Alcatel USA Inc v. DGI Technologies Inc

REVISED - February 26, 1999
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
______________________
No. 97-11339
______________________
ALCATEL USA, INC.,
Plaintiff-Counter-Defendant-
Appellee-Cross-Appellant,
versus
DGI TECHNOLOGIES, INC.,
Defendant-Counter-Claimant-
Appellant-Cross-Appellee.
________________________________________________
Appeal from the United States District Court
for the Northern District of Texas
________________________________________________
January 29, 1999
Before JOLLY, WIENER, and STEWART, Circuit Judges.
WIENER, Circuit Judge:
The complex intellectual property action that we hear on
appeal today involves a multifaceted dispute between two
competitors in the telecommunications equipment manufacturing
industry. Plaintiff-Counter-Defendant-Appellee-Cross-Appellant
Alcatel USA, Inc. (formerly DSC Communications Corporation (“DSC”))
filed suit against Defendant-Counter-Claimant-Appellant-Cross-
Appellee DGI Technologies, Inc. (“DGI”), alleging that DGI
infringed DSC’s copyrights, misappropriated its trade secrets, and
engaged in unfair competition by misappropriating its time, labor,
skill and money. DGI, in turn, asserted that DSC violated § 2 of
the Sherman Act, interfered with DGI’s prospective business
relations, and also engaged in unfair competition. After a lengthy
trial, the district court entered a set-off judgment in favor of
DSC and an order enjoining DGI from selling the infringing
products.
For the reasons explained below, we affirm the district
court’s grant of a judgment as a matter of law (“JML”) in favor of
DSC, dismissing DGI’s antitrust claim. We also affirm the jury’s
determination that damages are due to DSC on its claim of
misappropriation of trade secrets, and the district court’s
injunction against DGI, based in part on this claim. Because DSC
misused its copyrights, however, we reverse the portions of the
injunction tailored by the district court as relief from DGI’s
copyright infringement. Concluding that DSC’s state law claim of
unfair competition by misappropriation is preempted, we also
reverse the district court’s denial of a JML in favor of DGI on
this issue, and vacate all legal and equitable relief awarded to
DSC for this claim, including the portion of the damage award
attributable thereto. Because the monetary damages award to DSC
was not sufficiently itemized to permit us to modify the district
court’s judgment and render a modified judgment, we remand for that
court to do so, taking into account the elimination of state unfair
competition damages. Finally, we reverse the award of damages in
favor of DGI on its claims for tortious interference and unfair
competition, concluding that these claims are not supported by the
evidence.
2
I
FACTS AND PROCEEDINGS
DSC designs, manufactures, and sells equipment (“switches”)
comprising telephone switching systems. Its customers are long-
distance telephone service providers, such as MCI and Sprint. A
telephone switch routes long distance telephone calls to their
destinations.1 DSC switches are controlled by its copyrighted
operating system software. DSC regularly implements new features
in its switches by upgrading its software, a process that costs DSC
millions of dollars.
DSC does not sell its operating system software —— as it does
the switches —— but instead licenses its use pursuant to a
licensing agreement. The licensing agreement provides that (1) the
operating system software remains the property of DSC; (2) the
customer has the right to use the software only to operate its
switch; (3) the customer is prohibited from copying the software or
disclosing it to third parties; and (4) the customers are
authorized to use the software only in conjunction with DSC-
manufactured equipment.
The record evidence shows that DSC’s customers, like other
long distance providers, frequently need to expand the call-
handling capacity of their switches. One way to expand the call-
handling capacity of DSC switches is to add groups of “cards” to
the switch. Prior to 1989, DSC was the only manufacturer of
1
For a detailed description of the technology involved in this
case, see DSC Communications Corp. v. DGI Technologies, Inc., 81
F.3d 597 (5th Cir. 1996) (“DSC I”).
3
expansion cards for its own switches. In 1989, DGI was founded to
design and sell such cards for use with DSC switches.
DGI contends that it developed its cards by analyzing DSC’s
unpatented products and then duplicating their functionality —— a
process referred to as “reverse engineering.” DGI initially
obtained a used DSC switch containing a multitude of cards and a
set of switch owners manuals (“DSPs” or “DSP manuals”) from an
investor. Once DGI had determined the functionality of DSC’s
products, it designed its own to perform these same functions using
newer-generation electronics and adding additional features. DGI
further insists that, from its inception, DSC repeatedly attempted
to thwart DGI’s entry into the market. For instance, DSC
threatened to insert a software “patch” in its operating system
software to render DGI’s cards inoperable on DSC-manufactured
switches, and in fact did insert such a patch, but was never
successful in disabling the DGI products. DGI also notes that in
1991, before it had introduced its first product for sale, DSC sent
a letter to its switch owners, threatening to void their switch
warranties if they used DGI cards and claiming that DGI refused to
provide DSC a card to test, an assertion that DGI maintains was
untrue. Finally, DSC (1) refused to inform its customers of the
compatibility of DGI’s cards, even after testing them, and (2)
hired investigators to go through DGI’s trash.
DSC, on the other hand, asserts that DGI did not engage in
legitimate reverse engineering, but rather misappropriated DSC’s
intellectual property by wrongfully obtaining schematics and
4
manuals provided only to DSC customers on the express condition
that there be no disclosure to third parties. DSC also notes that
each manual contained a plainly visible copyright notice.
In any event, between 1992 and 1994, DGI developed and
introduced four DSC-compatible cards —— the Digital Trunk Interface
(“DTI”),2 the Bus Terminator (“BT”),3 the Digital Tone Detector
(“DTD”),4 and the Pulse Code Modulation Interface (“PCMI”). None
of these initial DGI cards were microprocessor cards, however. A
microprocessor card contains firmware, which is software embedded
in a memory chip on the card. When installed in a switch, a
microprocessor card controls the “boot up” —— that is, it downloads
DSC’s copyrighted operating system software into its random access
memory (“RAM”). A DTI, DTD, or BT card alone cannot expand the
capacity of a switch; a customer must install a group of cards
together with a microprocessor card to achieve expansion. For this
reason, DGI obtained DSC microprocessor cards —— then known as
MP-2s —— in the used market to sell along with three DGI cards.
This enabled DGI to offer a customer a complete expansion card
complement, which it did.
In 1995, as a result of a new dialing plan implemented by the
2
DTI cards translate incoming signals from the format of the
incoming trunk line that carries long distance calls to the switch
format and back.
3
BT cards check and regulate the various circuits between the
cards in a metal cabinet called a frame.
4
DTD cards detect and handle dial tones.
5
Federal Communications Commission (“FCC”)5 and customer demands for
new features, DSC revised and expanded its operating system
software. These changes required DSC customers to upgrade to a new
microprocessor card —— the MP-8. As few MP-8 cards were available
on the used market, DGI was no longer able to offer a complete card
complement. Its marketing problems were exacerbated by DSC’s
practice of offering substantial discounts to customers who
purchased whole complements of cards from DSC, but charging much
higher prices for individual MP-8 cards. This motivated DGI to
develop its own microprocessor card —— the DMP-2800.
To develop a microprocessor card, DGI had to overcome several
difficulties. First, DGI needed to understand DSC’s firmware. For
this purpose, DGI purchased an MP-8 card and, using a “burner” to
remove the DSC firmware from a memory chip, obtained the machine-
readable object code. DGI engineers then used a process called
“disassembly” to convert the firmware into human-readable form. In
this way, DGI was able to write its own firmware —— which it claims
is not substantially similar to DSC’s firmware —— for its DMP-2800
microprocessor card. DSC asserts that DGI violated the copyright
on its firmware when it copied DSC’s firmware several times in this
process.
Second, the DGI microprocessor card had to accept a download
from the switch of the DSC operating system. To obtain the
5
Recently, the United States ran out of three-digit area
codes, which had traditionally used only a 0 or 1 as the middle
digit. As a result, the FCC established a new dialing plan that
provided for the use of other numbers as the middle digit.
6
software needed for this function, several DGI engineers took an
MP-8 card to NTS Communications (“NTS”), a DSC switch owner/
software licensee and DGI customer. There, Ernie Carrasco, an NTS
employee who also consulted for DGI, placed the MP-8 card into an
NTS switch and copied the operating system to a laptop computer.
DGI engineers then took the laptop back to DGI. DSC maintains that
DGI never told NTS that it was copying and removing DSC’s
copyrighted software, only that it was “testing” MP-8 cards.
DGI engineers returned to NTS several times to test MP-8 cards
containing versions of DGI’s firmware. To avoid having to perform
all this testing at NTS, DGI modified an MP-8 card to include a
device called a “punch” card or “snooper” card, which monitored the
firmware during the operating system download. Using this snooper
card, DGI was able to understand which parts of the DSC firmware
were accessed during the “boot” of the operating system. DSC
maintains that DGI used this snooper card to copy the messages
contained in DSC’s copyrighted operating system software. It
insists that, but for DGI’s “theft” of DSC’s operating system, it
would have been extremely expensive and time-consuming for DGI to
develop its own microprocessor card.
DGI counters that the copy was used only to discern the size
of the operating system download to the MP-8 card, as it was
investigating the possibility of upgrading the older MP-2 card.
DGI insists that, as the content of the software was irrelevant in
determining its size, it never even disassembled the operating
system software from unreadable machine language.
7
DSC filed suit in 1994, alleging that DGI misappropriated its
trade secrets, and engaged in unfair competition by taking
advantage of the time, labor, skill, and money that DSC had
invested in its switches and cards. DGI counterclaimed, asserting
that DSC (1) violated the Sherman Act by monopolizing or attempting
to monopolize the relevant product market for expansion products
compatible with DSC telephone switches; (2) tortiously interfered
with DGI’s contractual relations; and (3) engaged in unfair
competition. In 1995, DSC filed a supplemental complaint,
asserting direct and indirect copyright infringement claims.6 The
district court preliminarily enjoined DGI from removing DSC’s
operating system software from customer facilities, and we
affirmed.7
After a three week trial, the jury returned a mixed verdict,
finding that DSC violated the Sherman Act, interfered with DGI’s
contractual relations, and engaged in unfair competition, and that
DGI infringed certain DSC copyrights, engaged in unfair competition
by misappropriating DSC’s time, labor, skill, and money, and
6
DSC’s original complaint alleged that DGI misappropriated its
trade secrets, violated the Lanham Act, and engaged in unfair
competition/palming off by deceiving prospective customers “as to
the origin, sponsorship, affiliation or approval” of its products.
