United States v. Slater, Jason ( 2003 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
Nos. 02-2059 & 02-2182
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
v.
JASON SLATER and CHRISTIAN MORLEY,
Defendants-Appellants.
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Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 00 CR 85—Matthew F. Kennelly, Judge.
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ARGUED DECEMBER 11, 2002—DECIDED NOVEMBER 7, 2003
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Before COFFEY, EASTERBROOK, and DIANE P. WOOD,
Circuit Judges.
DIANE P. WOOD, Circuit Judge. Defendants Jason Slater
and Christian Morley belonged to an organization called
“Pirates With Attitudes” (PWA), a group dedicated to the
unauthorized dissemination of copyrighted software over
the Internet. The FBI disbanded PWA and on May 4, 2000,
a grand jury indicted Slater and Morley, along with 15
others, for a single count of conspiracy to commit copyright
infringement in violation of 17 U.S.C. § 506(a)(2), 18 U.S.C.
§ 2319(c)(1), and 18 U.S.C. § 371. Slater entered a guilty
plea, and on May 11, 2001, a jury convicted Morley as
charged in the indictment. In this consolidated appeal, we
2 Nos. 02-2059 & 02-2182
consider the following two issues: (1) whether the district
court’s denial of a jury instruction on fair use was improper,
and (2) whether the district court’s valuation of loss for
Sentencing Guidelines purposes was clearly erroneous.
I
PWA was a group of Internet pirates organized in the
1990s with the goal of making vast amounts of copyrighted
software freely—and thus unlawfully—available over the
Internet. Members paid no money to download the software,
but they paid a different kind of price. Each member was
required to contribute valuable services in an assembly
line-like fashion. “Suppliers,” who often had special access
to copyrighted programs, supplied the programs to “crack-
ers.” Defendant Slater was one such cracker, and it was his
job to download the coded computer software program and
eliminate the internal copyright protection. Crackers then
forwarded the cracked program to “packagers,” who tested
the software and added descriptive information. Defendant
Morley was a packager. Packagers passed the program on
to the group’s “couriers,” who then uploaded the program to
the Internet sites maintained by PWA where it was avail-
able for downloading by PWA members. One of these sites,
which became the focus of the indictment, was known as
Sentinel.
In January 2000, the FBI seized the computer hardware
supporting Sentinel, which had been hidden in a closet on
the campus of a university and operated without the uni-
versity’s knowledge or authorization. The computer con-
tained about 5,000 programs available for downloading, in
addition to files documenting uploading and downloading
activity by members beginning in 1996. The FBI initially
determined that the total number of programs uploaded to
Sentinel during the period charged in the indictment was
Nos. 02-2059 & 02-2182 3
54,761, but it later reduced that estimate to 34,582 to take
into account nonfunctioning programs.
Slater and Morley, both senior members of PWA, were
indicted for a conspiracy that spanned the period between
January 1998 and January 2000. As noted above, Slater
pleaded guilty, and Morley was convicted by a jury, after
which the district court conducted a joint sentencing hear-
ing. The government submitted loss calculations under the
1998 Sentencing Guidelines, which indicates an upward
adjustment using the section 2F1.1 tables if the retail value
of the loss, calculated by reference to the “infringing items,”
exceeded $2000. U.S. SENTENCING GUIDELINES MANUAL
(U.S.S.G.) § 2B5.3(b)(1) (1998) (referring to the now-re-
pealed § 2F1.1). Infringing items are defined as the items
that violate the copyright (i.e., the pirated copies), not the
legitimate items that have been copied. Thus, the total
retail value of the infringing items can be calculated by
multiplying the number of infringing items by their average
retail value.
In determining the number of infringing items during the
conspiracy charged in the indictment, the government
argued that all of the copyrighted software uploaded to
Sentinel and each copy of the software downloaded from
it between January 1998 and January 2000 should be in-
cluded. The FBI took a more conservative approach, using
a reduced estimate of 34,582 that reflected only the number
of functioning uploads, and thus did not include the number
of programs downloaded from Sentinel. The district court
was more conservative still. It rejected even the FBI’s figure
as over-inclusive because it had “no confidence” in the
government’s expert, who it found used questionable,
untested theories in arriving at the number of functioning
uploads. The district court instead turned to the number of
functioning, distinct titles actually remaining on Sentinel
at the time of the computer’s seizure, which was only 3,947.
4 Nos. 02-2059 & 02-2182
Based on a sample of 71 programs, it found that 94% of the
extant programs functioned in the same manner as the
retail version of the program. Though the selection of the 71
programs was not random, the district court found that it
provided a reasonable basis for estimating the actual
number of fully functioning programs at the time of the
seizure: 94% of 3,947, or 3,710 programs.
With this cautious estimate of the number of infringing
items in hand, the district court next calculated the average
retail value of the infringing items. In making this cal-
culation, the government presented the actual retail prices
for 2,200 of the 3,947 software titles found on Sentinel.
