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| Chilling Effects Clearinghouse > Weather Reports > Scheme to Mislead Software Reseller Results in Loss of Right to Assert Microsoft Copyrights | 
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|  Scheme to Mislead Software Reseller Results in Loss of Right to Assert Microsoft CopyrightsSamuelson Clinic, UC-Berkeley School of Law (Boalt Hall), October 31, 2005 Abstract: On October 4, 2005, in HGI Associates, Inc. v. Wetmore Printing Co. (pdf), 2005 LEXIS 21427 (11th Cir. 2005), the Eleventh Circuit affirmed a district court ruling that Microsoft Corporation’s business partner, Wetmore Printing Co., fraudulently induced computer software reseller HGI Associates, Inc. to enter into sales contracts for Microsoft software. The court upheld the district court’s rulings that the contracts were valid, rejecting Wetmore’s defense that the contracts were against public policy because they would have led to copyright infringement. Under the doctrine of copyright estoppel, the court held that defendant Wetmore could not assert any copyright claim for the software that was the subject of the contracts. HGI Associates (“HGI”) is a computer software and hardware reseller. Wetmore Printing Co. (“Wetmore”) was authorized by Microsoft Corp. (“Microsoft”) to replicate Microsoft software and sell kits to approved distributors and licensees, including Wal-Mart, Compaq, and original equipment manufacturers. Wetmore’s kits typically included copies of relevant software, manuals, and certificates of authenticity, but not licenses or royalties. After Wetmore made a sale, it notified Microsoft Licensing, Inc. (“MLSI”), a subsidiary of Microsoft, which charged the licensing fees. In 2001, HGI contacted Wetmore about the possibility of purchasing Microsoft software. Although both Wetmore and MSLI knew that HGI was not an authorized distributor for Microsoft software, they led HGI to believe it could purchase the software. Microsoft suspected that HGI engaged in software piracy and pretended to be conducting business with HGI in order to investigate HGI’s activities. Microsoft recorded meetings with HGI and attempted to induce HGI to admit it was distributing Microsoft software without a license. Despite these suspicions, Wetmore entered into contracts with HGI in which Wetmore agreed to supply Microsoft software to HGI. However, nowhere in the contracts or otherwise did Wetmore or MLSI indicate to HGI that a separate licensing fee would apply. To the contrary, when HGI stated its belief it that needed no further license to distribute the Microsoft software, Wetmore and MLSI remained silent. In anticipation of increased business as a result of striking this deal with Wetmore, HGI took out a three-year lease on new warehouse space. After small initial partial shipments and stringing HGI along for over a month with promised shipments, Wetmore stopped shipments altogether and asked for the return of the product already shipped, stating there had been a “mistake.” HGI sued Wetmore for breach of contract. The Eleventh Circuit affirmed the district court’s 2004 ruling that the contracts between HGI and Wetmore were valid and that Wetmore intentionally misled HGI into believing it was buying Microsoft software that required no further licensing fee. Wetmore defended itself by saying the contracts were invalid because HGI’s resales of Microsoft software would have been unlicensed and therefore infringing on copyrights, which is against public policy. The Eleventh Circuit dismissed this argument, stating the contracts were “agreement[s] to purchase licensed and approved software.” Wetmore’s position was a “greater threat to public policy” in that it was analogous to a car seller “intentionally [attempting to] avoid contractual liability to sell a car by claiming the car he would have sold was in fact stolen and thus an illegal contract that violates public policy.” The Eleventh Circuit applied the doctrine of copyright estoppel to find that the actions of Wetmore and MLSI estopped all copyright claims based on the Microsoft software that was the subject of the contracts. “Copyright estoppel applies when . . . (1) the copyright owner knew the facts of the infringement, (2) the copyright owner intended its conduct to be acted upon or the copyright owner acted such that the alleged infringer has a right to believe it was so intended, (3) the alleged infringer is ignorant of the true facts, and (4) the alleged infringer relies on the copyright owner’s conduct to his own detriment.” Moreover, “silence and inaction” on the part of the copyright owner can lead to copyright estoppel. All four elements of copyright estoppel were present here. Wetmore knew that HGI did not have a license, intentionally misled HGI knowing HGI would purchase the software as soon as allowed to do so, and remained silent when HGI stated its belief that it did not need a license. HGI relied to its detriment on Wetmore’s conduct in leasing warehouse space and lining up customers. The district court awarded punitive damages to HGI but denied HGI’s claim for $16.7 million in future lost profits for the undelivered software because such profits were “speculative and conjectural.” The Eleventh Circuit held that punitive damages set by the district court were proper because of Wetmore’s acts of fraud, but reversed and remanded the case on the issue of future lost profits because it was possible to determine HGI’s future lost profits with “reasonable certainty.” A link to the Eleventh Circuit’s opinion can be found at http://www.ca11.uscourts.gov/opinions/ops/200411931.pdf.
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