633 F.Supp.2d 124 (2009)

[128] Steven Bernard Fabrizio, Duane C. Pozza, Luke Cardillo Platzer, Jenner & Block LLP, Washington, DC, Gianni P. Servodidio, Jenner & Block LLP, New York, NY, for Plaintiffs.

Charles Stewart Baker, Jim D. Aycock, Tina M. Stansel, John Reid Hawkins, Joseph D. Cohen, Porter & Hedges, L.L.P., Houston, TX, Lauren Eve Handler, Porzio, Bromberg & Newman, P.C., Morristown, NJ, Ray Berkerman, Ray Berkerman, P.C., Forest Hills, NY, for Defendants.

[129] OPINION & ORDER

HAROLD BAER, JR., District Judge.

This action arises out of allegations of widespread infringement of copyrights in sound recordings owned by Plaintiffs Arista Records LLC; Atlantic Recordings Corporation; BMG Music; Capitol Records, LLC; Caroline Records; Elektra Entertainment Group Inc.; Interscope Records; LaFace Records LLC; Maverick Recording Company; Sony BMG Music Entertainment; UMG Recordings, Inc; Virgin Records America, Inc.; Warner Bros. Records Inc; and Zomba Recording LLC ("Plaintiffs"), copies of which are available for download by accessing a network of computers called the USENET through services provided by Defendants Usenet.com, Inc. ("UCI"),^[1] Sierra Corporate Design, Inc. ("Sierra"), and spearheaded by their director and sole shareholder, Gerald Reynolds ("Reynolds") (collectively, "Defendants"). Specifically, Plaintiffs brought this action alleging (1) direct infringement of the Plaintiffs' exclusive right of distribution under 17 U.S.C. § 106(3);^[2] (2) inducement of copyright infringement; (3) contributory copyright infringement; and (4) vicarious copyright infringement. There are two motions by Plaintiffs before me— one for termination due to discovery abuse, and another for summary judgment —with a cross-motion for summary judgment from the Defendants. Defendants'^[3] cross-motion for summary judgment argues that they are entitled to the safe harbor protections of § 512(c) of the Digital Millennium Copyright Act ("DMCA"). All parties filed numerous additional motions to exclude certain testimony, as well as voluminous evidentiary objections. Plaintiffs opine that their motion for terminating sanctions alleges discovery abuse sufficient to require that I strike the Defendants' answer and enter a default judgment in their favor ("Terminating Sanctions Motion"). For the reasons set forth below, Plaintiffs' Terminating Sanctions Motion is granted to the extent discussed in this opinion, though not in its entirety; Plaintiffs' motion for summary judgment is granted with respect to all claims; and Defendants' motion for summary judgment is dismissed as moot.

I. FACTUAL BACKGROUND

A. The USENET and How It Works

The USENET network, created over twenty years ago, is a global system of [130] online bulletin boards on which users (or "subscribers") may post their own messages or read messages posted by others. Defendants' Statement of Undisputed Facts ("Defs.' SUF") 1. To obtain access to the USENET, a user must gain access through a commercial USENET provider, such as Defendant UCI, or an internet service provider. See Memorandum Opinion & Order, dated January 26, 2009 ("Sanctions Order") at 3. Messages posted to the USENET are commonly known as "articles." Id. Articles, in turn, are posted to bulletin boards called "newsgroups." Id. Newsgroups often are organized according to a specific topic or subject matter, and are oftentimes named according to the subject matter to which the articles posted to the newsgroup relate. Defs.' SUF 2. The USENET is divided into nine major subject headings known as "hierarchies," one of which is the alt.* hierarchy. Defs.' SUF 3-4. Content files known as binaries, which represent computer files such as images, videos, sounds, computer programs and text, are found in the alt.* hierarchy. Defs.' SUF 5. These binary files are encoded in text form for storage and processing, and require a software program to convert the text into a content file such as an image or music file. See id.

Users review available articles for potential download by selecting a newsgroup and then perusing the "headers" or titles of articles that are posted to that newsgroup; based on the header, the user may request to download articles that are of interest. Horowitz Decl. ¶ 21. Some news servers include a search field in which a user may type the name of a desired file and then review a list of articles responsive to the search request. Id. ¶ 24; Plaintiffs' Statement of Uncontroverted Facts ("Pls.SUF") 91. Once an article is retrieved, software is used to convert the text file into binary content; however, this conversion process is automated and virtually invisible to the user. Horowitz Decl. ¶ 35. "The combination of these additional features creates a user experience that substantially mimics the user experience of applications used on peer-to-peer file-sharing networks" such as Napster. Id. ¶ 36. Once the file is retrieved and converted, it is downloaded from the USENET provider's server and a copy is stored on the user's personal computer. Id.

To post an article to the USENET, a user must first obtain access to at least one USENET host, such as UCI; second, the user must use the proper USENET protocol for posting messages; and third, upon uploading the article to the USENET host, the article is distributed across the USENET network to other hosts' servers. Defs.' SUF 33; see also Sanctions Order at 3 ("The servers at each Usenet hub are programmed to feed the articles its users have posted to other Usenet servers, based on a user's implicit or explicit configuration settings, and, in turn, the servers receive postings from other servers."). This process is not completely automated; rather, USENET providers control which articles in which newsgroups are transmitted to, and accepted from, other providers through this "peering" process. See Horowitz Decl. ¶¶ 26, 57-58; Pls.' SUF 71. Articles that are posted to the USENET are not retained on the network indefinitely; rather, retention rates range from days to months depending on the host's server capacity. Defs.' SUF 14. Once the maximum capacity is reached, the server deletes older articles to make room for newer articles. Id. Unlike other forms of file-sharing networks, such as peer-to-peer networks, articles on the USENET are saved to news servers instead of another end-user's personal computer; a user accesses these articles and content files by connecting to these central [131] servers that are available through their provider's service. See Horowitz Decl. ¶ 15.

B. Defendants and Their Business

Sierra purchased the domain name "www.usenet.com" in 1998, and it ran the website until UCI was formed in 2004. Defs.' SUF 17. Defendants offer access to the USENET to subscribers who sign up for Defendants' services on the www. usenet.com website. See Defs.' SUF 19. To subscribe, the user may choose among a variety of monthly subscription plans, which vary in price depending on the user's desired bandwidth allocation. Id.; see also Defs.' SUF 38. Subscribers pay Defendants a monthly rate ranging from $4.95 to $18.95; for a monthly fee of $18.95, users had access to unlimited downloads. See Pls.' SUF 63-64; see also Pls.' SUF 65-66; Sanctions Order at 4. The user must then accept certain "Terms of Use" ("TOU") that govern the relationship between UCI and its subscribers. Pls.' SUF 67. Among the terms in the TOU is UCI's official policy prohibiting the upload of unauthorized, including copyrighted, content without the permission of the rights owner. Defs.' SUF 20. Once a user subscribes to Defendants' service, he or she is provided access to over 120,000 newsgroups. Defs.' SUF 28. Defendants themselves operate over 34 different computer servers that perform tasks that include storing content and transmitting copies of articles to users upon request. Pls.' SUF 89. Defendants' "front-end" servers (which manage interactions with subscribers and transmit requested articles) display articles available for download on servers over the USENET, and are configured to connect to the correct "spool server" (which actually store the articles) to retrieve an article that the user requests. See Defs.' SUF 28; Horowitz Decl. ¶¶ 46, 50, 67, 92. Defendants' spool servers have the ability to filter or block groups or articles, and can define feeds that specify which articles and newsgroups are copied to the spool servers. Horowitz Decl. ¶ 62. Defendants also have the ability to create designated servers for certain kinds of newsgroups; they exercised this ability by creating servers for newsgroups containing music binary files to increase their retention time. See Pls.' SUF 93-96. Defendants have, at times, exercised their right and ability to restrict, suspend or terminate subscribers, including by suspending accounts of users who sent "spam" messages and restricting download speeds of subscribers who downloaded what Defendants considered to be a disproportionate volume of content. Pls.' SUF 69. They have also taken measures to restrict users from posting or downloading articles with pornographic content. Pls. SUF 70; see also Pls' SUF 112. Defendants likewise have the right and ability to block access to articles stored on their own servers that contain infringing content. Pls.' SUF 72.

C. Evidence of Defendants' Subscribers Downloading Plaintiffs' Works

There can be no dispute that Defendants' services were used overwhelmingly for copyright infringement. Indeed, Plaintiffs' expert has testified that, based on a statistical analysis, over 94% of all content files offered in music-related binary newsgroups previously carried by Defendant UCI were found to be infringing or highly likely to be infringing. Pls.' SUF 7; Declaration of Dr. Richard Waterman ("Waterman Decl.") ¶ 5, 13.^[4] Moreover, [132] not only is there rampant copyright infringement of musical works occurring on Defendants' service in general, but there is direct undisputed evidence that Plaintiffs' copyrighted sound recordings have been distributed and downloaded in violation of their copyrights.^[5] First, Plaintiffs' evidence shows that both Plaintiffs' forensic investigators and Defendants' own former employees confirmed downloads of digital music files of Plaintiffs' sound recordings from Defendants' service. See Pls.' SUF 2. It is undisputed that Plaintiffs have not authorized the distribution or reproduction of their copyrighted works via Defendants' service. Pls.' SUF 3. Further, the record shows that at one time, Defendants' servers stored what has been termed "Usage Data," or "pre-existing records from Defendants' computer servers reflecting actual requests by Defendants' paid subscribers to download and upload digital music files using Defendants' service," which would have provided direct and irrefutable evidence of copyright infringement. See Sanctions Order at 5. Near the initial close of discovery in this case, Plaintiffs filed a motion for sanctions, contending that Defendants had deliberately destroyed this Usage Data, among other information, and that it would have provided direct evidence of widespread infringement of Plaintiffs' copyrighted sound recordings.^[6] Specifically, Plaintiffs alleged that on March 8, 2008, notwithstanding Defendants' obligations to preserve relevant and requested information, Defendant Reynolds personally and affirmatively disabled approximately 900 music-related newsgroups, which essentially destroyed or made unusable the Usage Data that Plaintiffs had requested.^[7] As a result, Judge Katz granted an adverse inference to establish the fact that copies of Plaintiffs' copyrighted sound recordings were actually transmitted from Defendants' computer servers to the personal computers of their subscribers. See Sanctions Order at 65-66, 68.

D. Defendants' Involvement in Infringement on Their Service

The record in this case is replete with instances of Defendants and their employees specifically engendering copyright infringement and targeting infringement-minded users to become subscribers of Defendants' service. First, Defendants' own former employees have testified that their marketing department specifically targeted young people familiar with other file-sharing programs and suggested they try Defendants' services "as a safe alternative to peer-to-peer file sharing programs that were getting shut down" due to copyright infringement lawsuits and resulting injunctions. See Pls.' SUF 8; see also [133] Pls.' SUF 9 (advertising Defendants' service as the best way to get "free" music now that "[f]ile sharing websites are getting shut down"); Pls.' SUF 10 (comparisons of Defendants' service to Kazaa, a formerly popular peer-to-peer service notorious for permitting exchange of copyrighted materials); Pls.' SUF 88a ("We understood that our marketing should be more targeted at persons interested in copyrighted entertainment media content.") (citing Declaration of Jolene Goldade ("Goldade Decl.") ¶ 8). Indeed, Defendants' promotional literature, created by marketing specialists at Reynolds's behest, stated that when Napster and Kazaa began to have problems from copyright owners' enforcement of their rights, "[t]his made the way for Usenet to get back in the game." Pls.' SUF 11; see also Pls.' SUF 12 (marketing specialist's statement that Defendants' service targeted "people who want to get free music, ilelgal [sic] or not"); Pls' SUF 108-109. Defendants' website also had pages devoted to certain popular recording artists and expressly promoted the availability of "FREE MUSIC" and mp3 files for download. Pls.' SUF 20-26, 29; Goldade Decl. ¶ 18. Defendants were aware that the downloading free music was, at the very least, a principal reason for a substantial portion of their subscribers' signing up for their service: their own consumer survey showed that 42% of responding subscribers identified downloading music files as a "primary" reason they used Defendants' service. Pls.' SUF 52; see also Pls.' SUF 53-55. Indeed, after Defendants disabled access to their music newsgroups in March 2008, they received hundreds of complaints and cancellations due to the unavailability of music content. Pls.' SUF 56.

Defendants also inserted "meta tags" into the source code for their website to attract internet traffic to their service. Horowitz Decl. ¶ 94; Pls.' SUF 13. Meta tags are not directly visible to a user who searches the internet; they are embedded in the source code of a website to increase the likelihood that the website will match a search that is run in a search-engine query. See Horowitz Decl. ¶ 94. Defendants inserted certain meta tags in their website's source code that increased the likelihood that their site would match searches for copyrighted content; for example, Defendants' meta tags included the term "warez," which is well-known internet slang for pirated content, and "kazaa," the name of a formerly popular file-sharing service. See id. ¶ 95.

Moreover, the record reflects numerous instances of Defendants' own employees explicitly acknowledging the availability of infringing uses through Defendants' service and using the service themselves to download Plaintiffs' copyrighted works. See, e.g., Pls.' SUF 16-18; see also Pls.' SUF 46-49, 78. Defendants' technical support staff even provided assistance to users seeking to download copyrighted material, and while employees did at times recite Defendants' official policy against assisting with potentially infringing conduct, they often went on to assist the subscriber in any event. See Pls.' SUF 30-35, 37-39a; Declaration of Charles S. Baker ("Baker Decl.") Ex. C; see also Pls.' SUF 79-80; Borud Decl. ¶ 10, Ex. 6. In addition, Defendants offered website tutorials on how to download content from www.usenet.com, using infringing musical works as illustrations. Pls.' SUF 81. Defendants also promoted the fact that users' uploading and downloading activities could not be tracked or monitored, and that unlike other "lower security" file-sharing programs like Napster and Kazaa, users would be able to conduct their infringing activities cloaked in anonymity. See Pls.' SUF 40-42, 44; Goldade Decl. ¶¶ 10-11. Based on this knowledge of, and participation in, widespread infringement, Defendants' own employees have [134] acknowledged that Defendants profit from availability of copyrighted material, including music, stored on their servers. See Pls.' SUF 61; Declaration of Matthew Borud ("Borud Decl."), Ex. 9.

E. Reynolds's Role in Defendants' Business

As director and sole shareholder of both Defendants UCI and Sierra, Reynolds's role is ubiquitous.^[8] Pls.' SUF 106-107. When asked about his role in the business, Reynolds replied "the company's me." Pls.' SUF 102. Moreover, other of Defendants' employees testified that they engaged in the business according to Reynolds's will and instructions, and that Reynolds was the individual responsible for the "overall strategic vision" of the business. Pls.' SUF 103-104. When asked in interrogatories to describe Reynolds's job responsibilities, Defendants responded that his responsibilities "included and continue to include virtually all aspects of Defendant's operations." Pls. SUF 105; see also Order dated June 16, 2009 at 5-7 ("June 16 Order") (noting Reynolds's "personal, active involvement" in the businesses of the corporate Defendants and describing Reynolds as "the driving force behind, and personally involved in, every act of spoliation found in the Court's [Sanctions Order]").

II. MOTION FOR TERMINATING SANCTIONS

A. Factual Background Relating to Spoliation of Evidence and Discovery Misconduct

As noted earlier, Defendants have once been sanctioned for spoliation of certain relevant and potentially highly incriminating data.^[9] However, upon the close of discovery and after having learned of certain even more egregious discovery violations, Plaintiffs filed their Terminating Sanctions Motion, this time seeking entry of a default judgment against Defendants based on widespread spoliation of evidence and gross discovery misconduct. Plaintiffs' motion catalogs numerous misdeeds on the parts of Defendants generally, and particularly by Reynolds.

Plaintiffs allege that despite numerous requests for production, "meet and confer" conferences, and correspondence between the parties regarding discovery requests, Defendants continually "stonewalled" discovery by failing to produce responsive documents or identify critical witnesses until after the initial discovery cutoff of October 15, 2008. See Declaration of Gianni P. Servodidio ("Servodidio Decl.") ¶¶ 10-12, 24, 37-38. Specifically, Plaintiffs demanded explanations for Defendants' failure to produce virtually any internal email communications, promotional website "essays," internal documents or reports, or documents relating to infringement by Defendants, their employees and subscribers. Servodidio Decl. ¶ 11, Exs. 11-14. Defendants' constant refrain was that they had produced all responsive documents. See id. Only upon deposing Defendants' former assistant newsmaster and email administrator, Jessica Heiberg, did Plaintiffs experience what they characterize as a "watershed moment" in the case. Heiberg's testimony confirmed that Defendants' [135] employees regularly used internal email for work-related matters, that a significant number of Defendants' employees stored their emails on their local computer hard drives, and that she had personally checked employees' work stations to ensure they were implementing proper email retention policies. See Deposition of Jessica Heiberg ("Heiberg Dep.") at 23:12-16, 27:15-29:21, 30:7-21, 34:4-11, 35:14-37:17, 39:5-9; 41:12-43:9. Heiberg also identified other key internal documents that Defendants had not produced, including "retention scripts" and reports reflecting Defendants' assessment of the most popular newsgroups available on its service. See id. at 100:14-16, 109:11-113:2, 116:18-117:10, 120:10-16.

1. The Seven "Wiped" Hard Drives

Based on the revelation of this new evidence, Plaintiffs promptly filed a motion to compel production of responsive documents stored on Defendants' employee hard drives, and requested an extension of the discovery period. A hearing was held before Magistrate Judge Katz on October 27, 2008 to address Plaintiffs' motion and Defendants' failure to produce discovery. At this hearing, Defendants' counsel acknowledged for the first time that he was in possession of seven computer hard drives that had belonged to Defendants' employees (the "Seven Hard Drives"). October 27, 2008 Hearing Transcript ("Oct. Tr.") at 13:9-22. Initially, Defendants conceded that four of the Seven Hard Drives had had their contents deleted or "wiped" and suggested they would produce documents from the remaining three drives. Id. at 11:30-12:11. Later, Defendants admitted that the remaining three drives had the majority of their contents deleted, as well. See Servodidio Decl. ¶ 20, Ex. 29. Defendants hired a forensic expert to examine the drives, and were able to extract approximately 300,000 file fragments from the remaining three drives. These files consisted largely of fragments of deleted files and were largely unusable; however, Plaintiffs' forensic expert's analysis revealed that the file fragments contained pieces of incriminating documents, including emails and word processing documents that had been stored on the hard drives. See Declaration of John Loveland ("Loveland Decl.") ¶¶ 8-9.

Over time, Defendants have proffered numerous explanations for the "wiping" of the hard drives. First, Defendants represented that the hard drives had been found in storage, and that they had been purchased blank on eBay and never used. See Oct. Tr. at 13:12-20, 17:3-5. Defendants later recanted this position and admitted that the Seven Hard Drives had all been pulled directly from the active workstations of Defendants' employees in June 2008, at the direction of Reynolds. See Servodidio Decl. ¶ 16, Ex. 25 (Defendants' letter dated 12/10/08); id., Ex. 3 (Reynolds Spoliation Deposition Transcript ("Spoliation Tr.") at 69:17-70:7). In opposing the Terminating Sanctions Motion, Defendants now espouse a different story—they now contend that the drives "would have appeared wiped" as a result of Defendants having upgraded all employee computers to the new Windows Vista operating system in early 2008. Analysis by Plaintiffs' forensic expert reveals that this explanation simply is not plausible. See Reply Declaration of John Loveland ("Loveland Reply Decl.") ¶¶ 5-7; Loveland Decl. ¶¶ 4, 6-7, 11. As Plaintiffs' expert explains, data that is simply deleted from a hard drive leaves traces on the hard drive; rather, to "wipe" a drive clean in this fashion requires running specific types of software that permanently eliminates the data and makes it irretrievable. See Loveland Decl. ¶¶ 10-11. Here, analysis of document [136] fragments indicates that the drives were deleted as late as June 2008. Loveland Decl. ¶¶ 4, 11. Plaintiffs allege that the user-generated data that had been wiped off these Seven Hard Drives, and not backed up on any central server, including emails and other internal documents, was voluminous and "undoubtedly would have been some of the incriminating evidence in this case."

In addition to the Seven Hard Drives that were purposefully wiped, the record evidence indicates that Defendants purposefully ensured that other of its work-issued computers became unavailable for production. For example, in March 2008, at the outset of discovery, Defendants terminated several key employees, including its chief technology officer Miro Stoichev and Jessica Heiberg and rather than preserving the data on their computers, Defendants allowed these and other terminated employees to take their computers with them, as "parting gifts." This was without making certain that the material was preserved. Indeed, Sierra had employed at least ten different individuals who did work relevant to UCI and its business since the commencement of this matter in October 2007. Some of the employees' desktop computers contained more than one hard drive; in all, some fifteen hard drives were either erased or are simply missing and were never produced to Plaintiffs. See Servodidio Decl. ¶ 18, Exs. 50, 26, 27, 35; Spoliation Dep. Tr. 44:12-18, 240:5-241:5; 350:24-352:1.

2. Alleged Spoliation of Email

As noted, throughout discovery Plaintiffs pressed Defendants about the absence from their document productions of internal emails. Defendants' rejoinder has been, and remains to this day, that they are a small company that did not use email frequently, and that all responsive emails had been produced. However, after the Heiberg deposition in October 2008, Defendants did produce some additional emails, many of which were allegedly produced from a central server. However, the production of these emails revealed significant and unexplained gaps in production, such as the absence of any email "mailboxes" for certain key former employees; the absence of any non-"spam" emails from the email mailbox of Miro Stoichev; the absence of any non-"spam" emails from IT Manager Brad Allison prior to November 13, 2007; the complete absence of emails prior to September 11, 2007 for Sierra's President Lesa Kraft; and the absence of emails from Heiberg for the last two months of her employment. See Servodidio Decl. ¶ 26. Moreover, although numerous employees were directed to create "gmail" accounts (i.e., email accounts available for free through Google) for work activities, Defendants produced no emails from those accounts.

3. "Workhorse" Server and Employee Workstations as "Light Terminals"

Defendants deny all allegations of spoliation, arguing that all of the documents on relevant hard drives—both "wiped" hard drives and drives on computers that employees were permitted to take with them upon termination—were backed up on a central server called "Workhorse." Thus, Defendants argue that the individual employees' workstation computers were merely "dummy" computers or "light stations" used only to access shared drives and not to save any user-generated documents to their local drives. However, Defendants themselves were able to "recover" over 300,000 file fragments from three of the Seven Hard Drives that contained traces of emails and word processing documents. Moreover, a review of the Workhorse server reveals that although some [137] relevant documents were apparently saved centrally, conspicuous gaps in the organization of the server indicates that not all documents created by Defendants' employees were saved there. For instance, documents from certain time periods are entirely missing; documents for key employees are missing; and the server contains only incomplete parts of certain employee email inboxes. Moreover, as Plaintiffs' expert testified, if all email mailboxes were backed up on a central server, the server could be expected to generate file structures for email accounts, including file folders such as "inbox," "sent mail," and "drafts," that approximate the employee's email mailbox as it would appear on his or her workstation; these file structures were simply missing from the scattershot emails that were stored on the Workhorse server. Loveland Reply Decl. ¶ 8.

4. Litigation Misconduct

In addition to these allegations of stonewalling and spoliation, Plaintiffs also allege that Defendants engaged in other misconduct to "pursue[] a clear strategy to prevent plaintiffs from discovering evidence demonstrating the true extent to which defendants fostered copyright infringement." First, Plaintiffs allege that at the time they began to serve third-party subpoenas, only five individuals were still employed by Sierra, other than Reynolds, all of whom were potentially significant witnesses. Plaintiffs allege that Defendants engineered these witnesses' unavailability during the height of discovery by causing them to travel to Europe on an expense-paid vacation to avoid being deposed. Defendants do not deny sending their employees out of the country during this critical period, but note that the employees returned from Europe in mid-August, a full two months before the end of the initial discovery period. However, Plaintiffs' information suggests that Defendants attempted to persuade the employees to remain out of the jurisdiction for a longer period, illustrating one more in what appears to be a series of bad faith tactics. Further, upon the employees' return, two of them—Leidholm and Richter—allegedly evaded service. See Declaration of Tony Snesko ¶¶ 5-9. Further, Reynolds, testifying as a Rule 30(b)(6) designee, provided misleading information concerning these witnesses' contact information and employment status. Plaintiffs allege that Defendants went to great lengths to shield former President Kraft from discovery by providing misleading information as to her employment and whereabouts. Although Ms. Kraft ultimately was deposed, Plaintiffs cite these actions as further evidence of bad faith.

In addition to witness misconduct, Plaintiffs also allege that Defendants knowingly served false responses to interrogatories. Specifically, Plaintiffs allege that Defendants never identified two employees—Ina Danova and Jolene Goldade—who together made up Sierra's marketing department, and who Plaintiffs later learned drafted incriminating promotional "essays," at Reynolds's request, touting the availability of free music for download on Defendants' service. Defendants' interrogatory responses expressly identified "a list of Sierra employees," which purported to include current and former employees of Sierra since its inception in the 1990s, yet the responses failed to identify Danova or Goldade. See Servodidio Decl. Exs. 26, 27.

Finally, Plaintiffs argue that Defendants violated two Court orders in an effort to conceal their widespread spoliation of evidence. Specifically, given the issues raised by the Heiberg deposition and the Seven Hard Drives, on December 22, 2008 Magistrate Judge Katz ordered Defendants to provide a detailed accounting of the wiping [138] of the data from the Seven Hard Drives, as well as the whereabouts of other hard drives that had belonged to former employees. See Servodidio Decl. Ex. 49. On January 8, 2009, Defendants served Plaintiffs with the Reynolds declaration in response to the December 22 Order that Plaintiffs contend was "so general and evasive as to be virtually meaningless." In particular, the Reynolds Declaration contained no information specifically identifying where in Defendants' production backups of employee hard drives could be found. See Servodidio Decl. Ex. 50. Plaintiffs raised Defendants' noncompliance with Magistrate Judge Katz, who issued a second order on February 22, 2009 ordering Defendants (1) to provide Plaintiffs with an affidavit setting forth precisely where in Defendants' production the contents of the missing hard drives could be found; and (2) to appear for a deposition prepared to give detailed testimony regarding specifically enumerated categories of information relating to the Seven Hard Drives and other missing employee computers. See Servodidio Decl. Ex. 52. Defendants did not comply with the February 22 Order. Reynolds submitted a second declaration, but even Defendants' counsel conceded that it did not specify the information that was expressly required to be disclosed. See Spoliation Dep. Tr. at 217:25-218:5. At the spoliation deposition, Reynolds also was repeatedly unprepared or unwilling to answer questions the Court had expressly directed be answered. E.g., id. at 87:17-91:23, 304:11-310:2.

B. Legal Standard

A district court has wide discretion to determine appropriate sanctions for discovery abuses under both Rule 37 of the Federal Rules of Civil Procedure and its inherent powers. Gutman v. Klein, No. 03 CV 1570(BMC)(RML), 2008 WL 4682208, at *11 (E.D.N.Y. Oct. 15, 2008). Rule 37 sanctions require a showing of violation of a court order. Daval Steel Prod. v. M/V Fakredine, 951 F.2d 1357, 1363 (2d Cir.1991). Sanctions under the court's inherent power require a showing of bad faith or willfulness. See DLC Mgmt. Corp. v. Town of Hyde Park, 163 F.3d 124, 136 (2d Cir.1998). When deciding a proper sanction, a court generally must consider, in light of the full record of the case, (a) willfulness or bad faith on the part of the noncompliant party; (b) the history, if any, of noncompliance; (c) the effectiveness of lesser sanctions; (d) whether the noncompliant party has been warned about the possibility of sanctions; (e) the client's complicity; and (f) prejudice to the moving party. Id. In the spoliation context, the court must also consider the "prophylactic, punitive and remedial rationales underlying the spoliation doctrine." West v. Goodyear Tire & Rubber Co., 167 F.3d 776, 779 (2d Cir.1999). Thus, the sanction should "(1) deter parties from engaging in spoliation; (2) place the risk of an erroneous judgment on the party who wrongfully created the risk; and (3) restore the prejudiced party to the same position he would have been in absent the wrongful destruction of evidence." Id.

Terminating sanctions are used "only in extreme circumstances, usually after consideration of alternative, less drastic sanctions." Id. However, "in this day of burgeoning, costly and protected litigation courts should not shrink from imposing harsh sanctions where they are clearly warranted." Jones v. Niagara Frontier Transp. Auth., 836 F.2d 731, 735 (2d Cir.1987); see also Cine Forty-Second Street Theatre Corp. v. Allied Artists Pictures Corp., 602 F.2d 1062, 1068-69 (2d Cir.1979) (dismissal is particularly appropriate when client, not counsel, is responsible for conduct leading to dismissal). Lesser sanctions have been found to be illsuited [139] to cases involving bad faith irretrievable spoliation of likely important documents. Gutman, 2008 WL 4682208 at *12 (imposing terminating sanctions when "it is impossible to know what plaintiffs would have found if defendants ... had complied with their discovery obligations," and especially when "the court has previously imposed lesser sanctions on the responsible party for other discovery misconduct"); Arista Records, LLC v. Tschirhart, 241 F.R.D. 462 (W.D.Tex.2006) ("One who anticipates that compliance with discovery rules and the resulting production of damning evidence will produce an adverse judgment, will not likely be deterred from destroying that decisive evidence by any sanction less than the adverse judgment she is tempted to thus evade."); Miller v. Time-Warner Commc'ns, Inc., No. 97 Civ. 7286, 1999 WL 739528 (S.D.N.Y. Sept.22, 1999).

C. Analysis

In this case, Plaintiffs have produced evidence of a wide range of discovery abuses that they contend warrant the harshest of available sanctions—the entry of a default judgment. While I agree that Plaintiffs' evidence credibly illustrates a pattern of destruction of critical evidence, a failure to preserve other relevant documents and communications, and at best dilatory (and at worst, bad-faith) tactics with respect to Defendants' conduct during discovery, I am not prepared to impose the ultimate sanction.

1. Spoliation of Evidence

The keystone of Plaintiffs' Terminating Sanctions Motion, and the most egregious misconduct alleged, is found in the "wiping" clean of the Seven Hard Drives that had belonged to Defendants' employees without backing up the data to a central server. To a lesser extent, Plaintiffs focus on the Defendants' failure to produce or preserve email communications, which Plaintiffs contend must have existed, based on the deposition testimony of Jessica Heiberg and the production of documents from the hard drive of Defendants' former employee, Matthew Borud.^[10] There can be no dispute that the Defendants were under an obligation to preserve all documents and communications stored on their employees' computers, at least as early as the start of this litigation. See In re Terrorist Bombings of U.S. Embassies in E. Africa v. Odeh, 552 F.3d 93, 148 (2d Cir. 2008) ("The obligation to preserve evidence arises when the party has notice that the evidence is relevant to litigation or when a party should have known that the evidence may be relevant to future litigation.") (citation omitted); Kronisch v. United States, 150 F.3d 112, 126 (2d Cir.1998); Stephen v. Hanley, 03-CV-6226(KAM)(LB), 2009 WL 1437613, at *3, 2009 U.S. Dist. LEXIS 42779, at *9 (E.D.N.Y. May 20, 2009). Indeed, it is likely that the preservation obligation arose much earlier than the initiation of this action, as Plaintiffs had sent several cease and desist letters months prior to filing their complaint. See Fox v. Riverdeep, Inc., 07 Civ. 13622, 2008 WL 5244297, at *7 (E.D.Mich. Dec.16, 2008) (imposing sanctions where defendant in copyright infringement action failed to preserve evidence, including email, after it [140] received plaintiff's cease and desist letter). Unlike the Usage Data and Digital Music Files that Magistrate Judge Katz considered in his Sanctions Order, the data alleged to have been despoiled here was not transitory in nature; rather, it was the sort of data—internal reports, email communication, and the like—that are clearly subject to a preservation obligation.

Once a court has determined that a party was under an obligation to preserve evidence that it destroyed, it must then consider whether the party acted with a sufficiently culpable state of mind to warrant the imposition of sanctions. See Fujitsu Ltd. v. Federal Express Corp., 247 F.3d 423, 436 (2d Cir.2001). "The degree of culpability bears on the severity of sanctions that are warranted. Severe sanctions for discovery violations, including dismissal, may be imposed for intentional conduct, such as bad faith or gross negligence." Reino De Espana v. American Bureau of Shipping, No. 03 Civ. 3573, 2007 WL 1686327, at *3 (S.D.N.Y. June 6, 2007). Plaintiffs contend that Defendants despoiled the Seven Hard Drives, removed computers used by other employees, and failed to preserve email communications, all in bad faith. Defendants have failed to come forward with a scintilla of credible evidence to support the disappearance of this likely relevant information or their allegations that all files were backed up on a central server. First, with respect to the Seven Hard Drives, Plaintiffs' forensic expert's testimony conclusively dispels Defendants' purported explanation that the drives were erased as a result of an upgrade to the Vista operating system early last year. The evidence reveals that, based on file fragments that were able to be extracted from some of the drives, the documents were in existence and had been accessed as late as June 2008, which is consistent with Reynolds's admission that he pulled the drives from employee workstations at about that time. Also, Loveland's testimony explains that complete and permanent evisceration of files from the drives would not have been accomplished by a simple operating system upgrade; rather, "wiping" documents permanently from a computer requires running specialized software.

Defendants argue that they did in fact send a copy of all documents to the central "Workhorse" server, and that the computers that were either deleted or taken from the company were merely "light stations" that contained no actual documents, but rather were used only to gain access to shared drives and servers. This explanation defies credibility for several reasons. First, Defendants' own forensic expert was able to extract 300,000 file fragments from three of the Seven Hard Drives, including fragments of emails and word processing documents. To make it plain, this clearly meant that at least those hard drives had contained, at one time, emails and documents that were saved to the local hard drive. This alone belies Defendants' "light station" theory. Second, former employee Matthew Borud, in response to a subpoena, produced hundreds of thousands of documents from the hard drive of his work-issued computer, including complete email mailboxes and internal documents. Finally, Plaintiffs' forensic expert provided credible evidence that illustrates that it is unlikely that the Workhorse server backed up all of Defendants' employees documents and emails. Specifically, there are numerous files that are missing for certain dates or key employees, and the email mailboxes do not contain the file structure that would be expected to exist if the mailboxes were saved automatically to the server.

Based on this evidence, it is clear that Defendants' "wiping" of the Seven Hard Drives was intentional and in bad faith, [141] and their failure to ensure that all documents —including emails, to the extent they existed—were preserved before intentionally disposing of employees' hard drives was at least grossly negligent. Here, where internal documents concerning, among other things, marketing plans, reports and assessments of the popularity of user newsgroups and communications with users are among the most critical in assessing Defendants' knowledge and fostering of, or material contribution to, copyright infringement, there can be no doubt but that the despoiled documents were highly relevant to this case. Moreover, when evidence is destroyed in bad faith or with gross negligence, that alone has been found to be sufficient to support an inference that the missing evidence would have been favorable to the prejudiced party, and thus relevant. See Residential Funding Corp. v. Degeorge Fin. Corp., 306 F.3d 99, 109 (2d Cir.2002).

2. Other Litigation Misconduct

Plaintiffs also point to several other instances of litigation conduct that, taken in context, adds to the air of wrongdoing surrounding Defendants' actions throughout discovery. As detailed above, the alleged misconduct includes sending potentially key witnesses to Europe to engineer their unavailability during the height of discovery and attempting to entice them to remain unavailable through the end of the discovery period; encouraging witnesses to evade process upon their return; providing evasive or false sworn responses to interrogatories; and violating not one but two orders of the Court requiring them to come forward with specific information regarding the despoiled computer evidence described in the preceding section. While I am of the opinion that none of these deeds would themselves suffice for the imposition of harsh sanctions, viewed in light of the whole of Defendants' conduct in this case, and especially in light of the fact that Defendants have once been sanctioned for bad-faith destruction of evidence, I find that these actions support a finding that some sanction for discovery abuse is warranted in this case.

3. Appropriate Sanction

Having determined that the imposition of sanctions is warranted in this case, the Court must next determine the appropriate remedy. As noted, tailoring an appropriate sanction lies within the sound discretion of the trial court, and is to be assessed on a case-by-case basis. West, 167 F.3d at 779-80; Fujitsu, 247 F.3d at 436. Plaintiffs argue that the misconduct is so pervasive and severe, and touches upon the core of Plaintiffs' case, that the only possible remedy is to strike Defendants' answer and enter a default judgment in favor of Plaintiffs. I cannot agree. While there is certainly strong evidence of extreme wrongdoing, courts must be wary of issuing case-dispositive sanctions; such sanctions "should be imposed only in extreme circumstances, usually after consideration of alternative, less drastic sanctions." West, 167 F.3d at 779. One such lesser sanction is to preclude the wrongdoer from litigating certain claims or defenses during the remainder of the case. See, e.g., American Stock Exch., LLC v. Mopex, Inc., 215 F.R.D. 87 (S.D.N.Y.2002) (adopting recommendation that plaintiffs' motion to preclude affirmative defense be granted due to discovery violations); see also Logan v. Gary Cmty. Sch. Corp., No. 2:07-CV-431-JVB-PRC, 2009 WL 187811, at *2, 2009 U.S. Dist. LEXIS 4784, at *6 (N.D.Ind. Jan. 23, 2009) (granting motion to strike affirmative defenses as sanction because defenses directly related to substance of discovery sought by plaintiff); Relectronic Service Corp. v. Kansas City Youth for Christ, No. 87-2247-O, 1988 [142] U.S. Dist. LEXIS 12238, at *3-4 (D.Kan. Oct. 14, 1988) (granting motion to preclude affirmative defense as sanction because defendant withheld discovery related to that defense).

In this case, Defendants rely in substantial measure on their apparent good-faith reasonable implementation of a non-infringement policy for its users. Indeed, Defendants' motion for summary judgment relies on its entitlement to protection under the safe harbor provisions of the DMCA. To show that it is entitled to such protection, Defendants must not have been aware of "red flags" indicating infringement on the part of their users. E.g., Perfect 10, Inc. v. CCBill LLC, 488 F.3d 1102, 1114 (9th Cir.2007) (finding a service provider may lose safe harbor protection "if it fails to take action with regard to infringing material when it is `aware of facts or circumstances from which infringing activity is apparent.'") (quoting 17 U.S.C. § 512(c)(1)(A)(ii)). Thus, if Defendants were aware of such red flags, or worse yet, if they encouraged or fostered such infringement, they would be ineligible for the DMCA's safe harbor provisions. The evidence that is alleged to have been destroyed or lost in this case would have been directly relevant to illustrate Defendants' state of mind in this regard. Moreover, Defendants' promotional marketing and advertising activities—accomplished almost exclusively through former employees Danova and Goldade, who were not identified in any of Defendants' sworn interrogatory responses—would have been highly relevant to Plaintiffs' allegations that Defendants specifically targeted and encouraged their users' infringement of copyrights, which would also disqualify Defendants from claiming safe harbor protections under the DMCA. More to the point, however, Defendants' bad faith spoliation of documents and other evasive discovery tactics have prevented Plaintiffs from ascertaining the extent to which they have been prejudiced with respect to their own claims or their arguments in opposition to Defendants' affirmative defense. See, e.g., Leon v. IDX Sys. Corp., 464 F.3d 951, 960 (9th Cir.2006). Accordingly, I find that the appropriate sanction in this case is to preclude Defendants from asserting their affirmative defense of protection under the DMCA's safe harbor provision. Because Defendants' motion for summary judgment is premised on their entitlement to such protection, that motion is mooted and will be dismissed.^[11]

III. PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT

Despite the widespread destruction of evidence, as well as other discovery misconduct and evasive tactics, that Defendants have perpetrated throughout discovery, Plaintiffs nonetheless contend that the record evidence—obtained mainly from third parties and their own investigations —provides overwhelming evidence of Defendants' direct infringement of Plaintiffs' copyrights and their complicity in the infringement of their subscribers, such that there is no genuine issue of material fact to be tried on any of Plaintiffs' claims. I turn now to these contentions and to the heart of the case, which centers on infringement of Plaintiffs' copyrighted material.

[143] A. Legal Standard on Motion for Summary Judgment

A motion for summary judgment must be granted if the moving party shows "there is no genuine issue as to any material fact" and it "is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). In considering a motion for summary judgment, the Court must view the evidence in the light most favorable to the non-moving party. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). Summary judgment should be granted "against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). In showing the existence of a genuine issue of material fact, "the non-moving party may not rely on mere conclusory allegations nor speculation," Golden Pac. Bancorp v. F.D.I.C., 375 F.3d 196, 200 (2d Cir.2004), nor can it rely on mere denials or unsupported alternative explanations of its conduct, see SEC v. Grotto, No. 05 Civ. 5880(GEL), 2006 WL 3025878, at *7 (S.D.N.Y. Oct.24, 2006). Rather, it "must come forward with evidence sufficient to allow a reasonable jury to find in [its] favor." Brown v. Henderson, 257 F.3d 246, 252 (2d Cir.2001); see also Fed. R.Civ.P. 56(e).

B. Admissibility of Certain Testimony and/or Evidence

Both parties have filed numerous motions to exclude certain witness testimony submitted in support of the cross-motions for summary judgment, as well as detailed and voluminous evidentiary objections. The Court must address these issues as a threshold matter before turning to the merits of Plaintiffs' motion for summary judgment. See Colon v. BIC USA, Inc., 199 F.Supp.2d 53, 68 (S.D.N.Y.2001) ("[T]he court must evaluate evidence for admissibility before it considers that evidence in ruling on a summary judgment motion.").

1. Testimony of Richard Waterman

Defendants' first challenge is to the admissibility of the proffered testimony of Plaintiffs' expert witness, Dr. Richard P. Waterman. As noted, in deciding whether a motion for summary judgment should be granted, a district court may consider only admissible evidence. See Major League Baseball, 542 F.3d at 309; Nora Beverages, Inc. v. Perrier Group of Am., Inc., 164 F.3d 736, 746 (2d Cir.1998). Thus, the Second Circuit has found that the district court should consider the admissibility of expert testimony in determining whether summary judgment is appropriate. See Raskin v. Wyatt Co., 125 F.3d 55, 66 (2d Cir.1997). In making this determination, "[t]he court performs the same role at the summary judgment phase as at trial." Id.

The admissibility of expert testimony is analyzed under Rule 702 of the Federal Rules of Evidence, which provides:

If scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education, may testify thereto in the form of an opinion or otherwise, if (1) the testimony is based upon sufficient facts or data, (2) the testimony is the product of reliable principles and methods, and (3) the witness has applied the principles and methods reliably to the facts of the case.

Fed.R.Evid. 702. The proponent of expert testimony bears the burden of establishing [144] by a preponderance of the evidence that Rule 702's requirements have been met. See, e.g., Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579, 593 n. 10, 113 S.Ct. 2786, 125 L.Ed.2d 469 (1993); United States v. Williams, 506 F.3d 151, 160 (2d Cir.2007). However, "the district court is the ultimate `gatekeeper.'" Williams, 506 F.3d at 160. Under Daubert and its progeny, the district court must perform this gate-keeping function to ensure that "any and all scientific testimony or evidence admitted is not only relevant, but reliable." Daubert, 509 U.S. at 589, 113 S.Ct. 2786.

District courts have wide discretion in determining whether proffered expert testimony is admissible. See Kumho Tire Co., Ltd. v. Carmichael, 526 U.S. 137, 152, 119 S.Ct. 1167, 143 L.Ed.2d 238 (1999); Berk v. St. Vincent's Hosp. & Med. Ctr., 380 F.Supp.2d 334, 351 (S.D.N.Y. 2005). The Second Circuit has set forth a three-part test for the admissibility of expert testimony under Rule 702, in which the court must determine (1) whether the witness is qualified to be an expert; (2) whether the opinion is based on reliable data and methodology; and (3) whether the expert's testimony on a particular issue will assist the trier of fact. See Nimely v. City of New York, 414 F.3d 381, 396-97 (2d Cir.2005). With respect to reliability, "the district court should consider the indicia of reliability identified in Rule 702, namely (1) that the testimony is grounded on sufficient facts or data; (2) that the testimony is the product of reliable principles and methods; and (3) that the witness has applied the principles and methods reliably to the facts of the case." Williams, 506 F.3d at 160 (internal quotation marks and citation omitted).

Here, Dr. Waterman's testimony is based on a statistical survey developed for the purpose of estimating the proportion of infringing content files available in certain music newsgroups on Defendants' service. Specifically, Dr. Waterman designed a protocol to draw a random sample of content files from a list of music newsgroups that had been disabled by Defendants' website Usenet.com, but that remained available on another service called Giganews.com.^[12] Dr. Waterman's protocol was implemented in two stages: first, files chosen by random sample were downloaded, and then the downloaded files were analyzed for their authorization status by copyright analyst Brad Newberg. See Waterman Decl. ¶¶ 7-9. After reviewing Newberg's classifications, Dr. Waterman concluded that over 94% of the content files available on the music newsgroups were either unauthorized or highly likely to have been unauthorized. Waterman Decl. ¶ 10-13. Defendants contend that Dr. Waterman's conclusion is unreliable and should be excluded because (1) the sampling frame was not representative of the universe of articles available on their service, (2) he improperly excluded text files and incomplete files from his analysis, and (3) categories of downloaded files are unreliable because they were created by Newberg, a hired attorney. Plaintiffs contend that, contrary to Defendants' view, the purpose of Dr. Waterman's survey was never to measure infringement on the USENET in general, but rather to estimate the volume of infringing content files in music newsgroups. Moreover, Plaintiffs argue that Dr. Waterman's exclusion of text files and incomplete files was consistent with the purpose of the survey—that is, to measure infringement volume in complete content files available [145] for download on Defendants' service, "because access to content is the crux of the service that defendants provide." Finally, Plaintiffs aver that Newberg's classifications were based on his extensive experience in copyright matters and were made in reliance on "multiple reliable public sources of information containing information on copyright ownership and distribution." Waterman Decl. Ex. 4 (Declaration of Brad Newberg) ¶ 5. Indeed, Plaintiffs correctly point out that such classifications have been found acceptable in other comparable copyright infringement actions. See Metro-Goldwyn-Mayer Studios, Inc. v. Grokster, Ltd., 454 F.Supp.2d 966, 985 (C.D.Cal.2006) (considering percentages of files classified as "infringing" or "highly likely to be infringing") ("Grokster II"); A & M Records, Inc. v. Napster, Inc., 114 F.Supp.2d 896, 903 n. 6 (N.D.Cal.2000) (noting files from statistical sample were confirmed infringing or classified as "likely to be copyrighted"). Considering the proffered evidence and the parties' contentions juxtaposed with Rule 702 and Daubert and its progeny, Plaintiffs have met their burden to prove that Dr. Waterman's testimony is reliable and relevant, and admissible for purposes of the instant motion. Thus, the Motion to Exclude Dr. Waterman's testimony is denied.

2. Testimony of Thomas Sehested and Bruce Ward

Defendants also seek to exclude the declarations of Thomas Sehested and Bruce Ward, principals of DtecNet Software and IP Intelligence, Inc., respectively, who Plaintiffs engaged as forensic investigators. Defendants argue that these declarants are fact witnesses whose identities and supporting documents were wrongfully concealed until the end of discovery under the work product immunity doctrine. Thus, Defendants contend that Plaintiffs have impermissibly used the work product privilege as "both a shield and a sword." Specifically, Defendants argue that Plaintiffs failed to identify Sehested and Ward in response to an interrogatory requesting the names of "all persons with knowledge regarding any monitoring by [Plaintiffs] or on [Plaintiffs'] behalf of the files uploaded, made available, searched for, copied, downloaded, or exchanged by [UCI]." See Baker Decl., Ex. A. Additionally, Defendants claim that Plaintiffs claimed privilege over the exhibits to the Ward and Sehested declarations —mainly downloads of Plaintiffs' copyrighted sound recordings that the declarants obtained on Defendants' service— only to submit them as evidence in support of their motion for summary judgment. Defendants also speculate that these specific documents, or parts thereof, were listed on Plaintiffs' privilege log, contending, for example, that the date of a particular document on the privilege log "coincide[] perfectly with the time period Sehested claims [the document attached to his Declaration] was created."

To the contrary, the record reflects that all of the actual downloads performed by Sehested and Ward were timely produced in discovery, and in fact Defendants deposed a representative of the Recording Industry Association of America ("RIAA"), Mark McDevitt, at length regarding Plaintiffs' investigation, and in particular examined McDevitt regarding those very downloads. Moreover, although Defendant now characterizes Sehested and Ward as "fact witnesses," the record is clear that Plaintiffs disclosed these two individuals as expert witnesses, without objection from Defendants. Plaintiffs made full and timely expert disclosures for the witnesses, and gave Defendants the opportunity to depose them, which Defendants declined. See Reply Declaration of Duane C. Pozza ("Pozza Reply Decl.") ¶¶ 16-17. The declarations [146] simply explain the technical processes surrounding the downloads that Plaintiffs produced in discovery. Finally, Plaintiffs aver that Defendants' speculation that the exhibits to the Sehested and Ward Declarations were preexisting documents listed on their privilege log is simply untrue; rather, these exhibits merely describe the actual downloads produced to Defendants in discovery, and all but one of the exhibits were created after the close of discovery in preparation of the declarations in support of summary judgment, and the remaining exhibit was timely disclosed with Plaintiffs' expert disclosures. For these reasons, Defendants' motion to exclude the Sehested and Ward Declarations is denied.

3. Other Miscellaneous Motions to Exclude and Evidentiary Objections

Plaintiffs have moved to exclude certain of Defendants' declarations submitted on these cross-motions for summary judgment, in whole or in part, because, inter alia, (1) certain witnesses' unavailability was engineered during discovery; (2) certain witnesses' testimony is improper opinion testimony by lay witnesses; (3) certain testimony is contradicted by the declarants' prior deposition testimony; and (4) certain testimony is contradicted by prior testimony of Defendants' designated Rule 30(b)(6) witness on the same topics. Both parties have also filed numerous objections to proffers of evidence by their opponents. In the interest of saving trees (an interest the parties apparently do not share), I will not rule on each motion individually. Rather, I assure the parties that I am fully capable of separating the wheat from the chaff, and will consider only the evidence— both testimony and exhibits—admissible on summary judgment.

C. Direct Infringement

Plaintiffs contend that Defendants' service directly infringes their copyrights by engaging in unauthorized distribution of copies of their musical works to subscribers who request them for download. "To establish a claim of copyright infringement, a plaintiff must establish (1) ownership of a valid copyright and (2) unauthorized copying or a violation of one of the other exclusive rights afforded copyright owners pursuant to the Copyright Act." Byrne v. British Broad. Corp., 132 F.Supp.2d 229, 232 (S.D.N.Y.2001) (citing Twin Peaks Prods. v. Publ'ns Int'l. Ltd., 996 F.2d 1366, 1372 (2d Cir.1993)). It is undisputed that Plaintiffs own the copyrights in the subject sound recordings, and Defendants have not raised any objections or facts to challenge the validity of those copyrights. See Pls.' SUF 1.^[13] It is likewise undisputed that Plaintiffs did not authorize the distribution or reproduction of any of their copyrighted works via Defendants' service. Pls.' SUF 3. The Court will therefore turn to the remaining question of whether Defendants' service directly distributes Plaintiffs' works in violation of the Copyright Act. See 17 U.S.C. § 106(3) (granting a copyright owner the exclusive right to "distribute copies ... of the copyrighted work to the public by sale or other transfer of ownership").

Plaintiffs contend that Defendants' delivery of copies of their copyrighted works by transmitting copies in response to subscribers' [147] requests to download a digital music file constitutes a "distribution" under the Copyright Act. In support of this position, Plaintiffs rely principally on the Supreme Court's ruling in New York Times Co., Inc. v. Tasini, 533 U.S. 483, 121 S.Ct. 2381, 150 L.Ed.2d 500 (2001). In that case, the defendants operated an online database from which users could download digital copies of newspaper articles on request. See id. at 498, 121 S.Ct. 2381. The Court found that it was "clear" that "by selling copies of the Articles through the NEXIS Database," the defendants "`distribute copies' of the Articles `to the public by sale'" in violation of the copyright owner's exclusive right of distribution. Id. In so holding, the majority implicitly rejected the dissenting Justices' conclusion that it was the users, not NEXIS, who were engaging in direct infringement. See id. at 518 & n. 14, 121 S.Ct. 2381 (Stevens, J., dissenting). Defendants correctly point out that the "focus" of the Court's opinion in Tasini was not an analysis of whether the service the defendants provided constituted a direct distribution; rather, the Court's analysis was premised primarily on whether the databases were entitled to a privilege under § 201(c) of the Copyright Act, which permits reproduction and distribution of, among other things, revisions of collective works. See generally id. at 499-506, 121 S.Ct. 2381. However, a finding of direct infringement of the right of distribution (and reproduction) was essential to the Court's opinion and holding—that is, without a finding of direct distribution and reproduction, there would have been no need for the § 201(c) privilege, because the databases would not have been engaged in direct infringement in the first instance. Thus, Plaintiffs are correct that Tasini indicates that the delivery of articles and/or content to download at the request of subscribers can be the basis of direct infringement of the distribution right.

However, Defendants cite the Second Circuit's decision in Cartoon Network LLLP v. CSC Holdings, Inc., 536 F.3d 121 (2d Cir.2008) ("Cablevision") for the proposition that direct infringement requires some volitional conduct on the part of the service provider, and where a service acts as a mere "passive conduit" for delivery of works requested by users, it cannot be liable for direct infringement as a matter of law. Plaintiffs urge that the court in Cablevision addressed only direct infringement of the exclusive rights of reproduction and public performance under sections 106(1) and 106(6) of the Copyright Act, and limited the "volitional conduct" requirement to the issues addressed in that case, and not to the exclusive right of distribution. I disagree. Although the particular circumstances before the court in Cablevision involved the exclusive rights not at issue here, the court made clear that "volitional conduct is an important element of direct liability." Id. at 131. There is nothing in the court's language or reasoning that convinces me that the Cablevision holding is as limited as Plaintiffs contend. The line of cases on which the Cablevision court relied—beginning with Religious Technology Center v. Netcom On-Line Communication Services, Inc., 907 F.Supp. 1361 (N.D.Cal.1995)—suggest that the volitional-conduct requirement should apply equally to all exclusive rights under the Copyright Act. See Cablevision, 536 F.3d at 131 (finding applicability of the volitional-conduct requirement "a particularly rational interpretation of § 106") (quoting CoStar Group, Inc. v. LoopNet, Inc., 373 F.3d 544, 551 (4th Cir.2004)). Contrary to Plaintiffs' contentions, this result is not foreclosed by the Supreme Court's holding in Tasini. Accordingly, I hold that a finding of direct infringement [148] of the right of distribution under § 106(3) of the Copyright Act requires a showing that Defendants engaged in some volitional conduct sufficient to show that they actively engaged in distribution of the copies of Plaintiffs' copyrighted sound recordings. Accord Playboy Enterprises, Inc. v. Russ Hardenburgh, Inc., 982 F.Supp. 503 (N.D.Ohio 1997) (volition required for direct infringement of distribution right); cf. CoStar, 373 F.3d 544 (volition required for direct infringement of any of § 106's exclusive rights); Parker v. Google, Inc., 242 Fed.Appx. 833 (3d Cir.2007); Netcom, 907 F.Supp. 1361 (volition required for infringement of exclusive rights of reproduction and public display).

The question then becomes, did the Defendants engage in such volitional conduct? Defendants argue that their service is akin to a "common carrier" that delivers requested articles to subscribers automatically without active involvement. Plaintiffs argue that even if volitional conduct is required, as I find it to be, the undisputed facts illustrate that Defendants engaged in such conduct. The holding in Playboy Enterprises, Inc. v. Russ Hardenburgh, Inc., 982 F.Supp. 503, is instructive in this regard. In that case, the district court granted summary judgment in favor of the plaintiffs on their claim of direct infringement of the distribution right, despite its agreement with the Netcom court that volitional conduct is required for a finding of direct infringement. In Playboy, the court found that the defendants (whose service consisted of an online bulletin board, not unlike the USENET, that provided access to downloadable articles and images) had a policy of encouraging subscribers to upload files and also used a screening policy that allowed employees to view files before they were uploaded and to move them to a generally available file for subscribers. Id. at 513. These two policies "transform[ed] Defendants from passive providers of a space in which infringing activities happened to occur to active participants in the process of copyright infringement." Id. Further, the undisputed facts in Playboy indicated that the quantity of copyrighted files available to customers increased the attractiveness of the service to customers, defendants actively encouraged subscribers to upload such files, defendants had control over which files were discarded and which were moved into the general system, and defendants knew there was a possibility that copyrighted photographs were being uploaded but failed to adopt procedures to ensure that such images would be discarded. Id. Under these circumstances, the court found that the defendants were liable for direct copyright infringement as a matter of law. Id.; see also Playboy Enters. v. Webbworld, Inc., 968 F.Supp. 1171, 1175 (rejecting defendant's argument that it was "nothing more than an information conduit" where "it [was] clear that [defendant's] function is not to provide Internet access, but rather to provide its subscribers with adult images which are contained in the storage devices of its computers").

Similarly, in this case, Defendants were well aware that digital music files were among the most popular articles on their service, and took active measures to create servers dedicated to mp3 files and to increase the retention times of newsgroups containing digital music files. See Pls.' SUF 94-96; see also Pls.' SUF 52 (42% of subscribers find digital music files the "primary" reason for subscribing to Defendants' service). Moreover, Defendants took active steps, including both automated filtering and human review, to remove access to certain categories of content, and to block certain users, see Pls.' SUF 69-70, and Defendants admit that they have control over which newsgroups their servers accept and store and which they reject, [149] and that they routinely exercised that control, Pls.' SUF 71. Under these circumstances, as in Playboy, Defendants' actions have "transform[ed] Defendants from passive providers of a space in which infringing activities happened to occur to active participants in the process of copyright infringement." 982 F.Supp. at 513. In other words, contrary to Defendants' contentions, here their service is not merely a "passive conduit" that facilitates the exchange of content between users who upload infringing content and users who download such content; rather, Defendants actively engaged in the process so as to satisfy the "volitional-conduct" requirement for direct infringement. Accordingly, Plaintiffs' motion for summary judgment on their claim for direct infringement of the exclusive right of distribution under 17 U.S.C. § 106(3) is granted.^[14]

D. Secondary Liability

In addition to their claim of direct infringement, Plaintiffs also move for summary judgment on their claims against Defendants for secondary liability based on their subscribers' direct infringement of the Plaintiffs' exclusive right of reproduction under § 106(1) of the Copyright Act. Specifically, Plaintiffs bring claims for (1) inducement of copyright infringement, (2) contributory copyright infringement and (3) vicarious copyright infringement.

For all three theories of secondary copyright infringement, there must be the direct infringement of a third party. See, e.g., Matthew Bender & Co. v. West Publ'g Co., 158 F.3d 693, 706 (2d Cir.1998). Defendants argue that Plaintiffs have failed to meet this threshold requirement because they have not established conclusively that their subscribers committed direct infringement of the works at issue. To the contrary, the undisputed facts establish that Defendants' subscribers have committed direct infringement of the Plaintiffs' exclusive right of reproduction by downloading copies of Plaintiffs' works from Defendants' service, thereby creating copies of the works on their computers without Plaintiffs' authorization. See Pls.' SUF 1-3. Plaintiffs submit uncontroverted evidence of unauthorized reproduction of their works from three different [150] sources. First, Plaintiffs were able to access a limited set of data from Defendants' server that Defendants did not destroy, which constitutes direct evidence of subscribers requesting to download Plaintiffs' copyrighted works. See Horowitz Dec. ¶ 97, Ex. S. Within Defendants' surviving Usage Data logs, Plaintiffs also identified articles containing copies of Plaintiffs' copyrighted works. See Sehested Decl. ¶ 11; Declaration of Mark McDevitt ¶ 2. Second, Defendants' former employees admitted to downloading certain of Plaintiffs' works from Defendants' service, and produced copies of those works to Plaintiffs. See Borud Decl. ¶ 34 & Ex. 49; Goldade Decl. ¶ 23 & Ex. 25.^[15] Finally, Plaintiffs submit direct evidence from their forensic investigators of downloads of Plaintiffs' copyrighted works from Defendants' service. See Sehested Decl. ¶¶ 5, 7, 9; Ward Decl. ¶¶ 5-7.^[16] Moreover, in the Sanctions Order, in response to Defendants' "bad faith" spoliation of Usage Data and Digital Music Files, Magistrate Judge Katz granted an adverse inference that "[e]ach of Plaintiffs' copyrighted works that has appeared in one of the disabled Music Groups has been transmitted from Defendants' computer servers to the personal computers of Defendants' subscribers." Sanctions Order at 68-69. Defendants have not presented any evidence to rebut this inference. Thus, Plaintiffs have established the threshold of users' direct infringement for their claims of secondary liability for copyright infringement.

1. Inducement of Infringement^[17]

In the recent case of Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd., 545 U.S. 913, 125 S.Ct. 2764, 162 L.Ed.2d 781 (2005) ("Grokster"), the Supreme Court enunciated what some have interpreted as a new theory of secondary copyright liability: inducement of infringement. See 3-12 [151] NIMMER ON COPYRIGHT § 12.04[A][3][b][ii]. The Grokster Court held that "one who distributes a device with the object of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement by third parties." 545 U.S. at 936-37, 125 S.Ct. 2764. The Court was careful to note that "mere knowledge of infringing potential or of actual infringing uses would not be enough here to subject a distributor to liability;" rather, "[t]he inducement rule... premises liability on purposeful, culpable expression and conduct, and thus does nothing to compromise legitimate commerce or discourage innovation having a lawful purpose." Id. at 937, 125 S.Ct. 2764. Several features about the defendants' service in Grokster led the Court to conclude that their unlawful objective was "unmistakable." See id. at 940, 125 S.Ct. 2764. First, the defendants "aimed to satisfy a known source of demand for copyright infringement, the market comprising former Napster users." Id. at 939, 125 S.Ct. 2764. Second, "this evidence ... [was] given added significance by [plaintiff's] showing that neither [defendant] attempted to develop filtering tools or other mechanisms to diminish the infringing activity using their software." Id. Finally, the evidence revealed that the defendants made substantial income from advertising, and that the defendants' business model relied on the existence of infringement. Id. at 939-40, 125 S.Ct. 2764, see also id. at 926, 125 S.Ct. 2764. The Court also noted that "[t]he classic instance of inducement is by advertisement or solicitation that broadcasts a message designed to stimulate others to commit violations." Id. at 937, 125 S.Ct. 2764.

On remand, the district court granted the plaintiffs' motion for summary judgment based on "overwhelming" evidence of unlawful intent. The district court considered a number of factors that, taken together, indicated the defendant had acted with intent to foster or induce infringement of its users. First, based on a statistical study based on a random sample, the plaintiffs presented evidence of massive infringement of their copyrighted content. Specifically, plaintiffs' expert testified that approximately 87% of the files offered for distribution on the defendant's network were infringing or highly likely to be infringing, and that almost 97% of the files actually requested for download were infringing or highly likely to be infringing. The court noted that "the staggering scale of infringement makes it more likely that [defendant] condoned illegal use, and provides the backdrop against which all of [defendant's] actions must be assessed." Grokster II, 454 F.Supp.2d at 985. Second, the district court noted that the defendant's "courting of the Napster community, which was notorious for copyright infringement, indicated an intent to foster infringement." Id. Third, the undisputed facts indicated that the defendant had provided users with technical assistance for playback of copyrighted content. Id. at 986. Fourth, the fact that the defendant had evaluated its system's functionality by its infringing capabilities evinced an intent for widespread infringing use. Id. at 987. Fifth, the evidence showed that the defendant knew its business model depended on the existence of massive infringement and that it had acted to grow its business accordingly. Id. at 989. Finally, the court found that the fact that the defendant had failed to prevent infringing uses, while not sufficient to establish liability on its own, "may be considered along with other circumstances in determining the defendant's motive." Id.

Here, the undisputed facts are equally compelling, and in many respects not dissimilar. Like in Grokster II, a statistical [152] survey based on random sampling methodology revealed that Defendants' service harbors massive amounts of infringement. To wit, Dr. Waterman's study concluded that over 94% of all content files offered in Defendants' music-related binary newsgroups were infringing or highly likely to be infringing. See Waterman Decl. ¶¶ 5, 12-13. As in Grokster II, this "staggering scale of infringement makes it more likely that [Defendants] condoned illegal use." 454 F.Supp.2d at 985. Moreover, also similarly to Grokster, the undisputed facts in this case indicate that Defendants openly and affirmatively sought to attract former users of other notorious file-sharing services such as Napster and Kazaa.^[18] See, e.g., Pls.' SUF 8, 12. Just as a for instance, in promotional essays, explaining how Napster and Kazaa were scrutinized and shut down for copyright infringement, Defendants boasted that "[t]his made way for Usenet to get back in the game." Pls.' SUF 11.^[19] Another sign that Defendants pursued infringement-minded users is their use of "meta tags" in the source code of their website, which embedded words such as "warez" (computer slang for pirated content) and "Kazaa" to ensure that a search on a search-engine for illegal content would return Defendants' website as a result. See Pls.' SUF 13-15; Horowitz Decl. ¶¶ 94-95.

Further, the record is replete with evidence of Defendants' own employees overtly acknowledging the infringing purpose for which their service was used, and advertising such uses on their website. For example, one employee commented that the tag line for Defendants' service should be "piracy, porno and pictures— Usenet," Pls.' SUF 16; another employee commented that "Usenet is full of Music and Movies so get your pirate on!," Pls.' SUF 17; after that employee received copies of several infringing albums downloaded by a co-worker, he clearly expressed his delight in Defendants' unlawful purpose in exclaiming "Bless the Usenet and all that it steals!" Pls.' SUF 18; see also Borud Decl., Ex. 2 at 419-20; id. at ¶ 10 & Ex. 3; Deposition of Matthew Borud ("Borud Dep.") at 343:1-344:7. Even more, the record reflects numerous instances when [153] Defendants' own employees acknowledged the availability of infringing uses through Defendants' service and used the service themselves to download Plaintiffs' copyrighted works. See, e.g., Pls.' SUF 16-18; see also Pls.' SUF 46-49, 78. Defendants' website also featured promotional materials advertising the service's infringing uses, including webpages advertising music files by popular recording artists, Pls.' SUF 20; webpages encouraging users to "[d]ownload thousands of FREE CD quality music files!," Pls.' SUF 21-22, 25; and advertisements for a specialized server dedicated to mp3's and groups containing sound and music files, Pls.' SUF 28. Additionally, Defendants' employees specifically provided technical assistance to users in obtaining copyrighted content, see Pls.' SUF 30-35, 37-39a; see also Pls.' SUF 79-80; Borud Decl. ¶ 10, Ex. 6, and provided website tutorials on how to download content, using infringing works as examples. See Pls.' SUF 81. Courts have taken this type of assistance into account in the secondary copyright infringement liability calculus. See Grokster, 545 U.S. at 926, 125 S.Ct. 2764 (finding that defendants "showing copyrighted [works] as examples" helped serve the purpose of "attract[ing] users of a mind to infringe"). Further, Defendants promoted the fact that file transmissions could not be monitored, and that unlike other "lower security" file-sharing programs like Napster and Kazaa, users could conduct infringing activities anonymously. See Pls.' SUF 40-42, 44; Goldade Decl. ¶¶ 10-11.

Other evidence reveals that, while Defendants had in place various tools and mechanisms that could be used to block access to infringing articles or newsgroups, Defendants never used them to limit copyright infringement on its servers. Indeed, Defendants did use this functionality to limit the downloading of questionable conduct, to block users from posting "spam" and to limit certain users' downloading speed, but they never used the same filtering capabilities to search for, limit or eliminate infringement on their service. See Pls.' 69-70, 72, 112. As in Grokster, Defendants did not even attempt to use "filtering tools or other mechanisms to diminish the infringing activity" on their service, 545 U.S. at 939, 125 S.Ct. 2764; worse yet, Defendants had developed such tools, but declined to use them when to do so would have harmed their business model and customer base. As Defendants well knew, infringing music content formed the backbone of their business model, serving as at least a "primary" reason for the subscriptions of approximately 42% of their subscribers. See Pls.' SUF 52. Indeed, when they disabled access to certain music groups in March 2008, there was an overwhelming number of complaints from users, and a substantial number of users even canceled their subscriptions to Defendants' servers. See Pls.' SUF 56. Further, Defendants' graded subscription payment plan ensures that users pay more the more they download, see Defs.' SUF 19, 38; Pls.' SUF 63-64; thus, when the musical content of a service is as overwhelmingly infringing as Defendants' service, it cannot be said that Defendants did not have the same "reliance on revenue from infringing use" as was found to be evidence of unlawful intent in Grokster II. See 454 F.Supp.2d at 988. Defendants' failure to exercise their clear ability to filter and limit infringement under such circumstances is strong circumstantial evidence of their intent to foster copyright infringement by their users.^[20]

[154] Defendants' primary arguments in opposition to Plaintiffs' inducement claim are based on their position that questions of intent and witness credibility are traditionally reserved for a jury. This is quite so, in the ordinary case; however, this is not the ordinary case. Indeed, the Supreme Court in Grokster all but explicitly instructed the district court to grant the plaintiffs' summary judgment motion, even where the central issue in an inducement claim is the defendant's intent to induce or foster infringement. See Grokster, 545 U.S. at 936-37, 125 S.Ct. 2764. Indeed, as the Second Circuit has acknowledged, "[t]he summary judgment rule would be rendered sterile ... if the mere incantation of intent or state of mind would operate as a talisman to defeat an otherwise valid motion." Meiri v. Dacon, 759 F.2d 989, 998 (2d Cir.1985). In addition, as noted earlier, "merely to assert that a witness may be lying, without any evidence to contradict the witness' testimony cannot defeat a motion for summary judgment." Fernandez, 312 F.Supp.2d at 378. Here, Defendants have submitted testimony denying wrongful intent; yet, the facts speak for themselves, and paint a clear picture of Defendants' intent to foster infringement by their users. See United States v. One Parcel of Prop., 985 F.2d 70, 73 (2d Cir. 1993) ("[C]aution normally exercised in granting summary judgment where state of mind is at issue ... is unnecessary ... where ... the claimed state of mind is so inconsistent with the uncontested facts."). Accordingly, based on the undisputed facts, I find that the Defendants' intent to induce or foster infringement by its users on its services was unmistakable, and no reasonable factfinder could conclude otherwise. Plaintiffs' motion for summary judgment on their claim for inducement of infringement is therefore granted.

2. Contributory Infringement

Contributory copyright infringement "is a form of secondary liability with roots in tort-law concepts of enterprise liability and imputed intent." Perfect 10, Inc. v. Visa Int'l Serv. Ass'n, 494 F.3d 788, 794-95 (9th Cir.2007), cert. denied, ___ U.S. ___, 128 S.Ct. 2871, 171 L.Ed.2d 811 (2008). A party is liable for contributory infringement if, "with knowledge of the infringing activity," it "induces, causes, or materially contributes to the infringing conduct of another." Gershwin Publ'g Corp. v. Columbia Artists Mgmt., Inc., 443 F.2d 1159, 1162 (2d Cir.1971). The requisite knowledge for contributory infringement liability may be actual or constructive. Faulkner v. Nat'l Geographic Soc'y, 211 F.Supp.2d 450, 474 (S.D.N.Y. 2002), aff'd, Faulkner v. Nat'l Geographic Enters. Inc., 409 F.3d 26 (2d Cir.2005); A & M Records, Inc. v. Napster, Inc., 239 F.3d 1004, 1020 (9th Cir.2001) ("Contributory liability requires that the secondary infringer `know or have reason to know' of direct infringement."). Turning a "blind eye" to infringement has also been found to be the equivalent of knowledge. Aimster, 334 F.3d at 650. Thus, knowledge of specific infringements is not required to support a finding of contributory infringement. See Arista Records, Inc. v. Flea World, Inc., No. 03-2670(JBS), 2006 WL 842883, at *14, 2006 U.S. Dist. LEXIS 14988, at *47-48 (D.N.J. Mar. 31, 2006).

[155] In this case, it is beyond peradventure that the Defendants knew or should have known of infringement by its users. Defendants' employees' own statements make clear that they were aware that Defendants' service was used primarily to obtain copyrighted material. See, e.g., Pls.' SUF 73; Goldade Decl. ¶ 9 ("[T]he widespread availability of ... copyrighted entertainment media on Sierra's [USENET] servers [was] obvious."); Heiberg Dep. 197:5-13 (employee "was aware the users of the Usenet.com service were downloading MP3s from the service" because "they told [her]" while she gave tech support). Indeed, employees acknowledged that Defendants' "primary audience" were "people who want to get free music, ilelgal [sic] or not," Pls.' SUF 19, and on many occasions, Defendants' users explicitly told Defendants' technical support employees that they were engaged in copyright infringement, see Pls.' SUF 79-80, 82. Reynolds also directed the marketing department of Sierra to create promotional "essays" to emphasize the availability of popular copyrighted content, and to entice former users of services such as Napster and Kazaa to try Defendants' service. See Pls.' SUF 77, 88a. Moreover, Defendants' employees themselves used Defendants' service to commit copyright infringement by downloading Plaintiffs' copyrighted sound recordings. Pls.' SUF 46-49. Additionally, Defendants were explicitly put on notice of the existence of thousands of copies of Plaintiffs' copyrighted sound recordings available on its service.

With respect to the "material contribution" prong, "the alleged contributory infringer must have made more than a mere quantitative contribution to the primary infringement: in other words, the participation or contribution must be substantial." Faulkner, 211 F.Supp.2d at 473 (internal quotation marks and citation omitted). This requirement has been found to be met where a defendant provides the "site and facilities" or the "environment and market" for infringing activity. See Fonovisa v. Cherry Auction, Inc., 76 F.3d 259, 264 (9th Cir.1996); see also Napster, 239 F.3d at 1022; Flea World, 2006 WL 842883 at *15, 2006 U.S. Dist. LEXIS 14988 at *51 (one "need only provide a central `hub' for infringing activity to materially contribute to infringement"). In this case, Defendants' servers are the sole instrumentality of their subscribers' infringement. Defendants operate over 30 different computers that store and distribute content. Pls' SUF 89. To use their service to download content, subscribers must connect to one of those servers; once connected, subscribers may search through newsgroups by header or they may run searches for particular desired works they wish to download. See Pls.' SUF 90-91. The user then transmits a request to download to Defendants' front-end servers, and the request is passed to another server (the "spool" server) that physically stores the content that the subscriber requested for download. Pls.' SUF 92; Defs.' SUF 28. Defendants also have created designated servers for newsgroups containing mp3 or music binary files so as to maximize the average retention time of those articles. See Pls.' SUF 93-96. Thus, it is beyond cavil that Defendants' service literally creates the "site and facilities" that their subscribers use to directly infringe copyrights.

In opposing summary judgment, Defendants do not address either the knowledge or material-contribution prongs of Plaintiffs' contributory infringement claim. Rather, they rely entirely on their assertion that the Supreme Court's holding in Sony Corp. of America v. Universal Studios, Inc., 464 U.S. 417, 104 S.Ct. 774, 78 L.Ed.2d 574 (1984), creates a complete [156] defense to contributory infringement liability where a product is "capable of substantial noninfringing uses." Id. at 442, 104 S.Ct. 774. In Sony, the Supreme Court considered whether the manufacturer of a VHS recorder device could be held liable for the infringing conduct of the end-user of the product. The court held that Sony was not liable where, in addition to infringing uses of which it was aware, the device was also capable of substantial noninfringing uses. See id. at 456, 104 S.Ct. 774. Defendants rely on this portion of the Court's holding, asserting that because their service is capable of substantial noninfringing uses, they cannot be held liable for contributory infringement as a matter of law. To be sure, there is no dispute that Defendants' service can be used for reasons other than reproduction and distribution of infringing music content. However, Defendants' argument rides roughshod over a critical part of the Supreme Court's reasoning in Sony. To wit, the Court noted that Sony's last meaningful contact with the product or the purchaser was at the point of purchase, after which it had no "ongoing relationship" with the product or its end-user. Id. at 438, 104 S.Ct. 774 ("The only contact between Sony and the users of the Betamax ... occurred at the moment of sale. ... [Sony had no] direct involvement with the allegedly infringing activity or direct contact with purchasers of Betamax who recorded copyrighted works off-the-air."). In this case, there is no dispute that Defendants maintain an ongoing relationship with their users; thus, Defendants' service is quite unlike Sony, where the defendants had no contact with the product or user once the device was released into the stream of commerce. As such, I find that the noninfringing uses for Defendants' service are immaterial, as Sony's insulation from contributory liability is inapplicable in this case. Accordingly, Plaintiffs' motion for summary judgment on their contributory copyright infringement claim is granted.

3. Vicarious Infringement

Finally, Plaintiffs contend Defendants are vicariously liable for their users' infringement. A defendant is liable for vicarious copyright infringement by "profiting from direct infringement while declining to exercise a right to stop or limit it." Grokster, 545 U.S. at 930, 125 S.Ct. 2764; see also Gershwin, 443 F.2d at 1162 ("[O]ne may be vicariously liable if he had the right and ability to supervise the infringing activity and also has a direct financial interest in such activities."). Thus, vicarious liability is premised wholly on direct financial benefit and the right and ability to control infringement; it does not include an element of knowledge or intent on the part of the vicarious infringer. See Ellison v. Robertson, 189 F.Supp.2d 1051, 1060 (C.D.Cal.2002), rev'd on other grounds, 357 F.3d 1072 (9th Cir. 2004).

Here, it is apparent from the record that Defendants earn a direct financial benefit from infringement. First, Defendants' revenues increased depending on their users' volume of downloads; thus, the greater the volume of downloads (the majority of which has been shown to be infringing), the greater the Defendants' income. See Pls.' SUF 63-65; see also Shapiro, Bernstein & Co. v. H.L. Green Co., 316, F.2d 304, 308 (2d Cir.1963) (finding defendant had definite financial interest from percentage commission based on record sales, regardless of whether the records sold were "bootleg" or legitimate). Moreover, infringing content certainly acts as "a draw" for users to subscribe to Defendants' service. Magistrate Judge Katz has granted an adverse inference that music files "constituted a substantial portion of the content previously available through [157] Defendants' service" and that music groups "acted as a draw to entice users to subscribe to Defendants' service." Sanctions Order at 59, 68-69. Indeed, Defendants' employees have acknowledged that Defendants profit from the availability of copyrighted material, including music, stored on their servers. See Pls.' SUF 61. Defendants argue that they lack direct financial benefit from infringement because they are paid on a per-volume, not per-download, basis and because infringing music accounts for less than 1% of the newsgroups available on their service. However, the law is clear that to constitute a direct financial benefit, the "draw" of infringement need not be the primary, or even a significant, draw—rather, it need only be "a" draw. E.g., Ellison, 357 F.3d at 1079 ("The essential aspect of the `direct financial benefit' inquiry is whether there is a causal relationship between the infringing activity and any financial benefit a defendant reaps, regardless of how substantial the benefit is in proportion to a defendant's overall profits."); Flea World, 2006 WL 842883, at *12, 2006 U.S. Dist. LEXIS 14988 at *41. On this record, there is no doubt that infringement constitutes a draw for users of Defendants' service.

Defendants have also failed to exercise their right and ability to stop or limit infringement on their service. In this regard, the Second Circuit has found that a defendant need not have "formal power to control" where a direct infringer "depend[s] upon [the defendant] for direction." Gershwin, 443 F.2d at 1163. Rather, "[t]he ability to block infringers' access to a particular environment for any reason whatsoever is evidence of the right and ability to supervise." Napster, 239 F.3d at 1023.^[21] Here, it is undisputed that Defendants expressly reserve the right, in their sole discretion, to terminate, suspend or restrict users' subscriptions, thereby limiting their access to uploading or downloading content to or from Defendants' servers. Pls.' SUF 68. Defendants have, in the past, exercised this right and ability to control their subscribers' actions by terminating or limiting access of subscribers who posted "spam," see Pls.' SUF 69; restricting download speeds for subscribers who downloaded what they considered a disproportionate volume of content, id.; and taking measures to restrict users from posting or downloading articles containing pornography, Pls. SUF 70. Defendants likewise have the right and ability to block access to articles stored on their own servers that contain infringing content, Pls.' SUF 72, but the record does not show any instance of Defendants exercising that right and ability to limit infringement by its users. More generally, Defendants have the right and ability to control which newsgroups to accept and maintain on their servers and which to reject, an ability they chose to exercise when they disabled access to approximately 900 music-related newsgroups in 2008. Pls.' SUF 88. Such unfettered ability to control access to newsgroups on the USENET has been found to be "total dominion" over the content of a provider's servers. See Playboy Enter., Inc. v. Webbworld, Inc., 991 F.Supp. 543, 552-53 (N.D.Tex.1997), aff'd without opinion, 168 F.3d 486 (5th Cir. 1999).

[158] As a primary defense to vicarious infringement liability, Defendants rely on the same defense under Sony's "staple article of commerce" doctrine as formed the basis of their defense to Plaintiffs' contributory infringement claim. Although Sony was a contributory infringement case, Defendants rely on the Court's dicta, in a footnote, in which the Court observed that "the line between direct infringement, contributory infringement and vicarious liability are not clearly drawn." Sony, 464 U.S. at 435 n. 17, 104 S.Ct. 774. That is, Defendants contend that Sony is best understood as a general limitation on secondary liability. In support, Defendants cite to the Aimster opinion, which noted in dicta that Sony treated contributory and vicarious liability interchangeably. 334 F.3d at 654. Other courts, however, have expressly found that Sony's holding bears no relation to vicarious liability. See Napster, 239 F.3d at 1022 ("Sony's `staple article of commerce' analysis has no application to Napster's potential liability for vicarious copyright infringement."). The Court need not resolve this apparently difficult question, as it has already been determined that Sony's "staple article of commerce" doctrine does not provide Defendants immunity, as they maintain an ongoing relationship with their users. Accordingly, because the undisputed facts illustrate that Defendants garnered a direct financial benefit from copyright infringement and failed to exercise their right and ability to control or limit infringement on their servers, Plaintiffs' motion for summary judgment on their claim for vicarious copyright infringement is granted.

E. Liability of Defendant Reynolds

As a last-ditch effort to avoid liability, Defendants contend that Plaintiffs have no evidence that Reynolds can be held liable for conduct that has been described only in broad terms referring to the "Defendants" in the collective. This argument cannot withstand scrutiny. It is well settled in this Circuit that "[a]ll persons and corporations who participate in, exercise control over, or benefit from the infringement are jointly and severally liable as copyright infringers." Sygma Photo News, Inc. v. High Society Magazine, Inc., 778 F.2d 89, 92 (2d Cir.1985) (citing Shapiro, 316 F.2d at 308-09). Here, the evidence bears out that Reynolds was personally responsible for a major share of Defendants' infringing activities; moreover, he was the moving force behind the entire business of both corporate Defendants. UCI has never had employees; rather, its business is carried out by Sierra's employees, all of whom (besides Reynolds) were terminated by August 2008. Reynolds is the director and sole shareholder of both companies, and he and other employees of Sierra have expressly admitted his ubiquitous role in the companies' activities. See, e.g., Pls.' SUF 102-05. Specifically, Reynolds was admittedly responsible for the "overall strategic vision" of the corporate defendants, Pls.' SUF 105, and former president of Sierra, Lesa Kraft, testified that she "ran the company as [Reynolds] requested," and "followed through with whatever he wanted, how he wanted it ran [sic]," Pls.' SUF 103; see also Pls.' SUF 115 ("[W]e aren't a publicly owned corp[oration]. We are running things how [Reynolds] ... would like things done."); see also June 16 Order at 5-7. Further, separate and apart from this general role, the evidence conclusively reveals that Reynolds was personally and intimately involved in many of the activities that form the basis of Defendants' copyright liability. For example, Reynolds directed the marketing department of Sierra to draft promotional "essays" to drive traffic to the Usenet.com [159] website and gave detailed instructions "to make sure everything [was] covered." Pls.' SUF 108-09. As discussed above, these promotional essays are among the multitude of evidence that shows Defendants' intent to foster infringement. Also, Reynolds had an active role in the corporate Defendants' technical operations, directing employees to block certain groups and filter certain conduct—though never issuing these imperatives, so far as the record shows, to limit the extent of copyright infringement on their service. See Pls.' SUF 112.

* * *

Accordingly, the record evidence reveals no genuine issue of material fact as to any of Plaintiffs' theories of direct or secondary liability for copyright infringement on the part of Defendants UCI and Reynolds. Plaintiffs are therefore entitled to summary judgment as a matter of law, and the only remaining question is the extent of Defendants' liability for damages.

IV. CONCLUSION

For the foregoing reasons, Plaintiffs' motion for sanctions is GRANTED to the extent discussed above. Plaintiffs' motion for summary judgment is also GRANTED. The Clerk of this Court shall close all open motions in this matter and enter judgment in favor of the Plaintiffs on all causes of action. The parties shall submit supplemental briefing of no more than ten (10) pages and proposed orders on the scope of permanent injunctive relief within twenty-one (21) days of the date of this Opinion and Order. By separate order of reference accompanying this Opinion, this matter shall be referred to Magistrate Judge Katz for a damage determination.

IT IS SO ORDERED.

[1] In an effort to avoid confusion based on the similarity between the name of Defendant Usenet.com, Inc. and the network to which it provides access, the latter will hereinafter be referred to as the "USENET," while Defendant Usenet.com, Inc. will hereinafter be referred to as "UCI."

[2] In their Amended Complaint, filed September 17, 2008, Plaintiffs alleged as a second cause of action direct infringement of their exclusive right of reproduction under 17 U.S.C. § 106(1). Based on the arguments that Plaintiffs have propounded on the instant motions and at oral argument, it appears that they have abandoned that claim, and their direct infringement claim is focused only on the distribution right.

[3] On May 21, 2009, Sierra filed a Suggestion of Bankruptcy in this matter advising the Court that it has filed a petition pursuant to chapter 7 of the Bankruptcy Code in the District of North Dakota. Pursuant to 11 U.S.C. § 362, an automatic stay is therefore in place with respect to Sierra, and it is not subject to the Court's Order and Opinion. For ease of reference, and because the majority of Plaintiffs' allegations are directed equally to all Defendants, this Opinion will, for the most part, refer to the "Defendants" in the collective. However, the Court is fully aware that no order shall affect the rights of Defendant-Debtor Sierra.

[4] Defendants have moved to exclude Dr. Waterman's testimony, arguing it is unreliable and irrelevant. As discussed in further detail below, Dr. Waterman's testimony is admissible on the instant motion for summary judgment. Additionally, Defendants have offered no facts to controvert the actual findings of Dr. Waterman's study.

[5] There is no dispute that Plaintiffs own or control the copyrights in sound recordings as detailed in the record. See Pls.' SUF 1 (citing testimony).

[6] Plaintiffs' allegation of spoliation of the Usage Data, as well as the alleged spoliation of "Digital Music Files," or the physical digital copies of the copyrighted sound recordings and related information hosted on Defendants' servers, was before Magistrate Judge Katz on Plaintiffs' first Motion for Sanctions, and formed the basis, in part, of Judge Katz's subsequent Sanctions Order granting certain adverse inferences as a result of the destruction of that evidence during discovery. These allegations of spoliation have been fully addressed on the first Motion for Sanctions, and are not before the Court on the Plaintiffs' instant Motion for Terminating Sanctions.

[7] Reynolds then personally selected 73 of the most popular music newsgroups that had been disabled and re-enabled them, but the Usage Data and Digital Music Files were essentially irretrievable. See Pls.' SUF 88b.

[8] Defendant UCI never had any employees; rather, the business was run by employees of Sierra. However, by the summer of 2008, Sierra had terminated all of its employees, and only Reynolds remained.

[9] As Judge Katz recently held, the Sanctions Order applied to all three Defendants, including Reynolds, who "was the driving force behind, and personally involved in" all acts of misconduct discussed in the Sanctions Order.

[10] In support of their Sanctions Motion, Plaintiffs also point to the alleged spoliation of certain pages of Defendants' website that contained highly incriminating information. However, I decline to consider these allegations, as they were squarely before Magistrate Judge Katz and formed at least part of the basis of his January 26, 2009 Sanctions Order. See Sanctions Order at 10-11, 47, 58-59. If indeed Defendants engaged in spoliation of this website evidence, it is not for me to count such conduct, egregious as it may be, against them twice.

[11] Pursuant to the automatic stay against Sierra, this holding applies only to UCI and Reynolds. To the extent Defendants appear to argue that a ruling on the instant motion should be stayed because all of the alleged misconduct, if it occurred at all, was at the hands of Sierra, such argument is rejected. As the foregoing discussion makes clear, Sierra employees in general, and Reynolds in particular, undertook all of the referenced actions to further UCI's service, which service comprises the heart of Plaintiffs' case.

[12] Plaintiffs contend that because the content in the same music newsgroup could be expected to be substantially the same, Dr. Waterman was able to draw conclusions about the level of infringement on Defendants' service using music newsgroups on Giganews.com. See Waterman Decl. ¶ 7; Horowitz Decl. ¶ 48 n. 12.

[13] In response to Plaintiffs' statement of undisputed fact as to their ownership or control of the copyrights to the subject sound recordings, Defendants' only response is that they are "[u]nable to dispute or confirm at this time." Thus, the fact has not been properly disputed and will be deemed admitted for purposes of this motion. See Local Rule 56.1(c) (each fact "will be deemed admitted for purposes of the motion unless specifically controverted").

[14] Defendants also propound several other arguments in opposition to summary judgment on the direct infringement claim, none of which has merit. First, they contend that because their subscribers pay fees based on volume, instead of on a per-article basis, any distribution of articles is not a "sale" under the Copyright Act. Yet, Defendants cite no authority for the position that a per-download payment is required to constitute a sale. See Playboy, 982 F.Supp. at 505-06 (bulletin board service liable for direct infringement even where service charged volume-based subscription). Second, Defendants argue they cannot be directly liable because, as they do not own the rights to articles posted on their system, they cannot effectuate a "transfer" under the Copyright Act. Defendants' argument illustrates a basic misunderstanding of the distribution right under § 106(3). As amazing as it may seem, Defendants misquote the language of the Act—it does not define a distribution as a "transfer of ownership rights," as Defendants contend, but rather a "transfer of ownership" of copies. See 17 U.S.C. § 106(3). The Act itself makes clear that ownership of a copy and ownership of copyright are two entirely separate concepts. See 17 U.S.C. § 202 ("Ownership of a copyright, or of any of the exclusive rights under a copyright, is distinct from ownership of any material object in which the work is embodied."); see also 3-10 NIMMER ON COPYRIGHT § 10.09 (2009). Thus, ownership of copies of digital music files is transferred from Defendants (who own the copies stored on their servers) to subscribers who download the copies. Finally, Defendants argue that direct liability cannot be premised on making unauthorized copies available. This argument is a red herring, as Plaintiffs have not premised their direct infringement claim on the "making available" theory.

[15] Defendants argue that there are issues of material fact on Plaintiffs claims because they assert that these declarants' testimony is not credible. However, "[m]erely to assert that a witness may be lying, without any evidence to contradict the witness' testimony cannot defeat a motion for summary judgment." Fernandez v. China Ocean Shipping, (Group) Co., 312 F.Supp.2d 369, 378 (E.D.N.Y.2003).

[16] Defendants' argument that these downloads are not proof of unauthorized copying because Plaintiffs had "authorized" the downloads by their investigators is without merit. Courts routinely base findings of infringement on the actions of plaintiffs' investigators. See, e.g., U2 Home Entm't, Inc. v. Fu Shun Wang, 482 F.Supp.2d 314, 317-18 (E.D.N.Y.2007) (infringement liability based on rentals of copyright works to plaintiffs' investigator); see also Microsoft Corp. v. Rechanik, 249 Fed. Appx. 476, 478 (7th Cir.2007); Olan Mills, Inc. v. Linn Photo Co., 23 F.3d 1345, 1347-48 (8th Cir.1994); Capitol Records, Inc. v. Thomas, 579 F.Supp.2d 1210, 1215 (D.Minn.2008); Atlantic Recording Corp. v. Howell, 554 F.Supp.2d 976, 978 (D.Ariz.2008).

[17] Plaintiffs have stated their theories of inducement and contributory copyright infringement as two separate causes of action. While Defendants have raised no objection to Plaintiffs' articulation of their claims, it is worth noting that several courts recently have expressed doubt as to whether inducement of infringement states a separate claim for relief, or rather whether it is a species of contributory infringement. See, e.g., KBL Corp. v. Arnouts, 08 Civ. 4873(JGK), ___ F.Supp.2d ___, ___ & n. 5, 2009 WL 302060, at *8 & n. 5, 2009 U.S. Dist. LEXIS 9192, at *27-29 & n. 5 (S.D.N.Y. Feb. 2, 2009) (finding inducement claim cannot exist separately from claim for contributory infringement). However, as one court put it, "[i]t is immaterial whether the [inducement] theory of liability is a subspecies of contributory ... liability, or whether it is a wholly separate theory based on inducement. The question is whether it applies to defendants in this case." In re Napster, Inc. Copyright Litig., 2006 WL 1348555, 2006 U.S. Dist. LEXIS 30338, at *31 (N.D.Cal. May 17, 2006). For the sake of clarity, I will address the inducement and contributory theories of secondary liability separately in the same way in which the parties briefed the issues.

[18] Importantly, Defendants admit in their opposition to summary judgment that they advertised their service as better than Morpheus (Grokster's file-sharing program) and Kazaa, but they argue that they did so only to promote the service generally, and not with a mind specifically to attract infringement-minded users. As discussed in detail in this opinion, this disavowal of intent is belied by the undisputed facts.

[19] Defendants' contention that they cannot be held liable for the actions of "rogue employees" in creating these promotional essays cannot withstand scrutiny. Indeed, as this Court recently has held, "[k]knowledge and actions of a corporation's employees and agents are generally imputed to the corporation where the acts are performed on behalf of the corporation and are within the scope of their authority." UCAR Int'l, Inc. v. Union Carbide Corp., No. 00 CV 1338(GBD), 2004 WL 137073, at *13 (S.D.N.Y. Jan.26, 2004); see also United States v. Koppers Co., Inc., 652 F.2d 290, 298 (2d Cir.1981) (finding employee or agent need not be high-ranking for knowledge and actions to be imputed to corporation if employee was acting within the scope of his responsibilities). Here, it is undisputed that Defendants' marketing department—namely, former employees Danova and Goldade— drafted the "essays" that promoted Defendants' server as a new replacement for Napster and similar file-sharing programs, and that they created these essays at the direction of Reynolds, who provided outlines of the topics to be addressed in the essays. Accordingly, the marketing department employees demonstrably were acting within the scope of their responsibilities, and Defendants cannot disclaim knowledge or responsibilities for acts they committed in furtherance of Defendants' collective goal to attract infringement-minded users to their service.

[20] Defendants attempt to thwart this conclusion by contending they had actually implemented measures to reduce infringement by, for example, requiring subscribers to comply with copyright laws and forbidding their technical support staff to assist with infringement. See Defendants' Responses to Pls.' SUF ("RSUF") 30-36, 66-68, 102; Defs.' SUF 19-22. However, actions speak louder than words. While the facts do reveal that Defendants at times paid lip service to their obligations under the copyright law not to allow or foster infringement by their users, the facts indicate that they indeed violated their own policies by engaging in the very conduct those policies prohibited.

[21] Further, courts have disapproved of defendants' arguments that to monitor and control infringement on their own premises or systems is too burdensome. See, e.g., Flea World, 2006 WL 842883, at *11, 2006 U.S. Dist. LEXIS 14988 at *37 ("If ... growth outpaced Defendants' ability to monitor and control what happens on their own premises ..., then they should have reduced the size and scope of their operations or hired more security to meet their obligations, or both.").

239 F.3d 1004 (2001)

Nos. 00-16401, 00-16403.

Argued and Submitted October 2, 2000.
Filed February 12, 2001.
As Amended April 3, 2001.

[1005] [1006] [1007] [1008] [1009] David Boies, Jonathan Schiller and Robert Silver, Boies, Schiller & Flexner, Armonk, New York, Laurence F. Pulgram, David L. Hayes, Daniel Johnson, Jr. and Darryl M. Woo, Fenwick & West, Palo Alto, California, for the defendant-appellant.

Russell J. Frackman (argued), George M. Borkowski, Jeffrey D. Goldman, Roy L. Shults, and Peter B. Gelblum, Mitchell Silberberg & Knupp LLP, Los Angeles, CA, Leon P. Gold, Hank Goldsmith, Lawrence I. Weinstein, Frank P. Scibilia, Proskauer Rose LLP, New York, New York, Steven B. Fabrizio, Recording Industry Ass'n of America, Inc., Washington, DC, for A & M Records, Inc. Plaintiffs-Appellees.

Carey R. Ramos(argued), Aidan Synnott, Michael C. Keats, Lewis E. Farberman, Paul Weiss, Rifkind Wharton & Garrison, New York, New York, Jeffrey G. Knowles, Keith Evans-Orville, Julia D. Greer, Coblentz, Patch, Duffy & Bass LLP, San Francisco, California, for Leiber plaintiffs-appellees.

Hannah Bentley, San Anselmo, California, for amicus Casanova Records.

Andrew P. Bridges, Wilson, Sonsini, Goodrich & Rosati, Palo Alto, California, for amicus Digital Media Association.

Bruce G. Joseph, Thomas W. Kirby, and Scott E. Bain, Wiley, Rein & Fielding, Washington, D.C., for amici Ad Hoc Copyright Coalition; Commercial Internet Exchange; Computer & Communications Industry Association; Information Technology Association of America; Netcoalition.com; United States Internet Industry Association, and United States Telecommunications Association.

Scott R. McIntosh, Civil Division, Department of Justice, Washington, D.C., for amicus United States.

Ann Brick, San Francisco, California, for amici American Civil Liberties Union and the American Civil Liberties Union of Northern California.

Judith B. Jennison, Perkins Coie, San Francisco, California, for amicus Scour, Inc.

Ralph Oman, Dechert, Price & Rhoads, Washington, D.C., as amicus.

Christopher Tayback, Quinn, Emanuel, Urquhart, Oliver & Hedges, Los Angeles, California, for amicus National Academy of Recording Arts & Sciences.

[1010] E. Edward Bruce, Covington & Burling, Washington, D.C., for amicus Business Software Alliance.

Kevin T. Baine, Williams & Connolly, Washington, D.C., for amici Motion Picture Association of America, Inc., Software & Information Industry Association, American Film Marketing Association, Association of American Publishers, American Society of Media Photographers, Professional Photographers Association, Graphic Artists Guild, Interactive Digital Software Association, American Society of Composers, Authors and Publishers, Broadcast Music, Inc., Producers Guild of America, Directors Guild of America, Inc., Writers Guild of America, West, Inc., American Federation of Musicians of the United States and Canada, Reed Elsevier, Inc., American Federation of Television and Radio Artists, Office of the Commissioner of Baseball, Songwriters Guild of America, and AmSong, Inc.; Joel M. Litvin, New York, New York, for amicus National Basketball Association.

Salvatore A. Romano, Seyfarth, Shaw, Washington, D.C., for amici National Association of Recording Merchandisers, Inc. and Video Software Dealers Association.

Erwin Chemerinsky, University of Southern California School of Law, Los Angeles, California, for amicus Law Professors Erwin Chemerinsky, Kenneth L. Karst, Steven Shiffrin, Rodney A. Smolla and Marcy Strauss.

Barry I. Slotnick, Richards & O'Neil, New York, New York, for amicus Association for Independent Music.

Morton David Goldberg, Cowan, Liebowitz & Latman, New York, New York, for amici Alliance Entertainment Corp., Audible Inc., Blue Spike, Inc., The Clandestine Group, Inc., Digimarc Corporation, Digital Media on Demand, Inc., FullAudio Corporation, InterTrust Technologies Corporation, Oak Technology, Inc., Reciprocal, Inc., RioPort, Inc., RPK SecureMedia Inc., Verance Corporation, and VNU USA, Inc.

Richie T. Thomas, Squire, Sanders & Dempsey, Washington, D.C., for amici Consumer Electronics Association, Digital Future Coalition, and Computer & Communications Industry Association.

Karen B. Tripp, Houston, Texas, for amici Association of American Physicians & Surgeons, Inc. and Eagle Forum Education and Legal Defense Fund.

Professor Jessica Litman, Wayne State University Law School, Detroit, Michigan; Professor Keith Aoki, University of Oregon School of Law; Professor Ann Bartow, University of South Carolina School of Law; Professor Dan Burk, University of Minnesota; Professor Julie Cohen, Georgetown University School of Law; Professors Christine Haight Farley and Peter Jaszi, Washington College of Law, American University; Professor Lydia Pallas Loren, Lewis and Clark College Northwestern School of Law; Professor Pamela Samuelson, Boalt Hall School of Law, University of California Berkeley; Professor Shubha Ghosh, University at Buffalo, SUNY; Professors Paul J. Heald, Allen Post Professor of Law, L. Ray Patterson, Pope Brock Professor of Law, and Laura N. Gasaway, University of Georgia School of Law; Professor Michael Madison, University of Pittsburgh School of Law; Professor Ruth Okediji, University of Oklahoma Law School; Alfred C. Yen, Associate Dean for Academic Affairs and Professor of Law, Boston College Law School; Professor Diame Zimmerman, New York University School of Law, and Professor Dennis Karjala, Arizona State University College of Law, for amicus Copyright Law Professors.

Before: MARY M. SCHROEDER, Chief Judge, ROBERT R. BEEZER and RICHARD A. PAEZ, Circuit Judges.

Argued and Submitted October 2, 2000. — San Francisco, California

ORDER AND AMENDED OPINION

The Opinion filed February 12, 2001 in this appeal is amended as follows:

Slip opinion at 2196, lines 4-6 — delete the see generally citation to "Copyright Infringement Issues on the Internet" and insert: "see generally 3 Melville B. Nimmer & David Nimmer, Nimmer On Copyright §§ 12.04[A][2] & [A][2][b] (2000) (confining Sony to contributory infringement analysis: "Contributory infringement itself is of two types — personal conduct that forms part of or furthers the infringement and contribution of machinery or goods that provide the means to infringe")."

Slip opinion at 2203, first full paragraph, lines 1-2 — insert "not" between "Napster argues that the district court erred in" and "finding that . . ."

Slip opinion at 2204, last paragraph, line 5 — delete "911 F.2d 970 at 976-77" and insert "911 F.2d at 976-77"

BEEZER, Circuit Judge:

Plaintiffs are engaged in the commercial recording, distribution and sale of copyrighted [1011] musical compositions and sound recordings. The complaint alleges that Napster, Inc. ("Napster") is a contributory and vicarious copyright infringer. On July 26, 2000, the district court granted plaintiffs' motion for a preliminary injunction. The injunction was slightly modified by written opinion on August 10, 2000. A & M Records, Inc. v. Napster, Inc., 114 F.Supp.2d 896 (N.D.Cal.2000). The district court preliminarily enjoined Napster "from engaging in, or facilitating others in copying, downloading, uploading, transmitting, or distributing plaintiffs' copyrighted musical compositions and sound recordings, protected by either federal or state law, without express permission of the rights owner." Id. at 927. Federal Rule of Civil Procedure 65(c) requires successful plaintiffs to post a bond for damages incurred by the enjoined party in the event that the injunction was wrongfully issued. The district court set bond in this case at $5 million.

We entered a temporary stay of the preliminary injunction pending resolution of this appeal. We have jurisdiction pursuant to 28 U.S.C. § 1292(a)(1). We affirm in part, reverse in part and remand.

I

We have examined the papers submitted in support of and in response to the injunction application and it appears that Napster has designed and operates a system which permits the transmission and retention of sound recordings employing digital technology.

In 1987, the Moving Picture Experts Group set a standard file format for the storage of audio recordings in a digital format called MPEG-3, abbreviated as "MP3." Digital MP3 files are created through a process colloquially called "ripping." Ripping software allows a computer owner to copy an audio compact disk ("audio CD") directly onto a computer's hard drive by compressing the audio information on the CD into the MP3 format. The MP3's compressed format allows for rapid transmission of digital audio files from one computer to another by electronic mail or any other file transfer protocol.

Napster facilitates the transmission of MP3 files between and among its users. Through a process commonly called "peer-to-peer" file sharing, Napster allows its users to: (1) make MP3 music files stored on individual computer hard drives available for copying by other Napster users; (2) search for MP3 music files stored on other users' computers; and (3) transfer exact copies of the contents of other users' MP3 files from one computer to another via the Internet. These functions are made possible by Napster's MusicShare software, available free of charge from Napster's Internet site, and Napster's network servers and server-side software. Napster provides technical support for the indexing and searching of MP3 files, as well as for its other functions, including a "chat room," where users can meet to discuss music, and a directory where participating artists can provide information about their music.

A. Accessing the System

In order to copy MP3 files through the Napster system, a user must first access Napster's Internet site and download^[1] the MusicShare software to his individual computer. See http://www.Napster.com. Once the software is installed, the user can access the Napster system. A first-time user is required to register with the Napster system by creating a "user name" and password.

B. Listing Available Files

If a registered user wants to list available files stored in his computer's hard drive on Napster for others to access, he [1012] must first create a "user library" directory on his computer's hard drive. The user then saves his MP3 files in the library directory, using self-designated file names. He next must log into the Napster system using his user name and password. His MusicShare software then searches his user library and verifies that the available files are properly formatted. If in the correct MP3 format, the names of the MP3 files will be uploaded from the user's computer to the Napster servers. The content of the MP3 files remains stored in the user's computer.

Once uploaded to the Napster servers, the user's MP3 file names are stored in a server-side "library" under the user's name and become part of a "collective directory" of files available for transfer during the time the user is logged onto the Napster system. The collective directory is fluid; it tracks users who are connected in real time, displaying only file names that are immediately accessible.

C. Searching For Available Files

Napster allows a user to locate other users' MP3 files in two ways: through Napster's search function and through its "hotlist" function.

Software located on the Napster servers maintains a "search index" of Napster's collective directory. To search the files available from Napster users currently connected to the network servers, the individual user accesses a form in the MusicShare software stored in his computer and enters either the name of a song or an artist as the object of the search. The form is then transmitted to a Napster server and automatically compared to the MP3 file names listed in the server's search index. Napster's server compiles a list of all MP3 file names pulled from the search index which include the same search terms entered on the search form and transmits the list to the searching user. The Napster server does not search the contents of any MP3 file; rather, the search is limited to "a text search of the file names indexed in a particular cluster. Those file names may contain typographical errors or otherwise inaccurate descriptions of the content of the files since they are designated by other users." Napster, 114 F.Supp.2d at 906.

To use the "hotlist" function, the Napster user creates a list of other users' names from whom he has obtained MP3 files in the past. When logged onto Napster's servers, the system alerts the user if any user on his list (a "hotlisted user") is also logged onto the system. If so, the user can access an index of all MP3 file names in a particular hotlisted user's library and request a file in the library by selecting the file name. The contents of the hotlisted user's MP3 file are not stored on the Napster system.

D. Transferring Copies of an MP3 file

To transfer a copy of the contents of a requested MP3 file, the Napster server software obtains the Internet address of the requesting user and the Internet address of the "host user" (the user with the available files). See generally Brookfield Communications, Inc. v. West Coast Entm't Corp., 174 F.3d 1036, 1044 (9th Cir.1999) (describing, in detail, the structure of the Internet). The Napster servers then communicate the host user's Internet address to the requesting user. The requesting user's computer uses this information to establish a connection with the host user and downloads a copy of the contents of the MP3 file from one computer to the other over the Internet, "peer-to-peer." A downloaded MP3 file can be played directly from the user's hard drive using Napster's MusicShare program or other software. The file may also be transferred back onto an audio CD if the user has access to equipment designed for that purpose. In both cases, the quality of the original sound recording is slightly diminished by transfer to the MP3 format.

This architecture is described in some detail to promote an understanding of transmission mechanics as opposed to the content of the transmissions. The content [1013] is the subject of our copyright infringement analysis.

II

We review a grant or denial of a preliminary injunction for abuse of discretion. Gorbach v. Reno, 219 F.3d 1087, 1091 (9th Cir.2000) (en banc). Application of erroneous legal principles represents an abuse of discretion by the district court. Rucker v. Davis, 237 F.3d 1113, 1118-19 (9th Cir.2001) (en banc). If the district court is claimed to have relied on an erroneous legal premise in reaching its decision to grant or deny a preliminary injunction, we will review the underlying issue of law de novo. Id. at 1118 (citing Does 1-5 v. Chandler, 83 F.3d 1150, 1152 (9th Cir. 1996)).

On review, we are required to determine, "whether the court employed the appropriate legal standards governing the issuance of a preliminary injunction and whether the district court correctly apprehended the law with respect to the underlying issues in the case." Id. "As long as the district court got the law right, `it will not be reversed simply because the appellate court would have arrived at a different result if it had applied the law to the facts of the case.'" Gregorio T. v. Wilson, 59 F.3d 1002, 1004 (9th Cir.1995) (quoting Sports Form, Inc. v. United Press, Int'l, 686 F.2d 750, 752 (9th Cir.1982)).

Preliminary injunctive relief is available to a party who demonstrates either: (1) a combination of probable success on the merits and the possibility of irreparable harm; or (2) that serious questions are raised and the balance of hardships tips in its favor. Prudential Real Estate Affiliates, Inc. v. PPR Realty, Inc., 204 F.3d 867, 874 (9th Cir.2000). "These two formulations represent two points on a sliding scale in which the required degree of irreparable harm increases as the probability of success decreases." Id.

III

Plaintiffs claim Napster users are engaged in the wholesale reproduction and distribution of copyrighted works, all constituting direct infringement.^[2] The district court agreed. We note that the district court's conclusion that plaintiffs have presented a prima facie case of direct infringement by Napster users is not presently appealed by Napster. We only need briefly address the threshold requirements.

A. Infringement

Plaintiffs must satisfy two requirements to present a prima facie case of direct infringement: (1) they must show ownership of the allegedly infringed material and (2) they must demonstrate that the alleged infringers violate at least one exclusive right granted to copyright holders under 17 U.S.C. § 106. See 17 U.S.C. § 501(a) (infringement occurs when alleged infringer engages in activity listed in § 106); see also Baxter v. MCA, Inc., 812 F.2d 421, 423 (9th Cir.1987); see, e.g., S.O.S., Inc. v. Payday, Inc., 886 F.2d 1081, 1085 n. 3 (9th Cir.1989) ("The word `copying' is shorthand for the infringing of any of the copyright owner's five exclusive rights. . . ."). Plaintiffs have sufficiently demonstrated ownership. The record supports the district court's determination that "as much as eighty-seven percent of the files available on Napster may be copyrighted and more than seventy percent may be owned or administered by plaintiffs." Napster, 114 F.Supp.2d at 911.

The district court further determined that plaintiffs' exclusive rights under § 106 were violated: "here the evidence establishes [1014] that a majority of Napster users use the service to download and upload copyrighted music. . . . And by doing that, it constitutes — the uses constitute direct infringement of plaintiffs' musical compositions, recordings." A & M Records, Inc. v. Napster, Inc., Nos. 99-5183, 00-0074, 2000 WL 1009483, at *1 (N.D.Cal. July 26, 2000) (transcript of proceedings). The district court also noted that "it is pretty much acknowledged . . . by Napster that this is infringement." Id. We agree that plaintiffs have shown that Napster users infringe at least two of the copyright holders' exclusive rights: the rights of reproduction, § 106(1); and distribution, § 106(3). Napster users who upload file names to the search index for others to copy violate plaintiffs' distribution rights. Napster users who download files containing copyrighted music violate plaintiffs' reproduction rights.

Napster asserts an affirmative defense to the charge that its users directly infringe plaintiffs' copyrighted musical compositions and sound recordings.

B. Fair Use

Napster contends that its users do not directly infringe plaintiffs' copyrights because the users are engaged in fair use of the material. See 17 U.S.C. § 107 ("[T]he fair use of a copyrighted work . . . is not an infringement of copyright."). Napster identifies three specific alleged fair uses: sampling, where users make temporary copies of a work before purchasing; space-shifting, where users access a sound recording through the Napster system that they already own in audio CD format; and permissive distribution of recordings by both new and established artists.

The district court considered factors listed in 17 U.S.C. § 107, which guide a court's fair use determination. These factors are: (1) the purpose and character of the use; (2) the nature of the copyrighted work; (3) the "amount and substantiality of the portion used" in relation to the work as a whole; and (4) the effect of the use upon the potential market for the work or the value of the work. See 17 U.S.C. § 107. The district court first conducted a general analysis of Napster system uses under § 107, and then applied its reasoning to the alleged fair uses identified by Napster. The district court concluded that Napster users are not fair users.^[3] [1015] We agree. We first address the court's overall fair use analysis.

1. Purpose and Character of the Use

This factor focuses on whether the new work merely replaces the object of the original creation or instead adds a further purpose or different character. In other words, this factor asks "whether and to what extent the new work is `transformative.'" See Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569, 579, 114 S.Ct. 1164, 127 L.Ed.2d 500 (1994).

The district court first concluded that downloading MP3 files does not transform the copyrighted work. Napster, 114 F.Supp.2d at 912. This conclusion is supportable. Courts have been reluctant to find fair use when an original work is merely retransmitted in a different medium. See, e.g., Infinity Broadcast Corp. v. Kirkwood, 150 F.3d 104, 108 (2d Cir.1998) (concluding that retransmission of radio broadcast over telephone lines is not transformative); UMG Recordings, Inc. v. MP3.com, Inc., 92 F.Supp.2d 349, 351 (S.D.N.Y.) (finding that reproduction of audio CD into MP3 format does not "transform" the work), certification denied, 2000 WL 710056 (S.D.N.Y. June 1, 2000) ("Defendant's copyright infringement was clear, and the mere fact that it was clothed in the exotic webbing of the Internet does not disguise its illegality.").

This "purpose and character" element also requires the district court to determine whether the allegedly infringing use is commercial or noncommercial. See Campbell, 510 U.S. at 584-85, 114 S.Ct. 1164. A commercial use weighs against a finding of fair use but is not conclusive on the issue. Id. The district court determined that Napster users engage in commercial use of the copyrighted materials largely because (1) "a host user sending a file cannot be said to engage in a personal use when distributing that file to an anonymous requester" and (2) "Napster users get for free something they would ordinarily have to buy." Napster, 114 F.Supp.2d at 912. The district court's findings are not clearly erroneous.

Direct economic benefit is not required to demonstrate a commercial use. Rather, repeated and exploitative copying of copyrighted works, even if the copies are not offered for sale, may constitute a commercial use. See Worldwide Church of God v. Philadelphia Church of God, 227 F.3d 1110, 1118 (9th Cir.2000) (stating that church that copied religious text for its members "unquestionably profit[ed]" from the unauthorized "distribution and use of [the text] without having to account to the copyright holder"); American Geophysical Union v. Texaco, Inc., 60 F.3d 913, 922 (2d Cir.1994) (finding that researchers at for-profit laboratory gained indirect economic advantage by photocopying copyrighted scholarly articles). In the record before us, commercial use is demonstrated by a showing that repeated and exploitative unauthorized copies of copyrighted works were made to save the expense of purchasing authorized copies. See Worldwide Church, 227 F.3d at 1117-18; Sega Enters. Ltd. v. MAPHIA, 857 F.Supp. 679, 687 (N.D.Cal.1994) (finding commercial use when individuals downloaded copies of video games "to avoid having to buy video game cartridges"); see also American Geophysical, 60 F.3d at 922. Plaintiffs made such a showing before the district court.^[4]

We also note that the definition of a financially motivated transaction for the purposes of criminal copyright actions includes trading infringing copies of a work for other items, "including the receipt of other copyrighted works." See No Electronic Theft Act ("NET Act"), Pub.L. No. 105-147, 18 U.S.C. § 101 (defining "Financial Gain").

[1016] 2. The Nature of the Use

Works that are creative in nature are "closer to the core of intended copyright protection" than are more fact-based works. See Campbell, 510 U.S. at 586, 114 S.Ct. 1164. The district court determined that plaintiffs' "copyrighted musical compositions and sound recordings are creative in nature . . . which cuts against a finding of fair use under the second factor." Napster, 114 F.Supp.2d at 913. We find no error in the district court's conclusion.

3. The Portion Used

"While `wholesale copying does not preclude fair use per se,' copying an entire work `militates against a finding of fair use.'" Worldwide Church, 227 F.3d at 1118 (quoting Hustler Magazine, Inc. v. Moral Majority, Inc., 796 F.2d 1148, 1155 (9th Cir.1986)). The district court determined that Napster users engage in "wholesale copying" of copyrighted work because file transfer necessarily "involves copying the entirety of the copyrighted work." Napster, 114 F.Supp.2d at 913. We agree. We note, however, that under certain circumstances, a court will conclude that a use is fair even when the protected work is copied in its entirety. See, e.g., Sony Corp. v. Universal City Studios, Inc., 464 U.S. 417, 449-50, 104 S.Ct. 774, 78 L.Ed.2d 574 (1984) (acknowledging that fair use of time-shifting necessarily involved making a full copy of a protected work).

4. Effect of Use on Market

"Fair use, when properly applied, is limited to copying by others which does not materially impair the marketability of the work which is copied." Harper & Row Publishers, Inc. v. Nation Enters., 471 U.S. 539, 566-67, 105 S.Ct. 2218, 85 L.Ed.2d 588 (1985). "[T]he importance of this [fourth] factor will vary, not only with the amount of harm, but also with the relative strength of the showing on the other factors." Campbell, 510 U.S. at 591 n. 21, 114 S.Ct. 1164. The proof required to demonstrate present or future market harm varies with the purpose and character of the use:

A challenge to a noncommercial use of a copyrighted work requires proof either that the particular use is harmful, or that if it should become widespread, it would adversely affect the potential market for the copyrighted work. . . . If the intended use is for commercial gain, that likelihood [of market harm] may be presumed. But if it is for a noncommercial purpose, the likelihood must be demonstrated.

Sony, 464 U.S. at 451, 104 S.Ct. 774 (emphases added).

Addressing this factor, the district court concluded that Napster harms the market in "at least" two ways: it reduces audio CD sales among college students and it "raises barriers to plaintiffs' entry into the market for the digital downloading of music." Napster, 114 F.Supp.2d at 913. The district court relied on evidence plaintiffs submitted to show that Napster use harms the market for their copyrighted musical compositions and sound recordings. In a separate memorandum and order regarding the parties' objections to the expert reports, the district court examined each report, finding some more appropriate and probative than others. A & M Records, Inc. v. Napster, Inc., Nos. 99-5183 & 00-0074, 2000 WL 1170106 (N.D.Cal. August 10, 2000). Notably, plaintiffs' expert, Dr. E. Deborah Jay, conducted a survey (the "Jay Report") using a random sample of college and university students to track their reasons for using Napster and the impact Napster had on their music purchases. Id. at *2. The court recognized that the Jay Report focused on just one segment of the Napster user population and found "evidence of lost sales attributable to college use to be probative of irreparable harm for purposes of the preliminary injunction motion." Id. at *3.

Plaintiffs also offered a study conducted by Michael Fine, Chief Executive Officer of Soundscan, (the "Fine Report") to determine the effect of online sharing of MP3 [1017] files in order to show irreparable harm. Fine found that online file sharing had resulted in a loss of "album" sales within college markets. After reviewing defendant's objections to the Fine Report and expressing some concerns regarding the methodology and findings, the district court refused to exclude the Fine Report insofar as plaintiffs offered it to show irreparable harm. Id. at *6.

Plaintiffs' expert Dr. David J. Teece studied several issues ("Teece Report"), including whether plaintiffs had suffered or were likely to suffer harm in their existing and planned businesses due to Napster use. Id. Napster objected that the report had not undergone peer review. The district court noted that such reports generally are not subject to such scrutiny and overruled defendant's objections. Id.

As for defendant's experts, plaintiffs objected to the report of Dr. Peter S. Fader, in which the expert concluded that Napster is beneficial to the music industry because MP3 music file-sharing stimulates more audio CD sales than it displaces. Id. at *7. The district court found problems in Dr. Fader's minimal role in overseeing the administration of the survey and the lack of objective data in his report. The court decided the generality of the report rendered it "of dubious reliability and value." The court did not exclude the report, however, but chose "not to rely on Fader's findings in determining the issues of fair use and irreparable harm." Id. at *8.

The district court cited both the Jay and Fine Reports in support of its finding that Napster use harms the market for plaintiffs' copyrighted musical compositions and sound recordings by reducing CD sales among college students. The district court cited the Teece Report to show the harm Napster use caused in raising barriers to plaintiffs' entry into the market for digital downloading of music. Napster, 114 F.Supp.2d at 910. The district court's careful consideration of defendant's objections to these reports and decision to rely on the reports for specific issues demonstrates a proper exercise of discretion in addition to a correct application of the fair use doctrine. Defendant has failed to show any basis for disturbing the district court's findings.

We, therefore, conclude that the district court made sound findings related to Napster's deleterious effect on the present and future digital download market. Moreover, lack of harm to an established market cannot deprive the copyright holder of the right to develop alternative markets for the works. See L.A. Times v. Free Republic, 54 U.S.P.Q.2d 1453, 1469-71 (C.D.Cal.2000) (stating that online market for plaintiff newspapers' articles was harmed because plaintiffs demonstrated that "[defendants] are attempting to exploit the market for viewing their articles online"); see also UMG Recordings, 92 F.Supp.2d at 352 ("Any allegedly positive impact of defendant's activities on plaintiffs' prior market in no way frees defendant to usurp a further market that directly derives from reproduction of the plaintiffs' copyrighted works."). Here, similar to L.A. Times and UMG Recordings, the record supports the district court's finding that the "record company plaintiffs have already expended considerable funds and effort to commence Internet sales and licensing for digital downloads." 114 F.Supp.2d at 915. Having digital downloads available for free on the Napster system necessarily harms the copyright holders' attempts to charge for the same downloads.

Judge Patel did not abuse her discretion in reaching the above fair use conclusions, nor were the findings of fact with respect to fair use considerations clearly erroneous. We next address Napster's identified uses of sampling and space-shifting.

5. Identified Uses

Napster maintains that its identified uses of sampling and space-shifting were wrongly excluded as fair uses by the district court.

[1018] a. Sampling

Napster contends that its users download MP3 files to "sample" the music in order to decide whether to purchase the recording. Napster argues that the district court: (1) erred in concluding that sampling is a commercial use because it conflated a noncommercial use with a personal use; (2) erred in determining that sampling adversely affects the market for plaintiffs' copyrighted music, a requirement if the use is noncommercial; and (3) erroneously concluded that sampling is not a fair use because it determined that samplers may also engage in other infringing activity.

The district court determined that sampling remains a commercial use even if some users eventually purchase the music. We find no error in the district court's determination. Plaintiffs have established that they are likely to succeed in proving that even authorized temporary downloading of individual songs for sampling purposes is commercial in nature. See Napster, 114 F.Supp.2d at 913. The record supports a finding that free promotional downloads are highly regulated by the record company plaintiffs and that the companies collect royalties for song samples available on retail Internet sites. Id. Evidence relied on by the district court demonstrates that the free downloads provided by the record companies consist of thirty-to-sixty second samples or are full songs programmed to "time out," that is, exist only for a short time on the downloader's computer. Id. at 913-14. In comparison, Napster users download a full, free and permanent copy of the recording. Id. at 914-15. The determination by the district court as to the commercial purpose and character of sampling is not clearly erroneous.

The district court further found that both the market for audio CDs and market for online distribution are adversely affected by Napster's service. As stated in our discussion of the district court's general fair use analysis: the court did not abuse its discretion when it found that, overall, Napster has an adverse impact on the audio CD and digital download markets. Contrary to Napster's assertion that the district court failed to specifically address the market impact of sampling, the district court determined that "[e]ven if the type of sampling supposedly done on Napster were a non-commercial use, plaintiffs have demonstrated a substantial likelihood that it would adversely affect the potential market for their copyrighted works if it became widespread." Napster, 114 F.Supp.2d at 914. The record supports the district court's preliminary determinations that: (1) the more music that sampling users download, the less likely they are to eventually purchase the recordings on audio CD; and (2) even if the audio CD market is not harmed, Napster has adverse effects on the developing digital download market.

Napster further argues that the district court erred in rejecting its evidence that the users' downloading of "samples" increases or tends to increase audio CD sales. The district court, however, correctly noted that "any potential enhancement of plaintiffs' sales . . . would not tip the fair use analysis conclusively in favor of defendant." Id. at 914. We agree that increased sales of copyrighted material attributable to unauthorized use should not deprive the copyright holder of the right to license the material. See Campbell, 510 U.S. at 591 n. 21, 114 S.Ct. 1164 ("Even favorable evidence, without more, is no guarantee of fairness. Judge Leval gives the example of the film producer's appropriation of a composer's previously unknown song that turns the song into a commercial success; the boon to the song does not make the film's simple copying fair."); see also L.A. Times, 54 U.S.P.Q.2d at 1471-72. Nor does positive impact in one market, here the audio CD market, deprive the copyright holder of the right to develop identified alternative markets, here the digital download market. See id. at 1469-71.

[1019] We find no error in the district court's factual findings or abuse of discretion in the court's conclusion that plaintiffs will likely prevail in establishing that sampling does not constitute a fair use.

b. Space-Shifting

Napster also maintains that space-shifting is a fair use. Space-shifting occurs when a Napster user downloads MP3 music files in order to listen to music he already owns on audio CD. See id. at 915-16. Napster asserts that we have already held that space-shifting of musical compositions and sound recordings is a fair use. See Recording Indus. Ass'n of Am. v. Diamond Multimedia Sys., Inc., 180 F.3d 1072, 1079 (9th Cir.1999) ("Rio [a portable MP3 player] merely makes copies in order to render portable, or `space-shift,' those files that already reside on a user's hard drive. . . . Such copying is a paradigmatic noncommercial personal use."). See also generally Sony, 464 U.S. at 423, 104 S.Ct. 774 (holding that "time-shifting," where a video tape recorder owner records a television show for later viewing, is a fair use).

We conclude that the district court did not err when it refused to apply the "shifting" analyses of Sony and Diamond. Both Diamond and Sony are inapposite because the methods of shifting in these cases did not also simultaneously involve distribution of the copyrighted material to the general public; the time or space-shifting of copyrighted material exposed the material only to the original user. In Diamond, for example, the copyrighted music was transferred from the user's computer hard drive to the user's portable MP3 player. So too Sony, where "the majority of VCR purchasers . . . did not distribute taped television broadcasts, but merely enjoyed them at home." Napster, 114 F.Supp.2d at 913. Conversely, it is obvious that once a user lists a copy of music he already owns on the Napster system in order to access the music from another location, the song becomes "available to millions of other individuals," not just the original CD owner. See UMG Recordings, 92 F.Supp.2d at 351-52 (finding space-shifting of MP3 files not a fair use even when previous ownership is demonstrated before a download is allowed); cf. Religious Tech. Ctr. v. Lerma, No. 95-1107A, 1996 WL 633131, at *6 (E.D.Va. Oct.4, 1996) (suggesting that storing copyrighted material on computer disk for later review is not a fair use).

c. Other Uses

Permissive reproduction by either independent or established artists is the final fair use claim made by Napster. The district court noted that plaintiffs did not seek to enjoin this and any other noninfringing use of the Napster system, including: chat rooms, message boards and Napster's New Artist Program. Napster, 114 F.Supp.2d at 917. Plaintiffs do not challenge these uses on appeal.

We find no error in the district court's determination that plaintiffs will likely succeed in establishing that Napster users do not have a fair use defense. Accordingly, we next address whether Napster is secondarily liable for the direct infringement under two doctrines of copyright law: contributory copyright infringement and vicarious copyright infringement.

IV

We first address plaintiffs' claim that Napster is liable for contributory copyright infringement. Traditionally, "one who, with knowledge of the infringing activity, induces, causes or materially contributes to the infringing conduct of another, may be held liable as a `contributory' infringer." Gershwin Publ'g Corp. v. Columbia Artists Mgmt., Inc., 443 F.2d 1159, 1162 (2d Cir.1971); see also Fonovisa, Inc. v. Cherry Auction, Inc., 76 F.3d 259, 264 (9th Cir.1996). Put differently, liability exists if the defendant engages in "personal conduct that encourages or assists the infringement." Matthew Bender & Co. v. West Publ'g Co., 158 F.3d 693, 706 (2d Cir.1998).

[1020] The district court determined that plaintiffs in all likelihood would establish Napster's liability as a contributory infringer. The district court did not err; Napster, by its conduct, knowingly encourages and assists the infringement of plaintiffs' copyrights.

A. Knowledge

Contributory liability requires that the secondary infringer "know or have reason to know" of direct infringement. Cable/Home Communication Corp. v. Network Prods., Inc., 902 F.2d 829, 845 & 846 n. 29 (11th Cir.1990); Religious Tech. Ctr. v. Netcom On-Line Communication Servs., Inc., 907 F.Supp. 1361, 1373-74 (N.D.Cal.1995) (framing issue as "whether Netcom knew or should have known of" the infringing activities). The district court found that Napster had both actual and constructive knowledge that its users exchanged copyrighted music. The district court also concluded that the law does not require knowledge of "specific acts of infringement" and rejected Napster's contention that because the company cannot distinguish infringing from noninfringing files, it does not "know" of the direct infringement. 114 F.Supp.2d at 917.

It is apparent from the record that Napster has knowledge, both actual and constructive,^[5] of direct infringement. Napster claims that it is nevertheless protected from contributory liability by the teaching of Sony Corp. v. Universal City Studios, Inc., 464 U.S. 417, 104 S.Ct. 774, 78 L.Ed.2d 574 (1984). We disagree. We observe that Napster's actual, specific knowledge of direct infringement renders Sony's holding of limited assistance to Napster. We are compelled to make a clear distinction between the architecture of the Napster system and Napster's conduct in relation to the operational capacity of the system.

The Sony Court refused to hold the manufacturer and retailers of video tape recorders liable for contributory infringement despite evidence that such machines could be and were used to infringe plaintiffs' copyrighted television shows. Sony stated that if liability "is to be imposed on petitioners in this case, it must rest on the fact that they have sold equipment with constructive knowledge of the fact that their customers may use that equipment to make unauthorized copies of copyrighted material." Id. at 439, 104 S.Ct. 774 (emphasis added). The Sony Court declined to impute the requisite level of knowledge where the defendants made and sold equipment capable of both infringing and "substantial noninfringing uses." Id. at 442 (adopting a modified "staple article of commerce" doctrine from patent law). See also Universal City Studios, Inc. v. Sony Corp., 480 F.Supp. 429, 459 (C.D.Cal. 1979) ("This court agrees with defendants that their knowledge was insufficient to make them contributory infringers."), rev'd, 659 F.2d 963 (9th Cir.1981), rev'd, 464 U.S. 417, 104 S.Ct. 774, 78 L.Ed.2d 574 (1984); Alfred C. Yen, Internet Service Provider Liability for Subscriber Copyright Infringement, Enterprise Liability, and the First Amendment, 88 Geo. L.J. 1833, 1874 & 1893 n.210 (2000) (suggesting that, after Sony, most Internet service providers lack "the requisite level of knowledge" for the imposition of contributory liability).

We are bound to follow Sony, and will not impute the requisite level of knowledge to Napster merely because [1021] peer-to-peer file sharing technology may be used to infringe plaintiffs' copyrights. See 464 U.S. at 436, 104 S.Ct. 774 (rejecting argument that merely supplying the "`means' to accomplish an infringing activity" leads to imposition of liability). We depart from the reasoning of the district court that Napster failed to demonstrate that its system is capable of commercially significant noninfringing uses. See Napster, 114 F.Supp.2d at 916, 917-18. The district court improperly confined the use analysis to current uses, ignoring the system's capabilities. See generally Sony, 464 U.S. at 442-43, 104 S.Ct. 774 (framing inquiry as whether the video tape recorder is "capable of commercially significant noninfringing uses") (emphasis added). Consequently, the district court placed undue weight on the proportion of current infringing use as compared to current and future noninfringing use. See generally Vault Corp. v. Quaid Software Ltd., 847 F.2d 255, 264-67 (5th Cir.1988) (single noninfringing use implicated Sony). Nonetheless, whether we might arrive at a different result is not the issue here. See Sports Form, Inc. v. United Press Int'l, Inc., 686 F.2d 750, 752 (9th Cir.1982). The instant appeal occurs at an early point in the proceedings and "the fully developed factual record may be materially different from that initially before the district court. . . ." Id. at 753. Regardless of the number of Napster's infringing versus noninfringing uses, the evidentiary record here supported the district court's finding that plaintiffs would likely prevail in establishing that Napster knew or had reason to know of its users' infringement of plaintiffs' copyrights.

This analysis is similar to that of Religious Technology Center v. Netcom On-Line Communication Services, Inc., which suggests that in an online context, evidence of actual knowledge of specific acts of infringement is required to hold a computer system operator liable for contributory copyright infringement. 907 F.Supp. at 1371. Netcom considered the potential contributory copyright liability of a computer bulletin board operator whose system supported the posting of infringing material. Id. at 1374. The court, in denying Netcom's motion for summary judgment of noninfringement and plaintiff's motion for judgment on the pleadings, found that a disputed issue of fact existed as to whether the operator had sufficient knowledge of infringing activity. Id. at 1374-75.

The court determined that for the operator to have sufficient knowledge, the copyright holder must "provide the necessary documentation to show there is likely infringement." 907 F.Supp. at 1374; cf. Cubby, Inc. v. CompuServe, Inc., 776 F.Supp. 135, 141 (S.D.N.Y.1991) (recognizing that online service provider does not and cannot examine every hyperlink for potentially defamatory material). If such documentation was provided, the court reasoned that Netcom would be liable for contributory infringement because its failure to remove the material "and thereby stop an infringing copy from being distributed worldwide constitutes substantial participation" in distribution of copyrighted material. Id.

We agree that if a computer system operator learns of specific infringing material available on his system and fails to purge such material from the system, the operator knows of and contributes to direct infringement. See Netcom, 907 F.Supp. at 1374. Conversely, absent any specific information which identifies infringing activity, a computer system operator cannot be liable for contributory infringement merely because the structure of the system allows for the exchange of copyrighted material. See Sony, 464 U.S. at 436, 442-43, 104 S.Ct. 774. To enjoin simply because a computer network allows for infringing use would, in our opinion, violate Sony and potentially restrict activity unrelated to infringing use.

We nevertheless conclude that sufficient knowledge exists to impose contributory liability when linked to demonstrated infringing use of the Napster system. See Napster, 114 F.Supp.2d at 919 ("Religious [1022] Technology Center would not mandate a determination that Napster, Inc. lacks the knowledge requisite to contributory infringement."). The record supports the district court's finding that Napster has actual knowledge that specific infringing material is available using its system, that it could block access to the system by suppliers of the infringing material, and that it failed to remove the material. See Napster, 114 F.Supp.2d at 918, 920-21.^[6]

B. Material Contribution

Under the facts as found by the district court, Napster materially contributes to the infringing activity. Relying on Fonovisa, the district court concluded that "[w]ithout the support services defendant provides, Napster users could not find and download the music they want with the ease of which defendant boasts." Napster, 114 F.Supp.2d at 919-20 ("Napster is an integrated service designed to enable users to locate and download MP3 music files."). We agree that Napster provides "the site and facilities" for direct infringement. See Fonovisa, 76 F.3d at 264; cf. Netcom, 907 F.Supp. at 1372 ("Netcom will be liable for contributory infringement since its failure to cancel [a user's] infringing message and thereby stop an infringing copy from being distributed worldwide constitutes substantial participation."). The district court correctly applied the reasoning in Fonovisa, and properly found that Napster materially contributes to direct infringement.

We affirm the district court's conclusion that plaintiffs have demonstrated a likelihood of success on the merits of the contributory copyright infringement claim. We will address the scope of the injunction in part VIII of this opinion.

V

We turn to the question whether Napster engages in vicarious copyright infringement. Vicarious copyright liability is an "outgrowth" of respondeat superior. Fonovisa, 76 F.3d at 262. In the context of copyright law, vicarious liability extends beyond an employer/employee relationship to cases in which a defendant "has the right and ability to supervise the infringing activity and also has a direct financial interest in such activities." Id. (quoting Gershwin, 443 F.2d at 1162); see also Polygram Int'l Publ'g, Inc. v. Nevada/TIG, Inc., 855 F.Supp. 1314, 1325-26 (D.Mass.1994) (describing vicarious liability as a form of risk allocation).

Before moving into this discussion, we note that Sony's "staple article of commerce" analysis has no application to Napster's potential liability for vicarious copyright infringement. See Sony, 464 U.S. at 434-435, 104 S.Ct. 774; see generally 3 Melville B. Nimmer & David Nimmer, Nimmer On Copyright §§ 12.04[A][2] & [A][2][b] (2000) (confining Sony to contributory infringement analysis: "Contributory infringement itself is of two types — personal conduct that forms part of or furthers the infringement and contribution of machinery or goods that provide the means to infringe"). 617 PLI/Pat 455, 528 (Sept. 2, 2000) (indicating that the "staple article of commerce" doctrine "provides a defense only to contributory infringement, not to vicarious infringement"). The issues of Sony's liability under the "doctrines of `direct infringement' and `vicarious liability'" were not before the Supreme Court, although the Court recognized that the "lines between direct infringement, contributory infringement, and vicarious liability are not clearly drawn." Id. at 435 n. 17, 104 S.Ct. 774. Consequently, when the Sony Court used the term "vicarious [1023] liability," it did so broadly and outside of a technical analysis of the doctrine of vicarious copyright infringement. Id. at 435 ("[V]icarious liability is imposed in virtually all areas of the law, and the concept of contributory infringement is merely a species of the broader problem of identifying the circumstances in which it is just to hold one individual accountable for the actions of another."); see also Black's Law Dictionary 927 (7th ed. 1999) (defining "vicarious liability" in a manner similar to the definition used in Sony).

A. Financial Benefit

The district court determined that plaintiffs had demonstrated they would likely succeed in establishing that Napster has a direct financial interest in the infringing activity. Napster, 114 F.Supp.2d at 921-22. We agree. Financial benefit exists where the availability of infringing material "acts as a `draw' for customers." Fonovisa, 76 F.3d at 263-64 (stating that financial benefit may be shown "where infringing performances enhance the attractiveness of a venue"). Ample evidence supports the district court's finding that Napster's future revenue is directly dependent upon "increases in userbase." More users register with the Napster system as the "quality and quantity of available music increases." 114 F.Supp.2d at 902. We conclude that the district court did not err in determining that Napster financially benefits from the availability of protected works on its system.

B. Supervision

The district court determined that Napster has the right and ability to supervise its users' conduct. Napster, 114 F.Supp.2d at 920-21 (finding that Napster's representations to the court regarding "its improved methods of blocking users about whom rights holders complain . . . is tantamount to an admission that defendant can, and sometimes does, police its service"). We agree in part.

The ability to block infringers' access to a particular environment for any reason whatsoever is evidence of the right and ability to supervise. See Fonovisa, 76 F.3d at 262 ("Cherry Auction had the right to terminate vendors for any reason whatsoever and through that right had the ability to control the activities of vendors on the premises."); cf. Netcom, 907 F.Supp. at 1375-76 (indicating that plaintiff raised a genuine issue of fact regarding ability to supervise by presenting evidence that an electronic bulletin board service can suspend subscriber's accounts). Here, plaintiffs have demonstrated that Napster retains the right to control access to its system. Napster has an express reservation of rights policy, stating on its website that it expressly reserves the "right to refuse service and terminate accounts in [its] discretion, including, but not limited to, if Napster believes that user conduct violates applicable law . . . or for any reason in Napster's sole discretion, with or without cause."

To escape imposition of vicarious liability, the reserved right to police must be exercised to its fullest extent. Turning a blind eye to detectable acts of infringement for the sake of profit gives rise to liability. See, e.g., Fonovisa, 76 F.3d at 261 ("There is no dispute for the purposes of this appeal that Cherry Auction and its operators were aware that vendors in their swap meets were selling counterfeit recordings."); see also Gershwin, 443 F.2d at 1161-62 (citing Shapiro, Bernstein & Co. v. H.L. Green Co., 316 F.2d 304 (2d Cir.1963), for the proposition that "failure to police the conduct of the primary infringer" leads to imposition of vicarious liability for copyright infringement).

The district court correctly determined that Napster had the right and ability to police its system and failed to exercise that right to prevent the exchange of copyrighted material. The district court, however, failed to recognize that the boundaries of the premises that Napster "controls and patrols" are limited. See, e.g., Fonovisa, 76 F.3d at 262-63 (in addition to having the right to exclude vendors, defendant "controlled and patrolled" the premises); see also Polygram, 855 F.Supp. at 1328-29 (in addition to having the contractual right to remove exhibitors, trade show operator reserved the right to police during the show and had its "employees walk the [1024] aisles to ensure `rules compliance'"). Put differently, Napster's reserved "right and ability" to police is cabined by the system's current architecture. As shown by the record, the Napster system does not "read" the content of indexed files, other than to check that they are in the proper MP3 format.

Napster, however, has the ability to locate infringing material listed on its search indices, and the right to terminate users' access to the system. The file name indices, therefore, are within the "premises" that Napster has the ability to police. We recognize that the files are user-named and may not match copyrighted material exactly (for example, the artist or song could be spelled wrong). For Napster to function effectively, however, file names must reasonably or roughly correspond to the material contained in the files, otherwise no user could ever locate any desired music. As a practical matter, Napster, its users and the record company plaintiffs have equal access to infringing material by employing Napster's "search function."

Our review of the record requires us to accept the district court's conclusion that plaintiffs have demonstrated a likelihood of success on the merits of the vicarious copyright infringement claim. Napster's failure to police the system's "premises," combined with a showing that Napster financially benefits from the continuing availability of infringing files on its system, leads to the imposition of vicarious liability. We address the scope of the injunction in part VIII of this opinion.

VI

We next address whether Napster has asserted defenses which would preclude the entry of a preliminary injunction.

Napster alleges that two statutes insulate it from liability. First, Napster asserts that its users engage in actions protected by § 1008 of the Audio Home Recording Act of 1992, 17 U.S.C. § 1008. Second, Napster argues that its liability for contributory and vicarious infringement is limited by the Digital Millennium Copyright Act, 17 U.S.C. § 512. We address the application of each statute in turn.

A. Audio Home Recording Act

The statute states in part:

No action may be brought under this title alleging infringement of copyright based on the manufacture, importation, or distribution of a digital audio recording device, a digital audio recording medium, an analog recording device, or an analog recording medium, or based on the noncommercial use by a consumer of such a device or medium for making digital musical recordings or analog musical recordings.

17 U.S.C. § 1008 (emphases added). Napster contends that MP3 file exchange is the type of "noncommercial use" protected from infringement actions by the statute. Napster asserts it cannot be secondarily liable for users' nonactionable exchange of copyrighted musical recordings.

The district court rejected Napster's argument, stating that the Audio Home Recording Act is "irrelevant" to the action because: (1) plaintiffs did not bring claims under the Audio Home Recording Act; and (2) the Audio Home Recording Act does not cover the downloading of MP3 files. Napster, 114 F.Supp.2d at 916 n. 19.

We agree with the district court that the Audio Home Recording Act does not cover the downloading of MP3 files to computer hard drives. First, "[u]nder the plain meaning of the Act's definition of digital audio recording devices, computers (and their hard drives) are not digital audio recording devices because their `primary purpose' is not to make digital audio copied recordings." Recording Indus. Ass'n of Am. v. Diamond Multimedia Sys., Inc., 180 F.3d 1072, 1078 (9th Cir.1999). Second, notwithstanding Napster's claim that computers are "digital audio recording devices," computers do not make "digital music recordings" as defined by the Audio Home Recording Act. Id. at 1077 (citing S. Rep. 102-294) ("There are simply no [1025] grounds in either the plain language of the definition or in the legislative history for interpreting the term `digital musical recording' to include songs fixed on computer hard drives.").

B. Digital Millennium Copyright Act

Napster also interposes a statutory limitation on liability by asserting the protections of the "safe harbor" from copyright infringement suits for "Internet service providers" contained in the Digital Millennium Copyright Act, 17 U.S.C. § 512. See Napster, 114 F.Supp.2d at 919 n. 24. The district court did not give this statutory limitation any weight favoring a denial of temporary injunctive relief. The court concluded that Napster "has failed to persuade this court that subsection 512(d) shelters contributory infringers." Id.

We need not accept a blanket conclusion that § 512 of the Digital Millennium Copyright Act will never protect secondary infringers. See S. Rep. 105-190, at 40 (1998) ("The limitations in subsections (a) through (d) protect qualifying service providers from liability for all monetary relief for direct, vicarious, and contributory infringement."), reprinted in Melville B. Nimmer & David Nimmer, Nimmer on Copyright: Congressional Committee Reports on the Digital Millennium Copyright Act and Concurrent Amendments (2000); see also Charles S. Wright, Actual Versus Legal Control: Reading Vicarious Liability for Copyright Infringement Into the Digital Millennium Copyright Act of 1998, 75 Wash. L.Rev. 1005, 1028-31 (July 2000) ("[T]he committee reports leave no doubt that Congress intended to provide some relief from vicarious liability").

We do not agree that Napster's potential liability for contributory and vicarious infringement renders the Digital Millennium Copyright Act inapplicable per se. We instead recognize that this issue will be more fully developed at trial. At this stage of the litigation, plaintiffs raise serious questions regarding Napster's ability to obtain shelter under § 512, and plaintiffs also demonstrate that the balance of hardships tips in their favor. See Prudential Real Estate, 204 F.3d at 874; see also Micro Star v. Formgen, Inc. 154 F.3d 1107, 1109 (9th Cir.1998) ("A party seeking a preliminary injunction must show . . . `that serious questions going to the merits were raised and the balance of hardships tips sharply in its favor.'").

Plaintiffs have raised and continue to raise significant questions under this statute, including: (1) whether Napster is an Internet service provider as defined by 17 U.S.C. § 512(d); (2) whether copyright owners must give a service provider "official" notice of infringing activity in order for it to have knowledge or awareness of infringing activity on its system; and (3) whether Napster complies with § 512(i), which requires a service provider to timely establish a detailed copyright compliance policy. See A & M Records, Inc. v. Napster, Inc., No. 99-05183, 2000 WL 573136 (N.D.Cal. May 12, 2000) (denying summary judgment to Napster under a different subsection of the Digital Millennium Copyright Act, § 512(a)).

The district court considered ample evidence to support its determination that the balance of hardships tips in plaintiffs' favor:

Any destruction of Napster, Inc. by a preliminary injunction is speculative compared to the statistical evidence of massive, unauthorized downloading and uploading of plaintiffs' copyrighted works-as many as 10,000 files per second by defendant's own admission. See Kessler Dec. ¶ 29. The court has every reason to believe that, without a preliminary injunction, these numbers will mushroom as Napster users, and newcomers attracted by the publicity, scramble to obtain as much free music as possible before trial.

114 F.Supp.2d at 926.

VII

Napster contends that even if the district court's preliminary determinations that it is liable for facilitating copyright infringement are correct, the district court [1026] improperly rejected valid affirmative defenses of waiver, implied license and copyright misuse. We address the defenses in turn.

A. Waiver

"Waiver is the intentional relinquishment of a known right with knowledge of its existence and the intent to relinquish it." United States v. King Features Entm't, Inc., 843 F.2d 394, 399 (9th Cir.1988). In copyright, waiver or abandonment of copyright "occurs only if there is an intent by the copyright proprietor to surrender rights in his work." 4 Melville B. Nimmer & David Nimmer, Nimmer On Copyright ¶ 13.06 (2000); see also Micro Star v. Formgen, Inc., 154 F.3d 1107, 1114 (9th Cir.1998) (discussing abandonment).

Napster argues that the district court erred in not finding that plaintiffs knowingly provided consumers with technology designed to copy and distribute MP3 files over the Internet and, thus, waived any legal authority to exercise exclusive control over creation and distribution of MP3 files. The district court, however, was not convinced "that the record companies created the monster that is now devouring their intellectual property rights." Napster, 114 F.Supp.2d at 924. We find no error in the district court's finding that "in hastening the proliferation of MP3 files, plaintiffs did [nothing] more than seek partners for their commercial downloading ventures and develop music players for files they planned to sell over the Internet." Id.^[7]

B. Implied License

Napster also argues that plaintiffs granted the company an implied license by encouraging MP3 file exchange over the Internet. Courts have found implied licenses only in "narrow" circumstances where one party "created a work at [the other's] request and handed it over, intending that [the other] copy and distribute it." SmithKline Beecham Consumer Healthcare, L.P. v. Watson Pharms., Inc., 211 F.3d 21, 25 (2d Cir.2000) (quoting Effects Assocs., Inc. v. Cohen, 908 F.2d 555, 558 (9th Cir.1990)), cert. denied, ___ U.S. ___, 121 S.Ct. 173, 148 L.Ed.2d 118 (2000). The district court observed that no evidence exists to support this defense: "indeed, the RIAA gave defendant express notice that it objected to the availability of its members' copyrighted music on Napster." Napster, 114 F.Supp.2d at 924-25. The record supports this conclusion.

C. Misuse

The defense of copyright misuse forbids a copyright holder from "secur[ing] an exclusive right or limited monopoly not granted by the Copyright Office." Lasercomb Am., Inc. v. Reynolds, 911 F.2d 970, 977-79 (4th Cir.1990), quoted in Practice Mgmt. Info. Corp. v. American Med. Ass'n, 121 F.3d 516, 520 (9th Cir.), amended by 133 F.3d 1140 (9th Cir.1997). Napster alleges that online distribution is not within the copyright monopoly. According to Napster, plaintiffs have colluded to "use their copyrights to extend their control to online distributions."

We find no error in the district court's preliminary rejection of this affirmative defense. The misuse defense prevents copyright holders from leveraging their limited monopoly to allow them control of areas outside the monopoly. See Lasercomb, 911 F.2d at 976-77; see also Religious [1027] Tech. Ctr. v. Lerma, No. 95-1107A, 1996 WL 633131, at *11 (E.D.Va. Oct.4, 1996) (listing circumstances which indicate improper leverage).^[8] There is no evidence here that plaintiffs seek to control areas outside of their grant of monopoly. Rather, plaintiffs seek to control reproduction and distribution of their copyrighted works, exclusive rights of copyright holders. 17 U.S.C. § 106; see also, e.g., UMG Recordings, 92 F.Supp.2d at 351 ("A [copyright holder's] `exclusive' rights, derived from the Constitution and the Copyright Act, include the right, within broad limits, to curb the development of such a derivative market by refusing to license a copyrighted work or by doing so only on terms the copyright owner finds acceptable."). That the copyrighted works are transmitted in another medium-MP3 format rather than audio CD-has no bearing on our analysis. See id. at 351 (finding that reproduction of audio CD into MP3 format does not "transform" the work).

VIII

The district court correctly recognized that a preliminary injunction against Napster's participation in copyright infringement is not only warranted but required. We believe, however, that the scope of the injunction needs modification in light of our opinion. Specifically, we reiterate that contributory liability may potentially be imposed only to the extent that Napster: (1) receives reasonable knowledge of specific infringing files with copyrighted musical compositions and sound recordings; (2) knows or should know that such files are available on the Napster system; and (3) fails to act to prevent viral distribution of the works. See Netcom, 907 F.Supp. at 1374-75. The mere existence of the Napster system, absent actual notice and Napster's demonstrated failure to remove the offending material, is insufficient to impose contributory liability. See Sony, 464 U.S. at 442-43, 104 S.Ct. 774.

Conversely, Napster may be vicariously liable when it fails to affirmatively use its ability to patrol its system and preclude access to potentially infringing files listed in its search index. Napster has both the ability to use its search function to identify infringing musical recordings and the right to bar participation of users who engage in the transmission of infringing files.

The preliminary injunction which we stayed is overbroad because it places on Napster the entire burden of ensuring that no "copying, downloading, uploading, transmitting, or distributing" of plaintiffs' works occur on the system. As stated, we place the burden on plaintiffs to provide notice to Napster of copyrighted works and files containing such works available on the Napster system before Napster has the duty to disable access to the offending content. Napster, however, also bears the burden of policing the system within the limits of the system. Here, we recognize that this is not an exact science in that the files are user named. In crafting the injunction on remand, the district court should recognize that Napster's system does not currently appear to allow Napster access to users' MP3 files.

Based on our decision to remand, Napster's additional arguments on appeal [1028] going to the scope of the injunction need not be addressed. We, however, briefly address Napster's First Amendment argument so that it is not reasserted on remand. Napster contends that the present injunction violates the First Amendment because it is broader than necessary. The company asserts two distinct free speech rights: (1) its right to publish a "directory" (here, the search index) and (2) its users' right to exchange information. We note that First Amendment concerns in copyright are allayed by the presence of the fair use doctrine. See 17 U.S.C. § 107; see generally Nihon Keizai Shimbun v. Comline Business Data, Inc., 166 F.3d 65, 74 (2d Cir.1999); Netcom, 923 F.Supp. at 1258 (stating that the Copyright Act balances First Amendment concerns with the rights of copyright holders). There was a preliminary determination here that Napster users are not fair users. Uses of copyrighted material that are not fair uses are rightfully enjoined. See Dr. Seuss Enters. v. Penguin Books USA, Inc., 109 F.3d 1394, 1403 (9th Cir.1997) (rejecting defendants' claim that injunction would constitute a prior restraint in violation of the First Amendment).

IX

We address Napster's remaining arguments: (1) that the court erred in setting a $5 million bond, and (2) that the district court should have imposed a constructive royalty payment structure in lieu of an injunction.

A. Bond

Napster argues that the $5 million bond is insufficient because the company's value is between $1.5 and $2 billion. We review objections to the amount of a bond for abuse of discretion. Walczak v. EPL Prolong, Inc., 198 F.3d 725 (9th Cir.1999).

We are reluctant to dramatically raise bond amounts on appeal. See GoTo.com, Inc. v. The Walt Disney Co., 202 F.3d 1199, 1211 (9th Cir.2000); see also Fed.R.Civ.P. 65(c). The district court considered competing evidence of Napster's value and the deleterious effect that any injunction would have upon the Napster system. We cannot say that Judge Patel abused her discretion when she fixed the penal sum required for the bond.

B. Royalties

Napster contends that the district court should have imposed a monetary penalty by way of a compulsory royalty in place of an injunction. We are asked to do what the district court refused.

Napster tells us that "where great public injury would be worked by an injunction, the courts might . . . award damages or a continuing royalty instead of an injunction in such special circumstances." Abend v. MCA, Inc., 863 F.2d 1465, 1479 (9th Cir.1988) (quoting 3 Melville B. Nimmer & David Nimmer, Nimmer On Copyright § 14.06[B] (1988)), aff'd, 495 U.S. 207, 110 S.Ct. 1750, 109 L.Ed.2d 184 (1990). We are at a total loss to find any "special circumstances" simply because this case requires us to apply well-established doctrines of copyright law to a new technology. Neither do we agree with Napster that an injunction would cause "great public injury." Further, we narrowly construe any suggestion that compulsory royalties are appropriate in this context because Congress has arguably limited the application of compulsory royalties to specific circumstances, none of which are present here. See 17 U.S.C. § 115.

The Copyright Act provides for various sanctions for infringers. See, e.g., 17 U.S.C. §§ 502 (injunctions); 504 (damages); and 506 (criminal penalties); see also 18 U.S.C. § 2319A (criminal penalties for the unauthorized fixation of and trafficking in sound recordings and music videos of live musical performances). These statutory sanctions represent a more than adequate legislative solution to the problem created by copyright infringement.

Imposing a compulsory royalty payment schedule would give Napster an "easy out" of this case. If such royalties were imposed, [1029] Napster would avoid penalties for any future violation of an injunction, statutory copyright damages and any possible criminal penalties for continuing infringement. The royalty structure would also grant Napster the luxury of either choosing to continue and pay royalties or shut down. On the other hand, the wronged parties would be forced to do business with a company that profits from the wrongful use of intellectual properties. Plaintiffs would lose the power to control their intellectual property: they could not make a business decision not to license their property to Napster, and, in the event they planned to do business with Napster, compulsory royalties would take away the copyright holders' ability to negotiate the terms of any contractual arrangement.

X

We affirm in part, reverse in part and remand.

We direct that the preliminary injunction fashioned by the district court prior to this appeal shall remain stayed until it is modified by the district court to conform to the requirements of this opinion. We order a partial remand of this case on the date of the filing of this opinion for the limited purpose of permitting the district court to proceed with the settlement and entry of the modified preliminary injunction.

Even though the preliminary injunction requires modification, appellees have substantially and primarily prevailed on appeal. Appellees shall recover their statutory costs on appeal. See Fed. R.App. P. 39(a)(4) ("[i]f a judgment is affirmed in part, reversed in part, modified, or vacated, costs are taxed only as the court orders.").

AFFIRMED IN PART, REVERSED IN PART AND REMANDED.

[1] "To download means to receive information, typically a file, from another computer to yours via your modem. . . . The opposite term is upload, which means to send a file to another computer." United States v. Mohrbacher, 182 F.3d 1041, 1048 (9th Cir.1999) (quoting Robin Williams, Jargon, An Informal Dictionary of Computer Terms 170-71 (1993)).

[2] Secondary liability for copyright infringement does not exist in the absence of direct infringement by a third party. Religious Tech. Ctr. v. Netcom On-Line Communication Servs., Inc., 907 F.Supp. 1361, 1371 (N.D.Cal. 1995) ("[T]here can be no contributory infringement by a defendant without direct infringement by another."). It follows that Napster does not facilitate infringement of the copyright laws in the absence of direct infringement by its users.

[3] Napster asserts that because plaintiffs seek injunctive relief, they have the burden of showing a likelihood that they would prevail against any affirmative defenses raised by Napster, including its fair use defense under 17 U.S.C. § 107. See Atari Games Corp. v. Nintendo, 975 F.2d 832, 837 (Fed.Cir.1992) (following Ninth Circuit law, and stating that plaintiff must show likelihood of success on prima facie copyright infringement case and likelihood that it would overcome copyright misuse defense); see also Dr. Seuss Enters. v. Penguin Books USA, 924 F.Supp. 1559, 1562 (S.D.Cal.1996) ("The plaintiff's burden of showing a likelihood of success on the merits includes the burden of showing a likelihood that it would prevail against any affirmative defenses raised by the defendant."), aff'd, 109 F.3d 1394 (9th Cir.1997); Religious Tech. Ctr. v. Netcom On-Line Communication Servs., 923 F.Supp. 1231, 1242 n. 12 (1995) (same); 2 William W. Schwarzer et al., California Practice Guide, Federal Civil Procedure Before Trial ¶ 13:47 (2000) (advising that when a preliminary injunction is sought "plaintiff must demonstrate a likelihood of prevailing on any affirmative defense as well as on plaintiff's case in chief"). But see Fair Use of Copyrighted Works, H.R. Rep. 102-836 n.3 (criticizing a Northern District of New York case in which "the district court erroneously held that where the copyright owner seeks a preliminary injunction, the copyright owner bears the burden of disproving the [fair use] defense"); see also 1 William F. Patry, Copyright Law & Practice, 725, 725 n.27 (1994) (citing cases placing burden on defendant at preliminary injunction stage).

The district court stated that "defendant bears the burden of proving. . . affirmative defenses." Napster, 114 F.Supp.2d at 912. Plaintiffs assert that the district court did not err in placing the burden on Napster. We conclude that even if plaintiffs bear the burden of establishing that they would likely prevail against Napster's affirmative defenses at the preliminary injunction stage, the record supports the district court's conclusion that Napster users do not engage in fair use of the copyrighted materials.

[4] Napster counters that even if certain users engage in commercial use by downloading instead of purchasing the music, space-shifting and sampling are nevertheless non commercial in nature. We address this contention in our discussion of these specific uses, infra.

[5] The district court found actual knowledge because: (1) a document authored by Napster co-founder Sean Parker mentioned "the need to remain ignorant of users' real names and IP addresses `since they are exchanging pirated music'"; and (2) the Recording Industry Association of America ("RIAA") informed Napster of more than 12,000 infringing files, some of which are still available. 114 F.Supp.2d at 918. The district court found constructive knowledge because: (a) Napster executives have recording industry experience; (b) they have enforced intellectual property rights in other instances; (c) Napster executives have downloaded copyrighted songs from the system; and (d) they have promoted the site with "screen shots listing infringing files." Id. at 919.

[6] As stated by the district court:

Plaintiff[s] . . . demonstrate that defendant had actual notice of direct infringement because the RIAA informed it of more than 12,000 infringing files. See Creighton 12/3/99 Dec., Exh. D. Although Napster, Inc. purportedly terminated the users offering these files, the songs are still available using the Napster service, as are the copyrighted works which the record company plaintiffs identified in Schedules A and B of their complaint. See Creighton Supp. Dec. ¶¶ 3-4.

114 F.Supp.2d at 918.

[7] Napster additionally asserts that the district court improperly refused to allow additional discovery into affirmative defenses and also erroneously failed to hold an evidentiary hearing. The denial of an evidentiary hearing is reviewed for abuse of discretion, Kenneally v. Lungren, 967 F.2d 329, 335 (9th Cir.1992), as is the court's decision to deny further discovery. See Sablan v. Dep't of Finance, 856 F.2d 1317, 1321 (9th Cir.1988) (stating that decision to deny discovery will not be disturbed except upon a clear showing "that the denial of discovery results in actual and substantial prejudice"). We conclude that the court did not abuse its discretion in denying further discovery and refusing to conduct an evidentiary hearing.

[8] The district court correctly stated that "most of the cases" that recognize the affirmative defense of copyright misuse involve unduly restrictive licensing schemes. See Napster, 114 F.Supp.2d at 923; see also Lasercomb, 911 F.2d at 973 (stating that "a misuse of copyright defense is inherent in the law of copyright"). We have also suggested, however, that a unilateral refusal to license a copyright may constitute wrongful exclusionary conduct giving rise to a claim of misuse, but assume that the "desire to exclude others . . . is a presumptively valid business justification for any immediate harm to consumers." See Image Tech. Servs. v. Eastman Kodak Co., 125 F.3d 1195, 1218 (9th Cir.1997). But see Intergraph Corp. v. Intel Corp., 195 F.3d 1346, 1362 (Fed.Cir.1999) ("[M]arket power does not `impose on the intellectual property owner an obligation to license the use of that property to others.'") (quoting United States Dep't of Justice & Fed. Trade Comm'n, Antitrust Guidelines for the Licensing of Intellectual Property 4 (1995)).

756 F.Supp.2d 938 (2010)

[942] Karl Regan Fink, Allen E. Hoover, John F. Flannery, Joseph Frank Marinelli, Rudy I. Kratz, Karl Regan Fink, Fitch, Even, Tabin & Flannery, Frederic R. Klein, Goldberg Kohn Ltd., Jeremy Matthew Downs, Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd., Martin J. Bishop, Thomas Kelly Anderson, Foley & Lardner, Roger Andrew Lewis, Goldberg Kohn Ltd., Chicago, IL, Steven C. Becker, David G. Luettgen, Jeffery N. Costakos, John C. Cooper, III, Steven C. Becker, Foley & Lardner LLP, Milwaukee, WI, J. Michael Huget, Deborah J. Swedlow, John C. Blattner, Butzel Long P.C., Ann Arbor, MI, Edward Alexander Eaton-Salners, Fish & Richardson P.C., San Diego, CA, Katherine Kelly Lutton, Katherine D. Prescott, Scott A. Penner, Tamara D. Fraizer, Fish & Richardson P.C., Redwood City, CA, Phillip J. Kessler, Butzel Long, Detroit, MI, Raymond N. Scott, Jr., Fish & Richardson P.C., Wilmington, DE, Rebecca L. Barbisch, Ruffin B. Cordell, Fish and Richardson P.C., Washington, DC, for Plaintiffs.

Ernie L. Brooks, Frank A. Angileri, Thomas A. Lewry, Brooks Kushman P.C., Southfield, MI, Kimball Richard Anderson, Imron T. Aly, Ivan Michael Poullaos, John Reynolds McNair, Kathleen B. Barry, Kevin John O'Shea, Samuel Mendenhall, Winston & Strawn LLP, Chicago, IL, for Defendant.

MEMORANDUM OPINION AND ORDER

AMY J. ST. EVE, District Judge:

In 2005, patentee The Chamberlain Group, Inc. ("Chamberlain"), and its exclusive licensee Johnson Controls Interiors, L.L.C. ("JCI"), filed suit against Lear Corporation, alleging that Lear's Car2U® product infringed U.S. Patent Nos. 6,154,544 and 6,810,123. Plaintiffs subsequently amended their complaint to allege that Lear also had infringed U.S. Patent No. 7,412,056. Following the close of discovery, the parties filed a number of dispositive motions. Lear seeks summary judgment as to its asserted noninfringement of the '544, '123, and '056 patents. (R. 406; R. 407.) Lear also requests summary judgment of invalidity of all three asserted patents under 35 U.S.C. § 101. (R. 637.) In addition to opposing the preceding motions, Chamberlain and JCI urge the Court to grant summary judgment in their favor as to Defendant's alleged infringement of all three patents. (R. 418; R. 428; R. 431.) Plaintiffs also move for summary judgment on Lear's invalidity defense that the asserted claims are directed to unpatentable subject matter. (R. 652.) Plaintiffs further seek summary judgment on Defendant's inequitable-conduct claim. (R. 665.) They also move for summary judgment on Defendant's invalidity defenses based on alleged lack of definiteness, enablement, and written description. (R. 659.)

The Court rules as follows on these motions: Lear's motion for summary judgment [943] as to its noninfringement of the '544 and '123 patents is granted in part and denied in part; Lear's summary-judgment motion of noninfringement of the '056 patent is denied; Plaintiffs' motions for summary judgment of Lear's alleged infringement of the '544, '123, and '056 patents are denied; Lear's motion for summary judgment of invalidity under 35 U.S.C. § 101 of the '544, '123, and '056 patents is denied; Plaintiffs' motion for summary judgment on Lear's invalidity defense that the asserted claims are directed to unpatentable subject matter is granted; Plaintiffs' motion for summary judgment on Lear's inequitable-conduct claim is granted in part and denied in part; and Plaintiffs' motion for summary judgment on Lear's invalidity defenses based on alleged lack of definiteness, enablement, and written description is granted in part and denied in part.

BACKGROUND

I. The Parties and the Lawsuit

Plaintiff, The Chamberlain Group, Inc., a manufacturer and purveyor of garage-door openers, is incorporated in Connecticut and has its principal place of business in Illinois. (R. 270 at ¶ 1; R. 410 at ¶ 2.) On November 28, 2000, Chamberlain acquired the rights to U.S. Patent No. 6,154,544 ("the '544 patent"), entitled "Rolling Code Security System." (R. 270 at ¶ 9.) Almost four years later, Chamberlain also acquired U.S. Patent No. 6,810,123 ("the '123 patent"), which bears the same title as the '544 patent. (R. 270 at ¶ 15.) The '544 and '123 patents disclose a remote-control, garage-door opening system, which includes a transmitter and a receiver. (R. 342 at ¶ 3.) The '544 and '123 patents are in the same patent family (the '123 patent is a continuation of the '544 patent) and the two share the same specification. (R. 410 at ¶ 9.) The similarity between the two patents led Chamberlain to file a "terminal disclaimer" to the '123 patent. (Id.)

On June 13, 2005, Chamberlain, owner of the '544 and '123 patents, sued Lear Corporation for infringement of those intellectual-property rights. (R. 410 at ¶ 5.) Lear is a manufacturer and seller of vehicle interior systems and components. (R. 342 at ¶ 1.) Chamberlain filed an Amended Complaint on October 5, 2005. (R. 43.) JCI, Chamberlain's exclusive licensee of the '544 and '123 patents, joined in the Amended Complaint as a named Plaintiff. (Id.) On August 19, 2008, Plaintiffs again amended their complaint to add a count of infringement of the subsequently issued U.S. Patent No. 7,412,056 ("the '056 patent"). (R. 270.) Chamberlain and JCI allege that Lear's transmitters, which are installed in automobiles made by OEM for actuating garage-door operators made by Chamberlain, infringe the '544, '123, and '056 patents. (Id.)

The allegedly infringing product is a universal transmitter used to open garage doors. (R. 434 at 26-27.) In opening those doors, the product's transmitter acts as a remote-control device that encrypts a coded signal each time the transmitter is actuated by the user and communicates that signal on a radio frequency carrier to the receiver, which is usually attached to a mechanical device that operates the garage door. Id. The receiver recognizes the coded signal sent from the transmitter, and then causes the mechanical device to operate the garage door. Id. The accused device is interoperable with Plaintiffs' garage-opening product, which incorporates the allegedly infringed patented technology. (R. 410-6 at 12; R. 455 at 14.)

II. The District Court's Grant of a Preliminary Injunction and Defendant's Successful Appeal to the Federal Circuit

Having held a Markman hearing, the [944] district court^[1] entered a claim-construction order in which it defined "binary code" as a "code in which each code element may be either of two distinct kinds of values, which code may represent various kinds of letters and numbers including, but not limited to, a representation of a base 2 number." (R. 148 at 8.) Construing "binary code" to encompass more than a binary number, the district court rejected Lear's proposed construction of "binary code generator." (Id. at 8-9.) Judge Moran reached the same conclusion with respect to "trinary code generator," observing that the claims did not limit the initial binary code to a binary number, but instead left "the term open to encompass other numerical and character languages, including trinary code." (Id. at 9.)

Shortly thereafter, the district court issued a preliminary injunction in Plaintiffs' favor. (R. 166.) Defendant contended that its Car2U® product used only trinary numbers and algorithms, and Plaintiffs argued that the distinction was irrelevant because the Car2U® device relied on binary language to communicate trinary numbers.^[2] Since Defendant conceded (as it had to) that the trinary numbers used by its Car2U® product were necessarily represented by 0s and 1s in the product's computer, the district court held that the accused product's "binary-coded trinary numbers" necessarily use binary code, and so the Car2U® product would likely fall within the '544's "binary-code" limitation. Id. This ruling formed the basis of the district court's decision preliminarily to enjoin Defendant.

On appeal, the Federal Circuit vacated the preliminary injunction and reversed the claim construction on which the district court had relied. The Chamberlain Group, Inc., et al. v. Lear Corp., 516 F.3d 1331 (Fed.Cir.2008). Judge Rader for the panel noted that, "for the district court, Lear's `binary-coded trinary numbers' were binary code, not trinary code." Id. at 1336. Examining the '544 patent's specification, the Federal Circuit found that the disclosure restricts the term "binary code" to a narrower meaning than the ordinary or customary reading of the term. Id. at 1337. The Federal Circuit construed "code" as it is used in the claims and concluded that "the '544 patent's term `trinary code' is relevant to construing `binary code' because the term `code' presumptively should carry the same meaning throughout the patent." Id. at 1337. Specifically, the Federal Circuit agreed with Lear that the '544 patent uses the term "binary code" "to represent the meaning of the message," or content, and "not its mere form." Id. In other words, the '544 limits "binary code" to binary, or base 2, numbers and "trinary code" to trinary, or base 3, numbers, even though the trinary numbers may be still expressed in the binary "0s and 1s" language of the transmitter's microcontroller. Id. at 1139.

Observing that its reversal of the district court's claim construction "fundamentally influence[d] the likelihood of success in proving infringement," the Federal Circuit vacated the preliminary injunction. Id. at 1340.

[945] III. Post-Remand Developments

On remand, Defendant moved for summary judgment, arguing that the Federal Circuit's construction made it impossible for Plaintiffs to prove infringement of the '544 and '123 patents. (R. 236.) The district court ordered discovery to close on August 15, 2008, and entered a briefing schedule. (R. 258.) Two days before discovery was scheduled to close, Plaintiffs sought leave to file a second amended complaint, adding a new patent, U.S. Patent No. 7,412,056, which issued just one day earlier. (R. 260.) On December 8, 2008, Defendant filed its second motion for summary judgment, arguing noninfringement of the '056 patent. (R. 293.) On April 9, 2009, the Executive Committee reassigned the case to this Court. (R. 315.)

On April 16, 2009, the Court denied Lear's motion for summary judgment of noninfringement of the '544, '123, and '056 patents as premature. On July 9, 2009, the Court stayed the case after Lear filed for bankruptcy. (R. 359.) The parties conducted further discovery and, on March 18, 2010, Lear filed renewed motions for summary judgment as to its noninfringement of the three asserted patents. (R. 406; R. 407.) Plaintiffs then filed their own motions for summary judgment of infringement. (R. 418; R. 428; R. 431.)

In addition to ruling upon these cross-motions for summary judgment, the Court now addresses several other motions that are presently before it. These are: Lear's motion for summary judgment of invalidity under 35 U.S.C. § 101 of the three asserted patents (R. 637); Plaintiffs' motion for summary judgment on Lear's invalidity defense that the asserted claims are directed to unpatentable subject matter (R. 652); Plaintiffs' motion for summary judgment on Lear's invalidity defenses based on alleged lack of definiteness, enablement, and written description (R. 659); and Plaintiffs' motion for summary judgment on Defendant's inequitable-conduct claim (R. 665).

SUMMARY-JUDGMENT STANDARD

Summary judgment is appropriate when "the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c)(2). A genuine issue of material fact exists if "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). In determining summary-judgment motions, "facts must be viewed in the light most favorable to the nonmoving party only if there is a `genuine' dispute as to those facts." Scott v. Harris, 550 U.S. 372, 380, 127 S.Ct. 1769, 167 L.Ed.2d 686 (2007). The party seeking summary judgment has the burden of establishing the lack of any genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). After "a properly supported motion for summary judgment is made, the adverse party `must set forth specific facts showing that there is a genuine issue for trial.'" Anderson, 477 U.S. at 255, 106 S.Ct. 2505 (quotation omitted); see also Fed.R.Civ.P. 56(e)(2) (requiring adverse party to "set out specific facts").

"[I]nfringement must be shown literally or equivalently for each limitation; general assertions of facts, general denials, and conclusory statements are insufficient to shoulder the non-movant's burden." TechSearch, L.L.C. v. Intel Corp., 286 F.3d 1360, 1372 (Fed.Cir.2002) (citations omitted). "Thus, the party opposing the motion for summary judgment of noninfringment must point to an evidentiary conflict [946] created on the record, at least by a counter-statement of a fact set forth in detail in an affidavit by a knowledgeable affiant. Mere denials or conclusory statements are insufficient." Id. at 1372 (citations omitted).

ANALYSIS

I. The '544 and '123 Patents

Lear has moved for summary judgment of noninfringement of the '544 and '123 patents, contending that the Federal Circuit's 2008 opinion in this case, in conjunction with undisputed facts in the record, reveals that its Car2U® product does not use binary numbers. (R. 407; R. 409.) Since the asserted claims in the '544 and '123 patents literally require the presence of those numbers—as all parties to this case agree—Lear contends that the absence of binary code in the allegedly infringing device entitles it to summary judgment as a matter of law. Lear, having failed to obtain a license from Chamberlain to practice the claimed invention, argues that it successfully invented around the '544 and '123 patents, thus allowing it to market a substitutable product that evades the zone of exclusivity inherent in those patent rights. (R. 410 at ¶ 62.)

In its response to Lear's motion, JCI devotes considerable time challenging Defendant's efforts to design around the claims underlying those patents. (R. 422 at 4-5.) Far from being a source of consternation, however, inventing around a patented technology is highly desirable from both an intellectual-property and public-policy perspective. See, e.g., WMS Gaming, Inc. v. Int'l Game Tech., 184 F.3d 1339, 1355 (Fed.Cir.1999) (noting that "the patent law encourages competitors to design or invent around existing patents"); State Indus., Inc. v. A.O. Smith Corp., 751 F.2d 1226, 1236 (Fed.Cir.1985) ("One of the benefits of a patent system is its so-called `negative incentive' to `design around' a competitor's products, even when they are patented, thus bringing a steady flow of innovations to the marketplace."). The question before the Court, of course, is whether, viewing all facts in favor of the nonmoving party, Lear succeeded in its design-around efforts. Answering that question requires the Court to determine whether a genuine issue of material fact exists as to whether Lear's Car2U® product uses binary numbers, a binary-code generator, or a trinary-code generator for generating a three-valued or trinary code responsive to the variable binary code. If no reasonable jury could find that Defendant's Car2U® product operates in such a manner, Lear is entitled to summary judgment as to the '544 and '123 patents. See, e.g., Vita-Mix Corp. v. Basic Holding, Inc., 581 F.3d 1317, 1323 (Fed.Cir.2009) (citing Anderson v. Liberty Lobby, 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)). In light of the claim construction adopted by the Federal Circuit, a genuine issue of fact exists that Defendant's Car2U® product literally generates, uses, or otherwise employs binary numbers. Lear is therefore not entitled to summary judgment of literal noninfringement of the '544 and '123 patents on that ground. Furthermore, there is a genuine issue of fact as to whether the accused device infringes those patents under the doctrine of equivalents. Lear is entitled to summary judgment, however, of literal noninfringement of the '544 patent and claim 17 of the '123 patent because the Court construes "binary code generator" to require the fact of storage. This result follows because there is no genuine issue that the accused product does not store binary numbers.

A. The Federal Circuit's Claim Construction Controls

A preliminary issue concerns the impact of the Federal Circuit's 2008 ruling. [947] Plaintiff JCI contends that "the Federal Circuit wiped the slate clean on claim construction and gave the parties a blank slate on which to move forward." (R. 422 at 6.) Plaintiff Chamberlain similarly argues that the appellate court's ruling was merely preliminary, such that this Court can and should revisit the relevant claim construction. (R. 432 at 4, 16-18.) Specifically, Chamberlain contends that the Federal Circuit's construction of relevant claim terms—including that "code" is synonymous with "number" due to the effect of the '544 patent's specification in giving particular limited meanings to the language in the claims—was qualified by a footnote in the court's opinion. (Id. at 16 (quoting Chamberlain, 516 F.3d at 1340 n. 2).) This footnote observed that "Chamberlain did not identify even any expert reports or testimony in support of its particular claim meaning theory." Id.

A full reading of the Federal Circuit's opinion, however, reveals that the court's construction was premised on Chamberlain's lack of expert reports. The appellate court went to some length to explain how the disputed claim terms, when read together and in light of the specification, compel the conclusion that, for the purpose of the '544 patent, "code" is synonymous with "number" and "binary code" represents "the meaning of the message." Chamberlain, 516 F.3d at 1335. The Federal Circuit's construction remains invariant in the face of Chamberlain's proffered expert reports, and, as previously noted, it is the "law of the case." (R. 319 at 4.)

This conclusion holds despite the case law relied on by Chamberlain. (R. 432 at 16 (quoting SEB S.A. v. Montgomery Ward & Co., Inc., 594 F.3d 1360, 1368 (Fed.Cir.2010); CVI/Beta Ventures, Inc. v. Tura L.P., 112 F.3d 1146, 1160 n. 7 (Fed. Cir.1997)).) Neither decision establishes that the Court is free, or ought, to disregard the Federal Circuit's prior claim construction. Both Montgomery Ward and Marchon Eyewear involved situations in which the Federal Circuit had to determine how it, as an appellate court, should receive a claim construction tendered by a district court on the basis of an incomplete factual record. Montgomery Ward, 594 F.3d at 1360, passim; CVI, 112 F.3d at 1146, passim. Neither case speaks to a situation in which a lower court, in light of a more complete record, is asked to jettison a prior claim construction adopted by the Federal Circuit. It further bears noting that, in the present case, the district court already had held a Markman hearing by the time the Federal Circuit determined the appropriate claim construction. (R. 148 at 1.) The Federal Circuit was not asked to ascertain the meaning of disputed claim terms in the presence of an impoverished factual record.

In continuing to abide by the Federal Circuit's claim construction in the face of a subsequent and contrary opinion proffered by Chamberlain's expert witness, Dr. Rhyne, this Court also notes the appellate court's earlier proclamation that "[i]ntrinsic evidence, that is the claims, written description, and the prosecution history of the patent, is a more reliable guide to the meaning of a claim term than are extrinsic sources like technical dictionaries, treatises, and expert testimony." Chamberlain, 516 F.3d at 1335. Given the Federal Circuit's careful exposition as to why its construction followed from such intrinsic sources as the claims and written description, the dearth of relevant case law relied upon by Chamberlain, and the fact that the relevant aspects of Dr. Rhyne's report would not persuade the Court to rule otherwise, the Federal Circuit's claim construction holds.

The Court therefore denies Chamberlain's cross-motion for summary judgment [948] of infringement of the '544 and '123 patents, which is premised on the adoption of Chamberlain's proposed claim construction over that previously found by the Federal Circuit. (R. 432 at 16-18; R. 491 at 4-8.)

B. JCI's Contention That Lear's Product Infringes The '544 And '123 Patents Because It Performs The Same Function As Plaintiffs' Patented Product Fails

Plaintiff JCI's first substantive argument is that "Lear performs the method disclosed in the Chamberlain patents, not because it wants to, but because it needs to.... For Lear to have a commercially viable product ... [its] garage door opener must be capable of opening... Chamberlain's garage door openers." R. 422 at 5 (emphasis in original). JCI thus claims that Lear's Car2U® product must infringe the '544 and '123 patents because there is no other way to "open Chamberlain garage door openers" but "to use the patented Chamberlain security algorithm or its equivalent." Id. at 5; see also id. at 7-9. This assertion is a non-starter, for it is well established that mere functional equivalence does not render an accused product or process infringing. See Chiuminatta Concrete Concepts v. Cardinal Indus., Inc., 145 F.3d 1303, 1309-10 (Fed.Cir.1998). Put differently, the fact of interoperability does not require mathematical identity in all material respects, such that an accused device necessarily infringes a patented product or process that achieves precisely the same result. Instead, the fact of infringement must be determined by reference to the claims in the patent. See Zenith Lab., Inc. v. Bristol-Myers Squibb Co., 19 F.3d 1418, 1423 (Fed.Cir.1994). This is not to say, of course, that interchangeability is irrelevant to the infringement analysis—it may be quite pertinent in assessing validity under the doctrine of equivalents. See, e.g., Fiskars, Inc. v. Hunt Mfg. Co., 221 F.3d 1318, 1324 (Fed.Cir.2000) (observing that "[i]nterchangeability is indeed relevant to equivalency"). Nevertheless, the Federal Circuit has made clear that "interchangeability... is certainly not dispositive." Cardinal Industries, 145 F.3d at 1309.

JCI next contends that Lear's Car2U® product "must produce a trinary number that corresponds to the value of a mirrored (reversed) binary number." R. 422 at 8 (emphasis in original). Looking to the Federal Circuit's claim construction, which emphasized that "trinary code is still trinary code when expressed as a trinary number represented by (base 2) bit pairs, using 0s and 1s," it does not follow that Lear's production of a trinary number that corresponds to the value of a mirrored binary number necessarily constitutes the use of a "binary number." Chamberlain, 516 F.3d at 1339. There is no reason to infer that mere correspondence is enough. Furthermore, Plaintiff Chamberlain's own expert, Dr. Rhyne, testified at his deposition that Lear's software "stores both the rolling code value and the mirrored rolling code value in what the Federal Circuit calls trinary." (R. 410-2 at 48.)

C. There Is No Genuine Issue Concerning the Fact that Lear's Car2U ® Product Does Not Literally Use "Binary Code" as the Federal Circuit Has Construed that Claim

1. The '544 and '123 Patents Require the Generation or Use of Binary Codes

The Court now turns to the crux of the parties' dispute: whether a genuine issue of fact exists as to whether the accused device uses "binary code." The parties do not dispute that the absence of binary code, either literally or equivalently, within [949] the accused product would necessitate a finding of noninfringement as to the '544 and '128 patents. Accord R. 432-1 at 6 ("[T]he sole infringement dispute is whether the Lear transmitter generates a binary code on which the trinary code is based.").

As highlighted in italics, each asserted claim requires the presence or use of binary code. Of course, it is black-letter law that the absence of a patented claim in the accused device is fatal to any contention of literal infringement. See Research Plastics, Inc. v. Fed. Packaging Corp., 421 F.3d 1290, 1297 (Fed.Cir.2005).

Claim 1 of the '544 patent claims as follows:

A transmitter for sending an encrypted signal to control an actuator, comprising:

[1] oscillator for generating a radio frequency oscillatory signal;

[2] apparatus for enabling the sending on an encrypted signal;

[3] binary code generator responsive to the enabling apparatus for generating a variable binary code, said variable code being different for each enabling by the enabling device;

[4] trinary code generator for generating a three-valued or trinary code responsive to the variable binary code; and

[5] transmitting apparatus for modulating the radio frequency oscillatory signal with the trinary code to produce a modulated trinary coded variable radio frequency signal for operation or control of a secure actuator.

(R. 270-2 at 27) (emphasis added).

Claim 1 of the '123 patent reads as follows:

A transmitter comprising:

[1] an oscillator for generating radio frequency oscillatory signal;

[2] a source of a sequence of binary codes, successive binary codes in the sequence being different from predetermined preceding codes in the sequence;

[3] trinary code generator for converting said sequence of binary codes to a sequence of trinary codes; and

[4] a transmitting apparatus for modulating the radio frequency oscillatory signal with the binary codes to produce a modulated trinary coded radio frequency signal.

(R. 270-2 at 51) (emphasis added).

Finally, Claim 17 of the '123 patent claims:

A transmitter for authorizing access to a secure area by a control actuator receiver, comprising:

[1] an oscillator for generating a radio frequency oscillatory signal;

[2] a binary code generator for generating a sequence of binary codes, predetermined ones of the binary codes being different from others of the binary codes of the sequence;

[3] a trinary code generator responsive to the binary codes for generating three-valued or trinary codes; and

[4] a transmitting apparatus for modulating the radio frequency oscillatory signal with the trinary codes to transmit a modulated trinary coded radio frequency signal to the control actuator receiver.

(R. 270-2 at 51) (emphasis added).

2. The Parties Dispute Whether Lear's Car2U® Product Uses Binary Code

The principal dispute concerns the question whether Lear's Car2U® product operates using purely trinary numbers, as its designers apparently sought to achieve. (R. 434 at 54-55; R. 410 at 21, ¶ 62.) Defendant's expert, Dr. Schonfeld, contends that "the securePlus module operates [950] exclusively on trinary numbers and performs only trinary operations." (R. 410-7 at 13, ¶ 30.) He submits that "the Lear Car2U product uses and operates only on trinary numbers" and thus that the device "is neither responsive to nor does it convert `binary codes.'" (Id. at 16, ¶ 36.)

Dr. Schonfeld's conclusions are bolstered by a number of meaningful concessions by Plaintiffs' experts. First, Chamberlain's expert. Dr. Rhyne, admitted in his deposition that Lear's code "stores both the rolling code value and the mirrored rolling code value in what the Federal Circuit calls trinary." (R. 410-2 at 48.) He also opined that the "fixed code" is stored as a trinary number in Lear's software. (Id.). Similarly, Chamberlain's expert, Mr. Cole, agreed in his deposition that "both the variable and fixed code[s] are trinary numbers in Lear's system." (R. 410-8 at 6; see also id. at 10.) Lear argues that these admissions, read in light of the Federal Circuit's claim construction and in conjunction with Dr. Schonfeld's report, necessitate an entry of summary judgment in its favor as to noninfringement of the '544 and '123 patents. (R. 409 at 12-18; R. 455 at 5-13.)

Plaintiffs dispute this assessment. They do not seek to counter the fact, well established in the record, that Lear's Car2U® product uses trinary numbers. (R. 410-7 at 2-112; R. 410-2 at 48; R. 410-8 at 6, 10.) Instead, they challenge whether the allegedly infringing product operates using exclusively trinary code. Specifically, Plaintiffs contend that the operation of the "Compare Ternary function" in the accused product entails the employment of a binary number. (R. 422 at 10-18; R. 432 at 9-11.) Plaintiffs assert that this function employs the subtraction method for binary conversion. (R. 422 at 11.) To this end, Plaintiffs proffer the expert reports of Mr. Cole and Dr. Stevenson.

Mr. Cole opines that the "Lear microcontroller performs the steps to convert a trinary number to a binary number" and asserts that the "microcontroller memory uses binary values (high and low bit), which represent 0 and 1." (R. 410-6 at 13, 15, ¶¶ 40, 47.) He finds binary numbers in the "special function register Status Z-bit[, which] fluctuates between 0 and 1 depending on whether a component power of 2 has been found in the counter. When a component power of 2 is not found, the value of this bit is 1. When the component power of 2 is found, the value of this bit is zero." (Id. at 25, ¶ 89.) He thus concludes that, "[r]ead sequentially, these Z-bit values constitute ... a binary number." (Id. at ¶ 90.)

Professor Stevenson similarly explains that, although he does "not dispute that Compare Ternary () eventually returns a trinary number, it is [his] opinion that there is a `binary code generator.' It is the comparison of the return value of Compare Ternary () to 0 inside the if () statement when run 31 times through the for () loop in Step 3 of the SecurityPlus () function. This comparison determines bit by bit whether the power of two in a binary number is present or absent." (R. 410-4 at 109.)

Plaintiff JCI summarizes the relevant process as follows:

• Each time a button on the garage door opener is pressed, the SecurityPlus() function increments the value of the variable code, button.data.chamberlain_sync[], by 3.

• Using the newly incremented value, a "for() loop" is executed.

• This "for() loop" runs 31 times, once for each of the 31 powers of two that the variable code could contain.

• Each time through the "for() loop," a comparison of the Compare Ternary() [951] function is made to the number 0 (this happens inside the "if()" statement); the internal comparison checks whether the variable code value contains that specific power of two.

• In other words, the first time through the "for() loop," the code checks whether the value of the variable code is greater than or equal to 231, (which is 2 raised to the thirty-first power), and if so, subtracts 231 from the variable code value to create a new temporary value Temp_Copy_K[], the second time through the loop the code checks whether the value of the variable code is greater than or equal to 230, the third time through the loop the code checks whether the value is greater than 229, etc.

• The resulting sequence of the outputs from the 31 comparisons made inside the "if()" statements is, in Dr. Stevenson's opinion, a binary number, because it is verbatim to the binary number that represents the quantity of the variable code.

(R. 422 at 11) (internal citations omitted) (emphasis in original).

3. Expert Disagreement Is Not Necessarily Enough In Itself to Preclude Summary Judgment

Plaintiffs' principal contention is that, because the plaintiff-and defense-side experts in the present case reach diametrically opposed conclusions as to whether Lear's Car2U® product generates or otherwise employs a binary number, summary judgment is categorically improper. (R. 422 at 10; R. 432 at 4-11.) It is indeed true that a "battle of the experts" can preclude summary judgment. See, e.g., Hot Wax, Inc. v. Turtle Wax, Inc., 27 F.Supp.2d 1043, 1048 (N.D.Ill.1998). Nevertheless, not every contention asserted by an expert will suffice to create a genuine issue of material fact to defeat summary judgment. Gratuitous assertions, for example, which are devoid of substantive explanation and analysis, need not be credited. See, e.g., Telemac Cellular Corp. v. Topp Telecom, Inc., 247 F.3d 1316, 1329 (Fed.Cir.2001) ("Broad conclusory statements offered by ... experts are not evidence and are not sufficient to establish a genuine issue of material fact."); Moore U.S.A., Inc. v. Standard Register Co., 229 F.3d 1091, 1112 (Fed.Cir.2000). Similarly, expert contentions that cannot be squared with applicable claim construction, as passed upon in this case by the Federal Circuit, will not create a genuine issue of material fact. Accord Southwall Techs., Inc. v. Cardinal IG Co., 54 F.3d 1570, 1578 (Fed.Cir.1995) ("Claim interpretation, as a question of pure law, is amenable to summary judgment and disagreement over the meaning of a term within a claim does not necessarily create a genuine issue of material fact."). Furthermore, courts may disregard expert testimony introduced through affidavits that is inconsistent with that expert's prior deposition testimony. See Delaware Valley Floral Group, Inc. v. Shaw Rose Nets, L.L.C., 597 F.3d 1374, 1382 (Fed.Cir.2010).^[3]

In the face of the discordant expert testimony referenced above, Lear articulates several arguments why Plaintiffs' proffered evidence is insufficient both to meet their burden of proof in responding to a [952] motion for summary judgment and hence to raise a genuine issue of material fact. As discussed in detail below, Lear has established that it is entitled to summary judgment as to literal noninfringement of the '544 and '123 patents. See Anderson, 477 U.S. at 255, 106 S.Ct. 2505 (requiring an adverse party to "set forth specific facts showing that there is a genuine issue for trial").

4. Defendant Is Not Entitled to Summary Judgment By Virtue of its Broad Contention That the Accused Product Does Not Operate With or Convert Binary Code as That Term Has Been Construed by the Federal Circuit

Defendant's case for noninfringement begins with a far-reaching assertion that, because its "software program was specifically designed in such a way as to avoid using binary numbers," since its "transmitter operates only with trinary numbers," and due to the asserted fact that its product "does not convert any binary numbers into trinary numbers," the accused device cannot infringe. (R. 409 at 13) (emphasis omitted). Lear grounds this argument in the Federal Circuit's claim construction, which, it contends, precludes the possibility of infringement. (Id. at 16-18.)

In light of the diametrically opposed contentions of fact advocated by the parties' respective experts, Lear's summary-judgment argument on the basis of this broad argument fails. This holds true in spite of the Federal Circuit's claim construction, which holds that trinary numbers constitute trinary code even when they are stored in the microcontroller in 1s and 0s (as they must be). Chamberlain, 516 F.3d at 1339. Since Plaintiffs' experts articulate reasoned explanations as to why they believe the Z-bit generates binary code as that term has been defined by the Federal Circuit, the Court declines to grant summary judgment on the blanket ground that the relevant claim construction categorically forecloses literal infringement. (R. 410-5 at 58-59, ¶¶ 186-89; R. 410-6 at 33-41, ¶¶ 124-51.)

5. Defendant Is Not Entitled to Summary Judgment on its Argument That the Z-Bit Cannot Be Understood to Generate or Use a Binary Number Because It Is Merely a Switch or Status Flag

Lear next contends that there is no dispute concerning the fact that the Z-bit status register is not a number. (R. 409 at 17; R. 455 at 6.) Defendant instead characterizes the Z-bit register as a "status flag" or "register." (Id.) This, Lear asserts, entitles it to summary judgment. Plaintiff Chamberlain counters that Dr. Rhyne and Mr. Cole testified that "the Z-bit does indeed represent a binary number." (R. 432 at 12.)

Chamberlain's response raises an important question whether the status register's "representing" a binary number is the same as being one, generating one, or producing a sequence of them. Plaintiffs argue that the Z-bit register's not being a number does not foreclose the possibility of its generating or otherwise employing a binary number. In support, they reference the expert reports of Dr. Rhyne and Mr. Cole, who opine that Lear's transmitter determines a series of component powers of 2 for each rolling counter value, and hence generates and uses binary codes. (R. 410-5 at 44-47, 59, 66-69, ¶¶ 138-153, 189, 215-27; R. 410-6 at 13, 19, 25-26, 33-34,35, ¶¶ 40, 60, 89-92, 124-125, 132.) In light of their supported contentions, the Court cannot award Lear summary judgment of noninfringement on the particular ground of the Z-bit register's not itself being a number because this is an issue of fact.

[953] 6. Defendant Is Not Entitled to Summary Judgment of Literal Noninfringement of the '544 and '123 Patents on the Ground that the Z-Bit Register Can Only Be Construed to Generate or Otherwise Use a Binary Number When One Consciously Omits Intervening Statuses

Lear contends that the Z-bit register's supposed generation of 1s and 0s cannot constitute the generation of a binary number on the ground that the Z-bit produces multiple intervening values that Plaintiffs' experts chose not to record. (R. 409 at 17-18; R. 455 at 9-10.) Indeed, Plaintiff's expert Mr. Cole admitted in his deposition that the series of Z-bit statuses he represented corresponds to the status of the Z-bit at successive break points at the BZ command. (R. 410-8 at 19.) He admitted further that he did not write down or represent intervening statuses of the Z-bit—statuses that he did not characterize as significant. (Id.) He thus conceded that his recorded sequence of Z-bit sequences "is not a complete record of the Z-bit during the entire time represented in the display." (Id. at 20.) This fact is therefore undisputed.

Defense expert Dr. Schonfeld submits that the presence of intervening statuses in the Z-bit, which are ignored by Plaintiffs for the purpose of identifying the generation of a binary number, precludes the existence of such a number, since it would reflect nothing more than a "hypothetical" collection of Z-bit flags. (R. 410-10 at ¶ 22.) He further explains:

Dr. Rhyne and Mr. Cole incorrectly claim that a collection of `1's and `O's from the `Z-bit' flag forms a `sequence' which represents a `binary number' corresponding to the `trinary number' in Lear's Car2U product. This `sequence' has been obtained by using the Microchip MPLab emulator debugging software, and then updating the status of the `Z-bit' flag at specific `breakpoints' or pausing points selected by Mr. Cole. Specifically, Mr. Cole recorded the status of the `Z-bit' flag at specific points in the execution of Lear's Car2U software, and ignored the status of the `Z-bit' flag at other points during the execution of the program between the selected points. Thus, the purported `binary number' represents a hypothetical collection of the `Z-bit' flag at nonsuccessive points during the execution of the program and discards the status of the `Z-bit' flag at intervening points in time. As I pointed out earlier, the `Z-bit' flag changes in response to arithmetic and logic operations and thus its status toggles repeatedly throughout the execution of the program. For instance, the command `SUBFWB [Oxl], W' which appears merely four lines below the `BZ Ox3aOe' command, also alters the status of the `Z-bit' flag. Therefore, the `Z-bit' flag will toggle in between the isolated points selected by Mr. Cole, who ignores intervening changes in the `Z-bit' flag.

(R. 410-10 at ¶ 22) (internal citations omitted).

Lear thus argues that "manually selecting out Z-bit statuses and throwing away intervening values that the experts do not like is relevant. It shows that Lear's product never treats the Z-bit as if it was [sic] a number." (R. 455 at 9) (emphasis in original).

Chamberlain contests the significance of the undisputed fact that not all Z-bit values are recorded on the basis that "Dr. Rhyne and Mr. Cole ... disagree." (R. 432 at 13.) Dr. Rhyne explains as follows:

Since most computer programs are performing multiple functions during their execution, it is normal for the Z bit to be used as other functions are performed by the Lear software. The fact that the [954] Z bit performs other functions between the times when it is used to define the sequence of bits in the calculated binary number does not detract from the fact that it shows the generation of powers of two and generation of a binary number when the Lear software is performing the relevant functions in the securePlus module in its software. It is irrelevant that the Z-bit takes on other values when it is executing functions other than generating binary code during the Compare Ternary function. The key is that at the times when the each bit of the binary number being generated is calculated, the value of that bit is represented in the Zbit, as it must be to allow the binary mirroring process to be performed by the Lear software.

(R. 434-3 at 290-91.)

Mr. Cole similarly opines:

Whether the Z-bit is an "operand" has no bearing on whether the Z-bit sequence is a number. Although it is entirely possible that the Z-bit is used in arithmetic operations within the processor, the performance of arithmetic operations on the Z-bit is not required for the Z-bit sequence to constitute a binary number. In substance, irrespective of the intermediate values, the generation of values at the Z-bit register during the operation of the securePlus module in the Lear software constitutes generation of a binary number.

(R. 434-3 at 299.)

One might question the sufficiency of these explanations on the ground that they do not explain how the Z-bit could be literally read to generate numbers, binary or otherwise, if such values can be ascertained only by recording particular statuses over time and ignoring intervening ones. Dr. Rhyne and Mr. Cole's declarations, however, are nevertheless sufficient to reveal a genuine issue of material fact. The Federal Circuit previously explained that "[t]he substance, rather than the form, controls whether a `code' is `binary' or `trinary' for the '544 patent." Chamberlain, 516 F.3d at 1339 (emphasis added). Dr. Rhyne and Mr. Cole's declarations explain that the Z-bit register's operation can give rise to the generation of a binary number "in substance." (R. 434-3 at 299.) Although their explanations are not as comprehensive as they could be, to survive summary judgment, they need not "give a primer on why the facts allow the expert to reach that conclusion." Vollmert v. Wis. Dep't of Trans., 197 F.3d 293, 300-01 (7th Cir. 1999); Patton v. MFS/Sun Life Financial Distribs., Inc., 480 F.3d 478, 487 (7th Cir. 2007) ("[E]ven brief expert reports will suffice at the summary judgment stage."); see also Novartis Corp. v. Ben Venue Labs., Inc., 271 F.3d 1043, 1051 (Fed.Cir. 2001) (observing that the sufficiency of the factual basis underlying an expert report is a question for the relevant regional circuit "since the factual foundation necessary to support an expert's opinion is not a matter peculiar to patent law").

A reasonable jury could find that, because Plaintiffs' experts had to pick and choose particular statuses of the Z-bit values, hence necessarily ignoring intervening values, in order to obtain a sequence that they contend to be a binary number, the Z-bit cannot literally generate or use a binary number. In light of Plaintiffs' experts' reasoned explanations, however, a reasonable jury would not be confined to reaching that conclusion. To grant summary judgment in Lear's favor, the Court would have to weigh conflicting evidence. Accordingly, the Court cannot grant Lear summary judgment on this ground. See, e.g., Dowden v. Polymer Raymond, Inc., 966 F.2d 1206, 1207 (7th Cir.1992) ("Summary judgment is not an appropriate occasion [955] for weighing the evidence and should not be granted if the evidence supports alternate inferences.") (internal citations omitted).

7. Lear Is Entitled to Summary Judgment of Literal Noninfringement of Claim 1 of the '544 Patent and Claim 17 of the '123 Patent Because "Binary Code Generator" Requires That the Relevant Binary Code Be Stored

Defendant is entitled to summary judgment as to literal noninfringement of claim 1 of the '544 patent and claim 17 of the '123 patent because "binary code generator" requires, consistent with the Federal Circuit's interpretation, the fact of storage. There is no genuine issue that the accused product does not store a binary number.

Plaintiff Chamberlain argues that the accused device does store binary codes. (R. 432 at 12-13.) Chamberlain's primary contention is that "all variables in the Car2U transmitter are processed and stored as binary codes because all processors use binary architecture for representing and storing." (R. 434 at 28.) This position, however, is inconsistent with the Federal Circuit's opinion, which held that, although "the transmitter's microcontroller, like other computers, undisputably stores and processes data as sequences of 0s and 1s," the district court had erred in concluding that "`binary code' encompassed anything represented in 1s and 0s in a computer." Chamberlain, 516 F.3d at 1337-39. Indeed, Chamberlain would appear to admit that this is the case. (R. 434 at 32) (contending that, "[u]nder the Federal Circuit's construction of `binary number'... the Compare Ternary function generates binary numbers," and further contending that "[u]nder Chamberlain's construction of `binary code,' the PIC18 processor in Lear's Car2U transmitter process and stores all information as binary code") (emphasis added). Because the Federal Circuit's construction remains law of the case, Plaintiff's argument fails. Chamberlain, 516 F.3d at 1339.

In the alternative, Chamberlain contends that, "[u]nder Lear's construction of `binary code,' the Lear transmitter generates and stores a binary number."^[4] (R. 434 at 35.) In doing so, Chamberlain relies on paragraphs 139-44 and 189 of Dr. Rhyne's expert report, as well as paragraph 55 of Mr. Cole's report. (Id. at 35.) Paragraph 55 of Mr. Cole's report, however, does not support that position. (R. 410-6 at ¶ 55; R. 434-3 at ¶ 55.) Nor do paragraphs 189 and 139 to 144 of Dr. Rhyne's expert report offer an opinion as to the alleged fact of storage. (R. 434-2 at 44-45, 59, ¶¶ 139-44, 189.)

The admissions Dr. Rhyne and Mr. Cole made during their respective depositions are even more important. Dr. Rhyne testified that Lear's code "stores both the rolling code value and the mirrored rolling code value in what the Federal Circuit calls trinary." (R. 410-2 at 48.) He also opined that the "fixed code" is stored as a trinary number in Lear's software. (Id.) Mr. Cole testified that the Z-bit status register can store a 30-bit number by reading them sequentially. (R. 410-8 at 18.) He further testified that "the counter in the Lear device is stored as a trinary [956] number." (R. 410-8 at 9-10; see also R. 410-6 at 26, ¶ 92.)

In light of the preceding analysis, there is no genuine issue of fact concerning the accused product's nonstorage of binary numbers. The Court thus proceeds to consider whether the term "binary code generator" necessitates the storage of a binary number. Of course, claim construction is a question of law that entitles the district court to award summary judgment despite the presence of a dispute between experts over the meaning of a claim term. See Lighting World, Inc. v. Birchwood Lighting, Inc., 382 F.3d 1354, 1358 (Fed. Cir.2004) (observing that all claim-construction issues are a matter of law for the court, though evidence from experts may be relevant).

Defense expert Dr. Schonfeld opines that a "`binary code generator' produces and stores binary numbers." (R. 410-7 at 15, ¶ 35; see also id. at 13-15, ¶¶ 31-32.) As a result, he contends, the fact that Lear's Car2U® product does not store any binary number it supposedly produces pursuant to the Z-bit sequence of the status register means that it cannot entail the use of a "binary code generator." (Id.) Mr. Cole opposes that view, arguing that the appropriate construction of "binary code generator" does not require storage. (R. 410-6 at 35-37, ¶¶ 133-36.) Plaintiffs' experts, Professor Stevenson and Dr. Rhyne, echo Mr. Cole's perspective. (R. 410-4 at 110, ¶ 179; R. 410-5 at 33, ¶ 101.)

Mr. Cole first asserts that the Federal Circuit's claim construction does not support an interpretation requiring storage. (R. 410-6 at 35, ¶ 133.) He is mistaken. The Federal Circuit observed that, for the purpose of the '544 patent, "the term `code' presumptively should carry the same meaning throughout the patent." Chamberlain, 516 F.3d at 1337. It stressed further that "`binary code' and `trinary code' should have parallel meanings, differing only insofar as `binary' and `trinary' differ in their relationships to the numbers 2 and 3." Id. (emphasis added). In the very next sentence, the Federal Circuit held that "`trinary code' as used in the '544 patent means values stored and processed in the binary language as 0s and 1s." Id. at 1337 (emphasis added). If this Court is to bestow the term "code" with the same meaning throughout the patent, then, as with "trinary code," "binary code" similarly means values that are "stored and processed." According to the Federal Circuit, then, "the '544 patent notes that the transmitter's microcontroller generates the trinary code," which "means values stored and processed in the binary language as 0s and 1s." Id. at 1337-38 (emphasis added). The Federal Circuit's claim construction strongly supports an interpretation requiring storage.

Mr. Cole supports his position by appealing to extrinsic dictionary evidence as to the meaning of "binary code" and "binary number." (Id. at 36-37, ¶¶ 134-35.) Such evidence is, of course, relevant, but its hermeneutic value is of ancillary importance. See Kara Tech., Inc. v. Stamps. com, Inc., 582 F.3d 1341, 1348 (Fed.Cir. 2009) ("It is not uncommon in patent cases to have ... dueling experts. When construing claims, however, the intrinsic evidence and particularly the claim language are the primary resources.... While helpful, extrinsic sources ... cannot overcome more persuasive intrinsic evidence."). In addition, it is relevant that the Federal Circuit has already determined that the term "binary code" in the context of the '544 patent has "a narrower meaning" than "an ordinary or customary reading" would provide. Chamberlain, 516 F.3d at 1337.

Mr. Cole, Professor Stevenson, and Dr. Rhyne look further to dependent claim 7, [957] which specifies a "transmitter for sending an encrypted signal to control an actuator according to claim 1, wherein said binary code generator for generating a variable binary code includes a non-volatile memory for storing a variable binary code." (R. 410-6 at 35, ¶ 133.) The Federal Circuit has made clear that "the presence of a dependent claim that adds a particular limitation gives rise to a presumption that the limitation in question is not present in the independent claim." Phillips v. AWH Corp., 415 F.3d 1303, 1315 (Fed.Cir.2005) (en banc). Mr. Cole therefore interprets the fact that storage is specified in a dependent claim as indicating that storage is an optional feature in the asserted independent claim. (R. 410-6 at 35-36, ¶ 133; see also R. 410-4 at 110, ¶ 179; R. 410-5 at 33, ¶ 101.) Nevertheless, the Court agrees with Defendant that the proper construction is that the independent claim requires that codes be stored in a computer.^[5] Dependent claim 7 imposes a further limitation, which is that the storage take place in "non-volatile memory." (R. 410-10 at 13, ¶ 25.)

This Court thus construes "binary code generator," as used in the '544 and '123 patents, to require not only the production, but the storage of binary numbers. Because there is no material dispute that Lear's Car2U® device does not store a binary number, Lear is entitled to summary judgment of literal noninfringement of claim 1 of the '544 patent and claim 17 of the '123 patent.

D. There Is a Genuine Issue of Material Fact as to Whether Lear's Car2U® Product Infringes Under the Doctrine of Equivalents

Defendant also seeks summary judgment of noninfringement on Plaintiff's doctrine-of-equivalents claim. Plaintiffs argue that the operation of the Z-bit status register within Lear's Car2U® product involves the generation and use of a binary number. It is a fundamental tenet of patent law that an accused product may infringe a patent if it meets each limitation of the claim equivalently. See Cybor Corp. v. FAS Techs., Inc., 138 F.3d 1448, 1459 (Fed.Cir.1998) (en banc). "An element in the accused product is equivalent to a claim limitation if the differences between the two are `insubstantial' to one of ordinary skill in the art." Amgen Inc. v. F. Hoffman-LA Roche, 580 F.3d 1340, 1382 (Fed.Cir.2009) (citing Warner-Jenkinson Co. v. Hilton Davis Chem. Co., 520 U.S. 17, 40, 117 S.Ct. 1040, 137 L.Ed.2d 146 (1997)). To determine whether the difference between an element in the accused product is insubstantially different to a claim limitation, the test is whether the accused device performs substantially the same function in substantially the same way to obtain the same result as the claim limitation. See id. (citing Graver Tank & Mfg. Co. v. Linde Air Prods. Co., 339 U.S. 605, 608, 70 S.Ct. 854, 94 L.Ed. 1097 (1950)).

Plaintiffs' expert reports provide that the accused product, even if it does not literally infringe the asserted patents, does infringe under the doctrine of equivalents. (R. 410-5 at 62-66, 77-80; R. 410-4 at 85-97.) Dr. Rhyne and Professor Stevenson present detailed analysis as to why, in their respective opinions, each element in the accused device is equivalent to the relevant claim limitations in the '544 and '123 patents. (Id.)

Noting the Federal Circuit's command that "the patent claims and specification... do not permit [the binary code and [958] trinary code] terms to overlap," Defendant argues that "a key facet of the invention is that it employs both the binary and trinary number systems." (R. 409-1 at 14) (emphasis omitted). Pursuant to this contention, Lear argues that any view that "Lear's trinary code and trinary operations are `substantially equivalent' to the patents' `binary code' limitations must fail" because "[s]uch a theory of equivalence would completely vitiate the claim element of a binary code, an element which is separate and cannot overlap." (Id. at 15.) See Vehicular Techs. Corp. v. Titan Wheel Intern., Inc., 141 F.3d 1084, 1090 (Fed.Cir. 1998) ("[I]f a claim limitation must play a role in the context of the specific claim language, then an accused device which cannot play that role, or which plays a substantially different role, cannot infringe under the doctrine of equivalents.").

Lear's error lies in its assertion that a jury could not find that its Car2U® product infringes under the doctrine of equivalents without conflating the separate requirements of "trinary code" and "binary code." A reasonable jury could find that the operation of a status register cannot literally be said to be or to generate a number (be it binary or trinary) if the construction of such a number depends on the selective omission of intervening values. Under this view, the Z-bit status register would literally constitute neither a binary number nor a trinary number. Nevertheless, a reasonable jury could simultaneously find that the nonsuccessive array of Z-bit statuses is the substantive equivalent of the generation of a binary number. Such a determination would be tantamount to finding that the Z-bit register, which is an element of the accused product, is insubstantially different to the claim limitations involving "binary code." This finding would not vitiate separate claims involving "trinary code."

Plaintiffs offer reasoned expert reports and deposition testimony that bolster their argument that the accused product performs substantially the same function in substantially the same way to achieve substantially the same result as the asserted claims underlying patents '544 and '123. Indeed, it is undisputed that the accused product achieves substantially the same result as the claimed invention. (R. 516-2 at 6 (agreeing that the goal was "to put out the same signal as the Chamberlain system"); R. 432 at 15; R. 455 at 14.) There is, however, a genuine issue of material fact as to whether the substitute element (the Z-bit status register and related operations within the accused product) matches the "way" and "function" of the claimed element. This question is the subject of competing expert reports, all of which are well reasoned. Because the Court cannot weigh conflicting evidence at the summary-judgment juncture, the issue of infringement under the doctrine of equivalents is a question for the jury. The jury could reasonably decide that the Z-bit status register's operation gives rise to the de facto generation or use of a binary number in a way that is insubstantially different to the claimed "binary code."

Defendant presents one further argument why its accused device cannot infringe under the doctrine of equivalents. It submits that infringement under that doctrine is necessarily foreclosed by its ownership of U.S. Patent No. 7,589,613 ("the Kraft patent"), which covers the "all-trinary solution" embodied in its Car2U® product. (R. 409 at 15-16.) This argument fundamentally misconceives the nature of a patent grant, which bestows upon its owner a right to exclude, but not an affirmative right to practice. See, e.g., TransCore LP v. Elec. Trans. Consultants Corp., 563 F.3d 1271, 1275 (Fed.Cir.2009). JCI is correct to point out that the existence of a patent on the accused process is not dispositive [959] on the question of infringement under the doctrine of equivalents, but is instead significant to that determination. (R. 516 at 2 n. 1 (citing Nat'l Presto Indus., Inc. v. West Bend Co., 76 F.3d 1185, 1191-92 (Fed.Cir.1996)).) At trial, Lear can point to the existence of the Kraft patent, in addition to the fact that the Kraft application cited the '544 and '123 patents as prior art (which thus demonstrates that the PTO considered the '544 and '123 patents and nevertheless considered the claimed invention to be novel, useful, and nonobvious in light of that prior art.) See Hoganas AB v. Dresser Indus., Inc., 9 F.3d 948, 954 (Fed.Cir.1993). Nevertheless, the existence of the Kraft patent does not in itself entitle Defendant to summary judgment of equivalent noninfringement.

For the preceding reasons, the Court grants in part and denies in part Defendant's motion for summary judgment of noninfringement of the '544 and '123 patents.

II. The '056 Patent

Plaintiffs also allege that Lear's Car2U® product infringes claim 1 of the '056 patent, which claims:

A transmitter for sending an encrypted signal to control an actuator, comprising:

[1] oscillator for generating a radio frequency oscillatory signal;

[2] apparatus for enabling the sending of an encrypted signal;

[3] a memory having a fixed code stored therein;

[4] code generator responsive to the enabling apparatus for generating a variable code, said variable code being different for each enabling by the enabling device;

[5] apparatus for providing a code that is based on the fixed code;

[6] apparatus for combining a trinary code version of the variable code with a trinary code version of the code, wherein the apparatus combines the trinary code version of the variable code with the trinary code version of the code by interleaving trinary bits for the trinary code version of the variable code with trinary bits for the trinary code version of the code to thereby provide an interleaved trinary code combined result;

[7] transmitting apparatus for modulating the radio frequency oscillatory signal with the interleaved trinary code combined result to produce a modulated trinary code variable radio frequency signal for operation or control of a secure actuator.

(R. 270-2 at 80.)

Lear contends that there is no genuine issue of fact that its Car2U® product uses exclusively trinary numbers and employs an encrypted fixed code, which changes with each actuation of the device. Defendant argues that it is entitled to summary judgment on Plaintiffs' claim of infringement of the '056 patent on either one of two interpretations; namely, that the term "variable code" in that patent means "non-trinary code" and that the "code that is based on the fixed code" is itself fixed. (R. 408 at 9-19.) Lear submits that, if the Court accepts either construction (or, indeed, both constructions) in said manner, Defendant is entitled to summary judgment of noninfringement. (Id.)

A. "Variable Code" Means "Nontrinary Variable Number"

Defendant argues that the "variable code" referenced in [4] and [6] of claim 1 of the '056 patent necessarily means "variable non-trinary number." (R. 408 at 9-10.) Reading the phrase in light of the entire claim language supports Lear's construction. The patent claims an "apparatus [960] for combining a trinary code version of the variable code"—language that immediately suggests that the underlying variable code must be of a nontrinary character. It would seem odd to claim an "apparatus for combining a trinary code version of the variable trinary code."

The specification, which reveals a binary number "comprising the variable portion of the code," adds powerful support to Lear's proffered construction. More specifically, the patent provides:

In the present system the transmitter includes means for producing a ... 32-bit frame comprising the variable portion of the code.... The transmitter then converts the 32-bit fixed code and the mirrored variable code to a three-valued or trinary bit fixed code and a three-valued or trinary bit variable code or rolling code.

(R. 270-2 at 77.)^[6] Previously in this case, and in considering the same specification, the Federal Circuit read "32-bit codes" in the '544 patent to refer to binary numbers. Chamberlain, 516 F.3d at 1339. The specification thus reveals precisely what a natural reading of the phrase "apparatus for combining a trinary code version of the variable code" would suggest—the variable code would not otherwise be trinary.

Plaintiffs strenuously object to this interpretation. (R. 421-1 at 1-14; R. 429-1 at 1-12.) Both Chamberlain and JCI contend that Lear places unwarranted reliance on the specification in interpreting "variable code." (R. 421 at 9-10; R. 429 at 8-9.) JCI correctly notes that the claims, rather than the specification, define the scope of patent protection. See Silicon Graphics, Inc. v. ATI Techs., Inc., 607 F.3d 784, 792 (Fed.Cir.2010) ("A construing court's reliance on the specification must not go so far as to "import limitations into claims from examples or embodiments appearing only in a patent's written description... unless the specification makes clear that `the patentee ... intends for the claims and the embodiments in the specification to be strictly coextensive.'"") (quoting Phillips v. AWH Corp., 415 F.3d 1303, 1323 (Fed.Cir.2005)). It bears emphasizing, however, that this is not an instance where the specification is being employed to limit the breadth of an otherwise unambiguous claim. The Court cannot agree with JCI's position that, "[s]ince the claim is clear on its face, there is no reason to even address the specification." (R. 421 at 9.) JCI does argue that the unbounded use of "variable code" in the present context of claim 1 contrasts with the presence of specific qualifications elsewhere within the patent, where the document makes such reference as "binary rolling code." (Id. at 9-10.) Nevertheless, the fact remains that Plaintiffs' tendered interpretation fits awkwardly with the larger claim of which the disputed term is a part.

JCI further contends that, in light of the Federal Circuit's earlier interpretation in this case that "code" means "number," "variable code" simply means "variable [961] number." (R. 421 at 8.) This interpretive approach does not answer the question, however, for even if the Court were to define "variable code" as "variable number," that would not answer whether the context in which the relevant term is employed counsels its being limited to nontrinary form.

In the presence of ambiguity concerning the meaning of a term within a claim, appeal to the specification is appropriate. See Abbott Labs. v. Andrx Pharms., Inc., 452 F.3d 1331, 1336 (Fed. Cir.2006) ("Where claim terms are ambiguous or disputed, then we turn to the specification."). Indeed, the Federal Circuit has seen fit in this very case to emphasize that "[u]sually [the specification] is dispositive; it is the single best guide to the meaning of a disputed term." Chamberlain, 516 F.3d at 1335 (quoting Phillips v. AWH Corp., 415 F.3d 1303, 1312 (Fed.Cir. 2005)). In reviewing the '544 patent, which shares a common specification with the '056 patent, the appellate court also made clear that the specification "gives particular limited meanings to the language in the claims." Chamberlain, 516 F.3d at 1337. The manner in which claim 1 employs the concept of "variable code" indicates that the term refers to a nontrinary variable code.

Chamberlain admits that "the preferred embodiment does convert a binary number to a trinary number," but nevertheless contends that "there is nothing in the '056 patent claims, specification, or prosecution history that limits the scope of the invention or claims to the preferred embodiment." (R. 429 at 9.) This assertion ignores the interpretive difficulty involved in defining "variable code" to include trinary variable code. Reading "variable code" in light of the larger claim language supports the interpretation excluding trinary variable codes. To define it otherwise would be to construe the patent as potentially calling for a trinary version of an already trinary variable code. Such an incongruous reading is implausible, as it made clear by the specification.

Relying on a declaration of Dr. Rhyne, Chamberlain contends that Lear's interpretation would exclude an embodiment disclosed in the specification. (R. 429 at 9.) Specifically, Dr. Rhyne submits that Figure 7A of the '056 specification reveals a code generator that is not limited to binary. (Id.) Chamberlain further proffers the opinions of Drs. Rhyne and Stevenson to the effect that one skilled in the art would understand "code" in the term "code generator . . . for generating a variable code" as not being limited to non-trinary numbers. (Id.)

Neither of these contentions persuades the Court that "variable code," as used in the '056 patent, encapsulates variable numbers in trinary form.^[7] In the first part, Figure 7A (upon which Dr. Rhyne places considerable focus) does appear unbounded in that the Box does not describe any particular version. Two steps below, however, Box 504 states "REVERSE ORDER OF BINARY DIGITS IN ROLLING CODE." (R. 454 at 8.) This Box requires that the variable code, before it is later converted to trinary, be in binary form.

Second, the opinions of Drs. Rhyne and Stevenson as to the meaning that one skilled in the art would ascribe to "code generator . . . for generating a variable [962] code" do not convince the Court, particularly insofar as they are offered with respect to the use of "code" in a subset of the claim, rather than in the context of the claim as a whole. As explained above, a larger reading of the claim requires that the variable code is in nontrinary form before a trinary code version of the same is later created. The accuracy of this construction is confirmed by appeal to the specification.

Defendant contends that the Court's adoption of its proposed claim construction entitles it to summary judgment, since its Car2U® product "has no binary number, and so performs no such conversion to trinary." (R. 454 at 13.) In light of the fact that a genuine issue of material fact exists concerning the accused product's use of binary code, the Court's construction of "variable code" to mean "nontrinary variable number" does not entitle Lear to summary judgment of both literal and equivalent infringement. A reasonable jury could find that Lear's Car2U® product employs binary code, or find that the device achieves the same result, using substantially the same function, in substantially the same way. The Court therefore denies Defendant's motion for summary judgment of noninfringement of the '056 patent.

B. A "Code That Is Based on a Fixed Code" Within Claim 1 Need Not Itself Be Fixed or Remain the Same for Each Actuation of the Transmitter

An element of the '056 patent claims involves an "apparatus for providing a code that is based on the fixed code." Contending that its Car2U® product entails the transmission of exclusively variable codes, Lear submits that it is entitled to summary judgment because "a code that is based on the fixed code" must remain the same for each actuation of the transmitter. (R. 408 at 10-15, 17-19.) This proposed construction is wholly divorced from the language of the claims. Unlike "variable code," which is implicitly limited to nonbinary form by the larger claim language, there is no reading of Claim 1 of the '056 patent that either suggests or requires that "a code that is based on the fixed code" itself be fixed or remain the same for each actuation of the transmitter. Lear's proposed construction would improperly limit the scope of the claims.

Despite the conspicuous absence of any textual (or contextual) foundation for its argument in the '056 patent claims, Defendant presents a variety of unavailing arguments as to why its advocated construction is the correct one. Defendant first turns to the prosecution history of the '056 patent. Lear notes that Chamberlain's initial application for that patent included a claim to "an encryptor for generating an encrypted fixed code in response to the rolling code and the fixed code." (R. 408 at 11.) Because the examiner rejected that claim and because Chamberlain then replaced it with the language "a code that is based on the fixed code," which the PTO allowed, Defendant argues that Chamberlain thereby disclaimed that the accepted language could be a variable code. (Id. at 11-12.) The Court agrees with Chamberlain, however, that this showing falls short of the requirement that a disclaimer "be both clear and unmistakable" to one skilled in the art. Omega Eng'g, Inc. v. Raytek Corp., 334 F.3d 1314, 1326 (Fed.Cir.2003). It is particularly relevant that the patentee did not expressly disclaim any subject matter. Indeed, JCI explains that it was the Federal Circuit's 2008 opinion, which was unfavorable to Plaintiffs, that led the patentee to embrace the broader language presently being construed. (R. 421 at 12.)

[963] Lear's second argument centers on the Federal Circuit's remark that the '544 patent "receiver compares the transmitted fixed code and the rolling code with stored codes to activate the door opener." (R. 408 at 12 (quoting Chamberlain, 516 F.3d at 1333-34).) Of course, the Federal Circuit was not concerned with the language specific to the '056 patent of "a code that is based on the fixed code." Insofar as the court's statement was directed to the '544 patent's specification, which is identical to that of the '056 patent, then it may be relevant. Yet, this Court has already determined that the relevant language in the '056 patent—when read in light of the larger claim language of which it is a part—is unambiguous. In such cases, it is improper to limit the claims by reference to the embodiment disclosed by the specification. See Liebel-Flarsheim Co. v. Medrad, Inc., 358 F.3d 898, 913 (Fed.Cir. 2004) ("[I]t is improper to read limitations from a preferred embodiment described in the specification—even if it is the only embodiment—into the claims absent a clear indication in the intrinsic record that the patentee intended the claims to be so limited.") Thus, adopting the Federal Circuit's characterization of the specification does not compel the conclusion that "a code that is based on the fixed code" in the '056 patent necessarily be fixed.^[8]

Defendant further argues that dependent claim 2 makes clear that the claimed invention requires transmitting both a fixed code and a variable code. (R. 408-1 at 13.) Dependent claim 2 refers to the transmission of "a trinary code version of the variable code with a trinary code version of the fixed code." Lear contends that the dependent claim's label of the "code that is based on the fixed code" itself being "the fixed code" clarifies the meaning of the relevant language in the independent claim. (R. 408-1 at 13.) The Court declines to restrict the reach of the clear language in the independent claim in this manner. Indeed, it is improper for a district court to read "an additional limitation from a dependent claim into an independent claim." See Curtiss-Wright Flow Control Corp. v. Velan, Inc., 438 F.3d 1374, 1380 (Fed.Cir.2006).^[9]

Finally, Lear submits that the "code that is based on the fixed code" cannot be a variable code because the claim term is part of a means-plus-function element, which renders the scope of the claim coterminous with what is identified in the specification. (R. 408 at 14.) The Court, however, agrees with Plaintiffs that the term should not be construed as a means-plus-function element. The Federal Circuit has made clear that the absence of the word "means" creates a rebuttable presumption that section 112, paragraph 6, does not apply. Phillips, 415 F.3d at 1311; see also Greenberg v. Ethicon Endo-Surgery, Inc., 91 F.3d 1580, 1583 (Fed.Cir.1996) ("The question whether a claim element triggers section 112(6) is ordinarily not a difficult one. Claim drafters conventionally use the preface `means for' (or `step for') when [964] they intend to invoke section 112(6), and there is therefore seldom any confusion about whether section 112(6) applies to a particular element."). In Greenberg, the Federal Circuit further explained that "[w]e do not mean to suggest that section 112(6) is triggered only if the claim uses the word `means.' . . . Nonetheless, the use of the term `means' has come to be so closely associated with `means-plus-function' claiming that it is fair to say that the use of the term `means' . . . generally invokes section 112(6) and that the use of a different formulation generally does not." Id. at 1584. The Federal Circuit referenced its earlier decision in Raytheon as an example of a case in which a litigant successfully rebutted the presumption with respect to the term "so that." Id. (citing Raytheon Co. v. Roper Corp., 724 F.2d 951, 957 (Fed.Cir.1983), cert. denied, 469 U.S. 835, 105 S.Ct. 127, 83 L.Ed.2d 69 (1984)).

More recently, the Federal Circuit has clarified that a court, in determining whether particular terms constitute a substitute for "means for," should consider whether the claim provides any structural context other than to describe its function. Welker Bearing Co. v. PHD, Inc., 550 F.3d 1090, 1096 (Fed.Cir.2008). There, the court noted that "[n]o adjective endows the claimed `mechanism' with a physical or structural component" and explained that, "[u]nlike the `detent mechanism' in Greenberg which had a known structural meaning, one of skill in the art would have no recourse but to turn to the '254 patent's specification to derive a structural connotation for the generically claimed `mechanism for moving said finger. . . .'" Id.

"The task of determining whether the limitation in question should be regarded as a means-plus-function limitation, like all claim construction issues, is a question of law." Lighting World, Inc. v. Birchwood Lighting, Inc., 382 F.3d 1354, 1358 (Fed.Cir.2004). There is no basis in the present case for rebutting the presumption that "code that is based on the fixed code" does not constitute a means-plus-function term. Unlike in Welker, one skilled in the art would not be forced to turn to the specification to derive a structural connotation. Indeed, Dr. Stevenson explains that "apparatus for providing a code based on a fixed code" would be understandable to one of skill in the art without reference to the specification. (R. 424-2 at 112-113.) Defendant's expert, Dr. Schonfeld, testified at his deposition that his report does not offer a view on whether the claim limitations are means-plus-function limitations. (R. 427-10 at 13-14.) In light of this evidence, coupled with the well-established presumption created by the absence of "means for" language, the Court concludes that the "code that is based on the fixed code" element of the '056 patent is not a means-plus-function element. See TriMed, Inc. v. Stryker Corp., 514 F.3d 1256, 1259 (Fed.Cir.2008) ("The task of determining whether the relevant claim language contains a means-plus-function limitation is, as with all claim construction issues, a question of law."). Lear's objection, namely that the term "code that is based on the fixed code" cannot involve a variable code that is based on the fixed code because it is part of a mean-plus-function element, therefore fails.

C. Plaintiffs Are Not Entitled to Summary Judgment of Infringement of the '056 Patent

Plaintiffs move for summary judgment of infringement of the '056 patent. (R. 418; R. 428; R. 431.) JCI contends that, under its proposed construction of "variable code," there is no genuine issue of material fact that Lear infringes claim 1 [965] of the '056 patent. (R. 419 at 16.) This argument is premised on "variable code" not being limited to nontrinary. (Id. at 17.) As explained above, however, the Court construes "variable code" to mean "nontrinary variable number," and so JCI's argument for infringement, which is founded on a rejected construction, fails.

JCI and Chamberlain further submit that they are entitled to summary judgment of infringement based on their advocated construction of "code that is based on the fixed code." (R. 419 at 17-18; R. 429 at 15-16.) The Court construes this term to mean that the "code that is based on the fixed code" need not itself be fixed. Plaintiffs argue that this limitation is satisfied by the accused product, which involves a variable code that is based on the fixed code. (Id.) This does not, however, entitle Plaintiffs to summary judgment. It is black-letter law that, "[t]o establish literal infringement, `every limitation set forth in a claim must be found in an accused product, entirely.'" Becton, Dickinson & Co. v. Tyco Healthcare Group, L.P., 616 F.3d 1249, 1253 (Fed.Cir.2010) (quoting Southwall Techs. Inc. v. Cardinal IG Co., 54 F.3d 1570, 1575 (Fed.Cir.1995)). There is a genuine issue of fact as to the existence of "variable code" within the accused product. As a result, the Court denies JCI's motion for summary judgment of infringement of the '056 patent.^[10]

III. Plaintiffs Are Entitled to Summary Judgment on Lear's Invalidity Defense that the Asserted Claims Are Directed to Unpatentable Subject Matter

Lear proffers the defense that the asserted claims are directed to unpatentable subject matter. (R. 653-1 at 33-34.) Defendant specifically contends that the claims "are directed to various algorithmic operations for the manipulation of numbers that the patentees attempt to limit to a field of use of transmitters for sending an encrypted signal." (Id. at 33.) Plaintiffs' efforts to so limit the claims are unsuccessful, Lear submits, because the physical components merely constitute insignificant post-solution activity. (Id. at 33-34; R. 709 at 10-11.) The parties have filed cross-motions for summary judgment. For reasons explained below, the Court grants Plaintiffs' motion for summary judgment on Lear's invalidity defense that the asserted claims are directed to unpatentable subject matter. For the same reasons, it denies Lear's motion for summary judgment of invalidity under 35 U.S.C. § 101 of the '544, '123, and '056 patents.

A. Plaintiffs' Argument that the Asserted Claims Are Directed to a Product Rather than a Process Does Not in Itself Entitle Them to Summary Judgment

As explored below, in arguing that the asserted claims are invalid under 35 U.S.C. § 101, Defendant relies on several Supreme Court cases that have invalidated process claims on the basis of their incorporating mathematical algorithms or otherwise being abstract in nature. (R. 638 at 5-6, 12-19; R. 709 at 7-13; 749 at 5-12 (citing and discussing Bilski v. Kappos, ___ U.S. ___, 130 S.Ct. 3218, 3225-27, 177 L.Ed.2d 792 (2010); Diamond v. Chakrabarty, 447 U.S. 303, 100 S.Ct. 2204, 65 L.Ed.2d 144 (1980); Parker v. Flook, 437 U.S. 584, 98 S.Ct. 2522, 57 L.Ed.2d 451 [966] (1978); Gottschalk v. Benson, 409 U.S. 63, 93 S.Ct. 253, 34 L.Ed.2d 273 (1972)).) Plaintiffs contrast these decisions with the claims at issue in the present case, which "are directed to a physical device." (R. 653 at 9.) They observe that the cases in which the Court has invalidated patents on the basis of their abstraction involved method claims, rather than product claims. (Id. at 9 n. 2.) Plaintiffs point out that the claimed invention pertains, for example, to a physical transmitter that sends an encrypted signal to control an actuator. (Id. at 9.) They then argue that, "[b]ecause the claimed and described inventions are directed to a `transmitter,' there should be no question that they qualify as a patentable `machine' under Section 101." (Id. at 10; see also R. 761 at 5.)

This argument raises the threshold question whether the relevant claims constitute product or process claims. The Federal Circuit has distinguished "between a claim to a product, device, or apparatus, all of which are tangible items, and a claim to a process, which consists of a series of acts or steps." In re Kollar, 286 F.3d 1326, 1332 (Fed.Cir.2002). Kollar further explained that "[a]process . . . is a different kind of invention; it consists of acts, rather than a tangible item." Id.

The Court agrees with Plaintiffs that the asserted claims in the '544, '123, and '056 patents are not process claims. Claims 1-6 and 8 of the '544 patent claim a "transmitter." (R. 270-2 at 27.) Claims 1-4 and 14-26 of the '123 patent similarly claim a "transmitter," as do claims 1 and 2 of the '056 patent. (Id. at 51-52, 80.) The asserted claims do not recount a method or process, but instead purport to describe a machine. (Id.)

Nevertheless, the fact that the asserted claims are directed at a machine rather than a process does not in itself render the claims valid under Section 101. Contrary to what Plaintiffs suggest, the same standards of patentable subject matter govern both product and process claims. As the Federal Circuit has explained:

Whether stated implicitly or explicitly, we consider the scope of § 101 to be the same regardless of the form—machine or process—in which a particular claim is drafted. . . . [T]he Supreme Court's decisions in Diehr, Benson, and Flook, all of which involved method (i.e., process) claims, have provided and supported the principles we apply to both machine- and process-type claims.

AT & T Corp. v. Excel Commc'ns, Inc., 172 F.3d 1352, 1357-58 (Fed.Cir.1999) (abrogated by In re Bilski, 545 F.3d 943, 943 (Fed.Cir.2008), passim); see also Ex Parte Cornea, 89 U.S.P.Q.2d 1557, at *6 (B.P.A.I.2009) (observing that "analysis of a `manufacture' claim and a `process' claim is the same under § 101").

Although the preceding case law supports that the same patentability standards apply to both product and process claims, it does not necessarily follow that the "machine-or-transformation" ("MOT") test is appropriate to assess the patentability of the asserted claims.^[11] Beyond the fact that the Supreme Court has held that it is not the exclusive test of patentability, it also made clear that the [967] MOT test is used to determine the patentability of processes. Specifically, the Supreme Court held "that the machine-or-transformation test is a useful and important clue, an investigative tool, for determining whether some claimed inventions are processes under § 101. The machine-or-transformation test is not the sole test for deciding whether an invention is a patent-eligible `process.'" Bilski, 130 S.Ct. at 3225-27. The Court therefore declines to base its analysis on the MOT test.

Instead, the question is whether the claimed subject matter falls within at least one category of statutory subject matter.^[12] In re Nuijten, 500 F.3d 1346, 1354 (Fed. Cir.2007) ("In telling courts where they `should not focus' their analysis, State Street [Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed.Cir.1998)] was advising not to be concerned about debates over `which of the four categories' subject matter falls into— that is, not to be overly concerned with pigeonholing subject matter once the court assures itself that some category has been satisfied.") (emphasis in original) (citations omitted). The Court must therefore determine whether the asserted claims are in fact directed at a machine. If so, they are patentable subject to the three limitations on patent eligibility articulated by Bilski: "`laws of nature, physical phenomena, and abstract ideas.'" Bilski, 130 S.Ct. at 3225 (quoting Diamond v. Chakrabarty, 447 U.S. 303, 309, 100 S.Ct. 2204, 65 L.Ed.2d 144 (1980)).

B. The Asserted Claims Constitute Patentable Subject Matter Under 35 U.S.C. § 101

Plaintiffs are entitled to summary judgment on account of their asserted claims being directed to a product. Specifically, even reviewing the facts in the light most favorable to Defendant, the asserted claims constitute patentable subject matter because they are directed to a "machine."

The Federal Circuit has defined "machine" as "a concrete thing, consisting of parts, or of certain devices and combination of devices. This includes every mechanical device or combination of mechanical powers and devices to perform some function and produce a certain effect or result." SiRF Tech., Inc. v. Int'l Trade Comm'n, 601 F.3d 1319, 1332 (Fed.Cir. 2010) (quoting In re Nuijten, 500 F.3d at 1355). The patents at issue satisfy this definition. There is no dispute that the asserted claims are directed to a physical transmitter, which sends an encrypted signal to control an actuator. (R. 270-2 at 27, 51-52, 80.) That transmitter is comprised of an oscillator, which generates a signal, and an apparatus, which enables the sending of the signal. It is also comprised of binary- and trinary-code generators. (Id.) As the specification explains, this physical device "relates to a security system or to a barrier operator system, such as a garage door operator, employing a transmitter and a receiver which communicate via code streams having at least a portion thereof which changes with multiple operation of the device." (Id. at 23.) This indisputably constitutes a "machine." See also In re Nujiten, 500 F.3d at 1356 n. 3 ("An apparatus that generates the signal is of course a machine.").

Defendant contends, however, that the preceding characteristics of the asserted claims do not reveal a product. (R. 709 at 6-7.) Instead, Lear submits that the transmitter is merely "an ordinary microcontroller, [968] a digital computer, for processing the mathematical algorithm and that the remaining claim elements merely send the signal." (Id. at 6) Although the relevant patents entail the use of software, Defendant's contention fails for two reasons. First, Lear fails to cite any evidence in the record to support that the transmitter is nothing more than an ordinary microcontroller—that is, that the transmitter is coterminous with a digital computer. (Id.) Cf. Misher v. Barnett, No. 07-CV-5242, 2010 WL 2136659, at *4 (N.D.Ill. May 26, 2010) ("[Plaintiff] has failed to cite any evidence to support her . . . claim . . . and, therefore, [Defendant] is entitled to summary judgment on that claim."). Plaintiffs, by contrast, direct the Court to undisputed evidence that a microcontroller is just one component of an RF transmitter, and further point out that the claimed transmitter also entails an oscillator and a transmitting apparatus, which are separate from a microcontroller. (R. 761 at 10.) Second, Lear's analysis violates Bilski's instruction that one must "consider the invention as a whole." Bilski, 130 S.Ct. at 3230.

The Supreme Court's leading decisions on the patentability of mathematical formulae dispel any lingering doubt as to the asserted claims' validity under Section 101.^[13] Defendant places significant weight on Gottschalk (R. 638 at 9, 13-14; R. 709 at 5, 9), where the Supreme Court found a method for converting binary-coded decimal numerals into pure binary numerals not to be patentable because "[t]he claims were not limited to any particular art or technology, to any particular apparatus or machinery, or to any particular end use." Gottschalk v. Benson, 409 U.S. 63, 64, 93 S.Ct. 253, 34 L.Ed.2d 273 (1972). The Court denied patentability, reasoning that:

The mathematical formula involved here has no substantial practical application except in connection with a digital computer, which means that . . . the patent would wholly pre-empt the mathematical [969] formula and in practical effect would be a patent on the algorithm itself.

Id. at 71-72, 93 S.Ct. 253. Defendant also appeals to Flook, where the Supreme Court found claims directed to a catalytic conversion process in the petrochemical and oil-refining industries to be unpatentable, where the applicant's only innovation involved a mathematical algorithm. Parker v. Flook, 437 U.S. 584, 585-86, 98 S.Ct. 2522, 57 L.Ed.2d 451 (1978).

Neither Gottschalk nor Flook benefits Lear, as the Supreme Court's subsequent decision in Diehr makes clear. Diamond v. Diehr, 450 U.S. 175, 101 S.Ct. 1048, 67 L.Ed.2d 155 (1981). In Diehr, the Court explored the contours of Gottschalk and Flook, explaining that

when a claim recites a mathematical formula. . . an inquiry must be made into whether the claim is seeking patent protection for that formula in the abstract. A mathematical formula as such is not accorded the protection of our patent laws, Gottschalk v. Benson, 409 U.S. 63, 93 S.Ct. 253, 34 L.Ed.2d 273 (1972), and this principle cannot be circumvented by attempting to limit the use of the formula to a particular technological environment. Parker v. Flook, 437 U.S. 584, 98 S.Ct. 2522, 57 L.Ed.2d 451 (1978). . . . On the other hand, when a claim containing a mathematical formula implements or applies that formula in a structure or process which, when considered as a whole, is performing a function which the patent laws were designed to protect (e.g., transforming or reducing an article to a different state or thing), then the claim satisfies the requirements of § 101.

Id. at 191-92, 101 S.Ct. 1048. The Supreme Court went on to hold that, "[b]ecause we do not view respondents' claims as an attempt to patent a mathematical formula . . . we affirm . . . ." Id. at 192-93, 101 S.Ct. 1048.

There is no genuine issue of fact that the asserted claims in the present case do not attempt to patent a mathematical formula. Gottschalk and Flook objected to granting patents in cases where intellectual-property protection would foreclose all use of the claimed algorithm. It is undisputed that those preemption concerns are wholly absent in this case. The asserted claims are directed to a particular form of transmitter that is used for generating and sending a secure signal for the purpose of opening and closing doors or gates. (R. 270-2 at 27, 51-52, 80.) Of course, mathematical algorithms are employed within the claimed transmitter. See Chamberlain, 516 F.3d at 1337 (observing that "the transmitter's microcontroller, like other computers, undisputedly stores and processes data"). Yet, the Supreme Court has made clear that a claim is "not unpatentable simply because it contains . . . a mathematical algorithm." Parker, 437 U.S. at 590, 98 S.Ct. 2522. The mathematical algorithms underlying the asserted claims are directed at a physical product that is to be used for a specific purpose. The claims do not purport, in any way, to preclude the use of the mathematical algorithms that operate within the transmitter for other purposes. Nor is there any evidence that the physical transmitter of which the algorithms are an underlying part is merely "insignificant extra-solution activity," as Defendant proclaims. (Compare R. 761 at 1, 5-6 with R. 709 at 10.) The machine, to the contrary, constitutes the very heart of the invention.

Ultimately, the "existence of merely a scintilla of evidence in support of the nonmoving party's position is insufficient to defeat a summary judgment motion; there must be evidence on which the jury could reasonably find for the non-moving party." [970] Delta Consulting Group, Inc. v. R. Randle Const., Inc., 554 F.3d 1133, 1137 (7th Cir. 2009). No reasonable jury could find that the asserted claims are directed at unpatentable abstract principles. The Court therefore denies Lear's motion for summary judgment of invalidity under 35 U.S.C. § 101 of the '544, '123, and '056 patents (R. 637), and grants Plaintiffs' motion for summary judgment on Lear's invalidity defense that the asserted claims are directed to unpatentable subject matter (R. 652).

IV. Plaintiffs Are Entitled to Partial Summary Judgment on Defendant's Inequitable-Conduct Claim

In its answer to Plaintiffs' Second Amended Complaint, Lear raised the affirmative defense that the '544, '123, and '056 patents are unenforceable due to inequitable conduct. (R. 283 at 8.) Defendant also asserted a counterclaim to the same effect, asserting that,

the inventors (Bradford Farris and James Fitzgibbon), the assignee (The Chamberlain Group, Inc.), the patent prosecution firm (Fitch, Even, Tabin & Flannery), and patent attorney Kenneth H. Samples . . . prosecuting the application resulting in the issuance of the '544, '123, and '056 patents intentionally did not disclose material prior art . . . which they knew was material to the examiners' determination of the patentability of the claims of the '544, '123, and '056 patents, for the purpose of deceiving the Patent Office into issuing the patents.

(Id. at 12-15.) Lear specifically contended that the inequitable conduct derived from "the nondisclosure of the Miyake reference in the proceedings of the '544, '123, and '056 patents." (Id. at 15.) Plaintiffs now move for summary judgment on Lear's inequitable-conduct claim. (R. 665.) For the reasons explained below, the Court grants Plaintiffs' motion in part and denies it in part.

A. Background

Lear's affirmative defense and counterclaim that the asserted patents are unenforceable due to inequitable conduct center on Plaintiffs' failure to disclose U.S. Patent No. 5,563,600 (the "Miyake patent"). (R. 706.) In order to resolve Plaintiffs' motion for summary judgment, it is essential to understand the prosecution process that led to the issuance of the '544, '123, and '056 patents. The "family" of which these patents are a part began with the filing of U.S. Application No. 08/446,886 ("the '886 application"). (R. 666 at 6; R. 706 at 6.) Chamberlain subsequently submitted U.S. Application No. 08/765,795 ("the '795 application"), which was a continuation-in-part of the '886 application. (R. 666 at 7; R. 706 at 6.) On August 3, 1999, the examiner rejected claims 17 and 18 of the '795 application on the ground of its being unpatentable in light of the Miyake patent. (R. 666 at 8; R. 706 at 6-7.) This led Chamberlain to abandon the '795 application.

On June 11, 1997, Chamberlain filed U.S. Application No. 08/873,149 ("the '149 application"), which was a continuation of the '886 patent. (R. 666 at 8; R. 706 at 6.) Chamberlain did not, however, disclose the Miyake reference to the PTO as part of the '149 application. (R. 706 at 7; R. 764 at 14.) Nevertheless, in rejecting certain claims in the '149 application on the ground of obviousness-type double patenting in light of the related '795 application, the examiner displayed awareness of the latter application. (R. 666 at 9.) The '149 application subsequently issued as the '544 patent. (Id.)

In light of its abandonment of the '795 application, Chamberlain filed U.S. Application No. 09/489,073 ("the '073 application"), which was divisional of the '149 [971] application. (R. 666 at 8-10; R. 706 at 6.)^[14] Chamberlain disclosed the Miyake reference to the PTO as part of the '073 application. (R. 666 at 10; R. 706 at 7.) The '073 application subsequently issued as U.S. Patent No. 6,690,796, which listed the Miyake patent as one of the references cited and considered during prosecution. (R. 666 at 10.)

The '073 application gave rise to multiple continuation applications. (R. 668-1 at 2; R. 706 at 6.) One of these was U.S. Application No. 10/674,259, which issued as the '056 patent. (Id.) Another was U.S. Application No. 09/981,433, which gave rise to a further continuation, U.S. Application No. 10/215,900 ("the '900 application"). (Id.) The '900 application issued as the '123 patent. Chamberlain did not disclose the Miyake reference in any of the continuations that derived from the '073 application. (R. 706 at 7; R. 764 at 16-17.)

B. Plaintiffs Are Entitled to Summary Judgment on Lear's Inequitable-Conduct Claim as to the '123 and '056 Patents

There is no dispute that Chamberlain disclosed the Miyake reference in the '073 application. Nor is there a dispute that the '073 application was a parent to '259 and '900 continuation applications, which issued as the '056 and '123 patents respectively. Plaintiffs contend that these uncontested facts entitle them to summary judgment on Lear's inequitable-conduct claims as to the '056 and '123 patents. (R. 666 at 16-18.) The Court agrees.

The PTO's Manual of Patent Examining Procedure explicitly provides that "it will not be necessary for the applicant to submit an information disclosure statement in the continuing application that lists the prior art cited by the examiner in the parent application." MPEP § 609.02 (emphasis in original). Courts have held that it cannot be inequitable conduct for an applicant not to resubmit references that were cited in the parent application. See ATD Corp. v. Lydall, Inc., 159 F.3d 534, 547 (Fed.Cir.1998) (citing Transmatic, Inc. v. Gulton Indus., Inc., 849 F.Supp. 526 (E.D.Mich.1994), aff'd in pertinent part, rev'd in part, 53 F.3d 1270 (Fed.Cir.1995)); see also eBay, Inc. v. IDT Corp., No. 08-CV-4015, 2009 WL 2706395, at *3 (W.D.Ark. Aug. 24, 2009); Sprint Commc'ns Co. v. Nuvox Commc'ns, Inc., No. 08-CV-2047, 2009 WL 86565, at *2 (D.Kan. Jan. 12, 2009); Intex Recreation Corp. v. Team Worldwide Corp., 390 F.Supp.2d 21, 26 (D.D.C.2005); Adv. Cardio. Sys., Inc. v. Medtronic Vascular, Inc., 485 F.Supp.2d 538, 546 (D.Del.2007); Adv. Respiratory, Inc. v. Electromed, Inc., No. 00-CV-2646, 2002 WL 31386740, at *4 (D.Minn. Oct. 22, 2002).

Lear seeks to distinguish this authority on the ground that there is evidence in this case that the examiner did not in fact review the parent ('073) application, and that he was therefore not aware of the Hershey reference in issuing the relevant notices of allowance. (R. 706 at 16.) Lear's argument, which would hold applicants responsible for ensuring that examiners abide by their responsibilities, fails. See TM Patents, L.P. v. Int'l Bus. Mach. Corp., 121 F.Supp.2d 349, 372 (S.D.N.Y. 2000) ("A patentee cannot be penalized for a patent examiner's dereliction of duty.") (citing Nintendo of Am., Inc. v. Magnavox Co., 707 F.Supp. 717 (S.D.N.Y. 1989)).

[972] Defendant nevertheless maintains that "[t]here is every reason to conclude that where, as here, the Examiner never confirms in writing that prior art from parent applications was actually considered, the patent applicants have a duty to submit earlier-cited prior art." (R. 706 at 16-17.) In making this argument, Lear relies on Dayco Prods., Inc. v. Total Containment, Inc., 329 F.3d 1358, 1367 (Fed.Cir.2003) and McKesson Info. Solutions, Inc. v. Bridge Med., Inc., 487 F.3d 897 (Fed.Cir. 2007). Neither case benefits Defendant.

Dayco involved an applicant who, during prosecution, failed to disclose the fact that a different examiner had rejected claims in a different application that were substantially similar in content and scope to the claims at issue in the pending application. Dayco, 329 F.3d at 1367. The question was whether failure to disclose such information met the threshold level of materiality for a finding of inequitable conduct. Id. at 1367-68. The Federal Circuit concluded that it did, such that an applicant's failure to disclose an examiner's adverse decision, with an intent to deceive, constitutes inequitable conduct. Id. Nothing in the opinion purports to impose a duty on an applicant to bring prior art to the attention of an examiner who is already charged with knowledge of that art by virtue of its being cited in a parent application.

Nor does McKesson offer support for Lear's argument that applicants have a duty to submit prior art that has been cited in a parent application when they learn or suspect that the relevant examiner has not reviewed it. That case involved an applicant's failure to apprise an examiner of a separate application that the same examiner had allowed. McKesson, 487 F.3d at 907. The Federal Circuit rejected the argument that, because the same examiner had been involved in both applications, the applicant had no need to disclose the earlier allowance. Id. at 925. The court explained that, "where inequitable conduct is at issue, mere possibilities are insufficient." Id. at 925 (citing J.P. Stevens & Co. v. Lex Tex, Ltd., 747 F.2d 1553, 1564 (Fed.Cir.1984)) (emphasis in original).

This holding, however, does not speak to the relevant issue in the present case. Specifically, McKesson does not stand for the proposition that an applicant commits inequitable conduct when it fails to disclose prior art in divisional or continuation applications that it already had disclosed in the parent application. In light of the black-letter law addressed above, Chamberlain's failure to disclose the Miyake reference in the '259 and '900 applications did not amount to inequitable conduct as a matter of law.

Defendant's final argument why Plaintiffs are not entitled to summary judgment on its inequitable-conduct claim as to the '123 and '056 patents is that "[i]nequitable conduct during one patent in a family can infect later applications." (R. 706 at 19 (citing Consol. Aluminum Corp. v. Foseco Int'l Ltd., 910 F.2d 804 (Fed.Cir.1990)).) Foseco did indeed hold that an applicant's concealment "permeated the prosecution of the other patents-in-suit and renders them unenforceable." Id. at 812. Lear, however, offers little in the way of explanation or argument as to why the failure to disclose with respect to the '544 patent permeated the prosecution of the '123 and '056 patents. (R. 706 at 19.) Even if Plaintiffs' failure to disclose during the '544 patent application amounted to inequitable conduct, the Court would not exercise its discretion to deem the '123 and '056 patents unenforceable. Cf. Aptix Corp. v. Quickturn Design Sys., Inc., 269 F.3d 1369, 1377 (Fed.Cir.2001) (observing that, "if Aptix had procured its patent by inequitable conduct before the PTO, the trial court would have full discretion to [973] declare the . . . patent unenforceable"). The failure to disclose with respect to the '544 patent application did not permeate the prosecution of the '123 and '056 patents because Plaintiffs in fact disclosed the prior-art reference in the parent application. Cf. Foseco, 910 F.2d at 811 ("The concealment of the CS1-B slurry from the '917 patent enabled Consolidated to present the CS1-B slurry as part of the invention disclosure in the '081 specification and as a basis for its successful arguments in prosecuting the applications that became the other patents-in-suit."); see also Pharmacia Corp. v. Par Pharm., Inc., 417 F.3d 1369, 1375 (Fed.Cir.2005) ("[T]his court's inequitable conduct cases do not extend inequitable conduct in one patent to another patent that was not acquired through culpable conduct.").

C. Plaintiffs Are Not Entitled to Summary Judgment on Defendant's Inequitable-Conduct Claim as to the '544 Patent

Plaintiffs also move for summary judgment on Lear's claim of inequitable conduct as to the '544 patent. (R. 665; R. 666 at 6-20.) It is well established that a "patent may be rendered unenforceable due to inequitable conduct if an applicant, with intent to mislead or deceive the examiner, fails to disclose material information. . . to the PTO during prosecution." Golden Hour Data Sys., Inc. v. emsCharts, Inc., 614 F.3d 1367 (Fed.Cir. 2010) (quoting Digital Control, Inc. v. Charles Mach. Works, 437 F.3d 1309, 1313 (Fed.Cir.2006)). One seeking to prove inequitable conduct must establish both materiality and deceptive intent by clear and convincing evidence. Id. Plaintiffs submit that there is insufficient evidence in the record to support a clear and convincing showing that the Miyake reference was material. (R. 666 at 15-16.) They argue further that the record does not support clear and convincing evidence of deceptive intent. (Id. at 19-20.) Lear contends that contested issues of fact preclude the entry of summary judgment in Plaintiffs' favor as to the '544 Patent. (R. 706 at 5.) The Court agrees with Lear.

1. Viewed in the Light Most Favorable to the Nonmoving Party, the Evidence Supports a Showing of Materiality

Plaintiffs contend that, even viewed in the light most favorable to Lear, the evidence does not support a showing of materiality. (R. 666 at 15-16.) In support of this position, Plaintiffs focus on the fact that, although he initially cited the reference, the examiner ultimately abandoned his reliance on Miyake in rejecting claims 17 and 18 of the divisional '795 application. (Id. at 15.) Plaintiffs also submit that the Miyake information was cumulative. (Id.) They observe that the examiner relied on Miyake during prosecution of the '795 application solely for its disclosure of fixed code and rolling code. (Id.) They then contend that there is no dispute that other references also disclose fixed code and rolling code. (Id.) Finally, Plaintiffs argue that the examiner's rejection of claims 17 and 18 in the '795 application was immaterial because those claims were different from the claims of the patents in suit. (Id. at 16.) They submit that rejected claims 17 and 18 in the '795 application "did not call for generation of trinary rolling codes to modulate a radio frequency signal to operate a secure actuator, as do all the claims of the patents in suit." (Id.) Plaintiffs fail, however, to marshal sufficient evidence of the Miyake reference's immateriality to demonstrate a genuine issue of material fact.

First, although the examiner ultimately relied on another reference in rejecting [974] claims 17 and 18 of the divisional '795 application, it is undisputed that he initially based that rejection on Miyake. If "a reasonable examiner would have considered. . . prior art important in deciding whether to allow the parent application," it is material. Digital Control, Inc. v. Charles Mach. Works, 437 F.3d 1309, 1314 (Fed.Cir.2006) (quoting Driscoll v. Cebalo, 731 F.2d 878, 884 (Fed.Cir.1984)). Although the '795 application is not a parent of the '149 application that issued as the '544 patent, the fact that the examiner in the former application initially relied on, but subsequently omitted reference to, the Miyake reference does not establish as a matter of law that that prior art is immaterial to the '149 application.

Second, and significantly, Lear has proffered expert testimony from Dr. Schonfeld as to the importance of the Miyake reference to the '149 application. (R. 706 at 10; R. 707-1 at 157.) Specifically, Dr. Schonfeld opines that the asserted claims of the '544 patent are obvious in light of Miyake. (Id.) The materiality of the Miyake reference is therefore a disputed fact question, which cannot be resolved at the summary-judgment stage.^[15]

2. There Is a Genuine Issue of Material Fact as to Deceptive Intent

Plaintiffs submit that Lear lacks clear and convincing evidence of deceptive intent during the prosecution process. (R. 666 at 19-20.) They focus on the testimony of Chamberlain's representative, Kenneth Samples, to the effect that he declined to disclose the Miyake reference during prosecution of the '149 application because it was cumulative of references that had already been cited. (Id. at 19.) Plaintiffs contend that this evidence forecloses the possibility of inequitable conduct because evidence of deceptive intent need not only be clear and convincing, "it must also be the single most reasonable inference able to be drawn from the evidence to meet the clear and convincing standard." (Id. (quoting Star Scientific, Inc. v. R.J. Reynolds Tobacco Co., 537 F.3d 1357, 1366 (Fed.Cir.2008)).) They therefore argue that the existence of two reasonable inferences—namely that Mr. Samples believed that Miyake was cumulative or that he believed that the examiner was already aware of the reference—refutes Lear's claim of inequitable conduct as a matter of law. (Id. at 19-20.) The Court agrees with Defendant, however, that contested issues of material fact preclude the entry of summary judgment in Plaintiffs' favor.

It is undisputed that Chamberlain failed to disclose Miyake to the PTO with respect to the '149 application. Of course, a patent applicant's "[i]ntent to deceive can not be inferred solely from the fact that information was not disclosed." Optium Corp. v. Emcore Corp., 603 F.3d 1313, 1321 (Fed.Cir.2010) (quoting Hebert v. Lisle Corp., 99 F.3d 1109, 1116 (Fed.Cir.1996)). Defendant has raised enough evidence to demonstrate a genuine issue of material fact.

First, in response to the question why he had not disclosed the Miyake reference, Mr. Samples testified at his deposition that "we were, again, just about at the point of an allowance in '544. And had I cited yet another reference in '544, we would have—it probably would have delayed the issuance while the examiner reviewed it and made all of this." (R. 707-1 at 65.) This testimony arguably constitutes "clear [975] and convincing evidence . . . that the applicant made a deliberate decision to withhold a known material reference."^[16] Molins PLC v. Textron, Inc., 48 F.3d 1172, 1181 (Fed.Cir.1995). Furthermore, as Lear correctly points out, it is improper for an applicant to withhold a reference from the PTO on the ground that it would delay the issuance of a patent. (R. 706 at 12-13.) In upholding a finding of inequitable conduct in Critikon, the Federal Circuit emphasized that "[i]t is axiomatic that `close cases should be resolved by disclosure, not unilaterally by applicant.'" Critikon, Inc. v. Becton Dickinson Vascular Access, Inc., 120 F.3d 1253, 1257 (Fed.Cir.1997). Although Mr. Samples testified that he considered Miyake "to be a non-important reference" and that he considered the reference to be cumulative (R. 707-1 at 65), one could conclude that these assertions served to mask deceptive intent.

Second, the timing of the events also supports an inference that Mr. Samples purposefully elected not to disclose the Miyake reference. As Lear points out, Mr. Samples did not disclose that reference in the '149 application, even though only twenty-two days had passed since the examiner had rejected claims 17 and 18 of the '795 application on the basis of Miyake. (R. 706 at 14.)

Ultimately, the question of intent is peculiarly fact intensive. See, e.g., Lorillard Tobacco Co. v. A & E Oil, Inc., 503 F.3d 588, 594 (7th Cir.2007) ("As a general rule, a party's state of mind (such as knowledge or intent) is a question of fact for the factfinder, to be determined after trial.") (quoting Chanel, Inc. v. Italian Activewear of Florida, Inc., 931 F.2d 1472, 1476 (11th Cir.1991)); see also Gen. Analytics Corp. v. CNA Ins. Cos., 86 F.3d 51, 54 (4th Cir.1996) ("It is readily apparent that determining intent is fact-intensive, and when the circumstantial evidence of a person's intent is ambiguous, the question of intent cannot be resolved on summary judgment."). Although this does not necessarily foreclose summary judgment as to an applicant's deceptive intent, it is inappropriate where, as here, there is conflicting evidence as to the nature of that intent. See, e.g., Leviton Mfg. Co., Inc. v. Universal Sec. Instruments, Inc., 606 F.3d 1353, 1363-64 (Fed.Cir.2010) (observing that "[w]e rarely affirm a grant of summary judgment of inequitable conduct," surveying the evidence in the case, vacating the district court's award of summary judgment for inequitable conduct, and concluding that "the district court could not find that Leviton intended to deceive the PTO . . . without an evidentiary hearing.").

Plaintiffs may be correct that the weight of the evidence reveals that Mr. Sample did not possess the requisite deceptive intent, but that is a determination properly made by the jury rather than the Court. A jury may conclude that deceptive intent is not the "single most reasonable inference able to be drawn from the evidence to meet the clear and convincing standard." (R. 804 at 1-2 (quoting Cancer Research Tech. Ltd. v. Barr Labs., Inc., 625 F.3d 724, 732-33 (Fed.Cir.2010)).) Nevertheless, given the above-referenced deposition testimony, in addition to the fact that all reasonable inferences must be drawn in Lear's favor at this juncture, the Court denies Plaintiffs' motion for summary judgment on Lear's claim of inequitable conduct as to the '544 patent.

[976] V. Plaintiffs Are Entitled to Summary Judgment on Lear's Invalidity Defense Based On Alleged Lack Of Definiteness, But Are Not Entitled to Summary Judgment on Lear's Invalidity Defense Based on Enablement And Written Description

Defendant contends that certain of the asserted claims in the patents in suit are means-plus-function claims, which Lear submits are insufficiently definite under 35 U.S.C. § 112 ¶ 2. (R. 663-1 at 22-23; R. 662-1 at 37-44.) Defendant also presents the expert report of Dr. Schonfeld to the effect that, under Plaintiffs' proposed construction of the "code that is based on the fixed code," claims 1 and 2 of the '056 patent are invalid under 35 U.S.C. § 112 ¶ 1 due to the lack of any enabling disclosure and written description. (R. 662-1 at 49-52.) Plaintiffs have moved for summary judgment on these invalidity defenses. (R. 659.) For the reasons that follow, the Court grants Plaintiffs' motion in part and denies it in part.

A. Because the Relevant Elements Are Not Written in Means-Plus-Function Terms, Plaintiffs Are Entitled to Summary Judgment on Lear's Invalidity Defense Based on Alleged Lack of Definiteness

Lear submits that the "`code generator' elements are all functional, lack sufficiently definite structure, and should be construed as means-plus-function claims." (R. 714 at 15.) Lear's argument that the relevant claims of the '056 patent are invalid for lack of definiteness is contingent on the Court's construing the code-generator elements as means-plus-function claims. (Id. at 16-20.) As noted above, whether elements are "means-plus-function" elements for the purpose of 35 U.S.C. § 112 ¶ 6 is a legal question for the Court. See TriMed, 514 F.3d at 1259. Because the code-generator elements are not means-plus-function elements, Plaintiffs are entitled to summary judgment on Lear's invalidity defense based on alleged lack of definiteness.

First, and as previously explained, the absence of means in the relevant claim language creates a presumption that the pertinent terms are not means-plus-function elements. Phillips, 415 F.3d at 1311; Greenberg, 91 F.3d at 1583. Second, Plaintiffs correctly point out that another court within this district^[17] did not construe "binary code generator" and "trinary code generator" as means-plus-function elements.^[18] (R. 148 at 8.) Third, Plaintiffs' experts Dr. Rhyne and Dr. Stevenson both opine that the code-generator terms are not means-plus-function elements. (R. 767 at 8.) Fourth, although the word "means" appears in the summary of the invention, it does not appear in the relevant claims. Given that the inventors saw fit to use "means" language in claim elements of the related '544 patent (e.g., R. 270-2 at 27), this suggests that the absence of the language in the '056 patent is purposeful.

Lear opposes this evidence on numerous grounds. It focuses first on the presence of "means" within the summary of the invention, arguing that "[t]his language corresponds to the function of the code generator elements of generating variable code." (R. 714 at 15.) Plaintiffs correctly point out, however, that a court must not [977] rely on the specification to the point of importing limitations into claims "unless the specification makes clear that the patentee intends for the claims and the embodiments in the specification to be strictly coextensive." (R. 767 at 9 (quoting Silicon Graphics, Inc. v. ATI Techs., Inc., 607 F.3d 784, 792 (Fed.Cir.2010)).) The specification does not make such an intention clear with respect to the '056 patent.

Lear also points to cases in which limitations employing the term "generator" are means-plus-function elements. (R. 714 at 15 (citing Isogon Corp. v. Amdahl Corp., 47 F.Supp.2d 436, 449-50 (S.D.N.Y.1998), QSIndus., Inc. v. Mike's Train House, Inc., 230 F.Supp.2d 1240, 1246 (D.Or.2002), Ex Parte Rodriguez, 92 U.S.P.Q.2d 1395, at *12 (B.P.A.I.2009)).) None of these cases stands for the proposition, however, that code-generator elements should generally be understood as being a substitute for means-plus-function elements. Id. Indeed, in this case, Dr. Rhyne has opined that someone skilled in the art would understand the code-generation terms at issue here "as connoting an appropriately programmed processor that generates a binary code or supplies a sequence of binary codes." (R. 767 at 8.) Similarly, Dr. Stevenson has opined that the code-generation terms "would convey sufficiently particular or definite structure to a person of skill in the art." (Id.)

Finally, Lear relies on Aristocrat Technologies for the principle that disclosure of "an appropriately programmed processor" cannot support a claim term that is written in means-plus-function form. (R. 714 at 16 (citing Aristocrat Techs. Australia Pty Ltd. v. Int'l Game Tech., 521 F.3d 1328, 1331, 1337-38 (Fed.Cir.2008)).) Plaintiffs accurately observe, however, that this holding only applies when § 112 ¶ 6 has been invoked. (Id.; R. 767 at 10.)

In light of the clear principle that elements are presumed not to be in means-plus-function form when they do not use the words "means for," as well as the evidence recounted above as to why the code-generator elements connote a structure to one skilled in the art, the Court determines the relevant elements not to be means-plus-function elements. As Defendant's invalidity defense based on an alleged lack of definiteness is premised on the Court's construing the code-generator elements as means-plus-function elements, the Court grants the relevant part of Plaintiffs' motion for summary judgment.

B. Plaintiffs Are Not Entitled to Summary Judgment on Defendant's Defenses Based on Alleged Lack of Enablement and Written Description

1. There Is a Genuine Issue of Material Fact as to Whether Claims 1 and 2 of the '056 Patent Are Sufficiently Enabled

It is well established that, in order to be valid, a patent specification must meet the enablement requirement of Section 112. 35 U.S.C. § 112; Anascape, Ltd. v. Nintendo of Am., Inc., 601 F.3d 1333, 1342 (Fed.Cir.2010). The Federal Circuit has explained that, "[t]o meet the enablement requirement, the specification of a patent must teach those skilled in the art how to make and use the full scope of the claimed invention without undue experimentation." Martek Biosci. Corp. v. Nutrinova, Inc., 579 F.3d 1363, 1378 (Fed.Cir. 2009) (citations omitted). To prove a lack of enablement, one must "show that one of ordinary skill in the art would be unable to make the claimed invention without undue experimentation." Johns Hopkins Univ. v. CellPro, Inc., 152 F.3d 1342, 1359-60 (Fed.Cir.1998).

[978] As explained above, the Court construes "code that is based on a fixed code" within claim 1 of the '056 patent to mean a claim that need not itself be fixed or remain the same for each actuation. There is no dispute that the specification reveals a fixed code that is based on a fixed code. (R. 661 at 17-18; R. 714 at 10.) There is no genuine issue of fact that the specification does not reveal a variable code that is based on a fixed code.^[19] Lear thus argues that claim 1 of the '056 patent is insufficiently enabled to allow one skilled in the art to make an invention in which the fixed code that is transmitted changes or is encrypted. (R. 714 at 9-12.) To substantiate this assertion, Lear proffers the second expert report of Dr. Schonfeld, who opines that the Court's construction of "a code that is based on the fixed code" "expand[s] to include any and all ways in which a fixed code could be encrypted or modified." (R. 717 at 12-13; R. 662-1 at 51-52.)

As noted, there is no dispute that the specification discloses at least one embodiment of a "code that is based on the fixed code." Nor is there a dispute over the fact that the '056 patent is directed to the electrical arts. In light of pertinent case law, Plaintiffs contend that they are therefore entitled to summary judgment on Lear's invalidity defense based on lack of enablement. (R. 661 at 18.) Plaintiffs' argument is bolstered by relevant case law. See Epistar Corp. v. Int'l Trade Comm'n, 566 F.3d 1321, 1336 (Fed.Cir. 2009) ("If an invention pertains to an art where the results are predictable . . . a broad claim can be enabled by disclosure of a single embodiment . . . and is not invalid for lack of enablement simply because it reads on another embodiment of the invention which is inadequately disclosed.") (quoting Spectra-Physics, Inc. v. Coherent, Inc., 827 F.2d 1524, 1533 (Fed. Cir.1987)); see also In re Vaeck, 947 F.2d 488, 496 (Fed.Cir.1991) (observing that electrical elements are predictable and noting that the required level of disclosure for such inventions is less than for unpredictable arts). Nevertheless, the Federal Circuit has distinguished Spectra-Physics in Liebel-Flarsheim Co. v. Medrad, Inc., 481 F.3d 1371, 1380 (Fed.Cir.2007).^[20]

Liebel-Flarsheim concerned a fluid injector with a replaceable syringe that is capable of withstanding high pressures for delivering a contrast agent to a patient. Id. at 1373. The claims in the originally filed application recited a pressure jacket in front of the syringe. Id. at 1374. During prosecution, "Liebel removed all references in the claims to a pressure jacket" after the applicants learned of the defendant's jacketless system. Id. Having previously [979] construed the claims to encompass embodiments lacking a pressure jacket, the Federal Circuit affirmed the district court's holding that the claims were invalid for lack of enablement. Id. at 1374-75.

The appellants argued that the district court had erred in light of Spectra-Physics, which stood for the proposition that, "if an invention pertains to an art where the results are predictable . . . then disclosure of a single embodiment can enable a broad claim." Id. at 1379. The appellants noted further that "the specification enables one mode of making and using the invention in its preferred embodiment, viz., an injector with a pressure jacket." Id. The Federal Circuit rejected their reliance on Spectra-Physics as "misplaced," explaining its decision in the cited case as follows:

We did note that the specifications of other patents identified TiCuSil brazing as a suitable alternative attachment technique and thus that the asserted patent's failure to mention TiCuSil brazing as an attachment was `not fatal to enablement under § 112.' Indeed, in that case, disclosure of one attachment means permitted one skilled in the art to make and use the invention as broadly as it was claimed, which included other attachment means known to one of ordinary skill in the art. In contrast, in this case, disclosure of an injector system with a pressure jacket does not permit one skilled in the art to make and use the invention as broadly as it was claimed, including without a pressure jacket.

Id. at 1380.

In light of Liebel-Flarsheim, the relevant question is whether the '056 patent's disclosure permits one skilled in the art to make and use the claimed invention, including a variable code based on a fixed code, without undue experimentation. This inquiry requires the Court to examine the evidence in the light most favorable to Lear to determine whether the '056 patent's specification embodies the claimed invention entailing a "code that is based on a fixed code" as the term has been construed above. Of course, Lear would have the burden of proof at trial in proving its invalidity defense of inadequate enablement of claims 1 and 2 of the '056 patent. See, e.g., Abbott Labs. v. Andrx Pharms., Inc., 473 F.3d 1196, 1201 (Fed.Cir.2007) (observing that the defendant bore the burden of proof at trial on its invalidity defenses). Plaintiffs would therefore be entitled to summary judgment if there is "a complete failure of proof concerning an essential element of the nonmovant's case," which would "necessarily render[] all other facts immaterial." Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).

Plaintiffs therefore cannot rely on the fact that the specification reveals a single embodiment to conclusively establish that the '056 patent meets the enablement requirements of 35 U.S.C. § 112 as a matter of law. The question thus arises whether there is a genuine issue of fact whether one skilled in the art would have to undertake undue experimentation to reproduce a variable code based on a fixed code. The Federal Circuit has observed that "[w]hether undue experimentation is needed is not a single, simple factual determination, but rather is a conclusion reached by weighing many factual considerations." In re Wands, 858 F.2d 731, 737 (Fed.Cir. 1998). The relevant factors identified by the court include: "(1) the quantity of experimentation necessary, (2) the amount of direction or guidance presented, (3) the presence or absence of working examples, (4) the nature of the invention, (5) the state of the prior art, (6) the relative skill of those in the art, (7) the predictability or [980] unpredictability of the art, and (8) the breadth of the claims." Id.

Defendant's principal evidence in support of its contention that claims 1 and 2 of the '056 patent are not enabled is Dr. Schonfeld's second expert report. (R. 662-1 at 51-52.) Having reviewed this evidence in the light most favorable to Lear, the Court concludes that it creates a genuine issue of fact for trial. At paragraph 109 of his report, Dr. Schonfeld observes that "there is no disclosure in the patent specification for any modification of the fixed code other than its conversion from binary fixed code to trinary fixed code." (Id. at 51.) Finding further support for this assertion in statements of Dr. Rhyne, and rejecting the validity of Professor Stevenson's reference to "potential modification of the fixed code in the patent specification," Dr. Schonfeld states: "I therefore conclude that based on the disclosure in the patent specification, a person of ordinary skill in the art would not be able to practice the claimed invention as broadly as Plaintiffs' experts contend it is claimed to encompass encryption of fixed codes [sic]." (Id. at 52.)

This explanation is sufficient under applicable law to create a genuine issue of material fact, and thus to enable Lear to survive summary judgment. See, e.g., Patton, 480 F.3d at 487 (7th Cir.2007) ("[E]ven brief expert reports will suffice at the summary judgment stage."); see also Vollmert, 197 F.3d at 300-01 ("In demanding a `roadmap,' the Department would require an expert to not only provide the justification for the opinion, but also to give a primer on why the facts allow the expert to reach that conclusion. That requires too much of the plaintiff to avoid summary judgment."). Dr. Schonfeld's report explains that the patent specification fails to disclose any modification of the fixed code, and opines on the basis of this observation that one skilled in the art would not be able to practice the claimed invention without undue experimentation. This goes beyond the wholly conclusory nature of expert testimony that may be insufficient to create a genuine issue of material fact. Cf. Vollmert, 197 F.3d at 298 ("On a few occasions, this court has recognized that an admissible expert report may not be sufficient to preclude summary judgment when it offers nothing but naked conclusions.").

The final evidence proffered by Lear (R. 714 at 11) relates to Mr. Kraft's experiences in reverse engineering Plaintiffs' garage-door product. Mr. Kraft did testify that "the '544 [patent] was not adequate to tell me how it worked." (R. 717-1 at 137.) Of course, to be sufficiently enabled for the purposes of section 112, a patent specification need not be so clear that in one skilled in the art would not have to engage in any experimentation at all to make the claimed invention. See ALZA Corp. v. Andrx Pharms., L.L.C., 603 F.3d 935, 940 (Fed. Cir.2010) ("Enablement is not precluded where a `reasonable' amount of routine experimentation is required to practice a claimed invention."). Furthermore, as Plaintiffs correctly point out, "the dispositive question of enablement does not turn on whether the accused product is enabled." (R. 767 at 13-14 (quoting Durel Corp. v. Osram Sylvania, Inc., 256 F.3d 1298, 1306 (Fed.Cir.2001)).) Mr. Kraft ultimately succeeded, of course, in his efforts to determine how Plaintiffs' product operated. (R. 717-1 at 137 ("I learned how to— I learned how the unit actually worked.").) Yet, Mr. Kraft's efforts took some time, as he explained in his deposition testimony: "I then started looking at this program, that program over a period of several months, and I determined actually how the device worked." (Id. at 138.)

[981] The relevant question is not, as Defendant urges, whether Mr. Kraft had to engage in undue experimentation to reverse engineer Plaintiffs' product. (R. 714 at 11.) Plaintiffs are correct to point out that the "ability to reverse engineer a product says nothing about the ability to devise the technology in the first place" and that "Mr. Kraft's efforts to reverse engineer the JCI transmitter are thus not relevant to the enablement analysis, and do not suggest that undue experimentation is necessary to practice the claim element `apparatus for providing a code that is based on the fixed code.'" (R. 767 at 17.) Accord Metso Minerals Inds., Inc. v. FLSmidth-Excel, L.L.C., No. 07-CV-926, 2010 WL 1929781, at *7 (E.D.Wis. May 13, 2010) ("Excel's only argument regarding its enablement defense is that there is a material factual question as to whether the length of time it would take to reverse engineer one of Metso's crushers constitutes 'undue experimentation.'. . . Excel's argument makes no sense. Indeed, there is no logical connection between how long it would take one of ordinary skill in the art to reverse engineer one of Metso's crushers based on the '681 patent and whether one of ordinary skill in the art can practice the '681 patent without `undue experimentation.'").

Notwithstanding the questionable relevance of Mr. Kraft's experience in reverse engineering Plaintiffs' product to the issue of enablement, Defendant has provided sufficient evidence in the form of Dr. Schonfeld's expert report to reveal a genuine issue of material fact that requires trial. The Court therefore denies Plaintiffs' motion for summary judgment on Lear's invalidity defense based on alleged lack of enablement.

2. The '056 Patent Satisfies the Written-Description Requirement

The Federal Circuit has recently reaffirmed that section 112 contains a written-description requirement that is separate from enablement. Ariad Pharms., Inc. v. Eli Lilly & Co., 598 F.3d 1336, 1344-48 (Fed.Cir.2010) (en banc). Thus, the fact that Plaintiffs are entitled to summary judgment on Lear's defense of lack of enablement does not mean that they are similarly deserving of summary judgment on Defendant's defense of inadequate written description. Id. Lear contends that the '056 patent is invalid by virtue of its failure to satisfy the written-description requirement. Plaintiffs have moved for summary judgment, contending that, even viewed in the light most favorable to Lear, the record makes clear that there is no genuine issue of material fact that requires proceeding to trial. (R. 661 at 17-19.)

It first bears noting that "[c]ompliance with patent law's written description requirement is a question of fact but is amenable to summary judgment in cases where no reasonable fact finder could return a verdict for the non-moving party." Spine Solutions, Inc. v. Medtronic Sofamor Danek USA, Inc., 620 F.3d 1305, 1312-13 (Fed.Cir.2010) (quoting PowerOasis, Inc. v. T-Mobile USA, Inc., 522 F.3d 1299, 1307 (Fed.Cir.2008)). The Federal Circuit has explained that the written-description provision of section 112 "requires that the specification objectively demonstrate that the applicant actually invented— was in possession—of the claimed subject matter." Ariad Pharms., Inc. v. Eli Lilly & Co., 598 F.3d 1336, 1349 (Fed. Cir.2010).

In their opening brief, Plaintiffs contend that Lear has insufficient evidence to prove by clear and convincing evidence that the specification of the '056 patent does not provide a written description of a "code that is based on the fixed code" under their proposed construction, which the Court has adopted. (R. 661 at 17-19.) [982] To support this contention, however, Plaintiffs rely only on Spectra-Physics for the proposition that a "claim term in the mechanical/electrical arts is adequately . . . described in compliance with § 112 ¶ 1 by just one example in the specification." (R. 661 at 18 (citing Spectra-Physics, 827 F.2d at 1533).) Plaintiffs' reliance on Spectra-Physics is inapposite, however, because the portion of the opinion they cite speaks only to enablement. See Spectra-Physics, 827 F.2d at 1533.^[21] Plaintiffs proffer no evidence that the '056 patent satisfies the written-description requirement; nor do they explain why the evidence relied upon by Defendant is insufficient to create a genuine issue of material fact. (R. 661 at 17-19 (criticizing Dr. Schonfeld's analysis with respect to enablement, arguing that the specification teaches an example of interleaving fixed and variable code elements, which would relieve one of ordinary skill in the art from engaging in undue experimentation for the purpose of the enablement inquiry, and discussing written description only by reference to Spectra-Physics, which Plaintiffs claim refutes Dr. Schonfeld's position that the '056 patent lacks a written description).)

Lear, in contrast, contends that the "specification contains no description of encrypting or changing the fixed code upon each transmission" and argues that "the specification specifically limits the invention to the transmission of `fixed code bits' that `remain[] the same for each actuation' of the transmitter." (R. 714 at 13.) Defendant also points to the deposition testimony of Plaintiffs' expert, Dr. Rhyne, which recognized that "the patents do not disclose any further modification of the fixed code before it is used as an interleaving code in order to form the transmitted data." (Id.) Lear further contends that the inventors admitted that they did not possess any such invention at the time they filed their patent application. (Id.) Lear thus concludes that, "under the Plaintiffs' claim construction[,] which includes encrypting or changing the fixed code, the '056 patent fails the written description requirement." Id.

In their reply, Plaintiffs raise the argument for the first time that "it is sufficient that the '056 patent describe the embodiment of controller 78, bus 79, and memory 80 to satisfy 35 U.S.C. § 112." (R. 767 at 18.) This is an argument that Plaintiffs did not articulate in its opening motion for summary judgment. (Cf. R. 661 at 17-19.) It is black-letter law that "arguments raised for the first time in a reply brief are waived." United States v. Wescott, 576 F.3d 347, 354 (7th Cir.2009); see also United States ex rel. Curtis v. Randolph, No. 09-CV-4751, 2010 WL 3937465, at *1 n. 1 (N.D.Ill. Oct., 2010).

As Lear has offered evidence that the '056 patent does not satisfy the written description of section 112, and because Plaintiffs have failed to point to evidence establishing that there is no genuine issue of material fact, the Court denies Plaintiffs' motion for summary judgment on Lear's invalidity defense based on lack of written description.

CONCLUSION

For the foregoing reasons, the Court grants in part and denies in part Defendant's motion for summary judgment of noninfringement of the '544 and '123 patents; denies Defendant's motion for summary judgment of noninfringement of '056 [983] patent; denies Chamberlain's cross-motion for summary judgment on the '544 and '123 patents; denies JCI's cross-motion for summary judgment on the '056 patent; denies Chamberlain's cross-motion for summary judgment on the '056 patent; denies Defendant's motion for summary judgment of invalidity under 35 U.S.C. § 101 of the '544, '123, and '056 patents; grants Plaintiffs' motion for summary judgment on Lear's invalidity defense that the asserted claims are directed at unpatentable subject matter; grants in part and denies in part Plaintiffs' motion for summary judgment on Lear's inequitable-conduct claim; and grants in part and denies in part Plaintiffs' motion for summary judgment on Lear's invalidity defense based on alleged lack of definiteness, enablement, and written description.

[1] This case was originally before the Hon. James B. Moran, who presided over the litigation until it was transferred to this Court on April 9, 2009. (R. 315.)

[2] As the Federal Circuit recognized, and as the parties agreed on appeal, modern computers operate in "binary code." As the Federal Circuit put it, "microprocessors and memory devices use low and high voltages to manipulate, transmit, receive, and store vast amounts of data. A low voltage represents a 0, while a high voltage represents a 1." The Chamberlain Group, Inc., et al. v. Lear Corp., 516 F.3d 1331, 1335 (Fed.Cir.2008).

[3] Ultimately, summary judgment of no literal infringement is appropriate if no reasonable jury could find that Lear's Car2U® device literally meets the claims of the '544 and '123 patents. See DePuy Spine, Inc. v. Medtronic Sofamor Danek, Inc., 567 F.3d 1314 (Fed.Cir. 2009). It is for that reason that Plaintiff JCI oversteps in asserting that, to obtain summary judgment, "Lear must prove that JCI has provided no expert testimony whatsoever on the subject." (R. 422 at 10.)

[4] Chamberlain similarly contends that "both Dr. Rhyne and Mr. Cole have tested the Lear transmitter and found that the Lear transmitter, in addition to storing trinary numbers, also operates in binary by generating a base two number one power of two at a time, temporarily storing each generated power of two in the Z-bit register, and then using each generated power of two to determine the binary mirror of it from a stored table of mirrored powers of two." (R. 434 at 30.)

[5] This construction is a matter of law for the Court. See Markman v. Westview Instruments, Inc., 517 U.S. 370, 116 S.Ct. 1384, 134 L.Ed.2d 577 (1996).

[6] Lear places great weight on the patent's use of the phrase "[i]n the present system" in the excerpted part. (R. 454 at 6-7.) It is true that the use of that or similar language means that the patentee is referring to the whole invention, rather than a particular embodiment of it. See, e.g., Verizon Servs. Corp. v. Vonage Holdings Corp., 503 F.3d 1295, 1308 (Fed.Cir.2007); Honeywell Intern., Inc. v. ITT Indus., Inc., 452 F.3d 1312, 1318 (Fed.Cir. 2006). The phrase's current usage, however, is qualified by the word "includes," which suggests that the patent is not purporting to describe all potential embodiments of the invention. Cf. Honeywell, 452 F.3d at 1318 (the phrase "the present invention" was not qualified by "includes"). Therefore, the Court does not rely on the language "[i]n the present system" in finding that "variable code" means "nontrinary variable number."

[7] Plaintiff Chamberlain argues that the proper construction of "code" is "data or instructions." (R. 429-1 at 5.) In light of the Federal Circuit's interpretation of "code" in the '544 patent (with which the '056 patent shares a common specification), the Court rejects Chamberlain's proffered construction. Chamberlain, 516 F.3d at 1339.

[8] Indeed, it bears noting that the appellate court's statement would not necessarily require that the "transmitted fixed code" be invariant from one actuation of the transmitter to the next. JCI may not be unreasonable in submitting that, as long as the fixed code underlying the transmitted code is capable of being understood by the receiver, there would be no clear conflict with the specification.

[9] Dr. Rhyne's concession that "the patents do not disclose any further modification of the fixed code before it is used as an interleaving code in order to form the transmitted data" is somewhat more injurious to Plaintiffs' position. (R. 410-2 at 54.) Nevertheless, Dr. Rhyne's deposition testimony does not foreclose the "code that is based on the fixed code" changing from one actuation to the next.

[10] Even if there were no dispute that the accused product meets the "variable code" limitation, however, Plaintiffs' assertion that Lear has no other noninfringement positions regarding the '056 patent is mistaken. (Compare R. 419 at 16 and R. 429 at 16 with R. 479 at 14-16.) As disputed issues of material fact remain, Plaintiffs would not be entitled to summary judgment of infringement of the '056 patent.

[11] According to the MOT test, a process is patent-eligible under Section 101 if "(1) it is tied to a particular machine or apparatus, or (2) it transforms particular article into a different state or thing." Bilski, 545 F.3d at 953 (affirmed but criticized by Bilski, 130 S.Ct. at 3218). Furthermore, "the use of a specific machine or transformation of an article must impose meaningful limits on the claim's scope to impart patent-eligibility" and "the involvement of the machine or transformation in the claimed process must not merely be insignificant extra-solution activity." Id. at 961-62.

[12] Section 101 specifies four categories of patentable subject matter, namely processes, machines, manufacturers, and compositions of matter, as well as any improvement of the same. 35 U.S.C. § 101.

[13] Nevertheless, the fact that the asserted claims are directed to a "machine" does not necessarily render them patentable, as they would not be if they were directed to "`laws of nature, physical phenomena, and abstract ideas.'" Bilski, 130 S.Ct. at 3225 (quoting Chakrabarty, 447 U.S. at 309, 100 S.Ct. 2204). The Federal Circuit has addressed the patentability of a machine that entailed the use of mathematical algorithms. In re Alappat, 33 F.3d 1526 (Fed.Cir. 1994) (abrogated by In re Bilski, 545 F.3d at 959-60.) In Alappat, the court explained:

Given the foregoing, the proper inquiry in dealing with the so called mathematical subject matter exception to § 101 alleged herein is to see whether the claimed subject matter as a whole is a disembodied mathematical concept, whether categorized as a mathematical formula, mathematical equation, mathematical algorithm, or the like, which in essence represents nothing more than a "law of nature," "natural phenomenon," or "abstract idea." If so, Diehr precludes the patenting of that subject matter. That is not the case here.

Although many, or arguably even all, of the means elements recited in claim 15 represent circuitry elements that perform mathematical calculations, which is essentially true of all digital electrical circuits, the claimed invention as a whole is directed to a combination of interrelated elements which combine to form a machine for converting discrete waveform data samples into anti-aliased pixel illumination intensity data to be displayed on a display means. This is not a disembodied mathematical concept which may be characterized as an "abstract idea" . . . .

Id. at 1544 (emphasis in original). The Supreme Court recently declined to endorse the useful-concrete-and-tangible-result test employed by the Federal Circuit in Alappat. Bilski, 130 S.Ct. at 3231. Nevertheless, the specific question whether a machine represents nothing more than a law of nature, natural phenomenon, or abstract idea is unquestionably the correct one in light of Bilski. Id. at 3225.

[14] Lear characterizes the '073 application as a continuation, while Plaintiffs characterize it as a divisional application. (Compare R. 666 at 8-10 and R. 668-1 at 2 with R. 706 at 6.) As the classification does not affect the Court's analysis of the question whether Plaintiffs committed inequitable conduct, the Court need not address this discrepancy.

[15] Furthermore, Defendant is correct to point out that "cumulativeness" requires the identify of each element of a claim in an anticipatory reference. (R. 706 at 10.) Lear also points to the prosecuting attorney's concession that Miyake disclosed certain information that other references did not. (Id.; R. 707 at 18, ¶ 7; R. 707-1 at 66-67.)

[16] As explained above, there is a genuine issue of fact as to whether the Miyake reference was material to the '149 application.

[17] This case was previously before Judge Moran.

[18] The Court declines to put controlling weight on this fact, however, because the district court informed the definition of binary-code generator by adopting a construction of "binary code" that was subsequently reversed by the Federal Circuit. R. 148 at 8; Chamberlain, 516 F.3d at 1339.

[19] Plaintiffs contend that the specification's description of interleaving fixed and variable code elements constitutes an example of a variable code that is based on a fixed code. (R. 661 at 18.) There is no genuine issue of fact, however, that interleaving does not modify the fixed code in such a manner that it changes with each actuation. (R. 714 at 11.) Construing the '056 patent, the Court agrees with Defendant that it is in fact the "code that is based on the fixed code" that is interleaved with the separate variable code. (Id. at 12; R. 270-2 at 80.) Claim 1 claims an "apparatus for providing a code that is based on the fixed code" and an "apparatus [that] . . . combines the trinary code version of the variable code with the trinary code version of the code by interleaving trinary bits for the trinary code version of the variable code with trinary bits for the trinary code version of the code to thereby provide an interleaved trinary code combined result." (R. 270-2 at 80.)

[20] Indeed, commentators have opined that the latter decision has made it easier to establish patents' invalidity on the basis of a lack of enablement in the predictable arts. See, e.g., Bernard Chao, Rethinking Enablement in the Predictable Arts: Fully Scoping the New Rule, 2009 STAN. TECH. L. REV. 3, at *1.

[21] Nor did Liebel-Flarsheim, which distinguished Spectra-Physics with respect to enablement, have occasion to consider the law on written description. Liebel-Flarsheim, 481 F.3d at 1380 ("Because we are resolving this issue on the enablement ground, we do not need to consider the written description holding of invalidity.").

[808] Gary L. Reback, with whom Peter N. Detkin, Michael Barclay, Isabella E. Fu, Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto, CA, Peter E. Gelhaar, Katherine L. Parks, and Donnelly Conroy & Gelhaar, Boston, MA, were on brief for appellant.

Matthew P. Poppel, Boston, MA, et al., were on brief for Computer Scientists, amicus curiae.

Dennis S. Karjala, Tempe, AZ, and Peter S. Menell, Berkeley, CA, on brief, amici curiae.

Jeffrey C. Cannon and Baker Keaton Seibel & Cannon, Walnut Creek, CA, were on brief for Computer Software Industry Ass'n, amicus curiae.

Laureen E. McGurk, David A. Rabin, Bryan G. Harrison and Morris Manning & Martin, Atlanta, GA, were on brief for Chicago Computer Soc., Diablo Users Group, Danbury Area Computer Soc., IBM AB Users Group, Kentucky-Indiana Personal Computer Users Group, Long Island PC Users Group, Napa Valley PC Users Group, Pacific Northwest PC Users Group, Palmetto Personal Computer Club, Philadelphia Area Computer Soc., Inc., Phoenix IBM PC Users Group, Pinellas IBM PC Users Group, Quad Cities Computer Soc., Quattro Pro Users Group, Sacramento PC Users Group, San Francisco PC Users Group, Santa Barbara PC Users Group, Twin Cities PC Users Group, and Warner Robbins Personal Computer Ass'n, amici curiae.

Diane Marie O'Malley and Hanson Bridgett Marcus Vlahos & Rudy, San Francisco, [809] CA, were on brief for Software Entrepreneurs' Forum, amicus curiae.

Peter M.C. Choy, Mountain View, CA, was on brief for American Committee for Interoperable Systems, amicus curiae.

Howard B. Abrams, Detroit, MI, Howard C. Anawalt, Santa Clara, CA, Stephen R. Barnett, Berkeley, CA, Ralph S. Brown, Stephen L. Carter, New Haven, CT, Amy B. Cohen, Longmeadow, MA, Paul J. Heald, Athens, GA, Peter A. Jaszi, John A. Kidwell, Madison, WI, Edmund W. Kitch, Charlottesville, VA, Roberta R. Kwall, Chicago, IL, David L. Lange, Durham, NC, Marshall Leaffer, Toledo, OH, Jessica D. Litman, Ann Arbor, MI, Charles R. McManis, St. Louis, MO, L. Ray Patterson, Athens, GA, Jerome H. Reichman, David A. Rice, Chestnut Hill, MA, Pamela Samuelson, Pittsburgh, PA, David J. Seipp, Boston, MA, David E. Shipley, Lexington, KY, Lionel S. Sobel, Santa Monica, CA, Alfred C. Yen, Newton, MA, and Diane L. Zimmerman, New York City, were on brief for Copyright Law Professors, amicus curiae.

Henry B. Gutman, Baker & Botts, LLP, with whom Kerry L. Konrad, Joshua H. Epstein, Kimberly A. Caldwell, O'Sullivan Graev & Karabell, New York City, Thomas M. Lemberg, James C. Burling, and Hale and Dorr, Boston, MA, were on brief for appellee.

Morton David Goldberg, June M. Besek, David O. Carson, Jesse M. Feder, Schwab Goldberg Price & Dannay, New York City, and Arthur R. Miller, Cambridge, MA, were on brief for Apple Computer, Inc., Digital Equip. Corp., International Business Machines Corp., and Xerox Corp., amici curiae.

Jon A. Baumgarten, Proskauer Rose Goetz & Mendelsohn, and Robert A. Gorman, New York City, were on brief for Adobe Systems, Inc., Apple Computer, Inc., Computer Associates Intern., Inc., Digital Equip. Corp., and International Business Machines Corp., amici curiae.

Herbert F. Schwartz, Vincent N. Palladino, Susan Progoff, Fish & Neave, New York City, William J. Cheeseman, and Foley Hoag & Eliot, Boston, MA, were on brief for Computer and Business Equip. Mfrs. Ass'n, amicus curiae.

Before TORRUELLA, Chief Judge, BOUDIN and STAHL, Circuit Judges.

STAHL, Circuit Judge.

This appeal requires us to decide whether a computer menu command hierarchy is copyrightable subject matter. In particular, we must decide whether, as the district court held, plaintiff-appellee Lotus Development Corporation's copyright in Lotus 1-2-3, a computer spreadsheet program, was infringed by defendant-appellant Borland International, Inc., when Borland copied the Lotus 1-2-3 menu command hierarchy into its Quattro and Quattro Pro computer spreadsheet programs. See Lotus Dev. Corp. v. Borland Int'l, Inc., 788 F.Supp. 78 (D.Mass. 1992) ("Borland I"); Lotus Dev. Corp. v. Borland Int'l, Inc., 799 F.Supp. 203 (D.Mass. 1992) ("Borland II"); Lotus Dev. Corp. v. Borland Int'l, Inc., 831 F.Supp. 202 (D.Mass. 1993) ("Borland III"); Lotus Dev. Corp. v. Borland Int'l, Inc., 831 F.Supp. 223 (D.Mass. 1993) ("Borland IV").

I.

Background

Lotus 1-2-3 is a spreadsheet program that enables users to perform accounting functions electronically on a computer. Users manipulate and control the program via a series of menu commands, such as "Copy," "Print," and "Quit." Users choose commands either by highlighting them on the screen or by typing their first letter. In all, Lotus 1-2-3 has 469 commands arranged into more than 50 menus and submenus.

Lotus 1-2-3, like many computer programs, allows users to write what are called "macros." By writing a macro, a user can designate a series of command choices with a single macro keystroke. Then, to execute that series of commands in multiple parts of the spreadsheet, rather than typing the whole series each time, the user only needs to type the single pre-programmed macro keystroke, causing the program to recall and perform the designated series of commands automatically. Thus, Lotus 1-2-3 macros [810] shorten the time needed to set up and operate the program.

Borland released its first Quattro program to the public in 1987, after Borland's engineers had labored over its development for nearly three years. Borland's objective was to develop a spreadsheet program far superior to existing programs, including Lotus 1-2-3. In Borland's words, "[f]rom the time of its initial release ... Quattro included enormous innovations over competing spreadsheet products."

The district court found, and Borland does not now contest, that Borland included in its Quattro and Quattro Pro version 1.0 programs "a virtually identical copy of the entire 1-2-3 menu tree." Borland III, 831 F.Supp. at 212 (emphasis in original). In so doing, Borland did not copy any of Lotus's underlying computer code; it copied only the words and structure of Lotus's menu command hierarchy. Borland included the Lotus menu command hierarchy in its programs to make them compatible with Lotus 1-2-3 so that spreadsheet users who were already familiar with Lotus 1-2-3 would be able to switch to the Borland programs without having to learn new commands or rewrite their Lotus macros.

In its Quattro and Quattro Pro version 1.0 programs, Borland achieved compatibility with Lotus 1-2-3 by offering its users an alternate user interface, the "Lotus Emulation Interface." By activating the Emulation Interface, Borland users would see the Lotus menu commands on their screens and could interact with Quattro or Quattro Pro as if using Lotus 1-2-3, albeit with a slightly different looking screen and with many Borland options not available on Lotus 1-2-3. In effect, Borland allowed users to choose how they wanted to communicate with Borland's spreadsheet programs: either by using menu commands designed by Borland, or by using the commands and command structure used in Lotus 1-2-3 augmented by Borland-added commands.

Lotus filed this action against Borland in the District of Massachusetts on July 2, 1990, four days after a district court held that the Lotus 1-2-3 "menu structure, taken as a whole — including the choice of command terms [and] the structure and order of those terms," was protected expression covered by Lotus's copyrights. Lotus Dev. Corp. v. Paperback Software Int'l, 740 F.Supp. 37, 68, 70 (D.Mass.1990) ("Paperback").^[1] Three days earlier, on the morning after the Paperback decision, Borland had filed a declaratory judgment action against Lotus in the Northern District of California, seeking a declaration of non-infringement. On September 10, 1990, the district court in California dismissed Borland's declaratory judgment action in favor of this action.

Lotus and Borland filed cross motions for summary judgment; the district court denied both motions on March 20, 1992, concluding that "neither party's motion is supported by the record." Borland I, 788 F.Supp. at 80. The district court invited the parties to file renewed summary judgment motions that would "focus their arguments more precisely" in light of rulings it had made in conjunction with its denial of their summary judgment motions. Id. at 82. Both parties filed renewed motions for summary judgment on April 24, 1992. In its motion, Borland contended that the Lotus 1-2-3 menus were not copyrightable as a matter of law and that no reasonable trier of fact could find that the similarity between its products and Lotus 1-2-3 was sufficient to sustain a determination of infringement. Lotus contended in its motion that Borland had copied Lotus 1-2-3's entire user interface and had thereby infringed Lotus's copyrights.

On July 31, 1992, the district court denied Borland's motion and granted Lotus's motion in part. The district court ruled that the Lotus menu command hierarchy was copyrightable expression because

[a] very satisfactory spreadsheet menu tree can be constructed using different commands and a different command structure from those of Lotus 1-2-3. In fact, Borland has constructed just such an alternate tree for use in Quattro Pro's native mode. Even if one holds the arrangement of menu commands constant, it is possible to generate literally millions of satisfactory [811] menu trees by varying the menu commands employed.

Borland II, 799 F.Supp. at 217. The district court demonstrated this by offering alternate command words for the ten commands that appear in Lotus's main menu. Id. For example, the district court stated that "[t]he `Quit' command could be named `Exit' without any other modifications," and that "[t]he `Copy' command could be called `Clone,' `Ditto,' `Duplicate,' `Imitate,' `Mimic,' `Replicate,' and `Reproduce,' among others." Id. Because so many variations were possible, the district court concluded that the Lotus developers' choice and arrangement of command terms, reflected in the Lotus menu command hierarchy, constituted copyrightable expression.

In granting partial summary judgment to Lotus, the district court held that Borland had infringed Lotus's copyright in Lotus 1-2-3:

[A]s a matter of law, Borland's Quattro products infringe the Lotus 1-2-3 copyright because of (1) the extent of copying of the "menu commands" and "menu structure" that is not genuinely disputed in this case, (2) the extent to which the copied elements of the "menu commands" and "menu structure" contain expressive aspects separable from the functions of the "menu commands" and "menu structure," and (3) the scope of those copied expressive aspects as an integral part of Lotus 1-2-3.

Borland II, 799 F.Supp. at 223 (emphasis in original). The court nevertheless concluded that while the Quattro and Quattro Pro programs infringed Lotus's copyright, Borland had not copied the entire Lotus 1-2-3 user interface, as Lotus had contended. Accordingly, the court concluded that a jury trial was necessary to determine the scope of Borland's infringement, including whether Borland copied the long prompts^[2] of Lotus 1-2-3, whether the long prompts contained expressive elements, and to what extent, if any, functional constraints limited the number of possible ways that the Lotus menu command hierarchy could have been arranged at the time of its creation. See Borland III, 831 F.Supp. at 207. Additionally, the district court granted Lotus summary judgment on Borland's affirmative defense of waiver, but not on its affirmative defenses of laches and estoppel. Borland II, 799 F.Supp. at 222-23.

Immediately following the district court's summary judgment decision, Borland removed the Lotus Emulation Interface from its products. Thereafter, Borland's spreadsheet programs no longer displayed the Lotus 1-2-3 menus to Borland users, and as a result Borland users could no longer communicate with Borland's programs as if they were using a more sophisticated version of Lotus 1-2-3. Nonetheless, Borland's programs continued to be partially compatible with Lotus 1-2-3, for Borland retained what it called the "Key Reader" in its Quattro Pro programs. Once turned on, the Key Reader allowed Borland's programs to understand and perform some Lotus 1-2-3 macros.^[3] With the Key Reader on, the Borland programs used Quattro Pro menus for display, interaction, and macro execution, except when they encountered a slash ("/") key in a macro (the starting key for any Lotus 1-2-3 [812] macro), in which case they interpreted the macro as having been written for Lotus 1-2-3. Accordingly, people who wrote or purchased macros to shorten the time needed to perform an operation in Lotus 1-2-3 could still use those macros in Borland's programs.^[4] The district court permitted Lotus to file a supplemental complaint alleging that the Key Reader infringed its copyright.

The parties agreed to try the remaining liability issues without a jury. The district court held two trials, the Phase I trial covering all remaining issues raised in the original complaint (relating to the Emulation Interface) and the Phase II trial covering all issues raised in the supplemental complaint (relating to the Key Reader). At the Phase I trial, there were no live witnesses, although considerable testimony was presented in the form of affidavits and deposition excerpts. The district court ruled upon evidentiary objections counsel interposed. At the Phase II trial, there were two live witnesses, each of whom demonstrated the programs for the district court.

After the close of the Phase I trial, the district court permitted Borland to amend its answer to include the affirmative defense of "fair use." Because Borland had presented all of the evidence supporting its fair-use defense during the Phase I trial, but Lotus had not presented any evidence on fair use (as the defense had not been raised before the conclusion of the Phase I trial), the district court considered Lotus's motion for judgment on partial findings of fact. See Fed.R.Civ.P. 52(c). The district court held that Borland had failed to show that its use of the Lotus 1-2-3 menu command hierarchy in its Emulation Interface was a fair use. See Borland III, 831 F.Supp. at 208.

In its Phase I-trial decision, the district court found that "each of the Borland emulation interfaces contains a virtually identical copy of the 1-2-3 menu tree and that the 1-2-3 menu tree is capable of a wide variety of expression." Borland III, 831 F.Supp. at 218. The district court also rejected Borland's affirmative defenses of laches and estoppel. Id. at 218-23.

In its Phase II-trial decision, the district court found that Borland's Key Reader file included "a virtually identical copy of the Lotus menu tree structure, but represented in a different form and with first letters of menu command names in place of the full menu command names." Borland IV, 831 F.Supp. at 228. In other words, Borland's programs no longer included the Lotus command terms, but only their first letters. The district court held that "the Lotus menu structure, organization, and first letters of the command names ... constitute part of the protectable expression found in [Lotus 1-2-3]." Id. at 233. Accordingly, the district court held that with its Key Reader, Borland had infringed Lotus's copyright. Id. at 245. The district court also rejected Borland's affirmative defenses of waiver, laches, estoppel, and fair use. Id. at 235-45. The district court then entered a permanent injunction against Borland, id. at 245, from which Borland appeals.

This appeal concerns only Borland's copying of the Lotus menu command hierarchy into its Quattro programs and Borland's affirmative defenses to such copying. Lotus has not cross-appealed; in other words, Lotus does not contend on appeal that the district court erred in finding that Borland had not copied other elements of Lotus 1-2-3, such as its screen displays.

II.

Discussion

On appeal, Borland does not dispute that it factually copied the words and arrangement of the Lotus menu command hierarchy. Rather, Borland argues that it "lawfully copied the unprotectable menus of Lotus 1-2-3." Borland contends that the Lotus menu command hierarchy is not copyrightable because it is a system, method of operation, process, or procedure foreclosed from protection by 17 U.S.C. § 102(b). Borland also raises a number of affirmative defenses. [813]

A. Copyright Infringement Generally

To establish copyright infringement, a plaintiff must prove "(1) ownership of a valid copyright, and (2) copying of constituent elements of the work that are original." Feist Publications, Inc. v. Rural Tel. Serv. Co., 499 U.S. 340, 361, 111 S.Ct. 1282, 1296, 113 L.Ed.2d 358 (1991); see also Data Gen. Corp. v. Grumman Sys. Support Corp., 36 F.3d 1147, 1160 n. 19 (1st Cir.1994); Concrete Mach. Co. v. Classic Lawn Ornaments, Inc., 843 F.2d 600, 605 (1st Cir.1988). To show ownership of a valid copyright and therefore satisfy Feist's first prong, a plaintiff must prove that the work as a whole is original and that the plaintiff complied with applicable statutory formalities. See Engineering Dynamics, Inc. v. Structural Software, Inc., 26 F.3d 1335, 1340 (5th Cir.1994). "In judicial proceedings, a certificate of copyright registration constitutes prima facie evidence of copyrightability and shifts the burden to the defendant to demonstrate why the copyright is not valid." Bibbero Sys., Inc. v. Colwell Sys., Inc., 893 F.2d 1104, 1106 (9th Cir.1990); see also 17 U.S.C. § 410(c); Folio Impressions, Inc. v. Byer California, 937 F.2d 759, 763 (2d Cir.1991) (presumption of validity may be rebutted).

To show actionable copying and therefore satisfy Feist's second prong, a plaintiff must first prove that the alleged infringer copied plaintiff's copyrighted work as a factual matter; to do this, he or she may either present direct evidence of factual copying or, if that is unavailable, evidence that the alleged infringer had access to the copyrighted work and that the offending and copyrighted works are so similar that the court may infer that there was factual copying (i.e., probative similarity). Engineering Dynamics, 26 F.3d at 1340; see also Concrete Mach., 843 F.2d at 606. The plaintiff must then prove that the copying of copyrighted material was so extensive that it rendered the offending and copyrighted works substantially similar. See Engineering Dynamics, 26 F.3d at 1341.

In this appeal, we are faced only with whether the Lotus menu command hierarchy is copyrightable subject matter in the first instance, for Borland concedes that Lotus has a valid copyright in Lotus 1-2-3 as a whole^[5] and admits to factually copying the Lotus menu command hierarchy. As a result, this appeal is in a very different posture from most copyright-infringement cases, for copyright infringement generally turns on whether the defendant has copied protected expression as a factual matter. Because of this different posture, most copyright-infringement cases provide only limited help to us in deciding this appeal. This is true even with respect to those copyright-infringement cases that deal with computers and computer software.

B. Matter of First Impression

Whether a computer menu command hierarchy constitutes copyrightable subject matter is a matter of first impression in this court. While some other courts appear to have touched on it briefly in dicta, see, e.g., Autoskill, Inc. v. National Educ. Support Sys., Inc., 994 F.2d 1476, 1495 n. 23 (10th Cir.), cert. denied, ___ U.S. ___, 114 S.Ct. 307, 126 L.Ed.2d 254 (1993), we know of no cases that deal with the copyrightability of a menu command hierarchy standing on its own (i.e., without other elements of the user interface, such as screen displays, in issue). Thus we are navigating in uncharted waters.

Borland vigorously argues, however, that the Supreme Court charted our course more than 100 years ago when it decided Baker v. Selden, 101 U.S. 99, 25 L.Ed. 841 (1879). In Baker v. Selden, the Court held that Selden's copyright over the textbook in which he explained [814] his new way to do accounting did not grant him a monopoly on the use of his accounting system.^[6] Borland argues:

The facts of Baker v. Selden, and even the arguments advanced by the parties in that case, are identical to those in this case. The only difference is that the "user interface" of Selden's system was implemented by pen and paper rather than by computer.

To demonstrate that Baker v. Selden and this appeal both involve accounting systems, Borland even supplied this court with a video that, with special effects, shows Selden's paper forms "melting" into a computer screen and transforming into Lotus 1-2-3.

We do not think that Baker v. Selden is nearly as analogous to this appeal as Borland claims. Of course, Lotus 1-2-3 is a computer spreadsheet, and as such its grid of horizontal rows and vertical columns certainly resembles an accounting ledger or any other paper spreadsheet. Those grids, however, are not at issue in this appeal for, unlike Selden, Lotus does not claim to have a monopoly over its accounting system. Rather, this appeal involves Lotus's monopoly over the commands it uses to operate the computer. Accordingly, this appeal is not, as Borland contends, "identical" to Baker v. Selden.

C. Altai

Before we analyze whether the Lotus menu command hierarchy is a system, method of operation, process, or procedure, we first consider the applicability of the test the Second Circuit set forth in Computer Assoc. Int'l, Inc. v. Altai, Inc., 982 F.2d 693 (2d Cir.1992).^[7] The Second Circuit designed its Altai test to deal with the fact that computer programs, copyrighted as "literary works," can be infringed by what is known as "nonliteral" copying, which is copying that is paraphrased or loosely paraphrased rather than word for word. See id. at 701 (citing nonliteral-copying cases); see also 3 Melville B. Nimmer & David Nimmer, Nimmer on Copyright § 13.03[A][1] (1993). When faced with nonliteral-copying cases, courts must determine whether similarities are due merely to the fact that the two works share the same underlying idea or whether they instead indicate that the second author copied the first author's expression. The Second Circuit designed its Altai test to deal with this situation in the computer context, specifically with whether one computer program copied nonliteral expression from another program's code.

The Altai test involves three steps: abstraction, filtration, and comparison. The abstraction step requires courts to "dissect the allegedly copied program's structure and isolate each level of abstraction contained within it." Altai, 982 F.2d at 707. This step enables courts to identify the appropriate framework within which to separate protectable expression from unprotected ideas. Second, courts apply a "filtration" step in which they examine "the structural components at each level of abstraction to determine whether their particular inclusion at that level was `idea' or was dictated by considerations of efficiency, so as to be necessarily incidental to that idea; required by factors external to the program itself; or taken from the public domain." Id. Finally, courts compare the protected elements of the infringed work (i.e., those that survived the filtration screening) to the corresponding elements of the allegedly infringing work to determine whether there was sufficient copying of protected material to constitute infringement. Id. at 710.

In the instant appeal, we are not confronted with alleged nonliteral copying of computer code. Rather, we are faced with Borland's deliberate, literal copying of the Lotus menu command hierarchy. Thus, we must determine not whether nonliteral copying occurred in some amorphous sense, but rather whether the literal copying of the Lotus [815] menu command hierarchy constitutes copyright infringement.

While the Altai test may provide a useful framework for assessing the alleged nonliteral copying of computer code, we find it to be of little help in assessing whether the literal copying of a menu command hierarchy constitutes copyright infringement. In fact, we think that the Altai test in this context may actually be misleading because, in instructing courts to abstract the various levels, it seems to encourage them to find a base level that includes copyrightable subject matter that, if literally copied, would make the copier liable for copyright infringement.^[8] While that base (or literal) level would not be at issue in a nonliteral-copying case like Altai, it is precisely what is at issue in this appeal. We think that abstracting menu command hierarchies down to their individual word and menu levels and then filtering idea from expression at that stage, as both the Altai and the district court tests require, obscures the more fundamental question of whether a menu command hierarchy can be copyrighted at all. The initial inquiry should not be whether individual components of a menu command hierarchy are expressive, but rather whether the menu command hierarchy as a whole can be copyrighted. But see Gates Rubber Co. v. Bando Chem. Indus., Ltd., 9 F.3d 823 (10th Cir.1993) (endorsing Altai's abstraction-filtration-comparison test as a way of determining whether "menus and sorting criteria" are copyrightable).

D. The Lotus Menu Command Hierarchy: A "Method of Operation"

Borland argues that the Lotus menu command hierarchy is uncopyrightable because it is a system, method of operation, process, or procedure foreclosed from copyright protection by 17 U.S.C. § 102(b). Section 102(b) states: "In no case does copyright protection for an original work of authorship extend to any idea, procedure, process, system, method of operation, concept, principle, or discovery, regardless of the form in which it is described, explained, illustrated, or embodied in such work." Because we conclude that the Lotus menu command hierarchy is a method of operation, we do not consider whether it could also be a system, process, or procedure.

We think that "method of operation," as that term is used in § 102(b), refers to the means by which a person operates something, whether it be a car, a food processor, or a computer. Thus a text describing how to operate something would not extend copyright protection to the method of operation itself; other people would be free to employ that method and to describe it in their own words. Similarly, if a new method of operation is used rather than described, other people would still be free to employ or describe that method.

We hold that the Lotus menu command hierarchy is an uncopyrightable "method of operation." The Lotus menu command hierarchy provides the means by which users control and operate Lotus 1-2-3. If users wish to copy material, for example, they use the "Copy" command. If users wish to print material, they use the "Print" command. Users must use the command terms to tell the computer what to do. Without the menu command hierarchy, users would not be able to access and control, or indeed make use of, Lotus 1-2-3's functional capabilities.

The Lotus menu command hierarchy does not merely explain and present Lotus 1-2-3's functional capabilities to the user; it also serves as the method by which the program is operated and controlled. The Lotus menu command hierarchy is different from the Lotus long prompts, for the long prompts are not necessary to the operation of the program; users could operate Lotus 1-2-3 even if there were no long prompts.^[9] The Lotus [816] menu command hierarchy is also different from the Lotus screen displays, for users need not "use" any expressive aspects of the screen displays in order to operate Lotus 1-2-3; because the way the screens look has little bearing on how users control the program, the screen displays are not part of Lotus 1-2-3's "method of operation."^[10] The Lotus menu command hierarchy is also different from the underlying computer code, because while code is necessary for the program to work, its precise formulation is not. In other words, to offer the same capabilities as Lotus 1-2-3, Borland did not have to copy Lotus's underlying code (and indeed it did not); to allow users to operate its programs in substantially the same way, however, Borland had to copy the Lotus menu command hierarchy. Thus the Lotus 1-2-3 code is not a uncopyrightable "method of operation."^[11]

The district court held that the Lotus menu command hierarchy, with its specific choice and arrangement of command terms, constituted an "expression" of the "idea" of operating a computer program with commands arranged hierarchically into menus and submenus. Borland II, 799 F.Supp. at 216. Under the district court's reasoning, Lotus's decision to employ hierarchically arranged command terms to operate its program could not foreclose its competitors from also employing hierarchically arranged command terms to operate their programs, but it did foreclose them from employing the specific command terms and arrangement that Lotus had used. In effect, the district court limited Lotus 1-2-3's "method of operation" to an abstraction.

Accepting the district court's finding that the Lotus developers made some expressive choices in choosing and arranging the Lotus command terms, we nonetheless hold that that expression is not copyrightable because it is part of Lotus 1-2-3's "method of operation." We do not think that "methods of operation" are limited to abstractions; rather, they are the means by which a user operates something. If specific words are essential to operating something, then they are part of a "method of operation" and, as such, are unprotectable. This is so whether they must be highlighted, typed in, or even spoken, as computer programs no doubt will soon be controlled by spoken words.

The fact that Lotus developers could have designed the Lotus menu command hierarchy differently is immaterial to the question of whether it is a "method of operation." In other words, our initial inquiry is not whether the Lotus menu command hierarchy incorporates any expression.^[12] Rather, our initial inquiry is whether the Lotus menu command hierarchy is a "method of operation." Concluding, as we do, that users operate Lotus 1-2-3 by using the Lotus menu command hierarchy, and that the entire Lotus menu command hierarchy is essential to operating Lotus 1-2-3, we do not inquire further whether that method of operation could have been designed differently. The "expressive" choices of what to name the command terms and how to arrange them do not magically change the uncopyrightable menu command hierarchy into copyrightable subject matter.

Our holding that "methods of operation" are not limited to mere abstractions is bolstered by Baker v. Selden. In Baker, the Supreme Court explained that

the teachings of science and the rules and methods of useful art have their final end in application and use; and this application [817] and use are what the public derive from the publication of a book which teaches them.... The description of the art in a book, though entitled to the benefit of copyright, lays no foundation for an exclusive claim to the art itself. The object of the one is explanation; the object of the other is use. The former may be secured by copyright. The latter can only be secured, if it can be secured at all, by letters-patent.

Baker v. Selden, 101 U.S. at 104-05. Lotus wrote its menu command hierarchy so that people could learn it and use it. Accordingly, it falls squarely within the prohibition on copyright protection established in Baker v. Selden and codified by Congress in § 102(b).

In many ways, the Lotus menu command hierarchy is like the buttons used to control, say, a video cassette recorder ("VCR"). A VCR is a machine that enables one to watch and record video tapes. Users operate VCRs by pressing a series of buttons that are typically labelled "Record, Play, Reverse, Fast Forward, Pause, Stop/Eject." That the buttons are arranged and labeled does not make them a "literary work," nor does it make them an "expression" of the abstract "method of operating" a VCR via a set of labeled buttons. Instead, the buttons are themselves the "method of operating" the VCR.

When a Lotus 1-2-3 user chooses a command, either by highlighting it on the screen or by typing its first letter, he or she effectively pushes a button. Highlighting the "Print" command on the screen, or typing the letter "P," is analogous to pressing a VCR button labeled "Play."

Just as one could not operate a buttonless VCR, it would be impossible to operate Lotus 1-2-3 without employing its menu command hierarchy. Thus the Lotus command terms are not equivalent to the labels on the VCR's buttons, but are instead equivalent to the buttons themselves. Unlike the labels on a VCR's buttons, which merely make operating a VCR easier by indicating the buttons' functions, the Lotus menu commands are essential to operating Lotus 1-2-3. Without the menu commands, there would be no way to "push" the Lotus buttons, as one could push unlabeled VCR buttons. While Lotus could probably have designed a user interface for which the command terms were mere labels, it did not do so here. Lotus 1-2-3 depends for its operation on use of the precise command terms that make up the Lotus menu command hierarchy.

One might argue that the buttons for operating a VCR are not analogous to the commands for operating a computer program because VCRs are not copyrightable, whereas computer programs are. VCRs may not be copyrighted because they do not fit within any of the § 102(a) categories of copyrightable works; the closest they come is "sculptural work." Sculptural works, however, are subject to a "useful-article" exception whereby "the design of a useful article ... shall be considered a pictorial, graphic, or sculptural work only if, and only to the extent that, such design incorporates pictorial, graphic, or sculptural features that can be identified separately from, and are capable of existing independently of, the utilitarian aspects of the article." 17 U.S.C. § 101. A "useful article" is "an article having an intrinsic utilitarian function that is not merely to portray the appearance of the article or to convey information." Id. Whatever expression there may be in the arrangement of the parts of a VCR is not capable of existing separately from the VCR itself, so an ordinary VCR would not be copyrightable.

Computer programs, unlike VCRs, are copyrightable as "literary works." 17 U.S.C. § 102(a). Accordingly, one might argue, the "buttons" used to operate a computer program are not like the buttons used to operate a VCR, for they are not subject to a useful-article exception. The response, of course, is that the arrangement of buttons on a VCR would not be copyrightable even without a useful-article exception, because the buttons are an uncopyrightable "method of operation." Similarly, the "buttons" of a computer program are also an uncopyrightable "method of operation."

That the Lotus menu command hierarchy is a "method of operation" becomes clearer when one considers program compatibility. Under Lotus's theory, if a user uses [818] several different programs, he or she must learn how to perform the same operation in a different way for each program used. For example, if the user wanted the computer to print material, then the user would have to learn not just one method of operating the computer such that it prints, but many different methods. We find this absurd. The fact that there may be many different ways to operate a computer program, or even many different ways to operate a computer program using a set of hierarchically arranged command terms, does not make the actual method of operation chosen copyrightable; it still functions as a method for operating the computer and as such is uncopyrightable.

Consider also that users employ the Lotus menu command hierarchy in writing macros. Under the district court's holding, if the user wrote a macro to shorten the time needed to perform a certain operation in Lotus 1-2-3, the user would be unable to use that macro to shorten the time needed to perform that same operation in another program. Rather, the user would have to rewrite his or her macro using that other program's menu command hierarchy. This is despite the fact that the macro is clearly the user's own work product. We think that forcing the user to cause the computer to perform the same operation in a different way ignores Congress's direction in § 102(b) that "methods of operation" are not copyrightable. That programs can offer users the ability to write macros in many different ways does not change the fact that, once written, the macro allows the user to perform an operation automatically. As the Lotus menu command hierarchy serves as the basis for Lotus 1-2-3 macros, the Lotus menu command hierarchy is a "method of operation."

In holding that expression that is part of a "method of operation" cannot be copyrighted, we do not understand ourselves to go against the Supreme Court's holding in Feist. In Feist, the Court explained:

The primary objective of copyright is not to reward the labor of authors, but to promote the Progress of Science and useful Arts. To this end, copyright assures authors the right to their original expression, but encourages others to build freely upon the ideas and information conveyed by a work.

Feist, 499 U.S. at 349-50, 111 S.Ct. at 1290 (quotations and citations omitted). We do not think that the Court's statement that "copyright assures authors the right to their original expression" indicates that all expression is necessarily copyrightable; while original expression is necessary for copyright protection, we do not think that it is alone sufficient. Courts must still inquire whether original expression falls within one of the categories foreclosed from copyright protection by § 102(b), such as being a "method of operation."

We also note that in most contexts, there is no need to "build" upon other people's expression, for the ideas conveyed by that expression can be conveyed by someone else without copying the first author's expression.^[13] In the context of methods of operation, however, "building" requires the use of the precise method of operation already employed; otherwise, "building" would require dismantling, too. Original developers are not the only people entitled to build on the methods of operation they create; anyone can. Thus, Borland may build on the method of operation that Lotus designed and may use the Lotus menu command hierarchy in doing so.

Our holding that methods of operation are not limited to abstractions goes against Autoskill, 994 F.2d at 1495 n. 23, in which the Tenth Circuit rejected the defendant's argument that the keying procedure used in a computer program was an uncopyrightable "procedure" or "method of operation" under § 102(b). The program at issue, which was designed to test and train students with reading deficiencies, id. at 1481, required students to select responses to the program's queries "by pressing the 1, 2, or 3 keys." Id. at 1495 n. 23. The Tenth Circuit held that, "for purposes of the preliminary injunction, ... the record showed that [this] keying procedure reflected at least a minimal degree [819] of creativity," as required by Feist for copyright protection. Id. As an initial matter, we question whether a programmer's decision to have users select a response by pressing the 1, 2, or 3 keys is original. More importantly, however, we fail to see how "a student select[ing] a response by pressing the 1, 2, or 3 keys," id., can be anything but an unprotectable method of operation.^[14]

III.

Conclusion

Because we hold that the Lotus menu command hierarchy is uncopyrightable subject matter, we further hold that Borland did not infringe Lotus's copyright by copying it. Accordingly, we need not consider any of Borland's affirmative defenses. The judgment of the district court is

Reversed.

Concurrence follows.

BOUDIN, Circuit Judge, concurring.

The importance of this case, and a slightly different emphasis in my view of the underlying problem, prompt me to add a few words to the majority's tightly focused discussion.

I.

Most of the law of copyright and the "tools" of analysis have developed in the context of literary works such as novels, plays, and films. In this milieu, the principal problem — simply stated, if difficult to resolve — is to stimulate creative expression without unduly limiting access by others to the broader themes and concepts deployed by the author. The middle of the spectrum presents close cases; but a "mistake" in providing too much protection involves a small cost: subsequent authors treating the same themes must take a few more steps away from the original expression.

The problem presented by computer programs is fundamentally different in one respect. The computer program is a means for causing something to happen; it has a mechanical utility, an instrumental role, in accomplishing the world's work. Granting protection, in other words, can have some of the consequences of patent protection in limiting other people's ability to perform a task in the most efficient manner. Utility does not bar copyright (dictionaries may be copyrighted), but it alters the calculus.

Of course, the argument for protection is undiminished, perhaps even enhanced, by utility: if we want more of an intellectual product, a temporary monopoly for the creator provides incentives for others to create other, different items in this class. But the "cost" side of the equation may be different where one places a very high value on public access to a useful innovation that may be the most efficient means of performing a given task. Thus, the argument for extending protection may be the same; but the stakes on the other side are much higher.

It is no accident that patent protection has preconditions that copyright protection does not — notably, the requirements of novelty and non-obviousness — and that patents are granted for a shorter period than copyrights. This problem of utility has sometimes manifested itself in copyright cases, such as Baker v. Selden, 101 U.S. 99, 25 L.Ed. 841 (1879), and been dealt with through various formulations that limit copyright or create limited rights to copy. But the case law and doctrine addressed to utility in copyright have been brief detours in the general march of copyright law.

Requests for the protection of computer menus present the concern with fencing off access to the commons in an acute form. A new menu may be a creative work, but over time its importance may come to reside more in the investment that has been made by users in learning the menu and in building their own mini-programs — macros — in reliance upon the menu. Better typewriter keyboard [820] layouts may exist, but the familiar QWERTY keyboard dominates the market because that is what everyone has learned to use. See P. David, CLIO and the Economics of QWERTY, 75 Am.Econ.Rev. 332 (1985). The QWERTY keyboard is nothing other than a menu of letters.

Thus, to assume that computer programs are just one more new means of expression, like a filmed play, may be quite wrong. The "form" — the written source code or the menu structure depicted on the screen — look hauntingly like the familiar stuff of copyright; but the "substance" probably has more to do with problems presented in patent law or, as already noted, in those rare cases where copyright law has confronted industrially useful expressions. Applying copyright law to computer programs is like assembling a jigsaw puzzle whose pieces do not quite fit.

All of this would make no difference if Congress had squarely confronted the issue, and given explicit directions as to what should be done. The Copyright Act of 1976 took a different course. While Congress said that computer programs might be subject to copyright protection, it said this in very general terms; and, especially in § 102(b), Congress adopted a string of exclusions that if taken literally might easily seem to exclude most computer programs from protection. The only detailed prescriptions for computers involve narrow issues (like back-up copies) of no relevance here.

Of course, one could still read the statute as a congressional command that the familiar doctrines of copyright law be taken and applied to computer programs, in cookie cutter fashion, as if the programs were novels or play scripts. Some of the cases involving computer programs embody this approach. It seems to be mistaken on two different grounds: the tradition of copyright law, and the likely intent of Congress.

The broad-brush conception of copyright protection, the time limits, and the formalities have long been prescribed by statute. But the heart of copyright doctrine — what may be protected and with what limitations and exceptions — has been developed by the courts through experience with individual cases. B. Kaplan, An Unhurried View of Copyright 40 (1967). Occasionally Congress addresses a problem in detail. For the most part the interstitial development of copyright through the courts is our tradition.

Nothing in the language or legislative history of the 1976 Act, or at least nothing brought to our attention, suggests that Congress meant the courts to abandon this case-by-case approach. Indeed, by setting up § 102(b) as a counterpoint theme, Congress has arguably recognized the tension and left it for the courts to resolve through the development of case law. And case law development is adaptive: it allows new problems to be solved with help of earlier doctrine, but it does not preclude new doctrines to meet new situations.

II.

In this case, the raw facts are mostly, if not entirely, undisputed. Although the inferences to be drawn may be more debatable, it is very hard to see that Borland has shown any interest in the Lotus menu except as a fall-back option for those users already committed to it by prior experience or in order to run their own macros using 1-2-3 commands. At least for the amateur, accessing the Lotus menu in the Borland Quattro or Quattro Pro program takes some effort.

Put differently, it is unlikely that users who value the Lotus menu for its own sake — independent of any investment they have made themselves in learning Lotus' commands or creating macros dependent upon them — would choose the Borland program in order to secure access to the Lotus menu. Borland's success is due primarily to other features. Its rationale for deploying the Lotus menu bears the ring of truth.

Now, any use of the Lotus menu by Borland is a commercial use and deprives Lotus of a portion of its "reward," in the sense that an infringement claim if allowed would increase Lotus' profits. But this is circular reasoning: broadly speaking, every limitation on copyright or privileged use diminishes the reward of the original creator. Yet not every writing is copyrightable or every use an infringement. The provision of reward is [821] one concern of copyright law, but it is not the only one. If it were, copyrights would be perpetual and there would be no exceptions.

The present case is an unattractive one for copyright protection of the menu. The menu commands (e.g., "print," "quit") are largely for standard procedures that Lotus did not invent and are common words that Lotus cannot monopolize. What is left is the particular combination and sub-grouping of commands in a pattern devised by Lotus. This arrangement may have a more appealing logic and ease of use than some other configurations; but there is a certain arbitrariness to many of the choices.

If Lotus is granted a monopoly on this pattern, users who have learned the command structure of Lotus 1-2-3 or devised their own macros are locked into Lotus, just as a typist who has learned the QWERTY keyboard would be the captive of anyone who had a monopoly on the production of such a keyboard. Apparently, for a period Lotus 1-2-3 has had such sway in the market that it has represented the de facto standard for electronic spreadsheet commands. So long as Lotus is the superior spreadsheet — either in quality or in price — there may be nothing wrong with this advantage.

But if a better spreadsheet comes along, it is hard to see why customers who have learned the Lotus menu and devised macros for it should remain captives of Lotus because of an investment in learning made by the users and not by Lotus. Lotus has already reaped a substantial reward for being first; assuming that the Borland program is now better, good reasons exist for freeing it to attract old Lotus customers: to enable the old customers to take advantage of a new advance, and to reward Borland in turn for making a better product. If Borland has not made a better product, then customers will remain with Lotus anyway.

Thus, for me the question is not whether Borland should prevail but on what basis. Various avenues might be traveled, but the main choices are between holding that the menu is not protectable by copyright and devising a new doctrine that Borland's use is privileged. No solution is perfect and no intermediate appellate court can make the final choice.

To call the menu a "method of operation" is, in the common use of those words, a defensible position. After all, the purpose of the menu is not to be admired as a work of literary or pictorial art. It is to transmit directions from the user to the computer, i.e., to operate the computer. The menu is also a "method" in the dictionary sense because it is a "planned way of doing something," an "order or system," and (aptly here) an "orderly or systematic arrangement, sequence or the like." Random House Webster's College Dictionary 853 (1991).

A different approach would be to say that Borland's use is privileged because, in the context already described, it is not seeking to appropriate the advances made by Lotus' menu; rather, having provided an arguably more attractive menu of its own, Borland is merely trying to give former Lotus users an option to exploit their own prior investment in learning or in macros. The difference is that such a privileged use approach would not automatically protect Borland if it had simply copied the Lotus menu (using different codes), contributed nothing of its own, and resold Lotus under the Borland label.

The closest analogue in conventional copyright is the fair use doctrine. E.g., Harper & Row, Publishers, Inc. v. Nation Enters., 471 U.S. 539, 105 S.Ct. 2218, 85 L.Ed.2d 588 (1985). Although invoked by Borland, it has largely been brushed aside in this case because the Supreme Court has said that it is "presumptively" unavailable where the use is a "commercial" one. See id. at 562, 105 S.Ct. at 2231-32. But see Campbell v. Acuff-Rose Music, Inc., ___ U.S. ___, ___, 114 S.Ct. 1164, 1174, 127 L.Ed.2d 500 (1994). In my view, this is something less than a definitive answer; "presumptively" does not mean "always" and, in any event, the doctrine of fair use was created by the courts and can be adapted to new purposes.

But a privileged use doctrine would certainly involve problems of its own. It might more closely tailor the limits on copyright protection to the reasons for limiting that protection; but it would entail a host of administrative problems that would cause [822] cost and delay, and would also reduce the ability of the industry to predict outcomes. Indeed, to the extent that Lotus' menu is an important standard in the industry, it might be argued that any use ought to be deemed privileged.

In sum, the majority's result persuades me and its formulation is as good, if not better, than any other that occurs to me now as within the reach of courts. Some solutions (e.g., a very short copyright period for menus) are not options at all for courts but might be for Congress. In all events, the choices are important ones of policy, not linguistics, and they should be made with the underlying considerations in view.

[1] Judge Keeton presided over both the Paperback litigation and this case.

[2] Lotus 1-2-3 utilizes a two-line menu; the top line lists the commands from which the user may choose, and the bottom line displays what Lotus calls its "long prompts." The long prompts explain, as a sort of "help text," what the highlighted menu command will do if entered. For example, the long prompt for the "Worksheet" command displays the submenu that the "Worksheet" command calls up; it reads "Global, Insert, Delete, Column, Erase, Titles, Window, Status, Page." The long prompt for the "Copy" command explains what function the "Copy" command will perform: "Copy a cell or range of cells." The long prompt for the "Quit" command reads, "End 1-2-3 session (Have you saved your work?)."

Prior to trial, the parties agreed to exclude the copying of the long prompts from the case; Lotus agreed not to contend that Borland had copied the long prompts, Borland agreed not to argue that it had not copied the long prompts, and both sides agreed not to argue that the issue of whether Borland had copied the long prompts was material to any other issue in the case. See Borland III, 831 F.Supp. at 208.

[3] Because Borland's programs could no longer display the Lotus menu command hierarchy to users, the Key Reader did not allow debugging or modification of macros, nor did it permit the execution of most interactive macros.

[4] See Borland IV, 831 F.Supp. at 226-27, for a more detailed explanation of macros and the Key Reader.

[5] Computer programs receive copyright protection as "literary works." See 17 U.S.C. § 102(a)(1) (granting protection to "literary works") and 17 U.S.C. § 101 (defining "literary works" as "works ... expressed in words, numbers, or other verbal or numerical symbols or indicia, regardless of the nature of the material objects, such as books, periodicals, phonorecords, film, tapes, disks, or cards, in which they are embodied" (emphasis added)); see also H.R.Rep. No. 1476, 94th Cong., 2d Sess. 54 (1976), reprinted in 1976 U.S.C.C.A.N. 5659, 5667 ("The term `literary works' ... includes computer data bases, and computer programs to the extent that they incorporate authorship in the programmer's expression of original ideas, as distinguished from the ideas themselves.").

[6] Selden's system of double-entry bookkeeping is the now almost-universal T-accounts system.

[7] We consider the Altai test because both parties and many of the amici focus on it so heavily. Borland, in particular, is highly critical of the district court for not employing the Altai test. Borland does not, however, indicate how using that test would have been dispositive in Borland's favor. Interestingly, Borland appears to contract its own reasoning at times by criticizing the applicability of the Altai test.

[8] We recognize that Altai never states that every work contains a copyrightable "nugget" of protectable expression. Nonetheless, the implication is that for literal copying, "it is not necessary to determine the level of abstraction at which similarity ceases to consist of an `expression of ideas,' because literal similarity by definition is always a similarity as to the expression of ideas." 3 Melville B. Nimmer & David Nimmer, Nimmer on Copyright § 13.03[A](2) (1993).

[9] As the Lotus long prompts are not before us on appeal, we take no position on their copyrightability, although we do note that a strong argument could be made that the brief explanations they provide "merge" with the underlying idea of explaining such functions. See Morrissey v. Procter & Gamble Co., 379 F.2d 675, 678-79 (1st Cir.1967) (when the possible ways to express an idea are limited, the expression "merges" with the idea and is therefore uncopyrightable; when merger occurs, identical copying is permitted).

[10] As they are not before us on appeal, we take no position on whether the Lotus 1-2-3 screen displays constitute original expression capable of being copyrighted.

[11] Because the Lotus 1-2-3 code is not before us on appeal, we take no position on whether it is copyrightable. We note, however, that original computer codes generally are protected by copyright. See, e.g., Altai, 982 F.2d at 702 ("It is now well settled that the literal elements of computer programs, i.e., their source and object codes, are the subject of copyright protection.") (citing cases).

[12] We think that the Altai test would contemplate this being the initial inquiry.

[13] When there are a limited number of ways to express an idea, however, the expression "merges" with the idea and becomes uncopyrightable. Morrissey, 379 F.2d at 678-79.

[14] The Ninth Circuit has also indicated in dicta that "menus, and keystrokes" may be copyrightable. Brown Bag Software v. Symantec Corp., 960 F.2d 1465, 1477 (9th Cir.), cert. denied, BB Asset Management, Inc. v. Symantec Corp., ___ U.S. ___, 113 S.Ct. 198, 121 L.Ed.2d 141 (1992). In that case, however, the plaintiff did not show that the defendant had copied the plaintiff's menus or keystrokes, so the court was not directly faced with whether the menus or keystrokes constituted an unprotectable method of operation. Id.

533 F.3d 1287 (2008)

[1293] David Lee Hoffman, Law Offices of David L. Hoffman, Valencia, CA, Raymond T. Nimmer, University of Houston Law Ctr., Houston, TX, for Plaintiff-Appellant.

Helena Kempner Kobrin, Moxon & Kobrin, Los Angeles, CA, Elizabeth Brooks Honkonen, Michael Nachwalter, Kenny Nachwalter Seymour Arnold Critchlow & Spector, Thomas John Meeks, Matthew Thomas Davidson, Zuckerman, Spaeder, Miami, FL, for Defendants-Appellees.

Before TJOFLAT, HULL and BOWMAN,^[1] Circuit Judges.

TJOFLAT, Circuit Judge:

The parties in this case disagree over the scope of copyright protection in a book about sales techniques authored by the late Leslie Achilles "Les" Dane. Peter Letterese & Associates, Inc. ("PL&A;"), the exclusive licensee of the copyright in Dane's book, claims that three entities affiliated with the Church of Scientology have been infringing its copyright by incorporating portions of the book into their instructional course materials, and seeks declaratory and injunctive relief. On cross-motions for summary judgment, the district court assumed that the infringement was occurring as alleged but ruled for defendants. The court did so on two alternative grounds: the infringement was permissible under the fair use doctrine; and PL&A;'s suit was barred by laches.

PL&A; now appeals. We uphold the district court's decision as to three claims, but find error in the court's application of the fair use doctrine and the laches defense to a remaining claim. We therefore affirm, in part, and vacate and remand, in part.

The organization of this opinion proceeds as follows. Part I presents the factual background and procedural history of the case. Part II affirms the grant of summary judgment with respect to two claims alleging that defendants' instructional courses — in and of themselves — constitute infringing derivative works, but concludes with respect to two remaining claims that there is a general issue of material fact as to whether the course materials are substantially similar to Dane's book. Part III explains the contours of fair use, and concludes that it is merited as to some, but not all, of defendants' uses of the book. Part IV considers the applicability of the defense of laches in a copyright infringement suit, a question of first impression in this circuit. Part V concludes.

[1294] I.

A.

The copyrighted work in question is a book by Les Dane entitled Big League Sales Closing Techniques ("Big League Sales"). The introduction to the book claims that its descriptions of "specific techniques and true cases" collectively "pinpoint[ ] the most effective, miracle closes" in sales. The balance of the book presents these sales techniques through Les Dane's recounting of personal anecdotes, from which the titles of techniques (both good and bad) are drawn. The book repeatedly returns to the "one basic theme" that each sales prospect is clad in a "brick overcoat" of fear, and that the well-prepared salesman will know how to identify different "bricks" (sources of sales resistance) and eliminate them.

The book was originally published in 1971 by the Parker Publishing Company^[2] and duly registered in April 1971 in compliance with the formalities of the Copyright Act of 1909, 35 Stat. 1075, 17 U.S.C. § 1 et seq. (1976 ed.). Under the copyright law then in effect, Les Dane was entitled to an initial 28-year term of copyright protection and the right to renew for an additional 28-year term. 17 U.S.C. § 24.

Shortly thereafter, L. Ron Hubbard, the founder of the Church of Scientology ("the Church") and a prolific writer in his own right, took a shine to Big League Sales and recommended that it be used to train Scientology "registrars," who sell Scientology books and services to Church members. The Hubbard Communications Office disseminated a number of policy letters regarding the teaching of salesmanship techniques and skills from the book, and in 1972 the Church began to create a number of courses for training registrars.

The Church developed materials for use in these courses, including "checksheets" and "drill sheets." A checksheet is a step-by-step list of the actions that a student is required to take to complete a course, such as the completion of reading assignments and the performance of various practical exercises, including sales drills. Students form pairs, or "twins," to perform the sales drills — generally involving some form of roleplay — which are described on drill sheets accompanying the checksheet. While these courses assigned readings from Big League Sales (among other writings), the Church did not make copies of the book itself; students would either borrow or purchase the book for their study.

It is undisputed that Les Dane knew of the Church's use of Big League Sales and participated in such use. Beginning in the mid-1980s, the Church hired Les Dane to travel to Scientology churches in the United States and abroad to deliver seminars to registrars and others on the application of the sales techniques in his book. In these seminars, Les Dane occasionally referred to the sales drills and supervised the practice of those drills.

Defendants in this action are three entities affiliated with the Church: the Church of Scientology International, Inc. ("CSI"), the World Institute of Scientology Enterprises International, Inc. ("WISE"), and the Church of Spiritual Technology ("CST"). CSI has been the mother church of Scientology since 1981.^[3] Among other duties, CSI creates materials for use in staff training courses. Of these courses, there are two main types which include the [1295] study of Big League Sales; courses typified by the Professional Registration Course and the Organization Executive Course, which were both compiled in 1991. CSI encourages Church staff members to take these courses as part of their training for certain positions in Church organizations.^[4] The staff members complete the courses at their own pace in course rooms provided by CSI, and their progress is monitored and assisted by a course supervisor. However, the course supervisor does not lecture or add to the substantive material of the course. In exchange for taking one of these courses, each staff member signs a promissory note for the "donation amount of the course." In the event that the staff member subsequently fails to serve out the duration of his staff contract, the promissory note becomes due to the Church organization as "a debt for the services that he took while on staff."

WISE, also formed in 1981, is a membership organization for businessmen and professionals who seek to apply Hubbard's administrative technologies to secular organizations. WISE creates and sells packs of course material on this subject, and licenses some of its members to provide business consulting services using WISE materials. From 1983 until June 2004, WISE sold for a flat price of $75 a Sales Course pack which taught the sales techniques from Big League Sales. The relevant sections of the checksheets and drills used in the Sales Course vary somewhat in content and organization from the corresponding materials used in the Professional Registration Course and the Organization Executive Course.^[5]

CST was created in 1982 to receive the bulk of the estate of Hubbard, including his intellectual property rights. (Hubbard died in 1986.) Its mission is to preserve Scientology scriptures, which consist of the written and spoken word of Hubbard as well as films concerning religious training and the administration of Scientology services. CST acquired the copyrights to Hubbard's works in 1993 and has since licensed the rights to use those works to CSI, WISE, and other affiliated entities. Though CST has claimed not to have reviewed any of WISE and CSI's course materials, it had the right to review the WISE materials pursuant to the license agreement.

Peter Letterese, a principal of PL&A;, was an off-and-on member of the Church for approximately two decades beginning in 1973. In addition to serving as a registrar, Letterese held several positions in Church organizations. He accordingly studied Big League Sales in several courses, including the Organization Executive Course. During the late 1980s and early 1990s, Letterese was also a member of WISE; as such, he was licensed to sell WISE courses.

On December 31, 1993, while Letterese was still a member in good standing in the Church, PL&A; acquired the exclusive rights to Les Dane's literary works (including the right of enforcement) through a written contract with the heirs of the Dane estate, including Les Dane's widow, Lois "Betty" Dane. These rights extended through the renewal term. PL&A; also purchased the outstanding rights of Prentice Hall in 1994. PL&A; subsequently withdrew Big League Sales from the market; it has been out of print since 1994.

The Church "declared," or excommunicated, Letterese in July 1994 for violating [1296] certain Church policies. Nonetheless, Letterese continued to regard himself as a Scientologist. In July 1995, Marilyn Pisani, then the legal affairs director of Bridge Publications, Inc. (the North American publisher of Scientology works), wrote a letter to Prentice Hall seeking certain non-exclusive rights in Big League Sales. Later that month, Prentice Hall notified Bridge Publications that PL&A; had purchased its rights. Pisani then contacted PL&A; in late November 1995 seeking the right to republish the book. In response, Daniel Dashman, who was then the general counsel of PL&A;, attempted several times to call Pisani back. Finally, in August 1996, Dashman sent Pisani a letter stating that PL&A; had acquired Big League Sales with the intention of "making its own use" of the book as well as "keeping it available to the Church." The letter explained: "It was not our intention in 1993, nor is it now, nor will it ever be in the future to prevent [L. Ron Hubbard's] intention with regard to Mr. Dane's work to be thwarted or stopped." In spite of PL&A;'s declared wish to ensure the continued availability of Big League Sales to the Church, however, Dashman made clear that "[n]o statements made in this letter are intended nor should they be construed as a granting of any rights to the work of Mr. Les Dane and specifically is not a granting of the right to republish [Big League Sales]." No agreement was reached at that time.

The copyright in Big League Sales was duly renewed and re-registered on January 4, 1999. During 1999 and 2000, PL&A; became embroiled in litigation with the Dane family over the license agreement. In 2000, Bridge Publications contacted the Dane family directly to seek rights relating to the book, but was unsuccessful. Later that year, PL&A; and Bridge Publications resumed negotiations concerning Bridge Publications' desire to publish hard cover versions of the book for the internal use of Church organizations. Periodically from 2000 to 2003, PL&A; corresponded with Bridge Publications in an attempt to ascertain the scope of Bridge Publications' intended use of the book.

In 2003, PL&A; sued Bridge Publications in the Superior Court of Los Angeles County, California, alleging tortious interference with contract and other related claims. On January 27, 2004, attorney David Schindler of Latham & Watkins, LLP, contacted PL&A;, seeking to negotiate a resolution of the pending dispute on behalf of Bridge Publications, WISE, and CSI. Schindler met with Letterese and two of his attorneys on February 13, 2004, to negotiate a settlement. On February 27, 2004, Schindler sent Letterese's attorney a letter confirming the terms of an agreement that provided for the dismissal of the pending suit without prejudice and for a one-year moratorium on litigation of any kind between any entity affiliated with Letterese and any entity affiliated with the Church. PL&A; dismissed its suit, as agreed. PL&A; also sought further assurances that Schindler was indeed authorized to act on behalf of all Church-related entities, and that the agreement was enforceable.

On April 8, 2004, believing that satisfactory assurances had not been provided, PL&A; returned to the Los Angeles County Superior Court and filed a second suit against Bridge Publications, WISE, CSI, and others, seeking a declaration either that the February 27 letter was not a binding agreement, or that it constituted a binding agreement with all Church-affiliated entities.^[6]

[1297] B.

On September 10, 2004, PL&A; brought this present suit in the United States District Court for the Southern District of Florida against CSI, CST, and WISE^[7] for the alleged violation of its exclusive rights pursuant to the Copyright Act, 17 U.S.C. § 101 et seq., within the three years prior to filing.^[8] The complaint set forth four vaguely pled causes of action, which we construe in conjunction with the parties' briefs.

Count 1 is against all defendants and alleges that the WISE Sales Course's checksheets and drill sheets constitute unauthorized reproductions of Big League Sales in violation of 17 U.S.C. § 106(1).^[9] Count 2 also names all defendants and alleges that the WISE Sales Course as a whole — which includes the checksheets, drill sheets, and Big League Sales itself — constitutes an infringing derivative work based upon the book in violation of 17 U.S.C. § 106(2).^[10]

Counts 3 and 4 name only CSI and CST as defendants and concern courses such as CSI's Organization Executive Course and Professional Registration Course. Count 3 alleges that the checksheets and drill sheets used in these courses infringe the copyright in Big League Sales in violation of 17 U.S.C. § 106(1). Like Count 2, [1298] Count 4 alleges that these courses as a whole constitute infringing derivative works based upon the book in violation of 17 U.S.C. § 106(2).

Defendants answered PL&A;'s claims by denying that the use of the course materials described in the complaint violated the Copyright Act. As affirmative defenses, defendants alleged that their use of Big League Sales was permissible under the fair use doctrine and, alternatively, that PL&A;'s claims were barred by laches.

Following a period of discovery, PL&A; moved for summary judgment on Counts 2 and 4 only, arguing that the Sales Course, Organization Executive Course, and Professional Registration Course represent infringing derivative works of Big League Sales.^[11] Defendants filed cross-motions for summary judgment on all counts, arguing that the course material is not substantially similar to the book and thus does not infringe its copyright, and further advancing the defenses of fair use and laches. The district court did not conclude that the copyright in Big League Sales had been infringed; rather, it assumed the existence of infringement and held that, in any event, fair use precluded recovery on all counts — including, of course, against those parties alleged to be liable for contributory or vicarious infringement.^[12] The district court also held that defendants were entitled to summary judgment on the ground of laches.^[13] Pursuant to its ruling, the district court entered [1299] judgment for defendants on August 23, 2005. This appeal followed.^[14]

II.

We begin by analyzing the antecedent issue, whether PL&A; has made out a prima facie case of infringement as to all claims. As to Counts 2 and 4, claims brought under 17 U.S.C. § 106(2), we find that defendants' courses as a whole are not derivative works of Big League Sales, and therefore affirm the court's grant of summary judgment for defendants as to those counts. See Parks v. City of Warner Robins, 43 F.3d 609, 613 (11th Cir.1995) ("[W]e may affirm the district court's decision on any adequate ground, even if it is other than the one on which the court actually relied."). With respect to Counts 1 and 3, we find that there is a genuine issue of material fact as to whether defendants' course materials are substantially similar to Big League Sales in violation of 17 U.S.C. § 106(1).

A.

PL&A; contends that the district court erred in not treating defendants' courses as derivative works of Big League Sales, which it believes would necessitate the grant of summary judgment in its favor as to Counts 2 and 4.^[15] Specifically, PL&A; argues that the courses as a whole are akin to the derivative works described in the much-criticized case of Mirage Editions v. Albuquerque A.R.T. Co., 856 F.2d 1341 (9th Cir.1988). See Lee v. A.R.T. Co., 125 F.3d 580, 582 n. 1 (7th Cir.1997) ("Scholarly disapproval of Mirage Editions has been widespread."). In that case, the defendant cut pages of artwork prints out of plaintiffs' book, "mounted them individually onto ceramic tiles and sold the tiles at retail." Mirage Editions, 856 F.2d at 1342. Because conventional mounting and framing techniques clearly do not result in the preparation of derivative works, the court's decision finding infringement could not have been based on the fact that the tile was a sort of "flush frame," but, as the Lee court observed, must have been based on the fact that "the epoxy resin bonds the art to the tile." Lee, 125 F.3d at 581.

Like others before us, we believe that this justification is a highly questionable one indeed. See id. (noting that "this is a [1300] distinction without a difference," in part because conventional mounting and framing techniques are likewise not "easily reversible," as they commonly involve punctures, trimming, or bonding as a prelude to framing). But even if we were to regard Mirage Editions as representing the outer boundary of what constitutes a derivative work, what PL&A; alleges in Counts 2 and 4 falls outside that boundary because defendants do not sell checksheets and drill sheets that are affixed to Big League Sales. Nor are any pages from the book photocopied as part of the coursepack. Indeed, the book is not a part of defendants' courses in the sense that the checksheets, drill sheets, and book "as a whole, represent an original work of authorship," 17 U.S.C. § 101; "the authorship of [the checksheets and drill sheets] is entirely different and separate from the authorship of [Big League Sales]." See SHL Imaging, Inc. v. Artisan House, Inc., 117 F.Supp.2d 301, 306 (S.D.N.Y.2000). PL&A;'s argument reduces simply to the flightless claim that selling the course materials (specifically, selling the checksheets and drill sheets to be used with lawfully acquired copies of the book) facilitates a "remounting" of Big League Sales. But like any other frame, this argument does not fulfill the requirement that a derivative work must "recast, transform, or adapt" the preexisting work. See Lee, 125 F.3d at 582 ("[T]he copyrighted note cards and lithographs were not `transformed' in the slightest. The art was bonded to a slab of ceramic, but it was not changed in the process. It still depicts exactly what it depicted when it left Lee's studio.").^[16] We therefore affirm the district court's grant of summary judgment as to Counts 2 and 4 because the courses as a whole do not constitute derivative works.

B.

Before embarking on an analysis of PL&A;'s remaining claims of copyright infringement, Counts 1 and 3, we first clarify the relevant legal standard. To make out a prima facie case of copyright infringement, a plaintiff must show that (1) it owns a valid copyright in the book and (2) defendants copied protected elements from the book. Feist Publ'ns, Inc. v. Rural Tel. Serv. Co., 499 U.S. 340, 361, 111 S.Ct. 1282, 1296, 113 L.Ed.2d 358 (1991); Suntrust Bank v. Houghton Mifflin Co., 268 F.3d 1257, 1266 (11th Cir.2001). Defendants have not contested PL&A;'s ownership of a valid copyright. Rather, they focus on Feist's second prong, which, in turn, entails proof of both factual and legal copying, that is: (1) "whether the defendant, as a factual matter, copied portions of the plaintiff's [work]"; and (2) "whether, as a mixed issue of fact and law, those elements of the [copyrighted work] that have been copied are protected expression and of such importance to the copied work that the appropriation is actionable." MiTek Holdings, Inc. v. Arce Eng'g, Inc., 89 F.3d 1548, 1554 (11th Cir.1996) (citation omitted); see also BUC Int'l Corp. v. Int'l Yacht Council Ltd., 489 F.3d 1129, 1148 n. 40 (11th Cir.2007).

In the absence of direct proof, factual copying may be inferred from circumstantial evidence, either through establishing that the works are "strikingly similar," [1301] see Calhoun v. Lillenas Publ'g, 298 F.3d 1228, 1232 n. 6 (11th Cir.2002); or through "proof of access to the copyrighted work and probative similarity." Bateman v. Mnemonics, Inc., 79 F.3d 1532, 1541 (11th Cir.1996) (internal quotation mark omitted).^[17] Because defendants admit that portions of Big League Sales were copied, this appeal centers on the subsequent inquiry of whether such copying is "legally actionable; that is, whether there is `substantial similarity' between the allegedly offending [works] and the protectable, original elements" of the book. See Bateman, 79 F.3d at 1542; Oravec v. Sunny Isles Luxury Ventures, L.C., 527 F.3d 1218, 1224 n. 5 (11th Cir.2008) (considering "whether a reasonable jury could find the competing [works] substantially similar at the level of protected expression"); see also Leigh v. Warner Bros., Inc., 212 F.3d 1210, 1214 (11th Cir.2000) (noting that substantial similarity in this "second, more focused way" is necessary to establish that the defendant's attempt at appropriation "succeeded to a meaningful degree").^[18]

[1302] Copyright protects original expression only; it does not extend to any underlying ideas, procedures, processes, and systems.^[19] Herzog v. Castle Rock Entm't, 193 F.3d 1241, 1248 (11th Cir. 1999). "For example, the idea of hunting a formidable whale at the lead of an eccentric captain is not protected by copyright law. The expression of this idea as it is encapsulated in the novel Moby-Dick, however, is protected by copyright." BUC Int'l Corp., 489 F.3d at 1143. Uncopyrightable "ideas" include scenes faire, which are "sequences of events which necessarily follow from a common theme," or "incidents, characters, or settings that are indispensable or standard in the treatment of a given topic." Herzog, 193 F.3d at 1248 (internal citations and quotation marks omitted). See, e.g., Beal v. Paramount Pictures Corp., 20 F.3d 454, 463 (11th Cir.1994) ("[A]ll works involving courtship and marriage will feature a wedding, usually near the end of the story."); Herzog, 193 F.3d at 1262 ("[D]eath due to foul play instead of natural causes is a standard element of murder mysteries.").

Historically, courts have hesitated to make determinations as to infringement or non-infringement on a summary judgment motion because of their "reluctan[ce] to make subjective determinations regarding the similarity between two works." Herzog, 193 F.3d at 1247; see also Beal, 20 F.3d at 459. Nonetheless, where "the similarity between two works concerns only non-copyrightable elements of the plaintiff's work," or where "no reasonable jury, properly instructed, could find that the two works are substantially similar," summary judgment is appropriate. Herzog, 193 F.3d at 1247.

Based on our evaluation of the course material, we find that PL&A; has established a prima facie case of infringement with respect to Counts 1 and 3. A factfinder ultimately may conclude that the similarities between the protected elements of Big League Sales and the course material are not substantial, but the similarities are significant enough to create a genuine issue of material fact. We now proceed to that analysis.

C.

The central question with which Big League Sales grapples is: "Why does the prospect balk when he gets face-to-face with the decision to buy or not buy?" Drawing upon his personal experience and the experience of fellow salesmen, Les Dane describes "step-by-specific step" how a salesman ought to deal with the case of a reluctant purchaser who is wrapped in a "brick overcoat" of his or her individual fears: "remove the bricks until the prospective buyer is stripped of his fear — his sales resistance — and becomes susceptible to a close." The book is organized into thirteen chapters. Each chapter is further subdivided into sections with headings identifying the particular technique or illustrative anecdote. For example, Chapter 1, "The Brick Overcoat of Resistance to the Sale: How Five Key Bricks Can Help You" contains eleven sections: "Scaredy-Cat," [1303] "The Legitimate Objection," "Listen For the Close," "The Night Shift Close," "You and the Finance Man," "Anything Goes," "Fool-Proof Financing Formula," "The Shopper-Stopper," "The Go-Ahead," "The Today-Only Close," and "Simple Sell Close."

Defendants' course material expressly teaches the content of Big League Sales. Organized into outline form, a checksheet typically lists the book chapter to be read and recites both the chapter title and the section headings. For example, a sample checksheet used in the Professional Registration Course contains a reference to "Chapter 1: `The Brick Overcoat of Resistance to the Sale: How Five Key Bricks Can Help You,'" and lists the pertinent subheadings: "a. The scaredy-cat and how to close him"; "b. The legitimate objection"; "c. Listening for the close"; "d. The night-shift close"; "e. The go-ahead"; "f. The today-only close"; "g. The simple sell close." No further explanation of these terms is listed on the checksheet; instead, the checksheet cross-references the sales drill attachments, which contain "DRILLS FOR BIG-LEAGUE SALES CLOSING TECHNIQUES, CHAPTER 1, THE BRICK OVERCOAT OF RESISTANCE TO THE SALE."

Although the differences among the three courses are manifest upon even a cursory review of the material, the parties' briefs did not evaluate each course separately in light of these differences. The content of CSI's Professional Registration Course and Organization Executive Course varies from that of WISE's Sales Course in terms of overall organization and in terms of the content and length of the descriptions in the sales drills. CSI's courses are more similar to the course material developed by the Church in the 1970s. Significantly, a Hubbard Communications Office Bulletin of November 12, 1972, explained that the registrar salesmanship drills based on Big League Sales "follow the same sequence as the book section by section," and instructed students to adhere to that order. CSI's courses remain faithful to that sequential approach. By contrast, the WISE Sales Course's checksheet and sales drills employ a somewhat rearranged approach to the sections of the book. (They are accompanied by the same stern admonition: "All items on this checksheet are to be done in the sequence shown.")

Our review of the works in question revealed potential instances of both fragmented literal similarity and comprehensive nonliteral similarity of protected expression.^[20] We will begin by reviewing the latter. Certain nonliteral aspects of Big League Sales are protectible as the author's original expression, reflecting his opinion as to which sales techniques, and in which order, are likely to yield the most effective sales results. Nonliteral similarity between the book and the course material may be present in the manner in which the course material tracks the selection and organization of the sales techniques in the book. The case for nonliteral similarity appears to be stronger with respect to CSI's courses, which canvass the book's topics in the same order and sequence, but we conclude that the differences in the order of WISE's Sales Course might be [1304] deemed insufficient to defeat an ultimate finding of comprehensive nonliteral similarity.

As for potential literal similarity, one of the more striking examples cited by PL&A; is contained in Chapter 12 and the corresponding sales drill described in Attachment L of the Professional Registration Course:

-----------------------------------------------------------------------------------------
                                              Professional Registration Course,
Big League Sales                              Attachment L
-----------------------------------------------------------------------------------------
Six Basic Questions That Guarantee Sound      ... the six basic questions that guarantee
Qualifying: ...                               sound qualifying.
The questions:                                The questions are:
1.  Where does he (she) work and how long?    1.  Where does he (she) work and how long?
2.  What does he do there?                    2.  What does he do there?
3.  Where does he live and how long?          3.  Where does he live and how long?
(Circumstances — own, rent, etc.?)            (Circumstances — own, rent, etc.
4.  Marital status? Children?                 4.  Marital status? Children?
5.  Who is the (car, boat, insurance,         5.  Who is the service or materials for?
furniture) for?                               6.  Appearance? (Physical, speech, manner,
6.  Appearance? (Physical, speech, manner,    attitude)
attitude) ...
-----------------------------------------------------------------------------------------

Similarly, Attachment H of the Professional Registration Course sets forth the "six closing errors" described in Chapter 8 of the book in nearly identical language. The book admonishes: "Don't argue with your prospect; Don't offer your opinions or criticize your prospects; Don't knock your competition; Don't assume authority or break the chain of command; Don't oversell your product or the finance terms; and most important of all, Don't ever succumb to one of the other five `don'ts' believing that, `Just this once won't hurt,' or, `The DON'TS really didn't apply in this case." The sales drill explains that "the `six don'ts'" are "1. Don't argue with your prospect"; "2. Don't offer your opinions or criticize your prospect's"; "3. Don't knock your competition"; "4. Don't assume authority or break the chain of command or violate policy"; "5. Don't oversell your product or the finance terms"; and "6. Don't succumb to one of the other five `don'ts' believing that just once won't hurt or that they didn't really apply in that case.'" And in addition to these nearly identical examples, there are several instances of paraphrasing of the book which could likewise support a finding of literal similarity.^[21] See Kepner-Tregoe, Inc. v. [1305] Leadership Software, No. H-90-804, 1992 WL 281474, at *2, 1992 U.S. Dist. LEXIS 12780, at *3 (S.D.Tex. Jan. 9, 1992) (finding substantial similarity between five definitions or "processes" incorporated from plaintiff's management training seminar materials into defendant's management training computer program).

Defendants contend that the course material "does not copy expression from [Big League Sales], and, where it does, it consists almost exclusively of short phrases, titles, unprotected methods or procedures, or concepts that Dane admittedly took from others." In the first place, the claim that Les Dane pilfered sales techniques from other salesmen misses the mark. Certainly, many of the sales techniques described in the book were nothing new to a profession that is one of the world's oldest. What is relevant for the purposes of copyright law is that an abstract idea is never eligible for copyright protection. But while Les Dane could not have copyrighted the underlying sales technique, any original expression he used to describe that technique falls squarely into the realm of copyright. See Palmer v. Braun, 287 F.3d 1325, 1331 (11th Cir.2002) (noting that the idea "that people's beliefs can alter how they experience and understand their lives" is not copyrightable, but "the question is whether [plaintiff's course] expresses this idea in a way that infringes on original expression of the same idea in the [defendant's course] materials"); see also Barbour v. Head, 178 F.Supp.2d 758, 764 (S.D.Tex.2001) (noting that although recipes that are "nothing more than mere recitations of facts" in the form of "mechanical listings of ingredients and cooking directions" are not eligible for copyright protection, "at least a few" of defendant's recipes "contain statements that may be sufficiently expressive to exceed the boundaries of mere fact," such as anecdotal language and suggestions for food presentation); Kepner-Tregoe, Inc., 1992 WL 281474, at *2, 1992 U.S. Dist. LEXIS 12780, at *2 ("Both the Vroom/Yetton model and the Vroom/Jago model are tools used to train managers in better ways of making decisions. Although the theory utilized by both models is an idea taught worldwide, the actual models are expressions of a method by which to make decisions.").

We have previously recognized that "in many copyright cases, the line between [idea] and expression is not easily drawn," and is to be determined on the totality of the facts. Palmer, 287 F.3d at 1334; see also Suntrust Bank, 268 F.3d at 1266 (noting that although "stock scenes and hackneyed character types" at one end of the spectrum are considered ideas, "as plots become more intricately detailed and characters become more idiosyncratic, they at some point cross the line into `expression'"). When drawing the line, however, "it is useful to note the policy purposes served by the distinction"; to "encourag[e] the creation of original works on the one hand," and to "promot[e] the free flow of ideas and information on the other." Oravec, 527 F.3d at 1225. A reasonable factfinder could conclude that this line has [1306] been breached on more than one occasion by the course material. For example, both the book and the Professional Registration Course identify the "four basic buyer types" as "the professional buyer," "the individual," "the unattached female," and "the family buyer." With respect to the professional buyer, the book urges salesmen to "[s]ell him facts, hard prices and, where possible, demonstration of the product or service," as he is someone who "wants facts, demonstrations, and proof that yours is the best service or produce [sic] he can buy for the least money." The sales drill states: "The student must make the close by showing with cold facts and demonstration that the service or item will produce the results required. Student must have such facts, proof and demonstration at his fingertips." Another salient example of the appropriation of original expression follows from the book's description of the "unattached female." An unmarried woman, according to the book, is someone who is susceptible to "a dab of flattery here, some good, practical advice there." The book then relates an anecdote from a salesman who confided to the author, "[W]hat they really want is to be able to trust what I tell them." The corresponding sales drill paraphrases this passage as follows: "The unattached female. The student must handle by using flattery, good sound practical advice, etc., so the prospect feels she can trust what the Registrar is telling her."

Defendants have submitted charts comparing the two works which further reflect a misguided understanding of what may constitute infringement. Defendants argue that short and unoriginal phrases such as "night shift," "tag team," and "scaredy cat" must be "filtered out of a court's consideration" altogether. We decline to adopt defendants' approach as one that unduly constricts the scope of copyright protection. A similar argument was advanced by the defendant in Salinger v. Random House, Inc., 811 F.2d 90, 92 (2d Cir.1987), in which the defendant wrote a biography of the author J.D. Salinger that borrowed from Salinger's unpublished letters. In advancing the fair use defense, the defendant argued that he had used only a small proportion of copyrighted expression, excluding from his calculations several passages in which Salinger used clichs and mundane combinations of words. Id. at 98. In rejecting this argument, the court observed:

[Copyright] protection is available for the "association, presentation, and combination of the ideas and thought which go to make up the [author's] literary composition." Or as we have recently stated, "What is protected is the manner of expression, the author's analysis or interpretation of events, the way he structures his material and marshals his facts, his choice of words and the emphasis he gives to particular developments." The "ordinary" phrase may enjoy no protection as such, but its use in a sequence of expressive words does not cause the entire passage to lose protection. And though the "ordinary" phrase may be quoted without fear of infringement, a copier may not quote or paraphrase the sequence of creative expression that includes such a phrase.

Id. (second alteration in original) (internal citations omitted). Similarly, here, Les Dane's inclusion of uncopyrightable short phrases in Big League Sales does not thereby cause the passage in which they are used to lose protection of its copyrightable elements — the original "sequence of thoughts, choice of words, emphasis, and arrangement." Id.

Defendants also argue that any copying that occurred was de minimis. See 2 Melville B. Nimmer & David Nimmer, Nimmer on Copyright, 8-24, § 8.01[G] (2002) ("[F]or similarity to be [1307] substantial, and hence actionable, it must apply to more than simply a de minimis fragment."). We disagree. The extent of copying must be assessed with respect to both the quantitative and the qualitative significance of the amount copied to the copyrighted work as a whole. MiTek Holdings, Inc., 89 F.3d at 1560 & n. 26 (noting that substantial similarity in this respect involves a comparison of the works "as a whole, not constituent elements" thereof); see also Ringgold v. Black Entm't Television, Inc., 126 F.3d 70, 75 (2d Cir.1997) (noting that a finding of "substantial similarity," to be legally actionable, requires that "the amount of the copyrighted work that is copied" must be "quantitatively and qualitatively sufficient"). In the first place, even if the borrowed expression from the book does not exceed one percent of defendants' course materials (itself a questionable calculation in light of defendants' overly narrow view of the book's protected expression), that argument is not really on point, because it is the relative portion of the copyrighted work — not the relative portion of the infringing work — that is the relevant comparison. Taken to its extreme, such a view would potentially permit the wholesale copying of a brief work merely by inserting it into a much longer work. Moreover, though the amount of expression copied may be quantitatively small with respect to the length of the book (constituting approximately 180 prose pages), the qualitative importance of the portion copied — particularly as it appears in the sales drills — is significant enough to preclude the grant of summary judgment for defendants on this ground. Accordingly, PL&A; has established a prima facie case of infringement of Big League Sales with respect to Counts 1 and 3.

III.

The district court's decision largely eschewed the foregoing analysis and rested primarily on fair use grounds.^[22] Because the district court misconstrued the factors relevant to the defense of fair use, we are at some pains to reiterate the doctrine's underlying principles and to demonstrate their application "in separating the fair use sheep from the infringing goats" in this case. Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569, 586, 114 S.Ct. 1164, 1175, 127 L.Ed.2d 500 (1994). We find upon proper application of the factors that defendants are entitled to the defense at the summary judgment stage as to Count 3 only.

A.

The Copyright Act provides that:

[T]he fair use of a copyrighted work ... for purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research, is not an infringement of copyright. In determining whether the use made of a work in any particular case is a fair use the factors to be considered shall include —

(1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes;

(2) the nature of the copyrighted work;

(3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and

(4) the effect of the use upon the potential market for or value of the copyrighted work.

[1308] 17 U.S.C. § 107. Fair use doctrine is an "equitable rule of reason"; neither the examples of possible fair uses nor the four statutory factors are to be considered exclusive.^[23] Stewart v. Abend, 495 U.S. 207, 236-37, 110 S.Ct. 1750, 1768, 109 L.Ed.2d 184 (1990); Campbell, 510 U.S. at 577-78, 114 S.Ct. at 1170-71. Furthermore, the statutory factors are not to "be treated in isolation, one from another. All are to be explored, and the results weighed together, in light of the purposes of copyright." Campbell, 510 U.S. at 578, 114 S.Ct. at 1170-71.

The district court explicitly adopted a "fifth" factor, which it described as "the copyright owner's actual consent to the use of the copyrighted material." The court pointed to record evidence showing that "both Dane and Plaintiff knew of, assented to, and participated in Defendants' use of [Big League Sales] for decades," namely, (1) the fact that in the 1980s, Les Dane taught the book and used sales drills in Church seminars, and (2) the fact that Letterese knew of Les Dane's participation in Church seminars and, as a practicing Scientologist, took several courses teaching the book. In addition to creating a "consent" factor, the court further explained that these facts "permeate[d]" its evaluation of the four statutory factors.

This was incorrect, both in terms of logic and precedent. As the district court itself recognized, the existence of actual consent negates the necessity of conducting a fair use analysis in the first place, as the existence of a license is an independent affirmative defense to a claim of copyright infringement. See Acuff-Rose Music, Inc. v. Jostens, Inc., 155 F.3d 140, 144 n. 2 (2d Cir.1998) ("The doctrine of `fair use' allows the appropriation of a copyrighted work without consent under certain circumstances.") (emphasis added). Actual consent therefore is not properly a factor in fair use analysis.^[24]

Moreover, the district court erred in finding that defendants had obtained [1309] actual consent to copy the book during the relevant period. Did Les Dane, at one time, give implied consent to the use of the book in the course material? Perhaps so; he evidently knew of and permitted Hubbard's use of the book to some extent, as he even taught seminars utilizing sales drills on behalf of the Church during the 1980s.^[25] See Korman v. HBC Fla., Inc., 182 F.3d 1291, 1293 (11th Cir.1999) ("While an exclusive license to use copyrighted material must be written, a nonexclusive license can be granted orally or can be implied from the conduct of the parties."). But PL&A; does not allege that defendants' use during that time was infringing; rather, this case is concerned with a period of defendants' use of the book that took place after any such grant of rights to defendants would have lapsed. Because Les Dane died before he could register for the book's renewal term, he could not have consented to defendants' use of the book in the renewal term, even had he wished it. See Stewart, 495 U.S. at 230, 110 S.Ct. at 1765. Les Dane's "death, prior to the renewal period, terminate[d] his [contingent] interest in the renewal," id. at 219, 110 S.Ct. at 1759, and the subsequent renewal of the copyright by his statutory heirs, the Dane family, created a "new estate" that was "clear of all rights, interests or licenses granted under the original copyright." P.C. Films Corp. v. MGM/UA Home Video, 138 F.3d 453, 456-57 (2d Cir.1998) (quotation marks omitted).

By finding that defendants' use of Big League Sales was fair because of Les Dane's earlier consent, the district court effectively contravened this principle by encumbering the renewal term. Nor does the fact that Letterese took several of the courses while he was still a practicing Scientologist mean that PL&A; consented to defendants' use of the book; PL&A; was not then the exclusive licensee of the book.

B.

As PL&A; did not actually consent to defendants' use of Big League Sales, it is appropriate to consider whether defendants were entitled to the defense of fair use. We proceed through an analysis of the statutory factors.

1. Purpose and Character of the Use.

"The first factor in the fair-use analysis, the purpose and character of the allegedly infringing work, has several facets." Suntrust Bank, 268 F.3d at 1269. Two such facets are (1) whether the use serves a nonprofit educational purpose, as opposed to a commercial purpose; and (2) the degree to which the work is a "transformative" use, as opposed to a merely superseding use, of the copyrighted work. Id. Before illumining these facets, however, we observe that the Supreme Court has cautioned against the use of the facets to create "hard evidentiary presumption[s]" or "categories of presumptively fair use." Campbell, 510 U.S. at 584, 114 S.Ct. at 1174 ("[T]he mere fact that a use is educational and not for profit does not insulate it from a finding of infringement, any more than the commercial character of a use bars a finding of fairness."). Rather, the commercial or non-transformative uses of a work are to be regarded as "separate factor[s] that tend[ ] to weigh against a finding of fair use," and "the force of that tendency will vary with the context." Id. at 585, 114 S.Ct. at 1174 (internal quotation marks omitted). And "[t]he more transformative the new work, the less will be the significance of other factors, like [1310] commercialism, that may weigh against a finding of fair use." Id. at 579, 114 S.Ct. at 1171.

The Supreme Court has emphasized that "[t]he crux of the profit/nonprofit distinction is not whether the sole motive of the use is monetary gain but whether the user stands to profit from exploitation of the copyrighted material without paying the customary price." Harper & Row, Publishers, Inc. v. Nation Enters., 471 U.S. 539, 562, 105 S.Ct. 2218, 2231, 85 L.Ed.2d 588 (1985). The district court misconstrued this statement, concluding that because "Dane and Plaintiff knew about Defendants' use of [Big League Sales] but never charged or demanded a fee for it[,] ... there appears to have been no `customary price' at all for their particular use of [the book]." The question is not whether PL&A; and defendants had set a price between themselves over a course of dealing (which defendants then neglected to pay); it is whether the nature of defendants' use vis-a-vis the public was such that defendants stood to profit commercially from it. See Paramount Pictures Corp. v. Carol Publ'g Group, 11 F.Supp.2d 329, 334 (S.D.N.Y.1998), aff'd mem., 1999 WL 319328 (2d Cir. May 13, 1999) (noting that the first aspect "is whether the work is primarily commercial in nature or whether [it] aspires to serve broad public purposes").

That WISE charged $75 for each Sales Course pack clearly demonstrates the commercial purpose of the course materials. See Suntrust Bank, 268 F.3d at 1269 & n. 24 (noting that the fact that defendant "chose a method of publication designed to generate economic profit" weighed against a finding of fair use). CSI did not charge a monetary fee outright for consumption of the Professional Registration Course or Organization Executive Course, but it undeniably derived a commercial benefit therefrom by obtaining a promissory note for the fixed "donation amount of the course," which became payable in the event that the student failed to render services to the Church for the full duration of his or her staff contract. Cf. Roy Export Co. Establishment v. Columbia Broad. Sys. Inc., 503 F.Supp. 1137, 1144 (S.D.N.Y.1980) (noting that although CBS's broadcast of a tribute to Charlie Chaplin which included copyrighted film clips was not sponsored, CBS "stood to gain at least indirect commercial benefit from the ratings boost which it had reason to hope would (and in fact did) result from the special").

Nor may defendants' course materials properly be deemed "transformative" of the book. A transformative work is one that "adds something new, with a further purpose or different character, altering the first [work] with new expression, meaning or message." Campbell, 510 U.S. at 579, 114 S.Ct. at 1171. On the other hand, a work that is not transformative, and that "merely supersede[s] the objects of the original creation," is less likely to be entitled to the defense of fair use because of the greater likelihood that it will "supplant" the market for the copyrighted work, "fulfilling demand for the original."^[26] See id. at 579, 588, 114 S.Ct. at 1171, 1176 [1311] (alteration in original) (internal quotation marks omitted); Harper & Row, 471 U.S. at 562, 105 S.Ct. at 2231 (noting the defendant's effect and intended purpose of "supplanting" the copyright owner's commercial rights). The difference between a transformative use and a superseding use is illustrated by the contrast between two works derived from Margaret Mitchell's novel, Gone With the Wind ("GWTW"). Alice Randall's novel, The Wind Done Gone, inverts the original storyline of GWTW in order "to explode the romantic, idealized portrait of the antebellum South during and after the Civil War." Suntrust Bank, 268 F.3d at 1270. Whereas the original novel "describes how both blacks and whites were purportedly better off in the days of slavery," Randall's highly transformative parody "flips GWTW's traditional race roles, portrays powerful whites as stupid or feckless, and generally sets out to demystify GWTW and strip the romanticism from Mitchell's specific account of this period of our history." Id. By contrast, despite the inclusion of several elements of parody or satire in the 1979 musical production, Scarlett Fever, the work "as a whole is not a critical commentary" of the original work, but rather a work that fulfills the same "overall function" — "to entertain." Metro-Goldwyn-Mayer, Inc. v. Showcase Atlanta Coop. Prods., Inc., 479 F.Supp. 351, 357, 361 (N.D.Ga.1979).

The difference, then, is one of substance and not of degree. Viewed in this light, defendants' use of Big League Sales in their course materials falls short of a transformative use. The book selects, orders, and describes a number of sales techniques with the purpose of educating its readers to become more effective salesmen. The same is true of the WISE and CSI course materials. As the district court noted, "Defendants' courses and materials merely attempt to provide a userfriendly method of reading and learning from [Big League Sales]." The course materials do not reshape the instructional purpose or character of the book, or cast the book in a different light through a new meaning, message, or expression. Although the course materials adopt a different format, incorporate pedagogical tools such as sales drills, and condense the material in the book, these changes do not alter the educational character of the material taken from the book; they merely emphasize, rather than transform, the overall purpose and function of the book. See also Blanch v. Koons, 467 F.3d 244, 252 (2d Cir.2006) (noting that it would be futile for defendant to argue that a painting is transformative of a photograph, because such a defendant would have "done no more than find a new way to exploit the creative virtues of the original work"); Paramount Pictures Corp., 11 F.Supp.2d at 335 (finding the defendant's work was not transformative because "it simply retells the story of Star Trek in a condensed version, albeit in a different order"; humorous asides interspersed throughout the summary did "not sufficiently transform" the Star Trek story).^[27] The further addition [1312] of Scientological terms or concepts likewise does not transform the overall educative purpose of the book. This is particularly true with respect to CSI's course materials; in the corresponding sales drills, the use of Scientological terms is incidental. For example, students pretend to be registrars (rather than ordinary salesmen) and practice selling "E-meters" or "Academy training" (rather than cars or insurance policies). Accordingly, the first factor favors PL&A.;^[28]

2. Nature of the Copyrighted Work.

The second factor "recognizes that there is a hierarchy of copyright protection" depending upon the nature of the copyrighted work. Suntrust Bank, 268 F.3d at 1271. Works that are "closer to the core of intended copyright protection," and thus merit greater protection, include original as opposed to derivative works; creative as opposed to factual works; and unpublished as opposed to published works. See Campbell, 510 U.S. at 586, 114 S.Ct. at 1175; Harper & Row, 471 U.S. at 563, 105 S.Ct. at 2232 ("The law generally recognizes a greater need to disseminate factual works than works of fiction or fantasy."); id. at 551, 105 S.Ct. at 2226-27 ("Publication of an author's expression before he has authorized its dissemination seriously infringes the author's right to decide when and whether it will be made public, a factor not present in fair use of published works."); Suntrust Bank, 268 F.3d at 1271 ("[O]riginal, creative works are afforded greater protection than derivative works or factual compilations.").

Big League Sales is neither a derivative work nor a factual compilation. It does, however, fall roughly under the rubric of a factual work. But "within the field of fact works, there are gradations as to the relative proportion of fact and fancy. One may move from sparsely embellished maps and directories to elegantly written biography." Harper & Row, 471 U.S. at 563, 105 S.Ct. at 2232 (quoting Gorman, Fact or Fancy? The Implications for Copyright, 29 J. Copyright Soc. 560, 561 (1982)) (internal quotation marks omitted). While the underlying sales techniques in Big League Sales are not copyrightable, the original and creative expression in which they are couched may be. Our review of the book reveals that, notwithstanding its informational nature, the book contains a significant "proportion of fact and fancy," and not merely in the subjective selection and arrangement of sales techniques; Les Dane utilizes original expression that surpasses the bare facts necessary to communicate the underlying technique. Although the techniques are presented by way of personal anecdote, it is hard to believe that such anecdotes feature actual persons and actual retellings of past events and conversations, [1313] as opposed to composite characters and experiences served with a healthy dose of fiction.

As for the publication status of Big League Sales, defendants characterize the book as out of print, which would tend to favor their claim of fair use. See Triangle Publ'ns, Inc. v. Knight-Ridder Newspapers, Inc., 626 F.2d 1171, 1176 n. 14 (5th Cir.1980) ("[I]f the copyrighted work is out of print and cannot be purchased, a user may be more likely to prevail on a fair use defense.").^[29] Pursuant to our review of the record, however, we are convinced that the publication status of the book requires further refinement. The book was published in 1971 and was subsequently withdrawn from the market by PL&A; in the mid-1990s. Although the book's withdrawal did not thereby render it an "unpublished" work, we find that the policies underlying the greater protection of unpublished works are implicated to a certain degree and counsel against lumping Big League Sales together with the kind of out-of-print works that might be more susceptible to the defense of fair use.

The law provides greater copyright protection for unpublished works in recognition of the author's property interest in the "commercially valuable right of first publication," including the "exploitation of prepublication rights, which are valuable in themselves and serve as a valuable adjunct to publicity and marketing," Harper & Row, 471 U.S. at 562, 555, 105 S.Ct. at 2231, 2228, and because of the author's "personal interest" in "creative or quality control," id. at 564, 105 S.Ct. at 2232.^[30] By contrast, out-of-print works are generally accorded less copyright protection. The relevant fact is not simply that the work is unavailable for purchase through normal channels. "Any copyright infringer may claim to benefit the public by increasing public access to the copyrighted work." Id. at 569, 105 S.Ct. at 2235. Rather, that fair use is more likely to apply in the standard scenario of an out-of-print work reflects in large part the assumption that no market harm to the owner will come of the use, as presumably it was lack of demand for the work that led to its demise. Moreover, as it was the market mechanism that caused the work to become unavailable, the countervailing personal interest of the author is not implicated; the author presumably would wish for the work's continued dissemination. Neither the personal nor the property interests of the author are thus strongly implicated with respect to the typical out-of-print work.

Defendants' characterization of Big League Sales as an out-of-print work obscures the actual nature of the book. It is not "out of print" in the typical sense, as it was the copyright owner's decision to withhold the book, and not the dearth of sales, that led to its withdrawal from the market. Cf. id. at 553, 105 S.Ct. at 2227 (distinguishing unpublished works from out-of-print works because although "the work is unavailable, this is the result of a deliberate choice on the part of the copyright owner"). Nonetheless, the personal interests of the author are less compelling with respect to the withdrawn work; the author has already had ample opportunity to exercise creative and quality control over his work during the "critical stage" prior to "the first public appearance" of his work. [1314] Id. at 555, 105 S.Ct. at 2227-28 (noting the "obvious benefit to author and public alike of assuring authors the leisure to develop their ideas free from fear of expropriation" prior to publication). Moreover, the author of an already-published work is not altogether powerless to exert continued editorial control; the printing of retractions or of subsequent revised editions supply such further opportunity.

Unlike the case of an out-of-print work, however, the application of fair use in this context may harm the copyright owner's market, and not simply because demand for the original work is presumably still extant. PL&A; claims that its decision to withdraw the book is accompanied by the reservation of "the decision as to when or whether to make [Big League Sales] public again." As PL&A; indicates, the decision to withdraw a work from the market and then re-release it can be a valuable marketing tool — taking advantage of timing and pent-up market demand, cf. Belushi v. Woodward, 598 F.Supp. 36, 37 (D.D.C.1984) (noting the importance of "carefully orchestrated and costly plans for selling and marketing the book" that "depends upon the coordination of advertising, serialization, author appearances, and reviews, and the release to the public of the book") — that has been successfully utilized by others. See, e.g., Boosey & Hawkes Music Publishers, Ltd. v. Walt Disney Co., 145 F.3d 481, 485 (2d Cir.1998) (noting that Walt Disney has re-released the film "Fantasia," starring Mickey Mouse, for theatrical distribution at least seven times since its original release).

We cannot agree, therefore, that the publication status of Big League Sales favors defendants' claim of fair use. Similarly, the semi-factual nature of Big League Sales neither expands nor constricts the scope of the fair use defense. On balance, therefore, we conclude that this factor is neutral.

3. Amount and Substantiality of the Portion Used.

Whatever the use, the portion of the copyrighted work that is taken must be reasonable; in other words, this third factor examines whether defendants have "helped themselves overmuch" to the copyrighted work in light of the purpose and character of the use. Campbell, 510 U.S. at 587, 114 S.Ct. at 1175. Like the preceding factors, this factor is intertwined with the fourth factor and partly functions as a heuristic to determine the impact on the market for the original.^[31] A book reviewer who copies snippets of a book is likely to increase the demand for the book, but "were a book reviewer to quote the entire book in his review, or so much of the book as to make the review a substitute for the book itself, he would be cutting into the publisher's market, and the defense of fair use would fail." Ty, Inc. v. Publ'ns Int'l Ltd., 292 F.3d 512, 517 (7th Cir.2002).

Two points bear particular emphasis. First, "the amount and substantiality of the portion used" is measured with respect [1315] to the "copyrighted work as a whole," not to the putatively infringing work. Defendants therefore go astray in focusing on the argument that the copyrighted expression taken from Big League Sales amounts to a small fraction of the 127 pages of the course pack for the Sales Course, the 22 pages of checksheets and 250 pages of the course pack for the Professional Registration Course, and the 47 pages encompassing the checksheet and sales drills for the Organization Executive Course. "[A] taking may not be excused merely because it is insubstantial with respect to the infringing work.... `[N]o plagiarist can excuse the wrong by showing how much of his work he did not pirate.'" Harper & Row, 471 U.S. at 565, 105 S.Ct. at 2233 (quoting Sheldon v. Metro-Goldwyn Pictures Corp., 81 F.2d 49, 56 (2d Cir.1936)).

Second, in analyzing the amount and substantiality of the portion used, a court considers "not only ... the quantity of the materials used, but ... their quality and importance, too." Campbell, 510 U.S. at 587, 114 S.Ct. at 1175. Quantitatively, the amount of verbatim copying or paraphrasing appears to be a small portion of Big League Sales. But the amount taken may be substantial from a qualitative perspective if the defendant has copied the "heart of the book." Harper & Row, 471 U.S. at 564-65, 105 S.Ct. at 2233. That may very well be the case here; as the district court observed, "the inherent value of [Big League Sales] comes not just from the sales techniques and concepts, but particularly from the way they were `selected, coordinated, or arranged' by Dane." Nonetheless, we might have found the bare-bones copying of chapter headings and subheadings into the course checksheets to be insubstantial, if defendants had stopped there. In such a scenario, the amount taken might have been deemed negligible because one could hardly imagine that the headings and subheadings, divorced from context and any explanation, could have a substitution effect on the market for Big League Sales or derivative works. But the incorporation of the sales drills, which include explanations of the sales techniques, adds flesh to the organizational bones and renders the whole of defendants' copying substantial enough that demand for the book or derivative works might be reduced. Thus, the amount and substantiality of the portion used slightly favors PL&A.;

4. Effect on the Market.

The fourth factor is the degree to which the defendant's use adversely affects the potential market or value of either the original work or derivative works. We must consider two inquiries: (1) "the extent of the market harm caused by the particular actions of the alleged infringer," and (2) "whether unrestricted and widespread conduct of the sort engaged in by the defendant [ ] would result in a substantially adverse impact on the potential market." Campbell, 510 U.S. at 590, 114 S.Ct. at 1177 (internal quotation marks omitted). In particular, the adverse effect with which fair use is primarily concerned is that of market substitution.^[32] Uses which are complementary, on the other hand, are [1316] more likely to be found fair because most authors would not want those uses to be impeded by a license requirement. See Ty, Inc., 292 F.3d at 517 ("[Fair use doctrine] thus economizes on transaction costs.").

The district court's analysis of this factor centered around PL&A;'s stipulation in open court that, "for purposes of this case only and for purposes of the statutory damages and the fair use defense," "there is no existing market for the Dane related material that [PL&A; has] a copyright to. That there is no potential market for any of that material, i.e., that [PL&A; has] never made a sale, [and is] never going to make a sale." The district court also found that defendants' course material actually contributed to the market for the book, since the courses require the purchase and study of the book. Defendants contend that PL&A; has effectively conceded the fourth factor by entering into the stipulation. We disagree as to both the scope and effect of the stipulation on our determination of the fourth factor.^[33]

This was an evidentiary stipulation made in the context of defendants' motion for sanctions due to PL&A;'s resistance to the production of certain financial records.^[34] Based on our review of the hearing transcript, however, we do not believe that PL&A; thereby intended to concede defeat as to the fourth fair-use factor. PL&A; apparently believed that the universe of existing or potential markets included only those markets that were being commercially exploited by themselves or by the defendants — the "existing market," according to PL&A;, is "what the plaintiff does" with the copyright, whereas the "potential market" refers to "what the defendants do with it" (from the plaintiff's perspective, a "potential market" for exploitation by the plaintiff). Based on that understanding, a stipulation that there were no existing or potential markets for Big League Sales and derivative works would be tantamount to a concession that PL&A; had been unable to profit from the book, and would not develop any such market in the future. Our review of the transcript further suggests that defendants and the district court may have been similarly laboring under an erroneous understanding of the applicable rule of law about the fourth factor, which renders questionable the content [1317] that defendants would give the stipulation. Cf. Tex. Instruments Fed. Credit Union v. DelBonis, 72 F.3d 921, 928 (1st Cir.1995) ("Litigation stipulations can be understood as the analogue of terms binding parties to a contract.").

Even putting aside the issue of intent, however, construing the stipulation as broadly as defendants would like is problematic given the undisputed facts of the case. It is undisputed, for example, that Bridge Publications sought several times to purchase rights to Big League Sales by contacting the Dane estate directly and, later, attempting to negotiate with PL&A.; What is further undeniable is that the course materials that are the subject of this litigation expressly rely upon contemporaneous use of Big League Sales, a fact which the district court emphasized in finding that the course materials actually contributed to the market for the book. A stipulation that Big League Sales and derivative works lacked all value and any potential market, therefore, would flatly contradict undisputed facts at the very heart of the case. See Darwish v. Tempglass Group, Inc., 26 Fed.Appx. 477, 480 (6th Cir.2002) (unpublished) ("We agree with the district court that `parties [cannot] stipulate to patently untrue facts.'") (alteration in original) (quoting FDIC v. St. Paul Fire & Marine Ins. Co., 942 F.2d 1032, 1038 n. 3 (6th Cir.1991)). While parties are permitted and encouraged to stipulate to facts that expedite the conduct of litigation and avoid unnecessary proof of peripheral factual matters, it goes almost without saying that such facts should be "within the range of possibly true facts." See St. Paul Fire & Marine Ins. Co., 942 F.2d at 1038 n. 3.

As we read the stipulation, therefore, PL&A; has conceded that it has failed to develop a profitable market for Big League Sales or derivative works, and will not do so in the future. Such a concession, however, falls short of establishing that the intrinsic value of the copyright is zero. "Even an author who ha[s] disavowed any intention to publish his work during his lifetime [is] entitled to protection of his copyright, first, because the relevant consideration [is] the `potential market' and, second, because he has the right to change his mind." Worldwide Church of God, 227 F.3d at 1119 (citing Salinger v. Random House, Inc., 811 F.2d 90, 99 (2d Cir.1987)). PL&A; is not required to prove that it has actually developed or will develop a market for Big League Sales or derivative works; even if a plaintiff "has evidenced little if any interest in exploiting [a] market for derivative works ..., the copyright law must respect that creative and economic choice." Castle Rock Entm't Inc., 150 F.3d at 145-46; Pac. & S. Co. v. Duncan, 744 F.2d 1490, 1496 (11th Cir.1984) ("The fact that WXIA does not actively market copies of the news programs does not matter, for Section 107 looks to the `potential market' in analyzing the effects of an alleged infringement. Copyrights protect owners who immediately market a work no more stringently than owners who delay before entering the market."); Salinger, 811 F.2d at 99 ("[Salinger] is entitled to protect his opportunity to sell his letters.").

The question remains, therefore, whether defendants' use, or widespread use of the same kind, would result in substantial adverse harm to the potential market for Big League Sales or derivative works, which "includes only those [markets] that creators of original works would in general develop or license others to develop." Campbell, 510 U.S. at 590, 114 S.Ct. at 1178.^[35] With respect to the WISE Sales Course, we think it may. The unrestricted [1318] and widespread dissemination of the Sales Course — a use that is not transformative of the book and may be regarded as appropriating "the heart" of its expression — namely, the selection and structure of sales techniques and distinctive descriptions thereof — may well usurp the potential market for Big League Sales and derivative works.^[36] Defendants have provided insufficient evidence in support of their claim that the Sales Course is unlikely to adversely affect the potential market.

The same is not true, however, with respect to the CSI courses. According to CSI, the Organization Executive Course "consist[s] exclusively of writings by L. Ron Hubbard concerning the administration of churches." Similarly, the Professional Registration course pack contains "246 pages of text by L. Ron Hubbard, the Founder of the Scientology religion." These courses are not taught through traditional pedagogical means; it is a fundamental feature of the courses that "[t]here is no `teacher' or `lecturer' in a Scientology course"; the course supervisor merely monitors and assists the student's progress through the course materials.^[37]

What this suggests is that derivative works developed by PL&A; (or developed by others pursuant to a license) would not be utilized by CSI, because they would not derive from Hubbard's writings. Defendants have apparently developed course material up until 1994, eight years after Hubbard's death, but even those versions bear the distilled imprimatur of Hubbard's pen. For example, the end of each volume of the Organization Executive Course, dated 1991, concludes with the legend: "L. RON HUBBARD; Founder; Compilation assisted by LRH Technical Research and Compilations." The fine print below this [1319] reads: "(The directions, drills and study assignments which make up this course checksheet were written by LRH Technical Research and Compilations staff. The compilation of this checksheet was done according to specific LRH advices on what materials should be on this course, as well as LRH policies and instructions which prescribe the standard format for course checksheets.)." Sales of CSI's courses to Scientology registrars and officers would have no impact on the potential market for derivative works developed by PL&A;, because registrars and officers would not study such texts.^[38] Cf. Pac. & S. Co., Inc., 744 F.2d at 1496 ("Some commercial purposes... might not threaten the incentives because the user profits from an activity that the owner could not possibly take advantage of."). Simply put, PL&A;'s derivative works would not be market substitutes for CSI's courses, and vice versa. See Campbell, 510 U.S. at 593, 114 S.Ct. at 1178 ("The only harm to derivatives that need concern us ... is the harm of market substitution.").

Overall Assessment

With respect to all of the courses in question, the first and third factors favor PL&A; to some degree, while the second factor is neutral. Given the lack of sufficient evidence disproving the likelihood that widespread dissemination of the WISE Sales Course would supplant PL&A;'s market for derivative works, the fourth factor also favors PL&A; with respect to those course materials. Defendants have therefore failed to prove their entitlement to summary judgment based on fair use with respect to Count 1. Because the use of Big League Sales in CSI's courses does not have a substantially adverse substitution effect on the potential market for derivative works, however, the fourth factor strongly favors defendants in that context. Upon consideration of the factors in the aggregate, we find that defendants are entitled to summary judgment as to Count 3.

IV.

We next consider whether summary judgment for defendants was appropriate as to Count 1 on the alternate ground that PL&A;'s claim is barred by the defense of laches, which prevents a plaintiff who has slept on his rights from enforcing those rights against a defendant. The question whether the equitable doctrine of laches may bar a claim for copyright infringement that was filed within the statute of limitations has generated a circuit split and is a question of first impression in this circuit.^[39]

[1320] Judge Learned Hand has stated that:

It must be obvious to every one familiar with equitable principles that it is inequitable for the owner of a copyright, with full notice of an intended infringement, to stand inactive while the proposed infringer spends large sums of money in its exploitation, and to intervene only when his speculation has proved a success. Delay under such circumstances allows the owner to speculate without risk with the other's money; he cannot possibly lose, and he may win.

Haas v. Leo Feist, Inc., 234 F. 105, 108 (S.D.N.Y.1916). But at the time of that writing, "there was no statute of limitations on civil suits relating to copyright infringement, and courts applied the law of the state in which the action was brought." Prather v. Neva Paperbacks, Inc., 446 F.2d 338, 339 (5th Cir.1971). Where the analogous state statute of limitations had not yet run, the application of laches as a judge-made, flexible limit on the period in which a plaintiff could bring suit did not present the same question as it does today.

In 1957, however, Congress enacted a three-year statute of limitations for copyright infringement claims. Id.^[40] Its purpose was to counteract the problem of forum-shopping by prescribing a "uniform federal period of limitations." Id. However, in deciding that the equitable doctrine of tolling nonetheless applied to a copyright infringement claim, the former Fifth Circuit observed that "the intent of the drafters was that the limitations period would affect the remedy only, not the substantive right, and that equitable considerations would therefore apply to suspend the running of the statute." Id. at 340. The court in Prather therefore held that a court "must look to general equitable principles to determine the proper disposition" of the plaintiff's cause of action. Id.

In answering the question of whether the defense of laches may be interposed in a copyright infringement suit, therefore, we cannot agree with the conclusion of the Fourth Circuit, which is an unqualified "no." See Lyons P'ship, L.P. v. Morris Costumes, Inc., 243 F.3d 789, 798 (4th Cir.2001). Prather recognized the applicability of general equitable doctrines, and like tolling, laches falls into that category. Cf. Teamsters & Employers Welfare Trust of Ill. v. Gorman Bros. Ready Mix, 283 F.3d 877, 882 (7th Cir.2002) ("What is sauce for the goose (the plaintiff seeking to extend the statute of limitations) is sauce for the gander (the defendant seeking to contract it)."). However, we remain mindful of the Fourth Circuit's invocation of separation of powers principles which counsel against the use of "the judicially created doctrine of laches to bar a federal statutory claim that has been timely filed under an express statute of limitations." Lyons P'ship, 243 F.3d at 798. We therefore answer this question with a presumptive "no"; there is a strong presumption that a plaintiff's suit is timely if it is filed before the statute of limitations has run. Only in the most extraordinary circumstances will laches be recognized as a defense. Cf. Chirco v. Crosswinds Communities, Inc., 474 F.3d 227, 234 (6th Cir. [1321] 2007) (noting the limited applicability of laches to copyright cases in "what can best be described as unusual circumstances"); Jacobsen v. Deseret Book Co., 287 F.3d 936, 951 (10th Cir.2002) ("Although it is possible, in rare cases, that a statute of limitations can be cut short by the doctrine of laches, we see no reason to supplant the statute of limitations in this case." (internal quotation marks and citation omitted)).

Even where such extraordinary circumstances exist, however, laches serves as a bar only to the recovery of retrospective damages, not to prospective relief. As the former Fifth Circuit explained in a patent infringement action:

Although laches and estoppel are related concepts, there is a clear distinction between the two. The defense of laches may be invoked where the plaintiff has unreasonably and inexcusably delayed in prosecuting its rights and where that delay has resulted in material prejudice to the defendant. The effect of laches is merely to withhold damages for infringement which occurred prior to the filing of the suit.

Estoppel, on the other hand, "arises only when one has so acted as to mislead another and the one thus misled has relied upon the action of the inducing party to his prejudice." Estoppel forecloses the patentee from enforcing his patent prospectively through an injunction or through damages for continuing infringement.

Studiengesellschaft Kohle mbH v. Eastman Kodak Co., 616 F.2d 1315, 1325 (5th Cir.1980) (internal citations omitted). This distinction between the remedies foreclosed by laches and those foreclosed by estoppel applies with equal force in the copyright context.^[41] It is also true in the copyright infringement context that "from the very nature of the thing [a copyright owner] cannot be fully cognizant of all infringements that occur throughout the length and breadth of this country. His information may be largely hearsay," and "the validity of [the copyright] and the infringement thereof may be, as here, disputed. These defenses present mixed questions of fact and law concerning which there is necessarily some doubt and uncertainty. In many cases, if not in most cases, the doubts are serious ones." See A.C. Aukerman Co. v. R.L. Chaides Constr. Co., 960 F.2d 1020, 1040-41 (Fed. Cir.1992) ("[L]aches bars relief on a patentee's claim only with respect to damages accrued prior to suit."). Permitting laches to operate as a bar on post-filing damages or injunctive relief would encourage copyright owners to initiate much needless litigation in order to prevent others from obtaining effective immunity from suit with respect to future infringements.^[42] [1322] Laches therefore does not preclude PL&A; from seeking prospective relief.^[43]

[1323] Our holding today does not, of course, otherwise restrict the power of a court, in its discretion, to fashion appropriate remedial relief. As the Supreme Court has observed, a permanent injunction does not automatically issue upon a finding of copyright infringement. See eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 392, 126 S.Ct. 1837, 1840, 164 L.Ed.2d 641 (2006) ("Like the Patent Act, the Copyright Act provides that courts `may' grant injunctive relief `on such terms as it may deem reasonable to prevent or restrain infringement of a copyright.'" (quoting 17 U.S.C. § 502(a))). Rather, under "well-established principles of equity, a plaintiff seeking a permanent injunction must satisfy a four-factor test before a court may grant such relief," and a court's decision to grant or deny such relief is within the exercise of its discretion. Id. at 391, 126 S.Ct. at 1839.

A plaintiff must demonstrate: (1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction.

Id. See, e.g., Christopher Phelps & Assocs. v. Galloway, 492 F.3d 532, 543-46 (4th Cir.2007) (affirming district court's decision, based on traditional equity principles, to deny plaintiff's request for an order permanently enjoining defendant from leasing or selling a house that infringed plaintiff's architectural plans).

V.

For the reasons herein stated, the judgment of the district court is AFFIRMED in part, REVERSED in part, and REMANDED for further proceedings consistent with this opinion.

[1] Honorable Pasco M. Bowman II, United States Circuit Judge for the Eighth Circuit, sitting by designation.

[2] Parker Publishing was later taken over by Prentice Hall.

[3] For a thorough description of the complex organizational structure of Scientology, see generally Church of Spiritual Technology v. United States, 26 Cl.Ct. 713, 715-20 (1992).

[4] CSI does not advertise or market these courses outside of Church membership.

[5] We explore the relevant distinctions between the Sales Course pack and the CSI course materials, and provide extensive examples of the alleged infringing material, infra at part II.C.

[6] The record does not indicate what subsequently transpired in PL&A;'s suit in Los Angeles County Superior Court.

[7] PL&A;'s complaint also named as defendants several additional organizations: Bridge Publications, Inc.; the Church of Scientology Flag Service Organization; New Era Publications International (a named but unserved defendant); Scientology Missions International ("SMI"); Church of Scientology Mission of Fort Lauderdale, Inc. ("Mission"); the Church of Scientology of Florida; and 3200 unknown entities affiliated with Scientology. The complaint contained five counts — the four counts described in the text which are before us in this appeal, and a count brought under section 43(a) of the Lanham Act, codified at 15 U.S.C. § 1125(a), which the court construed as a claim both for false designation of origin and false advertising. The complaint sought both legal and equitable relief. PL&A; amended its complaint at least twice. A revised first amended complaint, filed on July 13, 2005, deleted the fifth count and elected statutory damages as PL&A;'s legal relief. The second amended complaint, filed on August 19, 2005 (four days before the district court granted defendants' motion for summary judgment now under review) dropped the additional defendants named above — leaving only CSI, CST, and WISE in the case — and limited PL&A;'s prayer for relief to a declaratory judgment and a permanent injunction. In the text, our reference to the complaint is to the second amended complaint unless otherwise indicated.

[8] 17 U.S.C. § 507(b) sets a three-year statute of limitations for civil actions brought under the Copyright Act.

[9] 17 U.S.C. § 106(1) grants to a copyright owner the exclusive right to reproduce and to authorize others to reproduce "the copyrighted work in copies."

Based on our review of the pleadings, and by negative implication from Counts 2 and 4, we understand Counts 1 and 3 to allege that defendants' checksheets and drill sheets constitute unauthorized reproductions of Big League Sales, and not that they are derivative works of the book. But even were this not the case, and Counts 1 and 3 properly alleged that the checksheets and drill sheets are derivative works of Big League Sales, PL&A; would still be required to demonstrate that the putative derivative works would otherwise be infringing, including a determination of substantial similarity. See Atkins v. Fischer, 331 F.3d 988, 993 (D.C.Cir.2003); Well-Made Toy Mfg. Corp. v. Goffa Int'l Corp., 354 F.3d 112, 117 (2d Cir.2003); Kohus v. Mariol, 328 F.3d 848, 858 (6th Cir.2003); Dam Things from Denmark v. Russ Berrie & Co., Inc., 290 F.3d 548, 565 (3d Cir.2002); Vault Corp. v. Quaid Software Ltd., 847 F.2d 255, 267 (5th Cir. 1988); Litchfield v. Spielberg, 736 F.2d 1352, 1357 (9th Cir.1984).

[10] The exclusive rights of a copyright owner include the right to prepare and to authorize others to prepare "derivative works based upon the copyrighted work." 17 U.S.C. § 106(2).

[11] This was, in fact, PL&A;'s second motion for summary judgment on the issue of copyright infringement. PL&A; filed its first motion on April 1, 2005, before defendants had conducted any discovery and solely on the strength of affidavits submitted by Letterese and PL&A;'s counsel. Because defendants were unable to present facts essential to justify its opposition to PL&A;'s motion, the court denied the motion without prejudice. See Fed.R.Civ.P. 56(f) (providing that "[i]f a party opposing [a summary judgment motion] shows by affidavit that, for specified reasons, it cannot present facts essential to justify its opposition, the court may" provide appropriate relief, including denial of the motion or the grant of a continuance to permit additional discovery).

Additionally, notwithstanding PL&A;'s voluntary withdrawal of its claims against SMI and Mission, see supra note 6, PL&A; claims in this appeal that the district court should have granted Rule 56(f) relief to permit discovery into essential facts necessary to the proper disposition of summary judgment motions submitted by SMI and Mission. We dispose of this argument in short order. The request for Rule 56(f) relief to pursue further discovery with respect to SMI and Mission was rendered moot when the district court granted PL&A; leave to file a second amended complaint, which dropped all parties except defendants CSI, CST, and WISE, a consequence which was argued by PL&A; itself in its memorandum in support of its motion for leave to amend ("[F]or the dismissed parties it removes any FRCP 56(f) issues that the motion to compel raises."), and which was readily admitted by PL&A;'s counsel at the hearing on the motion.

[12] The district court specifically noted the existence of "genuine issues of material fact regarding CST's right to supervise the [alleged] infringing activity and financial benefit therefrom as to be liable for contributory or vicarious infringement." Nonetheless, because "[t]here can be no contributory infringement without a direct infringement," Bridgeport Music, Inc. v. Diamond Time, Ltd., 371 F.3d 883, 889 (6th Cir.2004), the court found it unnecessary to rule on the issue of secondary liability.

[13] In its brief, PL&A; makes two meritless arguments. First, as evidence to support its motion for summary judgment, PL&A; tried to obtain evidence via discovery that defendants purportedly launched an "economic attack" against it immediately after it brought this suit. Among other things, this evidence would purportedly include testimony that defendants mounted an "internet smear campaign" of Letterese that "compromis[ed] this litigation" because the campaign caused him to lose income from his business and distracted PL&A;'s counsel. Defendants moved the district court to bar such discovery. The court sustained their objection. In its brief on appeal, PL&A; argues that the court abused its discretion. Had the discovery been allowed, it contends, the resulting evidence would have established that defendants lacked "clean hands" and, moreover, willfully infringed its copyright in Big League Sales. PL&A;'s argument is baseless. The evidence at issue is irrelevant (belonging, if anything, to another lawsuit). Second, PL&A; claims that the district court erred in adopting the magistrate judge's denial of its motion for sanctions premised on allegations that defendants engaged in witness tampering. Since PL&A; failed to make a timely objection to the magistrate judge's denial of the motion, as it was required to do under Fed.R.Civ.P. 72(a), PL&A; has waived this claim. See Farrow v. West, 320 F.3d 1235, 1249 n. 21 (11th Cir. 2003).

[14] We review the grant of a motion for summary judgment de novo, applying the same legal standards as the district court. Custom Mfg. & Eng'g, Inc. v. Midway Servs., 508 F.3d 641, 646 (11th Cir.2007). The grant of summary judgment is appropriate where, upon viewing the admissible evidence and drawing all reasonable factual inferences therefrom in the light most favorable to the non-moving party, there remains no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. See Johnson v. Bd. of Regents, 263 F.3d 1234, 1243 (11th Cir.2001) (citation omitted).

[15] A derivative work is defined as

a work based upon one or more preexisting works, such as a translation, musical arrangement, dramatization, fictionalization, motion picture version, sound recording, art reproduction, abridgment, condensation, or any other form in which a work may be recast, transformed, or adapted. A work consisting of editorial revisions, annotations, elaborations, or other modifications which, as a whole, represent an original work of authorship, is a "derivative work."

17 U.S.C. § 101.

[16] PL&A; attempts to distinguish the courses further by arguing that the "frame" (the skills sheets and checksheets) interrelates with, adds on to, and modifies the "painting" (Big League Sales) such that the overall course could not stand without the book. We find this argument unintelligible, even in the intended analogous context; a frame is typically chosen to complement and interrelate with the style of the painting, and may interrelate with the painting on a very high level indeed (take, for example, Georges Seurat's painted borders and frames, such as for The Channel of Gravelines, Petit Fort Philippe). And certainly a framed Mona Lisa would be nothing without the Mona Lisa.

[17] Probative similarity, "in this sense, `exists where an average lay observer would recognize the alleged copy as having been appropriated from the copyrighted work.'" See Leigh v. Warner Bros., Inc., 212 F.3d 1210, 1214 (11th Cir.2000) (quoting Original Appalachian Artworks, Inc. v. Toy Loft, Inc., 684 F.2d 821, 829 (11th Cir.1982)). Previous cases in this circuit have also referred to this requirement of probative similarity as "substantial similarity," which potentially confuses those aspects of similarity necessary to establish the factual predicate that can support an inference of copying, with the different aspects of similarity necessary to establish that the copying is legally actionable. See Beal v. Paramount Pictures Corp., 20 F.3d 454, 459 n. 4 (11th Cir.1994) ("The term `substantial similarity' in copyright infringement actions has not always been used with precision.").

[18] As a preliminary matter, the district court, adopting defendants' view, erred in its assessment that Big League Sales is only entitled to protection as a factual compilation of sales techniques and concepts. The Act defines a "compilation" as "a work formed by the collection and assembling of preexisting materials or of data that are selected, coordinated, or arranged in such a way that the resulting work as a whole constitutes an original work of authorship. The term `compilation' includes collective works." 17 U.S.C. § 101. Big League Sales is a nondramatic literary work that does more than simply list bare facts and data in a creative format. See, e.g., BUC Int'l Corp. v. Int'l Yacht Council Ltd., 489 F.3d 1129 (11th Cir.2007) (yacht listing database); Warren Publ'g v. Microdos Data Corp., 115 F.3d 1509 (11th Cir.1997) (printed directory containing cable facts); Schoolhouse, Inc. v. Anderson, 275 F.3d 726 (8th Cir.2002) (tables of information on area schools). It is an extended argument that Les Dane "will show you that the sale should be and can be made at the first or second contact" with a sales prospect. It is not, therefore, a "compilation" within the meaning of the Copyright Act.

Defendants compound the error by arguing that because (they believe) the book is a compilation, the course material cannot be found to infringe the book's copyright unless there is "virtual identity," not simply "substantial similarity" of expression. The copyright in a factual compilation is "thin" in the sense that the protective scope of the copyright extends only to certain elements — namely, the creative and original "selection, arrangement, and coordination" of the compilation — and not to the underlying facts or ideas. See BellSouth Adver. & Publ'g Corp. v. Donnelley Info. Publ'g, Inc., 999 F.2d 1436, 1440 (11th Cir. 1993) (en banc) (citing Feist Publ'ns, Inc. v. Rural Tel. Serv. Co., 499 U.S. 340, 348, 111 S.Ct. 1282, 1289, 113 L.Ed.2d 358 (1991)); see also Warren Publ'g v. Microdos Data Corp., 115 F.3d 1509, 1515 (11th Cir.1997) (en banc) ("Only when one copies the protected selection, coordination, or arrangement in a factual compilation has one infringed the compilation copyright; copying of the factual material contained in the compilation is not infringement."). But this description of which elements are copyrightable does not further entail applying a more stringent standard to such elements, i.e., by requiring a showing of "virtual identity" between the allegedly infringing elements and the original elements. Rather, the law in this circuit is that outside of the narrow context of "claims of compilation copyright infringement of nonliteral elements of a computer program," the appropriate standard to resolve claims for the infringement of the selection, order, and arrangement of a factual compilation is "substantial similarity." BUC Int'l Corp. v. Int'l Yacht Council Ltd., 489 F.3d 1129, 1148-49 (11th Cir.2007) (distinguishing MiTek Holdings, Inc. v. Arce Eng'g Co., 89 F.3d 1548, 1558-59 (11th Cir. 1996)).

[19] 17 U.S.C. § 102(b) provides that "[i]n no case does copyright protection for an original work of authorship extend to any idea, procedure, process, system, method of operation, concept, principle, or discovery, regardless of the form in which it is described, explained, illustrated, or embodied in such work."

[20] Literal similarity refers to verbatim copying or paraphrasing of a copyrighted work. "Fragmented literal similarity" exists where "the work [copies] only a small part of the copyrighted work but [does] so word-for-word." Palmer v. Braun, 287 F.3d 1325, 1330 (11th Cir.2002). This may rise to the level of substantial similarity "[i]f this fragmented copy is important to the copyrighted work, and of sufficient quantity." Id. Comprehensive nonliteral similarity concerns the nonliteral elements of a work, and is "evident where the fundamental essence or structure of one work is duplicated in another." Id. (internal quotation marks omitted).

[21] Chapter 6 of the book is named "All in Favor Nod Your Head: Three Basic Musts and Four Ways to Apply Them to the Close." The reader is admonished to stick to three basic musts: "you control the conversation, you offer a choice rather than a yes-or-no, and you deliver your sales talk in a positive, `nod your head' nature." These three basic musts are then applied through four approaches: first, "when the salesman, rather than concentrating on overcoming objections, places the emphasis on clauses or features of the service or product in which the prospect has shown an interest." In the second approach, the "salesman has found what his prospect wants. The things he likes, or is most concerned about. From here on he will apply the pressure there, and the close will come much easier than it would if he bucked his man, trying to overcome objections." The third approach "is to let your prospect tell you what you're selling," a technique which is illustrated by the anecdote "Mr. Elrod, I'm Dumb ...." Finally, the fourth approach is for the salesman to "use the demonstration." "Would you buy a four-thousand-dollar car, a thirty-thousand-dollar home, or a $90 per month insurance portfolio before you had seen what you're getting for your money?"