Thereafter, DSC filed a supplemental complaint in which it alleged
that DGI’s actions also violated the Copyright Act. In light of
facts and evidence introduced during the first week of trial, DSC
submitted proposed jury questions and instructions —— intended to
replace and supersede those that it had previously filed —— in
which DSC dropped its claims under the Lanham Act and state palming
off law, and added a state law claim for unfair competition by
misappropriation. The district court instructed the jury in
accordance with DSC’s proposal, and DGI did not object.
7
DSC I, 81 F.3d at 599-602.
8
misappropriated DSC’s trade secrets. The jury also determined that
both parties had “unclean hands.”
Nine months later, in November 1997, the district court
entered its Final Judgment and Permanent Injunction. Noting that
the jury verdict afforded both parties some measure of double
recovery, the court awarded DSC $4.3 million in actual damages and
$7 million in punitive damages, and awarded DGI $2 million in
actual damages and $9 million in punitives —— resulting in a set-
off judgment of $300,000 for DSC. The district court dismissed
DGI’s antitrust claim, stating that DGI had failed to prove the
relevant product market under Eastman Kodak Co. v. Image Technical
Services, Inc.8 and that its damages model was “hopelessly flawed.”
Finally, the court permanently enjoined DGI from developing any new
microprocessor cards with the assistance of DSC’s operating system
software and from selling any other DGI microprocessor card
designed to use DSC’s software. The court also ordered DGI to turn
over all DMP-2800 microprocessor cards to DSC for destruction, but
the court stayed that order pending resolution of this appeal. DGI
timely appealed, and DSC timely cross-appealed.
II
ANALYSIS
A. DGI’s Antitrust Claim
The jury found DSC liable under § 2 of the Sherman Act for
monopolization of the expansion and enhancement market for DSC-
manufactured switches and awarded DGI $750,000 in lost profits and
8
504 U.S. 451 (1992).
9
$1.5 million in future lost profits on that claim. The district
court overturned this verdict, however, holding that (1) there was
insufficient evidence to establish that expansion cards are the
relevant market for antitrust purposes, and (2) DGI’s damage model
was hopelessly flawed.
1. Standard of Review
We review the district court’s grant of a JML de novo,
applying the same standards as those employed by the district
court.9 The district court may grant a motion for a JML only if
“there is no legally sufficient evidentiary basis for a reasonable
jury to find for that party on that issue.”10
2. Waiver
As a preliminary matter, DGI asserts that DSC waived its right
to challenge the sufficiency of DGI’s antitrust evidence. Although
DSC submitted a Rule 50 motion at the close of DGI’s case-in-chief,
it did not renew this motion after the rebuttal evidence.
“[I]t is well established that a party waives the right to
challenge the sufficiency of the evidence with a JNOV unless a
motion for directed verdict is made or renewed at the close of all
evidence.”11 We have approached this requirement with a “liberal
9
Burch v. Coca-Cola Co., 119 F.3d 305, 313 (5th Cir. 1997),
cert. denied, 118 S. Ct. 871 (1998).
10
Fed. R. Civ. P. 50(a).
11
McCann v. Texas City Ref., Inc., 984 F.2d 667, 671 (5th Cir.
1993). Of course, under Fed. R. Civ. P. 50, the terms “judgment
notwithstanding the verdict” and “directed verdict” have been
replaced by “judgment as a matter of law.”
10
spirit,”12 however, and in some circumstances, we have excused
technical noncompliance with Rule 50(b) if the deviation is “de
minimis.”13 “Whether technical noncompliance with Rule 50(b)
precludes a challenge to the sufficiency of the evidence on appeal
‘should be examined in the light of the accomplishment of its
particular purposes as well as in the general context of securing
a fair trial for all concerned in the quest for truth.’”14 We have
articulated two purposes for this rule: “to enable the trial court
to re-examine the sufficiency of the evidence as a matter of law
if, after verdict, the court must address a motion for judgment as
a matter of law, and to alert the opposing party to the
insufficiency of his case before being submitted to the jury.”15
Circumstances which have led us to deem a technical violation of
Rule 50(b) “de minimis” include, inter alia, (1) the trial court’s
having reserved a ruling on an earlier motion for a JML made at the
close of plaintiff’s evidence; (2) the defendant’s calling no more
than two witnesses before closing; (3) the elapse of only a small
amount of time between the motion for a JML and the conclusion of
all evidence; and (4) the plaintiff’s introducing no rebuttal
12
Davis v. First Nat’l Bank of Killeen, Tex., 976 F.2d 944, 948
(5th Cir. 1992), cert. denied, 508 U.S. 910 (1993).
13
MacArth. v. University of Tex. Health Ctr., 45 F.3d 890, 896
(5th Cir. 1995); McCann v. Texas City Refining, Inc., 984 F.2d 667,
671 (5th Cir. 1993).
14
MacArthur, 45 F.3d at 896-97 (quoting Bohrer v. Hanes Corp.,
715 F.2d 213, 217 (5th Cir. 1983), cert. denied, 465 U.S. 1026
(1984)).
15
Id. at 897.
11
evidence.16
In this case, we perceive no prejudice that would result from
waiving technical compliance with Rule 50(b). DSC moved for a JML
on DGI’s antitrust claim on a Friday afternoon, at the close of
DGI’s evidence, and the district court specifically reserved ruling
on the motion. That same afternoon, DSC called only its antitrust
expert witness, Dr. Teece, whose testimony was, of course,
favorable to DSC. The parties had the weekend and Monday off, and
before resting their cases on Tuesday DSC and DGI called but one
additional witness each —— neither of whom testified on antitrust
issues. Thus, although three calendar days elapsed between DSC’s
motion and the close of all evidence, this period was attributable
only to the intervening weekend and the district court’s need to
tend to its criminal docket on Monday. As DGI presented no
evidence to shore up its antitrust case after DSC made its JML
motion, that motion sufficed under these circumstances to alert DGI
to the insufficiency of its case. Furthermore, the district court
did not dismiss the antitrust claim until the passage of more than
nine months after the end of trial, only then concluding on its own
that the evidence was not sufficient to support the jury’s verdict.
We hold that DSC did not waive its challenge to the
sufficiency of DGI’s antitrust evidence by failing to reassert its
motion for JML at the close of all the evidence. Having so
determined, we now consider DSC’s substantive challenges to DGI’s
16
McCann, 984 F.2d at 671 (citing Davis, 976 F.2d at 948-49;
Merwine v. Board of Trustees, 754 F.2d 631, 634-35 (5th Cir.),
cert. denied, 474 U.S. 823 (1985); Bohrer, 715 F.2d at 216-17).
12
case.
3. Relevant Market
“‘The offense of monopoly under § 2 of the Sherman Act has two
elements: (1) the possession of monopoly power in the relevant
market and (2) the willful acquisition or maintenance of that power
as distinguished from growth or development as a consequence of a
superior product, business acumen, or historic accident.’”17 Thus,
to prove a monopolization claim, the plaintiff must first establish
the relevant product market.18 DGI disputes the district court’s
conclusion that it failed to prove that the “capacity enhancement
and expansion products” market for DSC-manufactured switches is the
relevant market for antitrust purposes.
As DGI stresses, in determining the relevant product market,
“the reality of the marketplace must serve as the lodestar.”19 DGI
advances that market realities dictate that the relevant market in
this case is the capacity expansion market. For instance, it
asserts that the evidence shows that DSC’s officers, employees,
customers, and internal documents, as well as DGI’s officers,
salesmen, and economic experts, defined the relevant market as the
17
Kodak, 504 U.S. at 481 (quoting United States v. Grinnell
Corp., 384 U.S. 563, 570-71 (1966)).
18
General Indus. Corp. v. Hartz Mountain Corp., 810 F.2d 795,
805 (8th Cir. 1987) (noting that the relevant product market is a
fact question to be decided by the jury, on which the plaintiff
bears the burden of proof).
19
Id.
13
market for expansion products.20 DGI insists that users of DSC
switches are “locked-in” to DSC in the aftermarket. This assertion
is strengthened, it maintains, by the fact that DSC’s software
license allows its customers to use its copyrighted software only
in conjunction with the unpatented DSC hardware.
DGI adds that the district court’s reference to Kodak is not
apt, and in fact urges that Kodak supports DGI’s claim by
establishing that aftermarket monopolization is actionable under
the Sherman Act. In that case, defendant Kodak sold plain paper
copiers in a market with several rivals. The Court assumed that,
at the time of sale, Kodak sold replacement parts, giving users the
option either to repair their copiers or to hire independent
service organizations (“ISOs”) to do so. Later, Kodak changed its
policy and refused to sell parts to ISOs. The ISOs alleged that,
as Kodak’s equipment was unique and its competitors’ parts
incompatible with Kodak machines, this altered practice allowed
Kodak to capture the repair business for itself, at “supra-
competitive” prices.21 Kodak argued that, “either presumptively or
as a matter of law, vigorous competition in the copier market would
prevent Kodak from raising its parts and servicing contract prices
above competitive levels, because any such price increases in these
‘derivative aftermarkets’ would become known to copier-equipment
20
See Bon-Ton Stores, Inc. v. May Dep’t Stores Co., 881 F.
Supp. 860, 873 (W.D.N.Y. 1994) (in the antitrust context, “[o]ne
means utilized to determine the relevant product market is to
analyze how the competitors themselves view the market.”).
21
Kodak, 504 U.S. at 472.
14
consumers, and eventually cause Kodak to lose ground to its
competitors in copier sales.”22
The Court rejected Kodak’s argument, concluding that summary
judgment was not appropriate. It reasoned that, at the time of
their original copier purchases, some consumers might not have
cost-efficient access to pricing information needed to evaluate the
total “life-cycle” cost of the entire Kodak package, i.e., the
price of the copier, likely replacement parts, and product-lifetime
servicing.23 Likewise, the Court explained that, inasmuch as
Kodak’s customers found it prohibitively expensive to replace their
equipment with another manufacturer’s product, they might tolerate
some level of aftermarket price increase before changing brands.24
The Court thus decided that the undetermined “information costs”
and “switching costs” represented material issues of fact that
precluded summary judgment. DGI argues here that, in a similar
manner, DSC could substantially raise its aftermarket card prices
before DSC switch owners would consider replacing DSC switches, and
that DSC was thus able to maintain supra-competitive prices in the
expansion products aftermarket.
DGI’s reliance on Kodak is misplaced. As we previously noted
in United Farmers Agents Association v. Farmers Insurance
22
Lee v. Life Ins. Co. of N. Am., 23 F.3d 14, 17 (1st Cir.)
(citing Kodak, 504 U.S. at 465-67, 469), cert. denied, 513 U.S. 964
(1994).
23
Id. (citing Kodak, 504 U.S. at 472-77).
24
Kodak, 504 U.S. at 476.
