Case 4:15-cv-03570-YGR Document 37 Filed 12/11/15 Page 1 of 10
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`UNITED STATES DISTRICT COURT
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`NORTHERN DISTRICT OF CALIFORNIA
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`MICROSOFT CORPORATION,
`Plaintiff,
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`v.
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`A&S ELECTRONICS, INC., ET AL.,
`Defendants.
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`Case No. 15-cv-03570-YGR
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`NOTICE OF TENTATIVE RULING RE:
`MOTION TO DISMISS FIRST AMENDED
`COMPLAINT
`Re: Dkt. No. 26
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`TO ALL PARTIES AND THEIR ATTORNEYS OF RECORD, PLEASE TAKE NOTICE OF THE FOLLOWING
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`TENTATIVE RULING FOR THE HEARING SCHEDULED ON DECEMBER 15, 2015, AT 2:00 P.M.:
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`The Court has reviewed the parties’ papers, and is tentatively inclined to order that the
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`Motion to Dismiss the First Amended Complaint is granted with leave to amend, for the reasons
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`stated more fully below.
`This is a tentative ruling and the parties still have an opportunity to present oral argument.
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`Alternatively, if the parties JOINTLY stipulate in writing to entry of the tentative ruling, the
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`hearing will be taken off calendar, and the tentative ruling will become the order of the Court.
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`Such stipulation must be filed no later than 5:00 p.m. on Monday, December 14, 2015.
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`Otherwise, the hearing will take place as scheduled. The parties should be prepared to address the
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`issues as stated in the tentative ruling at the hearing. If the parties intend to rely on authorities not
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`cited in their briefs, they must notify the Court and opposing counsel of these authorities
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`reasonably in advance of the hearing by filing a statement of supplemental authorities, with
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`pinpoint cites, and without argument or additional briefing. Cf. Civil L. R. 7-3(d). The parties
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`will be given the opportunity at oral argument to explain their reliance on such authority.
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`Case 4:15-cv-03570-YGR Document 37 Filed 12/11/15 Page 2 of 10
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`TENTATIVE RULING
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`Plaintiff Microsoft Corporation (“Microsoft”) brings this copyright and trademark case
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`against Defendants Alan Lin and A&S Electronics, Inc. (collectively, “A&S”), which resells
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`“used” Microsoft software online without Microsoft’s authorization. Microsoft filed its original
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`complaint on August 3, 2015. Subsequently, in response to a motion to dismiss filed by A&S,
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`Microsoft filed its First Amended Complaint on October 20, 2015 (Dkt. No. 23, “FAC.”)
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`In the FAC, Microsoft asserts six causes of action against A&S: (1) contributory copyright
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`infringement (17 U.S.C. §§ 501, et seq.); (2) trademark infringement (15 U.S.C. § 1114); (3) false
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`designation of origin and false description and representation of Microsoft packaging (15 U.S.C.
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`§§ 1125 et seq.); (4) unfair competition and false advertising (15 U.S.C. § 1125(a)); (5) imposition
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`of a constructive trust; and (6) an accounting. (FAC ¶¶ 1, 31-74.)
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`A&S has filed a Motion to Dismiss the FAC in its entirety on the grounds that Microsoft
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`has failed to state a claim.
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`I.
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`BACKGROUND
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`Microsoft brings the instant action to enjoin A&S’s alleged conduct in selling “product
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`activation keys,” in combination with distributable media, such as DVDs, containing Microsoft
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`software or instructions for downloading software from Microsoft’s website. A&S uses
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`trademarked terms like “Microsoft Office” to advertise the used software on its website, as well as
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`the physical items which display Microsoft’s trademarks. Microsoft specifically alleges
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`infringement of two copyrighted works: (1) Microsoft Office 2013, and (2) Microsoft Office
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`Professional Plus 2010. (FAC ¶¶ 13-14.) Microsoft further alleges infringement of five
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`trademarks related to Microsoft Office: “Microsoft” (twice for two different trademarks);
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`“Microsoft Office”; “Office 2010” design; and “Office 2012” design. (Id. ¶ 15.) Microsoft
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`alleges that its investigators were able to purchase two copies of Microsoft Office, one on eBay
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`offered by Alan Lin, and one on defendants’ website “TRUSTprice.com.” (Id. ¶¶ 20-30.) The
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`eBay purchase is alleged to be a combination of a product activation key number on a printed card
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`and an “Office Professional Plus 2013 Backup DVD…both traced to a Home Use Program
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`(‘HUP’) under which software is licensed only for the use of enterprise customers’ employees and
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`Case 4:15-cv-03570-YGR Document 37 Filed 12/11/15 Page 3 of 10
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`is nontransferable.” (Id. ¶ 22.) The website purchase is alleged as “a counterfeit Microsoft Office
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`Professional 2010 Product Key Card with an illicitly distributed product key, together with
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`instructions to download the Microsoft Office software directly from Microsoft or use the
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`customers’ own matching media.” (Id. ¶ 24.)
