United States Court of Appeals
For the First Circuit
No. 93-1637
DATA GENERAL CORPORATION, ET AL.,
Plaintiffs, Appellees,
v.
GRUMMAN SYSTEMS SUPPORT CORPORATION,
Defendant, Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Walter Jay Skinner, Senior U.S. District Judge]
Before
Torruella, Cyr and Stahl,
Circuit Judges.
Charles A. Gilman, with whom Cahill, Gordon & Reindel, Robert A.
Alessi, Marshall Cox, Allen S. Joslyn, Immanuel Kohn, William T.
Lifland, Gerard M. Meistrell, Roy L. Regozin, Dean Ringel, Laurence T.
Sorkin, Goodwin, Procter & Hoar, and Coudert Brothers, were on brief
for appellant.
Robert S. Frank, Jr., with whom Robert M. Buchanan,Jr.,
Brian A. Davis, Choate, Hall & Stewart, Jacob Frank, and Morris G.
Nicholson, were on brief for appellees.
September 14, 1994
STAHL, Circuit Judge. Grumman Systems Support
STAHL, Circuit Judge.
Corporation ("Grumman") assigns error to the district court's
handling of litigation arising from Grumman's acquisition,
duplication, and use of MV/Advanced Diagnostic Executive
System ("ADEX"), a sophisticated computer program developed
by Data General Corporation ("DG") to diagnose problems in
DG's MV computers. DG claimed that Grumman had infringed
DG's ADEX copyrights and misappropriated trade secrets
embodied in ADEX. A jury agreed, awarding DG $27,417,000 in
damages (excluding prejudgment interest and attorney's fees).
Grumman contends that the district court prematurely
dismissed its affirmative defenses and counterclaims and
committed several errors during and after the trial.
While this case raises numerous issues touching on
copyright law, Grumman's most intriguing argument --
presented below as both a defense and a counterclaim -- is
that DG illegally maintained its monopoly in the market for
service of DG computers by unilaterally refusing to license
ADEX to Grumman and other competitors. The antitrust claims
are intriguing because they present a curious conflict,
namely, whether (and to what extent) the antitrust laws, in
the absence of any statutory exemption, must tolerate short-
term harm to the competitive process when such harm is caused
by the otherwise lawful exercise of an economically potent
"monopoly" in a copyrighted work.
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After a careful analysis, we affirm on all but one
relatively minor issue concerning the calculation of damages.
I.
BACKGROUND1
BACKGROUND
DG and Grumman are competitors in the market for
service of computers manufactured by DG, and the present
litigation stems from the evolving nature of their
competitive relationship. DG not only designs and
manufactures computers, but also offers a line of products
and services for the maintenance and repair of DG computers.
Although DG has no more than a 5% share of the highly
competitive "primary market" for mini-computers, DG occupies
approximately 90% of the "aftermarket" for service of DG
computers. As a group, various "third party maintainers"
("TPMs") earn roughly 7% of the service revenues; Grumman is
the leading TPM with approximately 3% of the available
service business. The remaining equipment owners (typically
large companies in the high technology industry) generally
maintain their own computers and peripherals, although they
occasionallyneed outsideservice ona"time andmaterials" basis.
1. Because the bulk of the fact-related issues on appeal
concern the district court's analysis of the record on
summary judgment, we generally present the evidence in a
light most favorable to Grumman. See, e.g., Levy v. FDIC, 7
F.3d 1054, 1056 (1st Cir. 1993). Naturally, where the story
touches on matters necessarily decided by the jury, we
present the evidence in a manner most favorable to DG. See,
e.g., Toucet v. Maritime Overseas Corp., 991 F.2d 5, 11 (1st
Cir. 1993) (review of jury's damage award).
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A. Computer Service: Outputs and Inputs
Support service for DG computers entails a variety
of activities and a corresponding array of goods and
services. The principal activities are maintenance and
repair of computer equipment. Maintenance includes care of
parts subject to failure as well as replacement of hardware
components to bring equipment up to date. Repair involves
the diagnosis and correction of hardware failure. Service
technicians remedy equipment problems either by actually
mending a malfunctioning part (e.g., reformatting a "broken"
disk drive) or replacing the part.
Each of these support service "outputs" benefit
from a range of "inputs." For example, engineering change
orders, along with certain documentation and parts, allow
service technicians to make technological updates to computer
hardware. In order to identify the existence and location of
a malfunctioning part, a service technician may use
diagnostics (now increasingly sophisticated software),
schematics (maps of the location and function of hardware
elements), and various types of documentation, together with
the technician's own experience acquired by diagnosing
equipment problems. In order to actually mend a
malfunctioning part, a technician might fix the part on the
spot with routine tools or sophisticated software (e.g., a
software diagnostic that can reformat a disk drive), or send
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the part to a repair depot run either by the technician's
employer or another service organization. The repair of a
malfunctioning part often requires very detailed information
about the part (such as the information provided by
schematics and other documentation), and may in turn require
smaller replacement parts. Finally, replacement of parts
naturally requires the availability of spares. At the core
of this litigation is a dispute about Grumman's access to
software diagnostics and other service "tools" produced by DG
for use in the repair, upgrading, and maintenance of DG
equipment.
B. TPM Access to Service Inputs
DG's policies concerning TPM access to DG's service
tools have developed over time. As described below, DG's
policies have evolved through three stages.
1. Initial Suspicion
TPMs made their debut in the 1970s while DG was
still relatively new to the computer manufacturing market.
DG was suspicious of the ability of TPMs, often run and
staffed by former DG technicians, to service DG computers
without running afoul of DG's intellectual property rights or
confidentiality agreements binding on former DG employees.
In 1975, DG converted its suspicions into legal
claims, filing suit against Lloyd Root and Robert Montgomery,
two of its former employees, as well as Computer Systems
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Support Corporation ("CSSC"), the TPM that Root and
Montgomery had founded after leaving DG.2 DG's principal
allegations were that Root and Montgomery had breached their
employment agreements by taking DG information with them when
they left DG, and that CSSC personnel had been making
unauthorized use of DG proprietary information. It was
unclear, however, whether the proprietary items that CSSC was
using were items sold or licensed to equipment owners
(pursuant to agreements which arguably permitted some use by
TPMs),3 or items taken directly from DG by Root and
Montgomery.
Lacking promising proof to support its claims, DG
proposed a settlement whereby CSSC would agree to return any
proprietary information that Root and Montgomery unlawfully
took from DG, and DG would expressly authorize CSSC (and its
successors) to use DG proprietary information in the
maintenance and repair of DG computers.4 CSSC accepted, and
2. For the sake of simplicity, we will refer to all three of
the 1975 defendants as "CSSC."
3. There is some evidence that during the 1970s DG sold or
licensed proprietary information to equipment owners under
agreements which permitted owners to allow third parties to
use that information to service the owners' computers.
4. DG and Grumman (which acquired CSSC in 1984) vigorously
dispute the precise scope of this authorization. See infra
Sections II.C.1.a and III.A.3.
