Design Professional Asserting Copyright Infringement and Contributory Copyright Infringement

David Adelstein | Florida Construction Legal Updates | April 7, 2019

Standard form construction contracts between an owner and design professional will address copyright protection, as well as other contractual protections, associated with a design professional’s “instruments of service.”   An owner negotiating an agreement with a design professional should consider alternative language that broadens the scope of the contractual license given to it with respect to the use of the design.  Regardless, a design professional’s copyright infringement claim is still a challenging claim to ultimately prevail on.   While a design professional may likely survive the motion to dismiss stage in a copyright infringement claim, whether it survives the summary judgment stage is another, more challenging, story.

To state a claim for copyright infringement a plaintiff [design professional] must assert [and prove the following two prongs]: ‘(1) ownership of a valid copyright, and (2) copying of constituent elements of the work that are original.’” Robert Swedroe Architect Planners, A.I.A., P.A. v. J. Milton & Associates, Inc., 2019 WL 1059836, *3 (S.D.Fla. 2019) quoting Feist Publ’ns, Inc. v. Rural Tel. Serv. Co., Inc., 499 U.S. 340, 361 (1991).  

In the first prong, the design professional must establish it complied with statutory formalities to own a valid copyright. Id.

In the second prong, the design professional must establish that the defendant copied constituent elements that are original.  Id.

There is also a claim known as contributory copyright infringement.  

Contributory copyright infringement occurs where a party with knowledge of infringing activity materially contributes to the infringing conduct of another.” Robert Swedroe, 2019 WL at *4.   Actual knowledge is not required – it just needs to be shown the defendant had reason to know (i.e.,knew or should have known) of the copyright infringement.  Id. (citations omitted). 

For example, in Robert Swedroe, an architectural firm was hired by a developer to prepare plans and specifications in connection with a residential building project.  The contract was based off an AIA B141 agreement between an owner and architect. The architect was to initially prepare plans to obtain approval of the governing Planning Board and, upon approval, prepare the permit plans for the residential building.    Once the Planning Board approved the project, the developer sold the property to another developer. The new developer, however, hired another architectural firm–that was provided and had access to plans from the initial architect–with the intent on moving forward with the design and construction of the residential building.

The original architect submitted its technical drawings and architectural work to the United States Copyright Office and obtained a Certificate of Registration.   (Notably, this satisfied the first prong on the copyright infringement claim as the original architect satisfied statutory formalities).  The original architect sued the new developer and new architect for copyright infringement asserting the new architect copied original elements of its design for the residential building project.  The original architect also sued the new developer for contributory copyright infringement.  The new architect and new developer moved to dismiss the copyright infringement claims. Although the trial court denied the motion to dismiss, the original architect will still need to support the burden of its copyright infringement claims.  For more information on the difficulties proving a design professional’s copyright infringement claim, review this article.  

The Economic Loss Rule and Why It Matters in Construction Litigation

William S. Durr | Ward and Smith | March 20, 2019

In its broadest sense, the “economic loss rule” prohibits recovery in tort for purely economic loss incurred under contract law. 

The Merriam-Webster Dictionary online defines tort as “a wrongful act other than breach of contract for which relief may be obtained in the form of damages or an injunction.”  Negligence, the most common tort claim, is the failure to exercise the care that a reasonably prudent person would exercise in similar circumstances.  Thus, where a contract exists governing the subject matter of the dispute, claims between the parties must be based on the contract terms, and a tort-based claim between the parties will typically be barred.

The rationale for the economic loss rule is that where a contract exists, the parties have freely negotiated to include or exclude terms governing the parties’ respective rights, obligations, and remedies.  If a party to that contract could extend its remedies beyond those set forth in the contract, this would effectively allow the party to obtain something more than (or inconsistent with) what they bargained for in the contract.  This is especially true in the products liability context, where the economic loss rule first arose.

In 1978, some twelve years prior to the express adoption of the economic loss rule, the North Carolina Supreme Court addressed the essential elements of the rule (without referring to it by name in the decision) in a dispute between an owner and general contractor.  The case, North Carolina State Ports Authority v. Lloyd A. Fry Roofing Co., et al., 294 N.C. 73, 240 S.E.2d 345 (1978), involved a claim for damages arising from leaking roofs.  The owner, the North Carolina State Ports Authority, asserted two claims against the general contractor, as well as other project participants.  One claim was for breach of the construction contract, the other for negligence in constructing and installing the roofs.  The Court found that a tort claim is unavailable “against a promisor for his simple failure to perform his contract, even though such failure was due to negligence or skill.”

