Law & Valuation
Restitution is a method of returning to the plaintiff the value of the plaintiff’s property that has been used by the defendant. Restitution is usually limited to cases where the defendant acted negligently or in a wrong manner, such as in breach of a fiduciary duty, fraud, unfair trade practices, etc. Where there is an express contract, restitution is usually not applicable.
How should restitution be valued?
By examining several court decisions, it appears that restitution should be valued in a way that deters wrongful conduct, by depriving the defendant of any benefit that was or could have been derived from wrongful use of the plaintiff’s property.
Restitution should be used as a deterrent of negligent or wrongful behavior like that evinced by the defendant. Courts typically will value restitution in a manner based on the benefit derived from the defendant’s use of the plaintiff’s property, or unjust enrichment, instead of the value of the of the property to the plaintiff.
In Sheldon v. Metro-Goldwyn Pictures Corp., the plaintiff sued the defendant for copyright infringement based on the use of a play to make a motion picture. The court held that there should be an apportionment of the profits made by the movie based on the advantage received by the defendant from use of the play. Expert testimony was used to determine this apportionment. The court could have had the defendant pay the plaintiff the value of the play itself. However, this would not led to deterrence. Through apportionment, the defendant was deprived of the benefit of plagiarizing the play, and thus would be deterred from acting again in such a way in the future.
In Olwell v. Nye & Nissen Co., the Washington Supreme Court awarded the plaintiff the profits gained by defendant through use of plaintiff’s property, even though the property was returnable and easily valued. The defendant argued that this was not appropriate, in that the plaintiff was not even using the property in question and therefore would not have gained anything during the time the defendant was using the property, and therefore suffered no loss. The court rejected this argument, stating that infringement on the owner’s exclusive use of the property is indeed a compensable loss. The court found that the restitution should be all of the benefit gained from defendant’s tortious conduct in using the plaintiff’s property without his permission.
In Ventura v. Titan Sports Inc., the 8th Circuit affirmed a decision by the Minnesota Supreme Court awarding Jesse Ventura a portion of profits received by defendant’s fraudulent conduct in inducing Ventura to waive royalties for videos featuring him. Expert testimony was admitted to determine the value of the royalties that should have been paid for using his image and voice in the videos.
In University Computing Co. v. Lykes-Youngstown Corp., the 5th Circuit awarded the plaintiff a portion of profits that would have been earned if use of a stolen idea had been profitable, even though the defendant had not received any tangible benefit from use of the stolen idea. The court felt that this would accomplish the goal of deterrence. Several factors were used to determine the value of the restitution, all determined through expert testimony.
Thus, it would appear that deterrence is the main goal when courts value the restitution owed to the plaintiff for wrongful use of his property by the defendant. Depriving the defendant of any benefit that was or could have been derived from using the plaintiff’s property appears to be the best way of accomplishing this goal.
Courts often adopt a valuation methodology to achieve a policy goal rather than to determine the true value of the property in question. Modern restitution doctrine is an example. The policy goal is deterrence of tortious taking or use of another's property. The adopted valuation methodology supports the goal by consistently significantly inflating the true value of the property in question. If the court adopted a methodology aimed at establishing the true value of property tortiously taken, then tortfeasors would be indifferent to the property rights of others because the risk incurred is the same whether they acquire the property wrongfully or rightfully through market mechanisms. If tortfeasors incur a risk greater than the true value of the desired property, then they will prefer to acquire the property rightfully and wrongful takings will be reduced.
The Doctrine of Restitution
The modern law of restitution is derived from the common law action of general assumpsit. An action of general assumpsit would lie if a person possessed or used another's property and justice required that the person compensate the rightful owner. The remedy was a money payment for the value of the property given or the benefit received by the user. Restitution was normally available regardless of the relative culpability of the parties or the existence of an actual contract. The intention was to restore the status quo by returning to the plaintiff the value of the plaintiff's property possessed or used by the defendant. RESTATEMENT (FIRST) OF RESTITUTION § 1 (1936).
Modern courts have generally limited restitution to unjust enrichment and tend to rely on other remedies unless the plaintiff can show that the defendant was unjustly enriched at the plaintiff's expense. American Air Filter Co., Inc. v. McNichol, 527 F.2d 1297 (3rd Cir. 1975). Most jurisdictions have linked unjust enrichment to quasicontracts and will deny restitution when they can find an express contract. "Where an express contract exists, there can be no [quasi-contract] with respect to the same subject." Reese Design v. I-94 Highway 61 Eastview Center Partnership, 428 N.W.2d 441, 446 Minn. App. 1988). "It is fundamental that proof of an express contract precludes recovery in [restitution]." Breza v. Thaldorf, 276 Minn. 180, 149 N.W.2d 276 (1967). Modern courts also tend to premise restitution on defendant negligence or wrongdoing. Thus, restitution is usually limited to cases where the court finds a quasi-contract and a breach of a -fiduciary duty, conversion, patent/copyright infringement, fraud, misappropriation, or unfair trade practices and other business torts. RESTATEMENT (FIRST) OF RESTITUTION 1 (1936).
