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Massachusetts Recognizes Contract Damages Based on Destruction of Researcher’s Life’s Work

Massachusetts Recognizes Contract Damages Based on Destruction of Researcher’s Life’s Work

[Disclosure: Kevin Peters and Jennifer Henricks, attorneys at Gesmer Updegrove LLP, represented Dr. Hlatky in the case discussed below]

Contact law is complicated. It dates back centuries, and is mostly common law, meaning it evolves case-by-case in judicial opinions. There are thousands of cases, involving thousands of fact patterns, and it seems like there’s always room for one more variation. This was the case in the Massachusetts Supreme Judicial Court’s (SJC) April 28, 2020 decision in Hlatky v. Steward Health Care System LLC, where the plaintiff was awarded $10.2 million for damage to an asset — a cancer research lab — that she didn’t own.

The Facts. Dr. Lynn Hlatky is a prominent cancer researcher. She has over three decades of research experience, including at one time a faculty position in the radiation and oncology department at Harvard Medical School. Her research targets the development of a cancer vaccine. In 2010 Dr. Hlatky had been the principal researcher of a cancer research lab at Boston’s St. Elizabeth’s Hospital for five years. As 2010 began, little could she imagine the difficulties she would soon face. That year Steward Health Care System LLC (Steward), a for-profit hospital chain, acquired St. Elizabeth’s.

To comply with federal law regulating research grants the assets of Dr. Hlatky’s cancer lab were moved into a non-profit corporation, controlled by Steward, which would administer grant money and the lab’s operations. This is a common “business model” in federally grant-funded research labs. Dr. Hlatky continued as the lab’s principal researcher, and Steward entered into a three year contract with her committing, inter alia, to pay her an annual salary and to “continue to provide support and suitable office space” for the lab (the “support clause”). Dr. Hlatky anticipated that if this agreement was not renewed or extended at the end of three years, she would move her program (lab equipment, grants and cell samples) to another institution, a process that is not unusual in the world of grant-supported medical research.

Shortcutting a complicated story, Steward withdrew its support before the end of the three year period and left the non-profit and its assets in the hands of three unqualified individuals who drove the non-profit into bankruptcy. The lab equipment was sold and tens of thousands of cell samples were incinerated. For the gruesome details and machinations (what lawyers euphemistically call “bad facts”) behind these events see Death of a Cancer Lab in the April 2017 issue of Commonwealth Magazine.

Dr. Hlatky claimed  breach of contract by Steward, and the case went to trial in Suffolk Superior Court in Boston. The jury found for Dr. Hlatky, and after the dust settled on post-trial motions she was awarded $10.2 million, almost all of which was the amount Hlatky testified it would cost her to reestablish the cancer research lab. Steward appealed, arguing that Dr. Hlatky was not entitled to the damages suffered by the lab. At most, she was entitled to her personal financial losses, such as lost compensation. An award of $10 million to Dr. Hlatky personally, Steward argued, would be a windfall to her. And, it asked, what would present her from using the money for her own personal interest, for example to fund her retirement? Dr. Hlatky responded that she had an individual, legally protected interest in continuing her life’s scientific work, which Steward’s breach had destroyed. The “support clause” referenced above spelled a loss for Steward before the jury, and then again before the SJC, which stated:

It is important to recognize that the contract that Hlatky entered into with Steward was not merely an employment contract; Steward committed not only to employ Hlatky as the director of the [cancer center], . . . but also to “provide support” to the [cancer center], which it envisioned would evolve, under Hlatky’s leadership, “into an internationally competitive program.” The structure and terms of the contract, which Steward, a sophisticated entity, negotiated, involved more than contracting for Hlatky’s labor.. . . The jury determined that Steward committed a breach of the contract by withdrawing support for the [center], and the judge further found that this breach foreseeably resulted in the destruction of Hlatky’s life’s work.

So while damages principles are difficult to apply in this case, the [trial court] judge did not err in concluding that Hlatky personally suffered harm from the foreseeable destruction of her life’s work. Nor did she err in concluding that the jury reasonably could have sought to restore Hlatky to the position she would have been in if Steward had complied with its obligations under the contract by awarding her the amount of money needed to reestablish a functioning cancer laboratory — which, based on Hlatky’s testimony, the judge determined to be $10 million.

Having decided this issue in favor of Dr. Hlatky, the SJC decision then took an odd turn, from a legal perspective. Six judges sat on the appeal (a seventh was recused), and the six split over how Dr. Hlatky  should be awarded the money. Three justices voted to require the trial judge to fashion a form of judgment to ensure that the money in fact went toward a new cancer lab – presumably a trust that limited the use of the money for this purpose.

