Wall Data, Inc. v. L.A. Cnty. Sheriff's Dep't, 447 F.3d 769 (9th Cir. 2006) – Fair Use Doctrine application in software licensing infringement cases.  Over Deployment issue.

Introduction

The blog discusses a key issue that can pop up in software audit cases such as Autodesk licensing audits, and software compliance with Microsoft, Adobe and others.  If you are over-installing software on your company networks, will this lead to allegations of willful copyright infringement?

When this happens, you may be tempted to argue “fair use defense” but here is one case from the Ninth Circuit that seemed to favor software publishers over companies who exceed the scope of their licensing rights.  This is an important case to be aware of.

Key Facts

Here are some of the key facts from the case:

“Defendant Los Angeles County Sheriff's Department purchased 3,663 licenses for plaintiff Wall Data, Inc.'s computer software. Defendant installed the software in 6,007 computers, but configured it so that only 3,663 computers could use it at the same time. Plaintiff alleged that its software was “over-installed” in violation of the licensing agreement that restricted use of each license to a “single designated computer” and prohibited use “in any other multiple computer or multiple user arrangement.”

Defendant appealed the district court's ruling that limiting the number of “useable” copies to the number of licenses was not fair use.

The End User “Click Through” License Agreement

According to the case facts:

“Wall Data grants you (“You”), the end user, a non-exclusive license to use the enclosed software program on a single Designated Computer for which the software has been activated. A “Designated Computer” is either:

(i) a stand-alone workstation,

or

(ii) a networked workstation which does not permit the Software to be shared with other networked workstations.

You may not use the Software in any other multiple computer or multiple user arrangement. You may not use the Software other than on a Designated Computer, except that You may transfer the Software to another Designated Computer and reactivate it for use with such other Designated Computer not more than once every 30 days, provided that the Software is removed from the Designated Computer from which it is transferred.”

The click through nature of the agreement was discussed:

“A “click-through license” is a form embedded in computer software which requires the person initially installing the software onto a computer to affirmatively click a box or an “accept” button indicating that the user accepts the terms of the license in order to complete the software installation and to use the software after it is installed See, e.g., SoftMan Prods. Co. v. Adobe Sys. Inc., 171 F.Supp.2d 1075, 1080 (C.D.Cal.2001). The grant clause of the standard RUMBA click-through license at the time of the 1996 purchase stated that

The “click-through” end user license can be distinguished from a “shrink wrap” licensing agreement

“A shrink-wrap license is a form on the packing or on the outside of the CD-ROM containing the software which states that by opening the packaging or CD-ROM wrapper, the user agrees to the terms of the license. See, e.g., Specht v. Netscape Commc'n Corp., 306 F.3d 17, 22 n. 4 (2d Cir.2002).”

Issue

Whether it was fair use to install software on more computers than permitted under a license where the total number of computers that may access the software at the same time never exceeds the total number of licenses purchased.

Holding

The court held that defendant's over-installation of software was not fair use, finding all four fair use factors supported that conclusion. In determining that the use was not transformative, the court noted that defendant's argument was weakened by the fact that it made exact copies of the software and used it for the same purpose as the original. Moreover, although defendant did not commercially compete with plaintiff, the use was still commercial because the repeated and exploitative use saved defendant the expense of purchasing more authorized copies or more flexible licenses.

The court also determined that the copying affected plaintiff's potential market because defendant only purchased a few licenses and found a way to install the program on all its computers without paying the fee required for each installation. Defendant could have bargained for such flexibility in its license agreements, but it did not, leading to a negative effect on the potential market. The nature of the work and amount and substantiality factors went against fair use because computer programs are protected works, and the entire program was copied verbatim.

Copyright Damages and Attorney Fees

After proving its claim for losses to the jury, the Court upheld the aware of damages and attorney fees

“We conclude that such instructions properly state the law of damages in a copyright infringement suit. Actual damages are usually determined by the loss in the fair market value of the copyright, measured by the profits lost due to the infringement or by the value of the use of the copyrighted work to the infringer.” Polar Bear Prods., Inc. v. Timex Corp., 384 F.3d 700, 708 (9th Cir.2004) (quoting McRoberts Software, Inc. v. Media 100, Inc., 329 F.3d 557, 566 (7th Cir.2003)).  It is not improper for a jury to consider either a hypothetical lost license fee or the value of the infringing use to the infringer to determine actual damages, provided the amount is not based on `undue speculation.'” The district court properly instructed the jury in line with our circuit's caselaw, and accordingly this instruction was proper.  Moreover, the jury's finding was appropriate and was not speculative, and therefore any error was harmless.

Specifically, the jury heard testimony from Wall Data's vice president that the average price Wall Data charged the vendor that sold software to the Sheriff's Department was $189. She admitted on cross-examination that government entities were charged $113 per copy. The jury returned a general verdict awarding Wall Data damages of $210,000. It is not clear how the jury calculated this award: At one extreme, if the jury found that the Sheriff's Department infringed on 2,344 copies (6,007 computers — 3,663 total RUMBA Office and RUMBA Mainframe licenses), the award was approximately $90 per copy. At the other extreme, if the jury found that the Sheriff's Department infringed on 3,962 copies (6,007 computers — 2035 RUMBA Office licenses), the award was $53 per copy. Either way, these amounts were within an acceptable range — $85 original price paid by the Sheriff's Department and $189 average price. Because “the jury's verdict[] find[s] substantial support in the record and lie[s] within the range sustainable by the proof,” any error in instruction was harmless. Los Angeles Mem'l Coliseum Comm'n v. Nat'l Football League,791 F.2d 1356, 1365 (9th Cir.1986).”

The award of attorney fees was upheld

The court discussed:

“The Copyright Act provides for an award of reasonable attorneys' fees “to the prevailing party as part of the costs.” 17 U.S.C. § 505. A district court may consider (but is not limited to) five factors in making an attorneys' fees determination pursuant to § 505. These factors are:

(1) the degree of success obtained,

(2) frivolousness,

(3) motivation,

(4) reasonableness of losing party's legal and factual arguments,

and

(5) the need to advance considerations of compensation and deterrence. See Smith v. Jackson, 84 F.3d 1213, 1221 (9th Cir.1996) (citations omitted). We review a district court's decision regarding the award of attorneys' fees under the Copyright Act for an abuse of discretion. See Mattel, 353 F.3d at 814.