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Copyright Infringement Lawsuit

Vault Corporation sues Quaid Software Limited

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UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF LOUISIANA

VAULT CORPORATION versus QUAID SOFTWARE LIMITED

Filed Feb 12 3:29 pm '87 Civil Action Clerk NO. 85-2283 SECTION "B"

Plaintiff, Vault Corporation, instituted an action against defendant, Quaid Software Limited, seeking a permanent injunction and damages. Vault manufactures certain data security software designed to prevent the copying of software programs, which is sold under the registered trademark PROLOK. Quaid has developed a program called "CopyWrite" which unlocks the PROLOK security software and allows the program contained on the protected diskette to be copied.
This matter came on for hearing on the motion of plaintiff, Vault Corporation, for a preliminary injunction enjoining defendant, Quaid Software Limited, from advertising for sale or selling that portion of its CopyWrite Program that unlocks PROLOK; from violating the PROLOK License agreement; from misappropriating Vault's trade secret (the PROLOK program); from infringing or contributorily infringing Vault's copyright of PROLOK; and ordering the impoundment of all Quaid's copies of CopyWrite that are capable of unlocking PROLOK. The Court, having heard the testimony at the hearing and having considered the evidence, the applicable law, the amicus brief, and the memoranda submitted by the parties, now makes the following findings of fact and conclusions of law pursuant to Fed.R.Civ.P. 52(a), as hereafter set forth.

FINDINGS OF FACT

1. Plaintiff, Vault Corporation (hereinafter "Vault" ), is a corporation organized pursuant to the laws of the State of California and is domiciled in West Lake Village, California. Plaintiff does business in the State of Louisiana.

2. Defendant, Quaid Software Limited (hereinafter "Quaid" ), is a corporation organized under the laws of the Province of Ontario, Canada, and is domiciled in Toronto, Ontario, Canada.

3. Vault manufactures and distributes a line of computer software security products designed to prevent the copying of programs. Its primary product, PROLOK, is a program placed on a medium of storage referred to in the computer trade as a floppy diskette, upon which a "read only memory" (ROM) type alteration (termed a "hard fingerprint" by Vault) has been made.

4. There are two parts to PROLOK: the software component (program) and the fingerprint disk (read only memory chip).

5. Vault developed the original commercial version of PROLOK in early 1983. Since 1983 Vault has produced three substantially revised versions of PROLOK. The first is described as versions 1.01 - 1.06, the second as version 1.7, and the third as versions 2.0 - 2.01.

6. PROLOK is sold on the open market through retail dealers, through mail order, and through direct sales to other software manufacturers.

7. The PROLOK diskettes are sold in various different packages, containing different numbers of diskettes, all of which indicate that PROLOK is copyrighted. Additionally, the following license agreement is printed on each package:

IMPORTANT! VAULT IS PROVIDING THE ENCLOSED MATERIALS TO YOU ON THE EXPRESS CONDITION THAT YOU ASSENT TO THIS SOFTWARE LICENSE. BY USING ANY OF THE ENCLOSED DISKETTES(S), YOU AGREE TO THE FOLLOWING PROVISIONS. IF YOU DO NOT AGREE WITH THESE LICENSE PROVISIONS, RETURN THESE MATERIALS TO YOUR DEALER, IN ORIGINAL PACKAGING WITHIN 3 DAYS FROM RECEIPT, FOR A REFUND.
1. This copy of the PROLOK Software Protection System and this PROLOK Software Protection Diskette (the "Licensed Software") are licensed to you, the end-user, for your own internal use. Title to the Licensed Software and all copyrights and proprietary rights in the Licensed Software shall remain with VAULT. You may not transfer, sub-license, rent, lease, convey, copy, modify, translate, convert to another programming language, decompile or disassemble the Licensed Software for any purpose without VAULT's prior written consent.
2. THE LICENSED SOFTWARE IS PROVIDED "AS-IS". VAULT DISCLAIMS ALL WARRANTIES AND REPRESENTATIONS OF ANY KIND WITH REGARD TO THE LICENSED SOFTWARE, INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. UNDER NO CIRCUMSTANCES WILL VAULT BE LIABLE FOR ANY CONSEQUENTIAL , INCIDENTAL, SPECIAL OR EXEMPLARY DAMAGES EVEN IF VAULT IS APPRISED OF THE LIKELIHOOD OF SUCH DAMAGES OCCURRING. SOME STATES DO NOT ALLOW THE LIMITATION OR EXCLUSION OF LIABILITY FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES, SO THE ABOVE LIMITATION OR EXCLUSION MAY NOT APPLY TO YOU.

8. On PROLOK version 2.0, the first shipments of which were made on or about August 27, 1985, the following language was included: To the extent the laws of the United States of America are not applicable, this license agreement shall be governed by the laws of the State of Louisiana.

