Tuesday, September 18, 2012

Adobe crumbles: litigation mistakes allow reseller to prevail

Adobe Systems Inc. v. Christenson, --- F. Supp. 2d ----, 2012 WL 3994285 (D. Nev.)

Adobe sued Christenson and his now-defunct corporation, Software Surplus, for copyright and trademark infringement based on unauthorized sales of legitimate copies of Adobe software that Software Surplus bought from third parties.  And then Adobe had some trouble.  Defendants counterclaimed against Adobe and third-party defendant Software & Information Industry Association (“SIIA”), the “principal trade association for the software and digital content industry,” for various business torts based on a SIIA press release announcing the filing of six “software piracy” lawsuits on Adobe's behalf against various online sellers of Adobe software, including plaintiffs. 

The magistrate judge granted defendants’ motion to preclude Adobe and SIIA from using various contracts/license agreements that it had failed to identify in its Rule 26(a) disclosures or to produce.  Defendants moved to strike from Adobe and SIIA's briefs and exhibits “all documents covered by the order, as well as all factual assertions, references and arguments that relate to Adobe's licensing agreements with its distributors and users.”  Adobe and SIIA argued that the discovery order didn’t preclude testimony from their declarants or use of documents for limited or illustrative purposes, including as exemplars to illustrate the testimony of witnesses concerning Adobe's licensing agreements. No go. “[U]nder the best evidence rule, which Adobe and SIIA fail to address, the licenses themselves are required to prove their terms and, by extension, their legal effect.” Motion to strike granted.  (I skip over defendants’ objections to the proof of validity of the copyrights and trademarks at issue, but apparently Adobe’s submissions of registration certificates were at least questionable there too, though of course that’s not vital for trademark.)

With that out of the way, Adobe had nothing left.  It argued that defendants violated Adobe’s distribution right through their online sales, and that first sale was inapplicable because (1) the licenses meant that there had been no first sale, and (2) some of the products at issue were manufactured outside of the US.  (Note that if Kirtsaeng goes as the publishers want it to, you will be hard pressed, no pun intended, to find domestic manufacture of copyrighted works for this very reason.)  Defendants pointed out that, without the licensing agreements, Adobe couldn’t prove that it licensed rather than sold its products, and argued that Adobe hadn’t met its burden of proof to show that the products were manufactured outside the US (and, as the Ninth Circuit holds, not first subject to a voluntary/authorized domestic first sale).

So the case turned on the burden of proof.  The Ninth Circuit hasn’t explicitly addressed who has the burden of proof on first sale.  The legislative history suggested that the defendant bears the burden of at least proving “whether a particular copy was lawfully made or acquired,” based on the idea that burdens shouldn’t be put on litigants to establish facts particularly within an adversary’s knowledge.  However, “a defendant's production of evidence that the plaintiff made first sales of the copies in question, or that the defendant acquired his copies from a legitimate source, can shift the burden of production to the plaintiff to trace title backward to an illegitimate acquisition.”

Here, it was uncontroverted that defendants “lawfully purchased genuine copies of Adobe software from third-party suppliers before reselling those copies.”  Adobe didn’t contend that defendants’ purchases were unlawful or that the copies were not genuine.  Thus, the copies were lawfully made and acquired. 
The benefits of first sale are limited to owners, not licensees, and the Ninth Circuit has said that a software user is a licensee “where the copyright owner (1) specifies that the user is granted a license; (2) significantly restricts the user's ability to transfer the software; and (3) imposes notable use restrictions.”  Adobe argued that it only licensed, never sold, copies.  But there was no admissible evidence in the record on that point.  Examination of the licenses would be necessary to determine whether Adobe’s terms satisfied the Ninth Circuit’s test (which is phrased entirely in the affirmative, suggesting something about the proper allocation of the burden).   “[T]he copyright holder should bear the burden of producing evidence to establish that it retains title in and only licenses the copies it sells because any restrictions on ownership, transfer and use affirmatively imposed by the copyright holder in its dealings with its distributors are particularly within the copyright holder's knowledge.”

