DSC Communications v. DGI Technologies Inc ( 1996 )

United States Court of Appeals,
Fifth Circuit.
No. 95-10850.
DSC COMMUNICATIONS CORPORATION, Plaintiff-Appellant,
v.
DGI TECHNOLOGIES, INC., Defendant-Appellee.
April 30, 1996.
Appeals from the United States District Court for the Northern
District of Texas.
Before REYNALDO G. GARZA, WIENER and STEWART, Circuit Judges.
REYNALDO G. GARZA, Circuit Judge:
DSC Communications Corporation obtained a preliminary
injunction enjoining DGI Technologies, Inc. from making removable
copies of DSC Communication Corporation's copyrighted software.
DSC Communications Corporation appeals from the granting of this
preliminary injunction, arguing that it is too narrowly drawn.
Because we hold that the district court did not abuse its
discretion in crafting the injunction, we AFFIRM.
I.
FACTS
DSC Communications Corporation ("DSC") manufactures telephone
switching systems ("phone switches"). DGI Technologies, Inc.
("DGI") manufactures various devices, including microprocessor
cards, that are used in DSC phone switches. DSC sued DGI for
unfair competition on various grounds, including copyright
infringement. DSC obtained a preliminary injunction in that suit,
which prohibits DGI from making copies of DSC's copyrighted
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operating system software that can be removed from DSC's customer's
premises. The injunction, however, does not prohibit DGI from
making copies of DSC's copyrighted software that cannot be removed
from DSC's customer's premises. DSC's appeals from the preliminary
injunction, arguing that DGI should also be enjoined from making
copies that cannot be removed from DSC's customer's premises.
A phone switch routes long distance telephone calls to their
destinations. It consists of three principal components: (1) the
switch matrix, which actually routes the telephone calls; (2) the
trunk/line interface system, which converts long distance telephone
signals into a form and sequence that can be handled by the switch
matrix; and (3) a mass storage frame, which contains the software
that operates the entire switching system.
Long distance signals must be in digital form and properly
sequenced before they can be routed through the switch matrix. The
trunk/line interface system converts the data arriving from the
long distance telephone line into proper digital form and sequence.
The trunk/line interface system is controlled by DSC's copyrighted
software when it converts these signals. Once these signals have
been "switched"—i.e. routed to their destination—the trunk/line
system converts them back into a form in which they can be
transmitted through the phone lines to their destination.
The trunk/line interface system is housed in metal cabinets
called frames. These frames contain a number of shelves. The
front of the shelves is open, and at the back of the shelves is a
backpane. Cables carrying incoming telephone signals from the
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telephone line and outgoing signals to the switch matrix and the
telephone lines are attached to the backpane. Groups of printed
circuit boards called cards are inserted into the shelves of the
frames from the front and connect to the backpane. These cards
contain the components that translate the data from the telephone
line into a format that can be used by the switch matrix and vice
versa.
The principal cards in the frames are microprocessor cards.
The microprocessor cards contain firmware, which is software
embedded in a memory chip on the card. When a microprocessor card
is inserted into the frame, it must boot up. That is, it must
download DSC's copyrighted operating system software into its
random access memory ("RAM"). The booting up process is similar to
that used in personal computers, which also boot up by downloading
operating system software from a floppy disk or hard disk when the
computer is turned on or reset. A microprocessor card must
download DSC's copyrighted operating system software when it is
used in the phone switch.
DSC manufactures the entire phone switch system, and has a
copyright on the software used in the phone switch. DSC sells
phone switches, but does not sell the software necessary to operate
them. Instead, it licenses the software to its customers. One of
the customers to whom DSC sold a phone switch and licensed its
software is NTS Communications Corporation ("NTS"). The licensing
agreement between DSC and NTS prohibits NTS from copying the
software, and only allows NTS to use the software in conjunction
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with the phone switch purchased from DSC.
DGI is attempting to develop a microprocessor card that can be
used in DSC phone switches. Customers would use this card instead
of using a DSC-manufactured card. DSC contends that DGI engaged in
several acts of copyright infringement in its attempt to develop a
microprocessor card. The alleged infringement at issue in this
appeal is DGI's copying of DSC's copyrighted operating system
software.
Because DSC did not sell its operating system software on the
open market, the only way to gain access to the software was to
license it from DSC. DGI needed to gain access to DSC's operating
system software in order to develop a microprocessor card, because
the microprocessor card had to be able to download the software
into RAM, and had to be compatible with the software. To obtain
access to the operating system software, DGI obtained access to a
DSC phone switch owned by NTS. NTS gave DGI permission to use its
phone switch to test microprocessor cards. In return for this
permission, DGI gave NTS a ten percent discount on purchases of DGI
cards, shelves and frames. DGI did more than merely test its
cards, however. Without NTS's knowledge, it made copies of DSC's
copyrighted software, and removed these copies from NTS's premises.
