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

Mini Bluetooth Dongle

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to use programs protected by this method without needing a dongle as according to the United States this technology is obsolete.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  

$20 Million Copyright Infringement Jury Award Upheld

Kudos to David Wolfsohn at Woodcock Washburn in Philadelphia - on remand from the 3rd Circuit, the District Court upheld his $20 million copyright infringement judgment.  The case involved an employee who filched sales materials from an insurance company and used the materials secretly to poach clients for years.  Wolfsohn got damages for infringements reaching much farther back than the three years provided in 17 USC 507.   Plaintiffs whose unregistered copyrights were infringed are entitled only to actual damages and profits under 17 USD 504.

For the March 19, 20101 decision, click on the link below.

http://www.scribd.com/doc/28814393/Graham-v-Haughey-03-19-2010-20-Million-Copyright-Infringement-Jury-Award-Upheld

I reprint my post of August 2, 2009 below on the Graham v. Haughey case.

The Federal "Discovery" Rule: Can you sue for infringements occuring more than three years ago?
In Graham v. Haughey, --- F.3d ---, 2009 WL 1564223 (3d Cir. June 5, 2009), the Third Circuit considered the question of whether a victim of copyright infringement may sue for infringements that occurred over three years prior to the commencement of the lawsuit.
At issue is the federal "discovery" rule for accrual of an action versus the "injury" rule. I discuss this distinction in Chapter 5 of my Copyright Litigation Handbook (West 4th Ed. 2009). I was pleased to see that the Third Circuit discussed the cases that I had cited on this conflict (by the way, this fourth edition of Copyright Litigation Handbook just shipped last week).
The question is whether a cause of action for copyright infringement "accrues" when the infringement takes place (the "injury" rule) or whether it accrues when the victim, exercising reasonable diligence, discovers the infringement (the "discovery" rule). Most circuits have ruled that the federal discovery rule applies. But some district courts in the Second Circuit, relying on a powerfully-reasoned decision by Judge Kaplan in Auscape Intern. v. National Geographic Soc., 409 F. Supp.2d 235 (S.D.N.Y. 2004), have applied the "injury" rule.

To illustrate: under the injury rule, a court would either dismiss or grant summary judgment on a pleading that alleged infringements over three years prior to the action being filed.

Under the discovery rule, a court would permit equitable defenses such as tolling for fraudulent concealment and factfinding to determine whether a plaintiff could have, did, or should have discovered infringements over three years old prior to filing suit.

These rules relate to "accrual" of the action. The statute of limitations is always three years under 17 U.S.C. 507(b).
Graham v. Haughey determined that the "discovery" rule applies and that the plaintiff could sue on infringements that occurred over three years prior to the commencement of the action. Graham v. Haughey digs into the legislative history and consists of a point-by-point refutation of the Auscape decision. It also has an excellent discussion of issues relating to burdens of proof on damages, the nexus neccessary for damages to be attributable to copyright infringement, and the role of a judge in reviewing a jury verdict of copyright infringement.
Graham's facts are interesting because the infringement was committed by an ex-employee. The new employee used the infringing documents to generate millions in profits, but the publications were in proposals kept confidential by both the infringer and the recipient of the proposals for many years. After these secret transactions were finally revealed, the copyright owner sued and obtained a jury verdict in excess of $16 million.
This case involved an ex-employee breaching a contract not to retain or use copyrighted materials, so is an important cautionary tale for both new employers who don't want millions in liabilities and old employers who wish to protect their materials.
This is the odd case where a "publication" was not "public".
The Third Circuit remanded on apportionment issues.

Graham's counsel David J. Wolfsohn of Philadelphia's Woodcock Washburn (who was successful on the appeal and is pictured above) informs me that the matter is in abeyance pending Haughey's cert petition (due Sept 3). Haughey was represented by Floyd Abrams of Cahill Gordon & Reindell.