Gaylord v. US (Fed. Cir. 2015)
In this case’s third-trip to the Court of Appeals, the Federal Circuit has again sided with Sculptor Frank Gaylord — This time affirming the lower court’s award of 10% of $5.4 million in US Postal Service revenue as a reasonable royalty for its unauthorized use of Gaylord’s copyrighted work on a postage stamp.
Gaylord was commissioned by the U.S. government to design what turned out to be “The Column” as part of the Korean War Memorial in DC. Gaylord, however, retained copyright to the work and, when the the Postal Service released a stamp depicting the work Gaylord sued. Because this case is against the U.S. government, the lawsuit was brought in the Court of Federal Claims (CFC) and appeals from the CFC are heard by the Federal Circuit (CAFC).
In the first appeal, the Federal Circuit held that the government’s use was not a “fair use” but rather copyright infringement. In round-two, the Federal Circuit rejected the CFC’s award of $5,000 as a reasonable-royalty for the use. Rather, the Federal Circuit held that the lower court must award “the fair market value of a license for Mr. Gaylord’s work based on a hypothetical negotiation with the government.”
The stamp business is interesting. Most postage stamps are purchased and then used to mail letters with very little profit margin. For those, the appropriate royalty rate is quite low and Gaylord agreed that he would not seek any royalty for used-stamps. However, there are also a large number of stamp collectors and the USPS profit on those stamps is well over 90%. And, the popularity of collectible stamps tends to directly correlate with the quality and popularity of the work depicted on the stamp. For this second category, the Court of Federal Claims determined that an appropriate royalty was 10% of revenues for the unused stamps. On appeal, the Federal Circuit affirmed:
The basic premise of the hypothetical negotiation in this case would have been the opportunity for making substantial profits if the two sides were willing to join forces, which we must [hypothetically] assume they were. The Court of Federal Claims in this case determined that the negotiators, presented such an opportunity and acting under assumptions designed to identify market value, would have agreed to a 90/10 split of the revenue from retained stamps, which, here, is in substance a 90/10 split of profits, because the revenue for the unused stamps is almost pure profit to the Postal Service. The question for us is whether that result—giving the Postal Service 90% of the profits and Mr. Gaylord 10%—is within the range of reasonable findings from the evidence.
In reviewing that award, the Federal Circuit first confirmed that a royalty-approach was appropriate even though the USPS has never paid a royalty – its practice has always been to pay an up-front award of $5,000 or less.
The familiar advantages of a per-unit royalty can readily be found present here. A per-unit royalty is a logical way to tie the amount paid for the asset to the marketplace success it helps produce, which fits the objective of measuring market value.
Regarding the 10% split, Gaylord was able to show that he had previously obtained a 10% rate for other uses of the image and the 90% remaining leaves USPS with significant profit. Those reasons sat well with the appellate court as well.
Thus, Gaylord gets $570,000 in royalties.