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the parties signed a settlement agreement in 1976 ("the
Settlement Agreement").5
2. Peaceful Coexistence
From 1976 until some point in the mid-1980s, DG
affirmatively encouraged the growth of TPMs with relatively
liberal policies concerning TPM access to service tools. DG
sold or licensed diagnostics directly to TPMs, and allowed
TPMs to use diagnostics sold or licensed to DG equipment
owners. DG did not restrict access by TPMs to spare parts
manufactured by DG or other manufacturers. DG allowed (or at
least tolerated) requests by TPMs for DG's repair depot to
fix malfunctioning circuit boards, the heart of a computer's
central processing unit ("CPU"). DG sold at least some
schematics and other documentation to TPMs. DG also sold
TPMs engineering change order kits. And finally, DG training
classes were open to TPM field engineers. Grumman suggests
that DG's liberal policies were beneficial to DG because
increased capacity (and perhaps competition) in the service
aftermarket would be a selling point for DG equipment.6
3. Increased Restrictions
5. Another provision of the Settlement Agreement prohibited
CSSC from using DG proprietary information in the design or
manufacture of computer equipment. That provision is not at
issue in this case.
6. Grumman acquired CSSC in 1984, thereby becoming a
successor in interest to CSSC's rights under the 1976
Settlement Agreement.
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In the mid-1980s, DG altered its strategy. With
the goal of maximizing revenues from its service business, DG
began to refuse to provide many service tools directly to
TPMs. DG would not allow TPMs to use the DG repair depot,
nor would it permit TPMs to purchase schematics,
documentation, "change order" kits, or certain spare parts.
DG no longer allowed TPM technicians to attend DG training
classes. Finally, DG developed and severely restricted the
licensing of ADEX, a new software diagnostic for its MV
computers. The MV series was at once DG's most advanced
computer hardware and an increasingly important source of
sales and service revenue for DG.
A number of items unavailable to TPMs directly from
DG were either available to all equipment owners (even
customers of TPMs) from DG, or were available to TPMs from
sources other than DG. For example, DG depot service, change
order kits, and at least some documentation were available to
all equipment owners. There is also evidence that Grumman
had its own repair depot and that Grumman could make use of
repair depots run by other service organizations (sometimes
called "fourth party maintainers"). Likewise, there is
evidence that TPMs could purchase at least some spare parts
from sources other than DG.
The situation was different with respect to ADEX.
DG service technicians would use ADEX in performing service
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for DG equipment owners. DG would also license ADEX for the
exclusive use of the in-house technicians of equipment owners
who perform most of their own service.7 However, DG would
not license ADEX to its own service customers or to the
customers of TPMs. Nor was ADEX available to TPMs from
sources other than DG. At least two other diagnostics
designed to service DG's MV computers may have become
available as early as 1989, but no fully functional
substitute was available when this case was tried in 1992.
Grumman found various ways to skirt DG's ADEX
restrictions. Some former DG employees, in violation of
their employment agreements, brought copies of ADEX when they
joined Grumman. In addition, DG field engineers often stored
copies of ADEX at the work sites of their service customers,
who were bound to preserve the confidentiality of any DG
proprietary information in their possession. Although DG
service customers had an obligation to return copies of ADEX
to DG should they cancel their service agreement and switch
to a TPM, few customers did so. It is essentially undisputed
that Grumman technicians used and duplicated copies of ADEX
left behind by DG field engineers. There is also
uncontroverted evidence that Grumman actually acquired copies
of ADEX in this manner in order to maintain libraries of
7. This latter group is comprised of Cooperative Maintenance
Organizations ("CMOs").
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diagnostics so that Grumman technicians could freely
duplicate and use any copy of ADEX to service any of
Grumman's customers with DG's MV computers.
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C. The Present Litigation
In 1988, DG filed suit against Grumman in the
United States District Court for the District of
Massachusetts.8 DG patterned its suit after a similar
action it brought against Service & Training, Inc. ("STI") in
the United States District Court for the District of
Maryland. See Service & Training, Inc. v. Data General
Corp., 737 F. Supp. 334 (D. Md. 1990), aff'd on other
grounds, 963 F.2d 680 (4th Cir. 1992) ("STI"). STI was
another TPM in the DG aftermarket and a successor to
Montgomery's interest in the 1976 Settlement Agreement. In
one count, DG alleged that Grumman's use and duplication of
ADEX infringed DG's ADEX copyrights, and requested injunctive
relief, 17 U.S.C. 502 (1988), as well as actual damages and
profits, 17 U.S.C. 504(b) (1988). In another count, DG
alleged that Grumman had violated Massachusetts trade secrets
law by misappropriating copies of ADEX in violation of
confidentiality agreements binding on former DG employees and
DG service customers. On December 29, 1988, the district
court issued a preliminary injunction prohibiting Grumman
8. Grumman subsequently filed an action in the United States
District Court for the Northern District of California
alleging that DG had violated California's antitrust laws.
See Grumman Sys. Support Corp. v. Data General Corp., 125
F.R.D. 160 (N.D. Cal. 1988). That court later dismissed
Grumman's action on the grounds that the claim was a
compulsory counterclaim to DG's copyright infringement action
pending in the District of Massachusetts. Id.
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from using ADEX. See Data General Corp. v. Grumman Sys.
Support Corp., No. 88-0033-S (D. Mass. Dec. 29, 1988)
("Grumman I").9 The parties then prepared for trial.10
1. Pre-Trial Issues
Grumman raised a host of affirmative defenses and
counterclaims, all eventually rejected by the district court
in response to DG's motions for partial summary judgment.
Three of these issues play a pivotal role in Grumman's
appeal.
a. 1976 Settlement Agreement
Grumman alleged that the 1976 Settlement
Agreement authorized it (as a successor to CSSC) to "acquire,
possess, copy and use" all DG diagnostics, including ADEX.
Liberally construed, Grumman's allegation of a right to "copy
and use" ADEX fairly includes an allegation that Grumman has
9. The jury subsequently found that Grumman continued to use
ADEX in violation of the injunction. That finding is
unchallenged on appeal.
10. In the course of the pre- and post-trial litigation, the
district court issued a series of published and unpublished
opinions which contain additional background material. See,
e.g., Data General Corp. v. Grumman Sys. Support Corp., 761
F. Supp. 185 (D. Mass. 1991) ("Grumman II"); Data General
Corp. v. Grumman Sys. Support Corp., No. 88-0033-S (D. Mass.
May 2, 1991) ("Grumman III"); Data General Corp. v. Grumman
Sys. Support Corp., 795 F. Supp. 501 (D. Mass. 1992)
("Grumman IV"); Data General Corp. v. Grumman Sys. Support
Corp., 834 F. Supp. 477 (D. Mass. 1992) ("Grumman V"); Data
General Corp. v. Grumman Sys. Support Corp., 825 F. Supp. 340
(D. Mass. 1993) ("Grumman VI"); Data General Corp. v. Grumman
Sys. Support Corp., 825 F. Supp. 361 (D. Mass. 1993)
("Grumman VII").