Modern courts have shifted away from the principles underlying the old action for assumpsit because they view restitution as a deterrent to negligent or wrongful behavior. Once a court determines that restitution is appropriate, it will generally base the value of restitution on the benefit derived from the defendant's use or possession of the plaintiff's property, rather than the value of the property or the value of the defendant's loss. Awarding the plaintiff all the profit derived from the plaintiff's property deters wrongdoing by shifting the risk of loss to the defendant. If the plaintiff's recovery were limited to the actual value of her property, then a wrongdoing defendant would be tempted to speculate that its profits would exceed the plaintiff's loss and not be deterred from wrongfully using the plaintiff's property. Taylor v. Meirick, 712 F.2d 1112 (7th Cir. 198 )(J.Posner); National Merchandising Corp. v. Leyden, 370 Mass. 425, 348 N.E.2d 771 (1976).
For example, in Sheldon v. Metro-Goldwyn Pictures Corp., 309 U.S. 390, 60 S.Ct. 681, 84 L.Ed. 825 (1940), the Court considered the proper amount of restitution due a copyright holder whose copyrighted material had been stolen and used to produce a successful motion picture. Plaintiff Sheldon had copyrighted a play called "Dishonored Lady." The defendant offered to purchase the rights to the play for $30,000.00. When negotiations fell through, the defendant deliberately plagiarized the play and used it to produce a motion picture called "Letty Lynton."
A special master found that the picture had earned the defendant $587,604.37 in net profits. The district court reasoned that the plaintiff should only be allowed that portion of the profit actually derived from the play and allowed expert testimony to that end. The experts testified that the play contributed anywhere from nothing to 12% of the profits. However, the district court concluded that an award of 20% was equitable. Regardless, the district court felt constrained by precedent to award the plaintiff all the net profits, an amount almost twenty times the fair market value of the rights to the play.
On appeal, the defendants pointed to the expert testimony and argued that the bulk of the profit was derived from the studio's effort only a small amount of net profit could be attributed to the plagiarized play. The Second Circuit agreed and affirmed the district court's apportionment of the net profits. The plaintiff appealed and argued that apportionment was inappropriate in copyright infringement cases because without the play, defendant would have had nothing and all the studio's efforts would have been for naught.
The Court disagreed and concluded that the Copyright Act and equity both demanded an apportionment based on the fruits of the advantage which the defendant derived from the use of the play. The Court ruled that any apportionment should ensure that neither party ends up with what should rightfully belong to the other. Relying on the expert testimony in the record, the Court found that the bulk of the profits came from the drawing power of the actors. Additionally, the play's contribution was further diminished because the motion picture did not bear the title of the play and was not advertised as having any connection with the play whatsoever. Based on these factors, the Court concluded that the Second Circuit had properly apportioned the profits at 80% for the defendant and 20% for the plaintiff.
It is significant that all three courts excluded the $30,000.00 original offer for the play as completely irrelevant. They all held that it had no bearing on the benefit derived from its use in the film. They reached this conclusion despite the fact that expert testimony showed that rights to plays usually sold for much less.
Why did the courts disregard the amount arrived at in an arms length transaction between entertainment industry experts in favor of a court's informed guess? The answer lies in the Court's emphasis on returning to the plaintiff the benefit derived from his work and not the value of the work itself. If the Court required the defendant to only return the value of the play, then it would be rewarding a wrongful taking. By depriving the defendant of the benefits of his wrongful conduct, the Court hoped to establish a deterrent to wrongful takings.
In Olwell v. Nye & Nissen Co., 26 Wash. 2d 282, 173 P.2d 652 (1946) the Washington Supreme Court awarded the plaintiff profits the defendant had derived from the use of the plaintiff's property, even though return of the property itself was feasible and its value was easily quantified. Nye & Nissen was an egg packing corporation in which Olwell owned a one-half interest. When he sold his interest back to the company, he retained ownership of an egg washing machine. The machine was stored in a building adjacent to the one used by Nye & Nissen. When the company experienced labor shortages, it began using the egg washing machine without informing Olwell. Nye & Nissen used the machine for three years and saved at least $1,560.00 in labor costs. The market value of the machine at the time it was put to use was approximately $600.00.
