Sheldon v. MGM: Copyright | Outside IP Counsel

The Supreme Court held that an infringer's profits must be apportioned so the copyright owner recovers only the share attributable to the infringed material.

When a movie built on a stolen play earns a fortune, how much of that fortune belongs to the playwright? The Supreme Court answered that question in Sheldon v. Metro-Goldwyn Pictures Corp., 309 U.S. 390 (1940), decided March 25, 1940, and its answer reshaped copyright remedies for the next century. Chief Justice Charles Evans Hughes, writing for the Court, held that an infringer’s profits must be apportioned, so that the copyright owner recovers only the share of profits attributable to the infringed material and not the portion the infringer’s own contributions generated. On the facts, the plaintiffs recovered one-fifth of the net profits of the motion picture Letty Lynton.

The ruling matters because it rejected an all-or-nothing view of profit disgorgement. Before Sheldon, a copyright owner might claim every dollar an infringing work earned. After Sheldon, courts had to ask a harder and fairer question: what part of the defendant’s success did the plaintiff’s material actually drive? That inquiry is now built into the statute and animates every modern dispute over an infringer’s profits.

At a glance

Case: Sheldon v. Metro-Goldwyn Pictures Corp., 309 U.S. 390 (1940).
Decided: March 25, 1940; opinion by Chief Justice Hughes; affirmed the Second Circuit’s apportionment.
Holding: Under Section 25(b) of the 1909 Copyright Act, an infringer’s profits may be apportioned so the copyright owner recovers only the profits attributable to the infringing use, here one-fifth of the film’s net profits.
Significance: The foundational profit-apportionment rule, ancestor of 17 U.S.C. Section 504(b) and every modern disgorgement dispute.

The remedy at issue: profits under the 1909 Act

The 1909 Copyright Act, in Section 25(b), entitled a copyright owner to recover from an infringer “all the profits which the infringer shall have made from such infringement.” Read literally, that language seemed to hand the owner the entire net gain of the infringing enterprise. But copyright remedies have long been understood as compensatory rather than punitive, meant to make the owner whole for the wrong rather than to forfeit to the owner value the infringer independently created.

That tension framed the case. A film is a composite work. Its earnings flow not only from the underlying story but from the fame of its stars, the skill of its director, the resources of the studio, the quality of the production, and the reach of its marketing. If the story was infringed but everything else was the studio’s own, awarding the playwright the whole profit would overcompensate the wrong and effectively penalize the infringer for contributions that did not infringe anyone.

The facts: from a Scottish murder trial to a Hollywood hit

The petitioners, Edward Sheldon and Margaret Ayer Barnes, wrote the play Dishonored Lady, drawing on the 1857 Scottish trial of Madeleine Smith for the murder of her lover. They copyrighted the play as an unpublished work in 1930 and produced it in the United States and abroad. Metro-Goldwyn-Mayer later released the motion picture Letty Lynton, which the courts found had infringed the play by copying its protected expression.

Liability was not the Supreme Court’s concern; the infringement had been established below. The fight was over money. A special master, whose report the district court largely confirmed, had awarded the playwrights all of the net profits from exhibition of the film, a sum of $587,604.37. The Circuit Court of Appeals reversed on the remedy, holding that the profits should be apportioned and fixing the playwrights’ share at one-fifth. The Supreme Court granted review to decide whether apportionment was permissible and whether the evidence supported the one-fifth figure.

The Court’s reasoning: compensation, not penalty

The Court held that apportionment was not only permissible but required by the compensatory purpose of the statute. Chief Justice Hughes reasoned that the purpose of Section 25(b) is “to provide just compensation for the wrong, not to impose a penalty by giving to the copyright proprietor profits which are not attributable to the infringement.” Where an infringer’s profits derive partly from the infringed material and partly from the infringer’s own contributions, the owner is entitled only to the portion the infringement produced.

The Court acknowledged the practical difficulty. Apportioning the profits of an artistic work is not a matter of exact arithmetic; the contributions of a screenplay, a star, and a studio cannot be separated with a ruler. But the Court held that the impossibility of precision does not defeat the effort. A reasonable approximation, informed by evidence including expert testimony about the relative importance of the copied material, is both permissible and preferable to a windfall. On the record, the Court found the one-fifth allocation to be a fair and supported estimate of the share of profits attributable to the play, and it affirmed. The infringer, in other words, could retain the four-fifths of profits traceable to the elements it had legitimately supplied.

What the decision changed

Sheldon transformed the profits remedy from a blunt instrument into a calibrated one. It established that the copyright owner bears the initial burden of proving the infringer’s gross revenue, after which the infringer may reduce the award by proving both its deductible costs and the portion of profits attributable to factors other than the infringed work. That burden-shifting structure and the apportionment principle it protects were later carried into the 1976 Act. Section 504(b) of the current statute now provides that the owner may recover the infringer’s profits “attributable to the infringement,” and requires the infringer to prove “the elements of profit attributable to factors other than the copyrighted work.” That is Sheldon codified.

The decision also set the tone for how courts handle apportionment’s inherent imprecision. Modern disgorgement fights, from software to music to film, still turn on the Sheldon question: which revenues did the plaintiff’s protected material actually drive, and which flowed from the defendant’s independent contributions? Expert testimony, consumer-demand evidence, and market analysis have grown more sophisticated, but the governing principle traces directly to 1940.

Open questions

How much precision is enough? Sheldon blessed a reasonable approximation, but the line between a permissible estimate and impermissible speculation continues to generate litigation, especially where the infringed material is a small component of a large product.
Who bears uncertainty? The statute assigns the infringer the burden of proving non-infringing profit factors, yet in practice courts vary in how strictly they hold defendants to that burden when the evidence is thin.
How does apportionment interact with statutory damages? Because owners may elect statutory damages instead of profits, the strategic choice between the two, and how apportionment risk influences that choice, remains a recurring practical question.

Implications for creators and businesses

Copyright owners should build the profit story early. Recovering an infringer’s profits is not automatic. Owners must be ready to prove gross revenue and to rebut the defendant’s apportionment evidence with proof that the copied material drove demand.
Infringers can limit exposure through apportionment. A defendant who can document its own contributions, its costs, and the independent drivers of its success can substantially reduce a profits award, as the studio did in shrinking a full recovery to one-fifth.
Expert evidence is central. Because apportionment is an estimate, both sides live or die by credible expert analysis of what portion of profits the protected work generated.
Consider statutory damages as an alternative. Where apportionment would sharply cut a profits award, electing statutory damages may yield a better and more predictable outcome.

Frequently asked questions

What is profit apportionment in copyright law? It is the rule that when a copyright owner recovers an infringer’s profits, the award is limited to the portion of profits attributable to the infringed material, not the entire profit of the infringing work. Sheldon v. MGM established this by allowing the plaintiffs only one-fifth of the film’s net profits.

Why did the Supreme Court limit the plaintiffs to one-fifth of the film’s profits? Because the film’s success owed much to elements the studio itself supplied: stars, direction, production, and marketing. The Court held that Section 25(b) of the 1909 Act compensates for the wrong rather than penalizing the infringer, so the owner could recover only the profits fairly traceable to the copied material.

Does Sheldon still matter under the current Copyright Act? Yes. The apportionment principle is codified in 17 U.S.C. Section 504(b), which requires the infringer to prove deductible expenses and the elements of profit attributable to factors other than the copyrighted work. Sheldon remains the foundational authority behind modern disgorgement fights.