The North Carolina Court of Appeals expressly adopted the economic loss rule in a 1990 products liability case, Chicopee v. Sims Metal Works, 98 N.C. App. 423, 391 S.E.2d 211 (1990).  Since Chicopee, case law has intertwined the concepts set forth in Ports Authority and Chicopee and extended the economic loss rule to a number of other substantive areas.

There are exceptions to the economic loss rule.  Ports Authority identifies the following exceptions:

  1. The promisor’s negligent act or omission in the performance of the contract caused injury to the person or property of someone other than the promisee.  By way of example, if a crane falls over and injures a third party who had no connection to the promisee, a claim for negligence brought by the third party against the crane supplier would not be barred by the economic loss rule, as there was not a contract between the crane supplier and the third party.
  2. The promisor’s negligent, or willful, act or omission in the performance of his contract, caused injury to property of the promisee other than the property which was the subject of the contract, or personal injury to the promisee.  Thus, if a crane fell over and damaged the utility lines of the building and the contract with the crane supplier did not involve work on the utility lines, a claim for negligence against the crane supplier for damage to the utility lines would not be barred by the economic loss rule.  This makes sense as the contract with the crane supplier did not include or govern the utility lines and, therefore, there was not a contract that applied to the specific subject matter of the dispute (the utility lines that were damaged).
  3. The promisor’s negligent, or willful, act or omission in the performance of his contract, caused loss of or damage to the promisee’s property, which was the subject of the contract, and the promisor had a legal duty, as a matter of public policy, to use care in the safeguarding of the property from harm, as in the case of a common carrier, an innkeeper or other bailee. 
  4. The injury caused by the promisor to the promisee was a willful act.  

In applying and, in many cases, expanding these exceptions, the relevant inquiry under North Carolina law is whether the injured party has a basis for recovery in contract or warranty.  If there is a basis for recovery under a contract or warranty provision, then the Court will generally recognize and apply the economic loss rule, provided that there is not an independent legal duty which is identifiable and distinct from the contractual duty.  See, Bradley Woodcraft, Inc. v. Bodden, 795 S.E.2d 253, 258-59 (2016).  By way of example, an architect is held to a professional standard of care.  While this professional standard of care may be referred to in the contract between owner and architect, the duty to adhere to a professional standard of care is an independent legal standard and the owners’ tort claims against the architect are not barred by the economic loss rule. Put simply, the architect cannot contract away its obligations to perform at a minimum professional standard of care.    

In Bradley Woodcraft, the homeowner entered into a contract with the general contractor to undertake some interior finish work and kitchen remodeling.  The homeowner became dissatisfied with the contractor’s work.  After meeting with the contractor the homeowner paid the contractor an additional sum, using two credit card transactions.  The homeowner testified that payment was made with the understanding that the contractor would complete the project.  The contractor took the funds but never returned to the job.  The homeowner disputed the two credit card charges, which were reversed by the credit card company.  The contractor sued the homeowner for breach of implied and express contract, and the homeowner counterclaimed, alleging among other claims, breach of contract and fraud.  The homeowner argued that their fraud claim should survive the economic loss rule defense.  The Court agreed, “…while claims for negligence are barred by the economic loss rule where a valid contract exists between the litigants, claims for fraud are not so barred…”  Bradley Woodcraft at 259.  Bradley Woodcraft seems to suggest that a tort claim, other than negligence, will survive in an otherwise clear contractual dispute and not be subject to the economic loss rule. 

Fortunately, a 2018 federal case rejected the broad statement that the economic loss rule barred only negligence claims and distinguished Bradley Woodcraft by stating that the proper inquiry is whether there is an independent legal duty, which is identifiable and distinct from the contractual duty.  Legacy Data Access, Inc. v. Cadrillion, LLC, 889 F.3d 158, 166 (4th Cir. 2018).      

An earlier construction case, Lord v. Customized Consulting Specialty, Inc., 182 N.C. App. 635, 643 S.E.2d 28 (2007), allowed the owners of a home to pursue a tort claim against a subcontractor, holding the economic loss rule did not bar claims of negligence given the particular facts of the case.  In this case, the homeowners (Lords) discovered the trusses used to construct their home were defective.  The Lords sued their contractor (Customized Consulting Specialty, Inc.) and the subcontractor who designed the trusses.  The claims against the subcontractor included a negligence claim.  The subcontractor argued the economic loss rule applied to bar the homeowners’ negligence claim, relying on the holdings from several cases involving damage resulting from the use of synthetic stucco, some decided in Federal Court. The North Carolina Court of Appeals rejected the subcontractor’s arguments.  The Court found that no contract existed between the subcontractor and the homeowners, that the economic loss rule did not apply and that the economic loss rule did not operate to bar the homeowners’ negligence claim.     