As for foreign manufacture, there were equally fatal problems.  Among other things, Adobe failed to specify which copies defendants sold weren’t made in the US, and for first sale purposes each copy is distinct.  It only presented evidence about one copy, but that evidence only addressed where the software was authorized for distribution, not where it was made.  If it was made here and came back in a round trip, first sale applied. Summary judgment for defendants.

Unsurprisingly, the trademark claims proceeded similarly.  The multifactor test doesn’t apply in nominative fair use cases.  When the defendant shows that it was using the mark to refer to the trademarked good, the burden shifts to the plaintiff to show that the use wasn’t nominative fair use.  This Adobe could not do. 

Given occasional discussion about what the “how much” factor of New Kids really means, the court’s rejection of Adobe’s bad argument on this point is worth noting: Since Adobe’s products have multiple marks on them, Adobe argued that defendants could have identified them using only some of Adobe’s marks and not others.   “The use of a trademark need not be absolutely necessary.  It is sufficient that the defendants ‘needed to communicate’ that they were offering Adobe software for sale and that using Adobe's marks accomplished this goal.”  And on the third factor, the use didn’t imply sponsorship or endorsement “to a reasonably prudent consumer in the online marketplace,” the Tabari standard.  “Indeed, the very domain name—softwaresurplus.com—from which Defendants sold Adobe software would notify a reasonably prudent online consumer that Defendants were merely resellers of ‘surplus’ software.”

Adobe argued that nominative fair use didn’t apply because defendants engaged in false advertising about the versions or features of the software it was selling.  The court deemed that to be “mixing claims.”  While these alleged misrepresentations might support a false advertising claim, Adobe failed to allege false advertising in the complaint, even though it then moved for summary judgment on its false advertising claims.  (Adobe apparently not only didn’t use the term “false advertising” in the complaint, it didn’t even allege misrepresentations about features or versions, only “use [of] images confusingly similar or identical to Adobe's Trademarks” and alleged confusion or deception “concerning ... source and sponsorship” or “affiliation, sponsorship, endorsement or approval.”)  False advertising is distinct from confusion over sponsorship or endorsement by the TM owner.  “Adobe has not alleged that Defendants used its marks to falsely identify the origin or make of Adobe software, and it has failed to produce evidence that the use of its marks created any likelihood of confusion regarding sponsorship or endorsement.”  Summary judgment for defendants (and against Adobe’s “non-existent claim”).

Adobe’s day didn’t get better on the defamation/disparagement/etc. counterclaims.  SIIA’s press release, which indicated that SIIA had filed six “piracy” lawsuits on behalf of its member Adobe, called defendants “Software Pirates” and “Fraudulent Online Venders” who “swindled both consumers and Adobe by illegally copying or selling” Adobe's software and “knowingly engag[ed] in copyright infringement through the fraudulent sales of Adobe software.”  It said that defendants “either sold infringing copies, including counterfeit versions, or illegally sold educational and OEM versions without authorization.”

Adobe and SIIA moved for summary judgment, claiming that the statements were truthful/opinion; that the statements were privileged; that defendants weren’t injured; and that Adobe couldn’t be liable because it didn’t draft or publish the press release.  The court disagreed.

As to truth, those arguments were derivative of the merits of the infringement claims, which had been resolved against Adobe.  (And frankly, conflating “unauthorized sales of legitimate software” with “unauthorized copying” is inconsistent with the generally recognized meaning of “piracy,” as much as SIIA would like to change that.)  Adobe couldn’t prove truth.  (Hmm. An interesting First Amendment question: suppose you engage in such litigation misconduct that you're subjected to discovery sanctions preventing you from presenting your evidence of truth to counter plaintiff's evidence of falsity.  Does the First Amendment prevent this type of discovery sanction?  What if it's just incompetence, not deliberate abuse of the discovery process?  Just how far does the court's ability to protect its own processes go in a defamation case?)

Adobe and SIIA argued that the statements that defendants “swindled both consumers and Adobe by illegally copying or selling well-known Adobe software products,” and that “Software that seems too cheap to be legitimate probably is not” were nonactionable opinion.  The first statement wasn’t just opinion: a reasonable person would be likely to understand it as a statement of fact, and even if it were ambiguous that would be a matter for the jury.  Likewise, the second statement, in context with the other parts of the press release, could be understood as an implicit false statement of objective fact that defendants’ products were not legitimate. And the remaining statements challenged weren’t opinion either.

