Christopher Phelps v. Galloway

ON REHEARING

PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

CHRISTOPHER PHELPS & ASSOCIATES, 

LLC,

Plaintiff-Appellant,

v.

R. WAYNE GALLOWAY,

Defendant-Appellee,

v.

SIMONINI BUILDERS, INCORPORATED,  No. 05-2266

Third Party Defendant.

DONALD A. GARDNER ARCHITECTS,

INCORPORATED; DONALD A. GARDNER,

INCORPORATED; FRANK BETZ

ASSOCIATES, INCORPORATED,

Amici Supporting Appellant.



Appeal from the United States District Court

for the Western District of North Carolina, at Charlotte.

Graham C. Mullen, Chief District Judge.

(CA-03-429-3)

Argued: October 24, 2006

Decided: July 5, 2007

Before NIEMEYER, MOTZ, and TRAXLER, Circuit Judges.

2 CHRISTOPHER PHELPS & ASSOC. v. GALLOWAY

Affirmed in part, vacated in part, and remanded by published opinion.

Judge Niemeyer wrote the opinion, in which Judge Motz and Judge

Traxler joined.

COUNSEL

ARGUED: Louis K. Bonham, OSHA & LIANG, L.L.P., Houston,

Texas, for Appellant. W. Thad Adams, III, ADAMS & EVANS, P.A.,

Charlotte, North Carolina, for Appellee. ON BRIEF: Albert P. Allan,

SUMMA, ALLAN & ADDITON, P.A., Charlotte, North Carolina,

for Appellant. Matthew J. Ladenheim, Kathryn A. Gromlovits,

ADAMS & EVANS, P.A., Charlotte, North Carolina, for Appellee.

Wallace K. Lightsey, Frank S. Holleman, III, Troy A. Tessier,

WYCHE, BURGESS, FREEMAN & PARHAM, P.A., Greenville,

South Carolina, for Amici Supporting Appellant.

OPINION

NIEMEYER, Circuit Judge:

After R. Wayne Galloway began construction of his retirement

home on Lake Wylie, near Charlotte, North Carolina, using architec-

tural plans designed and copyrighted by Christopher Phelps & Asso-

ciates, LLC ("Phelps & Associates"), without permission, Phelps &

Associates commenced this action against Galloway for copyright

infringement. Phelps & Associates sought damages, disgorgement of

profits, and injunctive relief. A jury found that Galloway infringed

Phelps & Associates’ copyright and awarded it $20,000 in damages,

the fee that Phelps & Associates traditionally charged for such plans.

The jury also found that Galloway had realized no profits to disgorge.

The district court thereafter declined to enter an injunction, finding

that the jury verdict had made Phelps & Associates "whole," and

entered judgment in favor of Phelps & Associates for $20,000. From

that judgment, Phelps & Associates appeals, requesting a new trial on

damages and the entry of an injunction prohibiting the future lease or

sale of the infringing house and mandating the destruction or return

of the infringing plans.

CHRISTOPHER PHELPS & ASSOC. v. GALLOWAY 3

We agree with Phelps & Associates that the district court erred dur-

ing the damages phase of trial in instructing the jury that Phelps &

Associates’ copyright was a derivative work. As we explain herein,

Phelps & Associates held a copyright in the entire work manifested

in Galloway’s house. We conclude, however, that the error was harm-

less. We also reject Phelps & Associates’ challenges to evidentiary

rulings. Accordingly, we affirm the judgment incorporating the jury’s

verdict.

We agree with Galloway’s contention that the court in the circum-

stances presented here did not abuse its discretion in refusing to enter

a permanent injunction, as requested by Phelps & Associates, prohib-

iting Galloway from ever leasing or selling the house. Such an injunc-

tion would be overly broad and would unduly restrain the alienation

of real property. Other injunctive relief, however, might be available

in applying the general principles of equity, as required by eBay Inc.

v. MercExchange, L.L.C., 126 S. Ct. 1837 (2006), which was decided

after the district court’s order denying relief in this case. Accordingly,

we vacate portions of the district court’s order denying injunctive

relief and remand for the limited purpose of reconsidering other equi-

table relief, such as an order requiring Galloway to destroy the

infringing plans or return them to Phelps & Associates.

I

R. Wayne Galloway, in anticipation of retirement, planned to build

his "dream home" on a lot that he owned on the North Carolina side

of Lake Wylie, southwest of Charlotte, North Carolina. Displeased

with the design work done by an architect whom he had hired, Gallo-

way went with his son-in-law to view the designs of homes on Lake

Norman, an expensive residential area about 30 miles north of Lake

Wylie, where his son-in-law was working as an iron-work subcontrac-

tor. There, Galloway saw a French-country style house that he liked.

His son-in-law approached the builder of the house, Simonini Build-

ers, Inc., and asked the superintendent for a copy of the plans. The

superintendent said that Galloway would have to speak with the

owner, Mrs. Gina Bridgeford, because "she purchased the plans, they

were actually drawn for her." Galloway contacted Mrs. Bridgeford,

who gave Galloway her consent for use of the plans "as long as you

don’t build in our area." As to her authority to give consent, Mrs.