15
Exchange,25 “[t]he Supreme Court’s decision in Kodak was a rejection
of Kodak’s assertion that market power could never exist over
repair parts in any case where the defendant did not have market
power over earlier-purchased machines needing those parts.”26 We
pointed out that, “[c]ritically, the plaintiffs in Kodak produced
evidence that Kodak was charging above market prices for its
service and was engaging in price discrimination in favor of the
knowledgeable customers who could most easily obtain information or
switch companies.”27 Indeed, the Court in Kodak concluded that
“[i]t may be that [Kodak’s] parts, service, and equipment are
components of one unified market, or that the equipment market does
discipline the aftermarkets so that all three are priced
competitively overall, or that any anti-competitive effects of
Kodak’s behavior are outweighed by its competitive effects.”28 The
Court simply was not prepared to permit this factual determination
to be made at the summary judgment stage.
In contrast to Kodak, the instant case comes to us after a
full-blown jury trial. Also unlike Kodak, here there is no
evidence that DSC has a superior or unique product that allows it
to charge supra-competitive prices. Indeed, although DGI presented
testimony that DSC’s cards are extremely expensive, it never
25
89 F.3d 233 (5th Cir. 1996), cert. denied, 117 S. Ct. 960
(1997).
26
Id. at 237 (emphasis added).
27
Id.
28
Kodak, 504 U.S. at 486.
16
compared DSC’s prices to its competitors’ prices. And unlike the
plaintiffs in Kodak, DGI did not prove that DSC’s customers face
substantial information and switching costs. To the contrary, the
evidence shows that many DSC switch owners engage in life-cycle
pricing, that is, they factor in not only the purchase price of the
equipment, but also the post-acquisition costs of operation,
maintenance, and expansion at the time of purchase. By engaging in
life-cycle pricing, a customer links together the primary equipment
market and any aftermarket for parts and service for the equipment
of particular manufacturers.
And, as noted, DGI did not prove that a change in any of DSC’s
pricing, warranty, or other policies served to subject DSC switch
owners to substantial additional information or switching costs.
From the beginning, DSC’s licensing agreement for its operating
system software authorized its customers to use the software only
in conjunction with equipment manufactured by DSC. This was a
long-standing policy, not a response to DGI’s entry into the
market. True, there was some evidence that DSC threatened to
cancel its warranties on switches that used equipment not
manufactured by DSC. The evidence also shows, however, that
despite referring to DGI by name, the letter threatening to void
the warranties was sent before DGI ever offered its first product
for sale. As DSC was the sole manufacturer of expansion products
for DSC switches before DGI entered the market, this alleged change
in policy could not substantially increase the information costs
for DSC customers; when they purchased the DSC switches, they could
17
not have reasonably expected suppliers of expansion products other
than DSC to enter the aftermarket. Several circuits have held that
such a change in policy is a crucial factor in establishing an
aftermarket monopoly claim. As the Sixth Circuit held, “an
antitrust plaintiff cannot succeed on a Kodak-type theory when the
defendant has not changed its policy after locking-in some of its
customers, and the defendant has been otherwise forthcoming about
its pricing structure and service policies.”29
We agree with the district court’s determination that DGI’s
characterization of the expansion products market as the relevant
market is at odds with market realities. The record shows that the
prices for two-thirds of all of DSC’s cards are set at the time a
telephone company purchases a switch, either because the customer
purchases the one frame that the switch must have to operate, or
through a future or life-cycle pricing scheme negotiated at the
time of purchase. DGI’s model excludes all these cards from its
relevant market, not an insignificant flaw in the model.
Furthermore, DGI’s proposed market does not acknowledge that
29
PSI Repair Servs., Inc. v. Honeywell, Inc., 104 F.3d 811, 820
(6th Cir.), cert. denied, 117 S. Ct. 2434 (1997):
We likewise agree that the change in policy in Kodak was
the crucial factor in the Court’s decision. By changing
its policy after its customers were “locked in,” Kodak
took advantage of the fact that its customers lacked the
information to anticipate this change. Therefore, it was
Kodak’s own actions that increased its customers’
information costs. In our view, this was the evil
condemned by the Court and the reason for the Court’s
extensive discussion of information costs.
See also Digital Equip. Corp. v. Uniq Digital Tech., Inc., 73
F.3d 756, 762 (7th Cir. 1996); Lee, 23 F.3d at 20.
18
the purchase of a new frame with cards is only one of several ways
a telephone company can expand its call-handling capacity. For
instance, a company can purchase a new switch from DSC or from
another switch manufacturer, purchase a used switch from DSC or a
broker, or trade for or lease capacity in another company’s
network. In addition, as many of DSC’s customers, such as MCI, are
dual-sourced —— that is, they own switches built by more than one
manufacturer —— they can purchase a new frame for one of their non-
DSC switches. All of these capacity handling options are also
omitted from DGI’s relevant market.
We are convinced that DGI, like the plaintiff in United
Farmers, is “trying to define the market as narrowly as possible
(in order to make it look as if [defendant] had market power).”30
Because (1) DGI did not present legally sufficient evidence that
DSC’s customers faced significant information and switching costs,
and (2) DGI’s proffered relevant market does not comport with
market realities, its aftermarket monopoly claim fails as a matter
of law. As such, the district court did not err in granting DSC’s
motion for a JML dismissing DGI’s antitrust claim.
B. DSC’s State Law Damages Claims
The district court awarded DSC $4.3 million in compensatory
damages and $7 million in punitive damages on its Texas state law
claims for (1) misappropriation of trade secrets and (2) unfair
30
United Farmers, 89 F.3d at 236.
19
competition.31 DGI challenges both grounds on which these damage
awards were made.
1. Misappropriation of Trade Secrets
The jury found that DGI misappropriated DSC’s trade secrets in
its operating system software and MP-8 firmware. DGI asserts that
the evidence is legally insufficient to support these claims, so
that the district court erred in denying its motion for a JML. As
previously noted, we review a district court’s rulings on motions
for a JML de novo, using the same standards as did the district
court.
Under Texas law, trade secret misappropriation is established
by showing: “(a) a trade secret existed; (b) the trade secret was
acquired through a breach of a confidential relationship or
discovered by improper means; and (c) use of the trade secret
without authorization from the plaintiff.”32 DGI disputes the
jury’s findings with regard to the second element —— that DGI used
improper means or the breach of a confidential relationship to
appropriate DSC’s trade secrets in its operating system software
and firmware.
DGI argues first that, as a matter of law, it could not have
misappropriated DSC’s trade secrets in its firmware. As DSC and
DGI never formed a contractual or confidential relationship, urges
DGI, DSC must prove that DGI used “improper means” to
31
At DSC’s request, the district court did not award any
damages on its federal copyright infringement claim.
32
Phillips v. Frey, 20 F.3d 623, 627 (5th Cir. 1994).
20
misappropriate its firmware trade secrets. DGI contends that the
firmware was embedded on a chip in every DSC MP-8 card sold, and
that it bought a card and analyzed the firmware through
“disassembly” —— the translation of machine code into human-
readable form. DGI insists that this disassembly does not
constitute “improper means,” but is a lawful practice.33
DGI likewise maintains that, as a matter of law, the evidence
was insufficient to show that it misappropriated DSC’s operating
system software trade secrets. DGI points out that it was under no
contractual obligation to DSC and did not learn of the software by
breaching any confidence reposed in it by DSC. DGI also advances
that it did not use improper means to obtain the trade secrets; to
the contrary, it insists, a copy of part of the operating system
was obtained during a test at the site of NTS, a DSC switch
customer with whom DGI had an ongoing relationship. As NTS gave
its permission for DGI to test its cards, concludes DGI, it cannot
be liable for trade secret misappropriation.
DSC counters that there was sufficient evidence to support the
jury’s conclusion that DGI misappropriated its trade secrets in its
firmware and operating system software. As to the firmware, DSC
urges that DGI did not use legitimate disassembly or reverse
engineering to acquire DSC’s trade secrets. DSC points out that
33
See Phillips, 20 F.3d at 632; K&G Oil Tool & Serv. Co. v. G&G
Fishing Tool Serv., 314 S.W.2d 782, 788 (Tex.), cert. denied, 358
U.S. 898 (1958) (“It is unquestionably lawful for a person to gain
possession, through proper means, of his competitor’s product and,
through inspection and analysis, create a duplicate unless, of
course, the item is patented.”).
21
even Jay Gentry, one of DGI’s engineers responsible for developing
its version of the firmware, testified that DGI would not have been
able to understand DSC’s firmware if it had not unlawfully obtained
a copy of DSC’s operating system software. Thus, reasons DSC, DGI
used improper means to acquire the trade secrets in DSC’s firmware.
Similarly, DSC argues that DGI used improper means to obtain DSC’s
operating system trade secrets. Even though DGI did not have a
contractual or confidential relationship with DSC regarding the
nondisclosure of the software, NTS did. DSC adduced evidence that
DGI misled NTS’s employee, Ernie Carrasco, by informing him that it
needed to “test” a DGI card, but never told him that it planned to
copy and remove DSC’s software. As such, DGI duped NTS into
breaching its own contract with DSC —— an act which DSC submits
constitutes improper means.
Our review of the record satisfies us that there was ample
evidence to support the jury’s determination that DGI obtained
DSC’s trade secrets through improper means. In E.I. duPont
deNemours & Co. v. Christopher,34 we stated: “A complete catalogue
of improper means is not possible. In general they are means which
fall below the generally accepted standards of commercial morality
and reasonable conduct.”35 DSC adduced evidence showing that DGI
unlawfully made a copy of DSC’s operating system software at NTS’s
place of business by misleading an NTS employee who, at least
34
431 F.2d 1012 (5th Cir. 1970), cert. denied, 400 U.S. 1024
(1971).
35
Id. at 1016 (quoting Restatement of Torts § 757, comment f
at 10 (1939)).
22
inferentially, was particularly susceptible of being hoodwinked
because of his moonlighting as a consultant to DGI; and that DGI
then used the knowledge it gained from the purloined software to
interpret the trade secrets contained in DSC’s firmware. As a
reasonable jury could have found that such means “fall below the
generally accepted standards of commercial morality and reasonable
conduct,” the district court did not err in denying DGI’s motion
for a JML on the trade secret claims.
2. Unfair Competition by Misappropriation
Next, DSC asserted —— and the jury found —— that DGI’s use of
DSC’s firmware, operating system software, and DSP manuals in
developing its own DMP 2800 microprocessor card, DTD card, BT card
and PCMI card, constituted misappropriation under the Texas common
law of unfair competition. In contending that the district court
erred when it denied DGI’s motion for a JML, DGI argues that DSC’s
state law misappropriation action is preempted by federal copyright
law. We agree.
