuo, 620 F.3d 1158, 1164-65 (9th Cir. 2010); U.S. v. Harvey, 532 F.3d 326, 341 (4th Cir. 2008); and U.S. v. Badaracco, 954 F.2d 928, 942-43 (3rd Cir. 1992).

The Court then joined those Circuit Courts of Appeals in holding that in ordering restitution pursuant to the MVRA, the district court may not substitute a defendant’s ill-gotten gains for the victim’s actual, provable loss.  It added that victims of crime may achieve disgorgement of profits and ill-gotten gains through other statutory and civil recovery mechanisms.  Slip. op. 9.

The Court found that in cases involving copyright infringement and fraudulent sales, the victim’s actual loss typically equates to the profit the victim lost on the sales that were diverted from the victim as a result of the defendant’s infringing sales.  Slip op. 10.  It added that the actual loss to the displaced (authentic) seller is the profit loss from the displaced sales – not the retail value of the goods that would have been sold.  It found that, in ordering Fair to pay restitution to Adobe Systems equivalent to his sales revenue, the district court abused its discretion because the government failed to present evidence from which the district court could either determine Adobe Systems’ actual loss or find that Fair’s gain was a reasonable measure of that loss.  In making its decision, the Court found that the government had blurred the line between the “infringement amount” calculated under the sentencing guidelines §2B5.3 in criminal copyright cases, which is derived by multiplying the retail value of the infringed or infringing items by the quantity of infringing items, and the restitution amount calculated under the MVRA, which must reflect the actual provable loss to the victim.

In vacating the restitution order of the district court, the Court also rejected the government’s alternative argument that the matter be remanded to the District court so that it could present additional evidence regarding the loss to Adobe Systems, Inc.