Intellectual Property | Copyright Infringement | Technology | Software

Microsoft and the First Sale Doctrine – Copyright case brief!

Jan 10th, 2018 | By | Category: Microsoft Disputes

Copyright Case Briefs –  Microsoft Corp. v. Harmony Computer & Electronics, Inc., 846 F. Supp. 208 (E.D.N.Y. 19) United States District Court, Eastern District of New York

Defense of BSA audits and litigation 

SUMMARY:

Plaintiff Microsoft Corporation, sought declaratory and injunctive relief and treble damages against Defendants Harmony Computers & Electronics Inc. (“Harmony”) and its president, Stanley Furst (together the “defendants”) for allegedly selling, without authorization, copyrighted Microsoft MS-DOS and Microsoft Windows software programs and accompanying materials (“Products”). 

FACTS:

Microsoft argued that because the defendants were not licensed by Microsoft, they could not sell Microsoft Products, whether the products were counterfeit or not. Plaintiffs argued that even buying such products from legitimate Microsoft licensees violated Microsoft’s licensing restrictions by distributing the products “stand-alone.” Plaintiffs also alleged, and defendants acknowledged, that defendants persisted in their sales of Microsoft Products despite being notified of the alleged illegality of their activity by plaintiff’s cease and desist letters on April 19, June 16, July 14, and September 14, 1993. Plaintiffs alleged that twenty-one pieces of the Products seized from the defendants’ premises were counterfeit.

Defendants invoked the first sale doctrine as their defense. Plaintiff argued that the first sale doctrine did not apply because Microsoft never sells its Products. Defendants also denied that any of the Microsoft Products they sold were counterfeit, as they bought them from Microsoft licensees under the good faith belief that the Products were genuine.

Listen to Attorney Steve explain the First Sale Doctrine in this Video!

first sale doctrine explained

VIDEO:  Watch Attorney Steve explain this legal concept in this video.  Make sure to SUBSCRIBE to our popular legal channel to get the latest videos FREE.  We are now up over 5,100 subscribers.  As we like to say “Be Smarter Than Your Friends.”

PROCEDURAL HISTORY: 

On January 12, 1994, upon plaintiff’s ex parte application and based on plaintiff’s evidence that defendants were illegally copying and distributing Microsoft Products in violation of plaintiff’s exclusive rights as the copyright holder, the Court ordered the seizure and impoundment of Microsoft Products and related business records at defendants’ retail establishment, and temporarily restrained defendants from copying, using, distributing, secreting, or destroying any of plaintiff’s copyrighted software.

The Court held an initial hearing on plaintiff’s motion for preliminary injunction on January 20, 1994. On January 24, 1994, the Court extended the Temporary Restraining Order until February 1, 1994, pending the Court’s decision on plaintiff’s motion for preliminary injunction.

ISSUE:

Whether the first sale doctrine applies to copies of Microsoft Products purchased by the defendants given that they were purchased from vendors who the defendant believed to be Microsoft licensees.

RULE OF LAW:

A party seeking a preliminary injunction must establish both irreparable injury and either:

(1) a likelihood of success on the merits

or

(2) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly in favor of the movant. ICN Pharmaceuticals, Inc. v. Khan, 2 F.3d 484, 489 (2d Cir.1993). 

To establish a prima facie case of copyright infringement, the plaintiff must show that:

(1) it is the valid owner of a copyright

and

(2) defendant has engaged in unauthorized “copying,” where “copying” “is shorthand for the infringing of any of the copyright owner’s five exclusive rights, described at 17 U.S.C. § 106.” 

Section 106 of title 17 of the United States Code:

“The owner of copyright under this title has the exclusive rights to do and to authorize

(1) to reproduce the copyrighted work in copies…

(3) to distribute copies… of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending…”

Upon establishing a “reasonable likelihood of success on the merits,” in an action for copyright infringement, irreparable injury is presumed. Video Trip Corp. v. Lightning Video, Inc., 866 F.2d 50, 51–52 (2d Cir.1989).

Section 109(a) of title 17 of the United States Code: (a) Notwithstanding the provisions of section 106(3), the owner of a particular copy … lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy …

ANALYSIS:

  • Copyright Ownership

 Microsoft submitted certificates of federal copyright registration, which constituted prima facie evidence of the validity of Microsoft’s copyrights. Defendants did not contest Microsoft owned the Products.

  • Unauthorized Distributions 

Defendants were not Microsoft licensees and therefore were not authorized to sell Microsoft Products. It was established that defendants sold Microsoft Products. Because the defendants were not authorized by Microsoft to distribute Microsoft Products, their distribution of those Products constituted a prima facie case and irreparable harm to the plaintiff was presumed.

