This is a summary of a recent court decision in a copyright case that may be of interest to you. The case has implications for copyrighted works outside the world of computer operating system software, including the Court’s conclusion that Psystar’s modification of Apple’s software violated Apple’s shrink-wrap license, its analysis of the “first sale” doctrine, and its holding that Psystar’s use of decryption software to access and modify Apple’s software violated the Digital Millennium Copyright Act’s (“DMCA”) anti-circumvention and anti-trafficking provisions.

The Court rejected Psystar's claimed defenses under the doctrines of first sale and copyright misuse. It held that the first sale doctrine under Section 109 of the Copyright Act did not apply because the copies of OS X installed by Psystar on its non-Apple computers “were not lawfully manufactured with the authorization of the copyright owner ....” Slip Op. 5.

Apple does not authorize the use of its OS X operating system on non-Apple computers and Apple’s software as written prevents it from working on non-Apple computers. A substantial part of Psystar’s business is based upon the sale of non-Apple computers using copies of Apple’s OS X operating system software which Psystar has modified to work on non-Apple machines.

In 2008, Apple Inc. sued Psystar in the United States District Court for the Northern District of California for copyright infringement of its operating system software and violation of Apple’s shrink-wrap software license for OS X, among other claims. The case is Apple Inc. v. Psystar Corporation, No. C 08-03251 WHA (N.D. Cal.).

On November 13, 2009, District Judge William Alsup issued an Order granting Apple’s motion for summary judgment on its claims of copyright infringement and violation of the DMCA.

The Court held that Psystar infringed Apple's copyright in OS X by (1) making unauthorized copies of OS X on Psystar’s clone computer hard drives; (2) distributing those copies of OS X through sale of its non-Apple computers; (3) creating unauthorized derivative works by modifying the Apple software so that it would operate on non-Apple computers.

The Court also held that Psystar violated the DMCA anti-circumvention and anti-trafficking provisions by decrypting Apple's software protection and modifying the OS X software to enable it to run on non-Apple computers.

In addressing Apple’s infringement claims, the Court noted that Psystar’s actions were in violation of Apple’s shrink-wrap software license, which prohibits its use on non-Apple hardware.

The Court set a schedule to address the appropriate relief for its findings of copyright infringement and violations of the DMCA. Apple has additional claims of breach of contract, trademark infringement, and unfair competition which remain for trial.

It is difficult to see how Psystar’s business model for sale of Apple clones with a modified OS X operating system pre-installed can survive the Court’s finding that its use of Apple’s OS X operating system violates Apple’s copyright, much less the additional claims which remain to be decided.

Psystar’s website offers its computers with a choice of OS X, Windows, and Linux operating systems. As of the writing of this Alert, Psystar still offers its computers with OS X pre-installed. Apparently anticipating the Court’s decision in this case, in mid-October, Psystar began selling a software program called “Rebel EFI” which allows the user to install “operating systems of their choosing, including OS X on their [non-Apple] computers.” Will Apple’s next claim be against “Rebel EFI”?

Please contact us if you have any questions about this case or related matters.

© 2009 Cowan, DeBaets, Abrahams & Sheppard LLP

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New Federal Trade Commission Endorsement Rules for Bloggers and Online Content Go Into Effect December 1, 2009

On December 1, 2009, new Federal Trade Commission’s Guides Concerning the Use of Endorsements and Testimonials in Advertising (the “Guides”), with heightened requirements for bloggers to disclose affiliations with sponsors of those endorsements, go into effect. See FTC Press Release dated October 5, 2009 at http://www.ftc.gov/opa/2009/10/endortest.shtm. The text of the Guides, 16 CFR Part 235, is available at: http://www.ftc.gov/os/2009/10/091005revisedendorsementguides.pdf.

What has not been widely reported is that these Guides cover all endorsements, not just those in blogs, but also any endorsements found in websites, video blogs or other online sites as well as any other medium. While the FTC has said it does not intend to pursue individual bloggers, anyone sponsoring or paying for others to blog or promote their product or service may well find themselves on the receiving end of regulatory action.

For example, an employee needs to disclose his or her affiliation whenever they “talk up” the employer’s products or services. It may be advisable for employee handbooks to require employees to disclose who they work for, and state that their comments are their own, not those of their employer, or to refrain from blogging about their employer’s products or services so the employer can avoid liability for violating these new Guides.

Under the Guides, well-known individuals or celebrities who endorse products must be truthful about what they say, must in fact use the product or service and now have an added obligation to know that any factual statements they make are accurate.

For example, if a celebrity appears in an advertisement and reads a script saying what results can be obtained, the celebrity must know that the factual statements in the script are true. Also, in certain situations, such as in an interview where it is unclear in context that an endorsement was funded by a sponsor, the celebrity has an obligation to disclose if he or she is being paid or receiving anything of value from the sponsor.

How these new Guides interact with existing laws against false advertising and misleading statements in commerce can be complex and depends on the context. For example, even distinguishing a statement of fact from an expression of opinion is not always an obvious task. Please feel free to give us a call if you have any questions as to how the new Guides may affect your business.

CDAS collaborated with outside counsel Lisa Dubrow, Esq. in the preparation of this Legal Alert.

© 2009 Cowan, DeBaets, Abrahams & Sheppard LLP

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This Legal Alert contains information and comments on legal issues and developments we believe will be of interest to our clients and friends. It is not a comprehensive treatment of the subject matter of this Legal Alert and is not intended to provide legal advice. If you do not wish to receive further Legal Alerts, please reply to this email and insert “Remove from List” to the subject line.