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`The false designation of origin, unfair competition, and false advertising claims under the
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`Lanham Act derive from the same alleged conduct as the copyright and trademark claims. The
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`fifth and sixth causes of action seek imposition of a constructive trust, and demand that A&S
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`provide an accounting of all of the money earned from A&S’s alleged infringing sales of
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`Microsoft software. (Id. ¶¶ 69-74.)
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`A&S argues that its conduct is lawful and that Microsoft is attempting to prevent people
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`who lawfully obtain and own copies of software from reselling those copies without first obtaining
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`Microsoft’s consent. A&S argues that, under the Supreme Court’s ruling in Kirtsaeng v. John
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`Wiley & Sons, Inc., 568 U.S. __, 133 S. Ct. 1352 (2013), importation and sale of lawfully obtained
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`copies of Microsoft’s copyrighted works is subject to the “first sale” doctrine, 17 U.S.C. § 109(a).
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`That doctrine permits the owner of a particular copy of a copyrighted work to sell that copy
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`without the authority or permission of the copyright owner. Id. Consequently, A&S argues, the
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`Court should dismiss Microsoft’s copyright claim and all claims derived from it.
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`II.
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`APPLICABLE STANDARD
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`A motion to dismiss under Rule 12(b)(6) tests the legal sufficiency of the claims alleged in
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`the complaint. Ileto v. Glock, Inc., 349 F.3d 1191, 1199-1200 (9th Cir. 2003). “Dismissal can be
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`based on the lack of a cognizable legal theory or the absence of sufficient facts alleged under a
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`cognizable legal theory.” Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1990).
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`All allegations of material fact are taken as true and construed in the light most favorable to the
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`plaintiff. Johnson v. Lucent Techs., Inc., 653 F.3d 1000, 1010 (9th Cir. 2011). To survive a
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`motion to dismiss, “a complaint must contain sufficient factual matter, accepted as true, to ‘state a
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`claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting
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`Bell Atl. Corp. v. Twombly, 550 U.S. 544, 557 (2007)).
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`Case 4:15-cv-03570-YGR Document 37 Filed 12/11/15 Page 4 of 10
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`III. DISCUSSION
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`A.
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`Contributory Copyright Infringement
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`Microsoft alleges that A&S is liable for contributory infringement, a type of secondary
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`infringement. “To establish secondary infringement, [a claimant] must first demonstrate direct
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`infringement” by another. MDY Indus., LLC v. Blizzard Entm’t, Inc., 629 F.3d 928, 937 (9th Cir.
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`2010), as amended on denial of reh’g (Feb. 17, 2011), opinion amended and superseded on denial
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`of reh’g, No. 09-15932, 2011 WL 538748 (9th Cir. Feb. 17, 2011). In order to establish direct
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`infringement under 17 U.S.C. section 501(a), a claimant must allege facts to establish: (1)
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`ownership of the allegedly infringed material; and (2) the alleged direct infringers violated at least
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`one exclusive right granted to copyright holders under 17 U.S.C. section 106. A&M Records, Inc.
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`v. Napster, Inc., 239 F.3d 1004, 1013 (9th Cir. 2001). Liability for contributory infringement may
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`then be established by allegations that the contributor infringer knows of the third party’s direct
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`infringing activity and has “intentionally induc[ed] or encourag[ed] [the] direct infringement.” Id.
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`at 937-38 (quoting MGM Studios Inc. v. Grokster, Ltd., 545 U.S. 913, 930 (2005)).