4 CHRISTOPHER PHELPS & ASSOC. v. GALLOWAY

Bridgeford testified at trial, "I felt with all we had paid, we owned the

plans at that time." Galloway assured Mrs. Bridgeford that he would

not build in the area, telling her that he planned to build on Lake

Wylie about 30 miles away. With Mrs. Bridgeford’s permission, the

superintendent at Simonini Builders gave Galloway a copy of the

plans for "The Bridgeford Residence." Each page of the plans

included the copyright notice, in small print, of the designing architect

as follows:

© 2000 Copyright — Christopher Phelps & Assoc., L.L.C.

These plans are protected under the federal copyright laws.

The original purchaser of this plan is authorized to construct

one and only one home using this plan. Modifications or

reuse of this plan is prohibited.

Galloway altered the plans only to cover the name and address of

"The Bridgeford Residence" with the name and address of "The Gal-

loway Residence," and then he copied them for constructing his

house.

Phelps & Associates, which designed the Bridgeford Residence, is

an architectural firm in Charlotte, North Carolina, that designs ups-

cale custom houses. It created the design for the Bridgeford Resi-

dence as a variation of its earlier design — "The Bell and Brown

Residence." Bell and Brown had commissioned and paid Phelps &

Associates for the earlier design, but ultimately decided not to build

the house. Phelps & Associates modified the Bell and Brown design

somewhat for the Bridgefords by moving a dormer window, changing

the front entry and reconfiguring part of the floor plan, and removing

the basement. The Bridgefords paid Phelps & Associates $20,000 for

The Bridgeford Residence design, and the Bridgefords built their

house on Lake Norman in accordance with that design.

Acting as his own general contractor, Galloway began construction

of his house in September 2001, using the Phelps & Associates plans

for the Bridgeford Residence. During the course of construction,

some of the subcontractors checked back with Phelps & Associates

for clarification, particularly with respect to the windows. Phelps &

Associates did not then know that the construction was being pursued

without permission. Galloway’s framing contractor, who had been

CHRISTOPHER PHELPS & ASSOC. v. GALLOWAY 5

asked to do some work for Galloway’s brother-in-law using pirated

Phelps & Associates plans, surmised that Galloway did not have per-

mission to use the plans and approached Galloway to warn him that

he could "get in trouble constructing a copyright plan." Galloway

"shrugged his shoulders and said something to the effect: ‘They’ve

got to find me, catch me first.’"

Through rumors from subcontractors, Phelps & Associates learned

in early 2003 that Galloway was constructing a house using its

designs. After confirming that fact, Phelps & Associates sent Gallo-

way a cease and desist letter in July 2003. Upon receipt of the letter,

Galloway stopped construction on his house, which was then over

half completed. Thereafter, in August 2003, Phelps & Associates reg-

istered its plans for The Bridgeford Residence with the Copyright

Office and then commenced this action against Galloway for copy-

right infringement.

In its suit, Phelps & Associates sought compensatory damages, dis-

gorgement of Galloway’s profits (claimed as the difference between

the value of Galloway’s house and his provable expenses in construct-

ing it), and injunctive relief. With respect to compensatory damages,

Christopher Phelps, the principal of Phelps & Associates, testified at

trial that if Galloway had come to him and asked Phelps & Associates

to design "a house like the Bridgeford house," Phelps & Associates

would have charged Galloway $20,000 — the same fee that it had

charged Mrs. Bridgeford. Christopher Phelps made clear, however,

that he would not have sold Galloway the actual Bridgeford Resi-

dence design, but something different, as Phelps & Associates prided

itself on designing "custom homes." With respect to Galloway’s prof-

its, Phelps & Associates presented expert testimony that Galloway’s

house would be worth $1.1 million when completed. With this esti-

mated value, Galloway would have realized over $200,000 in profits

if he were to sell the completed house.

Galloway testified at trial that he would have made no profit in the

house had he sold it — he had spent more on the house than it was

worth. He estimated that if he completed the house, he would show

a loss of about $160,000. He introduced into evidence his receipts and

ledger of expenditures for construction to date totaling approximately

$660,000, and he estimated that it would cost an additional $250,000

6 CHRISTOPHER PHELPS & ASSOC. v. GALLOWAY

to $300,000 to complete the house. He estimated that upon comple-

tion, the house itself would be worth $758,000. He also introduced

into evidence the Mecklenburg County tax assessment of his house

when half-completed, which evaluated the house in that state at

$408,100.

At the end of the trial, the jury returned a verdict in favor of Phelps

& Associates, finding that Galloway had infringed Phelps & Asso-

ciate’s architectural design copyright; awarding Phelps & Associates

$20,000 in actual damages; and finding that Galloway had no profits

to disgorge. Thereafter, Phelps & Associates requested injunctive

relief from the court (1) ordering that the infringing copy of the plans

be returned or destroyed; (2) enjoining completion of the house; and

(3) permanently enjoining the lease or sale of the house. The court "in

its discretion" denied all injunctive relief, finding that the $20,000

jury award made Phelps & Associates "whole." Accordingly, the

court entered judgment in favor of Phelps & Associates for $20,000

in damages.

