IBLS Speaker's Corner : Copyrights

Chip-per Copyright Infringement

IBLS Editor — Tue, 17 Jul 2007 18:53:00 GMT

IBLS Contributor: Attorney Odia Kagan, Tel Aviv, Israel, odia@okaganlaw.com, writes:

US Federal Court determined that the Digital Millennium Copyright Act should be used for the prevention of piracy and illegal copying and not for the prevention of the sale of programs which facilitate legitimate access and use and enable significant non-infringing commercial action.

The United States Court of Appeals for the Sixth Circuit held that the Digital Millennium Copyright Act (DMCA) cannot be used to prevent competition in the printer ink cartridge market.

In a decision issued on October 26, 2004, in the case of Lexmark International Inc. v. Static Control Components, the United States Court of Appeals held that printer maker Lexmark cannot use the DMCA in order to prevent its competitors from producing ink cartridges to be used in Lexmark printers. This decision vacated the injunction which the District Court in the State of Kentucky granted Lexmark against SCC, a company that produced chips enabling the manufacture of such cartridges.

More expensive than Chanel No. 5

A liter of ink for a Lexmark printer is more expensive than a liter of the luxury perfume Chanel No. 5 and a liter of premium whisky, according to research conducted by Gartner Group. The manufacturers of printers, who sell their printers at low prices, make most of their profits from the sale of printer cartridges. Companies like Lexmark are interested in selling as many original cartridges manufactured by them at full price. Therefore, they have an interest in decreasing the competition in this market.

To make sure that buyers of Lexmark printers only purchase licensed cartridges, that is, Lexmark cartridges, a chip is installed in the Lexmark-printer cartridges through which the printer identifies the cartridge used. Upon the insertion of the cartridge, an “electronic handshake” is performed between information in the chip, including a program called the Toner Loading Program, and the software installed in the printer, the Printer Engine Program. The program and the chip calculate a code. If the calculated code is not identical, the printer concludes that this is not a “licensed” cartridge. If this is the case, the printer sends an error report and ceases to operate.

SCC (Static Control Components Inc.), a small North Carolina company produced the Smartek chip. The chip includes the said Toner Loading Program, and thus, when it is installed in cartridges produced by Lexmark’s competitors, it enables the said authentication process successfully. SCC sells its chips to these competitors.

Who copied my software?

Lexmark filed a complaint against SCC based on three theories of liability: (1) That it violated the Federal Copyright statute in that it copied the Toner Loading Program into the chip, (2) that SCC violated the DMCA by selling the chip that circumvents access controls on the Toner Loading Program and (3) that SCC violated the DMCA by selling the chip that circumvents access controls on the Printer Engine Program.

The District Court, in a decision of March 2003, concluded that Lexmark established a likelihood of success on its copyright infringement claim for SCC’s copying of its Toner Loading Program on all three counts. Therefore the Court granted Lexmark an injunction against the production of the chips by SCC. The US Court of Appeals reversed this decision and vacated the district Court’s preliminary injunction.

Copyright Act not Competition-Prevention Act

As to the copyright infringement, the Court of Appeals held that the Toner Loading Program is a “lock out code”, allowing access to the hardware in which it is found only to licensed programs. Therefore, at least with regard to the injunction, the Toner Loading Program is not entitled to copyright protection. Whereas computer programs may be copyrightable, this defense does not apply when the idea embodied in the program may be expressed in only one way. In such case, the idea and the expression effectively merge and the program constitutes a lock out code for competitors and thus is not entitled to copyright protection. In this manner, others are not denied the opportunity to use the idea.

The Court added that the “originality” component has not been sufficiently proven with regard to the Toner Loading Program, and remanded to the District court the question of whether the Federal Copyright Statute had been violated. The Court concluded further that even if the production of the Smartek chip constitutes copyright infringement, SCC enjoyed the fair use defense. When SCC copied the Toner Loading Program, it did not do so to use it for the original purpose for which it had been written (i.e. the calculation of the amount of ink), but rather it did so to successfully pass the authentication process, which causes the printer to function. Thus, SCC may sell the chips to competitors and they, in turn, would be able to sell their printer cartridges for use with Lexmark Printers.

