Advanced Computer Services v. MAI SYSTEMS

• Decision Date: 03 February 1994
• Docket Number: Civ. A. No. 93-667-A.
• Court: U.S. District Court — Eastern District of Virginia
• Parties: ADVANCED COMPUTER SERVICES OF MICHIGAN, INC., d/b/a Advanced Computer Services; MGM Associates, Inc., d/b/a Business Systems, Inc.; Data Systems Support, Inc.; Basic System Services, Inc.; React Computer Services, Inc.; Pacific React Services, Inc.; and Total Support Incorporated, Plaintiffs, v. MAI SYSTEMS CORPORATION, Defendant. MAI SYSTEMS CORPORATION, Counterclaim-Plaintiff, v. ADVANCED COMPUTER SERVICES OF MICHIGAN, INC., d/b/a Advanced Computer Services; MGM Associates, Inc., d/b/a Business Systems, Inc.; Data Systems Support, Inc.; Basic System Services, Inc.; React Computer Services, Inc.; Pacific React Services, Inc.; Total Support Incorporated; and Tim Peter Francis, an individual, Counterclaim-Defendants.

845 F. Supp. 356

ADVANCED COMPUTER SERVICES OF MICHIGAN, INC., d/b/a Advanced Computer Services; MGM Associates, Inc., d/b/a Business Systems, Inc.; Data Systems Support, Inc.; Basic System Services, Inc.; React Computer Services, Inc.; Pacific React Services, Inc.; and Total Support Incorporated, Plaintiffs, v. MAI SYSTEMS CORPORATION, Defendant.

MAI SYSTEMS CORPORATION, Counterclaim-Plaintiff, v. ADVANCED COMPUTER SERVICES OF MICHIGAN, INC., d/b/a Advanced Computer Services; MGM Associates, Inc., d/b/a Business Systems, Inc.; Data Systems Support, Inc.; Basic System Services, Inc.; React Computer Services, Inc.; Pacific React Services, Inc.; Total Support Incorporated; and Tim Peter Francis, an individual, Counterclaim-Defendants.

Civ. A. No. 93-667-A.

United States District Court, E.D. Virginia, Alexandria Division.

February 3, 1994.

COPYRIGHT MATERIAL OMITTED

Nathan Vance Holt, Jr., Douglas E. Rosenthal, Douglas B. Rutzen, Grace W. Lawson, Coudert Bros., Washington, DC, Ronald S. Katz, Janet S. Arnold, Coudert Bros., San Francisco, CA, for plaintiffs.

Paul James Kennedy, Kip Schwartz, Graham and James, Washington, DC, Elliott J. Stein, Gen. Counsel, MAI Systems Corp., Irvine, CA, for defendant.

MEMORANDUM OPINION

ELLIS, District Judge.

I.

Does the act of transferring a copyrighted software program from a computer's hard drive or permanent memory to its random access memory ("RAM") amount to the making of a "copy" under the Copyright Act, 17 U.S.C. § 101 et seq. ("the Act"), so as to constitute infringement of the software copyright?

This important question, undecided in this circuit, is central to the disposition of the summary judgment motions at bar in this copyright and anti-trust action. Many of the other questions raised by the motions depend significantly on the resolution of this central question.

More specifically, plaintiffs in this case are small independent service organizations ("ISO's"), who allege that defendant MAI, a computer manufacturer and owner of copyrighted software, engaged in illegal tying and monopolization in violation of the Sherman Act §§ 1 and 2, respectively. MAI, in turn, counterclaimed against plaintiffs, alleging, inter alia, infringement of its copyrighted software, misappropriation of trade secrets, and several state claims, including tortious interference with business relations.

After extensive discovery, plaintiffs have moved for partial summary judgment on MAI's copyright infringement claim, while MAI has moved for summary judgment on its copyright infringement claim as well as on plaintiffs' Sherman Act claims. This memorandum opinion reflects the Court's disposition of these summary judgment motions.

II.

MAI is a Delaware corporation with its principal place of business in Irvine, California.¹ Until recently, MAI was engaged in the business of manufacturing and selling various minicomputers, including the Mpx and Spx model series ("MAI computers"). In addition, MAI has always been, and continues to be, engaged in the business of maintaining and servicing its computers. The worldwide market for service and maintenance of MAI computers produces revenues in excess of $50 million dollars per year. Approximately 90% of this market is controlled by MAI, while plaintiffs, seven relatively small independent service organizations who have competed in this market for years, collectively share most of the remaining 10% of the market.²

In April 1993, MAI filed for bankruptcy protection and reorganization under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 1101 et seq. A month later, on May 20, 1993, plaintiffs filed their three-count anti-trust complaint in this case, asserting (1) per se tying, in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1, (2) rule of reason tying, in violation of the same statute, and (3) monopolization, in violation of Section 2 of the Sherman Act, 15 U.S.C. § 2.