However, the remaining three judges disagreed with this restriction. Justice Barbara Lenk, writing for those judges, stated: “whether Dr. Hlatky wishes to start again, whether she even could start again after so much time has passed and her faculty position has been lost, whether she wishes to use the money to fund different research or others’ research in the same field, or whether she wants to hike the Appalachian trail — these matters simply are not our concern. . . .  Hlatky should receive the money damages the jury awarded, just as she would in any other case of breach of an employment contract.” Because the trial judge had entered damages for Dr. Hlatky without restriction, and because the court split 3-3 on the restriction/no restriction issue, the trial court’s decision stands – she will receive this money without restriction. This means Dr. Hlatky won’t have to suffer the indignities of a trustee scrutinizing her expenditures, not to mention a trustee’s fees and bureaucratic complications in obtaining federal grant funding that could result from use of a trust.

Implications. To say that this case was unusual is an understatement. The SJC itself noted that out of the thousands of cases applying contract law nation-wide, only one case came close to the unique circumstances of this case. It’s difficult to know whether this case represents the origin of a new branch of contract law in Massachusetts, or whether, based on its unusual facts, it’s a one-off, never to be repeated. However, we can make a couple of  general observations. At the very least, organizations that administer grant-funded research labs — especially those in Massachusetts — will review their current contracts to see if they are vulnerable in the way that Steward was in this case. This may lead to the renegotiation of existing contracts to block potential damages, or to ensure that principal investigators such as Dr. Hlatky are employees of the non-profit administering their grant money, and have no direct contractual relationship with a deep-pocketed  parent company (in this case Steward).

And, of course, well-represented research institutions won’t follow the “split duty” approach that Steward used here, where there is a fiduciary duty toward the non-profit that owns the grant-funded assets and a separate employment contract with the principal researcher. Whether the case will have consequences outside the realm of research grants is uncertain. Lawyers will take every opportunity to push the envelope on behalf of their clients, and the “destruction of life’s work” theory could provide the basis for damages theories in contexts far removed from the Hlatky case.

A last word on damages.While the base damages in the case are $10.2 million, Dr. Hlatky will receive a judgment for substantially more than that. Under Massachusetts law interest for breach of contract runs at 12% per year from the filing of the complaint in February 2014. As of February 2020 six years has passed, adding 72% in interest to the judgment, or $7,344,000, for a total of $17,544,000, plus 1/365 of $10.2 million per day after that date, until the judgment is paid. Hlatky v. Steward Health Care Systems, LLC (Mass. April 28, 2020)

A Renter Uses Your House to Film Porno Movies – Copyright Infringement?

A Renter Uses Your House to Film Porno Movies – Copyright Infringement?

I can’t let a decision on this case pass by, both because the facts are so bizarre and because the case is in my backyard, the Federal District Court for the District of Massachusetts.

The plaintiff, Leah Bassett, owns a house on Martha’s Vineyard. She entered into a several-month long lease with Joshua Spafford. Spafford allowed the house to be used to film a number of pornographic movies. Ms. Bassett sued everyone involved, and one of her claims is copyright infringement. She claims that the movies include shots of paintings, slipcovers, wall hangings and the like (over 50 works in total), all of which were created by her.  She asserts that their appearance in the movie scenes violate her copyright rights (reproduction, distribution and public display).

This case received a lot of attention when it was filed. See, for example,What if your house was used in a porn shoot? This homeowner says hers was, and she’s suing (Boston Globe, March 2018)(link);Martha’s Vineyard homeowner says rental was used as porn set (New York Post, March 2018)(link). The case was assigned to District Court Judge Patti Saris, a federal judge highly experienced in copyright law. The defendants filed a motion for summary judgment, and Judge Saris issued her opinion on May 11, 2020 (link). Here’s a short summary of her ruling on the copyright claims.

Copyrightability. With a few exceptions, all of the works are protected by copyright.

De Minimis Doctrine. Maybe – the evidence in the record before the court was insufficient. Ms. Bassett has 45 days to file a document describing which of the works appear in which films, for how long, and in what level of detail. With representative screen shots. (No movies, please).

Fair Use. The first, second and third fair use factors favor Bassett. (Transformative use, nature of the work, and amount copied). The fourth factor (effect on potential market or value of the work) favors defendants. Three to one, fair use defense loses on summary judgment.

Damages. Bassett may be able to establish damages based on a“reasonable fair market licensing fee.” Damages discovery has not taken place, so this option remains open.