DGI used two methods to copy DSC's copyrighted software.
First, it downloaded DSC's operating system into the memory of a
DSC microprocessor card, out through a port on that card, and into
a lap top computer. Second, DGI modified a DSC microprocessor card
by adding chips designed to capture the communications between the
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card and another microprocessor card from which the operating
system software would be obtained and a chip designed to hold and
retain information on the downloading function when the
microprocessor card was removed. DGI copied DSC's copyrighted
operating system software using this modified microprocessor card.
DSC and DGI were already involved in litigation at the time
that DGI was copying DSC's operating system software. DSC sued DGI
for allegedly misappropriating its trade secrets to develop
microprocessor cards for use is DSC's phone switch and for
violating the Lanham Act in selling its cards. DGI countersued,
alleging that DSC violated antitrust laws, misappropriated DGI's
trade secrets, engaged in unfair competition and committed tortious
interference with DGI's business relationships. When DSC learned
that DGI was copying its operating system software, it amended its
complaint to allege copyright infringement, and moved for a
preliminary injunction to prevent DGI from continuing to copy, and
benefitting from copying, the operating system software. The
district court granted a preliminary injunction, prohibiting DGI
from making any copies of DSC's operating system software that
could be removed from NTS's premises. However, the injunction did
not prohibit DGI from "downloading into dynamic RAM on a
microprocessor or test microprocessor card which is incidental to
the testing or operating of a compatible [microprocessor] card so
long as the copy is not capable of being removed from the customer
location and transported to any other location." In other words,
DGI could not continue to make copies of the operating system to
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take back to its lab and study, but it could test its
microprocessor card on NTS's phone switch, even though DSC's
operating system software would be downloaded into the
microprocessor card's RAM.
II.
DISCUSSION
A.
STANDARD OF REVIEW
The decision to grant or deny a preliminary injunction lies
within the discretion of the district court and will be reversed on
appeal only upon a showing of abuse of discretion. Blue Bell Bio-
Medical v. Cin-Bad, Inc., 864 F.2d 1253, 1256 (5th Cir.1989).
B.
ANALYSIS
In order to obtain a preliminary injunction, DSC was required
to demonstrate: (1) a substantial likelihood of success on the
merits; (2) a substantial threat of irreparable injury if the
injunction is not issued; (3) that the threatened injury to DSC
outweighs any damage the injunction might cause to DGI; and (4)
that the injunction will not disserve the public interest. Plains
Cotton Co-op. Ass'n v. Goodpasture Computer Serv., Inc., 807 F.2d
1256, 1259 (5th Cir.), cert. denied, 484 U.S. 821, 108 S. Ct. 80, 98
L. Ed. 2d 42 (1987). Because we hold that the district court did not
abuse its discretion in implicitly1 finding that DSC did not have
1
The district court's order did not address the issue of
whether DGI violated DSC's copyright when making non-removable
copies of the operating system software. It simply found that
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a substantial likelihood of success on the merits, we affirm the
injunction.
DSC claims that it has a substantial likelihood of prevailing
on its claim that DGI infringes upon its copyright every time DGI
boots up one of its microprocessor cards on a DSC phone switch.
When a DGI microprocessor card boots up, DSC's copyrighted
operating system software is downloaded into the card's RAM. DSC
contends that this downloading constitutes making a copy under
copyright law. Therefore, DSC argues, booting up a DGI
microprocessor card infringes upon DSC's copyright by making an
unauthorized copy of DSC's copyrighted operating system software.
To prevail on its claim of copyright infringement, DSC will
have to prove: (1) that it owned a copyright on the operating
system software; and (2) that DGI impermissibly copied or
otherwise infringed upon that copyright. Plains Cotton Co-op., 807
F.2d at 1260. Further, it will have to overcome DGI's affirmative
defenses, including the defense of copyright misuse.
The parties agree that DSC owns a copyright on the operating
system software. However, they disagree on whether booting up a
DGI microprocessor card constitutes impermissible copying. DSC
argues that an impermissible copy is made every time software is
loaded onto a computer's RAM. See MAI Sys. Corp. v. Peak Computer,
DGI violated DSC's copyright when it made removable copies of the
software. Because the district court refused to enjoin DGI from
making non-removable copies of DSC's software "incidental to the
testing or operating of a compatible [microprocessor] card," we
treat the district court's order as implicitly holding that DGI
was not entitled to an preliminary injunction prohibiting such
copying.