Nor were the statements conditionally privileged as statements made in good faith on a subject matter in which they had an interest.  Even if Adobe and SIIA could show good faith/interest in the subject matter, they didn’t even try to show that they made the statements to a person with a corresponding interest or duty, a necessary element of this conditional privilege. “Indeed, it would be difficult, if not impossible, to do so, as the communication here was a press release posted on the internet for widespread dissemination.”  Nor did the litigation privilege (assuming the California version applied) protect the press release.  That privilege allows parties to inform third parties of the pendency of litigation, not to to beyond the allegations in the lawsuit by labeling defendants as swindlers, fraudsters, and pirates.  “[S]uch ‘litigating in the press’ that bears no ‘functional’ connection to the litigation is not immune, even under California's expansive litigation privilege.” 

On injury, Adobe and SIIA made various arguments, including that there couldn’t be general damages because defendants didn’t request a correction, and that defendants' suppliers stopped doing business with them because of the litigation, not because of any defamatory statements in the press release.  Again the court disagreed.  On the first, the relevant Nevada statutory provision limiting general damages requires that a correction be demanded only for “the publication of a libel in a newspaper, or of a slander by radio or television broadcast,” which didn’t happen here.  Defendants sued the non-media sources of the internet press release, not media outlets that then reported on the story.  “Neither Adobe nor SIIA is a newspaper publisher or radio or television broadcaster, and the statute, enacted in 1969 and last amended in 1975, neither addresses in its text nor could contemplate a non-media entity's dissemination of information over the World Wide Web.”  Thus, defendants weren’t limited to special damages for failing to request a correction, and since the statements were defamatory per se no proof of special damages was required.

Adobe tried to throw SIIA under the bus, arguing that SIAA “independently developed the concept for, drafted, approved and published the press release,” which contained no statements by Adobe or its personnel.  But disputed issues of material fact precluded summary judgment on this basis.  The lawsuit was filed in Adobe’s name, but the press release issued two weeks later states that SIIA acted “[o]n behalf of SIIA member Adobe Systems Incorporated” in “investigat[ing] and fil[ing]” this lawsuit and five others. Other record evidence showed that SIIA's representation of Adobe's interests was not unique to this lawsuit; SIIA regularly acts on behalf of Adobe in investigating and suing alleged infringers.  It would be reasonable to infer that SIIA acted as Adobe’s “investigator, prosecutor and spokesperson.” “Also, Adobe's blanket denial of any active participation regarding the press release is belied by its own evidence, which establishes that the press release was sent to Adobe for review before being issued and that SIIA and its public relations firm may have made revisions in response to feedback from Adobe.”  SIIA’s lead role didn’t mean that Adobe wasn’t a material participant or otherwise involved enough to be liable.

Comment: I wonder if Adobe’s lawyers have contacted their insurers.


Anonymous said...

This one is very interesting. I have a first hand experience with this aggressive group. Does it appear that they've changed direction to improve their chances on succeeding in future cases of this issue?

Rebecca Tushnet said...

Anonymous, I don't have further information, but there were some obviously correctable issues in this litigation that lead me to doubt that Adobe will see this as a reason to change course in terms of asserting rights to stop resales.

Anonymous said...

Rebecca, I admire your quick response to my comment.
Is there any entity or forum you would suggest to get a little more of a layman's breakdown on some of these legal terms?
And I would imagine that this defendant had to retain counsel for such a detailed defense and wonder what the difference would be between legal fees and the amount being sought by these plaintiffs.

As mentioned, I recently received one of these demands for a one time incident and can't help but wonder if it would end up more advantageous to seek a negotiated settlement (which still wouldn't be affordable) and make it go away.

Rebecca Tushnet said...

Anonymous, you should really consult a lawyer in your jurisdiction if you have specific questions, including about fees, which can vary a lot. If you want to read up on first sale, you might look at what's been posted on ssrn.com, but I don't know how layperson-friendly that will be.