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a right to copy and use DG diagnostic software in the
possession of DG equipment owners. Judge Skinner rejected
the Settlement Agreement defense by adopting the reasoning of
the STI courts, which had rebuffed the same arguments on a
nearly identical record. See Grumman V, 834 F. Supp. at 482-
83. In the district court decision in STI, Judge Motz
analyzed the language of the Settlement Agreement, testimony
from the lawyers who negotiated it, and evidence of the
parties' subsequent conduct. 737 F. Supp. at 339-41. On the
basis of this evidence, Judge Motz concluded that the
Settlement Agreement did not require DG to license any
proprietary information to CSSC or its customers, nor did the
Settlement Agreement prevent DG from prohibiting CSSC from
copying and using proprietary information in the custody of
DG service customers. Id.11
b. Antitrust Defenses
Grumman also claimed that DG could not maintain its
infringement action because DG had used its ADEX copyrights
to violate Sections 1 and 2 of the Sherman Antitrust Act, 15
U.S.C. 1 and 2 (1988 & Supp. IV 1992).12 Specifically,
Grumman charged that DG misused its copyrights by (1) tying
11. Although the reasoning of the Fourth Circuit's
affirmance differed from that of Judge Motz on other issues,
the two courts appear to have been in total agreement with
respect to the Settlement Agreement issue.
12. Grumman presented the antitrust claims as independent
counterclaims as well.
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the availability of ADEX to a consumer's agreement either to
purchase DG support services (a "positive tie") or not to
purchase support services from TPMs (a "negative tie"), and
(2) willfully maintaining its monopoly in the support
services aftermarket by imposing the alleged tie-in and
refusing to deal with TPMs.
Concerning the tying claim, the district court
again adopted the reasoning of the Fourth Circuit in STI,
this time for the proposition that there was insufficient
proof of a tying agreement to withstand summary judgment.
Grumman V, 834 F. Supp. at 484-85. The Fourth Circuit held
that there was no positive tie for two independent reasons.
First, the court noted that DG did not actually license ADEX
to its service customers. STI, 963 F.2d at 686-87. Second,
the court held that there was not enough evidence to prove
that any license to use ADEX was conditioned on the purchase
of DG support services. Id. at 687. The court noted that
there was no explicit tying condition in any written
agreement. Id. The court also noted that there was
insufficient evidence of unwilling purchases of DG support
service so as to justify an inference of an implicit
condition; customers may simply prefer service supported by
ADEX diagnostics over service that is not. Id. at 687-88.
The court further held that there was insufficient evidence
of a negative tie because, on the record before the court,
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"[t]he fact that CMOs do not purchase repair services . . .
is at least as consistent with the legitimate and independent
business decision not to purchase unneeded services as it is
with an agreement not to purchase such services." Id. at
686.
Judge Skinner conducted his own exhaustive analysis
of the monopolization claim, concluding that Grumman failed
to "assert[] any facts that would indicate that DG has
engaged in any unlawful exclusionary conduct." Grumman II,
761 F. Supp. at 192. The court essentially narrowed the
question to whether DG's restrictive policies with respect to
TPMs constitute unlawful unilateral refusals to deal,
reasoning that DG's actions do not rise to the level of
unlawful exclusionary conduct for several reasons. The court
agreed with Grumman that this case, like Aspen Skiing Co. v.
Aspen Highlands Skiing Corp., 472 U.S. 585 (1985), raises
"the issue of prior promotion of competition in a market that
is later halted," Grumman II, 761 F. Supp. at 190. The
district court nonetheless concluded that Grumman had failed
to demonstrate that DG's restrictive policies have
unreasonably harmed the competitive process. In particular,
the court noted that DG's policies with respect to most
service products do not prevent TPMs from competing in the
service market because "DG will sell its service products,
except [ADEX and schematics], to any ultimate consumer
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regardless of whether [the consumer] now or later use[s] a
TPM." Id. at 191. The court also observed that "TPMs have
demonstrated the ability to develop diagnostics [without
schematics], even if they are not as efficient as MV/ADEX."
Id. Lastly, the court suggested that the Sherman Act would
not compel DG to disclose its schematics, in part because
such compulsory disclosure would undermine the incentives of
copyright and patent laws. Id. at 192.13
In rejecting Grumman's motion for reconsideration
of the grant of summary judgment on the monopolization claim,
the district court also directly addressed Grumman's
contention that DG's refusal to license ADEX to TPMs
constitutes exclusionary conduct. The court stated that DG's
refusal to license ADEX to TPMs was not exclusionary because
"DG offers to the public a license to use MV/ADEX on any
computer owned by the customer," and therefore DG "`did not
withhold from one member of the public a service offered to
the rest[.]'" Grumman III, slip op. at 5 (citing Olympia
Equip. Leasing Co. v. Western Union Tel. Co., 797 F.2d 370,
377 (7th Cir. 1986), cert. denied, 480 U.S. 934 (1987)).
c. Federal Preemption of State Trade Secrets
Claim
13. The district court also held that neither ADEX nor DG's
schematics were "essential facilities" that DG (as a
monopolist in the service aftermarket) must share with its
competitors. Id. at 191-92. Grumman does not assign error
to this aspect of the district court's decision.
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Grumman unsuccessfully sought to convince the
district court that Section 301 of the Copyright Act of 1976,
17 U.S.C. 301 (1988 & Supp. IV 1992), preempts DG's state
law action for misappropriation of trade secrets. The
district court held that DG's trade secrets claim was not
preempted because DG did not simply allege conduct equivalent
to the copying and use which form the basis of an
infringement claim; instead, DG's trade secrets claim was
based on Grumman's acquisition of ADEX in violation of
confidentiality agreements binding on former DG employees and
service customers. Grumman IV, 795 F. Supp. at 507.
2. Trial Issues
Stripped of its affirmative defenses, Grumman
proceeded to trial. Grumman focused its defensive energies
in two areas. Grumman attacked DG's proof of the prima facie
elements of copyright infringement and misappropriation of
trade secrets, and attempted to undermine DG's broad-gauged
request for compensation for lost profits and disgorgement of
Grumman's MV-related profits.
a. Validity of Copyright Registration
During the trial, it became evident that DG had
made several errors in registering its ADEX copyrights.
After Edward Gove, a DG official, testified that DG had
deposited with the Copyright Office the correct excerpts of
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human-readable "source code,"14 Grumman introduced evidence
that there were some errors in the deposits for the first
three versions of ADEX. In rebuttal testimony, Gove
confirmed that there were a number of minor, inadvertent
errors in the deposits that would not affect the operation of
the programs.15
Grumman argued to the district court that any error
in a copyright deposit renders the registration invalid, and
requested that the court so instruct the jury. The district
court refused, instructing the jury instead that minor,
inadvertent errors in the deposit of excerpts of computer
code do not threaten the validity of the copyright
registration. As a fall-back tactic, Grumman renewed its
previous request that the district court compel DG to produce
the entire human-readable source code for each version of
ADEX so that Grumman could more effectively cross-examine
Gove about the significance of the errors. The district
court refused to do so, and later explained its discretionary
decision by finding that "Grumman had an adequate opportunity
14. "Source code" refers to an annotated text, written in a
programming language intelligible to humans, that represents
the set of instructions comprising a particular computer
program. See Computer Assocs. Int'l, Inc. v. Altai, Inc., 22
F.3d 32, 33 n.1 (2d Cir. 1994); Johnson Controls, Inc. v.
Phoenix Control Sys., Inc., 886 F.2d 1173, 1175 n.2 (9th Cir.
1989). "Object code" refers to the text of the same set of
instructions, translated into binary form (a sequence of
zeros and ones) intelligible to the computer itself. See id.