7
Inc., 991 F.2d 511, 518 (9th Cir.1993), cert. dism'd, --- U.S. ----
, 114 S. Ct. 671, 126 L. Ed. 2d 640 (1994). Because the licensing
agreement between DSC and NTS only allows the software to be booted
up on DSC equipment, this copying is not authorized. Therefore,
DSC argues, booting up a microprocessor card violates its
copyright. DGI does not dispute that a copy is made when the
microprocessor cards are booted up. Instead, DGI argues, inter
alia, that it is entitled to the defense of copyright misuse.
The district court did not err in implicitly finding that DSC
did not have a substantial likelihood of prevailing on the merits
because DGI may well prevail on its affirmative defense of
copyright misuse. The defense of copyright misuse "bars a culpable
plaintiff from prevailing on an action for the infringement of the
misused copyright." Lasercomb Am., Inc. v. Reynolds, 911 F.2d 970,
972 (4th Cir.1990). See Mitchell Bros. Film Group v. Cinema Adult
Theater, 604 F.2d 852, 865 n. 27 (5th Cir.1979), cert. denied, 445
U.S. 917, 100 S. Ct. 1277, 63 L. Ed. 2d 601 (1980) (recognizing the
copyright misuse defense). The defense is a recognition that while
"copyright law [seeks] to increase the store of human knowledge and
arts by awarding ... authors with the exclusive rights to their
works for a limited time ... the granted monopoly power does not
extend to property not covered by the ... copyright." Lasercomb,
911 F.2d at 976.
The copyright misuse defense is analogous to the patent misuse
defense. Id. The patent misuse defense was recognized by the
Supreme Court in Morton Salt Co. v. G.S. Suppiger, 314 U.S. 488, 62
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S. Ct. 402, 86 L. Ed. 363 (1942). In that case, the plaintiff Morton
Salt brought suit on the basis that the defendant had infringed
upon Morton's patent in a salt-depositing machine. The salt
tablets that the machine deposited were not themselves a patented
item, but Morton's patent license required that licensees use only
salt tablets produced by Morton. Morton was thereby using its
patent to restrain competition in the sale of an item that was not
within the scope of the patent's privilege. The Supreme Court held
that, as a court of equity, it would not aid Morton in protecting
its patent when Morton was using that patent in a manner contrary
to public policy.
In Lasercomb, the Fourth Circuit extended the rationale
behind Morton Salt to copyright misuse. Paraphrasing Morton Salt,
the Fourth Circuit stated:
The grant to the author of the special privilege of a
copyright carries out a public policy adopted by the
Constitution and laws of the United States, "to promote the
Progress of Science and useful arts, by securing for limited
Times to [Authors] ... the exclusive Right ..." to their
"original" works. United States Constitution, Art. I, § 8,
cl. 8, 17 U.S.C. § 102. But the public policy which includes
original works within the granted monopoly excludes from it
all that is not embraced in the original expression. It
equally forbids the use of the copyright to secure an
exclusive right or limited monopoly not granted by the
Copyright Office and which is contrary to public policy to
grant.
Lasercomb, 911 F.2d at 977. We concur with the Fourth Circuit's
characterization of the copyright misuse defense.
DGI may well prevail on the defense of copyright misuse,
because DSC seems to be attempting to use its copyright to obtain
a patent-like monopoly over unpatented microprocessor cards. Any
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competing microprocessor card developed for use on DSC phone
switches must be compatible with DSC's copyrighted operating system
software. In order to ensure that its card is compatible, a
competitor such as DGI must test the card on a DSC phone switch.
Such a test necessarily involves making a copy of DSC's copyrighted
operating system, which copy is downloaded into the card's memory
when the card is booted up. If DSC is allowed to prevent such
copying, then it can prevent anyone from developing a competing
microprocessor card, even though it has not patented the card. The
defense of copyright misuse "forbids the use of the copyright to
secure an exclusive right or limited monopoly not granted by the
Copyright Office," including a limited monopoly over microprocessor
cards. See Lasercomb, 911 F.2d at 977. Therefore, DGI's asserting
the misuse defense could cast substantial doubt on the
predictability of success by DSC.
Of course, we do not hold that DGI will successfully avail
itself of the copyright misuse defense. After a trial on the
merits, the district court may well decide that DSC did not commit
copyright misuse, or that DGI cannot avail itself of the defense
because it has "unclean hands." We simply hold that the district
court did not abuse its discretion in implicitly holding that DSC
did not have a substantial likelihood of success on the merits
because—based on the evidence before the district court—DGI may
prevail on its misuse to the defense.
III.
CONCLUSION
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Because we hold that the district court did not abuse its
discretion in crafting the preliminary injunction, we AFFIRM.
AFFIRMED.
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