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Microsoft Corp. v. A&S Electronics, Inc.

United States District Court, N.D. California

March 14, 2017

Microsoft Corporation, Plaintiff,
A&S Electronics, Inc., ET AL., Defendants.



         Plaintiff Microsoft Corporation brings this action against defendants A&S Electronics, Inc. and Alan Z. Lin (collectively, “A&S”) alleging contributory copyright infringement, as well as claims for trademark infringement, false designation of origin, and unfair competition, and common law counts for constructive trust and an accounting. (Third Amended Complaint [“TAC”], Dkt. No. 45.) A&S previously brought a motion to dismiss the TAC. The Court denied that motion and instead directed the parties to file cross-motions for summary judgment, focused on the issue of whether the licensing agreements alleged in the TAC established that the software sold by A&S was not subject to a “first sale” defense to the copyright infringement claim. (Dkt. No. 54.) After a brief period of focused discovery, the parties' filed their motions for summary judgment on the first sale issue (Dkt. Nos. 72, 82) and oppositions thereto. The Court heard oral argument on February 7, 2017.

         The Court having considered the briefing, arguments, and admissible evidence[1] in support and opposition, and for the reasons stated herein, Denies the Cross-Motions for Summary Judgment on the first sale issue. First, triable issues of material fact exist that preclude summary judgment in favor of either party with respect to the sale of the software originally sold through the Home Use Program (“HUP”). Second, the parties have agreed that, because Microsoft product keys are not copyrightable works, and therefore the sale of cards containing the product keys would not be a sale of a copyrighted work, the first sale doctrine does not apply to the alleged sale of such product keys (as traced back to a Chinese student use program) located on “product key cards.”

         I. Legal Framework

         The federal Copyright Act protects “original works of authorship, ” including software programs. 17 U.S.C. §§ 101-103. The Copyright Act confers certain exclusive rights on copyright owners, including exclusive rights to reproduce the works and to distribute the works by sale or rental, and actions in violation of those rights constitute infringement. Id. § 106(1), (3). The Copyright Act contains limitations on those rights. Under section 109 of the Copyright Act, the exclusive distribution right is limited by the “first sale” doctrine, which allows owners of particular copies of copyrighted works to resell those copies. 17 U.S.C. § 109(a).[2] As the Supreme Court has held, “once the copyright owner places a copyrighted item in the stream of commerce . . . . he has exhausted his exclusive statutory right to control its distribution.” Quality King Distributors, Inc. v. L'anza Research Int'l, Inc., 523 U.S. 135, 137 (1998); see also UMG Recordings, Inc. v. Augusto, 628 F.3d 1175, 1179 (9th Cir. 2011).

         In the context of computer software, the exclusive reproduction right is limited by the “essential step” defense, which allows the owner of a copyrighted software program to make a copy of the computer program as an “essential step” in the utilization of the program, generally when installing (a copy of) the program onto the computer's hard-drive memory. 17 U.S.C. § 117(a)(1).[3] However, these limitations only apply when the particular copies of the copyrighted works at issue are owned rather than merely licensed for use. Vernor v. Autodesk, Inc., 621 F.3d 1102, 1107 (9th Cir. 2010). A true licensee cannot resell the software under the “first sale” doctrine or assert the “essential step” defense against a claim of unlawful reproduction. Id.

         Here, Microsoft alleges that A&S is liable for contributory infringement which requires Microsoft to establish: (1) direct infringement by a third party (violation of some copyright-protected right) and (2) defendant's knowledge of the direct infringing activity and intentional inducement or encouragement of such activity. See MDY Indus., LLC v. Blizzard Entm't, Inc., 629 F.3d 928, 937 (9th Cir. 2010); A&M Records, Inc. v. Napster, Inc., 239 F.3d 1004, 1013 (9th Cir. 2001). Microsoft asserts that the first sale doctrine does not apply to its software, and particularly to the software at issue in this litigation, because it was not sold to a first purchaser and then resold, but instead was merely licensed.