Bottom line and Further Thoughts: The defendants still have a chance of dismissing the case as to some of the works, depending on Bassett’s ability to overcome their de minimis defense. However, there will have to be a separate finding on each of the 50-plus works. In the meantime, Bassett has 45 days to compile her evidence on this. I expect it will be a lot of work with a spreadsheet and a stopwatch. With respect to damages, Ms. Bassett never sold her works, so she can’t prove lost profits. The defendants’ profits will be be a challenge, since it will be difficult to show that customers purchased the films because of the background art and allocate part of the profits associated with the films to her work. She hadn’t registered any of the works prior to the infringement, so statutory damages are not available. The judge is right – she is probably limited to “value of use” damages – what the film makers would have paid based on an arms-length licensing deal. However, Bassett may be hard-pressed to establish a licensing fee for her works, since she is not a commercial artist and has no sales/licensing history. And what would the producer of a porno film pay for background art in any case?

My prediction – Ms. Bassett will not go to the effort to catalogue which films her works appear in and how long each work appears in each scene. Her potential damages are not worth the effort. She survived summary judgment on several other counts (infliction of emotional distress, Chapter 93A and defamation, in particular). Including a copyright case over 50 works will only make the trial longer and more complicated, and distract the jury from the more sympathetic claims where she has a good shot at substantial damages. My two cents: discretion is the better part of valor, and Ms. Bassett will be better served by exercising discretion and dismissing her copyright claims. Bassett v. Jensen (D. Mass. May 11, 2020)

Update: I was mistaken – the plaintiff did submit additional detail on copyright infringement to the court, and on August 6, 2020 Judge Saris entered summary judgment with respect to ten items. (link, via Evernote) Presumably (and absent settlement) the case will now proceed to trial on copyright damages, along with the other claims asserted by the plaintiff-home owner.

Supreme Court Focuses on Standard of Review/Seventh Amendment Issue in Oracle v. Google

Supreme Court Focuses on Standard of Review/Seventh Amendment Issue in Oracle v. Google

The odds of Oracle coming out on top in the Supreme Court appeal of Oracle v. Google just took a turn for the worse.

On May 4, 2020 the following entry appeared on the Supreme Court docket in the long-pending Oracle v. Google copyright case:

The parties are directed to file supplemental letter briefs addressing the appropriate standard of review for the second question presented, including but not limited to the implications of the Seventh Amendment, if any, on that standard. The briefs, not to exceed 10 pages, are to be filed simultaneously with the Clerk and served upon opposing counsel on or before 2 p.m., Friday, August 7, 2020. (Emphasis added)

The “second question presented” is Google’s appeal of the Federal Circuit’s decision reversing a trial jury’s fair use finding in favor of Google. The “standard of review” is a reference to the “de novo” standard used by the Court of Appeals for the Federal Circuit (CAFC) in the opinion under review. The Seventh Amendment is the constitutional right to a jury trial (“the right of trial by jury shall be preserved, and no fact tried by a jury, shall be otherwise reexamined in any court of the United States …”).

This order appeared without warning after the Supreme Court bumped oral argument in this copyright case to an as yet unspecified date in the 2020 term. The case had been scheduled for argument on March 24, 2020, and the Court removed it from the calendar only 12 days before that date.

We aren’t told what prompted the Court to ask for additional briefs in this case, but the order brought to mind one of the amicus briefs filed in support of Google. The brief (link), filed by several law professors (the “Professors Brief”), focused on precisely the issued on which the Court requested briefing. The opening section of the brief summarized their argument –

Reversal of a jury verdict on the issue of fair use is extraordinarily rare. For two centuries, courts have given great deference to jury verdicts. Indeed, history overwhelmingly demonstrates that juries are uniquely situated to make the discretionary judgments that fair-use cases call for. But in this case, the Federal Circuit ignored history, along with the law. It applied de novo review to overturn the jury verdict of fair use. This is the first time that has ever happened. And it is unconstitutional. The Seventh Amendment requires that a jury finding of fair use not be “re-examined” under a de novo standard of review.

This is a powerful argument. It may be Google’s best argument now that the Court has (if belatedly) focused on this issue.

A Brief Recap. In this case following a trial, appeal and remand on infringement a jury trial was held solely on the issue of fair use. After a two week trial the jury returned a verdict for Google, finding that Google’s copy of the Java application programming interface (the Java API) was protected by fair use. Oracle appealed to the CAFC.

On appeal the CAFC held that while fair use is a mixed question of fact and law, this did not “dictate the applicable standard of review.” The CAFC concluded that in deciding copyright fair use the jury’s role “is limited to determining disputed ‘historical facts, not inferences or conclusions to be drawn from those facts.” Thus, “all jury findings relating to fair use other than its implied findings of historical fact must, under governing Supreme Court and Ninth Circuit case law, be viewed as advisory only.” Accordingly, the CAFC held that it must “assess all inferences to be drawn from the historical facts found by the jury and the ultimate question of fair use de novo” – without reference to any legal conclusion made by the previous court to hear the case.