With a few exceptions, all causes of action falling within the
scope of the Copyright Act are expressly preempted.36 Section 301
of the Act37 sets forth two conditions, both of which must be
36
Daboub v. Gibbons, 42 F.3d 285, 288 (5th Cir. 1995).
37
17 U.S.C. § 301 provides:
(a) On and after January 1, 1978, all legal or
equitable rights that are equivalent to any of the
exclusive rights within the general scope of
copyright as specified by section 106 in works of
authorship that are fixed in a tangible medium of
expression and come within the subject matter of
copyright as specified by sections 102 and 103,
whether created before or after that date and
23
satisfied, for preemption of a right under state law to occur:
First, the work in which the right is asserted must come within the
subject matter of copyright as defined in sections 10238 and 103.39
whether published or unpublished, are governed
exclusively by this title. Thereafter, no person
is entitled to any such right or equivalent right
in any such work under the common law or statutes
of any State.
(b) Nothing in this title annuls or limits any
rights or remedies under the common law or statutes
of any State with respect to ——
(1) subject matter that does not come within
the subject matter of copyright as specified by
sections 102 and 103, including works or authorship
not fixed in any tangible medium of expression; or
. . .
(3) activities violating legal or equitable
rights that are not equivalent to any of the
exclusive rights within the general scope of
copyright as specified by section 106 . . . .
38
17 U.S.C. § 102 provides:
(a) Copyright protection subsists, in accordance with this
title, in original works of authorship f i x e d i n a n y t a n g i b l e
medium of expression, now known or later developed, from which they
can be perceived, reproduced, or otherwise communicated, either
directly or with the aid of a machine or device. Works of
authorship include the following categories:
(1) literary works;
(2) musical works, including any accompanying words;
(3) dramatic works, including any accompanying
music;
(4) pantomimes and choreographic works;
(5) pictorial, graphic, and sculptural works;
(6) motion pictures and other audiovisual works;
(7) sound recordings; and
(8) architectural works.
(b) In no case does copyright protection for any original work of
authorship extend to any idea, procedure, process, system, method
of operation, concept, principle, or discovery, regardless of the
form in which it is described, explained, illustrated, or embodied
in such work.
39
17 U.S.C. § 103 provides:
(a) The subject matter of copyright as specified by section
102 includes compilations and derivative works, but protection for
a work employing preexisting material in which copyright subsists
does not extend to any part of the work in which such material has
24
Second, the right that the author seeks to protect must be
equivalent to any of the exclusive rights within the general scope
of copyright as specified by section 106.40
We begin our analysis under the first prong by noting that the
Copyright Act protects expression, not facts.41 A compilation of
facts is not entitled to copyright protection unless the
compilation itself possesses some degree of originality.42
Moreover, even if a compilation is original by virtue of the
been used unlawfully.
(b) The copyright in a compilation or derivative work extends
only to the material contributed by the author of such work, as
distinguished from the preexisting material employed in the work,
and does not imply any exclusive right in the preexisting material.
The copyright in such work is independent of, and does not affect
or enlarge the scope, duration, ownership, or subsistence of, any
copyright protection in the preexisting material.
40
17 U.S.C. § 106 provides:
Subject to sections 107 through 120, the owner of a copyright under
this title has the exclusive rights to do and to authorize any of
the following:
(1) to reproduce the copyrighted work in copies or
phonorecords;
(2) to prepare derivative works based upon the copyrighted
work;
(3) to distribute copies or phonorecords of the copyrighted
work to the public by sale or other transfer of ownership, or
by rental, lease, or lending;
(4) in the case of literary, musical, dramatic, and
choreographic works, pantomimes, and motion pictures and other
audiovisual works, to perform the copyrighted work publicly;
and
(5) in the case of literary, musical, dramatic, and
choreographic works, pantomimes, and pictorial, graphic, or
sculptural works, including the individual images of a motion
picture or other audiovisual work, to display the copyrighted
work publicly.
41
Feist Publications, Inc. v. Rural Tel. Serv. Co., 499 U.S.
340, 356 (1991). 17 U.S.C. § 102(b) is “universally understood to
prohibit any copyright in facts.” Id.
42
Id. at 348.
25
selection or arrangement of its component facts, the copyright is
limited to that selection or arrangement and does not extend to the
information contained in it.43
DSC rejects preemption of its misappropriation claim based on
these fundamental principles. In the instant case, contends DSC,
DGI’s offense was not the use of DSC’s firmware, software, and
manuals, but rather the use of uncopyrightable information ——
presumably facts44 —— contained within these copyrightable works.
This assertion is belied by the fact that DSC has consistently
framed its misappropriation count in the context of DGI’s use of
its firmware, operating system software and DSP manuals. Without
objection, the district court instructed the jury on DGI’s use of
these works, and not specific pieces of information contained in
them. In response, the jury found that DGI had impermissibly
relied on DSC’s firmware, software, and manuals in developing its
competing microprocessor and expansion cards. Because the jury
also found DSC to be the owner of copyrights in these works, these
works, by definition, “come within the subject matter of
copyright.” Consequently, we conclude, the first prong of the
preemption analysis is satisfied.
The second prong is more complex, however, requiring a
comparison of the nature of the rights protected under federal
copyright law with the nature of the state rights for which DSC
43
Id.
44
DSC fails to identify the nature of the “information” used
by DGI, but nevertheless maintains that this information falls
outside the scope of copyright protection.
26
seeks protection. If these rights are determined to be
“equivalent,” then the state law cause of action is preempted. We
evaluate the equivalency of rights under what is commonly referred
to as the “extra element” test.45 According to this test, if the
act or acts of DGI about which DSC complains would violate both
misappropriation law and copyright law, then the state right is
deemed “equivalent to copyright.”46 If, however, one or more
qualitatively different elements are required to constitute the
state-created cause of action being asserted, then the right
granted under state law does not lie “within the general scope of
copyright,” and preemption does not occur.47
The purpose of copyright law is to promote and protect
creativity.48 For a work to qualify for copyright protection, it must
be original.49 And originality, as the term is used in copyright,
requires both “independent creation” and “a modicum of creativity.”50
45
National Basketball Ass’n v. Motorola, Inc., 105 F.3d 841,
850 (2d Cir. 1997).
46
Id.; 1 Melville B. Nimmer & David Nimmer, Nimmer on Copyright
§ 1.01[B][1], at 1-13 (1998).
47
1 Nimmer, supra, § 1.01[B][1], at 1-13.
48
Twentieth Century Music Corp. v. Aiken, 422 U.S. 151, 156
(1975)(stating that the basic purpose of the Copyright Act is “to
stimulate artistic creativity for the general public good”); Feist,
499 U.S. at 349 (noting that “[t]he primary objective of copyright
is not to reward the labor of authors, but ‘[t]o promote the
Progress of Science and useful Arts’” (quoting U.S. Const. art. I,
§ 8, cl. 8)); Kelly A. Ryan, Copyright Law: Do State
Misappropriation Rights Survive Feist Publications Copyright Laws?,
1992/1993 Ann. Surv. Am. L. 329, 329 (1994).
49
Feist, 499 U.S. at 345.
50
Id. at 346.
27
The requisite level of creativity is extremely low.51 Nevertheless,
without some creative spark —— “no matter how crude, humble or
obvious”52 —— the labor that goes into independently creating (as
opposed to simply reproducing) a work is insufficient to bring that
work within the scope of copyright.53 And, if a work is entitled to
copyright protection, its author is granted exclusive rights over its
reproduction,54 adaptation,55 distribution,56 performance, and display.
Use of a copyrighted work by one who does not own the copyright
51
Id. at 345.
52
Id.
53
See generally Feist, 499 U.S. 340 (holding that alphabetized
telephone white pages lacked the creative spark required by the
Copyright Act and the Constitution, and, therefore, were not
entitled to copyright protection despite the hard work that went
into compiling the facts contained in the directory).
54
The reproduction right consists of the exclusive right “to
reproduce the copyrighted work in copies or phonorecords.” 17
U.S.C. § 106(1). “Copies” and “phonorecords” consist of material
objects in which the work is fixed. 2 Nimmer, supra, § 8.02[B][2],
at 8-29, 30. One who makes copies of a copyrighted work infringes
the copyright owner’s reproduction right even if he does not also
infringe the distribution right by sale or other disposition of
such copies. 2 id., § 8.02[C], at 8-31, 32. Therefore, subject to
certain exemptions, copyright infringement occurs whenever an
unauthorized copy is made, even if it is used solely for the
private purposes of the reproducer. 2 id., at 8-32.
55
Section 106(2) of the Copyright Act grants to the copyright
owner the exclusive right “to prepare derivative works based upon
the copyrighted work.” In order to violate clause (2), the
infringing work must incorporate a sufficient portion of the pre-
existing work so as to constitute an infringement of either the
reproduction right, or of the performance right. 2 Nimmer, supra,
§ 8.09[A], at 8-128. To be actionable, the finished product must
be “substantially similar” to its forbear. 2 id.
56
Section 106(3) of the Copyright Act accords to the copyright
owner the exclusive right “to distribute copies or phonorecords of
the copyrighted work to the public by sale or other transfer of
ownership or by rental, lease, or lending. . . .”
28
constitutes infringement under federal law,57 provided the use falls
within the scope of a copyright owner’s exclusive rights.58
In contrast to federal copyright law, which focuses on the value
of creativity, state misappropriation law is specifically designed to
protect the labor —— the so-called “sweat equity” —— that goes into
creating a work.59 This purpose is evident in the elements of proof
57
The two fundamental elements of a copyright infringement claim
under the federal Copyright Act are:
(1) ownership of a valid copyright by the plaintiff;
and
(2) copying, by the defendant, of constituent
elements of the plaintiff’s work that are original.
Feist, 499 U.S. at 361; Allied Mktg. Group, Inc. v. CDL Mktg.,
Inc., 878 F.2d 806, 810 (5th Cir. 1989).
58
17 U.S.C. § 501(a). “Use” other than reproduction,
adaptation, distribution, performance, and display does not amount
to “copying” under the Copyright Act, and is not, therefore,
actionable under federal law. 2 Nimmer, supra, § 8.01[A], at 8-13,
14. See, e.g., G.S. Rasmussen & Assocs., Inc. v. Kalitta Flying
Serv., Inc., 958 F.2d 896, 904 (9th Cir. 1992)(implicitly holding
that the interest for which plaintiff sought protection under state
law —— the “use” of its Supplemental Type Certificate as a basis
for obtaining an airworthiness certificate from the FAA —— fell
outside the scope of the exclusive rights granted under federal
copyright law, and plaintiff’s state claim was not, therefore,
preempted).