On appeal, Phelps & Associates contends that it is entitled to a new

trial on damages because the district court erroneously instructed the

jury that "The Bridgeford Residence" design was a derivative work

and made certain erroneous evidentiary rulings. It also argues that the

district court’s refusal to enter an injunction was error as a matter of

law because it had proved a past infringement and a likelihood of

future infringement.

Phelps & Associates did not obtain an injunction pending appeal,

and, according to representations made at oral argument, Galloway

has completed the construction of his house, where he now resides.

Galloway has also satisfied the $20,000 money judgment.

II

To obtain a new jury trial on damages, Phelps & Associates argues

that the district court (1) erred in instructing the jury on the scope of

its copyright, telling them erroneously that Phelps & Associates’

design was a derivative work, not an original work in its entirety; and

(2) abused its discretion by making several evidentiary rulings. We

address these contentions in turn.

CHRISTOPHER PHELPS & ASSOC. v. GALLOWAY 7

A

Phelps & Associates contends first and principally that the jury was

improperly instructed that its copyright in the Bridgeford Residence

design was a derivative work of the earlier design of the Bell and

Brown Residence and that the scope of Phelps & Associates’ copy-

right consisted only of the minimal difference between the two

designs. The jury was instructed:

[Phelps & Associates’] copyright in the architectural work

known as the Bridgeford Residence is a derivative work of

the architectural work known as the Bell/Brown Residence.

A derivative work is a work that is based upon one or more

preexisting works, including a revision, transformation, or

adaptation of a preexisting work.

[Phelps & Associates’] recovery is limited by the scope of

copyright protection afforded a derivative work. You are

instructed that the copyright protection in a derivative work

covers only the additions, changes, or other new material

appearing for the first time in the work.

It does not extend to any preexisting material and does not

imply a copyright in that material. The copyright in a com-

pilation or derivative work extends only to the material con-

tributed by the author of such work, as distinguished from

the preexisting material employed in the work, and does not

imply any exclusive right in the preexisting material.

The copyright in such work is independent of, and does not

affect or enlarge the scope, duration, ownership, or sub-

stance of any copyright protection in the preexisting mate-

rial.

Phelps & Associates contends that this instruction essentially told the

jury that the copyright consisted of the relocation of a dormer win-

dow, a few floor plan changes, and the lack of a basement, and that

the jury accordingly attributed no profits to the infringement.

8 CHRISTOPHER PHELPS & ASSOC. v. GALLOWAY

Galloway argues that the derivative work instruction was accurate

— that Phelps & Associates’ copyright only extended to the new

material embodied in the Bridgeford Residence — and that its regis-

tration of the Bridgeford Residence design did not effect a registration

of the many elements common to the Bridgeford Residence design

and the Bell and Brown Residence design.

We agree with Phelps & Associates that the instruction was errone-

ous. The Bridgeford Residence was not a derivative work as defined

in the Copyright Act; Phelps & Associates held a copyright in the

entire design. Galloway’s position misunderstands a fundamental pre-

cept of copyright law, that a copyright is independent of its registra-

tion.

Both parties properly recognize that the copyright in a derivative

work extends only to the new elements contributed by the author and

does not extend to the underlying work. See 17 U.S.C. § 103(b). That

provision assures that the author of a derivative work does not acquire

ownership over constituent material that is already in the public

domain or is owned by someone else. But when the author of the

derivative work also has a copyright on the underlying work, there is

no need to protect the public domain or the author of the underlying

work, as the entire work is that of the single author.

Galloway’s emphasis on the scope of Phelps & Associates’ regis-

tration of the Bridgeford Residence design places more emphasis on

the registration than the Copyright Act provides. The copyright itself

does not depend on registration. See 17 U.S.C. § 408(a)

("[R]egistration is not a condition of copyright protection"). It is

obtained without formalities simply when a work has been fixed in a

tangible medium of expression. See id. §§ 102(a), 408(a). Once fixa-

tion of an original work has taken place, the author has a copyright

in the work, and registration with the Copyright Office serves only

supporting roles. For instance, it provides evidence of a copyright, see

id. § 410, and it is required as a condition to bringing suit, see id.

§ 411.

In this case, the undisputed facts are that Phelps & Associates was

the author of the Bell and Brown Residence design and therefore

owned the copyright in that work, even though it never registered that

CHRISTOPHER PHELPS & ASSOC. v. GALLOWAY 9

copyright. Phelps & Associates was also the author of the Bridgeford

Residence design, which was a modification of the Bell and Brown

Residence design. Phelps & Associates did register the Bridgeford

Residence design, but not as a derivative work. It simply registered

the entire design, as it was the author of the entire design.