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`The federal Copyright Act protects “original works of authorship,” including software
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`programs. 17 U.S.C. §§ 101-103. With respect to these works, the Copyright Act confers certain
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`exclusive rights on copyright owners, including exclusive rights to reproduce the works and to
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`distribute the works by sale or rental. Id. § 106(1), (3). Actions in violation of those rights
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`constitute infringement. However, the Copyright Act contains limitations on those rights. For
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`instance, the exclusive distribution right is limited by the “first sale” doctrine, which allows
`owners of particular copies of copyrighted works to resell those copies. 17 U.S.C. § 109(a).1
`And, in the context of computer software, the exclusive reproduction right is limited by the
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`“essential step” defense, which allows the owner of a copyrighted software program to make a
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`1 Section 109(a) of the Copyright Act provides that:
`Notwithstanding the provisions of section 106(3), the owner of a particular
`copy…lawfully made under this title, or any person authorized by such owner, is
`entitled, without the authority of the copyright owner, to sell or otherwise dispose
`of the possession of that copy….
`17 U.S.C. § 109(a).
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`copy of the computer program as an “essential step” in the utilization of the program, generally
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`when installing (a copy of) the program onto the computer’s hard-drive memory. 17 U.S.C. §
`117(a)(1).2 However, these limitations only apply when the particular copies of the copyrighted
`works at issue are owned rather than merely licensed for use. Vernor, 621 F.3d at 1107. A true
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`licensee cannot resell the software under the “first sale” doctrine or assert the “essential step”
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`defense to claim of unlawful reproduction.
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`To determine whether a software user is a licensee or an owner, the Ninth Circuit looks to
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`three factors: whether the “copyright owner (1) specifies that the user is granted a license; (2)
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`significantly restricts the user’s ability to transfer the software; and (3) imposes notable use
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`restrictions.” Vernor, 621 F.3d at 1111. In Vernor, the question before the Ninth Circuit was
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`whether the party that sold copies of software to Vernor was: (i) the owner of that software, such
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`that “both its sales to Vernor and Vernor’s subsequent sales were non-infringing under the first
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`sale doctrine;” or (ii) a licensee permitted to use the software, so that the selling party’s sale, and
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`Vernor’s subsequent sales, were “not protected by the first sale doctrine and would therefore
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`infringe [the copyright owner’s] exclusive distribution right.” Vernor, 621 F.3d at 1107. The
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`Ninth Circuit concluded that the software user who had sold to Vernor was a licensee, not an
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`owner, based upon evidence that it retained title to the software and imposed significant transfer
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`and use restrictions. Id. at 1111-12. As a consequence, the first sale doctrine did not apply, and
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`the sales to Vernor and subsequent purchasers infringed the copyright owner’s reproduction and
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`distribution rights. Id. at 1112. Importantly, the Ninth Circuit in Vernor did not hold that all
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`software customers were mere licensees, but instead held that “a software customer bound by a
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`restrictive license agreement may be a licensee of a copy not entitled to the first sale doctrine or
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`2 Section 117 of the Copyright Act provides, in part:
`(a) Making of additional copy or adaptation by owner of copy.-- Notwithstanding
`the provisions of section 106, it is not an infringement for the owner of a copy of
`a computer program to make or authorize the making of another copy or
`adaptation of that computer program provided:
`(1) that such a new copy or adaptation is created as an essential step in the
`utilization of the computer program in conjunction with a machine and that it is
`used in no other manner….
`17 U.S.C. § 117(a)(1).
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`Case 4:15-cv-03570-YGR Document 37 Filed 12/11/15 Page 6 of 10
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`the essential step defense.” Vernor, 621 F.3d at 1113.
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`Subsequent Ninth Circuit authority has confirmed that “the mere labeling of an
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`arrangement as a license rather than a sale, although it [is] a factor to be considered, [is] not by
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`itself dispositive of the issue.” UMG Recordings, Inc. v. Augusto, 628 F.3d 1175, 1180 (9th Cir.
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`2011). In UMG, the Ninth Circuit held that, despite a statement printed on the audio CDs
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`purporting to maintain ownership of the property by the recording company and to limit use,
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`resale, or transfer of possession, “under all the circumstances of the CDs’ distribution, the
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`recipients were entitled to use or dispose of them in any manner they saw fit, and UMG did not
`enter a license agreement for the CDs with the recipients.” UMG, 628 F.3d at 1180.3 In UMG, the
`court considered significant the facts that the CDs were sent to recipients without any prior
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`arrangement, without any meaningful way to track or control their use, and without any
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`confirmation of an agreement to enter into a license, all of which indicated a transfer of title rather
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`than a licensing agreement. Id. at 1182-83.
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`Microsoft argues that it has sufficiently alleged the direct infringement here, referencing
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`paragraph 32 of the FAC which alleges:
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`Defendants have contributed to the infringement of Microsoft’s copyrights by
`distributing counterfeit Microsoft product key cards and labels in the United
`States of America without approval or authorization from Microsoft to end users
`who were not licensed to use the software associated with the product keys
`printed on the counterfeit cards and labels.