15. The errors are described infra, note 23.
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to explore the errors contained in the initial copyright
deposits, to challenge Data General's explanation of those
errors, and to argue these issues before the jury." Grumman
VI, 825 F. Supp. at 352. Using a special verdict form, the
jury found that DG had properly registered each of the ADEX
copyrights.
b. Actual Damages and Profits
Grumman argued that the jury should identify and
ignore that portion of Grumman's profits which was not
attributable to Grumman's use of ADEX. To this end, Grumman
introduced evidence that some of its revenues were derived
from servicing DG computers that cannot or need not be
serviced with ADEX, and that the value of Grumman's use of
ADEX to service customers with MV computers was distinct from
the value of other products and services Grumman provided to
those customers.
In contrast, DG offered evidence that because
equipment owners prefer to purchase all service from one
vendor, equipment owners with both MV computers and other DG
computers ("mixed-equipment customers") would not have
purchased service from Grumman if Grumman had lacked access
to ADEX. DG also offered evidence tending to show that, even
if Grumman did not always use ADEX in servicing a computer,
Grumman could not have attracted and retained its MV-related
business had it not been for Grumman's use of ADEX. DG's
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expert witness opined that DG's damages totaled $28,003,000 -
- $26,364,000 in DG's lost profits and $1,639,000 in
nonduplicative profits16 earned by Grumman as a result of
its acquisition and use of ADEX.
Attempting to blunt at least part of DG's sweeping
"but for" theory, Grumman asked the district court to
instruct the jury to discount that portion of Grumman's
profits which was not attributable to the infringement. The
court instructed the jury that DG could recover that portion
of Grumman's profits that was "attributable to the
infringement," but did not elaborate on the jury's task in
this regard. Left to choose between the parties' theories,
the jury apparently accepted the essence of DG's theory,
though the total award of compensatory damages was
$27,417,000, somewhat less than DG requested.17
3. Post-Trial Issues
Grumman sought relief from the judgment on a number
of grounds, two of which are most relevant to this appeal.
a. Actual Damages and Profits
16. "Nonduplicative profits" are those profits earned by
Grumman that would not have been available to DG in the
absence of Grumman's wrongful conduct. See 17 U.S.C.
504(b) (providing that copyright owner may "recover . . . any
profits of the infringer that are attributable to the
infringement and are not taken into account in computing the
actual damages").
17. On the verdict slip, the jury assessed the same amount
of damages -- $27,417,000 -- for Grumman's misappropriation
of trade secrets.
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Claiming that the jury's award was speculative and
excessive, Grumman moved for a new trial or, in the
alternative, remittitur. See Fed. R. Civ. P. 59(a). As the
district court related:
Grumman complains that the jury awarded
speculative and excessive damages because
it uncritically adopted the plaintiff's
damage analysis in its entirety which was
built on theoretically unsound and
factually inaccurate assumptions. More
specifically, defendant contends that the
plaintiff's damage analysis failed to
identify relevant revenues, failed to
apply a reasonable profit margin, and
failed to apportion service profits
between infringing and non-infringing
activities.
Grumman VI, 825 F. Supp. at 349 (footnote omitted). The
district court denied the motion, ruling in essence that DG's
theory of damages was proper and that the jury was free to
weigh the testimony of DG's experts more heavily than that of
Grumman's experts. Id. at 349-51.
b. Attorney's Fees
The district court included in its judgment order
an award of attorney's fees under the Copyright Act, although
it appears that the court has not yet fixed the amount.
Grumman argued that the court should not award attorney's
fees because DG had "elected" only those remedies available
under Massachusetts trade secrets law, which does not allow
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an award of attorney's fees.18 The district court denied
the motion, finding that DG had merely sought to maximize the
judgment by selecting the most generous body of law for each
element of its recovery. Grumman VI, 825 F. Supp. at 346.
The district court reasoned further that because DG would not
receive a double award of attorney's fees, the judgment was
in no need of correction. Id. at 346-47.
4. Issues on Appeal
Grumman renews its arguments concerning the pre-
trial, trial, and post-trial issues described above. Grumman
claims that the district court erred in entering summary
judgment on its affirmative defenses, questions the propriety
of certain of the district court's jury instructions,
maintains that the jury's award of damages lacks evidentiary
support, and insists that DG is not entitled to recover
attorney's fees. After reviewing the procedural rules that
govern this appeal, we address each of Grumman's arguments in
turn.
II.
PROCEDURAL PRINCIPLES
Because this appeal turns largely on questions of
law, we outline the corresponding standard of review.
Although the reasoning of the court below may provide a
18. Massachusetts law provides for a higher rate of
prejudgment interest on compensatory damages than does
federal law.
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useful starting point for analysis, the district court's view
of the law is not binding on a court of appeals. See
Williams v. Poulos, 11 F.3d 271, 278 (1st Cir. 1993) (citing
Dedham Water Co. v. Cumberland Farms Dairy, Inc., 972 F.2d
453, 457 (1st Cir. 1992)). Thus, we exercise our independent
judgment in evaluating the legal correctness of the district
court's jury instructions. Likewise, we must reach our own
conclusion as to a statute's correct construction. See FDIC
v. Keating, 12 F.3d 314, 316 (1st Cir. 1993).
Similarly, in reviewing a district court's entry of
summary judgment, we determine anew whether the moving party
has shown "that there is no genuine issue as to any material
fact and that [it] is entitled to judgment as a matter of
law." Fed. R. Civ. P. 56(c). See also Bird v. Centennial
Ins. Co., 11 F.3d 228, 231 (1st Cir. 1993). "In this
context, `genuine' means that the evidence about the fact is
such that a reasonable jury could resolve the point in favor
of the nonmoving party and `material' means that the fact is
one that might affect the outcome of the suit under the
governing law." Pagano v. Frank, 983 F.2d 343, 347 (1st Cir.
1993) (citations, internal quotation marks, and brackets
omitted). Although "we read the record and indulge all
inferences in a light most favorable to the non-moving
party," Rivera-Ruiz v. Gonzalez-Rivera, 983 F.2d 332, 334
(1st Cir. 1993), the adverse party cannot defeat a well-
-23-
23
supported motion by "rest[ing] upon the mere allegations or
denials of [its] pleading," Fed. R. Civ. P. 56(e). If the
nonmovant bears the ultimate burden of persuasion with
respect to its claim or defense, it may avert summary
judgment only if it identifies issues genuinely in dispute
and advances convincing theories as to their materiality.
See Pagano, 983 F.2d at 347 (citing Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 247-48 (1986)). Of course, it may
be difficult for a trial court to forecast the reaction of a
reasonable jury to an intricate array of complex theories.
Nonetheless, Rule 56 applies equally to simple cases as well
as cases involving complicated legal principles and theories
of recovery. See, e.g., Amerinet, Inc. v. Xerox Corp., 972
F.2d 1483, 1490 (8th Cir. 1992) ("In complex antitrust cases,
no different or heightened standard for the grant of summary
judgment applies."), cert. denied, 113 S. Ct. 1048 (1993).
Finally, we note that we are at liberty to affirm a
district court's grant of summary judgment "on any ground
supported in the record even if the issue was not pleaded,
tried or otherwise referred to in the proceedings below.'"
de Casenave v. United States, 991 F.2d 11, 12 n.2 (1st Cir.
1993).
III.