9 Vault sells blank protected diskettes to software producers. The software producer places his program on a PROLOK diskette, and sells the diskette to the public. The user of a program placed on a PROLOK diskette cannot make a copy of the program that will run independently of the original PROLOK diskette. The sole purpose of PROLOK is to inhibit copying of the program by the user.

10. Vault at all times attempted to prevent the general public from discovering the PROLOK program, method and technology. Their efforts included encrypting the PROLOK program in four layers of code, separating the various different programmers working on the program from each other, having all employees sign nondisclosure agreements prohibiting them from disclosing any of Vault's secrets, the use of shredding devices at the close of business each day to shred all paper containing any portion of the PROLOK program, and keeping the master PROLOK program locked in a safe.

11. Periodically Vault changes PROLOK in order to make it more difficult to be broken or unlocked.

12. The PROLOK licensing agreement is not necessarily enclosed in the sale by the software manufacturer to the ultimate user. The user usually is not aware that the program is on a PROLOK diskette.

13. Vault registered the copyrights of PROLOK versions 1.7 and 2.0 on August 8, 1985.

14. Defendant, Quaid Software Limited , manufactures at least three different computer software products and one hardware product.

15. Quaid manufactures a software program called "CopyWrite", which allows a user to make copies of programs contained on floppy diskettes. A segment of CopyWrite called "RAMKEY" allows a user to make copies of software programs placed on a PROLOK disk.

16. The development of CopyWrite took place at Quaid's offices in Toronto, Ontario, Canada.

17. CopyWrite is sold by Quaid primarily through mail order sales solicited by advertising in national magazines. The shipments are made from Quaid's offices in Canada.

18. Quaid advertises its products in at least six different personal computer publications which are distributed in all fifty states, including Louisiana. These publications include "Personal Computing", "PC Magazine", "BYTE", "Infoworld", "PC World Magazine", and "PC Tech Journal". In its advertisements, Quaid solicits direct mail sales of CopyWrite for $50.00 (U.S.) per unit. The advertisements state that CopyWrite is revised monthly to keep up with the latest in copy protection.

19-21 (...synopsis...) Quaid sells product in Louisiana but does not maintain any offices or personnel in Louisiana.

22. Quaid has never purchased any PROLOK diskettes in Louisiana. Quaid has only purchased PROLOK diskettes by mail. These diskettes were received and used by Quaid solely in Canada.

23. It is an ordinary practice of computer users to purchase computer software and immediately make archival backup copies of that software. This is done in order to assure the user that in the event of mechanical, electrical or physical damage to the software program or disks, a functional backup copy is available for use.

24. Without the use of CopyWrite or other methods of unlocking PROLOK, a purchaser of a PROLOK protected software program cannot make a functional archival copy of that program.

25. Although one can make a "backup" copy of a PROLOK protected software program without CopyWrite or a similar product, that copy is not workable in the event that the original PROLOK disk is extensively damaged, destroyed or lost. The backup copy will operate only as long as the original PROLOK diskette is in either of the two disk drives of the computer. The backup copy will not operate by itself.

26. In order to unlock PROLOK protected software programs, Quaid developed RAMKEY and incorporated it within the CopyWrite product. The means for creating the RAMKEY program evolved in three different stages. In the first stage, Quaid developed RAMKEY by analyzing the operation of PROLOK using Disk Explorer and IBM Debug, two products sold on the open market. this analysis took place in September or October 1983. The next version of RAMKEY was developed with information gained through the disassembly and decompilation of PROLOK. The RAMKEY product developed through this means was discontinued in July 1984. Subsequently, Quaid developed a new software program known as "Monitor" which allowed Quaid to analyze the functions of various programs, including PROLOK, without decompiling or disassembling PROLOK. Quaid developed an updated version of RAMKEY through this analysis.

27. Vault contends that Quaid made an illegal copy of PROLOK by loading the PROLOK program into the random access memory (RAM) of Quaid's computer. However, any person who purchases a PROLOK disk must necessarily load the PROLOK program into RAM in order to utilize the program.

28. There was no evidence introduced that Quaid has ever made a physical copy of PROLOK which could be sold or loaned to others.

29. Quaid neither sought nor obtained the permission of Vault to copy, disassemble, decompile or reverse engineer the PROLOK program.

30. Decompilation and disassembly is the process by which a machine language program is placed in another programming language which is more readily understood by human beings. Quaid has neither decompiled nor disassembled PROLOK since July 1984.

31. Thirty characters within the 1984 PROLOK program were similar to thirty characters in the 1984 RAMKEY module of the CopyWrite program. This amounted to one page out of approximately eighty pages.