Taking into account Slater’s own retail pricing data, the
district court arrived at an average retail value of $384 per
infringing item. The district court was satisfied that this
estimate was reasonably accurate for sentencing purposes.
By multiplying 3,710 pirated programs by an average retail
value of $384, the district court determined that the total
retail value of the infringing items was $1,424,640.
On April 19, 2002, the district court sentenced Morley
to 24 months imprisonment and Slater to eight months
imprisonment and six months community custody with su-
pervised release to follow.
II
Appellants raise two issues on appeal. First, Morley
disputes the district court’s denial of a jury instruction on
fair use, which we review de novo. United States v. Irorere,
228 F.3d 816, 825 (7th Cir. 2000). Second, Slater contests
the district court’s valuation of the infringing items for
Sentencing Guidelines purposes, which we review for clear
error. United States v. Vivit, 214 F.3d 908, 914 (7th Cir.
2000).
Nos. 02-2059 & 02-2182 5
A. Fair Use Instruction
In Morley’s case, we find no fault with the district court’s
denial of a jury instruction on fair use. Federal copyright
law contains a fair use exception that limits the exclusive
rights of a copyright holder by excepting an otherwise in-
fringing use of a work “for purposes such as criticism, com-
ment, news reporting, teaching (including multiple copies
for classroom use), scholarship, or research” upon consider-
ation of the following factors:
(1) the purpose and character of the use, including
whether such use is of a commercial nature or is for
nonprofit educational purposes;
(2) the nature of the copyrighted work;
(3) the amount and substantiality of the portion used in
relation to the copyrighted work as a whole; and
(4) the effect of the use upon the potential market for or
value of the copyrighted work.
17 U.S.C. § 107.
Morley urges us to find that PWA’s use of copyrighted
software falls within the fair use exception. He asserts that
the Sentinel site was noncommercial—merely for edu-
cational and entertainment purposes. It was “noncommer-
cial” because members did not have to pay to download the
software; it was “educational” because defendants learned
something from using the software, one of the individuals
operating the site was a professor, and the hardware was
located at a university.
We are unpersuaded—indeed, in our view these argu-
ments barely pass the straight-face test. While members did
not have to pay in hard currency to download the software,
they did have to contribute valuable services—a barter form
of payment—to receive commercially available software.
Morley’s reliance on Sony Corp. v. Universal City Studios,
6 Nos. 02-2059 & 02-2182
Inc. is thus inapposite, because the transaction was not
purely noncommercial. 464 U.S. 417, 449 (1984) (commer-
cial use of copyrighted material is presumptively unfair
use). Morley’s attempt to establish an educational purpose
also strains credulity. The professor who operated the site
did so without the knowledge or authorization of the
university, and he kept the computer hidden in a closet.
Even if Morley could show some noncommercial educa-
tional purpose, consideration of other factors weighs deci-
sively against application of the fair use doctrine to Internet
piracy. Limited copying may be permissible for certain
noncommercial, educational purposes, taking into account
the nature of the copyrighted work and market consider-
ations. 17 U.S.C. § 107; Sony, 464 U.S. at 448-50. See also
Stephen M. McJohn, Fair Use of Copyrighted Software, 28
Rutgers L. J. 593, 603-06 (1997). These factors, however,
weigh against application of the fair use doctrine to cases
involving Internet piracy. PWA allowed members to obtain
unlawful, digital duplicates of thousands of commercially
available software programs. The government also pre-
sented expert testimony on the harmful effect of Internet
piracy on the potential market for the copyrighted work,
though we think this point is fairly obvious. See generally
In re Aimster Copyright Litigation, 334 F.3d 643 (7th Cir.
2003). It is preposterous to think that Internet piracy is
authorized by virtue of the fair use doctrine. For these
reasons, we affirm the district court’s denial of a jury
instruction on fair use.
B. Valuation of Loss
We now turn to Slater’s claim, which fares no better than
Morley’s. Under the 1998 Sentencing Guidelines, the
defendant’s sentence is enhanced according to the table in
section 2F1.1 if the retail value of the loss exceeded $2000.
Nos. 02-2059 & 02-2182 7
U.S.S.G. § 2B5.3(b)(1) (1998). The value of the loss is
measured by the retail value of the “infringing items,”
defined as “the items that violate the copyright or trade-
mark laws.” Id. at cmt. n.1. (The Sentencing Guidelines
have since been amended, but those amendments have no
effect on the present case. The May 2000 amendments pro-
vide that the value of the loss is to be measured according
to the retail value of the “infringed item.” See § 2B5.3, cmt.
n.2 (2002). Infringing items are distinguishable from
“infringed items,” which are “the legitimate items that are
infringed upon.” U.S.S.G. app. C (2002). The total value of
the infringing items can be calculated by multiplying the
number of infringing items by their average retail value.)