While Phelps & Associates only registered the Bridgeford Resi-

dence design, that registration satisfied the prerequisite for suit under

17 U.S.C. § 411 for the entire design, even though some of it was cre-

ated earlier in the form of the Bell and Brown Residence design. See

Xoom v. Imageline, Inc., 323 F.3d 279, 283-84 (4th Cir. 2003) (hold-

ing that a party has standing to sue on all components of a registered

work if he owns a copyright on those components, even if the under-

lying components have not been registered); 2 Melville B. Nimmer

& David Nimmer, Nimmer on Copyright § 7.16[B][2][c], at 7-173

(perm. ed., rev. vol. 2006) (same). Therefore, even if Phelps & Asso-

ciates had only registered the Bridgeford Residence design as a deriv-

ative work, it could have sought damages and profits for infringement

of all of the components, including those embodied in the Bell and

Brown Residence design, because it held the copyright in all of the

components. The scope of registration need not precisely trace the

scope of the copyright for the holder to sue. See Educ. Testing Serv.

v. Katzman, 793 F.2d 533, 538-39 (3d Cir. 1986) ("[T]he statutory

premise that the copyright in a compilation extends to the constituent

material contributed by the author is express"); Morris v. Business

Concepts, Inc., 259 F.3d 65, 68 (2d Cir. 2001) (same).

Accordingly, Phelps & Associates was entitled to sue for remedies

based on infringement of the entire Bridgeford Residence design,

even though that design included components of an earlier work cre-

ated by Phelps & Associates; it was the author and therefore owner

of the copyright in all of the copyrightable design elements. The

instruction given by the district court to the jury was therefore errone-

ous.

Nonetheless, we conclude that the error was harmless. Three differ-

ent aspects of the trial — the district court’s other instructions, the

evidence presented at trial, and the jury’s verdict — indicate that the

jury followed the other instructions given by the district court and

10 CHRISTOPHER PHELPS & ASSOC. v. GALLOWAY

understood that they were to award damages based on the entire Gal-

loway house as an infringement of the Bridgeford Residence design.

First, when instructing the jury about the relief it was to consider

if it found infringement, the court correctly stated that Phelps & Asso-

ciates would be entitled to both actual damages for infringement and

to all profits of the infringer resulting from the copyright infringe-

ment. See 17 U.S.C. § 504. In instructing the jury about the actual

damages, the court said:

Actual damages for infringement are measured according to

market value, which means what a willing buyer would have

been reasonably required to pay a willing seller for the

copyright holder’s work.

Stated differently, this amount is what [Phelps & Asso-

ciates] would have received from a willing buyer as a rea-

sonable licensing fee for the use of the Bridgeford

Residence architectural works.

(Emphasis added). On actual damages, Phelps & Associates intro-

duced evidence that it charged Mrs. Bridgeford $20,000 as its fee for

the Bridgeford Residence design. Christopher Phelps testified further

that if Galloway had come to him to create a similar design, Phelps

& Associates would likewise have charged Galloway a $20,000 fee.

There was no other evidence on Phelps & Associates’ actual damages

as they were defined by the court’s instructions. In returning a verdict,

the jury awarded Phelps & Associates $20,000, consistent with the

evidence about the licensing fee for the entire Bridgeford Residence

design. Had the jury paid attention to the court’s instruction on deriv-

ative works, it would have awarded a licensing fee only for the ele-

ments added by the Bridgeford Residence design to the Bell and

Brown Residence design, i.e. a relocated dormer and a slightly recon-

figured floor plan. There was no evidence, however, of the market

value of these design elements, if they had any substantial value at all.

And if the jury speculated on this matter, having no evidence of the

design value of the two elements, it would have given Phelps & Asso-

ciates only a portion of the $20,000 fee that represented the full

licensing fee charged by Phelps & Associates for the entire house.

CHRISTOPHER PHELPS & ASSOC. v. GALLOWAY 11

With respect to the profits for which Phelps & Associates sought

disgorgement, the district court instructed the jury:

In addition to its actual damages, the law allows a copyright

holder to recover all profits of the infringer resulting from

copyright infringement.

An infringer’s profits consist of the amount of the infring-

er’s gross revenues from the infringing activity less the

expenses of producing the infringing work.

Relating this general instruction about profits to the circumstances of

this case, the district court referred the jury to the costs of the entire

house less the expenses incurred in constructing the entire house. The

court stated:

Galloway bears the burden of proving the expenses he

incurred in constructing the house at issue. If he fails to

prove his direct expenses, you must find the amount of his

gross revenues as the amount of his profits.

For an item to be a deductible expense, Galloway must

prove that he actually incurred such amounts in the con-

struction of the house in question, and that such expense

actually assisted in the construction of the house in question.

(Emphasis added). Again, no evidence was introduced to the jury

from which to conclude what the profits were for the minor design

changes between the two works — the addition of the dormer and the

changed configuration of the layout. All of the evidence focused on

the market value of the entire house and the expenses that Galloway

incurred in constructing it. In response to the court’s instructions and

the evidence, the jury found that Galloway realized $0 in profits. If

the jury had believed that Galloway actually had profits from the two

changed elements, it would have allocated some amount to those ele-

ments. Whether that was $2,000 or a nickel, some amount of infringer

profits would be associated with the relevant design changes. Because

$0 was given in profits, the jury apparently credited Galloway’s posi-

tion that there were no profits in the house. This conclusion was

12 CHRISTOPHER PHELPS & ASSOC. v. GALLOWAY

amply supported by the evidence presented, which included Gallo-

way’s own valuation, the county tax assessment, and the loss taken

by the Bridgefords when they sold their identical house.

If the jury had given effect to the court’s instruction relating to

derivative works, it would have applied that instruction to both its

award of actual damages and its finding with respect to infringer prof-

its. Yet such an application is belied by the verdict itself.