DISCUSSION
A. DG's Intellectual Property Claims
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24
We first examine the two arguments that strike at
the heart of DG's right to pursue its claims: DG's alleged
failure to comply with the copyright registration
requirements and the possible preemption of the state trade
secrets claim by Section 301 of the Copyright Act. We then
discuss Grumman's two affirmative defenses -- the 1976
Settlement Agreement Defense and the "misuse" defense -- each
of which is intended to undermine both the copyright claim
and the trade secrets claim. Finally, we review Grumman's
challenges to the award of actual damages, infringer's
profits, and attorney's fees.
1. Validity of Copyright Registration
Registration of a work with the Copyright Office
provides several benefits to a plaintiff in an infringement
action. First, although copyright protection attaches the
day original expression is fixed in a tangible medium, see 17
U.S.C. 102(a) (1988 & Supp. IV 1992), and thus an infringer
may be liable for infringement from that day forward, see 17
U.S.C. 408(a) (1988 & Supp. IV 1992) (providing that
"registration is not a condition of copyright protection"),
registration of the copyright is a prerequisite to suit under
the Copyright Act, 17 U.S.C. 411(a) (1988 & Supp. IV 1992).
Second, upon accepting the registrant's application, fee, and
deposit of a representative copy of the work, see 17 U.S.C.
408, the Copyright Office issues a certificate of
-25-
25
registration, which is admissible in an infringement action
as "prima facie evidence of the validity of the copyright and
of the facts stated in the certificate," 17 U.S.C. 410(c)
(1988).19 In the case of computer programs which, like
ADEX, are either unpublished or published only in machine-
readable form, the copyright owner must deposit "identifying
portions of the program," generally the first and last 25
pages of the human-readable source code 37 C.F.R.
202.20(c)(2)(vii) (1993).20 By questioning DG's compliance
with the registration requirements, Grumman is effectively
claiming that (1) DG may not claim infringement of those ADEX
copyrights for which DG tendered a defective deposit; and (2)
even if DG is free to bring such claims, it is not entitled
to a presumption as to the validity of the copyrights at
issue.
19. To demonstrate copyright infringement, DG had the burden
of demonstrating (1) that it owns a valid copyright in the
versions of ADEX alleged to have been copied, and (2) that
Grumman copied constituent, original elements of ADEX. See
Feist Publications, Inc. v. Rural Tel. Serv. Co., 111 S. Ct.
1282, 1296 (1991); Concrete Mach. Co. v. Classic Lawn
Ornaments, Inc., 843 F.2d 600, 605 (1st Cir. 1988); 3
Melville B. Nimmer & David Nimmer, Nimmer on Copyright
13.01, at 13-5 to 13-6 (1993) (hereinafter "Nimmer").
20. Where the program contains trade secret material, the
copyright regulations permit some portions of the deposit to
be blocked out, and allow a portion of the deposit to be in
machine-readable "object code" (lines of zeroes and ones).
37 C.F.R. 202.20(c)(2)(vii)(A)(2). If the deposit includes
no blocked-out portions and consists entirely of source code,
the first and last ten pages of the program will suffice.
Id.
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26
Essentially, Grumman's argument is that the
district court erred in instructing the jury that minor,
inadvertent errors in material deposited with a registration
application do not affect the validity of the
registration.21 DG admits that there were inadvertent
errors in the material deposited with the registration
application for ADEX Revisions 0.0 to 2.0,22 but maintains
that the errors are inconsequential.23 Grumman does not
21. The district court instructed the jury as follows:
Because the function or registration
[with respect to computer programs] is
symbolic, clerical errors in the
materials deposited with the application
for registration do not affect the
validity of the registration. For
instance, discrepancies in the dates,
filing the wrong pages, or partial pages,
and similar errors, if accepted by the
Copyright Office, do not impeach the
validity and effect of the registration.
If the errors were intentional, however,
for purposes of deceiving the Copyright
Office and perpetrating a fraud, the
errors invalidate the registration.
22. Grumman does not question the validity of the copyright
registration for the last five versions of ADEX, which
Grumman also admitted it copied and used. Therefore,
Grumman's argument, if persuasive, would not constitute a
complete defense to the infringement action; the real issue
is the extent of infringement properly subject to suit.
23. With respect to ADEX Revisions 0.0, 1.0, and 2.0, DG
attempted to deposit the first and last ten pages of source
code (with no trade secrets blocked-out) in accordance with
37 C.F.R. 202.20(c)(2)(vii)(A)(2). In all three instances,
DG deposited the correct last ten pages but did not deposit
the correct first ten pages. Nonetheless, in the case of
ADEX Revisions 1.0 and 2.0, there was only one difference
between the deposited pages and the pages DG intended to
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27
quibble with DG's denial of intent, but argues in effect that
any error, however minor, precludes a finding that the
plaintiff complied with Section 408(b). Alternatively,
Grumman argues that an unintentional error in the deposit may
still invalidate a copyright registration if the error is
material. Grumman contends further that the district court
erred in refusing Grumman's request for production of the
entire source code for each of the first three versions of
ADEX, a decision which allegedly prejudiced Grumman's ability
to demonstrate that the defects in the deposit were not
minor. We address these contentions seriatim.
a. Immaterial Errors in the Copyright Deposit
It is well established that immaterial, inadvertent
errors in an application for copyright registration do not
jeopardize the validity of the registration. See Masquerade
Novelty, Inc. v. Unique Indus., Inc., 912 F.2d 663, 667-68 &
n.5 (3d Cir. 1990); Whimsicality, Inc. v. Rubie's Costume
Co., 891 F.2d 452, 456 (2d Cir. 1989) (citing Eckes v. Card
deposit: the Primary Label Block on the copyright deposit
designates "1982" rather than "1983" as the copyright date.
The same error occurred in the deposit for ADEX Revision 0.0,
although there were three additional errors: two other
discrepancies concerning the Primary Label Block, and one
line of code missing from the deposited pages. The district
court observed that "the Primary Label Block, which contains
descriptive information about the tape, does not instruct or
direct the computer." Grumman VI, 825 F. Supp. at 356. In
addition, Mr. Gove, DG's expert, testified that the few
errors in the deposited pages would have no bearing on the
operation of the programs.
-28-
28
Prices Update, 736 F.2d 859, 861-62 (2d Cir. 1984)); Harris
v. Emus Records Corp., 734 F.2d 1329, 1335 (9th Cir. 1984);
Original Appalachian Artworks, Inc. v. Toy Loft, Inc., 684
F.2d 821, 828 (11th Cir. 1982); 2 Nimmer 7.20, at 7-201
("[A] misstatement or clerical error in the registration
application if unaccompanied by fraud will not invalidate the
copyright nor render the registration certificate incapable
of supporting an infringement action."). In general, an
error is immaterial if its discovery is not likely to have
led the Copyright Office to refuse the application. See
Eckes, 736 F.2d at 861-62.24
Grumman observes that the cases approving
substantial compliance with registration requirements concern
errors in the application, not the deposit, and suggests that
we adopt a rule demanding strict compliance with the deposit
requirement. Although a different rule for deposit errors
might be warranted if the language and underlying purposes of
the deposit requirement were of a significantly different
24. Some courts have suggested that a defendant must show
that it was prejudiced by a fraudulent misstatement or
omission in a registration application, see, e.g., Harris,
734 F.2d at 1335 ("Absent intent to defraud and prejudice,
inaccuracies in copyright registrations do not bar actions
for infringement."), whereas others merely require proof that
an intentional error, if discovered by the Copyright Office,
would have been material to the registration decision, see,
e.g., Eckes, 736 F.2d at 861-62. Any substantive difference
in these standards has no bearing on our decision today.
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29
character than that of the application requirement, we do not
find that to be the case.
In the first place, the registration application
described in Section 409, as well as the deposit described in
Section 408(b), are both equally mandatory components of the
registration process outlined in Section 408(a). Likewise,
just as Section 409 sets forth what an application "shall
include," (emphasis added), Section 408(b) uses the same
phrase to prescribe the contents of the deposit. There is
nothing in this language that would prevent our interpreting
both the application requirements and the deposit
requirements in a consistent and practical manner.
Nor do the apparent purposes of the deposit
requirement counsel a different result. Although related to
the deposit requirement in Section 407, which is designed to
further the acquisitions policy of the Library of Congress,
the deposit required by Section 408(b) serves the separate
purpose of providing the Library's Copyright Office with
sufficient material to identify the work in which the
registrant claims a copyright. See H.R. Rep. No. 94-1476,
94th Cong., 2d Sess. 5 (1976), reprinted in 1976 U.S.C.C.A.N.
5659, 5766-70; see also 37 C.F.R. 202.20(c)(2)(vii)
(requiring deposit of "identifying portions" of programs that
are unpublished or published only in machine-readable form).
In other words, a key purpose of the Section 408(b) deposit
-30-
30
requirement is to prevent confusion about which work the
author is attempting to register.
A second apparent aim of Section 408(b) is to
furnish the Copyright Office with an opportunity to assess
the copyrightability of the applicant's work. Pursuant to
the Copyright Act, the Register of Copyrights must register a
copyright claim and issue a registration certificate "[w]hen,
after examination, the Register . . . determines that . . .
the material deposited constitutes copyrightable subject
matter." 17 U.S.C. 410(a) (1988).25 Some provisions of
the copyright regulations seek to preserve the same
opportunity for examination in relation to the deposit of a
relatively small subset of a computer program. In adopting
regulations encouraging source code deposits for computer
programs, the Copyright Office explained that "[i]n
registering all copyright claims, the Copyright Office
25. Because Section 410(a) does not specify the nature of
the "examination," and because there is evidence that
Congress intended the government to play a role in copyright
registration that is much more limited than its extensive
responsibilities in overseeing patent registration, the
Copyright Office may have the discretion to limit its
examination to the facial validity of the application and
deposit. See Midway Mfg. Co. v. Bandai-America, Inc., 546 F.
Supp. 125, 143-44 (D.N.J. 1982) (citing, inter alia, Donald
v. Uarco Business Forms, 478 F.2d 764, 765 n.1 (8th Cir.
1973)). Nevertheless, any such discretion resides in the
Copyright Office, not the applicant, for Section 410(a)
suggests that an applicant must always give the Copyright
Office an opportunity to undertake an appropriate
examination.
-31-
31
examines the deposit to determine the existence of
copyrightable authorship." 54 Fed. Reg. 13,173 (1989). In
order to allow the Office to continue this practice, the new
regulations provide, for example, that when the applicant's
deposit contains portions of the source code of an
unpublished computer program with blocked-out trade secrets
the deposit must still "reveal[] an appreciable amount of
original computer code." See 37 C.F.R.
202.20(c)(2)(vii)(A)(2) (emphasis added). On the other hand,
where there are no blocked-out portions in the deposited
portions of a computer program, the regulations do not
specifically require that the deposit contain "an appreciable
amount of original computer code." In other words, the
Copyright Office seems to have assumed that in such cases the
deposited pages are likely to contain sufficient elements of
original expression to determine the copyrightability of the
work at issue. At any rate, it appears that Congress viewed
the deposit requirement as a means of collecting information
that the Copyright Office may use in resolving the question
of copyrightability for the purposes of Section 410.26
26. Another objective of Section 408(b) might be to give
would-be infringers notice of the extent of their civil
liability. Yet, this can hardly have been an important
legislative goal because a copyright owner is free to
register any time before filing suit, even after the act of
infringement. See 17 U.S.C. 408(a); Twentieth Century-Fox
Film Corp. v. Dunnahoo, 637 F.2d 1338, 1342-43 (9th Cir.
1981); see also Olan Mills, Inc. v. Linn Photo Co., 23 F.3d
1345, 1349 (8th Cir. 1994); Konor Enters. v. Eagle
-32-
32
Neither of these objectives differs so
significantly from those of the application requirement as to
justify a departure from the rule governing application
errors. Quite naturally, one important function of a
registration application is to identify the work in which the
applicant claims a copyright. See 17 U.S.C. 409 (1988 &
Supp. IV 1992) (requiring application to include, inter alia,
title of work, dates of completion and publication, along
with "any other information . . . bearing upon the . . .
identification of the work"). Furthermore, like the deposit,
the application also provides some evidence of
copyrightability, because it must identify any preexisting
work from which the author borrowed in creating a compilation
or derivative work. See 17 U.S.C. 409(9). Indeed, the
Copyright Office may often be in a better position to assess
the originality of the work being registered by reviewing a
Publications, Inc., 878 F.2d 138, 140 (4th Cir. 1989). In
addition, because Congress had included a recordation
requirement elsewhere in the copyright laws until 1988, see
17 U.S.C.A. 205(d) (West 1977) (providing that recordation
of transfer of copyright ownership is prerequisite to
infringement suit by transferee), but did not do so in the
context of Section 408, we may infer that affording notice to
potential infringers was not Congress's primary motivation in
drafting Section 408(b). See City of Chicago v.
Environmental Defense Fund, 114 S. Ct. 1588, 1593 (1994) ("It
is generally presumed that Congress acts intentionally and
purposely when it includes particular language in one section
of a statute but omits it in another.") (citation, internal
quotation marks, and brackets omitted); United States ex rel
S. Prawer & Co. v. Fleet Bank, 24 F.3d 320, 329 (1st Cir.
1994) (similar).
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33
list of preexisting works than by conducting a cursory
inspection of the deposited material. And yet, an
inadvertent failure to identify preexisting works on an
application is treated no differently from any other
application error. See, e.g., Toy Loft, 684 F.2d at 828
(analyzing in similar fashion failure to mention co-author
and failure to mention preexisting works).
We conclude that there is no support in law or
reason for a rule that penalizes immaterial, inadvertent
errors in a copyright deposit.27 Accordingly, we find no
flaw in the district court's instruction that such errors "do
not impeach the validity and effect of the registration."
b. Material Errors in the Copyright Deposit
27. Contrary to Grumman's vigorous assertions, this court's
opinion in Unistrut Corp. v. Power, 280 F.2d 18 (1st Cir.