The Court noted that it was unlikely that the defendants were innocent infringers because they were notified by Microsoft of the unlawfulness of their activities. The Court also noted that a Good Faith Defense does not exist for copyright infringement. The Court therefore rejected the defendants’ good faith defense.

Defendants also provided no evidence to contradict plaintiff’s claim that the Products they sold included counterfeits. However, because plaintiff was likely to succeed on the merits of its copyright infringement claim on the grounds that defendants were not licensees and therefore not authorized to distribute any Microsoft products, counterfeit or not, the Court declined to make a finding as to the genuineness of the Microsoft Products sold by defendants.

  • First Sale Doctrine Does Not Apply 

Defendants failed to prove that the first sale doctrine applied because they did not trace their purchase of Microsoft Products to a “first sale” by Microsoft or any party authorized by Microsoft to sell the Products. Defendants had the burden of proving that the particular pieces of the copyrighted work it sold were lawfully made or acquired. 

Here, defendants argued that the “first sale” occurred when they bought the Products from entities whom they believed to be authorized Microsoft licensees. However, defendants had the burden of tracing the chain of title to show that their authority to sell Microsoft Products flowed from the copyright holder. Defendants’ only evidence of a chain of title for any of their Products was an invoice of their purchase of several pieces of Microsoft Products from an entity called Innovative Datronics Corp. The Court held that this was not enough to establish a first sale.

Furthermore, the Court also noted that Microsoft only licenses and does not sell its Products. The Court noted that entering a license agreement is not a “sale” for the purpose of the first sale doctrine and the only chain of distribution that Microsoft authorized was one in which all possessors of Microsoft Products have only a license to use, rather than actual ownership of the Products.

Therefore, the Court rejected the defendant’s first sale defense.

  • Exceeding Scope of Licensing Agreements 

The Court held that plaintiff was likely to succeed on its claim that defendants were liable for copyright infringement for exceeding the scope of Microsoft’s license agreements.

Plaintiff traced a unit of MS-DOS 6.0 that defendant had sold to plaintiff’s undercover investigators, back to Amax Engineering, a Microsoft licensee that was authorized to distribute MS-DOS 6.0 exclusively with the sale of its personal computer systems. Microsoft software seized from defendants’ premises were not traceable to a specific licensee, but plaintiff’s counsel affirmed that none of the Products was authorized to be sold stand-alone.

Every Microsoft license agreement contains the same licensing language, which provides in relevant part, that licensees: … shall distribute Product(s) only with [licensee’s] Customer System(s) … for the particular Product(s) and only inside the Customer System package. [The licensee] shall provide a copy of the … Product with, and only with, each Customer System on which the corresponding Preinstalled Product Software is distributed.

The Court held that the defendant’s argument was unpersuasive and that its actions exceeded the scope of the license agreement. 

CONCLUSION:

The Court in this case underscored the idea that the first sale doctrine does not apply to products that are licensed rather than sold. The Court clarified that in order to invoke the first sale doctrine, the defendant must demonstrate that the chain of sales which led to the defendant’s use/sale of the product were all legitimate sales. The defendant in this case failed to meet that burden.

Contact a Copyright Infringement Attorney

We are happy to provide a no cost initial consultation by calling (877) 276-5084.

This blog was written by Claudia Lin, law student at U.S.C. School of Law.

The following two tabs change content below.
We are a business and civil litigation firm with a focus on copyright infringement cases involving illegal movie downloads (torrent cases such as London Has Fallen, ME2 Productions and Malibu Media defense), software audits (ex. Microsoft audits, SPLA, Autodesk audit notification letter, Siemens PLM defense, SIIA, Adobe and Business Software Alliance defense) and other software vendors threatening piracy and infringement. We also handle cases involving internet law, anti-SLAPP, media law, right of publicity, trademarks & domain name infringement, and we have a niche practice area handling California BRE licensing disputes, accusations, subpoena response, statement of issues and investigations. We have offices in San Francisco, Beverly Hills, Newport Beach, San Diego & Phoenix, Arizona and accept federal copyright and trademark cases nationwide. All content on our website is general legal information only and not a substitute for legal advice, and should not be relied upon. Decisions to hire counsel should not be based on advertising alone. Blogs, videos and podcasts are authored by Steve Vondran, Esq. unless otherwise noted. We can be reached at (877) 276-5084.

Latest posts by Vondran Legal - Civil Litigation firm handling Software audits, Copyright Infringement, Internet law, and general Business & Real Estate law (see all)

Comments are closed.