United States: Piracy Pays (The IP Owner) – Judge Whyte Grants Motion For Default Judgment After Awarding Sanctions In Unauthorized Software Distribution Case

Last Updated: September 22 2016
Article by Matthew Poppe and Daniel Justice

Everyone in the software field (and probably every computer user) is familiar with Adobe and at least one of its products, including Acrobat and Photoshop. Popular software vendors like Adobe are often the victims of piracy and the unauthorized distribution of their products. As such, many have adopted policing measures like employing investigators to purchase products from third-party distributors to verify authenticity and proper licensing.

Adobe recently had success using such a measure in Adobe Systems, Inc. v. Software Tech, a case against several related distributors of Adobe software: La Boutique Du Softwaretech, Inc., Futur-Soft Inc., and Pierre Francis (an individual). Adobe sued them for copyright infringement, trademark infringement, and trademark dilution based on having resold serial numbers used to activate Adobe software they provided in downloads or on disks, thereby essentially selling the same product multiple times without authorization.

The parties stipulated to a preliminary injunction prohibiting the defendants from selling Adobe products until resolution of the suit. However, through the use of an investigator, Adobe discovered that the defendants continued to sell its software in violation of the injunction. Their wrongful conduct resulted in $1,900,000 in sanctions.

But that was not the end of it. Adobe's suit was still pending in the Northern District of California when a default occurred because the defendants all failed to participate in discovery and the corporate defendants failed to be represented by counsel (a requirement for corporations in federal court). Consequently, Adobe filed a motion for default judgment against the defendants.

Judge Ronald Whyte considered seven factors laid out by the Ninth Circuit in Eitel v. McCool in determining whether to enter default judgment, and found that nearly all of the factors weighed in Adobe's favor.1 He therefore granted the motion, but awarded only a fraction of the amount Adobe sought. Applying the statutory damages framework found in the Copyright Act and the Lanham Act, he generated a damages number that he felt was more just than Adobe's request given the evidence before him.

Applying the Eitel factors, Judge Whyte first determined there was a possibility of prejudice to Adobe because denying judgment against a defendant who does not participate in litigation leaves the plaintiff with limited recourse for recovery.

On the second and third factors, Judge Whyte found that Adobe had properly established copyright infringement, trademark infringement, and trademark dilution. Specifically, Adobe had adequately alleged and submitted evidence showing that (1) Adobe had copyright registrations for 21 works, and the defendants had distributed unauthorized copies of those works (copyright infringement), (2) the defendants had copied Adobe's products, using identical trademarks, and placed them in direct competition with authorized Adobe software (intentional trademark infringement), and (3) the defendants had begun copying the trademarks after they became famous and had tarnished Adobe's marks by selling unauthorized software that did not work (trademark dilution).

Analyzing the fourth factor, Judge Whyte found that even though large damages awards are disfavored when entering default judgment, he was able to reduce the weight of this factor by awarding Adobe a substantially smaller sum than it had requested (discussed further below).

Finally, Judge Whyte found that all of the remaining factors supported entry of a default judgment: there was no genuine issue of material fact because allegations in the complaint are taken as true; there was no evidence that defendants' default was due to excusable neglect; and the policy disfavoring default judgment was outweighed by the other factors. Accordingly, Judge Whyte entered default judgment against all defendants.

Judge Whyte next turned to determining the proper amount of damages. Adobe proffered two figures: (1) $4,600,000 in statutory damages based on two copyrighted works distributed before the preliminary injunction and infringement of 22 trademarks, and (2) $24,966,618.70 in lost profits based on 53,731 alleged unauthorized activations of Adobe software.

Judge Whyte disposed of the lost profits figure as inadequately supported. The fatal flaw was that Adobe assumed, without proffering support, that absent the infringement it would have sold all 53,371 software units at full retail price. Yet much of the software sold by defendants consisted of academic and "Transactional Licensing Program" editions, which Adobe offers at steep discounts. Judge Whyte therefore declined to award any lost profits.

Turning to statutory damages, Judge Whyte first determined that case law supported the simultaneous award of statutory damages for both copyright and trademark infringement, and that such an award would not constitute impermissible double recovery. He did find, however, that the $4,600,000 sought would be an impermissible windfall, reducing the amount to a mere $400,000. Half of that amount represented enhanced copyright statutory damages for willful infringement: $100,000 for each of the two infringed works (compared to an upper limit of $150,000 per work for enhanced statutory damages under the Copyright Act). The other half represented trademark damages, which Judge Whyte exercised his discretion to award for only two of the twenty-two trademarks Adobe alleged were infringed (being the only two for which Adobe proffered evidence of actual confusion). He awarded $100,000 for each of those marks (the upper limit for use of a counterfeit mark is $2,000,000), bringing the total trademark damages to $200,000 and the total default award to $400,000. When added to the $1,900,000 in sanctions that he had already awarded, Judge Whyte ordered the defendants to pay $2,300,000 and ordered a broad permanent injunction prohibiting them from directly or indirectly engaging in the sale of Adobe's products in the future.

In the end, the defendants (hopefully) learned that piracy doesn't pay, and neither does neglecting to participate in litigation.

Footnote

1 The seven factors are: "(1) the possibility of prejudice to the plaintiff, (2) the merits of plaintiff's substantive claim, (3) the sufficiency of the complaint, (4) the sum of money at stake in the action, (5) the possibility of a dispute concerning material facts, (6) whether the default was due to excusable neglect, and (7) the strong policy underlying the Federal Rules of Civil Procedure favoring decision on the merits." 792 F.2d 1470, 1771-72 (9th Cir. 1987).

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