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Ninth Circuit Uses Copyright Law to Slam Independent Service Organizations

July 1993

In a highly unusual and unprecedented decision, the Ninth U.S. Circuit Court of Appeals in California has held that Peak Computer, Inc., an independent service organization (“ISO”) infringed the copyright in a computer manufacturer’s operating system by the mere act of turning on the computer in order to service it.

In past issues we have reported extensively on court battles between computer manufacturers and ISOs. We’ve observed that manufacturers, faced with narrowing sales margins, are trying to recapture market share they once owned in the lucrative service market for their equipment. These companies have made strategic business moves designed to make it more difficult — or even impossible — for independent service companies to compete with them. The ISOs have responded, with some success, by striking back with antitrust lawsuits challenging these strategies.

MAI is a computer manufacturer that owns the copyright in its operating systems software. MAI’s software license does not permit the use or copying of MAI software by third parties.

Peak, an ISO, provided third-party maintenance for various computer systems, including MAI’s computers. MAI sued Peak, charging that every time Peak serviced an MAI Computer, parts of the MAI system software were copied into RAM, and the creation of these copies violated MAI’s copyright. Surprisingly, both the trial court, and on appeal the Ninth Circuit, accepted MAI’s argument.

How did the courts reach the conclusion that turning on a computer to service it violated the copyright laws? The answer lies in an obscure provision of the copyright statute. In essence, the law states that a “copy” is an object in which a work is fixed “for a period of more than transitory duration.” The court of appeals held that when MAI’s operating system was loaded into RAM it was clearly “fixed” for some extended period of time and therefore the fixation was more than transitory. In our view, this part of the decision is subject to question. There is a strong technical argument (and some legal precedent) for the proposition that loading a program into RAM results in only a temporary fixation, and should not satisfy the “more than transitory” requirement of the statute.

Peak also argued that even if there was an extended period of fixation, its conduct was permitted by another section of the law, which states that it is not an infringement for an “owner” of software, or the owner’s authorized representative, to copy a computer program as “an essential step in the utilization of the computer program.” Peak argued that on every occasion when it serviced a computer, it was an authorized representative of its customer, who was an owner of the software. However, the court held that since MAI’s customers only licensed MAI’s operating system (software is generally licensed, not sold), the customers were not owners, and they could not authorize Peak, as their representative, to copy the operating system into memory. Again, we think that the court made an overly technical distinction. By ignoring the fact that the overwhelming majority of software users are “licensees,” not “owners,” the court has almost certainly ruled contrary to the intent, if not the letter, of the drafters of the copyright statute.

TLB Comment : Although the Ninth Circuit’s decision is extremely significant, MAI may have won only a battle, not the war. Following the decision MAI sent cease and desist letters to a number of ISOs, warning them that they would be committing copyright infringement if they continued to service MAI hardware. Six ISOs have responded by filing suit in federal court in Virginia, charging MAI with misusing its copyright in its operating system, in violation of the antitrust laws.