59
See International News Serv. v. Associated Press, 248 U.S.
215, 239 (1918). Misappropriation is the act of converting to
one’s own use and profit the product of another’s labor. See id.
The doctrine of unfair competition by misappropriation was
established by the Supreme Court in International News Service v.
Associated Press. In that case, INS copied AP news reports printed
in the eastern U.S., and transmitted them to subscribers in the
western U.S. INS used the copied information to compete against AP
for a West Coast clientele. While AP’s articles were
copyrightable, the underlying news events were not. Concluding
that INS’s behavior was inequitable, the Court established the
misappropriation doctrine to prevent INS from unjustly benefitting
from AP’s labor. Id. at 239. The Court noted that it was not the
news events themselves which were being protected by the doctrine,
but rather the proprietor’s effort and expense in obtaining them.
Id. at 240.
International News was decided pre-Erie as a matter of federal
29
required to succeed under a Texas misappropriation claim. These
elements, as articulated by the Texas Court of Appeals in United
States Sporting Products, Inc. v. Johnny Stewart Game Calls, Inc.,60
include:
(i) the creation by plaintiff of a product through
extensive time, labor, skill and money; (ii) the use
of that product by defendant in competition with
plaintiff, thereby giving the defendant a special
competitive advantage because he was burdened with
little or none of the expense incurred by plaintiff
in the creation of the product; and (iii) commercial
damage to plaintiff.61
Despite the seemingly divergent purposes of federal copyright law
and state misappropriation law, we conclude that, under the
discrete facts of this case, the rights protected under these laws
are equivalent.
This conclusion is supported by our holding in Daboub v.
Gibbons.62 Daboub involved the performance by the band ZZ Top of
music that the plaintiffs alleged originally belonged to them. The
complained-of acts centered around ZZ Top’s live performances and
common law, and thus nowhere is binding precedent. The case
spawned the development of unfair competition laws throughout the
states, however, including Texas. See Gilmore v. Sammons, 269 S.W.
861, 863 (Tex. Civ. App. 1925)(concluding that a common-law
property interest exists “in facts and information collected and
utilized by skill, labor, and expense, although the same
information is available to any one who chooses to collect it,” and
adopting the International News misappropriation doctrine as a
remedy for defendant’s appropriation of news items gathered by
plaintiff’s effort at his great expense).
60
865 S.W.2d 214 (Tex. App. 1993, writ denied).
61
Id. at 218.
62
42 F.3d 285 (5th Cir. 1995).
30
sales of studio recordings of this music.63 Plaintiffs brought suit
alleging various Texas state law claims, including
misappropriation, but we held that plaintiffs’ state claims were
preempted by the Copyright Act. In so doing, we stated that
“[plaintiffs’] state claims center on the improper copying of the
song, an interest clearly protected by the Copyright Act. . . . The
core of each of [their] state law theories of recovery . . .,
without detailing the specific elements comprising each claim, is
the same: the wrongful copying, distribution, and performance of
the lyrics of Thunderbird.”64 We held that the state claims were
preempted because plaintiffs had failed to “allege or produce
evidence of ‘any element, such as an invasion of personal rights or
a breach of fiduciary duty’,”65 which would have rendered their
claims different in kind from copyright infringement.
Likewise, the acts that form the basis of DSC’s
misappropriation claim touch on interests clearly protected by the
Copyright Act, including (1) the reproduction of its firmware,
software, and manuals; (2) the use of these materials in the
preparation of allegedly derivative works —— DGI’s microprocessor
and expansion cards; and (3) the distribution of these works in
competition with DSC. Nevertheless, DSC insists, its claim is not
preempted because Texas misappropriation law requires proof of
63
Id. at 287.
64
Id. at 289.
65
Id. at 289-90 (quoting P.I.T.S. Films v. Laconis, 588 F.
Supp. 1383 (E.D. Mich. 1984)).
31
elements qualitatively different from those necessary to establish
copyright infringement.
First, submits DSC, state law requires proof that DSC’s
product was created through “extensive time, labor, skill and
money” whereas, under the Copyright Act, this proof is irrelevant.
As previously noted, however, copyright protection is awarded only
to those works in which independent creation and creativity
converge. DSC is correct in its observation that no amount of
time, labor, skill, and money can bestow copyright eligibility on
a work that is devoid of creativity. While proof of these elements
is not sufficient to establish copyright protection, however, these
elements are fundamental to the independent creation of a work,
proof of which is necessary under the Copyright Act. Thus, under
circumstances in which a work has been granted copyright protection
—— such as the circumstances that are before us in the instant case
—— the time, labor, skill, and money expended by the author in
creating the work are necessarily contemplated in that copyright.
Next, submits DSC, a Texas misappropriation claim requires
proof that DGI used DSC’s firmware, software, and manuals “in
competition with” DSC. Because an unauthorized act of reproduction
would violate copyright law but would not, in itself, offend the
competition requirement of state law, DSC argues, its
misappropriation claim is qualitatively different. This type of
reverse reasoning defies logic. The owner of a copyright has a
claim under federal law for the infringement of his exclusive
rights to reproduce, adapt, distribute, perform, and display his
32
works. Whether the infringing act touches on all of these rights
or just one is irrelevant for the purposes of copyright law. In
the instant case, alleges DSC, DGI reproduced works created by DSC,
prepared derivative works based on those creations, and then
distributed its product in competition with DSC. To establish a
claim under state law, proof of this final infringing act is
necessary. Although not necessary, such proof is sufficient to
establish a claim under federal copyright. That proof of
reproduction would, in itself, be sufficient to establish a
copyright claim as well means only that the scope of protection
afforded by copyright law is broader than that afforded by state
misappropriation.
We conclude that, because DSC has failed to demonstrate the
presence of any element that renders different in kind its rights
under state and federal law, DSC’s state misappropriation claim is
preempted by federal copyright law. Consequently, the district
court erred in denying DGI’s motion for a JML on this issue, and
its award of damages on DSC’s claim of unfair competition by
misappropriation must be vacated. Unfortunately, however, the
monetary damages awarded to DSC were not itemized, and we have no
way of parsing that award to reduce its quantum appropriately and
render it. Therefore, we have no choice but to remand this
particular issue to the district court for it to recalculate the
damages in accordance with this opinion and render a revised
judgment accordingly.
C. Injunction
33
The jury found, and the district court agreed, that as a
result of DGI’s trade secret misappropriation, unfair competition
by misappropriation, and copyright infringement DSC would be
irreparably harmed in the future with respect to its operating
system software. The court therefore issued a permanent injunction
(1) requiring DGI to produce for destruction all of its existing
microprocessor cards, and (2) prohibiting DGI from selling any
microprocessor cards developed with the assistance of DSC’s
operating system software or designed to use DSC’s operating system
software. DGI urges that none of the grounds relied on by the
district court justify the issuance of the injunction. We address
each of these grounds in turn, reviewing the underlying claims and
the reasons proffered by DGI for its contention that equitable
relief was improper.
1. Standard of Review
We review a district court’s issuance of a permanent
injunction for abuse of discretion.66 A district court abuses its
discretion if it “(1) relies on clearly erroneous factual findings
when deciding to grant or deny the permanent injunction[,] (2)
relies on erroneous conclusions of law when deciding to grant or
deny the permanent injunction, or (3) misapplies the factual or
legal conclusions when fashioning its injunctive relief.”67
66
Seven-Up Co. v. Coca-Cola Co., 86 F.3d 1379, 1389 (5th Cir.
1996).
67
Peaches Entertainment Corp. v. Entertainment Repertoire
Assocs., 62 F.3d 690, 693 (5th Cir. 1995).
34
2. Copyright Infringement68
a. Sufficiency of the Evidence
The jury found that DGI directly infringed DSC’s copyrights in
its pulse code modulation interface manual and printed circuit
board assembly, its MP-8 firmware, and its operating system
software. The jury also concluded that DGI had not contributorily
infringed DSC’s copyright in its operating system software.
To succeed on a claim for direct copyright infringement, a
plaintiff must prove two elements: (1) ownership of the
copyrighted material and (2) copying by the defendant.69 A copy is
legally actionable if (1) the alleged infringer actually used the
copyrighted material to create his own work, and (2) substantial
similarity exists between the two works.70 A party is liable for
contributory infringement when it, “with knowledge of the
infringing activity, induces, causes or materially contributes to
infringing conduct of another.”71 Section 502 of the Copyright Act
authorizes the district court to grant “final injunctions on such
terms as it may deem reasonable to prevent or restrain infringement
68
DSC did not seek damages, but solely injunctive relief, for
its copyright infringement claim.
69
Allied Mktg. Group, Inc. v. CDL Mktg., Inc., 878 F.2d 806,
810 (5th Cir. 1989).
70
Engineering Dynamics, Inc. v. Structural Software, Inc., 26
F.3d 1335, 1340-41 (5th Cir. 1994), opinion supplemented on denial
of rehearing, 46 F.3d 408 (5th Cir. 1995).
71
Gershwin Publishing Corp. v. Columbia Artists Management,
Inc., 443 F.2d 1159, 1162 (2d Cir. 1971) (footnote omitted).
35
of a copyright.”72 Likewise, section 503 provides that the court
may impound and destroy any articles used to make infringing copies
of a copyrighted material.73
Regarding direct copyright infringement, DGI argues that the
district court’s injunction prohibiting the manufacture, sale and
development of competing microprocessor cards is not justified by
any such act. DGI first maintains that its competing
microprocessor cards do not directly infringe DSC’s operating
system software copyright, as the DMP-2800 card contains no form of
DSC’s operating system software when sold to a customer. In
addition, DGI submits that the cards do not directly infringe DSC’s
firmware copyright, inasmuch as the firmware contained in DGI’s
DMP-2800 cards is not substantially similar to DSC’s firmware.
Accordingly, DGI posits, the district court must have based its
injunction on the theory that DGI developed its card with the
benefit of earlier infringement of DSC’s copyrights. DGI urges
that, as we have previously rejected such a “fruit of the
infringing tree” doctrine, the district court abused its discretion
in enjoining DGI from continuing to produce a non-infringing
product, even if DGI is guilty of past copyright infringement.74
72
17 U.S.C. § 502(a) (1994).
73
17 U.S.C. § 503(a)-(b).
74
See Kepner-Tregoe, Inc. v. Leadership Software, Inc., 12 F.3d
527, 538 (5th Cir.), cert. denied, 513 U.S. 820 (1994). In Kepner-
Tregoe, the defendant appealed the district court’s order enjoining
not only its infringing product, but also “all future modifications
and revisions.” This court rejected the last portion of the
injunction, holding that “the most [the district court] could
enjoin were future modifications and improvements of the
36
DGI likewise argues that the district court erred in ignoring the
jury’s finding that DGI’s microprocessor cards do not
contributorily infringe on DSC’s copyright in its operating system
software.
