Since your company was a sole proprietorship, the liability would pass to you personally. To prove copyright infringement the plaintiff would need to prove that you had access to the work and that it was, in fact, copied. It seems that both criteria can be met here. The amount in question here is relatively small and probably not worth the expense of a lawsuit. I would suggest that you contact Masterfile yourself, explain the situation politely, apologize for taking their image and offer a small settlement. I would suggest that you start at 10% of their demand. It is likely that they will settle for less than the amount demanded. Make sure that when you agree on a settlement that you get a complete written release. If you have further questions you can call at (310) 743-1188 - David Belasco
There's no legal difference between you and you sole proprietorship, so you're personally liable here for any infringement, even if your DBA has expired (which takes 5 years, even if your company is no longer doing business, unless you've abandoned this DBA with your County Recorder).
You're right that being ignorant is not excuse, copyright infringement is a "strict liability" offense, meaning your intent and knowledge doesn't matter to a detrmination of liability, and you did take their photo and put it on your website, and it probably had a copyright notice on it, so your claim of innocence may not fly.
Your intent might matter to a court asked to use their discretion to increase or reduce damages based on your wilfullness. It won't come to that, probably, but that's where the practicalities come in. Is this image even registered for a copyright? If not, then this claimant can't even sue you. If their photo hasn't been registered long enough for them to claim statutory damages and legal fees, then they'd be limited to actual damages, which are presumably minimal in this case, and would be what the photo would normally license for in this type of use.
I agree with my colleague that a reasonable approach would be to contact the company, but only after you've checked the copyright database to see what the status is of their image. Chances are, it's not even registered. If so, that changes your leverage substantially, but if they have registered their image, you have to take this more seriously. Only after you've confirmed their ownership and registration of this image should you make any offer, with your explanation of lack of profits, dissolution of the business etc., in exchange for a full release from them. Hire an IP litigator if you need help.
Disclaimer: Please note that this answer does not constitute legal advice, and should not be relied on, since each state has different laws, each situation is fact specific, and it is impossible to evaluate a legal problem without a comprehensive consultation and review of all the facts and documents at issue. This answer does not create an attorney-client relationship.
Ms. Koslyn provided an excellent answer.
If you are interested in a real-life example of the importance of registering a copyright on time, please see the post at the link below.
If you have not already done so, you should remove the infringing image ASAP.
Disclaimer: This post does not constitute legal advice and does not establish an attorney-client relationship.
Super responses by all.
I write only to note a very recent -- and fundamental -- change in the law regarding the copyright registration requirement.
The rule that most courts used to follow [at least in the Ninth Circuit] was that a copyright owner had to actually register his or her copyright with the Copyright Office before a court would even consider the question of whether the copyright was infringed.
In short, the mere filing of an application to register the copyright was not enough -- the Copyright Office had to actually issue the registration [often a 24 month process] before the court would hear the infringement case.
That rule changed last week when the Ninth Circuit Court of Appeal issued its decision in Cosmetic Ideas v. IAC/Interactive Corp. [see http://j.mp/aPJ1L1 ]. The new rule is that a court MUST consider the infringement case so long as the copyright owner has merely applied to register its copyright with the Copyright Office.
One of the consequences of this decision is that folks who are accused of copyright infringement cannot rely on the Copyright Office's online database of registered works to determine if the plaintiff really owns the copyright or even if the plaintiff has applied to register the copyright that's being enforced [mere applications not being in the database].
Another consequence is that copyright owners may bring more lawsuits because they won't have to wait for their copyright registration to issue -- or else pay the very high price to acquire the registration on an expedited basis.
In sum, you can no longer rely on the Copyright Office's online database of registered works to determine if Masterfile has the right to sue you for infringement.