1960), does not compel a different rule. In that case,
plaintiff claimed infringement of the 1942 edition of its
catalog but apparently sought to prove unauthorized copying
at trial by demonstrating the similarity of the defendant's
work to the 1943 edition of plaintiff's catalog, "which
admittedly contained some, unspecified, additions." Id. at
23. Because "there was no proof that copies of this later
edition were deposited with the Copyright Office, and there
was no proof that the infringed material was contained in the
1942 edition," we held that there was insufficient proof of
infringement of the earlier edition. Id. Unistrut is
distinguishable in at least two respects. First, our opinion
in Unistrut does not suggest that the plaintiff mistakenly
deposited the 1943 edition when attempting to register a
copyright claim concerning the 1942 edition; hence, Unistrut
cannot serve as authority on the legal ramifications of
registration errors. Second, in this case there is evidence
that sections of source code from ADEX Revisions 0.0 to 2.0
were among the pages deposited with the Copyright Office,
even if other portions of the deposited material came from
other computer programs.
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34
The law is not quite as settled as to the effect of
an application error that is inadvertent but nonetheless
material. No court has suggested that a registration
premised in part on an unintentional material error would
fail to satisfy the jurisdictional requirement of Section
411(a). At the same time, at least one court has suggested
that in such instances the proper approach might be to
prevent the plaintiff from exploiting the presumption of
validity that ordinarily attaches to a registered copyright
under Section 410(c). Masquerade Novelty, 912 F.2d at 668
n.5 (dictum). We assume for argument's sake that a material
error in a copyright deposit, even if unintentional, may
destroy the presumption of validity.
c. Refusal to Compel Production of Source
Code
Grumman next argues that it was unfairly deprived
of an opportunity to prove that the errors in the deposits
were material. Specifically, Grumman claims that the
district court abused its discretion when, during the trial,
it refused to compel DG to produce roughly 40,000 pages of
source code (on approximately 33,000 floppy disks) for each
of the first three versions of ADEX (0.0 to 2.0). See
Geremia v. First Nat'l Bank, 653 F.2d 1, 5-6 (1st Cir. 1981)
(reviewing denial of mid-trial discovery motion for abuse of
discretion).
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35
Grumman renewed its unsuccessful pre-trial requests
for the source code after Edward Gove, a DG witness, admitted
on cross-examination that there were some discrepancies
between the source code deposited with the Copyright Office
and the actual source code for ADEX 0.0 to 2.0, and then
explained in rebuttal testimony that those errors were minor
and of no consequence to the operation of the diagnostic
program as a whole. In response to the renewed request, DG
provided Grumman with those portions of the source codes for
ADEX Revisions 0.0 to 2.0 necessary to conduct a character-
by-character comparison of the intended deposits of source
code with those portions of source code actually
deposited.28 Nonetheless, Grumman insisted that it was
entitled to the entire source code for all three versions.
Grumman apparently sought the three sets of source
code because it believed that analysis of the entire source
code would permit a more effective cross-examination of the
DG witness about the magnitude of the discrepancies during
DG's rebuttal. It seems that Grumman had one main goal: it
believed it might be able to show that, although the
discrepancies were few in number and seemingly minor in
character, ADEX would not function properly if the source
28. In its brief, DG states that "Data General collected and
provided to Grumman copies of the entire source code of all
of the sub-programs that were, or should have been, filed in
the Copyright Office for each of the relevant revisions of
MV/ADEX." Grumman does not challenge this assertion.
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36
code deposited with the Copyright Office had been inserted
into the versions of ADEX DG intended to register.
The marginal benefit to Grumman of obtaining the
balance of the source code was at best highly uncertain, and
all indications were that such a test would produce no
compelling results. Even if Grumman could demonstrate that
inserting the errors would impair the operation of ADEX, it
is extremely unlikely that this would establish the
materiality of the errors. Grumman does not allege that any
of the errors, if discovered, would have led the Copyright
Office to refuse registration of DG's copyright claims. Nor
does Grumman contend that the Copyright Office would have
been unable to use the correct portions of the deposits to
identify the works DG intended to register or make a
preliminary determination concerning the copyrightability of
those works.29 In contrast, DG produced evidence that
29. If a showing of prejudice is necessary to enable a
defendant to use a registration error as a defense to an
infringement action, see supra note 24, Grumman has failed in
this respect as well because Grumman has not shown that it
was misled as to the copyrightability of ADEX Revisions 0.0
to 2.0. It appears that Grumman has always acted in a manner
consistent with the belief that each revision of ADEX
contains copyrightable elements. In these proceedings,
moreover, Grumman has never seriously argued that the first
three versions of ADEX are entirely devoid of original
computer code, and has consistently admitted that it made
identical copies of the entire contents of each version of
ADEX at issue in this action. Accordingly, we are unable to
see why Grumman was disadvantaged by bearing the burden of
proving that there are no copyrightable elements in the first
three versions of ADEX, a task even Grumman seems to have
forsworn.
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37
production of the requested material would be an extremely
cumbersome process, a point Grumman does not contest. We
find no abuse of discretion in the district court's decision
to deny Grumman's mid-trial discovery request.
2. Preemption of Trade Secrets Claim
Seeking to avoid the additional damages associated
with the trade secrets remedies selected by DG, Grumman
argues that the state claim is preempted by Section 301 of
the Copyright Act, 17 U.S.C. 301(a).
Section 301(a) precludes enforcement of any state
cause of action which is equivalent in substance to a federal
copyright infringement claim.30 See generally Gates Rubber
Co. v. Bando Chem. Indus., Ltd., 9 F.3d 823, 846-47 (10th
Cir. 1993); Trandes Corp. v. Guy F. Atkinson Co., 996 F.2d
655, 658-60 (4th Cir.), cert. denied, 114 S. Ct. 443 (1993);
1 Nimmer 1.01[B][h], at 1-35 to 1-36.1. Courts have
developed a functional test to assess the question of
equivalence. "[I]f a state cause of action requires an extra
element, beyond mere copying, preparation of derivative
works, performance, distribution or display, then the state
cause of action is qualitatively different from, and not
30. In pertinent part, Section 301(a) provides that "all
legal or equitable rights that are equivalent to any of the
exclusive rights within the general scope of copyright . . .
are governed exclusively by this title. [N]o person is
entitled to any such right or equivalent right in any such
work under the common law or statutes of any State."
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38
subsumed within, a copyright infringement claim and federal
law will not preempt the state action." Gates Rubber, 9 F.3d
at 847 (citing Computer Assocs. Int'l, Inc. v. Altai, Inc.,
982 F.2d 693, 716 (2nd Cir. 1992)).
Not every "extra element" of a state claim will
establish a qualitative variance between the rights protected
by federal copyright law and those protected by state law.