DSC responds that the district court did not abuse its
discretion in issuing the injunction based in part on DGI’s acts of
copyright infringement. In addition to its assertion that the
jury’s finding of direct infringement is supported by the evidence,
DSC advances that the injunction was also justified on the ground
of contributory infringement. Towards this end, DSC notes the
undisputed fact that its operating system is subject to a valid
copyright, that DGI’s microprocessor card downloads, i.e.,
reproduces, that system each time it is booted up, and that DGI
intentionally designed its card to perform this infringing
function. Furthermore, observes DSC, there is evidence in the
record that DGI could have developed its own computer code to
operate its card, but realized that copying DSC’s system was faster
and cheaper. Even though the jury found evidence of contributory
infringement —— specifically, that DSC’s customers infringed DSC’s
software copyright by using DGI cards, and that DGI knowingly
induced this infringing activity —— the jury went on to conclude
that there was no contributory infringement. This finding, urges
DSC, is internally inconsistent, and the district court properly
disregarded the jury’s finding of no contributory infringement.
[defendant’s product] that are substantially similar to [the
plaintiff’s] copyrighted Materials.” Id.
37
We have no problem upholding the district court’s injunction
on the basis of DGI’s copyright infringement. There is no question
that DGI engaged in at least one act of direct copyright
infringement: None dispute that DGI personnel connected a laptop
computer to the DSC switch at NTS, made a copy of the DSC operating
system software, and carried the laptop back to the DGI labs. This
unauthorized act clearly infringed DSC’s exclusive right to
reproduce its software.75
We also agree with DSC and the district court that DGI engaged
in contributory infringement as a matter of law. The evidence
shows that each time a DGI microprocessor card is booted up, it
downloads (makes a copy of) the DSC operating system. By selling
its DMP-2800 card, therefore, DGI knowingly induces and causes its
customers —— i.e., DSC switch owners —— to violate DSC’s exclusive
right to reproduce its software. Under section 117 of the
Copyright Act, DGI could have avoided liability for contributory
infringement by proving that its customers owned copies of the DSC
operating system software, and were therefore authorized to make
additional copies, provided such reproduction was “an essential
75
Vault Corp. v. Quaid Software Ltd., 847 F.2d 255, 259 (5th
Cir. 1988)(noting that the Copyright Act was amended in 1976 “to
include computer programs in the definition of protectable literary
works and to establish that a program copied into a computer’s
memory constitutes a reproduction”); Central Point Software, Inc.
v. Nugent, 903 F. Supp. 1057, 1059-60 (E.D. Tex. 1995)(recognizing
that “[p]laintiffs may establish copying if they can demonstrate
that the software has been reproduced in a computer’s memory
without permission”).
38
step in the utilization of the computer program.”76 In a specific
interrogatory, however, the jury found that DGI did not prove by a
preponderance of the evidence that DSC switch owners owned77 copies
of DSC software.78 In light of this finding —— which was unappealed
76
17 U.S.C. § 117 provides an exception to a copyright owner’s
exclusive rights in computer programs. It states:
Notwithstanding the provisions of section 106, it is not
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:
(1) 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, or
(2) that such new copy of 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. . . .
(Emphasis added).
77
We are aware of opinions by this court and others in which
the reproduction of computer programs by licensees has been held to
come within the § 117 exception. See Vault Corp. v. Quaid Software
Ltd., 847 F.2d 255, 261 (5th Cir. 1988)(holding in the context of
direct infringement that defendant’s complained-of copy was
“created as an essential step in the utilization of [plaintiff’s]
computer program,” and that defendant did not infringe plaintiff’s
exclusive right to reproduce the program, despite the fact that
defendant did not use the complained-of copy for its intended
purpose, and without explaining why the defendant “owned a copy of
the computer program” from which the complained-of copy was made);
DSC Communications Corp. v. Pulse Communications Inc., 976 F. Supp.
359, 363 (E.D. Va. 1997)(concluding that “[i]t would be
nonsensical” to give licensees —— customers of a telecommunications
switching system —— the right, under the non-exclusive rights
clause of their licensing agreement, to buy equipment from a second
source, but prevent the licensees from using this equipment ——
which temporarily downloaded software into its memory —— under the
threat of an infringement claim). Because DGI did not appeal the
jury’s finding of non-ownership in the instant case, however, we
save for another day the task of defining the contours of the term
“owner” as it is used in § 117.
78
This finding is supported by undisputed evidence that the DSC
licensing agreement prohibits DSC switch owners from (1) using the
39
—— the jury’s conclusion that DGI did not contributorily infringe
DSC’s software copyright is internally inconsistent. Considering
the complex nature of this case and this issue, we understand and
sympathize with the jury’s confusion on this point. We have
previously recognized, though, that when facts are undisputed, we
may set aside a jury’s finding concerning the legal significance of
those facts.79
DGI’s reliance on Kepner-Tregoe is also unavailing. As DSC
reminds us, that case involved a claim of direct infringement.
Here, the district court’s injunction can be upheld solely on the
basis of contributory infringement. As such, the injunctive relief
is grounded not in some earlier act of infringement by DGI, but in
the recognition that DGI and its customers are violating the DSC
software licensing agreement each time they boot up the DSC
operating system into a DGI microprocessor card.
b. Copyright Misuse
DGI nevertheless insists that, even assuming that it committed
acts of copyright infringement, the “copyright misuse” doctrine
precludes injunctive relief based on that infringement. This
doctrine —— which has its historical roots in the unclean hands
defense80 —— “bars a culpable plaintiff from prevailing on an action
software in conjunction with products manufactured by other
companies, and (2) making copies of the software or disclosing it
to third parties.
79
See Kiff v. Travelers Ins. Co., 402 F.2d 129, 131 (5th Cir.
1968).
80
Qad, Inc. v. ALN Assocs., Inc., 974 F.2d 834, 836 (7th Cir.
1992); Supermarket of Homes, Inc. v. San Fernando Valley Bd. of
40
for the infringement of the misused copyright.”81 It “forbids the
use of the [copyright] to secure an exclusive right or limited
monopoly not granted by the [Copyright] Office and which it is
contrary to public policy to grant.”82 The copyright misuse defense
is analogous to the patent misuse defense, which was originally
recognized by the Supreme Court in Morton Salt Co. v. G.S.
Suppiger.83 The Fourth Circuit was the first to extend the
rationale behind patent misuse to copyrights. In Lasercomb
America, Inc. v. Reynolds, the Fourth Circuit explained that,
whereas “copyright law [seeks] to increase the store of human
knowledge and arts by rewarding . . . authors with the exclusive
rights to their works for a limited time . . . , the granted
Homes, 786 F.2d 1400, 1408 (9th Cir. 1986).
81
Lasercomb Am., Inc. v. Reynolds, 911 F.2d 970, 972 (4th Cir.
1990). A finding of misuse does not, however, invalidate
plaintiff’s copyright. Indeed, the court in Lasercomb specified
that “[plaintiff] is free to bring a suit for infringement once it
has purged itself of the misuse.” Id. at 979 n.22.
82
Id.
83
314 U.S. 488 (1942). In Morton,
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.
DSC I, 81 F.3d at 601.
41
monopoly power does not extend to property not covered by the . .
. copyright.”84
We recognized the copyright misuse defense in DSC I.85 We
noted that “DSC seems to be attempting to use its copyright to
obtain a patent-like monopoly over unpatented microprocessor
cards.”86 Speculating that DGI might prevail on a copyright misuse
defense, we refused to expand the preliminary injunction issued by
the district court.
Not surprisingly, DGI argues, based on DSC I, that on remand
the district court abused its discretion when it ignored the jury’s
finding that DSC misused its operating system copyright and entered
the permanent injunction. DGI reasons that, as DSC’s software is
licensed to customers to be used only in conjunction with DSC-
manufactured hardware, DSC indirectly seeks to obtain patent-like
protection of its hardware —— its microprocessor card —— through
the enforcement of its software copyright. DSC responds that its
actions do not constitute misuse, inasmuch as its licensing
agreement does not prohibit the independent development of
compatible operating system software. As DSC points out, it was
this “attempt[] to suppress any attempt by the licensee to
independently implement” competing software that the court
84
911 F.2d at 976.
85
See 81 F.3d at 601 (“We concur with the Fourth Circuit’s
characterization of the copyright misuse defense.”). We recognize,
however, that pronouncements made during resolution of an appeal of
a preliminary injunction are not binding. University of Texas v.
Camenisch, 451 U.S. 390 (1981).
86
Id. (emphasis added).
42
condemned in Lasercomb.87
We agree with the DSC I panel’s conjecture and the jury’s
finding that DSC’s licensing agreement for its operating system
constitutes misuse. The district court instructed the jury, in
pertinent part:
[I]f DSC has used its copyrights to indirectly gain
commercial control over products DSC does not have
copyrighted, then copyright misuse may be present. 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.
A reasonable juror could conclude, based on the licensing
agreement, that “DSC has used its copyrights to indirectly gain
commercial control over products DSC does not have copyrighted,”
namely, its microprocessor cards. The facts on which we based our
misuse prediction in DSC I have not changed substantially. As we
reasoned then:
Any 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
87
Lasercomb, 911 F.2d at 978; see also Triad Sys. Corp. v.
Southeastern Express Co., 64 F.3d 1330, 1337 (9th Cir. 1995)
(finding that Southeastern was not likely to prevail on copyright
misuse defense because in that case, “unlike the case of
[Lasercomb], Triad did not attempt to prohibit Southeastern or any
other ISO from developing its own service software to compete with
Triad.”), cert. denied, 516 U.S. 1145 (1996).
43
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.
Under these facts, DSC’s assertion that its licensing agreement
does not prohibit the independent development of compatible
software is simply irrelevant. Despite the presence of some
evidence —— the testimony of a DSC executive —— that DGI could have
developed its own software, there was also evidence that it was not
technically feasible to use a non-DSC operating system because the
switch has a “common control” scheme in which each microprocessor
card in a network of such cards runs the same operating system.
Hence, without the freedom to test its cards in conjunction with
DSC’s software, DGI was effectively prevented from developing its
product, thereby securing for DSC a limited monopoly over its
uncopyrighted microprocessor cards. Furthermore, the jury
instructions never mentioned that misuse could only be present if
DSC’s agreement prohibited the independent development of software.
Consequently, we conclude that the district court abused its
discretion in awarding injunctive relief based on DGI’s infringing
acts.