With regard to the violation of the DMCA, the Court accepted the defense argument presented by SCC in the District Court whereunder the program it wrote is a technological means the sole purpose of which is to enable the interoperability of an independent program with other programs.

Judge Merrit concurred with the majority opinion and noted that the Court “should make clear that in the future companies like Lexmark cannot use the DMCA in conjunction with copyright law to create monopolies of manufactured goods for themselves just by tweaking the facts of this case.”

Judge Feikens added that the DMCA must be used for the purposes for which it was legislated, that is, for the prevention of piracy and the manufacturing of programs which facilitate legitimate use and access and enable commercially significant non-infringing use.

In addition, the Court emphasized that the chip did not circumvent the Toner Loading Program, but rather replaced it altogether.

Lexmark’s Loss is the Consumers’ Gain

Consumer organizations are praising this decision as a significant victory for the consumer and state that “the court ruled in favor of competition”. The Court ruled that the DMCA may not be used for the prevention of competition by a blanket prohibition of reverse engineering and such technique must be permitted when its sole purpose is to enable the interoperability of different programs. The Court recognized that reverse engineering is often the key for new developments.

The Court’s decision permits the production of printer cartridges which compete with printer cartridges produced by Lexmark. This will increase the competition in this market and is expected to result in a price reduction and in the improvement of the technology. In addition, the Court expressed its objection to frivolous claims under the DMCA, intended to prevent competition rather than to protect copyright.

**Reprinted with permission from the Israel Bar Association Website (www.israelbar.org.il) where it was published on December 29, 2004 (http://www.israelbar.org.il/english_inner.asp?pgId=16712&catId=246). Originally published in Hebrew on NFC (www.nfc.co.il) on November 11, 2004 (http://www.nfc.co.il/archive/003-D-8030-00.html?tag=11-02-05).

Ms. Kagan specializes in Internet and IT law. Her articles on these subjects are published regularly in professional publications of the American Bar Association and the New York State Bar Association, as well as in national Israeli websites. Ms. Kagan authored the Israeli Chapter in the book “Cybercrime and Security” published worldwide by Oceana Publications, a division of Oxford University Press. A graduate of the Law Faculty of Tel Aviv University, Ms. Kagan is a member of the Israel and New York Bars, is qualified as a Solicitor in England & Wales and is also admitted as legal practitioner in New South Wales, Australia.

ASK THE EXPERT: Is it legal to include any geographical name in my website?

IBLS Editor — Mon, 02 Jul 2007 16:20:00 GMT

Yassin Mazzar from Saudi Arabia (Jeddah) asks:

Hi I’m soon to launch my website, and it contains names of different countries & cities. Is writing names of other countries, cities in my website legal? Thanks

Long Player: Five-Year Dispute Ends Successfully For BPI against CD Wow!

IBLS Editor — Tue, 19 Jun 2007 16:31:00 GMT

IBLS Contributor: Chris Scroggs, Wards Solicitors, United Kingdom, chris.scroggs@wards.uk.com, writes:

Last month saw the conclusion (or did it…?) of a long running battle between the BPI, on behalf of record companies, and CD Wow!, effectively fighting on behalf of consumers everywhere.

The story behind the dispute

The case had its genesis in 2002, when the BPI issued proceedings against CD Wow!, alleging that it had illegally imported discs into the UK, from Asia. That case was settled in January 2004, when CD Wow! gave undertakings to the court.

The allegation was that CD Wow! was buying discs in the Far East and selling them to consumers in the UK. CD Wow! accepted that it was selling cut-price CDs but claimed that they were all licensed to sell in the UK and that there was nothing improper, let alone illegal, about what they were doing. Not so, said the BPI, who felt it was a clear case of “parallel importing”.

Parallel importing is what happens when copyright material that is intended for a market outside the EEA (European Economic Area) is introduced for sale in Europe without the consent of the copyright owner. Such a practice contravenes UK and also European copyright law and is therefore illegal.

There was then a further flurry of proceedings in September 2005, when it became apparent to the BPI that the illegal importation of CDs – in particular the Live Aid DVD – by CD Wow! was still happening. In that particular case, the charity had been deprived of income.

The BPI spent some time gathering further information and then brought contempt of court proceedings against both CD Wow! and its principal share holder, Philip Robinson, in October 2006.