In summary, while the economic loss rule does not provide an absolute defense to all tort claims, it must certainly be considered in litigation that involves claims sounding in both contract and tort. 

More importantly, the protection of the economic loss rule begins with the contract itself.  Creating, maintaining, and properly executing well-drafted contracts is a foundational requirement to controlling and allocating risk in the construction industry.  If you give less attention to your contracts than you do other details of a project, you are placing your company at risk, as you may find yourself defending both contract and tort claims.

Understanding Contract Payment Provisions

Amandeep S. Kahlon | Bradley Arant Boult Cummings LLP | March 19, 2019

Payment terms and conditions are an important piece of every construction contract. Taking some time to understand your payment obligations will help you successfully administer your project and, hopefully, avoid disputes. Although many construction projects utilize industry-standard form contracts with set payment terms, such provisions may, in practice, vary slightly or substantially from contract to contract, and it is important to understand the different obligations and rights that may arise under the payment section in any contract, regardless of the form used. Below is insight on how to navigate and apply some of the typical elements of payment provisions in construction contracts.

Timing

Be aware of the payment timing requirements in your contract regardless of whether you are billing for or paying for the work. If you are a contractor contracting with a subcontractor, make sure your project manager understands the time period provided for review and approval of a subcontractor’s payment application. Many contracts will require a contractor to dispute an application within a certain number of days; otherwise, the application will be deemed approved.

That same contractor will also want to know when payment on undisputed amounts is due in order to avoid any state prompt payment act violations. Many states use prompt pay acts to ensure timely payment from owners to contractors and contractors to subcontractors. Failure to adhere to the requirements of a particular state’s prompt pay requirements can make the paying party liable for interest on past due payments, as well as payment of the billing party’s attorneys’ fees and costs incurred in order to collect on the past due payment.

For subcontractors, be mindful of “pay when paid” or “pay if paid” provisions in the contract. If your payment is tied to owner payments to the contractor and there is any delay in paying the contractor, you may experience delays irrespective of the timing requirements contained in your agreement. You need to plan your cash flow needs accordingly.

Conditions for Payment

Many contracts will require submission of a signed payment application before the obligation to review and approve billings accrues. Other contracts require additional documentation, which may come in the form of partial lien waivers or itemized schedule of values documenting percentage of work completed. Before beginning work, you should make sure you understand what documentation is required, as failure to satisfy express documentation requirements is a simple way for a party to delay payment on a bill that is otherwise due and owing.

Pay particular attention to any partial lien waivers that an upstream party requires as a condition for payment. Aggressive upstream parties may draft broad lien waiver forms that effectively waive all claim rights through the date of partial payment on a particular payment cycle. Many courts will enforce the express terms of these waivers, so you should be weary of executing such forms, especially when you have pending claims or disputes with the owner or contractor you are billing. If an upstream party insists on submission of a broad waiver and you know you have change orders or other claims pending, one way to handle is to include a reservation of rights in the form before signing.

As mentioned above, an upstream party may also have review and approval authority over any payment application. As the upstream party, you should understand and try to adhere to any contractual notice requirements if you decide to dispute payment. As the billing party, you should recognize the contractual reasons that may be proffered for disputing or rejecting payment and be prepared to rebut in writing any such excuses for nonpayment.

Conclusion

Payment on construction contracts can be contentious. Owners are often dealing with lender financing issues that may complicate or delay payment, and contractors and subcontractors may encounter cash flow concerns if payment is withheld, which can impact the project schedule and progress of the work. If payment terms are properly dealt with through the parties’ contract and the parties operate in good faith, most construction projects will achieve successful completion without substantial payment disputes arising.

However, if disputes regarding payment do arise, you should comply with your contract requirements as best you can. In the event that your dispute escalates to litigation, compliance with the contract payment terms will likely be given substantial consideration by whatever judge or arbitrator is hearing your case. If you have a substantively sound argument for disputing or demanding payment but fail to satisfy express payment terms under your contract, you may face an unfavorable outcome, so proceed diligently and carefully to avoid that result.