         The Court reviews a trilogy of cases which construct the relevant legal framework. To determine whether a software user is a licensee or an owner, the Ninth Circuit looks to whether the copyright owner: (1) “specifies that the user is granted a license”; (2) “significantly restricts the user's ability to transfer the software;” and (3) “imposes notable use restrictions.” Vernor, 621 F.3d at 1111; see also UMG Recordings, 628 F.3d at 1180. In Vernor, the Ninth Circuit held that software manufacturer Autodesk had: (1) “retained title to the software;” (2) “imposed significant transfer restrictions” including provisions that the license was non-transferable and the software itself could not be transferred or leased without written consent; and (3) imposed “restrictions against the use of the software outside the Western Hemisphere, ” among others. Vernor, 621 F.3d at 1111-12. Based on these and other restrictions, the court concluded “Vernor did not receive title to the copies from [initial purchaser] CTA and accordingly could not pass ownership on to others, ” so that both CTA's and Vernor's sales infringed on Autodesk's distribution rights. Id. at 1112.

         The following year, in UMG Recordings, the Ninth Circuit further held that merely labeling an arrangement as a license, or stating that the copyrighted works were “not for resale, ” was not dispositive of the issue. UMG Recordings, 628 F.3d at 1180. The Ninth Circuit instead analyzed the transfer itself, including whether the copyright holder retained “sufficient incidents of ownership, ” such as: (1) recipients expressing agreement to enter into a license; and (2) the copyright holder exercising any “meaningful control or even knowledge of the status” of the copyrighted work after distribution. Id. at 1182-83 (“UMG dispatched the CDs in a manner that permitted their receipt and retention by the recipients without the recipients accepting the terms of the promotional statements . . . . [and thereby] effected a gift or sale within the meaning of the first sale doctrine”).

         Finally, in Christenson, the Ninth Circuit clarified the parties' burdens on the issue of establishing a license versus a sale. Adobe Sys. Inc. v. Christenson, 809 F.3d 1071, 1078-79 (9th Cir. 2015). The Christenson court held that “the party asserting a first sale defense must come forward with evidence sufficient for a jury to find lawful acquisition of title, through purchase or otherwise, to genuine copies of the copyrighted software.” Id. at 1079. Once established, “[t]o the extent that the copyright holder claims that the alleged infringer could not acquire title or ownership because the software was never sold, only licensed, the burden shifts back to the copyright holder to establish such a license or the absence of a sale.” Id. The copyright holder must then offer evidence of the “specific license agreements…[that the court could] benchmark [ ] against the Vernor factors to determine whether there was a legitimate license at the outset, as well as whether downstream customers were ‘bound by a restrictive license agreement' such that they are ‘not entitled to the first sale doctrine.'” Id. at 1080 (citing Vernor, 621 F.3d at 1113).

         In Christenson, the software reseller offered his own sworn statement as well as an invoice to show that he had “lawfully purchased genuine copies of Adobe software from third-party suppliers before reselling those copies.” The court found such evidence “discharged [the reseller's] burden with respect to the first sale defense.” Id. When the burden then shifted to Adobe, the court held that “Adobe's effort to substitute general testimony and generic licensing templates in lieu of the actual licensing agreements does not withstand scrutiny under Vernor” which required consideration of the precise terms of the applicable agreements, not merely whether the agreement was titled a licensing agreement. Id.

         II. Analysis

         Here, with respect to the HUP software, A&S has offered a sworn statement, an invoice, a transmittal email, and a cashier's check for payment as proof that it purchased genuine Microsoft software from Flashback Technology (“FTB”). Microsoft has countered with evidence suggesting that: (1) the invoice did not appear to be genuine, according to FTB's person most knowledgeable; and (2) the first, upstream purchaser of the software, Jon Cossin, acquired it unlawfully, such that no subsequent sales could be lawful.[4] Thus, the record establishes disputed issues of material fact as to whether A&S lawfully purchased genuine copies of the Microsoft software it sold.[5]

         The Court next looks to Microsoft's showing on its burden to establish the Vernor/UMG Recordings factors that would demonstrate a license rather than a sale. The evidence tracing the sale of the copy of the software at issue here indicates the following: one, Microsoft engaged Digital River to serve as its “fulfillment agent, ” and manage purchases of software to Amazon employees through a HUP program. Two, Amazon employee Jon Cossin acquired the ...

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