125 824 v. 1997 824 125 824 235 27,688 44 1201, 97 v. 7544, 97 12,167 Cadence Design Systems, Inc v. Avant Corporation

• Decision Date: 23 September 1997
• Docket Number: No. 97-15571,97-15571
• Parties: Page 824 125 F.3d 824 235 Copr.L.Dec. P 27,688, 44 U.S.P.Q.2d 1201, 97 Cal. Daily Op. Serv. 7544, 97 Daily Journal D.A.R. 12,167 CADENCE DESIGN SYSTEMS, INC., a Delaware corporation, Plaintiff-Appellant, v. AVANT! CORPORATION, formerly Arcsys, Inc., a Delaware corporation; Gerald Hsu, an individual; Mitsuru Igusa, an individual; and Chih-Liang Cheng, an individual, Defendants-Appellees. United States Court of Appeals, Ninth Circuit
• Court: U.S. Court of Appeals — Ninth Circuit

Page 824

125 F.3d 824

235 Copr.L.Dec. P 27,688, 44 U.S.P.Q.2d 1201,

97 Cal. Daily Op. Serv. 7544,

97 Daily Journal D.A.R. 12,167

CADENCE DESIGN SYSTEMS, INC., a Delaware corporation Plaintiff-Appellant v AVANT! CORPORATION, formerly Arcsys, Inc., a Delaware corporation; Gerald Hsu, an individual; Mitsuru Igusa, an individual; and Chih-Liang Cheng, an individual Defendants-Appellees.

No. 97-15571.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Aug. 12, 1997.

Decided Sept. 23, 1997.

Jeffrey R. Chanin, Ragesh K. Tangri, Keker & Van Nest, San Francisco, CA, for plaintiff-appellant.

George A. Riley, O'Melveny & Myers, San Francisco, CA, for defendant-appellee Avant! Corporation.

Appeal from the United States District Court for the Northern District of California; Ronald M. Whyte, District Judge, Presiding. D.C. No. CV-95-20828-RMW(PVT).

Before: GOODWIN and THOMAS, Circuit Judges, PREGERSON, ^* District Judge.

PREGERSON, District Judge:

Cadence Design Systems, Inc. ("Cadence") brought suit against Avant! Corporation ("Avant!") (pronounced Ah VAN tee) for copyright infringement and misappropriation of trade secrets. Cadence appealed the district court's partial denial of its motion for preliminary injunction. Cadence asserts that the district court erred (1) by failing to enjoin Avant! from using copyrighted computer code after the district court found that Cadence was likely to succeed on the merits of its copyright claim and (2) by failing to enjoin Avant! from selling modified software products created to replace the infringing software products. For the following reasons, we reverse the district court's decision and remand.

Background

Cadence and Avant! compete in the field of "place and route" software. ¹ On December 6, 1995, Cadence sued Avant! for theft of its copyrighted and trade secret computer source code ² and notified Avant! and the district court that it intended to file a motion for preliminary injunction. ³ Cadence asserts that Avant! incorporated wholesale portions of Cadence's copyrighted source code in Avant!'s ArcCell and ArcCell XO software products ("ArcCell products" or "ArcCell software"). The copied portions of Cadence's code allegedly came into Avant!'s possession by way of several employees who left Cadence to work for Avant!. Cadence also asserts that Avant! paid Cadence employees to provide valuable information about Cadence's software products.

After Cadence filed this action, Avant! undertook a "clean room" process where it attempted to remove the allegedly infringing portions of code. Avant! hired an independent expert to examine the portions of infringing source code identified by Cadence. The expert then created specifications based on the Cadence code from which Avant! could write original code to take the place of the infringing code. Finally, Avant!'s engineers, allegedly operating without access to the Cadence code (hence the term "clean room"), created new code to replace the copied code. Avant!'s modified software is called Aquarius.

Due to the highly technical issues involved in the case, several months passed before the district court, with the aid of an independent expert, granted in part and denied in part Cadence's motion for preliminary injunction. The district court made the following findings: (1) that Cadence had established that its source code was protected by copyright and by trade secret law; (2) that Avant! used some of Cadence's code in its ArcCell products, thereby infringing Cadence's copyright; and (3) that Cadence will likely prevail on its claim that Avant!'s clean room procedures were inadequate.

The district court enjoined Avant! from using certain source code, in part because Avant! no longer used the code in its software and thus an injunction would not harm Avant!. The district court declined to enjoin the use of other source code because Cadence failed to make a sufficient showing of success on the merits. Finally, the court declined to enjoin Avant!'s use of Cadence's source code in Avant!'s ArcCell and Aquarius products. The court declined to enjoin the sale of the ArcCell and Aquarius products because it found that the balance of harm tilted in favor of Avant! and that money damages were an adequate remedy for any harm to Cadence.