Not only does the jury’s verdict of $0 in profits reveal that it con-

sidered profits from the entire house design despite the derivative

work instruction, finding that none were proved, the district court’s

other instructions overrode any prejudicial effect that might have

resulted from the erroneous instruction. The court gave instructions

telling the jury how to apportion damages between conduct that was

infringing and conduct that was not. The instructions imposed the

burden on Galloway to prove any profits attributable to non-

infringing conduct. On a failure of that proof, the jury was instructed

to award all profits realized from the house. As the court stated:

Moreover, if non-infringing factors are so intertwined with

infringing factors that it is impossible to apportion profits,

then no apportionment is allowed.

All profits should be deemed attributable to the infringement

unless Galloway proves by a preponderance of the evidence

that they are not.

If you have any doubts as to the amount of the profits or

whether they resulted solely due to other factors, you must

resolve those doubts in favor of [Phelps & Associates].

Galloway did not present any evidence of apportionment at trial to

give effect to this apportionment instruction or the derivative work

instruction. Consequently, the jury was instructed to award damages

as if the entire house was an infringement of Phelps & Associates’

copyright. It could have awarded $0 in profits only if it concluded

there were no profits at all. While the jury did award Phelps & Asso-

ciates the full amount of actual damages that it claimed and proved,

CHRISTOPHER PHELPS & ASSOC. v. GALLOWAY 13

the jury concluded that Galloway had realized no profits. If the jury

had found any profits and if Galloway had carried his burden on

apportionment, the jury still would have given some amount of the

profits to Phelps & Associates in accordance with both the apportion-

ment instruction and the derivative work instruction. Its failure to do

so satisfies us that the jury did not believe there were any profits.

In short, the erroneous derivative work instruction had no operative

effect on the jury’s award and therefore was harmless. Accordingly,

we reject Phelps & Associates’ request for a new jury trial on dam-

ages based on the district court’s erroneous instruction.

B

Phelps & Associates also contends that it is entitled to a new trial

on damages because of erroneous evidentiary rulings made by the dis-

trict court during the course of trial. We have reviewed each of the

court’s rulings and conclude that the district court did not abuse its

discretion.

First, Phelps & Associates challenges the district court’s admission

of Galloway’s receipts and ledger which he offered to prove expenses

incurred in constructing his house, contending that these documents

were inadmissible hearsay evidence. We conclude, however, that they

could appropriately have been admitted under the business records

exception, see Fed. R. Evid. 803(6), or the residual hearsay exception,

see Fed. R. Evid. 807.

Phelps & Associates also challenges the admission of a Mecklen-

burg County tax assessment, offered to prove the value of Galloway’s

property. It argues that the assessment contained undisclosed expert

testimony, i.e., a real estate appraisal, subject to the gatekeeper provi-

sions of Federal Rule of Evidence 702 and Daubert v. Merrell Dow

Pharmaceuticals, Inc., 509 U.S. 579 (1993). We conclude, however,

that the assessment could appropriately have been admitted under the

agency records exception to the hearsay rule, Fed. R. Evid. 803(8),

which holds such documents sufficiently reliable because they repre-

sent the outcome of a governmental process and were relied upon for

non-judicial purposes.

14 CHRISTOPHER PHELPS & ASSOC. v. GALLOWAY

Next, Phelps & Associates challenges the district court’s admission

of Galloway’s own testimony on the value of his property. Lay opin-

ion testimony, however, may appropriately be admitted if it is helpful

to the jury; if it is based on the perception of the witness; and if it is

not expert testimony under Federal Rule of Evidence 702. See Fed.

R. Evid. 701. Courts indulge a common-law presumption that a prop-

erty owner is competent to testify on the value of his own property.

See, e.g., North Carolina State Highway Comm’n v. Helderman, 207

S.E.2d 720, 725 (N.C. 1974); Fed. R. Evid. 701 advisory committee’s

note ("[M]ost courts have permitted the owner or officer of a business

to testify to the value or projected profits of the business, without the

necessity of qualifying the witness as an [expert] . . . . The amend-

ment does not purport to change this analysis").

Finally, Phelps & Associates complains that its expert witness

should have been allowed to testify to rebut the tax assessment and

Galloway’s testimony on the value of his property. The expert pro-

posed to testify on the reliability of the Mecklenburg County tax

appraisal. The court listened to Phelps & Associates proffer of the

expert’s testimony out of the presence of the jury and concluded that

it was "unhelpful" and "potentially misleading." The district court has

broad discretion to regulate the admissibility of such testimony, and

our review of the record indicates that the court did not abuse its dis-

cretion. See Hosp. Bldg. Co. v. Trustees of Rex Hosp., 791 F.2d 288,

291 (4th Cir. 1986).

In sum, we reject Phelps & Associates’ arguments for a new trial

on damages and affirm the jury’s verdict.

