Tuesday, July 27, 2010

Copyright Law: Donglegate - Fifth Circuit Shreds DMCA, Tosses Damages Experts

Here's a scenario for a copyright plaintiff's lawyer:

Client comes to you.  Potential defendant has cracked (infringing) copies of your client's software on its system.  Client uses a "dongle" to protect the software:  you can't access or operate the software without the dongle.  The cracked copies of the software can run without using your client's dongle key: bypassing the encryption system.   You sue. Judge gives you an injunction, infringer proceeds to ignore it, keeps using copies and fails to account for missing laptops.  Defendant is big, profitable company, made lots of $$ using your infringements.

Enter the Digital Millenium Copyright Act:

17 USC § 1201. Circumvention of copyright protection system

(a) Violations Regarding Circumvention of Technological Measures. — (1)(A) No person shall circumvent a technological measure that effectively controls access to a work protected under this title. The prohibition contained in the preceding sentence shall take effect at the end of the 2-year period beginning on the date of the enactment of this chapter.

From Wikipedia:
A dongle is a small piece of hardware that connects to a laptop or desktop computer for the purpose of copy protection or authentication of software to be used on that system.[1]
Electrically, dongles mostly appear as two-interface security tokens with transient data flow that does not interfere with other dongle functions and a pull communication that reads security data from the dongle. These are used by some proprietary vendors as a form of copy protection or digital rights management, because it is generally harder to replicate a dongle than to copy the software it authenticates. Without the dongle, the software may run only in a restricted mode, or not at all. As of July 26, 2010 it became legal in the United States to use programs protected by this method without needing a dongle as according to the United States this technology is obsolete.

(no citations for that last proposition)

You have a SLAM DUNK, in collecting big damages right?   Not in the Fifth Circuit, and not if you have screwed up your damages claim.

Enter MGE UPS Systems v. GE Consumer and Indus. Inc., 2010 WL 2820006 (5th Cir. July 20, 2010). You can find the decision here.

Deciding an issue of first impression, the Fifth Circuit Court of Appeals found that the dongle wasn't used by the infringer to bypass copyright protections to make infringing copies, it was bypassed simply to use the infringing copy, so didn't violate 17 USC 1201.  That is now the law of the Fifth Circuit interpreting 17 U.S.C. 1201.   The Fifth Circuit reasoned that once you bypassed the dongle, there wasn't ANOTHER layer of protection, so using the cracked software was AOK under 17 U.S.C. 1201.   Also, the infringer's possession of a cracked copy was not sufficient to show that the DEFENDANT had bypassed the technology.

Ordinarily in copyright law, showing access plus an infringing copy is enough to prove direct copying - videos of people actually cracking software are pretty rare.   So the general rule is when a copyright owner busts someone with a lot of cracked software, it's pay up or shut up time.  Not in the Fifth Circuit!

But for the poor copyright owner, it gets worse.  Rule 26 of  the Federal Rules of Civil Procedure requires a litigant to calculate damages upfront.  This is usually impossible prior to discovery, so litigants usually put in something pro-forma and then try to amend/update as possible or necessary as early as reasonably possible.  In this case, the plaintiff put in that it would rely on its expert.  The expert calculated only the Plaintiff's losses based on theories that the trial court threw out.  The expert NEVER SOUGHT OR CALCULATED ACTUAL PROFITS RELATING TO THE INFRINGEMENT.

The result?  Since the expert's hokey theories were thrown out, plaintiff's lawyers were left with the gross sales of the infringer.  But it gets worse.  They never present to the jury the revenues that they claim are RELATED TO THE INFRINGEMENT.

Result?   The Fifth Circuit threw out all jury awards, granted plaintiff injuntive relief plus a "take nothing judgment" (those are the Fifth Circuit's actual words).

Time for a book plug, because obviously the message is not getting through.   When you start a copyright litigation, please buy my book Copyright Litigation Handbook.  I took three years to write the book combing the case law for examples of lawyers running afoul of the Federal Rules of Civil Procedure as applied to claims under the Copyright Act.  Nimmer it ain't.  Patry it ain't.  It is SHORT and USEFUL.  It doesn't try to replace or compete with a treatise on copyright law.  It's a little over $200.  Unlike any other publication on copyright law, each Chapter is chock full of screwups for the litigation practitioner to avoid. When you get to your Rule 26 disclosures on damages and experts, read three relatively short chapters:  Chapter 14 Discovery; Chapter 15: Evidence and Experts and Chapter 17:  Damages and Profits.  They are short chapters, it won't kill you.

I am reading more and more case law where experts are coming in with goofy theories and getting tossed out by judges.   You may need to pursue a few different theories in discovery and be prepared for at least one to be tossed as outright nonsense (economists, industry comparisons, etc.).  And if you can't get those billions you think your case is worth, it's better to take home at least the value of your legal fees and costs.

Purchase Copyright Litigation Handbook from West here  
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1 comment:

Christopher Fulmer said...

I think you're misreading the DMCA portion of the case, the meat of which is here:
The owner’s technological measure must protect the copyrighted material against an
infringement of a right that the Copyright Act protects, not from mere use or viewing.

So, if you have a technological measure that prevented people from doing X, the first question is "does X constitute copyright infringement"? If the answer is "no," then the measure can be cracked without violation section 1201(a).

At an extreme, suppose the following system: I distribute pre-loaded ebook readers with 1000s of books, each of which is protected by a software key, and make money by selling the keys. You figure out a way to work around the keys and unlock each of the books on your device, reading them all. Reading a book is not a copyright violation -- no copy, no derivative work, no public performance, etc... -- therefore, the DMCA is unaffected.

That doesn't leave me without remedies -- I probably have good claims for breach of contract or unjust enrichment. I just can't go after you for a DMCA violation. If I'm really worried about it, maybe I should use stronger encryption.