Differing Site Conditions Produce Differing Challenges

Sarah E. Carson | Smith Currie | January 8, 2019

The saying “The best laid plans of mice and men often go awry” can too often apply in the construction industry. A contractor may receive a description of site conditions that is ultimately found flawed or misleading. The costs associated with addressing these surprise conditions often fall on the contractor to pay. The following article details proactive steps to avoid costly obstacles that may cause a project’s success to go awry.

What are Differing Site Conditions?

There are generally two recognized types of differing site conditions. The first, often referred to as a “Type I Changed Condition,” exists when a specification in the conditions indicated in the contract documents varies from what is represented. The second category, generally referred to as a “Type II Changed Condition,” is a variance so unusual in its nature that it materially differs from conditions ordinarily encountered in performing the type of work called for in the geographic area where the project is located.

Recognizing the possibility of both circumstances, most construction contracts contain notice clauses requiring the contractor to stop work and notify the owner before disturbing a differing site condition so as to give the owner an opportunity to inspect and evaluate. Failure to give the required notice may jeopardize the contractor’s ability to recover an adjustment for the additional cost, time, or both required to address the differing site condition.

How can a Contractor Demonstrate a Differing Site Condition?

To recover for a Type I changed condition, a contractor generally must show that: (1) the conditions were indicated in the contract documents; (2) the contractor relied on the conditions indicated in the contract documents; (3) the nature of the actual conditions encountered; (4) the actual conditions encountered materially differed from those indicated; (5) proper notice was given; and (6) the changed condition resulted in additional performance cost, time, or both, as demonstrated by appropriate documentation.

To recoup costs and time for a Type II changed condition, a contractor generally must show that: (1) the conditions encountered were unusual and differed materially from those reasonably anticipated, given the nature of the work and the locale; (2) proper notice was given; and (3) the change resulted in additional performance cost or time, as demonstrated by appropriate documentation.

What is Required by a Contract that Includes a “Site Investigation” Clause?

Bid and proposal documents sometimes contain a site investigation clause that requires the contractor to investigate and examine existing conditions before submitting its bid or proposal. The language may also require a contractor to inspect existing documents detailing site conditions. Such site investigation clauses become part of the contract.

When the contract contains both a site investigation clause and a differing site conditions clause, the contractor’s ability to recover for cost or time may depend on whether the condition was one that a contractor, experienced in the particular field of work involved, would discover based on a reasonable site investigation. While a “reasonable” site investigation does not require an independent subsurface investigation, if a contractor is warned of certain infrastructure issues, such as roads, water, and site utilities, this information may be sufficient to place the risk on the contractor, especially in the context of a design-build project.

Recovery on an otherwise valid differing site condition claim is questionable if the contractor cannot prove that the unanticipated condition increased its cost or the time of its performance. To avoid liability for such differences, documentation of the contractor’s site investigation effort is imperative. Contractors should consider using a standardized checklist to investigate for concealed conditions before submitting a bid or proposal. The checklist should include a notation section where a contractor can note a description of any unusual site or subsurface condition observed, when such an issue was observed, what geotechnical information, reports, surveys or analyses were furnished or requested, and how the owner was provided notice of such variances.

The Importance of Complying with Notice Requirements

Providing notice of a differing site condition to the owner benefits both the owner and the contractor: it allows the owner to change the design or alter the contractor’s method of performance and it prevents the contractor from absorbing the cost associated with the changed condition. In some instances, a lack of strict compliance may be excused if the contractor substantially complied with the notice requirement or if the owner had actual knowledge of a differing site condition but did not provide such information to the contractor. However, a contractor should not assume such scenarios will excuse it from complying with explicit notice obligations contained in its contract. Contractors should always endeavor to give prompt written notice of differing site conditions and to use delivery methods that show proof of the owner’s receipt. Never think that oral notice to the owner or its representative will suffice.

The Use of Exculpatory Clauses

Many public and private owners use differing site condition clauses, but also include other exculpatory clauses in an effort to shift the risk of differing site conditions back to the contractor. Some courts have held such exculpatory clauses are generally not enforceable and have narrowly construed them and their limited effect. That being said, a contractor should not assume a court will automatically insulate it from the impact of an exculpatory clause. Instead, try to negotiate such language and/or include the risk of encountering such conditions in the bid or proposal price.

What if the Contract Has No Differing Site Conditions Clause?

In the absence of a differing site conditions clause, a contractor may be able to recover the additional cost caused by a changed condition if the contractor can establish misrepresentation, breach of warranty, mutual mistake, or establish an owner’s superior knowledge and a duty to disclose on the part of the owner. Reliance on such theories can, however, be risky. If a contract contains no differing site conditions clause, contractors should consider performing a heightened site investigation or, perhaps, forgoing the project entirely.