III

After the jury returned its verdict, Phelps & Associates filed a

motion under 17 U.S.C. §§ 502, 503(b) for injunctive relief (1) to pro-

hibit the completion of the house; (2) to enjoin permanently the lease

or sale of the house; and (3) to require the destruction or return of the

infringing plans. The district court denied the motion and all of the

relief requested, stating:

After trial in this matter, the jury awarded the Plaintiff

$20,000 in actual damages. The court finds that the Plaintiff

CHRISTOPHER PHELPS & ASSOC. v. GALLOWAY 15

has been made whole, and in its discretion, declines to order

Defendant to destroy all copies of the plans at issue. More-

over, the court declines to enjoin further construction of the

house, alteration of the house, or the future lease or sale of

the house. Evidence at trial revealed that the house is sub-

stantially constructed and that only interior finish work

remains to be done. Thus, there is no likelihood that comple-

tion of the house will result in further infringement. Taking

into account equitable considerations, the court refuses to

grant the relief requested by the Plaintiff.

Phelps & Associates contends that in denying injunctive relief, the

district court erred as a matter of law. It argues that the court denied

injunctive relief simply because Phelps & Associates received dam-

ages and thereby had been made "whole." It maintains that "the mere

fact that a copyright owner may recover damages does not negate his

right to injunctive relief." See Lyons P’ship, LP v. Morris Costumes,

Inc., 243 F.3d 789, 801 (4th Cir. 2001) (remanding for the entry of

a permanent injunction and a determination of the amount of damages

award). Phelps & Associates argues affirmatively that when copyright

infringement has been proved and there is a threat of continuing

infringement, the copyright holder is "entitled to an injunction." Walt

Disney Co. v. Powell, 897 F.2d 565, 567 (D.C. Cir. 1990); see also

Harolds Stores, Inc. v. Dillard Dep’t Stores, Inc., 82 F.3d 1533, 1555

(10th Cir. 1996); Olan Mills, Inc. v. Linn Photo Co., 23 F.3d 1345,

1349 (8th Cir. 1994); Nat’l Football League v. McBee & Bruno’s,

Inc., 792 F.2d 726, 732 (8th Cir. 1986). Because Phelps & Associates

says that it made that showing, it claims that it was entitled to injunc-

tive relief.

Insofar as Phelps & Associates suggests that it is entitled to injunc-

tive relief, we reject the argument. See eBay Inc. v. MercExchange,

L.L.C., 126 S. Ct. 1837, 1839 (2006). In eBay, the Supreme Court

rejected any notion that "an injunction automatically follows a deter-

mination that a copyright has been infringed." 126 S. Ct. at 1840

(reversing the Federal Circuit, which had articulated "a ‘general rule,’

unique to patent disputes, ‘that a permanent injunction will issue once

infringement and validity have been adjudged’"). The Supreme Court

reaffirmed the traditional showing that a plaintiff must make to obtain

16 CHRISTOPHER PHELPS & ASSOC. v. GALLOWAY

a permanent injunction in any type of case, including a patent or

copyright case:

A plaintiff must demonstrate: (1) that it has suffered an

irreparable injury; (2) that remedies available at law, such as

monetary damages, are inadequate to compensate for that

injury; (3) that, considering the balance of hardships

between the plaintiff and defendant, a remedy in equity is

warranted; and (4) that the public interest would not be dis-

served by a permanent injunction.

Id. at 1839. Moreover, the Court reiterated that even upon this show-

ing, whether to grant the injunction still remains in the "equitable dis-

cretion" of the court.

Rejecting Phelps & Associates’ claim to an automatic injunction or

an "entitlement" to one, we now apply traditional equity principles to

each of Phelps & Associates’ requests for injunctive relief to deter-

mine whether the district court abused its discretion.

A

Phelps & Associates’ first request, that Galloway be enjoined from

completing the house, appears to be moot. At oral argument, the par-

ties represented that the house had been completed.

B

Phelps & Associates’ second request for equitable relief, that Gal-

loway be permanently enjoined from leasing or selling the completed

house, is argued with the following syllogism: First, the completed

house is an infringing copy of Phelps & Associates’ copyrighted

work. See 17 U.S.C. § 101. Second, as the copyright holder, Phelps

& Associates has the exclusive right to "distribute" its copyrighted

work "by sale or other transfer of ownership." See id. § 106(3). There-

fore, Galloway may never lease or sell the house without infringing

Phelps & Associates’ copyright. See id. § 501(a). Because it is likely

that Galloway will lease or sell the house, Phelps & Associates

believes this lease or sale should be foreclosed by a permanent injunc-

tion.

CHRISTOPHER PHELPS & ASSOC. v. GALLOWAY 17

We agree with Phelps & Associates that Galloway will inevitably

sell or transfer his house within the period during which Phelps &

Associates still holds the copyright — i.e. 95 years, see 17 U.S.C.

§ 302(c) — and that such a sale could, absent this action, expose Gal-

loway to further relief, see id. § 106(3); id. § 501(a); cf. id. § 109(a)

(permitting resale of "lawfully made" copies); 1 William F. Patry,

Patry on Copyright § 3.111 (2007) (arguing that sale of a copyrighted

structure is not a "distribution" under § 106(3)). But Phelps & Asso-

ciates has requested relief for that inevitable transaction now in this

action, as part of the panoply of remedies available under the Copy-

right Act, and therefore entitlement to that relief can be and is

resolved in this action under the principles of eBay, 126 S. Ct. at

1839.