32. This 1984 version of RAMKEY was discontinued in July 1984. No evidence was introduced to indicate that there has been any source code common to PROLOK and RAMKEY since that time.

33. RAMKEY is not a "substantially similar copy" of PROLOK, nor can it be said that RAMKEY is a "recasting, transformation or adaptation of PROLOK"

34. A copy of a program placed on a PROLOK diskette made by using CopyWrite/RAMKEY is a fully operating copy of the program. It will operate completely independently of the original PROLOK diskette.

35. CopyWrite/RAMKEY is used to make legitimate archival copies of computer software programs.

36. CopyWrite is also used as a diagnostic tool for assessing the quality of computer programs.

37. Another use of CopyWrite is the copying of unprotected programs. CopyWrite allows the user to make a more accurate copy of the program than the copy utility programs provided to users by hardware manufacturers.

38. In selling CopyWrite , Quaid takes steps to prevent the use of CopyWrite for illegal purposes. These steps include:

a) Statements in advertising to the effect that CopyWrite should not be used for making illegal copies;

b) Statements in the CopyWrite user manuals to the effect that CopyWrite should not be used for making illegal copies;

c) The incorporation of code within the CopyWrite program which allows the tracing of any copied programs;

d) Taking steps in prosecuting individuals who were found to be using CopyWrite to make illegal copies.

CONCLUSIONS OF LAW

1-6 (...synopsis...) Discussion of jurisdiction provided by Louisiana long-arm statute.

7. Vault claims that jurisdiction exists here under subsection (4) because Quaid causes injury in Louisiana in at least three different ways. Plaintiff argues that: 1) Louisiana residents use CopyWrite to make unauthorized copies of programs produced by Louisiana software producers; 2) Louisiana residents use CopyWrite to make unauthorized copies in Louisiana of programs produced in other states; and 3) persons in other states use CopyWrite to copy programs produced by Louisiana companies. Vault maintains that Louisiana has a strong interest in redressing the injury being done to Louisiana software publishers and also to corporations doing business in Louisiana.

8. Quaid has sold computer software, in particular CopyWrite, in Louisiana. Vault's claims against Quaid arise from the sale of CopyWrite to users in Louisiana as well as the other 49 states. These users purchase CopyWrite to make copies of PROLOK protected disks.

9. Since the Louisiana long-arm statute is to be liberally construed in favor of finding jurisdiction, this Court concludes that there is a nexus between sales of CopyWrite in Louisiana and Vault's claims against Quaid.

10. Vault has moved for an order enjoining Quaid from advertising for sale or selling that portion of it CopyWrite program that unlocks PROLOK; from violating the PROLOK License agreement; from misappropriating Vault's trade secret (the PROLOK Program); and from infringing or contributorily infringing Vault's copyright on PROLOK. Vault is further seeking impoundment of all Quaid's copies of CopyWrite that are capable of unlocking PROLOK.

11. In considering a motion for preliminary injunctive relief, a court must carefully weigh four factors:

  1. whether there is a substantial likelihood that movant will prevail on the merits;

  2. whether the movant will suffer irreparable injury if relief is denied;

  3. whether the threatened injury to the movant outweighs the threatened harm the injunction may do to the nonmoving party;

  4. whether the granting of the preliminary injunction will be in the public's interest.

(...citations...)

12. The grant or denial of a preliminary injunction rests in the discretion of the trial court. (...citations...)

13. A finding against the movant on any of these four factors will justify the refusal of the preliminary injunctive relief. (...citations...)

COPYRIGHT INFRINGEMENT

14. This court will first address the issue of copyright infringement. In a copyright infringement case, the substantial likelihood of success on the merits prong of the preliminary injunction test is predominant. (...citations...)

15. The second factor, that of proving irreparable harm, is generally not required in copyright litigation. It is presumed once the moving party has established a case copyright infringement. (...citations...)

16. The third factor, balancing of hardships, is not usually dispositive in a copyright infringement action. (...citations...)

17. As to the fourth factor, "the public interest can only be served by upholding copyright protections and, correspondingly, preventing the misappropriation of the skills, creative energies, and resources which are invested in the protected work." (...citations...)

18. To establish copyright infringement, a plaintiff must prove ownership of a valid copyright and "copying" by the defendant of the copyrighted work. (...citations...)

19. (...synopsis...) Vault owns and has registered the copyrights to PROLOK.

20. A copyright infringement occurs when a person violates any of the exclusive rights of the copyright owner as provided by Sections 106-118 of the Copyright Act. 17 U.S.C. § 501(a) (1977). Among the exclusive rights of the copyright owner are the right to reproduce and to authorize the reproduction of the copyright work in copies, the right to prepare derivative works based upon the copyrighted work, and the right to distribute copies of the copyrighted work to the public by sale or lease. 17 U.S.C. § 106 (1977) .

