The Very Real Case of a Hypothetical Copyright License

It’s hard enough to recover copyright damages under the clearest of circumstances. A particularly tricky situation arose recently in Oracle Corp. v. SAP AG. Here, the U.S. Court of Appeals answered the difficult question of whether a copyright holder could recover infringement damages based on a “hypothetical” license — that is, one it never granted.

Downloading the case

Oracle and SAP are self-described fierce competitors in the enterprise software industry. In 2005, Oracle acquired PeopleSoft, another enterprise software company that itself had recently acquired an enterprise software company, JD Edwards. Then, in 2006, Oracle acquired a software business called Siebel Systems.

In response, SAP initiated a marketing program dubbed Safe Passage. A key part of that program was the acquisition of TomorrowNow, a software maintenance service company founded by former employees of PeopleSoft. It served PeopleSoft’s customers, including JD Edwards’ customers — at a 50% discount off Oracle’s prices.

In 2006, an Oracle employee noticed thousands of suspicious downloads of Oracle software. Oracle investigated and determined that TomorrowNow had illegally downloaded millions of PeopleSoft, JD Edwards, Siebel and Oracle database files. TomorrowNow continued providing maintenance services to Oracle customers using these downloads until sometime in 2008.

Oracle sued SAP for copyright infringement in 2007, and SAP admitted liability before trial. Thus, the only issue at trial was the amount of damages. The jury awarded Oracle $1.3 billion based on the fair market value (FMV) of a hypothetical license granted by Oracle to SAP.

The district court, though, ordered a new trial conditioned on Oracle’s rejection of a reduced award of $272 million. It also ruled that Oracle couldn’t pursue hypothetical-license damages in a second trial. Oracle rejected the smaller award and appealed.

Showing willingness

In support of the district court’s finding, SAP argued that Oracle had to show that it actually would have granted a license to TomorrowNow before it could recover hypothetical-license damages. And Oracle, SAP said, wouldn’t have done so.

The Ninth Circuit agreed that Oracle never would have granted such a license. And Oracle executives themselves testified that the company doesn’t license its software to competitors.

The court, however, disagreed that “willingness” to license was required for an award based on a hypothetical license. It noted that the market value of the injury to the copyright holder under a theory of hypothetical damages is determined by the amount a willing buyer would have been reasonably required to pay a willing seller at the time of the infringement for the actual use made by the infringer of the copyrighted work. But, the court said, it has never required a copyright plaintiff to show that it would have licensed the infringed material — and declined to do so in this case.

Nonetheless, the Ninth Circuit affirmed the district court’s ruling that Oracle couldn’t recover hypothetical-license damages because such damages are appropriate only if the amount isn’t based on “undue speculation.” The FMV of a hypothetical license must be based on the amount, at the time of infringement, that the seller and buyer believed would be their respective cost.

In addition, the court found, the FMV must be based on the range between the two poles of cost and benefit within which the parties likely would have settled. Oracle failed to present evidence that provided this “range of the reasonable market value” for its hypothetical license.

Running up that hill

As the Ninth Circuit noted, Oracle “faced an uphill battle” because it had no history of granting licenses and presented no evidence of benchmark licenses in the industry resembling the hypothetical license. Other copyright holders seeking hypothetical-license damages may well run into similar obstacles.