The first two eBay criteria for injunctive relief — irreparable injury

and the inadequacy of monetary damages — have most likely been

demonstrated. Irreparable injury often derives from the nature of

copyright violations, which deprive the copyright holder of intangible

exclusive rights. Damages at law will not remedy the continuing exis-

tence of Phelps & Associates’ design in the Galloway house. More-

over, while the calculation of future damages and profits for each

future sale might be possible, any such effort would entail a substan-

tial amount of speculation and guesswork that renders the effort diffi-

cult or impossible in this case. Accordingly, we conclude that Phelps

& Associates most likely has satisfied the first two eBay factors.

When considering the third and fourth factors, however — the bal-

ance of hardships and the public interest — Phelps & Associates’

showing has fallen short.

First, Phelps & Associates has been fully and adequately compen-

sated for the copying and use of its design as manifested in the single

Galloway house, as described above in Part II. A sale of the house

would not be a second copy or manifestation of the design, but merely

a transfer of the structure in which the design was first copied. An

injunction against sale would but slightly benefit Phelps & Asso-

ciates’ legitimate entitlements because the infringing house would

retain the same form and location, remaining a permanent nuisance

to the copyright regardless of whether there is an injunction. An

injunction against sale would neither undo the prior infringement, nor

18 CHRISTOPHER PHELPS & ASSOC. v. GALLOWAY

diminish the chances of future copying. At the same time, a perma-

nent injunction would impose a draconian burden on Galloway, effec-

tively creating a lis pendens on the house and subjecting him to

contempt proceedings simply for selling his own property.

Second, a house or building, as an expression of the architect’s

copyrighted plans, usually has a predominantly functional character.

This functional character was the reason American copyright law,

pre-Berne Convention, denied protection to constructed architectural

works altogether. See 1 Nimmer & Nimmer, supra, § 2.08[D][2][b],

at 2-126 ("an architectural structure ordinarily constitutes a ‘useful

article’ . . . . For that reason, such structures remained unprotected by

United States copyright law from passage of the current [Copyright]

Act until enactment of an amendment, the Architectural Works Copy-

right Protection Act"). This is the same reason that Congress mani-

fested an expectation that injunctions will not be routinely issued

against substantially completed houses whose designs violated archi-

tectural copyrights. H.R. Rep. No. 101-735, at 13-14 (1990),

reprinted in 1990 U.S.C.C.A.N. 6935, 6944 (explaining that buildings

"are the only form of copyrightable subject matter that is habitable").

Those considerations are at their strongest when the architectural

structure is completed and inhabited by the infringer, as here. While

Galloway infringed the copyright, he now is living in a "copy" of the

architectural work. His interest in remaining there, with the same

rights as other homeowners to alienate his property, is substantial and,

in this case, trumps Phelps & Associates’ interests in any injunction

prohibiting a lease or sale of the house.

Third, an injunction against sale of the house would be overbroad,

as it would encumber a great deal of property unrelated to the

infringement. The materials and labor that went into the Galloway

house, in addition to the swimming pool, the fence, and other non-

infringing features, as well as the land underneath the house, would

be restrained by the requested injunction. As such, the injunction

would take on a fundamentally punitive character, which has not been

countenanced in the Copyright Act’s remedies. See Bucklew v. Haw-

kins, Ash, Baptie & Co., 329 F.3d 923, 931 (7th Cir. 2003) (noting

that the Copyright Act does not authorize punitive damages); cf. 17

U.S.C. §§ 504, 505 (specifying the remedies available under the

Copyright Act). In a similar vein, the requested injunction would

CHRISTOPHER PHELPS & ASSOC. v. GALLOWAY 19

undermine an ancient reluctance by the courts to restrain the alienabil-

ity of real property. See, e.g., Williams v. First Fed. Sav. & Loan

Ass’n, 651 F.2d 910, 919 n.18 (4th Cir. 1981); Jiggets v. Davis, 28

Va. 368 (1829); Howard v. Earl of Shrewsbury, (1867) 2 Ch. App.

760. For these reasons, the public interest would be disserved by the

entry of an injunction.

Finally, ultimate discretion to grant any such injunctive relief rests

with the district court, and for the reasons enumerated, we conclude

that deference to the district court’s refusal is appropriate in the

absence of any showing that such refusal was otherwise an abuse of

discretion. See eBay, 126 S. Ct. at 1839.

Thus, with respect to the Galloway house as one manifestation of

the Phelps & Associates’ design, arising from a single infringing

transaction, Phelps & Associates is limited to the other relief provided

in this case. Upon satisfaction of that relief, Galloway will be entitled

to peaceful ownership of the house, with good and marketable title.

This is consistent with the result reached when a converter of property

satisfies a judgment: if the judgment does not order return of the prop-

erty, but rather other relief, the converter obtains good and marketable

title to the property after satisfying the judgment. See Restatement

(Second) of Torts § 222A, cmt. (c) ("When the defendant satisfies the

judgment in the action for conversion, title to the chattel passes to

him, so that he is in effect required to buy it at a forced judicial sale");

Lovejoy v. Murray, 70 U.S. (3 Wall.) 1, 16-17 (1866); Stirling v. Gar-

ritee, 18 Md. 468, 474 (1862) ("The measure of damages in trover,

is the value of the goods at the time of conversion. The plaintiff

obtaining this value, it operates as a transfer of title from the time of

conversion"). The same policies of promoting clear property rights

and finality apply in the case of copyright actions involving single

copies of completed structures. Indeed, they are perhaps stronger, as

we are promoting the alienability of real property.