21. Vault claims that Quaid has infringed its copyright in three different ways:

  1. First, Vault claims that Quaid infringes its copyright whenever an employee of Quaid loads a PROLOK diskette in a personal computer's random access memory (RAM). By loading the PROLOK program into RAM, Vault claims that Quaid is making an unauthorized copy of PROLOK;

  2. Vault contends that CopyWrite is an unauthorized derivative work of PROLOK;

  3. Vault argues that by producing CopyWrite, Quaid is a contributory infringer because CopyWrite may be used to make an unauthorized copy of copyrighted software placed on a PROLOK protected diskette.

22. Section 117 of the 1976 Copyright Act provides as follows:

  1. Notwithstanding the provisions of section 106, it is not an infringement for the owner of a copy of a computer program to make or authorize the making of another copy or adaptation of that computer program provided:

  2. that such a new copy or adaptation is created as an essential step in the utilization of the computer program in conjunction with a machine and that it is used in no other manner,

  3. or that such new copy or adaptation is for archival purposes only and that all archival copies are destroyed in the event that continued possession of the computer program should cease to be rightful.

  4. Any exact copies prepared in accordance with the provisions of this section may be leased, sold, or otherwise transferred, along with the copy from which such copies were prepared, only as part of the lease, sale, or other transfer of all rights in the program. Adaptations so prepared may be transferred only with the authorization of the copyright owner.

17 U.S.C. § 117 (1977).

23. Subsection (1) of Section 117 exempts the "copying" of the computer program which is performed when a program is loaded into computer's random access memory (RAM). Quaid's actions clearly fall within this exemption. The loading of the PROLOK program into the RAM of a computer is an "essential step in the utilization" of the PROLOK program. Therefore, Quaid has not infringed Vault's copyright by loading PROLOK into RAM.

24. Vault has contended that RAMKEY is a derivative work of PROLOK. Section 101 of the Copyright Act defines a derivative work as:

A "derivative work" is a work based upon one or more preexisting works, such as a translation, musical arrangement, dramatization, fictionalization, motion picture version, sound recording, art reproduction, abridgment, condensation, or any other form in which a work may be recast, transformed, or adapted. A work consisting of editorial revisions, annotations, elaborations, or other modifications which, as a whole, represent an original work of authorship, is a "derivative work".

17 U.S.C § 101 (1977).

25. Section 106(2) grants the holder of the copyright the exclusive right to prepare derivative work. "To constitute a violation of section 106(2) the infringing work must incorporate in some form a portion of the copyrighted work.." (..citations...) The allegedly infringing work must be a "substantially similar copy" of the original work.

26. There is no substantial similarity between CopyWrite and PROLOK. In 1984 thirty characters of RAMKEY were copied from PROLOK. Quaid discontinued this version of RAMKEY that same year. Since that time there has been no evidence to convince this Court that there has been any further duplication. The Court finds that the copying in 1984 was not significant.

27. There has been no violation of 17 U.S.C. 106(2) because RAMKEY is not a substantially similar copy of PROLOK. RAMKEY is not a derivative work of PROLOK.

28. Vault has contended that Quaid is guilty contributory infringement because CopyWrite permits a user to make illegal copies of programs placed on PROLOK disks. Vault lacks standing to raise such a claim since it is not Vault, but the customers of Vault who place their programs on PROLOK disks, who may assert such claims. Clearly, the copyright rights to these underlying programs belong to their publishers, not Vault.

29. Even if Vault has standing to pursue a claim for contributory infringement, this Court finds no contributory infringement.

30. The Copyright Act does not expressly hold one liable for infringement committed by another. (...citations...) However, "the absence of such express language in the copyright statute does not preclude the imposition of liability for copyright infringements on certain parties who have not themselves engaged in the infringing activity." (...citations...)

31. In a contributory infringement case, the Court is "to look beyond actual duplication of a device or publication to the products or activities that make such duplication possible (...citations...)

32. CopyWrite, however, does not contributorily infringe PROLOK if it is capable of "commercially significant noninfringing uses."

33. Quaid claims that CopyWrite is capable of "commercially significant noninfringing uses", such as making archival copies of software programs as allowed by Section 117(2) of the Copyright Act. The archival copies which PROLOK provides are not functional, those copies made by CopyWrite are functional. In addition, there was testimony at trial that CopyWrite is used make copies of unprotected software because CopyWrite makes a better copy than IBM DOS Copy, the copy utility supplied with all IBM personal computers. CopyWrite is also used as a diagnostic utility.

Copyright Infringement Lawsuit

Vault Corporation sues Quaid Software Limited

FINDINGS OF FACT:

CONCLUSIONS OF LAW:

COPYRIGHT INFRINGEMENT: