DSC Communications v. DGI Technologies Inc

• Court: Court of Appeals for the Fifth Circuit
• Decided: April 30, 1996
• Docket: 95-10850
• Status: Published

Opinion

United States Court of Appeals,

Fifth Circuit.

No. 95-10850.

DSC COMMUNICATIONS CORPORATION, Plaintiff-Appellant,

v.

DGI TECHNOLOGIES, INC., Defendant-Appellee.

April 30, 1996.

Appeals from the United States District Court for the Northern District of Texas.

Before REYNALDO G. GARZA, WIENER and STEWART, Circuit Judges.

REYNALDO G. GARZA, Circuit Judge:

DSC Communications Corporation obtained a preliminary

injunction enjoining DGI Technologies, Inc. from making removable

copies of DSC Communication Corporation's copyrighted software.

DSC Communications Corporation appeals from the granting of this

preliminary injunction, arguing that it is too narrowly drawn.

Because we hold that the district court did not abuse its

discretion in crafting the injunction, we AFFIRM.

I.

FACTS

DSC Communications Corporation ("DSC") manufactures telephone

switching systems ("phone switches"). DGI Technologies, Inc.

("DGI") manufactures various devices, including microprocessor

cards, that are used in DSC phone switches. DSC sued DGI for

unfair competition on various grounds, including copyright

infringement. DSC obtained a preliminary injunction in that suit,

which prohibits DGI from making copies of DSC's copyrighted

1 operating system software that can be removed from DSC's customer's

premises. The injunction, however, does not prohibit DGI from

making copies of DSC's copyrighted software that cannot be removed

from DSC's customer's premises. DSC's appeals from the preliminary

injunction, arguing that DGI should also be enjoined from making

copies that cannot be removed from DSC's customer's premises.

A phone switch routes long distance telephone calls to their

destinations. It consists of three principal components: (1) the

switch matrix, which actually routes the telephone calls; (2) the

trunk/line interface system, which converts long distance telephone

signals into a form and sequence that can be handled by the switch

matrix; and (3) a mass storage frame, which contains the software

that operates the entire switching system.

Long distance signals must be in digital form and properly

sequenced before they can be routed through the switch matrix. The

trunk/line interface system converts the data arriving from the

long distance telephone line into proper digital form and sequence.

The trunk/line interface system is controlled by DSC's copyrighted

software when it converts these signals. Once these signals have

been "switched"—i.e. routed to their destination—the trunk/line

system converts them back into a form in which they can be

transmitted through the phone lines to their destination.

The trunk/line interface system is housed in metal cabinets

called frames. These frames contain a number of shelves. The

front of the shelves is open, and at the back of the shelves is a

backpane. Cables carrying incoming telephone signals from the

2 telephone line and outgoing signals to the switch matrix and the

telephone lines are attached to the backpane. Groups of printed

circuit boards called cards are inserted into the shelves of the

frames from the front and connect to the backpane. These cards

contain the components that translate the data from the telephone

line into a format that can be used by the switch matrix and vice

versa.

The principal cards in the frames are microprocessor cards.

The microprocessor cards contain firmware, which is software

embedded in a memory chip on the card. When a microprocessor card

is inserted into the frame, it must boot up. That is, it must

download DSC's copyrighted operating system software into its

random access memory ("RAM"). The booting up process is similar to

that used in personal computers, which also boot up by downloading

operating system software from a floppy disk or hard disk when the

computer is turned on or reset. A microprocessor card must

download DSC's copyrighted operating system software when it is

used in the phone switch.

DSC manufactures the entire phone switch system, and has a

copyright on the software used in the phone switch. DSC sells

phone switches, but does not sell the software necessary to operate

them. Instead, it licenses the software to its customers. One of

the customers to whom DSC sold a phone switch and licensed its

software is NTS Communications Corporation ("NTS"). The licensing

agreement between DSC and NTS prohibits NTS from copying the

software, and only allows NTS to use the software in conjunction

3 with the phone switch purchased from DSC.

DGI is attempting to develop a microprocessor card that can be

used in DSC phone switches. Customers would use this card instead

of using a DSC-manufactured card. DSC contends that DGI engaged in

several acts of copyright infringement in its attempt to develop a

microprocessor card. The alleged infringement at issue in this

appeal is DGI's copying of DSC's copyrighted operating system

software.

Because DSC did not sell its operating system software on the

open market, the only way to gain access to the software was to

license it from DSC. DGI needed to gain access to DSC's operating

system software in order to develop a microprocessor card, because

the microprocessor card had to be able to download the software

into RAM, and had to be compatible with the software. To obtain

access to the operating system software, DGI obtained access to a

DSC phone switch owned by NTS. NTS gave DGI permission to use its

phone switch to test microprocessor cards. In return for this

permission, DGI gave NTS a ten percent discount on purchases of DGI

cards, shelves and frames. DGI did more than merely test its

cards, however. Without NTS's knowledge, it made copies of DSC's

copyrighted software, and removed these copies from NTS's premises.

DGI used two methods to copy DSC's copyrighted software.

First, it downloaded DSC's operating system into the memory of a

DSC microprocessor card, out through a port on that card, and into

a lap top computer. Second, DGI modified a DSC microprocessor card

by adding chips designed to capture the communications between the

4 card and another microprocessor card from which the operating

system software would be obtained and a chip designed to hold and

retain information on the downloading function when the

microprocessor card was removed. DGI copied DSC's copyrighted

operating system software using this modified microprocessor card.

DSC and DGI were already involved in litigation at the time

that DGI was copying DSC's operating system software. DSC sued DGI

for allegedly misappropriating its trade secrets to develop

microprocessor cards for use is DSC's phone switch and for

violating the Lanham Act in selling its cards. DGI countersued,

alleging that DSC violated antitrust laws, misappropriated DGI's

trade secrets, engaged in unfair competition and committed tortious

interference with DGI's business relationships. When DSC learned

that DGI was copying its operating system software, it amended its

complaint to allege copyright infringement, and moved for a

preliminary injunction to prevent DGI from continuing to copy, and

benefitting from copying, the operating system software. The

district court granted a preliminary injunction, prohibiting DGI

from making any copies of DSC's operating system software that

could be removed from NTS's premises. However, the injunction did

not prohibit DGI from "downloading into dynamic RAM on a

microprocessor or test microprocessor card which is incidental to

the testing or operating of a compatible [microprocessor] card so

long as the copy is not capable of being removed from the customer

location and transported to any other location." In other words,

DGI could not continue to make copies of the operating system to

5 take back to its lab and study, but it could test its

microprocessor card on NTS's phone switch, even though DSC's

operating system software would be downloaded into the

microprocessor card's RAM.

II.

DISCUSSION

A.

STANDARD OF REVIEW

The decision to grant or deny a preliminary injunction lies

within the discretion of the district court and will be reversed on

appeal only upon a showing of abuse of discretion. Blue Bell Bio-

Medical v. Cin-Bad, Inc., 864 F.2d 1253, 1256 (5th Cir.1989).

B.

ANALYSIS

In order to obtain a preliminary injunction, DSC was required

to demonstrate: (1) a substantial likelihood of success on the

merits; (2) a substantial threat of irreparable injury if the

injunction is not issued; (3) that the threatened injury to DSC

outweighs any damage the injunction might cause to DGI; and (4)

that the injunction will not disserve the public interest. Plains

Cotton Co-op. Ass'n v. Goodpasture Computer Serv., Inc., 807 F.2d

1256, 1259 (5th Cir.), cert. denied, 484 U.S. 821, 108 S.Ct. 80, 98

L.Ed.2d 42 (1987). Because we hold that the district court did not

abuse its discretion in implicitly1 finding that DSC did not have

1 The district court's order did not address the issue of whether DGI violated DSC's copyright when making non-removable copies of the operating system software. It simply found that

6 a substantial likelihood of success on the merits, we affirm the

injunction.

DSC claims that it has a substantial likelihood of prevailing

on its claim that DGI infringes upon its copyright every time DGI

boots up one of its microprocessor cards on a DSC phone switch.

When a DGI microprocessor card boots up, DSC's copyrighted

operating system software is downloaded into the card's RAM. DSC

contends that this downloading constitutes making a copy under

copyright law. Therefore, DSC argues, booting up a DGI

microprocessor card infringes upon DSC's copyright by making an

unauthorized copy of DSC's copyrighted operating system software.

To prevail on its claim of copyright infringement, DSC will

have to prove: (1) that it owned a copyright on the operating

system software; and (2) that DGI impermissibly copied or

otherwise infringed upon that copyright. Plains Cotton Co-op., 807

F.2d at 1260. Further, it will have to overcome DGI's affirmative

defenses, including the defense of copyright misuse.

The parties agree that DSC owns a copyright on the operating

system software. However, they disagree on whether booting up a

DGI microprocessor card constitutes impermissible copying. DSC

argues that an impermissible copy is made every time software is

loaded onto a computer's RAM. See MAI Sys. Corp. v. Peak Computer,

DGI violated DSC's copyright when it made removable copies of the software. Because the district court refused to enjoin DGI from making non-removable copies of DSC's software "incidental to the testing or operating of a compatible [microprocessor] card," we treat the district court's order as implicitly holding that DGI was not entitled to an preliminary injunction prohibiting such copying.

7 Inc., 991 F.2d 511, 518 (9th Cir.1993), cert. dism'd, --- U.S. ----

, 114 S.Ct. 671, 126 L.Ed.2d 640 (1994). Because the licensing

agreement between DSC and NTS only allows the software to be booted

up on DSC equipment, this copying is not authorized. Therefore,

DSC argues, booting up a microprocessor card violates its

copyright. DGI does not dispute that a copy is made when the

microprocessor cards are booted up. Instead, DGI argues, inter

alia, that it is entitled to the defense of copyright misuse.

The district court did not err in implicitly finding that DSC

did not have a substantial likelihood of prevailing on the merits

because DGI may well prevail on its affirmative defense of

copyright misuse. The defense of copyright misuse "bars a culpable

plaintiff from prevailing on an action for the infringement of the

misused copyright." Lasercomb Am., Inc. v. Reynolds, 911 F.2d 970,

972 (4th Cir.1990). See Mitchell Bros. Film Group v. Cinema Adult

Theater, 604 F.2d 852, 865 n. 27 (5th Cir.1979), cert. denied, 445

U.S. 917, 100 S.Ct. 1277, 63 L.Ed.2d 601 (1980) (recognizing the

copyright misuse defense). The defense is a recognition that while

"copyright law [seeks] to increase the store of human knowledge and

arts by awarding ... authors with the exclusive rights to their

works for a limited time ... the granted monopoly power does not

extend to property not covered by the ... copyright." Lasercomb,

911 F.2d at 976.

The copyright misuse defense is analogous to the patent misuse

defense. Id. The patent misuse defense was recognized by the

Supreme Court in Morton Salt Co. v. G.S. Suppiger, 314 U.S. 488, 62

8 S.Ct. 402, 86 L.Ed. 363 (1942). In that case, the plaintiff Morton

Salt brought suit on the basis that the defendant had infringed

upon Morton's patent in a salt-depositing machine. The salt

tablets that the machine deposited were not themselves a patented

item, but Morton's patent license required that licensees use only

salt tablets produced by Morton. Morton was thereby using its

patent to restrain competition in the sale of an item that was not

within the scope of the patent's privilege. The Supreme Court held

that, as a court of equity, it would not aid Morton in protecting

its patent when Morton was using that patent in a manner contrary

to public policy.

In Lasercomb, the Fourth Circuit extended the rationale

behind Morton Salt to copyright misuse. Paraphrasing Morton Salt,

the Fourth Circuit stated:

The grant to the author of the special privilege of a copyright carries out a public policy adopted by the Constitution and laws of the United States, "to promote the Progress of Science and useful arts, by securing for limited Times to [Authors] ... the exclusive Right ..." to their "original" works. United States Constitution, Art. I, § 8, cl. 8, 17 U.S.C. § 102. But the public policy which includes original works within the granted monopoly excludes from it all that is not embraced in the original expression. It equally forbids the use of the copyright to secure an exclusive right or limited monopoly not granted by the Copyright Office and which is contrary to public policy to grant.

Lasercomb, 911 F.2d at 977. We concur with the Fourth Circuit's

characterization of the copyright misuse defense.

DGI may well prevail on the defense of copyright misuse,

because DSC seems to be attempting to use its copyright to obtain

a patent-like monopoly over unpatented microprocessor cards. Any

9 competing microprocessor card developed for use on DSC phone

switches must be compatible with DSC's copyrighted operating system

software. In order to ensure that its card is compatible, a

competitor such as DGI must test the card on a DSC phone switch.

Such a test necessarily involves making a copy of DSC's copyrighted

operating system, which copy is downloaded into the card's memory

when the card is booted up. If DSC is allowed to prevent such

copying, then it can prevent anyone from developing a competing

microprocessor card, even though it has not patented the card. The

defense of copyright misuse "forbids the use of the copyright to

secure an exclusive right or limited monopoly not granted by the

Copyright Office," including a limited monopoly over microprocessor

cards. See Lasercomb, 911 F.2d at 977. Therefore, DGI's asserting

the misuse defense could cast substantial doubt on the

predictability of success by DSC.

Of course, we do not hold that DGI will successfully avail

itself of the copyright misuse defense. After a trial on the

merits, the district court may well decide that DSC did not commit

copyright misuse, or that DGI cannot avail itself of the defense

because it has "unclean hands." We simply hold that the district

court did not abuse its discretion in implicitly holding that DSC

did not have a substantial likelihood of success on the merits

because—based on the evidence before the district court—DGI may

prevail on its misuse to the defense.

III.

CONCLUSION

10 Because we hold that the district court did not abuse its

discretion in crafting the preliminary injunction, we AFFIRM.

AFFIRMED.