Nye & Nissen argued that restitution was not appropriate because Olwell had suffered no quantifiable loss. It emphasized that the egg machine would not have earned Olwell any profit because he had merely kept it in storage. Further, an egg washing machine, standing alone, cannot generate profit unless it is part of a complete egg packing and vending operation. Additionally, the egg washing machine was returned undamaged. Thus, restitution was impossible because the plaintiff suffered no compensable loss.
The court rejected this argument ruling that the essence of property ownership is exclusive use and any infringement on the owner's exclusive use causes a compensable loss. Therefore, the only issue was the value of the restitution.
The court held that the value of restitution was dependent upon the defendant's conduct. It concluded that because the defendant had to tiously acquire the use of the machine, the plaintiff was owed all the benefits derived from the conduct, even though that may exceed the value of the plaintiff's actual loss. Had the defendant's conduct not been tortious, or if its culpability had equaled the plaintiff's, then the value of restitution would be the value of the machine itself. The court, agreed with the trial court that the labor cost savings was the closest approximation of the benefit derived and affirmed its award of 1,560.00, over twice the market value of the machine.
Fifty years later, the Eighth Circuit reaffirmed the princi(Othat a property owner is entitled to the benefit derived from the wrongful taking of her property. In Ventura v. Titan Sports Inc., 65 F.3d 725 (8th Cir. 1995), professional wrestler Jesse "The Body" Ventura (now known as Jesse The Mind) was paid $1,000.00 a week to provide color commentary on wrestling matches promoted by Titan. The trial court found that Titan fraudulently induced "The Body" to waive royalties on videotapes of the wrestling matches. Titan sold copies of ninety different videotapes featuring Ventura. The sales brought Titan 25.7 million dollars in profits.
The Minnesota Supreme Court ruled that Titan had tortiously deprived Jesse of property rights to his image and voice. It affirmed the jury's award of 810 thousand dollars. The jury based its award on expert testimony concerning the royalties usually paid to professional athletes and other performers. The court reasoned that royalties paid are proportionate to the performer's contribution to the profits earned.
Sometimes a court will find a derived benefit even when a defendant fails to generate any profit on tortiously acquired property. In University Computing Co. v. LykesYoungstown Corp., 504 F.2d 518 (5th Cir. 1974), the plaintiff and defendant entered into a joint venture. While working on the venture, the defendant stole the design of computer system the plaintiff had developed for sale to others. However, the defendant's use of the stolen design failed to generate any profits. Nevertheless, the court awarded the plaintiff a portion of the profits the defendant would have earned if its use of the stolen design had been fruitful. The court emphasized that to do otherwise would shift the risk attendant to the defendant's efforts onto the plaintiff and away from the defendant. The court opined that such a shift would effectively reward the defendant's tortious conduct and detract from the deterrent effect of restitution.
The court determined that the value of restitution should be based on the estimated market value of the system; the plaintiff's cost in developing the system; reasonable and foreseeable changes in the parties' respective competitive posture; the nature and extent of the defendant's use of the system; and the availability of alternative systems. dependent upon expert testimony. court wanted was a replication of an arms-length transaction between two parties who never intended to reach such an agreement. Such a methodology is completely dependent upon expert testimony. Essentially, what the court wanted was a replication of an arms-length transaction between two parties who never intended to reach such an agreement. Regardless of qualification, no collection of experts can raise this approach to anything beyond mere guesswork. Nevertheless, courts are attracted to this approach because it preserves the deterrent force of restitution by ensuring that the plaintiff recovers the benefit of her labor and not just its intrinsic value.
Courts have adopted a methodology for valuing restitution aimed at discouraging wrongful taking rather than determining the true value of the property in question. Restitution was originally intended to restore the status quo by returning to the plaintiff the value of property possessed or used by the defendant but owned by the plaintiff. Modern courts have reshaped restitution into a punitive measure intended to deter wrongful taking. They did this by changing the valuation basis from the intrinsic value of the property taken to the benefit derived from the defendant's use of the property. Generally, the taken property does not generate profits on its own, but is used in conjunction with other property rightfully possessed by the defendant. Consequently, courts rely on expert testimony to apportion the derived profit between the plaintiff and the defendant. This expert testimony generally boils down to an estimate of the fair market value of the plaintiff's property. Courts then inflate this estimate to punitive levels in order to deter tortious takings.