Based on de novo review the CAFC set aside the jury verdict for Google and decided the copyright fair use issue in favor of Oracle. In other words, despite the jury verdict it decided that Google’s use of the Java API is not protected by fair use.

The CAFC’s decision was surprising, to say the least. Appellate reversal of a jury finding on fair use is virtually unprecedented in the law. A determination fair use at trial is based on a weighing of the four fair use factors, and the CAFC was wrong to abrogate the jury’s conclusion on this issue. Or so the argument went.

However, in the three merits briefs filed with the Supreme Court Google and Oracle gave short shrift to the standard of review, at least relative to the other issues. They discussed the Seventh Amendment not at all.

Clearly the Supreme Court has concluded that this issue deserves more attention.

Does the Standard of Review/Seventh Amendment Argument Have Legs? Until we see the parties briefs in August the Professors Brief may be the best guide on this issue. The Professors ground their argument in 18th and 19th Century English common law, their point being that English law courts heard issues similar to modern fair use, and that under English law the courts left the issue of fair use to the jury to decide. This is not as far-fetched as it might seem at first – the Supreme Court has often looked to English common law as an antecedent to help it interpret and apply U.S. copyright law.

From there they move to the Supreme Court’s 1998 decision in Feltner v. Columbia Pictures Television where, tying modern U.S. copyright law to English common law precedents, the Court held that the Seventh Amendment provides a right to a jury trial on all issues pertinent to an award of statutory damages. Fair use, the Professors argue, is pertinent to an award of statutory damages, since statutory damages are a potential remedy in a case premised on a fair use defense. That being the case, the Seventh Amendment applies to a jury determination on fair use, implying a deferential (not de novo) review of a fair use jury verdict.

Lastly, the Professors argue that Supreme Court precedent requires a deferential standard of review in cases involving a mixed question of law and fact (such as fair use), where the issue entails “primarily . . . factual work.” U.S. Bank National Ass’n v. Village at Lakeridge, LLC. The Professors argue that the  copyright fair use determination in this case rested upon its individualized facts, and therefore primarily involved factual work. Accordingly, the CAFC erred in declining to apply a deferential standard of review to the jury verdict.

Did Oracle Make a Mistake By Agreeing That The Jury Could Issue a “General Verdict”? It’s not uncommon for juries to be asked complete detailed “special verdicts”  that may shed light on the the bases for their decisions. For example, in a copyright fair use case the jury might be asked to indicate how it decided each of the fair use factors in reaching its decision.

But that didn’t happen in this case. Instead, Oracle and Google agreed that the jury need only issue a “general verdict.” The jury made no specific findings of fact.

Whether this was a strategic mistake by Oracle or part of a calculated trial strategy we don’t know, but at this point it appears to put Oracle at a disadvantage. The general verdict could weigh in favor of a finding that the CAFC erred in applying a de novo standard, since there were no “historical facts” for the CAFC to analyze, short of the CAFC reviewing the entire trial record and finding facts without the ability to evaluate witness credibility.

What Next? We will have to see what the parties have to say on this issue when they file their briefs in August. However, a decision based on a narrow procedural ground such as the standard of review is likely to be attractive to the Supreme Court. It allows it to avoid the mystifying complexities of copyright law as applied to computer software technology. It allows the Court to avoid revisiting the law of copyright fair use, a doctrine the Court has not addressed in-depth in the 26 years since it decided Campbell v. Acuff-Rose Music, Inc. It enables it to decide the case on a narrow standard-of-review issue and hold that a jury verdict on fair use should not be reviewed de novo on appeal, at least where the jury has issued a general verdict.

And, potentially (should the Court decide to resolve the case on this ground per curiam without hearing before the start of the 2020 term), it is one less case from the 2019 term that the Court would need to carry over into the 2020 term.

It’s worth noting that such an outcome would be disappointing to many people in the computer industry who are hoping for a reversal of the CAFC’s 2014 holding (on an earlier appeal) that the Java API is protected by copyright. And, while Google would be happy with this outcome, it’s not certain that it would be a clear winner for Google and end this case once-and-for all. It’s likely that the Court would decide that the jury verdict should stand, ending the case. But there’s also a risk that it could send the case back to the CAFC for yet another appeal, to be decided under a more deferential standard of review, but one that (given the CAFC’s hard-to-ignore antipathy to Google in this case), still leaves Google at risk.

It’s also worth noting the unusual sequence of events in this case. But for COVID-19’s disruption to the Court’s schedule, argument on this case would have been heard on March 24, 2020. The Court had not requested supplemental briefing prior to that date, and the case would have been taken under advisement on the thin record (as to this issue) as it existed at that time. The delay gave the Court time to request additional briefing on the standard of review, and the risk of that action falls entirely on Oracle.