Cadence argues on appeal that the district court abused its discretion by failing to enjoin the ArcCell and Aquarius products. Cadence asserts that the district court was obligated to enjoin the sale of the products once the court determined that Cadence was likely to succeed on the merits of its copyright claim.

Discussion

I. Standard of Review.

A plaintiff seeking preliminary injunctive relief must demonstrate "either a likelihood of success on the merits and the possibility of irreparable injury[ ] or that serious questions going to the merits were raised and the balance of hardships tips sharply in its favor." Sega Enterprises Ltd. v. Accolade, Inc., 977 F.2d 1510, 1517 (9th Cir.1992).

A district court's preliminary injunction order will be reversed only if the district court abused its discretion or based its decision on an erroneous legal standard or on clearly erroneous findings of fact. See Triad Sys. Corp. v. Southeastern Express Co., 64 F.3d 1330, 1334 (9th Cir.1995); Sega, 977 F.2d at 1517.

II. The District Court Erred by Failing to Enjoin Sale of Avant!'s ArcCell and ArcCell XO Products.

A. The District Court Erred by Finding that Avant! Had Rebutted the Presumption of Irreparable Injury.

The district court recognized that a presumption of irreparable injury arises if the plaintiff is able to show a likelihood of success on the merits of its copyright infringement claim. The district court erred, however, by finding that Avant! had rebutted the presumption of irreparable injury.

1. A copyright infringement defendant cannot rebut the presumption of irreparable harm by showing that money damages are adequate.

Cadence asserts that the district court erred because "it is well settled that the availability of money damages does not rebut the presumption of irreparable harm in copyright cases." Cadence cites several appeals court decisions for support, including: Triad, 64 F.3d at 1335 (holding that the presumption of irreparable harm supported the district court's preliminary injunction order); Johnson Controls, Inc. v. Phoenix Control Sys., Inc., 886 F.2d 1173, 1174 (9th Cir.1989) (same); Apple Computer, Inc. v. Franklin Computer Corp., 714 F.2d 1240, 1254 (3d Cir.1983) (holding that the district court erred when it failed to consider the presumption of irreparable harm); and Atari, Inc. v. North Am. Philips Consumer Elecs. Corp., 672 F.2d 607, 620-21 (7th Cir.1982) (reversing the district court's finding of non-infringement and directing the district court to enter a preliminary injunction based upon the presumption of irreparable harm).

None of the decisions cited by Cadence directly hold that a defendant cannot rebut the presumption of irreparable harm by showing the adequacy of money damages. In Triad and Johnson Controls, for example, we addressed cases where the presumption supported the district court's grant of a preliminary injunction. However, implicit in our prior decisions, as well as those of other federal courts of appeals, is the rule that a defendant cannot, by asserting the adequacy of money damages, rebut the presumption of irreparable harm ⁴ that flows from a showing of likelihood of success on the merits of a copyright infringement claim. ⁵

In Triad, the defendant argued that any damages that the plaintiff suffered as a result of the defendant's infringement were monetary damages from lost revenues, and thus since monetary damages are not usually considered irreparable harm, the defendant asserted that it should not have been enjoined. Triad, 64 F.3d at 1335. Affirming the district court's preliminary injunction order, we acknowledged the general validity of the defendant's contention, but held that "[i]n a copyright infringement action, however, the rules are somewhat different." In copyright infringement actions, there is a presumption of irreparable harm and thus the plaintiff "need only show a reasonable likelihood of success on its copyright infringement claim to support the district court's grant of the preliminary injunction." Id.

We rejected the defendant's argument that monetary damages were adequate as a matter of law--we did not review the district court's factual findings for clear error. The implication of this resolution is that the alleged availability of money damages is not a reason to deny injunctive relief. See also Johnson Controls, 886 F.2d at 1174 (holding that as a result of the presumption of irreparable harm, the plaintiff "need only show a reasonable likelihood of success on its copyright infringement claim to support the district court's grant of the preliminary injunction").

Commentator Nimmer supports this result. Nimmer writes that if a plaintiff establishes a likelihood of success on the merits of a copyright infringement claim, "it would seem erroneous to deny a preliminary injunction simply because actual damages can be precisely calculated...." 4 Melville B. Nimmer & David Nimmer, Nimmer on Copyright § 14.06[A], at 14-105 (1997); see also American Direct Mktg., Inc. v. Azad Int'l, Inc., 783 F.Supp. 84, 96 (E.D.N.Y.1992) (noting that in the Second and Ninth Circuits, "a finding of likelihood of success on the merits automatically triggers a preliminary injunction, and failure to issue one is reversible error if the validity of the copyright and existence of copying are not at issue"); Concrete Mach. Co., 843 F.2d at 612 (discussing the presumption of irreparable harm and stating that "[t]here is ... no need actually to prove irreparable harm when seeking an injunction against copyright infringement").

2. The district court erroneously permitted Avant! to rebut the presumption of irreparable harm.

Here,...