Plaintiffs' anti-trust allegations are based on the following facts, which MAI does not dispute. MAI computers are unique; their parts and operating system software do not work in other manufacturers' minicomputers. Purchasing MAI computers requires a substantial financial investment. With proper maintenance and service, a new MAI system has a useful service life of at least five (5) years. Because special training is required to maintain MAI systems, purchasers of MAI computers have limited choices in selecting a maintenance and service firm; they must select either MAI or another firm, including any of plaintiffs, that specializes in the servicing and maintenance of MAI computers. Firms without the technical training or skill in maintenance and service of MAI computers or without an inventory of MAI parts cannot adequately meet the maintenance and service needs of MAI computer owners.

On April 29, 1993, MAI sent a "cease and desist" letter to plaintiffs and other independent service organizations. This letter cited MAI Sys. Corp. v. Peak Computer, 991 F.2d 511 (9th Cir.1993), cert. dismissed, ___ U.S. ___, 114 S.Ct. 671, 126 L.Ed.2d 640 (1994), a decision favorable to MAI,³ and demanded that all independent service organizations immediately cease and desist from any activity involving copying of MAI's operating system software, including loading or booting the software.

Based on the facts alleged, plaintiffs contend that MAI is unlawfully tying the sale of its copyrighted operating system and diagnostic software (the tying product) to the sale of maintenance and repair services for its computers (the tied product). Plaintiffs further allege that MAI is exploiting the complete market power it enjoys over the sale of its copyrighted software to distort and preclude competition in the tied product market, namely the market for maintenance and repair services for MAI computers. This tying arrangement, according to plaintiffs, (i) "has harmed and is harming competition in the market for the tied product" and (ii) "has foreclosed and is foreclosing a substantial volume of commerce in the market for the tied product." Plaintiffs also claim that MAI's tying arrangement "has caused and is causing injury to both buyers and sellers in the market." Plaintiffs finally claim that they have lost, and are continuing to lose, profits as a result of the tying arrangement, which they contend is both a per se and a rule of reason violation of § 1 of the Sherman Act, as well as an abuse of market power amounting to monopolization under § 2 of the Sherman Act. In sum, the thrust of the complaint is that MAI is impermissibly using its copyrights to preclude competition in MAI computer maintenance and repair.

MAI answered by denying the complaint's legal claims. But more than this, MAI also filed a six-count counterclaim, the thrust of which is that plaintiffs' efforts to compete in the MAI computer service and repair market really amount to an infringement of MAI's software copyrights, misappropriation of MAI's trade secrets, interference with MAI's business relations with its present and prospective customers, and infringement of MAI's trademarks. Counterclaim relief sought by MAI includes compensatory and punitive damages, as well as injunctive and declaratory relief.

At the heart of this litigation is MAI's software. In the process of developing its computer systems, MAI developed two types of unique software: (1) operating system software designed to provide the basic commands to operate MAI computers and (2) diagnostic software. The operating system software, which contains utilities programs and some diagnostic programs, is integrated into the computer. Perhaps the most important diagnostic feature built into the operating system software for the purposes of this litigation is the "error log." This feature serves as a first indication of a malfunction in the computer hardware and may direct a technician to the source of the problem. The diagnostic stand-alone software provides more detailed and specified instructions regarding identifying and solving computer malfunctions. Both types of this unique software enjoy federal copyright protection.⁴

Because MAI licenses, but does not sell, this software, its authorized use is limited to MAI and MAI's licensees. Significantly, MAI contends that "loading" or "booting" the operating system software constitutes the creation of a "copy" and therefore that the process of unauthorized loading or booting of the software, including loading and use by the plaintiffs, who are unlicensed, constitutes a violation of the Copyright Act.

"Loading" or "booting" the software entails a transfer of the software program from a storage device such as a hard disk or floppy disk into the random access memory ("RAM") of the computer. This loading can occur in various ways, depending upon the type of software and upon the model of MAI computer used. In at least one MAI model this "loading" occurs automatically when the computer is turned on. In other models, users typically must take an additional step, such as pressing a "load" button. Similarly, access to the stand-alone diagnostic software requires the physical insertion of a disk containing the program into the computer. Regardless of the means of loading, none of the programs can communicate with the computer unless they are first loaded into RAM.

MAI contends that plaintiffs infringed on its copyrights in three distinct ways: (1) direct infringement of its software copyrights, (2) contributory copyright infringement, and (3) infringement through the wrongful distribution of MAI software in conjunction with the sale of used MAI hardware. Of these claims, only the first two are the subject of summary judgment. With respect to these claims of direct infringement, the record reflects the following. Direct infringement arises in two contexts: plaintiffs' use of MAI software at their own office locations and plaintiffs' use of MAI software at customer sites. It is undisputed that all plaintiffs,...