Supreme Court Settles Age-Old Arbitrability Debate

William G. Geisen | Stites & Harbison | February 20, 2019

Many construction contracts designate arbitration as the means to adjudicate disputes which are not resolved through executive negotiation, mediation or some alternate method. Occasionally, a question arises whether the claim falls within the scope of the arbitration clause. In other words, the parties debate whether the dispute is arbitrable under the contract. Examples of such arbitrability disagreements include claims for negligence, misrepresentation, fraud, interference in business relationships or other non-contractual claims. One of the parties might file a lawsuit and request the court to decide the issue of arbitrability of the claim. For many years, legal scholars have debated whether the court or the arbitrator should decide the threshold arbitrability question.

On January 8, 2019, the U.S. Supreme Court answered the age-old question regarding arbitrability. In Henry Schein, Inc., et al. v. Archer & White Sales, Inc., the Supreme Court ruled that, when the parties’ contract delegates the arbitrability question to an arbitrator, the court cannot meddle in the parties’ contract; and, therefore, the arbitrator must decide the issue of arbitrability. The Schein decision marked Justice Kavanaugh’s first Supreme Court opinion, which he wrote for the unanimous Court.

The Schein case involved a dispute between a dental equipment distributor and a dental equipment manufacturer. The parties’ contract contained a straightforward arbitration provision which excluded actions for injunctive relief and disputes related to trademark, trade secrets or other intellectual property of the manufacturer. The arbitration clause also incorporated the Rules of the American Arbitration Association (“AAA”). Interestingly, the AAA rules provide that arbitrators have the power to resolve arbitrability questions.

In Schein, the distributor claimed that the manufacturer violated federal and state antitrust laws and filed suit in federal court in Texas. The manufacturer invoked the Federal Arbitration Act (“FAA”) and requested that the court refer the antitrust disputes to arbitration in accordance with the parties’ contract. The question then became who decides the threshold question whether the antitrust dispute is subject to arbitration…the court or the arbitrator.

Both the trial court and the Court of Appeals determined that the manufacturer’s arbitrability challenge was “wholly groundless” and ruled that the court could determine the arbitrability issue. The Supreme Court disagreed and held that the “wholly groundless” argument was inconsistent with the FAA and Supreme Court precedent. The Court held that when the parties’ contract delegates the arbitrability question to an arbitrator, a court cannot override a parties’ contract. Justice Kavanaugh wrote that, in such circumstances, a court possesses no power to decide the arbitrability issue, even when the court thinks that the challenge to the scope of the arbitration provision is “wholly groundless.”

In Schein, the Supreme Court was careful not to express a view on whether the contract between the manufacturer and the distributor, in fact, delegated the arbitrability question to an arbitrator, because the Court of Appeals did not decide that issue. Under Supreme Court precedent, courts “should not assume that the parties agreed to arbitrate arbitrability unless there is clear and unmistakable evidence that they did so.”

Although Schein is not a construction case, its holding clearly applies to arbitrability issues which arise under a construction contract. Notably, Rule R-9 of the AAA’s Construction Industry Arbitration Rules provides that the arbitrator has the authority to decide arbitrability of claims. Similarly, Rule 11 of the JAMS Engineering and Construction Arbitration Rules provides that the arbitrator has such authority to decide the threshold arbitrability question. Therefore, if a construction contract incorporates the AAA or JAMS Arbitration Rules, the parties agree to delegate the arbitrability question to the arbitrator.

If a construction professional is concerned about giving the arbitrator the authority to decide arbitrability of claims, it can do one of at least three things. First, specify in the construction contract that any issue relating to arbitrability of the claim or dispute will be decided by the court, not the arbitrator. Second, review the arbitration rules which are incorporated into the arbitration provision to determine whether the arbitrability question is delegated to the arbitrator by the rules. Third, carefully craft the arbitration clause to exclude specific construction claims which are not covered by the arbitration provision.

The recent Schein decision regarding arbitrability of claims extends well beyond manufacturer-distributor disputes and clearly relates to claims arising under a construction contract containing an arbitration provision. In Schein, the Supreme Court settled the age-old debate whether the court or arbitrator decides the threshold arbitrability question by holding that the arbitrator makes such determination when the parties’ contract delegates such authority to the arbitrator. You can read the short and concise Schein opinion HERE.