In this case, neither the government nor Slater disputes
the district court’s exceedingly conservative finding of the
number of infringing items. The issue raised on appeal is
whether the district court’s valuation of the infringing items
is clearly erroneous. Vivit, 214 F.3d at 914.
In nonsoftware cases, this court has calculated the val-
ue of infringing items based on the retail value of those
goods on the black market—“the full price the willing buyer
in this market would have paid the willing seller in the
same market for the appellants’ products.” United States v.
Oberhardt, 887 F.2d 790, 792-93 (7th Cir. 1989) (document);
United States v. Bakken, 734 F.2d 1273, 1278 (7th Cir.
1984) (antifreeze); United States v. Berkwitt, 619 F.2d 649,
658 (7th Cir. 1980), abrogated on other grounds, Dowling v.
United States, 473 U.S. 207 (1985) (bootlegged tapes). Other
circuits also follow this approach. United States v. Guerra,
293 F.3d 1279, 1292 (11th Cir. 2002) (cigars); United States
v. Bao, 189 F.3d 860, 867 (9th Cir. 1999) (Microsoft Win-
dows 95 manuals). But see United States v. Larracuente,
952 F.2d 672, 674-75 (2d Cir. 1992) (applying the normal
retail price of movies rather than the lower price of counter-
feit copies). This assumes, importantly, that the infringing
8 Nos. 02-2059 & 02-2182
item is somehow distinguishable from and less valuable
than the original. Neither assumption, as we shall see,
necessarily applies to digital copies that have been purged
of copy-protection features and thus are easier to replicate
than the originals.
Slater argues that black-market approach ought to govern
here. Because members paid nothing to download the
programs, he further claims that the retail value of the in-
fringing items should be zero. The district court, however,
correctly rejected a zero value for the infringing items. Zero
reflects neither the price paid to acquire the program (i.e.,
the value of the member’s services) nor the retail value of
a digital duplicate of the original copyrighted software.
The district court instead accepted the government’s ap-
proach, finding that in the particular case of almost exact
digital copies, it was appropriate to value the infringing
items by reference to the normal retail price of the bona fide
copyrighted software. Based on the evidence, it calculated
the average retail value as $384 per infringing item. While
we recognize that $384 equates the retail value of the
“infringing item” with the retail value of the “infringed
item,”this was an acceptable choice in this situation, where
the infringing item is the virtual equivalent of the infringed
item.
The district court properly understood that it was asses-
sing the retail value of the infringing items—not the retail
value of the infringed items. Section 2F1.1 of the Sentenc-
ing Guidelines gives the district court considerable leeway
in assessing the retail value of the infringing items.
For the purposes of subsection (b)(1), the loss need not
be determined with precision. The court need only make
a reasonable estimate of the loss, given the available
information.
Nos. 02-2059 & 02-2182 9
U.S.S.G. § 2F1.1, cmt. n.8. Unlike more conventional in-
fringement cases, such as those we faced in Oberhardt,
Bakken, and Berkwitt, supra, here there was no evidence of
the value of the pirated copies on the black market. We
agree with the district court that the pirated copies were
certainly worth more than a retail value of zero. For this
reason, it is not appropriate to apply any rule of lenity, such
as the one used in the Ninth Circuit under which the court
selects “the value bringing lesser punishment” where “two
prices are equally good measures of the actual or intended
loss to the victim.” United States v. Hardy, 289 F.3d 608,
614 (9th Cir. 2001). Here, a value of zero is not an “equally
good measure” of loss.
Instead, we join the Fifth Circuit and find that where
there is little or no evidence of the value of the infringing
item, the court may consider the retail value of the in-
fringed item. United States v. Kim, 963 F.2d 65, 69-70 (5th
Cir. 1992). In this case, the pirated programs were digital
duplicates of the original copyrighted program, providing
reasonable justification for the district court’s reliance on
the normal retail price of the software. See Larracuente, 952
F.2d at 674 (where “unauthorized copies are prepared with
sufficient quality to permit their distribution through
normal retail outlets, the value of the infringing items is
their normal retail price to ultimate consumers who pur-
chase from such outlets”).
We are further mindful that the total value of the loss for
sentencing purposes depends not only on the retail value of
the infringing item, but also on the number of infringing
items. Here the district court used an exceptionally conser-
vative estimate of the number of infringing items—looking
not at the total number of downloads or uploads for the
period charged, but only at the number of programs actu-
ally remaining on Sentinel at the time of the hardware’s
seizure. Because the district court used a considerably
lower figure for the number of infringing items than the
10 Nos. 02-2059 & 02-2182
evidence might have supported, its reliance on the normal
retail price to arrive at the total value of the loss was not
clearly erroneous.
III
For the reasons discussed, we hold that the district court’s
denial of a jury instruction on fair use was proper, and the
district court’s valuation of loss for Sentencing Guidelines
purposes was not clearly erroneous. The judgment of the
district court is AFFIRMED.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—11-7-03