MGE UPS Systems, Inc. v. GE Consumer and Industrial, Inc.

In a case of first impression in the circuit, Fifth Circuit affirms dismissal of Digital Millennium Copyright Act claims and holds that a defendant does not violate the DMCA’s anti-circumvention provision merely by bypassing a technological protection that restricts a user from viewing or using copyrighted software, finding the DMCA prohibits only forms of access that would violate the Copyright Act’s protections.

Plaintiff MGE UPS Systems, Inc. manufactures several uninterruptible power supply (“UPS”) machines, which are used during periods of power outages to provide power to critical operating systems. Some of plaintiff’s UPS machines require use of plaintiff’s copyrighted software programs Pacret and Muguet during servicing. The software requires connection of an external hardware security key (called a “dongle”) to a laptop serial port. PMI, a critical power service company, services a variety of brands of UPS machines, including plaintiff’s UPS machines. Sometime before June 2000, a group of PMI employees obtained at least one copy of plaintiff’s software from an unknown source that did not require use of a dongle to be accessed. Defendant GE acquired PMI in 2001. In December 2004, plaintiff filed suit against GE/PMI for, inter alia, copyright infringement, misappropriation of trade secrets, unfair competition, conversion, and violation of the Digital Millennium Copyright Act’s (“DMCA”) anti-circumvention provision. Defendant did not dispute liability, inasmuch as it admits to recovering a laptop from a former PMI employee that contained hacked MGE software and admits to five instances of the software’s use. The district court dismissed the DMCA claim but plaintiff obtained a $4,624,000 jury verdict on the claims of copyright infringement, misappropriation of trade secrets, and unfair business practices. On appeal, plaintiff argued that the district court erred in dismissing its DMCA violation claim. GE/PMI cross-appealed on various grounds.

Under the DMCA’s anti-circumvention provisions, “[n]o person shall circumvent a technological measure that effectively controls access to a work protected under this title.” The Fifth Circuit noted that the DMCA does not describe the type of access-controlling technology measures required to invoke the DMCA’s protections, and that this is an issue of first impression in the Fifth Circuit.

Defendant argued that plaintiff’s dongle does not actually prevent copying of its software, but merely prevents access to the software. Once that access is breached, there are no barriers to copying. Plaintiff’s software, argued defendants, is therefore freely accessible within the meaning of the DMCA because the dongle does not block the type of “access” the DMCA is designed to prevent. In response, plaintiff argued that the dongles prevented access to its software and that without using both the hardware key and its corresponding password, a user cannot view, gain access to, or make use of the software.

The Fifth Circuit found that plaintiff's definition of “access” is too broad. According to the court, plaintiff’s interpretation would permit liability under the DMCA for accessing a work simply to view it or to use it within the purview of “fair use” permitted under the Copyright Act. “Merely bypassing a technological protection that restricts a user from viewing or using a work is insufficient to trigger the DMCA’s anti-circumvention provision.” The court emphasized that a copyright owner’s technological measure must protect the copyrighted material against an infringement of a right that the Copyright Act protects, not from mere use or viewing. Plaintiff’s dongle merely prevents initial access to the software; there is no encryption or other form of protection on the software itself to prevent copyright violations. Because the dongle does not protect against copyright violations, the mere fact that that dongle itself is circumvented does not give rise to a circumvention violation within the meaning of the DMCA.

Moreover, the court held that the DMCA’s anti-circumvention provision does not apply to the use of copyrighted works after the technological measure has been circumvented, targeting instead the circumvention itself. According to the court, plaintiff failed to demonstrate that defendant was responsible for altering the Pacret and Muguet software such that a dongle was not required to use the software. The court concluded that without proving that defendant actually circumvented the technology (as opposed to using technology already circumvented), plaintiff did not present a valid DMCA claim.

Turning to defendant's cross-appeal, the court also agreed with defendant’s contention that plaintiff failed to present sufficient evidence of damages. Under the Copyright Act, instructed the court, a copyright owner is permitted to recover (1) his own “actual damages, (2) what a willing buyer would be reasonably required to pay a willing seller as a licensing fee, or (3) any profits of the infringer that are attributable to the infringement and are not taken into account in computing the actual damages.” If the copyright owner chooses to claim infringer’s profits, the court wrote, the copyright owner is required to present only proof of the infringer’s gross revenue, and the infringer is required to prove his or her deductible expenses and elements of profits attributable to factors other than the copyrighted work. Defendant argued that plaintiff failed to satisfy the first step in proving infringer’s profits because plaintiff’s only evidence of gross revenues was a one-page bar graph which reflected undifferentiated gross revenue from servicing a variety of brands of equipment. Defendant presented evidence that approximately 10% of PMI’s total revenue was reasonably related to infringement of plaintiff’s copyright. The court agreed, concluding that plaintiff had not shown damages under the Copyright Act where plaintiff failed to present a more narrowly tailored calculation of PMI’s profits in order to recognize a claim for copyright damages “attributable to the infringement.”

Similarly, the court held that plaintiff’s state law claims for misappropriation of trade secrets and unfair competition should have been dismissed because the record did not support damages for these claims. Plaintiff has not presented, emphasized the court, evidence that provides any means of distinguishing revenue PMI gained from other sources from revenue gained through misappropriation of plaintiff’s trade secrets, let alone the calculation of profits from the relevant portion of revenue.

Finally, the court affirmed the grant of a permanent injunction against defendant’s use of plaintiff’s software and trade secrets. The circuit court held that the district court did not abuse its discretion where infringing materials may still be in defendant’s possession and defendant failed to conform to the constraints of the preliminary injunction.