Phelps & Associates relies upon Sony Corporation of America v.

Universal City Studios, Inc., 464 U.S. 417, 446 n.28 (1984), to argue

that the refusal to issue an injunction against future leases and sales

of the Galloway house amounts to a judicially-created compulsory

license, which is disfavored. The reliance on Sony, however, is mis-

placed. The remedies under the Copyright Act do not resemble a

20 CHRISTOPHER PHELPS & ASSOC. v. GALLOWAY

license because the Copyright Act remedies are far broader than sim-

ply requiring a defendant to make license payments. Under the Copy-

right Act, a copyright holder is entitled to both actual damages — the

market price of the license — and disgorgement of the infringer’s

profits, which might be immensely greater than the price of a license.

See 17 U.S.C. § 504. Moreover, the infringer takes the risk that the

district court will order, in its discretion, the destruction or other dis-

position of the infringing article. See id. § 503(b). In the garden-

variety piracy case, such orders are routinely issued. See, e.g., Loud

Records, LLC v. Lambright, Civ. No. 1:05-0171, 2006 U.S. Dist.

LEXIS 38016 (S.D. W. Va., March 30, 2006); Graduate Mgmt.

Admission Council v. Raju, 267 F. Supp. 2d 505 (E.D. Va. 2003);

Microsoft Corp. v. Grey Computer, 910 F. Supp. 1077 (D. Md. 1995).

Given the risks attendant to infringement, denying an injunction is not

equivalent to a compulsory license. See Walker v. Forbes, Inc., 28

F.3d 409, 412 (4th Cir. 1994) ("By stripping the infringer not only of

the licensing fee but also of the profit generated as a result of the use

of the infringed item, the law makes clear that there is no gain to be

made from taking someone else’s intellectual property without their

consent"). While granting an injunction to destroy an infringing arti-

cle might be usual with respect to personal property, especially in the

garden-variety music or movie piracy case, refusing to order destruc-

tion or the inalienability of property is also consistent with the Copy-

right Act’s remedial scheme and does not amount to a compelled

license.

For all of these reasons, we affirm the district court’s order denying

an injunction against the future lease or sale of Galloway’s house.

C

Finally, Phelps & Associates contends that the district court erred

as a matter of law in refusing to grant injunctive relief to require the

return or destruction of the infringing plans. See 17 U.S.C. § 503(b).

Again, any relief granted in equity is at the discretion of the district

court, and a petitioner cannot claim that it was entitled to injunctive

relief. See eBay, 126 S. Ct. at 1839. Nonetheless, the district court,

without the benefit of eBay, may have denied equitable relief categor-

CHRISTOPHER PHELPS & ASSOC. v. GALLOWAY 21

ically, rather than basing its analysis on the traditional principles of

equity.

In denying Phelps & Associates’ motion for an injunction, the dis-

trict court stated:

The court finds that the Plaintiff has been made whole, and

in its discretion, declines to order Defendant to destroy all

copies of the plans at issue.

Being made whole in the circumstances of this case, however, could

only have referred to the jury award of damages for the cost of a

license and its finding that Galloway realized no profits for disgorge-

ment. It could not have related to other questions, such as the exis-

tence of infringing plans or future acts of infringement.

To explain its ruling, the court stated only,

Evidence at trial revealed that the house is substantially con-

structed and that only interior finish work remains to be

done. Thus, there is no likelihood that completion of the

house will result in further infringement.

It does not follow, however, that because the plans were not needed

to complete the house, they should not therefore be returned or

destroyed, as authorized by 17 U.S.C. § 503(b). The risk of future

infringement includes the possible use of plans to build another

house, publication of the plans, or other violations of the exclusive

rights conferred by 17 U.S.C. § 106. See Serv. & Training, Inc. v.

Data Gen. Corp., 963 F.2d 680, 690 (4th Cir. 1992) (affirming the

entry of a preliminary injunction against further unauthorized use and

copying of copyrighted software).

When Phelps & Associates requested the return or destruction of

the infringing plans, the district court was obligated to consider the

traditional factors for equitable relief. Yet it appears that the court did

not do so. At most, it stated without explanation that it declined "in

its discretion . . . to order defendant to destroy all copies of the plans

at issue." Considering the court’s ruling in the context of the admoni-

22 CHRISTOPHER PHELPS & ASSOC. v. GALLOWAY

tions given in eBay, we cannot conclude that the district court prop-

erly performed its equitable functions. See eBay, 126 S. Ct. at 1839.

Therefore, we vacate that portion of its order as an abuse of discre-

tion.

In sum, while we affirm the jury’s verdict and the district court’s

order refusing to enjoin the future leasing or sale of Galloway’s

house, we remand this case for further consideration, in light of eBay,

of Phelps & Associates’ request for injunctive relief with respect to

the return or destruction of the infringing plans.

AFFIRMED IN PART,

VACATED IN PART, AND REMANDED