Sales Drill # 4 of the Sales Course sets forth "the three basic musts": "1. Control the conversation"; "2. Offer a choice as a gimmick to bypass a large decision"; "3. Deliver your sales in a positive manner." The sales drill explains that these are "done in various ways," and provides four examples. First: "Don't concentrate on overcoming objections but find features of the service that the prospect is interested in and increase that interest, thereby raising the A, R, and C." Second: "Find out what the prospect is most concerned about, what it is he wants handled and make full use of the ARC Triangle and comm formula and show him that it really can be handled." Third: "Let him tell you how it would work for him (play dumb)." And fourth: "Employ the use of demonstration (showing the person what he is getting for his money). This can be done by using success stories, before and after graphs, letting him handle the new model, etc."

[22] The affirmative defense of fair use is a mixed question of law and fact as to which the proponent carries the burden of proof. See Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569, 590, 114 S.Ct. 1164, 1177, 127 L.Ed.2d 500 (1994); Harper & Row, Publishers, Inc. v. Nation Enters., 471 U.S. 539, 560, 105 S.Ct. 2218, 2230, 85 L.Ed.2d 588 (1985).

[23] The district court found that all four of the statutory factors favored defendants and concluded that defendants had "hit a grand slam on the fair use playing field." The district court thus relied upon the Second Circuit for the proposition that where a defendant "shut[s] out her opponent on the four factor tally," then "victory on the fair use playing field is assured." Arica Inst., Inc. v. Palmer, 970 F.2d 1067, 1079 (2d Cir. 1992) (internal quotation marks and citation omitted). We disagree. In certain circumstances, such "rigid application of the copyright statute" might "stifle the very creativity which that law is designed to foster." See Campbell, 510 U.S. at 577, 114 S.Ct. at 1170. A court must examine the four statutory factors to the extent they are relevant to a particular case, but we do not rule out the possibility that specific factual circumstances may compel a conclusion that cuts against the grain of all four factors. See also Ty, Inc. v. Publ'ns Int'l Ltd., 292 F.3d 512, 522 (7th Cir.2002) (noting that because "the four factors are a [non-exhaustive] checklist of things to be considered rather than a formula for decision," a party "can get nowhere in defending [summary] judgment by arguing that some or even all of them lean against the defense of fair use").

[24] The case law and congressional history speak of fair use as "predicated on the author's implied consent to `reasonable and customary' use," Harper & Row, 471 U.S. at 550, 105 S.Ct. at 2225, but we understand such language to refer more to the doctrinal underpinnings of fair use in a sort of "hypothetical consent" by a rational author to a particular kind of use, cf. Hanna Pitkin, Obligation and Consent-I, 59 Am. Pol. Sci. Rev. 990, 999 (1965) (explaining the doctrine of hypothetical consent as one that predicates political obligation upon "the nature" and "the objective characteristics of the government": "If it is a good, just government doing what a government should, then you must obey it" because "rational men in a hypothetical `state of nature' would consent to be governed by such a government"); and not to suggest that in determining whether a use is fair, one should look to the actual past conduct of the copyright owner to determine whether consent may be implied.

[25] At oral argument, PL&A;'s counsel argued that Les Dane could not have granted an implied license to defendants because "Prentice Hall had those rights." It is unclear from the record exactly which rights Les Dane assigned to Parker Publishing (Prentice Hall's predecessor), but as explained infra, this determination is ultimately unnecessary.

[26] This does not mean that a use that harms the market for the original work cannot be transformative. A transformative work may well reduce demand for the original work or its derivatives, as in the case of an unfavorable review. See Castle Rock Ent'mt, Inc. v. Carol Publ'g Group, Inc., 150 F.3d 132, 145 (2d Cir. 1998). But the interaction of this first factor with the fourth factor, the effect on the market, is not centered around "whether the secondary use suppresses or even destroys the market for the original work or its potential derivatives, but whether the secondary use usurps or substitutes for the market of the original work. The more transformative the secondary use, the less likelihood that the secondary use substitutes for the original." Id. (emphasis added) (internal citation omitted).

[27] In this respect, the course materials teaching Big League Sales are somewhat analogous to The Seinfeld Aptitude Test, a trivia quiz book that tested its readers' memory of events and characters from the television series Seinfeld. In Castle Rock Entertainment, Inc. v. Carol Publishing Group, Inc., the Second Circuit determined that the purpose of the trivia quiz book was not "to educate, criticize, parody, comment, report upon, or research Seinfeld," as claimed by defendants, but simply "to repackage Seinfeld to entertain Seinfeld viewers." 150 F.3d at 142-43. Specifically, the court held that the trivia book's effort to "capture Seinfeld's flavor in quiz book fashion" was such a minimal alteration of the original expression of Seinfeld as to lack transformative purpose. Id. at 142 (internal quotation marks omitted).

[28] A third aspect of the character of the use is "the propriety of the defendant's conduct," as "[f]air use presupposes good faith and fair dealing." Harper & Row, 471 U.S. at 562-63, 105 S.Ct. at 2231-32 (internal quotation marks omitted) (noting that defendants "knowingly exploited a purloined manuscript"). Evidence of bad faith may be a relevant, but not necessarily dispositive, aspect of the first factor. See Campbell, 510 U.S. at 585 & n. 18, 114 S.Ct. at 1174 & n. 18. Here, the district court found that defendants had acted in "good faith" because they first utilized the book in the 1970s with the permission of the author, "continued such use for decades without any protestations from Dane or Plaintiff," did not conceal their use of the book, did not make unlawful duplicates of the book, and did not fail to attribute the book to Les Dane.

Even if we were to credit the district court's good-faith finding, however, since good faith does not insulate a defendant from liability and is merely a "presupposition" of a defendant's claim to the defense, its existence here would not outweigh the commercial and superseding nature of defendants' use.

[29] In Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir. 1981) (en banc), this court adopted as binding precedent all decisions of the former Fifth Circuit handed down prior to October 1, 1981.

[30] We note that "[t]he converse of this principle does not follow, however: The fact that a work is published does not mean that the scope of fair use is broader." See 1 William F. Patry, Copyright Law & Practice 767 n. 195 (1994)."

[31] See, e.g., William W. Fisher III, Reconstructing the Fair Use Doctrine, 101 Harv. L.Rev. 1659, 1678 (1988). In this respect, the analysis of the third factor, while facially similar in some respects to the threshold inquiry of whether the amount taken is de minimis and therefore does not rise to the level of actionable copying, see supra, is more nuanced. The inquiry is whether the amount taken is reasonable in light of the purpose of the use and the likelihood of market substitution. See Campbell, 510 U.S. at 588, 114 S.Ct. at 1176 (noting that in the context of parody, after determining the amount that is necessary to conjure up the original, determining "how much more is reasonable will depend, say, on the extent to which the [work's] overriding purpose and character is to parody the original or, in contrast, the likelihood that the parody may serve as a market substitute for the original").

[32] As Judge Posner explains, "[I]n economic terminology that has become orthodox in fair-use case law, we may say that copying that is complementary to the copyrighted work (in the sense that nails are complements of hammers) is fair use, but copying that is a substitute for the copyrighted work (in the sense that nails are substitutes for pegs or screws), or for derivative works from the copyrighted work, is not fair use." Ty, Inc., 292 F.3d at 517 (internal citation omitted). See also 3 Melville B. Nimmer & David Nimmer, Nimmer on Copyright, 13-182, § 13.05[A][4] (1994) ("The fourth factor looks to adverse impact only by reason of usurpation of the demand for plaintiff's work through defendant's copying of protectible expression from such work.").

[33] Like the question of fair use overall, this fourth factor is "a mixed question of law and fact." Suntrust Bank, 268 F.3d at 1275 n. 32 (noting that while the fourth factor is not "a purely legal matter," neither is it a "purely factual or evidentiary matter"). To the extent that the fourth factor involves a question of law, we are not generally bound by PL&A;'s evidentiary stipulation.

[34] During the course of discovery, a dispute arose over PL&A;'s refusal to produce financial records from its dental consulting business. The district court, adopting the magistrate judge's recommendation, ordered PL&A; to produce the requested documents. In an apparent effort to avoid their production, PL&A; revised its first amended complaint so as to drop Count 5 entirely and to elect statutory damages, thereby disclaiming actual damages and profits pursuant to 17 U.S.C. § 504(a). See 17 U.S.C. § 504(c)(1) (permitting "an award of statutory damages for all infringements involved in the action, with respect to any one work ... in a sum of not less than $750 or more than $30,000 as the court considers just"). Defendants insisted that the business records remained relevant to their fair use defense, specifically, to the market for Big League Sales. Defendants wished to demonstrate that PL&A;'s profits from the book had been plummeting, and to disprove PL&A;'s claim that it would "market [the book] to Fortune [500] companies" and would "make millions of dollars doing that." PL&A; entered into the stipulation in response to defendants' motion for sanctions.

PL&A;'s subsequent decision to drop its claim for statutory damages was apparently motivated by its belief that it would thus avoid the application of the equitable doctrine of laches. We address this argument in part IV, infra.

[35] There is thus "no protectible derivative market for criticism" because of "the unlikelihood that creators of imaginative works will license critical reviews or lampoons of their own productions." Campbell, 510 U.S. at 592, 114 S.Ct. at 1178. Moreover, a plaintiff's actual licensing activity cannot stake a claim over a derivative market that "creators of original works" would not "in general develop or license others to develop." See Castle Rock Entm't, 150 F.3d at 145 n. 11.

[36] In finding that defendants' course materials actually contributed to the market for the book, the district court overlooked the crucial fact that the control of derivative works is part of a copyright owner's bundle of rights. The course materials may be complementary to the book, but they may also be market substitutes for derivative works of the book. See Ty, Inc., 292 F.3d at 518 ("Were control of derivative works not part of a copyright owner's bundle of rights, it would be clear that [defendant's] books fell on the complement side of the divide and so were sheltered by the fair use defense.").

Furthermore, the fact that PL&A; might "offer a competing course of entirely different substance with its own set of explanations, drills, and other means of teaching the sales techniques," as the district court suggested, misses the point. The inquiry is not whether the market for derivative works has been utterly usurped; it is whether there is a substantial market substitution effect.

[37] Specifically, the course supervisor "does not lecture, nor in any way add his own rendition of the subject." This aspect of the courses "ensur[es] that a student receives only the pure rendition as written or spoken by Mr. Hubbard himself," because the Church believes that "the results obtained in Scientology come only from closely following the technology exactly as written by Mr. Hubbard.... Verbal renditions passed on from teacher to student would inevitably contain alterations from the original, however unintentional, until Scientology's efficacy would be lost." Therefore, the main task of the course supervisor is to "assist the student to apply the study principles developed by L. Ron Hubbard, so that he overcomes any misunderstanding and grasps the meaning directly from the Scripture." In keeping with this idea, and in contrast to the WISE courses, the CSI courses more closely resemble the courses as developed by the Church through the policy letters disseminated by the Hubbard Communications Office.

[38] One might wonder why PL&A; could not claim as market harm the loss of revenue it would earn if defendants were required to license the book for use in the existing CSI courses, which registrars and officers obviously would study. In the absence of evidence that such a licensing market has been developed, however, we are persuaded that "the loss of the licensing fee sought in the case itself does not constitute `market harm.' If it did, circular reasoning would resolve all fair use cases for the plaintiff, who certainly profits less if the defendant wins." Fitzgerald v. CBS Broad., Inc., 491 F.Supp.2d 177, 189 (D.Mass.2007) (citing Ringgold v. Black Entm't Television, 126 F.3d 70, 81 (2d Cir. 1977) ("Since the issue is whether the copying should be compensable, the failure to receive licensing revenue cannot be determinative in the plaintiff's favor.")); see also Am. Geophysical Union v. Texaco, 60 F.3d 913, 931 (2d Cir.1994) ("[I]t is sensible that a particular unauthorized use should be considered `more fair' when there is no ready market or means to pay for the use, while such an authorized use should be considered `less fair' when there is a ready market or means to pay for the use. The vice of circular reasoning arises only if the availability of payment is conclusive against fair use.").

[39] We review the district court's application of the laches defense for abuse of discretion. See Sanders v. Dooly County, 245 F.3d 1289, 1291 (11th Cir.2001). However, the question of whether laches is available as a defense in the context of a copyright infringement case is a pure question of law, which we decide de novo. See Young v. New Process Steel, LP, 419 F.3d 1201, 1203 (11th Cir.2005) ("We decide pure law issues de novo, which is another way of saying that a ruling based on an error of law is an abuse of discretion.") (internal citation omitted).

[40] The statute of limitations, 17 U.S.C. § 507(b), serves only to limit the period of recovery to three years. See Stone v. Williams, 970 F.2d 1043, 1049 (2d Cir.1992) ("Each act of infringement is a distinct harm giving rise to an independent claim for relief.").

[41] The fact that we have permitted laches to bar injunctive relief in trademark cases, see, e.g., Kason Indus., Inc. v. Component Hardware Group, Inc., 120 F.3d 1199, 1207 (11th Cir. 1997), does not compel our holding likewise in the copyright context. Unlike patent and copyright infringement actions, claims brought pursuant to the Lanham Act are not subject to an express statute of limitations, id. at 1203, and unlike the limited terms of protection accorded to patents and copyrights, trademark protection "can be of indefinite duration and laches may correspondingly run for decades." A.C. Aukerman Co. v. R.L. Chaides Constr. Co., 960 F.2d 1020, 1040 (Fed.Cir. 1992) (noting moreover that "the public interest in avoidance of confusion in the market place may lead a court to grant an injunction against trademark infringement on laches alone").

[42] The Fourth Circuit has similarly held that "laches may not be invoked to deny injunctive relief that otherwise would appear appropriate," Lyons P'ship, 243 F.3d at 800, although its reasons for so doing appear to be grounded in the prerequisites of injunctive relief: "A prospective injunction is entered only on the basis of current, ongoing conduct that threatens future harm. Inherently, such conduct cannot be so remote in time as to justify the application of the doctrine of laches." Id. at 798; see also Hampton v. Paramount Pictures Corp., 279 F.2d 100, 105 (9th Cir.1960) (affirming the trial court's finding that the action was not barred by laches where "[o]nly future use of the films is enjoined. Hence, Paramount's knowledge in years past, prior to asserting a specific claim against Hampton, is immaterial. This action is grounded upon the 1955 infringements alone, and was commenced less than nine months thereafter"); Hayden v. Chalfant Press, Inc., 177 F.Supp. 303, 307 (S.D.Cal.1959), aff'd, 281 F.2d 543 (9th Cir.1960) (noting, with respect to plaintiff's claim of copyright infringement, that in contrast to estoppel, which "destroys the very rights which it is sought to assert," laches "might result in denial of equitable relief, such as injunction and recovery of profits. But it would not stand in the way of the granting of damages for the unauthorized copying or of injunction against future violations") (emphasis added).

More recently, the Ninth Circuit, while acknowledging the "generally sound" principle that "even if laches applied, it does not bar a prospective injunction against future infringement," nonetheless has recognized an exception permitting laches to bar a claim for prospective injunctive relief where "the feared future infringements are identical to the alleged past infringements" and are "subject to the same prejudice that bars retrospective relief." See Danjaq L.L.C. v. Sony Corp., 263 F.3d 942, 959 (9th Cir.2001) (denying injunction to bar future sequels and re-releases in the James Bond movie franchise). We find this departure from sound principle to be unwarranted in light of the policy grounds outlined above.

[43] In this case, PL&A; sought to avoid the defense of laches by disclaiming damages and seeking only prospective equitable relief. The district court rebuffed this attempt, citing the Supreme Court case of City of Sherrill v. Oneida Indian Nation of New York for the proposition that "[i]t is well established that laches, a doctrine focused on one side's inaction and the other's legitimate reliance, may bar long-dormant claims for equitable relief." 544 U.S. 197, 217, 125 S.Ct. 1478, 1491, 161 L.Ed.2d 386 (2005). The circumstances of City of Sherrill, however, render it eminently distinguishable from the facts of the case before us. In that case, the Oneida Indian Nation ("the Tribe") sought "declaratory and injunctive relief recognizing its present and future sovereign immunity from local taxation on parcels of land the Tribe purchased in the open market, properties that had been subject to state and local taxation for generations" — since the early 1800s, to be more precise. Id. at 214, 125 S.Ct. at 1489. Specifically, the Tribe's claims were premised on "a federal common law right to Indian homelands." Id. at 210, 125 S.Ct. at 1488 (internal quotation mark omitted). As Justice Stevens had pointed out in a dissent to the opinion in an earlier iteration of the case, the Tribe's "ancient claim at common law" arose "under the federal common law, not under any congressional enactment, and in this context the Court would not risk frustrating the will of the Legislature" if it were to apply laches. County of Oneida v. Oneida Indian Nation, 470 U.S. 226, 261-62, 105 S.Ct. 1245, 1266, 84 L.Ed.2d 169 (1985) (Stevens, J., dissenting). Accordingly, the Court chose to apply laches, explaining that a "claim to a sovereign's prerogative... does `not survive eternally.'" City of Sherrill, 544 U.S. at 221 n. 14, 125 S.Ct. at 1494 n. 14. With respect to PL&A;'s copyright infringement claim, however, "[s]eparation of powers principles ... preclude us from applying the judicially created doctrine of laches to bar a federal statutory claim that has been timely filed under an express statute of limitations." Lyons P'ship, 243 F.3d at 798 ("[W]hen considering the timeliness of a cause of action brought pursuant to a statute for which Congress has provided a limitations period, a court should not apply laches to overrule the legislature's judgment as to the appropriate time limit to apply for actions brought under the statute."). Notwithstanding the Supreme Court's holding in City of Sherrill that laches barred the Tribe's ancient claim at common law to regain Indian homelands, therefore, we are bound in this copyright infringement case by our prior panel precedent that has not been implicitly overruled. See Atl. Sounding Co. v. Townsend, 496 F.3d 1282, 1284 (11th Cir.2007) ("Under our prior panel precedent rule, a later panel may depart from an earlier panel's decision only when the intervening Supreme Court decision is `clearly on point.'") (quoting Garrett v. Univ. of Ala. at Birmingham Bd. of Trs., 344 F.3d 1288, 1290-92 (11th Cir.2003)); see also Fla. League of Prof'l Lobbyists, Inc. v. Meggs, 87 F.3d 457, 462 (11th Cir. 1996) ("[W]e are not at liberty to disregard binding case law that is so closely on point and has been only weakened, rather than directly overruled, by the Supreme Court.").

The district court also cited New Era Publications International v. Henry Holt & Co., 873 F.2d 576, 584-85 (2d Cir. 1989), for the proposition that "equitable considerations [of laches] dictate denial of injunctive relief in this [copyright infringement] action." The persuasive value of New Era Publications International has been considerably weakened by the fact that a district court within the Second Circuit has declined to be strictly bound by its holding, noting that the opinion "fails to mention, much less discuss, the statute of limitations or separation of powers concerns later raised and addressed by Ivani [Contracting Corp. v. City of New York, 103 F.3d 257, 259 (2d Cir.1997)], albeit in the context of a different statute." Price v. Fox Entm't Group, Inc., 2007 WL 241387, at *3 n. 41, 2007 U.S. Dist. LEXIS 6081, at *15 n. 41 (S.D.N.Y. Jan. 26, 2007).

615 F.Supp.2d 575 (2009)

[576] Allison W. Freedman, Christopher D. Landgraff, Jennifer E. Heisinger, Bartlit Beck Herman Palenchar & Scott, LLP, Chicago, IL, John J. Dabney, Paul E. Poirot, Stefan M. Meisner, William H. Barrett, McDermott, Will & Emery, LLP, Seth D. Greenstein, Constantine Cannon, PC, Washington, DC, John M. Hughes, Joseph C. Smith, Jr., Bartlit Beck Herman Palenchar & Scott, LLP, Denver, CO, Kevin M. Bolan, Melise R. Blakeslee, McDermott, Will & Emery, Boston, MA, Mickey T. Webster, W. Craig Robertson, III, Sharon L. Gold, Wyatt, Tarrant & Combs LLP, Lexington, KY, Stanley L. Amberg, Chappaqua, NY, William L. London, III, Static Control Components, Sanford, NC, for Plaintiff/Counterclaim Defendant.

Allen E. Hoover, Bradley Rademaker, Matthew P. Becker, Michael L. Krashin, Robert H. Resis, Binal J. Patel, Christopher J. Renk, Jason S. Shull, Timothy C. Meece, Banner & Witcoff, Ltd., Chicago, IL, Christopher B. Roth, Frederic M. Meeker, Robert F. Altherr, Joseph M. Potenza, Banner & Witcoff, Ltd., Washington, DC, Hada V. Haulsee, Jason C. Hicks, Mark N. Poovey, W. Andrew Copenhaver, Womble, Carlyle, Sandridge & Rice PLLC, Winston-Salem, NC, Charles E. Shivel, Jr., Hanly A. Ingram, Steven Brian Loy, Stoll Keenon Ogden, PLLC, Lexington, KY, for Defendant/Counterclaim Plaintiff.

MEMORANDUM OPINION & ORDER

GREGORY F. VAN TATENHOVE, District Judge.

This matter is before the Court on Static Control Components, Inc.'s Motion to Reconsider Interlocutory Order and Supplemental Opposition to Lexmark's Renewed Motion for Judgment as a Matter of Law on Static Control's Affirmative Defense of Exhaustion [R. 1422].^[1] In this Motion, Static Control seeks to have the Court reconsider its Interlocutory Order at Record [577] 1008 in light of the Supreme Court's most recent statement of the law regarding patent exhaustion, or the first sale doctrine, announced in Quanta Computer, Inc. v. LG Electronics, Inc., ___ U.S. ___, 128 S.Ct. 2109, 170 L.Ed.2d 996 (2008). [Id.] After reading the parties' briefs and hearing oral arguments, this Court agrees that Quanta compels reconsideration and reversal of the aforementioned Order. Quanta has changed the landscape of the doctrine of patent exhaustion generally, and specifically the application of the doctrine to the facts of this case.

I.

Lexmark is a large producer of printers and toner cartridges for its printers. Static Control is "a leading supplier to toner cartridge manufacturers." [R. 172 at 16, Case No. 5:02-571.] The remanufacturers take used toner cartridges, repair them, refill the toner, et cetera, and resell the cartridges to end-user consumers. Static Control sells to the remanufacturers parts and supplies for reworking the used toner cartridges, such as replacement parts, toner, and microchips. [R. 1.] Long ago, in 2002, this litigation began when Lexmark filed suit against Static Control. [5:02-571, R. 1.] Static Control filed a second suit, a declaratory judgment action, on February 24, 2004. [5:04-084, R. 1.]^[2] Since the filing and consolidation of these cases, this action has been appealed; numerous parties have come and gone; amended complaints, counterclaims, and cross-claims have been filed in the record; well over twenty summary judgment motions have been filed and decided, as well as comparable numbers of motions for judgment; and a jury trial has commenced and concluded.

The primary, though not only, theory on which Lexmark alleges direct patent infringement and inducement of patent infringement against Static Control is predicated on Lexmark's employment of single-use restrictions on the majority of cartridges at issue. These "restricted" cartridges have been commonly referred to as "Prebate Cartridges" for the reasons that follow: Lexmark runs what it called at one time its "Prebate Program" and what now is referred to as the "Lexmark Return Program." [R. 594 at 3, n. 4.] In that program, Lexmark's customers buy printer cartridges at an up-front discount in exchange for their agreement to use the cartridges only once and then return the empty cartridges to Lexmark. According to Lexmark, it offers "`regular' toner cartridge[s] for those customers who do not choose the Prebate/Cartridge Return Program toner cartridge[s] with [their] terms." [R. 2 at 8.] Therefore, "Prebate" is temporally the reverse of a rebate.^[3]

[578] In its Order at Record 1008, this Court found that Lexmark's Prebate Program avoided the exhaustion of patent rights normally associated with a patented article's first sale. Stated otherwise, the Court upheld the validity of Lexmark's Prebate Program against Static Control's claims that it should be considered invalid under the patent exhaustion doctrine. It is this decision that Static Control now asks the Court to reconsider.

II.

The authority to reconsider the Interlocutory Order at Record 1008 before final judgment has been entered is well established. Federal Rule of Civil Procedure 54(b) provides that "any order or other decision, however designated, that adjudicates fewer than all the claims or the rights and liabilities of fewer than all the parties does not end the action as to any of the claims or parties and may be revised at any time before the entry of a judgment adjudicating all the claims and all the parties' rights and liabilities." Additionally, in Christianson v. Colt Indus. Operating Corp., 486 U.S. 800, 817, 108 S.Ct. 2166, 100 L.Ed.2d 811 (1988), the Supreme Court stated that "[a] court has the power to revisit prior decisions of its own ... in any circumstance...." Although, "where litigants have once battled for the court's decision, they should neither be required, nor without good reason, permitted to battle for it again," Official Committee of Unsecured Creditors of Color Tile, Inc. v. Coopers & Lybrand, LLP, 322 F.3d 147, 167 (2d Cir.2003) (quoting Zdanok v. Glidden Co., 327 F.2d 944, 953 (2d Cir.1964)), there are certainly instances in which the law of the case changes before a final judgment because of "an intervening change of controlling law." Rodriguez v. Tennessee Laborers Health & Welfare Fund, 89 Fed.Appx. 949, 959 (6th Cir. 2004). Here, the change or clarification in the law provided by the Supreme Court's decision in Quanta justifies revisiting this Court's prior decision that Lexmark's patent infringement claims are not barred by the doctrine of patent exhaustion.

III.

A.

Quanta is the latest in a long and old line of Supreme Court decisions dealing with the consequences of the first sale of a patented item, a doctrine also known as patent exhaustion. Though the terms "patent exhaustion" and "first sale" are used interchangeably, some have called the phrase "patent exhaustion" a "misnomer." F. Scott Kieff, Quanta v. LG Electronics: Frustrating Patent Deals By Taking Contracting Options Off the Table?, 2008 Cato Sup.Ct. Rev. 315, 320 (2007-2008)(quoting Judge Giles S. Rich, Address at Sixth Annual Conference on International Intellectual Property Law & Policy, Fordham University (April 16, 1998)(as quoted in F. Scott Kieff, et al, Principals of Patent Law 1144 (4th ed. 2008))(hereinafter "Rich Address")). Patent rights include "the right to exclude others from making, using, offering for sale, or selling the patented invention." Id. at 320-21 (quoting Rich Address). Those who argue against using the term "patent exhaustion" note that in selling a patented article, the patentee is not exercising his right to exclude others from doing so-patent law is not involved. Id. at 321 (citing Rich Address). Thus, if the patentee is not exercising his patent rights, he cannot be "exhausting" them. Id. (citing Rich Address). The term "first sale," however, focuses attention on the [579] terms of the sale; in this way, it moves us away from patent law and, more appropriately, on to the principles of contract, property, and antitrust law. [See R. 1424, attach. 1 at 5 (Mazumdar, "Supreme Court: Patent Exhaustion Doctrine Applies to Permit Post-Sale Use of Cliamed Methods," The Bureau of National Affairs, Inc., PATENT, TRADEMARK & COPYRIGHT DAILY, June 10, 2008 (quoting Witherspoon)).] And it is this framework that the Court finds most helpful when considering the teachings of Quanta's ancestors.

The Quanta Court begins with a brief survey of its decisions on patent exhaustion, thereby setting forth its own family history of the doctrine. Quanta, 128 S.Ct. at 2115-17. What emerges is a renewed understanding of a principle first set forth before the Civil War.

In 1853, the Supreme Court made its first statement on the law of patent exhaustion with the case of Bloomer v. McQuewan, 55 U.S. 539, 14 How. 539, 14 L.Ed. 532 (1852). Here, the Court was asked to consider the effect of a patent extension on purchasers of patented Woodworth planing machines. Id. at 548. Specifically, the Court considered whether purchasers of licenses to sell or use the planing machines for the duration of the original patent term could continue to use the licenses through the extended term. Id. See Quanta, 128 S.Ct. at 2115. The Court held that purchasers who bought the machine "for the purpose of using it in the ordinary pursuits of life" were not affected by the patent extension. McQuewan, 55 U.S. at 549. See Quanta, 128 S.Ct. at 2115.

In making this decision, the McQuewan Court articulated a distinction between purchasers of the right to manufacture and sell patented articles and purchasers of the right to use such articles. According to the Court, a purchaser of the right to make and vend a patented article

obtains a share in the [patentee's] monopoly, and that monopoly is derived from, and exercised under, the protection of the United States. And the interest he acquires, necessarily terminates at the time limited for its continuance by the law which created it. The patentee cannot sell it for a longer time. And the purchaser buys with reference to that period; the time for which exclusive privilege is to endure being on of the chief elements of its value. He therefore has no just claim to share in a further monopoly subsequently acquired by the patentee. He does not purchase or pay for it.

McQuewan, 55 U.S. at 549. A purchaser of the right to use a patented article in the ordinary pursuits of life, however, "stands on different ground." Id. The Court explained,

In using it, he exercises no rights created by the act of Congress, nor does he derive title to it by virtue of the franchise or exclusive privilege granted to the patentee. The inventor might lawfully sell it to him, whether he had a patent or not, if no other patentee stood in his way. And when the machine passes to the hands of the purchaser, it is no longer within the limits of the monopoly. It passes outside of it, and is no longer under the protection of the act of Congress ... The implement or machine becomes his private, individual property, not protected by the laws of the United States, but by the laws of the State in which it is situated.

Id. at 549-50. Thus, from the beginning the Supreme Court has recognized a difference between end users of patented articles and licensees of the right to make and/or sell those articles.

[580] In Adams v. Burke, 84 U.S. 453, 456, 17 Wall. 453, 21 L.Ed. 700 (1873), the Supreme Court again made a distinction between one who manufactures and sells a patented product and one who purchases it for use. The Court was asked whether a patent holder could restrict post-sale use of his coffin-lids to a limited district, specifically the circle often miles around Boston. The Court stated, "Whatever ... may be the rule when patentees subdivide territorially their patents, as to the exclusive right to make and to sell within a limited territory, we hold that in the class of machines or implements we have described, when they are once lawfully made and sold, there is no restriction on their use to be implied for the benefit of the patentee or his assignees or licensees." Id. at 456-57. Stated otherwise, while the right of Lockhart & Seelye to make and sell the coffin-lids was restricted to the circle often miles around Boston, the right of their customers to use the coffin-lids was not. Id. According to the Court, "[A] purchaser ... of a single coffin acquired the right to use that coffin for the purpose for which all coffins are used." Id. at 456.

The Supreme Court again addressed the issue of patent exhaustion in the case of Henry v. A.B. Dick Co., 224 U.S. 1, 32 S.Ct. 364, 56 L.Ed. 645 (1912). This time, however, the Court held that a patent holder could restrict a purchaser's use of his patented product. The case involved a patented mimeograph sold by the A.B. Dick Company with the license restriction that it could be used only with stencil paper, ink, and other supplies made by the A.B. Dick Company. Id. at 11, 32 S.Ct. 364. The Court explained that, in previous cases, "the statement that a purchaser of a patented machine has an unlimited right to use it for all the purposes of the invention, so long as the identity of the machine is preserved, was made of one who bought unconditionally; that is, subject to no specified limitation upon his right of use." Id. at 19, 32 S.Ct. 364. The Court asserted that "[t]he property right to a patented machine may pass to a purchaser with no right of use, or with only the right to use in a specified way, or at a specified place, or for a specified purpose." Id. at 24, 32 S.Ct. 364. The Court simply required that the purchaser "have notice that he buys with only a qualified right of use." Id. at 26, 32 S.Ct. 364.

Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502, 518, 37 S.Ct. 416, 61 L.Ed. 871 (1917), expressly reversed A.B. Dick Co. In Motion Picture Patents, a patent holder, by means of a plate attached to its patented film projectors, attempted to restrict purchasers' use of the projectors to the display of films made under a patent held by the same company. Id. at 506-7, 37 S.Ct. 416. The Supreme Court described the case as "present[ing] anew the inquiry, which is arising with increasing frequency in recent years, as to the extent to which a patentee or his assignee is authorized by our patent laws to prescribe by notice attached to a patented machine the conditions of its use and the supplies which must be used in the operation of it, under pain of infringement of the patent." Id. at 509, 37 S.Ct. 416. Noting that "the primary purpose of out patent laws is not the creation of private fortunes for the owners of patents," the Court held that

it is not competent for the owner of a patent, by notice attached to its machine, to, in effect, extend the scope of its patent monopoly by restricting the use of it to materials necessary in its operation, but which are no part of the patented invention, or to send its machines forth into the channels of trade of the country subject to conditions as to use or royalty to be paid, to be imposed thereafter at the discretion of such patent owner.

[581] Id. at 511, 516, 37 S.Ct. 416. Indeed, according to the Court, "[t]he patent law furnishes no warrant for such a practice, and the cost, inconvenience, and annoyance to the public which the opposite conclusion would occasion forbid it." Id. at 516, 37 S.Ct. 416.

In Ethyl Gasoline Corporation v. United States, 309 U.S. 436, 60 S.Ct. 618, 84 L.Ed. 852 (1940), a case not discussed in the Quanta Court's overview but briefly mentioned later in the opinion, the Court again referenced the doctrine of patent exhaustion. Ethyl Gasoline Corporation ("Ethyl") "engaged in the manufacture and sale of a patented fluid compound ... which, when added to gasoline used as a motor fuel, increases the efficiency of high pressure combustion engines in which the fuel is consumed." Id. at 446, 60 S.Ct. 618. Ethyl "grant[ed] licenses under its patents to most of the large oil refining companies in the United States, to manufacture, sell and distribute motor fuel containing the patented fluid." Id. at 447, 60 S.Ct. 618. These licenses prohibited the refiners from selling the product to any jobbers other than those licensed by Ethyl. Id. The Government argued that "the control acquired through the licensing agreements over the refiners and jobbers ha[d] been used by [Ethyl] to control the business practices of the jobbers, particularly to maintain resale prices of the patented motor fuel in unlawful restraint of interstate commerce." Id. at 450, 60 S.Ct. 618. The Supreme Court agreed. Citing Adams v. Burke and Motion Picture Patents, among other cases, the Court explained that "[b]y [Ethyl's] sales to refiners it relinquishes its exclusive right to use the patented fluid and it relinquishes to the licensed jobbers its exclusive rights to sell the lead-treated fuel by permitting the licensed refiners to manufacture and sell the fuel to them." Id. at 457, 60 S.Ct. 618. The Court continued: "And by the authorized sales of the fuel by refiners to jobbers the patent monopoly over it is exhausted, after the sale neither appellant nor the refiners may longer rely on the patents to exercise any control over the price at which the fuel may be resold." Id. Though not a broad holding on the doctrine of patent exhaustion, as the Court seemed to suggest that some control over the jobbers may have been lawful, the decision in Ethyl Gasoline Corp. foreshadowed the Court's much broader statement of the doctrine in United States v. Univis Lens Co., 316 U.S. 241, 62 S.Ct. 1088, 86 L.Ed. 1408 (1942).

According to the Supreme Court, before Quanta, it most recently discussed patent exhaustion in Univis. Quanta, 128 S.Ct. at 2116. The case involved the Univis Lens Company ("Lens Company"), which had owned a number of patents related to multifocal lenses. Univis, 316 U.S. at 243, 62 S.Ct. 1088. The Lens Company organized the Univis Corporation ("Corporation") and transferred its interest in the patents to this new entity.^[4] Id. The Corporation licensed the Lens Company to manufacture lens blanks and sell them to designated licensees. Id. Specifically, the Corporation issued licenses to wholesalers, finishing retailers, and prescription retailers. Id. at 244, 62 S.Ct. 1088. The licenses to wholesalers authorized them "to purchase the blanks from the Lens Company, to finish them by grinding and polishing, and to sell them to prescription licensees" at prices fixed by the Corporation. Id. Similarly, the licenses to finishing retailers authorized them to purchase the blanks from the Lens Company, grind and polish them, adjust the lenses to the eyes of consumers, and then sell them to their customers at prices fixed by the Corporation. Id. The Government sought an injunction, [582] claiming that the resale price provisions of this licensing arrangement restrained trade in violation of the Sherman Act. Id. at 242-43, 62 S.Ct. 1088. The Supreme Court "granted certiorari to determine whether Univis' patent monopoly survived the sale of the lens blanks by the licensed manufacturer and therefore shielded Univis' pricing scheme from the Sherman Act." Quanta, 128 Sup.Ct. at 2116. Though the facts of Univis are not particularly relevant to the case at bar, the Court's holding is. The Court held that Univis, after the sale of the lens blanks, could not set the price or "exercise any further control over the article sold." Univis, 316 U.S. at 252, 62 S.Ct. 1088. Rather, "the authorized sale of an article which is capable of use only in practicing the patent is a relinquishment of the patent monopoly with respect to the article sold." Id. at 249, 62 S.Ct. 1088.

Another Supreme Court case addressing the issue of patent exhaustion, one not discussed by the Quanta Court, bears mentioning—Mitchell v. Hawley, 83 U.S. 544, 16 Wall. 544, 21 L.Ed. 322 (1872). Like McQuewan, Mitchell is a patent extension case. In Mitchell, however, the license agreement "expressly stipulated" that the licensee could not sell or grant any license to use the patented machine beyond the expiration of the term of the original patent. Id. at 549. Because of this language in the license agreement, the Court reached a different result, holding that purchasers of the machines for use in the ordinary pursuits of life could not continue to use them through the extended term. Id. at 550. The result in Mitchell seems inconsistent with the results reached in Adams, Motion Picture Patents, and Univis regarding restrictions on the post-sale use of patented products. Language in the Mitchell opinion, however, suggests the Court considered the restriction at issue to be a condition limiting the right to sell, rather than a post-sale restriction on the right of use. For example, the Court wrote that "the grantor under whom the respondents claim never acquired the right to sell the machines and give their purchasers the right to use the same ... beyond the term of the original patent...." Id. In this way, Mitchell is distinguishable from the Court's other cases dealing with the doctrine of patent exhaustion.

Similarly, General Talking Pictures Corp. v. Western Electric Co., 304 U.S. 175, 58 S.Ct. 849, 82 L.Ed. 1273 (1938), another case left out of the Court's patent exhaustion overview, though discussed later in the Quanta opinion, concerns a restriction on the sale of patented products, as opposed to a restriction on post-sale use. In the case, the license from the patent owner prohibited the manufacturer from making its initial sales of the patented amplifiers to commercial users. Id. at 180, 58 S.Ct. 849. Id. Sales to commercial users were thus unauthorized and did not result in patent exhaustion. See Quanta, 128 S.Ct. at 2121.

In sum, the Supreme Court's overview of its history of statements on the law of patent exhaustion reveals that the Court has consistently held that patent holders may not invoke patent law to enforce restrictions on the post-sale use of their patented products. After the first authorized sale to a purchaser who buys for use in the ordinary pursuits of life, a patent holder's patent rights have been exhausted.

B.

Quanta itself reaffirms the Supreme Court's articulation of the doctrine of patent exhaustion as set forth in the cases discussed in the previous section. It represents a change in the law, however, because the Court reasserted a broad understanding of patent exhaustion in the face of Federal Circuit case law that had narrowed the scope of the doctrine. That [583] Federal Circuit case law had been followed as binding precedent by the district courts, including this one.

Quanta involved a portfolio of computer technology patents purchased by LG Electronics, Inc. (LGE), hereinafter referred to as the LGE Patents. Quanta, 128 S.Ct. at 2113. LGE licensed to Intel Corporation a patent portfolio that included the LGE Patents. Id. at 2114. The License Agreement between LGE and Intel authorized Intel to manufacture and sell micropressors and chipsets that practiced the LGE Patents. Id. The License Agreement also provided, however, that no license was granted to Intel's customers to combine Intel products practicing the LGE Patents with non-Intel products. Id. At the same time, the License Agreement purported not to alter the usual rules of patent exhaustion. Id. In a separate agreement (the Master Agreement) between LGE and Intel, Intel agreed to give its customers written notice informing them that Intel's license from LGE did not extend to any products they made by combining an Intel product with a non-Intel product. Id. This Master Agreement further provided that its breach would not be grounds for termination of the patent license from LGE to Intel. Id.

Quanta, a computer manufacturer, "purchased micropressors and chipsets from Intel and received the notice required by the Master Agreement." Id. In spite of the notice, "Quanta manufactured computers using Intel parts in combination with non-Intel memory and buses in ways that practice[d] the LGE Patents." Id. LGE thus filed suit against Quanta, alleging that Quanta's conduct infringed the LGE Patents. Id.

In its review of the case, the Federal Circuit held that the agreement between LGE and Intel avoided the exhaustion of patent rights that usually accompanies a patented product's first sale. LG Electronics, Inc. v. Bizcom Electronics, Inc., 453 F.3d 1364, 1369-70 (Fed.Cir.2006). The Federal Circuit explained that the "`exhaustion doctrine ... does not apply to an expressly conditional sale or license.'" Id. at 1370 (quoting B. Braun Med. Inc. v. Abbott Labs., 124 F.3d 1419, 1426 (Fed.Cir.1997)). The Federal Circuit noted that the "LGE-Intel license expressly disclaims granting a license allowing computer system manufacturers to combine Intel's licensed parts with other non-Intel components." Id. It further noted that the "conditional agreement required Intel to notify its customers of the limited scope of the license, which it did." Id. Thus, according to the Federal Circuit, "[a]lthough Intel was free to sell its micropressors and chipsets, those sales were conditional, and Intel's customers were expressly prohibited from infringing LGE's combination patents." Id. Stated otherwise, the Federal Circuit held that the agreement between LGE and Intel made Intel's sales of the micropressors and chipsets conditional, so that the doctrine of patent exhaustion did not apply and LGE could assert claims of patent infringement against Quanta.

The Supreme Court, however, reversed the decision of the Federal Circuit, holding that patent exhaustion barred LGE's claims against Quanta.^[5] The Court [584] explained that "[e]xhaustion is triggered only by a sale authorized by the patent holder." Quanta, 128 S.Ct. at 2121 (citing United States v. Univis Lens Co., 316 U.S. 241, 249, 62 S.Ct. 1088, 86 L.Ed. 1408 (1942)). While LGE argued—and the Federal Circuit held—that there was no authorized sale because the License Agreement did not permit Intel to sell its products for use in combination with non-Intel products to practice the LGE Patents, the Court noted that nothing in the License Agreement restricted Intel's right to sell products embodying the LGE Patents. Id. Further, according to the Court, though LGE did require Intel to give notice to its customers that LGE had not licensed those customers to practice its patents, Intel's authority to sell was not conditioned on its customers' decision to abide by LGE's directions in that notice. Id. at 2121-22. Thus, the Court found that "[b]ecause Intel was authorized to sell its products to Quanta, the doctrine of patent exhaustion prevents LGE from further asserting its patent rights with respect to the patents substantially embodied by those products." Id. at 2122. In more general terms, "The authorized sale of an article that substantially embodies a patent exhausts the patent holder's rights and prevents the patent holder from invoking patent law to control postsale use of the article." Id. According to the Supreme Court, then, the LGE-Intel agreement did not impose conditions on the sale of the patented products, but rather attempted to impose conditions on the use of those products after a fully authorized sale.

In its Motion to Reconsider, Static Control asserts that "[t]he patent exhaustion doctrine articulated in Quanta invalidates Lexmark's effort to create patent-based use restriction through its postsale Prebate terms, as well as Lexmark's attempt to enforce the Prebate terms under patent law against Static Control." [R. 1422-2 at 6.] This Court Agrees. Like LGE, Lexmark does not impose any restrictions on the sale of its patented products—toner cartridges. Additionally, like LGE, Lexmark attempts to reserve patent rights in its products through post-sale restrictions on use imposed on its customers. This is what Quanta says Lexmark cannot do. As Static Control puts it, "LGE could not preserve its patent rights through a postsale restriction on an authorized sale, even when the subsequent purchaser was on notice of the asserted patent rights." Now, neither can Lexmark. [R. 1422-2 at 6.]

In its Opposition to Static Control's Motion, Lexmark argues that Quanta "did not result in a change of the controlling law relating to conditional sales or patent exhaustion." [R. 1424 at 1.] Instead, Lexmark contends Quanta reaffirmed that patent exhaustion applies to sales that are both authorized and unconditional—and Lexmark asserts that the Prebate terms made the sale of its toner cartridges conditional. This Court agrees with Static Control, however, that, in making this argument, Lexmark confuses the distinction made in Quanta between conditions restricting the right to sell, like the condition in the license agreement between the patent [585] holder and the manufacturer in General Talking Pictures which prohibited the manufacturer from making its initial sales of the patented amplifiers to commercial users, and post-sale conditions on use. Sales of Lexmark Prebate cartridges were unconditional. Anyone could walk into a store carrying Lexmark Prebate cartridges and purchase one. Anyone could purchase Lexmark Prebate cartridges directly from Lexmark through its website.^[6] No potential buyer was required to agree to abide by the Prebate terms before purchasing a cartridge. Thus, sales of Lexmark's Prebate toner cartridges were authorized and unconditional, just like sales of LGE's patented products in Quanta. As such, sales of Lexmark cartridges exhausted Lexmark's patent rights in them, stripping Lexmark of the ability to control post-sale use of the cartridges through patent law.

In upholding the validity of Lexmark's Prebate Program against Static Control's charge of patent exhaustion in the Record at 1008, this Court relied in part on Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed.Cir.1992). Mallinckrodt involved the sale of a patented medical device accompanied by a "single use only" notice. Id. at 701. The district court had referenced patent exhaustion, stating that "policy considerations require that no conditions be imposed on patented goods after their sale and that Mallinckrodt's restriction could not `convert[] what was in substance a sale into a license.'" Id. at 703. The Federal Circuit, however, found that the district court had "erred in its analysis of the law, for not all restrictions on the use of patented goods are unenforceable." Id. For the Federal Circuit, the issue was not one of patent exhaustion. Citing Mitchell v. Hawley, it noted that the legality of restrictive licenses "seems clear." Id. at 704. Instead, the issue was "whether Mallinckrodt's restriction is reasonably within the patent grant, or whether the patentee has ventured beyond the patent grant and into behavior having an anticompetitive effect not justifiable under the rule of reason." Id. at 708.

As Lexmark points out, the Supreme Court did not expressly overrule Mallinckrodt in its Quanta opinion. Academic literature that has followed in the wake of the Quanta decision has grappled with the question of whether the Supreme Court intended to overrule Mallinckrodt. Several authors believe Mallinckrodt is no longer good law. See, e.g., Herbert Hovenkamp, Innovation and the Domain of Competition Policy, 60 Ala. L.Rev. 103, n. 35 (2008). Others have expressed the belief, or the hope, that the Quanta holding is limited to the very specific facts, and the very specific license agreement, that confronted the Court. See, e.g., Matthew W. Siegal and Kevin C. Ecker, Quanta Computer, Inc., et al. v. LG Electronics, Inc.: Patent Exhaustion Restrictions May Not Be ... Exhausted, 14 No. 11 Intell. Prop. Strategist 1 (August 2008). After reviewing Quanta, Mallinckrodt, and the parties' arguments, this Court is persuaded that Quanta overruled Mallinckrodt sub silentio. [586] The Supreme Court's broad statement of the law of patent exhaustion simply cannot be squared with the position that the Quanta holding is limited to its specific facts. Further, the Federal Circuit relied in part on Mallinckrodt in reaching its decision in LG Electronics, Inc. v. Bizcom Electronics, Inc., 453 F.3d 1364, 1369 (Fed.Cir.2006), the decision the Supreme Court reversed in Quanta. It is also worth noting that the Quanta decision did not mention a single Federal Circuit case. As Static Control points out, however, in holding that patent exhaustion applies to method patents, the Supreme Court clearly overruled Federal Circuit precedent on that issue.^[7]

In the Order at Record 1008, this Court, relying on Jazz Photo Corp. v. Int'l Trade Comm., 264 F.3d 1094, 1105 (Fed.Cir. 2001), and B. Braun Med. Inc. v. Abbott Labs., 124 F.3d 1419, 1426 (Fed.Cir.1997), explained that patent exhaustion rests in part on the theory that, after the first sale, the patentee has received its full reward for the use of the article. [R. 1008 at 26.] Lexmark, however, offers its Prebate cartridges at a lower price; it demands a higher price for cartridges sold without any single-use restriction. Thus, this Court reasoned, if sales of Prebate cartridges to end users exhaust Lexmark's patent rights and Lexmark can no longer enforce its single-use restriction, Lexmark does not receive its full reward for its Prebate cartridges. [Id.] In its review of the Quanta case, the Federal Circuit also cited this theory behind the doctrine of patent exhaustion. It explained:

[A]n unconditional sale of a patented device exhausts the patentee's right to control the purchaser's use of the device thereafter. The theory behind this rule is that in such a transaction, the patentee has bargained for, and received, an amount equal to the full value of the goods. This exhaustion doctrine, however, does not apply to an expressly conditional sale or license. In such a transaction, it is more reasonable to infer that the parties negotiated a price that reflects only the value of the "use" rights conferred by the patentee.

LG Electronics, Inc. v. Bizcom Electronics, Inc., 453 F.3d 1364, 1369-70 (Fed.Cir. 2006) (quoting B. Braun Med. Inc., 124 F.3d at 1426). In this way, the Federal Circuit implied that LGE had not received the full value of its patented micropressors and chipsets; rather, it had negotiated a price that reflected only the value of those patented articles so long as they were not used in combination with non-Intel products. As previously stated, however, the Supreme Court reversed the decision of the Federal Circuit, finding that the sale was unconditional and therefore patent exhaustion applied. It did not even mention the notion that LGE may not have received its full reward from the sale of the patented items. Therefore, this Court is now persuaded that, regardless of the fact that Lexmark may not have received the full value of its Prebate cartridges, after Quanta Lexmark may not invoke patent law in order to enforce its Prebate terms.

This is not to say, however, that state contract law may not be invoked. See Quanta, 128 S.Ct. at 2122, n. 7. In the Order at Record 1008, this Court addressed Static Control's argument that, regarding Prebate, Lexmark could not show any meeting of the minds as required by [587] Kentucky contract law, and, therefore, Prebate terms could not constitute valid, enforceable contracts between Lexmark and it customers.^[8] [R. 1008 at 19.] The Court found that "Lexmark's Prebate agreements are akin to contracts of adhesion, so named because the contracts `are offered to the ... consumer on essentially a "take it or leave it" basis without affording the consumer a realistic opportunity to bargain.'" [Id. at 21 (quoting Jones v. Bituminous Cas. Corp., 821 S.W.2d 798, 801 (Ky.1991)).] Additionally, the Court noted that this issue has already been considered by the Court of Appeals for the Sixth Circuit at the preliminary injunction phase. [Id. at n. 13 (citing Lexmark Int'l, Inc. v. Static Control Components, Inc., 387 F.3d 522 (6th Cir.2004)).] In Judge Feikens's opinion concurring in part and dissenting in part, he prophetically described the merits, vel non, of Static Control's "meeting of the minds" argument:

[Static Control] contends that such shrinkwrap agreements are not enforceable. In support of this, at least one amicus brief cites a 2001 Federal Circuit court decision that held there must be a "meeting of the minds" in order for restrictions in the agreement to be enforceable. Other circuits have upheld the validity of shrinkwrap agreements. Here, the shrinkwrap agreement was clear and the district court could find that it supports the conclusion that there was a meeting of the minds and the agreement is enforceable ... Finally, I note this case is factually different from Hewlett-Packard Co. v. Repeat-O-Type Stencil Mfg. Corp. Inc., 123 F.3d 1445 (Fed.Cir.1997), in which the shrinkwrap agreement contained only a warning against refilling, and did not condition the sale^[9] on a promise not to refill.

[Id. at 25 (quoting Lexmark Int'l, Inc., 387 F.3d at 563, n. 10).] Accordingly, this Court denied Static Control's motion for partial summary judgment on the state contract law issue.

On March 5, 2009, Lexmark filed a Notice of Authority [R. 1437] regarding Monsanto Co. v. Scruggs, 2009 WL 536833 (N.D.Miss. Mar. 3, 2009). Monsanto is a seed patent case, and it is important to understand its unique facts. The Monsanto Company used its patented biotechnology to develop herbicide resistant soybeans and cotton. Monsanto Co. v. Scruggs, 459 F.3d 1328, 1332-33 (Fed.Cir.2006). Monsanto began licensing its biotechnology to seed companies, and these licenses imposed certain restrictions. Id. at 1333. For example, seed companies were prohibited from selling seed containing Monsanto's technology to growers who had not signed one of Monsanto's license agreements. Id. Additionally, seed sold to licensed growers could only be used to grow a single commercial crop. Id. Scruggs purchased seeds containing Monsanto's technology from the seed companies without signing a license agreement. Id. After planting the purchased seeds, Scruggs retained the new generation of seeds and used them to plant subsequent generations of crops. Id. Monsanto filed suit against Scruggs for infringement of its patent rights. Id. The district court granted summary judgment in favor of Monsanto, denying Scruggs' cross-motion for summary judgment. Id.

In the order filed in the record by Lexmark, the district court rejected the defendants' argument that it should reconsider [588] its decision to deny them summary judgment in light of the Supreme Court's decision in Quanta. Monsanto Co., 2009 WL 536833, at *1. Lexmark undoubtedly filed it because the court "conclude[d] that defendants read Quanta too broadly." Id. As Static Control points out, however, the facts in Monsanto are readily distinguishable from the facts in Quanta and in this case. The license agreements between Monsanto and the seed companies only permitted sale of the seed to licensed growers. Id. Because Scruggs did not have a license, any sale to him was unauthorized. Id. Neither LGE nor Lexmark restricted the sale of their patented products to licensed purchasers. Further, the district court reminded the parties that

the "first sale" doctrine of exhaustion of the patent right is not implicated, as the new seeds grown from the original batch had never been sold. Without the actual sale of the second generation seed to Scruggs, there can be no patent exhaustion. The fact that a patented technology can replicate itself does not give a purchaser the right to use replicated copies of the technology. Applying the first sale doctrine to subsequent generations of self-replicating technology would eviscerate the rights of the patent holder.

Id. (quoting Monsanto Co., 459 F.3d at 1336)(internal citations and quotation marks omitted). Here, however, Static Control engaged in repair, not reconstruction or "replication" of Lexmark's Prebate cartridges. [See R. 1008 at 18-19.] The district court in Monsanto even permitted an interlocutory appeal from its order due to "the wealth of persuasive authority which posits the opposite conclusion, e.g. that Quanta's holding on the doctrine of patent exhaustion is a substantial limitation on the rights of patent holders." Monsanto Co., 2009 WL 536833, at *2. Accordingly, the Monsanto decision is not persuasive.

In contrast to Monsanto, another recent district court decision reads the Quanta decision very broadly. In LG Electronics, Inc. v. Hitachi, Ltd., 2009 WL 667232, at *8 (N.D.Cal. March 13, 2009), the court found that "the Supreme Court's rationale for its decision supports the conclusion that it meant `authorized sales' to include `authorized foreign sales.'" In the Order at Record 1008, this Court quoted Jazz Photo Corp. for the proposition that

United States patent rights are not exhausted by products of foreign provenance. To invoke the protection of the first sale doctrine, the authorized first sale must have occurred under the United States patent. Our decision applies only to [patented articles] for which the United States patent right has been exhausted by first sale in the United States.

Jazz Photo Corp., 264 F.3d at 1105 (citing Boesch v. Graff, 133 U.S. 697, 701-703, 10 S.Ct. 378, 33 L.Ed. 787 (1890)). This Court interpreted Jazz Photo Corp. to mean that even fully authorized first sales of patented articles overseas do not result in the exhaustion of patent rights. While the issue of overseas sales is not before the Court in the context of Static Control's Motion to Reconsider, the Court notes that, the district court in Hitachi, embracing an expansive view of Quanta, would have likely reached a different conclusion.

IV.

In sum, after Quanta this Court is compelled to reconsider and reverse a decision that at the time was consistent with the Federal Circuit's articulation of the law. Because Lexmark's patent rights in its toner cartridges were exhausted by the authorized, unconditional sales of the cartridges to end users, Lexmark's attempt to impose single-use restrictions on the cartridges fails. The Prebate Program is invalid under patent law.

[589] Accordingly, and the Court being sufficiently advised, it is hereby ORDERED as follows:

1. Static Control's Motion to Reconsider the Interlocutory Order at Record 1008 [R. 1422] is GRANTED;

2. The Court finds that Lexmark's Prebate terms are not enforceable under patent law in light of Quanta Computer, Inc. v. LG Electronics, Inc., ___ U.S. ___, 128 S.Ct. 2109, 170 L.Ed.2d 996 (2008);

3. The Court will schedule a telephonic status conference in this matter by subsequent order.

[1] Lexmark argues that Local Rule 7.1 does not authorize Static Control's Supplemental Opposition to Lexmark's Renewed Motion for Judgment as a Matter of Law on Static Control's Affirmative Defense of Exhaustion. Regardless, the Court denied Lexmark's Renewed Motion for Judgment as a Matter of Law on Static Control's Affirmative Defense of Exhaustion by previous Order [R. 1429], Accordingly, only Static Control's Motion to Reconsider remains before the Court.

[2] It is this later case, 04-084, that became the lead case, and it is the case to which all record citations refer unless otherwise noted.

[3] Over the years, the precise language of Lexmark's Prebate terms printed across the top of Prebate cartridge boxes has varied, with a total of four different versions. [See, e.g., R. 573 at 3.] The terms at issue here read:

RETURN EMPTY CARTRIDGE TO LEXMARK FOR REMANUFACTURING AND RECYCLING

Please read before opening. Opening this package or using the patented cartridge inside confirms your acceptance of the following license agreement. This patented Return Program cartridge is sold at a special price subject to a restriction that it may be used only once. Following this initial use, you agree to return the empty cartridge only to Lexmark for remanufacturing and recycling. If you don't accept these terms, return the unopened package to your point of purchase. A regular price cartridge without these terms is available. [R. 594 at 3-4 (Lexmark provided the Court with a demonstrative cartridge and cartridge box with the above Prebate language, as Lexmark represented it would at Record 519 at 9, n. 13).]

[4] For the purposes of the suit, the Court treated the Lens Company and the Corporation as though they were a single corporation. Univis, 316 U.S. at 243, 62 S.Ct. 1088.

[5] In the case, the Supreme Court first addressed and rejected LGE's argument that the patent exhaustion doctrine was inapplicable in the case because it did not apply to method claims, which were contained in the LGE Patents. Quanta, 128 S.Ct. at 2117. The Court explained, "It is true that a patented method may not be sold in the same way as an article or device, but methods nonetheless may be `embodied' in a product, the sale of which exhausts patent rights." Id. Next, the Court found that the Intel products sufficiently "embod[ied] the essential features of the LGE Patents because they carr[ied] out all the inventive processes when combined, according to their design, with standard components." Id. at 2120. This part of the Quanta Court's holding does not need to be addressed here. This Court held previously that Lexmark's method patent claims are subject to patent exhaustion. Specifically, this Court found that Lexmark's method patents "are so intertwined with the use of the licensed patented article itself that denying a license in the method claims to a user would deprive the user of his non-infringing, bargained-for use of the toner cartridge." [R. 1008 at 41]. Thus, the Quanta Court's holding with respect to method patent claims merely affirms this Court's earlier decision.

[6] In this Court's pre-Quanta discussion of patent exhaustion in the Record at 1008, it found that, for the purposes of patent exhaustion, it should not matter whether a patentee sells its patented articles directly to consumers or first sells to middlemen, such as an office supply store, who in turn sell to consumers. [R. 1008 at 26-27.] The Court explained that "[t]o hold otherwise would create an arbitrary distinction that direct sellers to consumers can maintain restrictive licenses on their patented products while those who happen to get their products to the consumer via middlemen cannot." [Id.] The Court continues to abide by this decision. Therefore, whether Lexmark sells its Prebate cartridges directly to customers through its website or indirectly through middlemen, after Quanta its patent rights have been exhausted.

[7] At the hearing on this matter in September of 2008, Lexmark argued that when the Supreme Court overrules a case it does so expressly. Lexmark provided examples of Supreme Court decisions explicitly overruling conflicting case law. In all of those cases, however, the Supreme Court overruled its own prior decisions, not the decisions of lower courts.

[8] In order for Lexmark to recover under its state law claims, claims that were later dismissed, the existence of valid contracts was essential. [Id. at 20.]

[9] Of course, after Quanta, we understand that the Prebate agreement is not a condition on the sale of the cartridge, but rather a condition on its use.