`(FAC ¶ 32.) Microsoft submits that this allegation suffices to state the basis for the direct
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`infringement by A&S customers. Though contending that this allegation is sufficient, Microsoft
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`offers to amend the FAC to add that these end users “directly infringed Microsoft’s copyrights by
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`using the product keys to copy unauthorized Microsoft software.” (Oppo. at 12:22-23.)
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`3 Some of the CDs at issue included a statement reading:
`This CD is the property of the record company and is licensed to the intended
`recipient for personal use only. Acceptance of this CD shall constitute an
`agreement to comply with the terms of the license. Resale or transfer of
`possession is not allowed and may be punishable under federal and state laws.
`UMG, 628 F.3d at 1177-78.
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`On the direct infringement elements, Microsoft argues that it owns the copyrights for
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`Microsoft Office 2010 and Office 2013, the software at issue here, acquired by A&S customers.
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`Thus, it contends that A&S customers violate Microsoft’s exclusive rights under section 106 to
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`reproduce copies of its software programs. See 17 U.S.C. § 106(1). End users necessarily
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`reproduce “copies” of software by installing it on their computers using the product activation
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`keys obtained from A&S. See MAI Sys. Corp. v. Peak Computer, Inc., 991 F.2d 511, 517-18 (9th
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`Cir.1993) (installing software is making a “copy” under Copyright Act’s definition in 17 U.S.C. §
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`101); see also Columbia Pictures Indus., Inc. v. Fung, 710 F.3d 1020, 1034 (9th Cir.) cert.
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`dismissed, 134 S. Ct. 624 (2013) (“uploading and downloading copyrighted material are infringing
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`acts…[; t]he former violates the copyright holder’s right to distribution, the latter the right to
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`reproduction”).
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`Microsoft’s argument fails to address the question of whether the parties originally in
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`possession of the software, before A&S sold a DVD copy or a product activation key associated
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`with it, acquired that software as owners or as licensees. The distinction is significant and the
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`need for clarify in the FAC compelling: if the parties originally in possession of the software held
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`that software as owners, A&S could lawfully sell copies of Microsoft’s software to its customers,
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`and those customers could lawfully reproduce copies of the software by installing it onto their
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`computers. While “this distinction between sales and licenses [ ] has caused the use of software
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`licensing agreements to flourish and become the preferred form of software transactions,” (Apple
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`Inc. v. Psystar Corp., 658 F.3d 1150, 1156 (9th Cir. 2011)), the existence of a licensing agreement
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`still requires pleading and proof of facts to establish it. Again, merely labeling the arrangement as
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`a license rather than a sale is not sufficient. UMG Recordings, 628 F.3d at 1180; cf. MDY
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`Industries, 629 F.3d at 938-39 (license found where copyright owner’s agreement with users:
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`reserved title to the company; granted users a non-exclusive, limited license; allowed transfer only
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`to a recipient who accepted licensing agreement’s terms and received all original packaging and
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`documentation; permanently deletion of all copies and installations; use restrictions; and the
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`ability to terminate the software remotely if the user violated the terms of the agreement).
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`Moreover, while violation of certain terms of a license agreement can give rise to a copyright
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`infringement claim, violation of other license terms is actionable only as a breach of contract. See
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`MDY Industries, 629 F.3d at 939 (a copyright owner who grants license ordinarily waives the right
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`to sue for copyright infringement except when the licensee acts “outside the scope of” the license;
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`mere violation of other “covenants” in the license agreement is actionable only under contract
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`law); Twentieth Century Music Corp. v. Aiken, 422 U.S. 151, 155 (1975) (an unlicensed use of a
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`copyrighted work is not an infringement unless it conflicts with one of the specific exclusive rights
`conferred by the copyright statute).4 Thus, the details of any purported licensing arrangement, and
`the facts indicating that the software user was a licensee rather than an owner, are necessary to set
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`forth a plausible allegation of direct infringement.