We reach this conclusion despite the jury’s finding that DGI
acted with unclean hands in its acquisition and use of DSC’s
copyrighted software, firmware, and manuals. DSC insists that,
based on this finding, DGI is barred from invoking an equitable
defense, and DSC is entitled to injunctive relief notwithstanding
44
its alleged copyright misuse. We reject this contention.
“It is old hat that a court called upon to do equity should
always consider whether the petitioning party has acted . . . with
unclean hands.”88 In Precision Instrument Mfg. Co. v. Automotive
Maintenance Machinery Co.,89 the Supreme Court proclaimed that “one
tainted with inequitableness or bad faith relative to the matter in
which he seeks relief” is barred from a court of equity, “however
improper may have been the behavior of the defendant.”90 In the
instant case, it is DSC which seeks equitable relief in the form of
an injunction, and thus it is DSC’s hands alone that must pass the
hygenic test. By misusing its software copyright, DSC sullied its
hands,91 barring itself from obtaining the equitable reward of
injunction on grounds of copyright infringement. This does not
mean that we repudiate the jury’s finding of unclean hands on the
part of DGI. Indeed, the deceptive practices used by DGI to obtain
a copy of DSC’s software left it with very dirty mitts.
Nevertheless, this finding is irrelevant given the particular
88
Texaco Puerto Rico, Inc. v. Department of Consumer Affairs,
60 F.3d 867, 880 (1st Cir. 1995). This consideration is rooted in
the maxim that “he who comes into equity must come with clean
hands.” Precision Instrument Mfg. Co. v. Automotive Maintenance
Mach. Co., 324 U.S. 806, 814 (1945).
89
324 U.S. 806 (1945).
90
(Emphasis added). Precision Instrument, 324 U.S. at 814.
Later, the Court added, “[t]hat the actions of [defendants] may
have been more reprehensible is immaterial.” Id. at 819.
91
Although perhaps not indelibly so. See Lasercomb, 911 F.2d
at 979 n.22.
45
posture of this case.92
In support of its contrary position, DSC relies on the Federal
Circuit’s decision in Atari Games Corp. v. Nintendo of America,
Inc..93 In that case, the court held that the misuse defense is an
equitable doctrine, and that Atari was ineligible to assert that
defense because of its unclean hands.94 The Atari court cited
Supermarket of Homes, Inc. v. San Fernando Valley Board of
Realtors95 in support of this conclusion. As DGI points out,
however, Supermarket does not stand for the proposition that
unclean hands preclude the copyright misuse defense.96 Although a
92
See United Cities Gas Co. v. Brock Exploration Co., 995 F.
Supp. 1294, 1296 n.11 (D. Kan. 1998)(citing Precision Instrument
for the proposition that “[i]f the plaintiff has unclean hands and
seeks equitable relief, the defendant’s own improper behavior
serves as no bar to its equitable defenses.” But, finding support
in the historical courts of equity for the proposition that “[i]f
. . . the plaintiff has no unclean hands or requests exclusively
legal relief, the defendant’s unclean hands may preclude it from
advancing equitable defenses.”). See also Minnesota Muskies, Inc.
v. Hudson, 294 F. Supp. 979, 989 (M.D. N.C. 1969)(holding, in
action to enjoin professional basketball player from playing ball
for any team other than plaintiff, that “[i]t is irrelevant that
the conduct of [defendant] may have been more reprehensible than
that of [plaintiff], since it is the devious conduct of the
[plaintiff] that created the problems presented in this
litigation.”); MAS v. Coca-Cola Co., 163 F.2d 505, 510 (4th Cir.
1947)(concluding that, based on the Supreme Court’s statement in
Precision Instrument, plaintiff’s contention that he was entitled
to relief notwithstanding his fraudulent conduct because defendant
was also guilty of fraud and unlawful conduct was without merit).
93
975 F.2d 832, 846 (Fed. Cir. 1992).
94
Id. at 846. Atari was a consolidated case primarily
involving Nintendo’s claims against Atari for copyright
infringement. Id. at 835.
95
786 F.2d 1400, 1408 (9th Cir. 1986).
96
Supermarket recognized copyright misuse as a form of the
unclean hands doctrine, and its viability as a defense, but held
46
smattering of other courts have proposed this type of bar to the
use of an equitable defense,97 we find these decisions unpersuasive.
Consequently, we conclude that the district court abused its
discretion in failing to allow DGI to invoke the equitable defense
of copyright misuse.
3. Trade Secret Misappropriation
After finding that DGI misappropriated DSC’s trade secrets,
the jury nevertheless found that DSC had “unclean hands” in the
assertion of those trade secrets in its firmware, operating system
software, and written manuals. DGI would have us find that the
district court abused its discretion in granting an injunction to
DSC based on DGI’s misappropriation of trade secrets as, under
Texas law, a plaintiff with unclean hands is not entitled to
equitable relief.98
that none of plaintiff’s alleged conduct constituted misuse. In
reference to Supermarket, the Atari court stated that “[t]he Ninth
Circuit has noted that the doctrine of unclean hands can also
preclude the defense of copyright misuse.” Atari, 975 F.2d at 846.
Contrary to the Atari court’s reading of the case, Supermarket does
not appear to stand for this proposition.
97
See Data Gen. Corp. v. Grumman Sys. Support Corp., 36 F.3d
1147, 1170 n.43 (1st Cir. 1994)(stating that “[i]f copyright misuse
is an equitable defense, a defendant that has itself acted
inequitably may not be entitled to raise such a defense.”); Leo
Feist, Inc. v. Young, 138 F.2d 972 (7th Cir. 1943); Tempo Music,
Inc. v. International Good Music, Inc., 143 U.S.P.Q. 67 (W.D. Wash.
1964). See also 4 Nimmer, supra, § 13.09[B], at 13-295 (citing the
above listed cases and suggesting that the defense of unclean hands
should possibly be denied “when the defendant has been guilty of
conduct more unconscionable and unworthy than the plaintiff’s.”).
98
See Regional Properties, Inc. v. Financial & Real Estate
Consulting Co., 752 F.2d 178, 183 (5th Cir. 1985); DeSantis v.
Wackenhut Corp., 793 S.W.2d 670, 682 n.6 (Tex. 1990), cert. denied,
498 U.S. 1048 (1991).
47
As a preliminary matter, DGI insists that the district court
erred in suggesting that the jury’s finding was not binding, but
was only “an advisory recommendation on the issue of equitable
relief.” DGI acknowledges that district courts sometime have
discretion to disregard findings of unclean hands,99 but argues that
once the court submits the question to a nonadvisory jury, it
relinquishes that discretion.
On this point of law, we agree with DGI. Fed. R. Civ. Proc.
39(c) provides that “[i]n all actions not triable of right by a
jury the court upon motion or of its own initiative may try an
issue with an advisory jury or . . . the court, with consent of
both parties, may order a trial with a jury whose verdict has the
same effect as if trial by jury had been a matter of right.” It is
well established that the right to trial by jury does not extend to
matters historically cognizable in equity,100 and thus, a
determination whether a party has unclean hands might be a suitable
question for an advisory jury. Courts have held, however, that
once litigants have consented —— either expressly or implicitly101
—— to a nonadvisory jury, the court must provide them advance
99
Thomas v. McNair, 882 S.W.2d 870, 880 (Tex. App. 1994, no
writ).
100
Sheila’s Shine Prods., Inc. v. Sheila Shine, Inc., 486 F.2d
114, 121-22 (5th Cir. 1973).
101
The express consent of the parties to a nonadvisory jury is
not required by Fed. R. Civ. P. 39(c). If one party demands a
jury, the other does not object, and the court orders a jury trial,
this will be regarded as trial by consent. Bereda v. Pickering
Creek Indus. Park, Inc., 865 F.2d 49, 52 (3d Cir. 1989) (citing C.
Wright & A. Miller, 9 Federal Practice & Procedure § 2333(1971)).
48
notice if it intends to regard the verdict as advisory.102 In the
absence of such an advance notice requirement, “[a]ll jury verdicts
in cases not triable by right by a jury would effectively be
advisory, as the district judge could always rule that the verdict
was advisory if the judge did not agree with the jury’s verdict.”103
In the instant case, the possibility that the jury’s findings might
be advisory was never mentioned until after the verdict was
returned. Accordingly, “whether or not the issues were equitable
in nature, the verdict of the jury must be treated as if the right
had existed and it is beyond the power of the district court to set
the verdict aside on the theory it was advisory.”104
Nevertheless, we are satisfied that the jury’s finding of
unclean hands with regard to DSC is not supported by the evidence.
The district court defined “unclean hands” as follows:
The doctrine of unclean hands is an equitable defense
which provides that a party must have acted fairly and
justly in its dealings with another in order to assert a
cause of action against that party. A party is said to
possess “unclean hands” if it is guilty of conduct
involving fraud or bad faith. If you find that either
party acted in a fraudulent, underhanded, unfair or
unjust manner then you may conclude that party had
“unclean hands.”
102
Thompson v. Parkes, 963 F.2d 885, 888 (6th Cir. 1992)
(“Clearly the rule requires that the court’s initiative in ordering
a trial to an advisory jury must occur, and parties must be made
aware of it, before case is submitted.”); Bereda, 865 F.2d at 53
(holding that “when the litigants have consented to a nonadvisory
jury under Rule 39(c), a district court must notify both sides of
a jury’s advisory status no later than the time at which the jury
selection has begun.”).
103
Bereda, 865 F.2d at 52.
104
Thompson, 963 at 888.
49
DGI points to several acts of DSC’s which it contends constitute
unclean hands. First, DGI notes that DSC installed software
designed to prevent the operation of DGI’s competing microprocessor
card. Second, DSC threatened to void switch owners’ warranties and
maintenance agreements if non-certified cards were used in the
switches. Finally, DSC refused to certify DGI cards.
We are persuaded nonetheless that the jury was unreasonable in
finding, on the basis of the record evidence, that DSC had unclean
hands in its efforts to protect its trade secrets. DSC was under
no obligation to certify third party products for use in its
switches. Neither was it required to offer warranties for products
over whose quality it had no control. And, DSC’s letter to its
customers informed or reminded them of that policy before DGI’s
products were ever available for sale. Thus, the only evidence to
support the jury’s finding of unclean hands was DSC’s attempt to
install a software patch that disabled DGI’s cards. But this
evidence also shows that (1) the patch was never effective in
disabling the DGI products, (2) the complexity of the switches and
the potential problems involved with the introduction of an
untested component into those switches provided DSC a valid
business justification for the development of the patch, and (3)
DSC stopped threatening or attempting to develop such a patch
within a year and a half. As such, there seems to be no
substantial evidence of bad acts to support a finding of unclean
hands on the part of DSC.