That case was due to come to court in July 2007 but in fact the court short-circuited that process and dealt with the case in mid May. That followed a four day hearing in March when the High Court ruled that CD Wow! was in breach of the 2004 agreement and CD Wow! was ordered to pay £37 million damages plus costs and interest, altogether totalling £41 million.

In the hearing, CD Wow! admitted to breaches of copyright law but put them down to human error in its despatch process. The court would have none of it and that evidence was unhesitatingly rejected.

The court said there was clear evidence that CD Wow! was committing widespread breaches of the undertakings that it gave in 2004. In fact, not only was it in breach, but even after the application for contempt of court had been pursued, in September 2005, the court found evidence that even then, CD Wow! had taken no effective steps to ensure compliance with the 2004 undertakings.

Trial Judge, Justice Evans-Lombe continued in his ruling that in “meeting the criminal burden of proof” the BPI had established “beyond reasonable doubt” that CD WOW!'s actions were a “substantial breach of the court order” and that it had “no tenable ground of defence to the claimants' claim for damages for primary infringement of the claimants' copyright”.

Although the damages enquiry was due to take place in July 2007, the court felt the matter was so serious it could not wait until then. In particular, given CD Wow!’s alleged failure to co-operate with the court orders for disclosure of documentation and for payment of security, the court assessed damages in May 2007. The BPI had then already obtained a freezing order against CD Wow!’s assets and bank account in Hong Kong.

The arguments for and against

The BPI’s case was quite simple: the record industry is a business like any other. Artists need to be paid and record companies need to receive a return on their investment. CD Wow! said (in effect) fine, all well and good. But…..you should be targeting pirates, in particular, in the Far East rather than us. All we are doing is selling a licensed product, at a discount. You still get your royalty payments from all the discs we ship.

The difficulty is that although it was part of the CD Wow! case that it was simply selling in the UK discs that it was entitled to sell, where royalties still went to the record company in question, an anonymous survey by the BPI and random purchases that it carried out, showed that the reality was somewhat different.

The BPI had made repeated test purchases of albums from CD Wow! Discs such as Robbie Williams’ “Greatest Hits” and the Live Aid DVD that were being despatched from Hong Kong to UK consumers, were not discs that were licensed to be sold in the UK.

Those were the instances that CD Wow! referred to as “a little human error”. Unfortunately for them, the court found that though one or two incidences of human error could be excused, the same could not be said where it happened, as it did, on a wholesale basis (the BPI produced evidence to show 33 instances in total).

On a wholesale basis, selling in the UK albums that were despatched from Hong Kong but that were licensed to be sold in the UK, contravened the relevant legislation and was a clear case of parallel importing. Whereas CD Wow!’s initial purchase of the CDs i.e. the bulk purchase, was legitimate, even though it happened outside of the EEA, when it resold that CD in the UK, it did so illegally.

CD Wow!’s argument was simplicity in itself. It was a Hong Kong based company. It purchased its products in Hong Kong and distributed from there. If, from Hong Kong, it sold a product to a customer in the UK, that sale was a personal import by that customer. That, it claimed, was not parallel importing.

The implications

The BPI disagreed and sued and the court in May 2007 resoundingly came down in the BPI’s favour.

Interestingly, the Consumer Association described the initial CD Wow! settlement as a “sad day for consumers and a sad day for e-commerce”. It felt that the whole purpose of the Internet and Internet shopping would be circumvented, if customers in the UK were not allowed to use the Internet to buy goods from abroad.

The BPI’s case is that there is no objection to that conduct, in principle. Its objection however is to customers buying whatever they like and ignoring the law of copyright. We do have some sympathy for the statement by CD Wow!’s founder, Henrick Wesslen, who condemned the BPI’s pursuit of its company. He said that at a time when the record industry was losing out vastly to piracy, it seemed ludicrous that the BPI could set out to destroy a section of the market that was actually making it money.

So where does this all leave us? Five years down the line we have a substantial judgement and an authoritative statement of the law on parallel importing and copyright laws. But… we are left with the uncomfortable feeling that free trade or, at least, healthy competition has been suppressed. If nothing else, we are still left feeling that consumers in the UK are still paying far too much for their music, now as much as ever. However, we may not have heard the end yet, as CD-Wow! says it will fight the High Court judgement in the European Courts if it can.