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`A&S argues that the FAC do not allege an act of primary direct infringement by anyone,
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`and therefore a claim for contributory infringement cannot be supported. Turning to the allegations
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`of the FAC itself, Microsoft alleges that it “sells licenses to use its software, not the software
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`itself… no title to Microsoft Office itself passes to any individual when he or she purchases a
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`license and DVD containing the Microsoft Office software code.” (FAC ¶ 22.) Microsoft further
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`alleges that its licensing agreements “make clear to the end users that they have only purchased a
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`license for use…[and] contain limitations around the use of the software and place certain
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`restrictions on any transfer of the license and accompanying materials (e.g. backup discs).” (FAC
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`¶ 12.) As to the two specific sales identified in the FAC, Microsoft alleges one purchase was a
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`product key and a backup DVD with the words “Not for resale” printed on the front, both of which
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`were traced to a “Home Use Program” that licensed a non-transferable use only by enterprise
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`customers’ employees. The other alleged purchase was a product key only, with instructions for
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`downloading Microsoft Office software directly from Microsoft or for use with the customers’
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`own matching media. (FAC ¶ 22.) Microsoft alleges that the latter purchase was traced to “a
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`4 Not every breach of a license agreement constitutes copyright infringement. “To recover
`for copyright infringement based on breach of a license agreement, (1) the copying must exceed
`the scope of the defendant’s license and (2) the copyright owner’s complaint must be grounded in
`an exclusive right of copyright (e.g., unlawful reproduction or distribution).” MDY Industries, 629
`F.3d at 940.
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`product key originally distributed through a program in China for academic users under which the
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`software and associated products keys are nontransferable.” (FAC ¶ 26.)
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`The Court agrees that these allegations are insufficient to state the basis for direct
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`infringement. In order to allege an act of direct infringement that would not fall within the “first
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`sale” and “essential step” exceptions to the Copyright Act, Microsoft must allege facts supporting
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`the three Vernor factors: (1) specification that the user is granted a license; (2) “significant”
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`restrictions on the ability to transfer the software; and (3) “notable use restrictions.” Vernor, 621
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`F.3d at 1110. Microsoft’s allegations here are, at best, vague and conclusory on these points. The
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`FAC does not specify the terms and conditions that applied to software acquired under the two
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`particular programs to which the purchases here were traced.
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`The Court acknowledges the requirements of pleading under Rule 8, however, without a
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`clear allegations on direct infringement, Microsoft has failed to state its claim for contributory
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`trademark infringement. Therefore, Court GRANTS the Motion to Dismiss the first claim for relief
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`WITH LEAVE TO AMEND.
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`B.
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`All Other Claims
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`A&S also moves to dismiss Microsoft’s claims for trademark infringement, false
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`designation or origin, and false advertising under the Lanham Act, as well as the derivative claims
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`for imposition of a constructive trust and an accounting. Primarily, A&S argues that Microsoft
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`cannot use the Lanham Act to extend the reach of rights that are actually based on copyright, but
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`otherwise excluded by the Copyright Act, citing Dastar Corp v. Twentieth Century Fox Film
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`Corp., 539 U.S. 23 (2003). In addition, A&S argues that all the trademark claims fail under the
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`“nominative fair use” doctrine. See New Kids on the Block v. News Am. Publishing, Inc., 971 F.2d
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`302, 308 (9th Cir. 1992) (nominative fair use determined by whether: (1) the product “readily
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`identifiable without use of the trademark,” (2) the defendant used more of the mark than is
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`“reasonably necessary” to identify the product, and (3) the defendant falsely suggested
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`sponsorship or endorsement by the trademark holder.)
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`Leaving aside the merits of these arguments, which the Court does not reach, the Court’s
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`reading of the FAC indicates that all of Microsoft’s Lanham Act claims are based upon the
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`Case 4:15-cv-03570-YGR Document 37 Filed 12/11/15 Page 10 of 10
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`premise that A&S sells “infringing” products, and that representations and designations thereon
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`are false because customers would be led to believe that the products are genuine, authentic
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`Microsoft products that they are entitled to use. Because the viability of these claims as alleged
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`depend, at least in part, upon the sufficiency of the copyright infringement claim, the Court
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`GRANTS the Motion to Dismiss the remainder of the claims WITH LEAVE TO AMEND.
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`IV.
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`CONCLUSION
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`Based upon the foregoing, the Court is inclined to grant the motion to dismiss with leave to
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`amend. In amending the complaint, Microsoft is directed state its claims without superfluous
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`allegations of “the global problem of software piracy” and “defendants’ past infringing conduct,”
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`neither of which has any bearing on the merits of the claims herein or would need to be proven at
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`trial.
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`Dated: December 11, 2015
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`______________________________________
`YVONNE GONZALEZ ROGERS
`UNITED STATES DISTRICT COURT JUDGE
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