But even assuming arguendo that there was sufficient evidence
50
for the jury to conclude that DSC had unclean hands, such a finding
is not an absolute bar to injunctive relief.105 To invoke the
doctrine, a defendant must show that he was injured by the
plaintiff’s improper acts.106 And “[w]here the harm done to the
defendant is not serious and can be otherwise corrected, the
unclean hands maxim should not be applied.”107 Moreover, “[t]he
doctrine cannot be used as a defense if the unlawful or inequitable
conduct of the plaintiff is merely collateral to the plaintiff’s
cause of action.”108
As previously noted, the software patch was never successful
in disabling any DGI products. And, DGI presented no evidence that
any customers were actually deterred from buying DGI equipment
because of the threat of the patch. Accordingly, DSC’s putative
unclean hands do not serve as a bar to injunctive relief grounded
in trade secret misappropriation. We therefore conclude that,
based on DGI’s misappropriation of trade secrets, the court was
within its discretion in fashioning the equitable relief awarded in
105
Omohundro v. Matthews, 341 S.W.2d 401, 410 (Tex. 1960);
First Coppell Bank v. Smith, 742 S.W.2d 454, 464 (Tex. App. Dallas
1987, no writ) (“The doctrine of unclean hands does not operate to
repel all sinners from a court of equity.”); see also Schenck v.
Ebby Halliday Real Estate, Inc., 803 S.W.2d 361, 367 (Tex. App.
1990, no writ) (in deciding whether equitable remedy of rescission
should be available to plaintiffs suing under Texas Deceptive Trade
Practices Act, “[plaintiffs’] unclean hands, as determined by the
jury, [are] a factor” to be considered) (emphasis added).
106
Omohundro, 341 S.W.2d at 410.
107
First Coppell, 742 S.W.2d at 464.
108
Grohn v. Marquardt, 657 S.W.2d 851, 855 (Tex. App. 1983,
writ ref’d n.r.e.).
51
this case.109
D. DSC’s Cross-Appeal
1. DGI’s State Law Damages Claims
The jury found DSC liable for interference with DGI’s
prospective contracts and for unfair competition. In its cross-
appeal, DSC asserts that DGI failed to present evidence sufficient
to support these claims, and that the district court therefore
erred in denying DSC’s motion for a JML.
To establish a claim for tortious interference with
prospective contract or business relationships under Texas law, a
plaintiff must show: “(1) a reasonable probability that the
parties would have entered into a contractual relationship, (2) an
intentional and malicious act by the defendant that prevented the
relationship from occurring, with the purpose of harming the
plaintiff, (3) the defendant lacked privilege or justification to
do the act, and (4) actual harm or damage resulted from the
defendant’s interference.”110 While “[i]t need not be absolutely
certain that the prospective contract would have been made but for
the interference . . . , it must reasonably appear so, in view of
109
DGI also submits that the misuse doctrine should prevent DSC
from obtaining injunctive relief based on its Texas claim of unfair
competition by misappropriation. Because we held this state law
claim preempted by federal copyright law, any and all relief
awarded by the district court in association with that claim has
been vacated, and we need not address DGI’s misuse defense in this
context.
110
Exxon Corp. v. Allsup, 808 S.W.2d 648, 659 (Tex. App. 1991,
writ denied); see also Leonard Duckworth, Inc. v. Michael L. Field
& Co., 516 F.2d 952, 956 (5th Cir. 1975).
52
all the circumstances.”111 Malice, in this regard, “is not to be
understood in its proper sense of ill will against a person, but in
its legal sense, as characterizing an unlawful act, done
intentionally without just cause or excuse.”112
To support its claim, DGI adduced the testimony of
representatives of two of its customers, Frontier Communications
and Allnet Communications. Greg Wallace, director of engineering
for Frontier, testified that his company had not purchased more DGI
equipment because of DSC’s policy of not warranting or providing
technical support to DSC switch owners who used non-certified
equipment. He stated that the “limited amount of business we have
probably done with DGI” resulted from this perceived risk. When
asked if Frontier bought fewer products from DGI than it would have
liked to, Wallace responded, “I think so, yes.” Joe Buckman, a
purchasing manager for Allnet, testified that DSC’s policy of
canceling the warranties and maintenance agreements of customers
who used non-certified products “made Allnet very circumspect about
buying the DGI product.” He further recalled that “there were at
least two incidents where, in trying to formulate a decision
whether to buy a DSC product or a DGI product, that letter had an
impact that dictated we buy the DSC product as opposed to the DGI
product.”
DSC maintains that, as a matter of law, this testimony is too
vague to support a claim for interference with prospective
111
Exxon, 808 S.W.2d at 659.
112
Id.
53
contracts. It notes that, whereas Buckman stated that DSC’s letter
made Allnet “circumspect” about buying from DGI, there was no
evidence that Allnet was actually negotiating with DGI or had
received any sort of proposal from DGI; indeed, DGI produced no
evidence of any specific proposed contract with Allnet that was
lost or of what profits DGI would have earned under such a contract
but for DSC’s interference. DSC insists that Buckman’s and
Wallace’s testimony that Allnet and Frontier would have purchased
more products from DGI had DSC not refused to certify and warrant
switches containing DGI cards also fails to support the tortious
interference claim, as neither official could relate which products
would have been purchased or for what price. Furthermore, DSC
submits that DGI’s proof of damages is legally insufficient, noting
that (1) the proof is based on generic lost profits and not the
profits lost from any specific contract, and (2) DGI provided the
jury no basis to measure the profit DGI might have made from legal,
as opposed to illegal, conduct. Finally, DSC urges that even if it
interfered with any prospective DGI contracts, DGI should not be
able to recover, as those contracts would only have been possible
because of DGI’s illegal development efforts: “[I]nterference with
an affirmatively illegal act is not a tort for which damages may be
recovered because it does not impinge upon any legally protected
interest. The law affords no compensation to a wrongdoer for
interference with his illegal gain.”113
113
Guaranty Bank v. National Sur. Corp., 508 S.W.2d 928, 933
(Tex. Civ. App. 1974, writ ref’d n.r.e.).
54
DGI, of course, takes the opposite position, i.e., that the
evidence of interference was legally sufficient. It disputes DSC’s
contention that DGI did not prove the prospective contracts with
specificity, pointing out that Texas law requires only that the
contract or business relations appear reasonably probable in light
of all the circumstances.114 It posits that the testimony of
Wallace and Buckman showed such a probability, and that it did not
need to provide proof of particular proposals, price schedules, or
the like. DGI also maintains that it was not required to prove its
lost profits from DSC’s interference with absolute certainty;115
instead, evidence “may be introduced to show a business’ decreased
profitability based upon objective facts, figures, and data
. . . .”116
Our review of the record convinces us that DGI simply did not
adduce sufficient evidence to support the jury’s verdict on this
claim. We recognize that Texas law does not require a great deal
of specificity with respect to prospective business relations. The
testimony of Wallace and Buckman, however, fails as a matter of law
to satisfy even the reasonable probability standard. Statements
that a potential customer was “circumspect” about buying DGI
products —— without any evidence of the type, amount, or price of
those products —— is too vague to form the basis of a successful
114
Leonard Duckworth, 516 F.2d at 956.
115
See Sandare Chem. Co. v. Wako Int’l, Inc., 820 S.W.2d 21,
23-24 (Tex. App. 1991, no writ).
116
Gonzales v. Gutierrez, 694 S.W.2d 384, 390 (Tex. App. 1985,
no writ).
55
tortious interference claim. Furthermore, DGI’s proof of damages
is wholly speculative. It relies entirely on testimony from
Frontier and Allnet, providing absolutely no evidence of its own
regarding the profits it would have earned from business relations
with these companies. Rather, DGI depends solely on estimated
future profits extrapolated from the growth curve of a company
that, as we have already shown, was not proven to be closely
comparable to DGI. DGI’s unitary proof of damages made no attempt
to separate the damages from its alleged antitrust and state law
claims. Likewise, DGI made no effort to show the quantum of
damages resulting from DSC’s and DGI’s lawful, as opposed to
unlawful, actions.
We do not overturn the findings of a jury lightly.
Nonetheless, based on the evidence presented at trial —— or the
lack thereof —— we conclude that the district court erred in
denying DSC’s motion for a JML on DGI’s claim for tortious
interference with prospective business relations. As DGI’s
allegations of DSC’s tortious interference were also the
underpinnings of its unfair competition claim, that too fails as a
matter of law. Consequently, we reverse those portions of the
district court’s order that denied DSC’s motion for a JML and
awarded damages in favor of DGI.
2. The Extension of the Injunction
DSC implores us to expand the district court’s injunction to
cover not only DGI’s microprocessor card, but every DGI card,
including its DTI, BT, PCMI, and DTD cards. In support of its
56
request, DSC emphasizes that, when a defendant unlawfully
appropriates another’s time, labor, skill, and money, the defendant
should be denied all benefits of the misappropriation.117 In light
of our holding that DSC’s state law unfair competition by
misappropriation claim is preempted, we stress that any and all
relief awarded by the district court in association with that claim
is vacated. Consequently, we conclude, DSC’s request for an
expansion of the district court’s injunction based on its preempted
state claim has been rendered moot.
III
CONCLUSION
For the foregoing reasons, we affirm the district court’s
grant of a JML in favor of DSC, dismissing DGI’s antitrust claim.
We also affirm the jury’s determination that damages are due to DSC
on its claim of misappropriation of trade secrets, and the district
court’s injunction against DGI, based in part on this claim.
Because DSC misused its copyrights, however, we reverse the
portions of the injunction tailored by the district court as relief
from DGI’s copyright infringement. Concluding that DSC’s state law
claim of unfair competition by misappropriation is preempted, we
also reverse the district court’s denial of a JML in favor of DGI
on this issue, and vacate all legal and equitable relief awarded to
DSC for this claim, including the portion of the damage award
attributable thereto. Because the monetary damages award to DSC
was not sufficiently itemized to permit us to modify the district
117
See Johnny Stewart Game Calls, 865 S.W.2d at 219-20.
57
court’s judgment and render a modified judgment, we remand for that
court to do so, taking into account the elimination of state unfair
competition damages. While on remand, the district court is also
instructed to reconsider the scope of the injunction in accordance
with this opinion, and revise its injunction if and to the extent
the court deems necessary or desirable. Finally, we reverse the
award of damages in favor of DGI on its claims for tortious
interference and unfair competition, concluding that these claims
are not supported by the evidence.
AFFIRMED in part; REVERSED and VACATED in part; and REMANDED in
part.
58