The Ninth Circuit recently rejected a small computer manufacturer's copyright misuse defense against Apple's claim that it had infringed on Apple's copyright in Mac OS X. In Apple, Inc. v. Psystar Corp., the Ninth Circuit attempted to distinguish the Fifth Circuit's acceptance of the copyright misuse defense in Alcatel USA, Inc. v. DGI Techs., Inc. Careful review of the two opinions reveals they are more similar than the Ninth Circuit has let on. It remains to be seen whether the circuit courts will harmonize Apple and Alcatel or whether they will split on the copyright misuse defense.
A copyright holder has a limited monopoly that it can protect by suing persons who infringe on its copyright. The copyright misuse doctrine is a defense against copyright infringement. The purpose of the doctrine is to prevent a copyright holder from leveraging its limited monopoly to areas outside the monopoly. With respect to software, a copyright holder does not misuse its copyright through licensing as long as it does not prevent the development of competing products. The plaintiffs in both Apple and Alcatel imposed restrictions on the use of their software. The question was whether these restrictions prevented the development of competing products.
In Alcatel, DSC sold switches and expansion cards to long-distance telephone service providers that enabled the providers to route calls through their networks. These switches ran on software in which DSC held a copyright. To increase network capacity, the service providers could buy expansion cards, but the expansion cards also ran on DSC's copyrighted software. DSC licensed this software to its customers under the conditions that they not copy the software and that they use the software only in conjunction with equipment manufactured by DSC. In essence, DSC was using its copyright to monopolize the market in expansion cards. It is important to note that DSC was not preventing other switch manufacturers from developing their own software or selling their own switches. Nonetheless, the Fifth Circuit upheld the jury's finding that DSC's licensing agreement constituted copyright misuse.
The Ninth Circuit, in Apple, rejected the copyright misuse defense under circumstances that bear many similarities to the facts in Alcatel. Psystar is a small computer manufacturer that makes Apple clones. To avoid blatant copyright infringement, Psystar includes a shrink-wrapped copy of Mac OS X with each computer it sells. Like the licensing agreement in Alcatel, Apple restricts the use of Mac OS X to hardware manufactured by Apple. The Ninth Circuit held that Apple's licensing agreement does not constitute copyright misuse because Mac OS X was designed to operate on Apple computers and the licensing agreement does not prevent competitors from developing their own computers or operating systems.
The Ninth Circuit attempted to distinguish Alcatel by noting that DSC's licensing agreement effectively prohibited its licensees from using any competing expansion cards, whereas Apple's license does not restrict competitors from developing their own software or using non-Apple components with Apple computers. According to the Ninth Circuit, Apple's license simply limits the use of Apple's software to its own hardware.
This distinction does not hold up under scrutiny. DSC, like Apple, had a licensing agreement that required its customers to use its software on only its products. In addition, DSC did not prevent competitors from developing competing switches and software. In fact, many of DSC's customers were dual-sourced, meaning they bought switches from DSC and one of DSC's competitors. It is difficult to understand how DSC misused its copyright while Apple did not. It will be interesting to see whether the Fifth and Ninth Circuits attempt to harmonize the two cases or whether they turn this inconsistency into a full-blown circuit split.