For example, a state claim of tortious interference with
contractual relations may require elements of awareness and
intentional interference not necessary for proof of copyright
infringement. And yet, such an action is equivalent in
substance to a copyright infringement claim where the
additional elements merely concern the extent to which
authors and their licensees can prohibit unauthorized copying
by third parties. Harper & Row, Publishers, Inc. v. Nation
Enters., 723 F.2d 195, 201 (2d Cir. 1983), rev'd on other
grounds, 471 U.S. 539 (1985). Similarly, a state law
misappropriation claim will not escape preemption under
Section 301(a) simply because a plaintiff must prove that
copying was not only unauthorized but also "commercial[ly]
immoral[,]" a mere "label attached to [the same] odious
business conduct." Mayer v. Josiah Wedgwood & Sons, Ltd.,
601 F. Supp. 1523, 1535 (S.D.N.Y. 1985). Nonetheless, a
trade secrets claim that requires proof of a breach of a duty
of confidentiality stands on a different footing. Such
-39-
39
claims are not preempted because participation in the breach
of a duty of confidentiality -- an element that forms no part
of a copyright infringement claim -- represents unfair
competitive conduct qualitatively different from mere
unauthorized copying. See Gates Rubber, 9 F.3d at 847-48;
Trandes Corp., 996 F.2d at 660; Computer Associates, 982 F.2d
at 717; S.O.S., Inc. v. Payday, Inc., 886 F.2d 1081, 1090
n.13 (9th Cir. 1989).31
DG's trade secrets claim fits comfortably within
this category. To demonstrate misappropriation of trade
secrets under Massachusetts law, DG must prove that "(1)
MV/ADEX is a trade secret; (2) Data General took reasonable
steps to preserve the secrecy of MV/ADEX; and (3) Grumman
used improper means, in breach of a confidential
relationship, to acquire and use the trade secret." Grumman
VI, 825 F. Supp. at 357 (citing, inter alia, J.T. Healy &
Son, Inc. v. James A. Murphy & Son, Inc., 260 N.E.2d 723,
729-31 (Mass. 1970)). The district court instructed the jury
31. Grumman insists that acquisition of copyrightable
software in violation of confidentiality agreements is
equivalent to unauthorized copying where, as appears to be
the case here, the defendant does not actually learn the
trade secrets embodied in the software. The qualitative
difference between unauthorized copying and such acts as the
discovery of wrongfully acquired trade secrets and the
illegal use of that knowledge may be more striking than the
difference between unauthorized copying and mere
participation in the breach of a confidentiality agreement.
But we cannot agree that the latter relationship is one of
equivalence.
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40
that "wrongful acquisition" is an element of a Massachusetts
trade secrets claim, and that "[a]cquisition of a trade
secret is wrongful . . . if it is by theft of property known
to belong to another, or by knowing participation in the
breach of an express or implied confidentiality agreement by,
for instance, a former employee or customer of Data General."
(Emphasis added.) Grumman does not assign error to this
portion of the charge, which thus becomes the law of the
case. See United States v. Connell, 6 F.3d 27, 30 (1st Cir.
1993) (explaining that unchallenged legal decisions are
ordinarily unassailable at later stages in litigation).
Furthermore, DG's theory was precisely that Grumman acquired
ADEX by participating in the breach of confidentiality
agreements binding on former employees and service customers
of DG.32 Because the Copyright Act does not prevent the
states from imposing liability for such conduct, the district
court was correct to spare DG's trade secrets claim from
preemption under Section 301(a).
3. 1976 Settlement Agreement Defense
Grumman denies its liability for copyright
infringement and misappropriation of trade secrets, arguing
that the Settlement Agreement contains a license allowing
Grumman to copy and use ADEX in the maintenance and repair of
32. The relevant contract language appears infra, note 37.
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41
DG computers. The district court granted DG's motion for
partial summary judgment on this issue, and Grumman now
appeals that decision on two alternative grounds: (1) the
Settlement Agreement unambiguously grants Grumman a license
to use ADEX; or (2) the Settlement Agreement is at least
ambiguous, and conflicting extrinsic evidence about the scope
of the license presents a factual dispute worthy of
resolution by a jury.
a. Maryland Contract Law
The parties agree that the Settlement Agreement,
executed in Maryland, is governed by Maryland contract law.
Maryland courts do not follow the subjective theory of
contracts, which aims to discover the actual intent of the
parties even at the expense of unambiguous language to the
contrary. See Hershon v. Gibraltar Bldg. & Loan Ass'n, 864
F.2d 848, 851 (D.C. Cir. 1989) (applying Maryland law).
Instead, Maryland subscribes to the objective approach. See
id. Under that approach, a court may consider extrinsic
evidence only in determining whether contract language is
ambiguous. See id. at 852. However, as long as the result
is objectively reasonable, a court may not use extrinsic
evidence "to interpret facially explicit contractual terms."
Id. at 851-52. See also General Motors Acceptance Corp. v.
Daniels, 492 A.2d 1306, 1310 (Md. 1985).
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42
Where contract terms are ambiguous, a court may
look to extrinsic evidence in order to ascertain the
intention of the parties and, if successful, interpret the
contract as a matter of law. See Collier v. MD-Individual
Practice Ass'n, 607 A.2d 537, 541 (Md. 1992); Truck Ins.
Exch. v. Marks Rentals, Inc., 418 A.2d 1187, 1190 (Md. 1980).
If, after such examination, the meaning of the ambiguous
terms remains in genuine dispute, and the dispute is material
to the outcome of the claim or defense at issue, the
ambiguity must be resolved by the trier of fact. See id.;
Monumental Life Ins. Co. v. United States Fidelity & Guar.
Co., 617 A.2d 1163, 1174 (Md. Ct. Spec. App.) ("Only when
there is a bona fide ambiguity in the contract's language or
legitimate doubt as to its application under the
circumstances is the contract submitted to the trier of the
fact for interpretation."), cert. denied, 624 A.2d 491 (Md.
1993).33
33. Grumman asserts that any ambiguity must be interpreted
against DG as the drafter of the Settlement Agreement.
However, because the Settlement Agreement is the product of
negotiations by sophisticated parties represented by counsel,
this "`secondary rule of construction . . . perhaps should
have but slight force.'" Acme Markets, Inc. v. Dawson
Enters., 251 A.2d 839, 847 (Md. 1969) (quoting Rossi v.
Douglas, 100 A.2d 3, 6 (Md. 1953)). In any event, this
interpretive presumption has no application where, as here,
the record contains extrinsic evidence sufficient to discover
the intention of the parties to the Settlement Agreement.
See Pacific Indem. Co. v. Interstate Fire & Casualty Co., 488
A.2d 486, 497 (Md. 1985); St. Paul Fire & Marine Ins. Co. v.
Pryseski, 438 A.2d 282, 288 (Md. 1981).
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b. Areas of Agreement
In order to focus our analysis of DG's entitlement
to summary judgment, we first determine the reach of
Grumman's contentions in light of the existing areas of
agreement.
In the first place, the parties agree that the
existence and scope of a license turn on the interpretation
of the "maintenance or repair" exception to the general
prohibition of paragraph four of the Settlement Agreement,
which provides that Grumman's predecessor "will not, directly
or indirectly, copy or utilize `Proprietary Information' of
DG for the design or manufacture of computers or any other
purpose."34 In addition, DG admits that the Settlement
Agreement gives Grumman a right to use some of DG's
34. In its entirety, paragraph four reads as follows:
4. Defendants [CSSC, Lloyd Root,
and Robert Montgomery] agree, jointly and
severally, that they will not, directly
or indirectly, copy or utilize
"Proprietary Information" of DGC for the
design or manufacture of computers or any
other purpose except [i] maintenance or
repair of DGC equipment, [ii]
installation and integration of equipment
manufactured or sold by companies other
than DGC, or [iii] other purposes
permitted by any proprietary or
confidentiality legends accompanying or
made part of any data or documentation
comprising Proprietary Information.
"Proprietary Information" of DGC shall
mean data and documentation which is
marked confidential or proprietary to DGC
by appropriate legend.
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proprietary information for some purposes. Although DG
denies that the Settlement Agreement allows Grumman to use
ADEX itself, DG nonetheless admitted in its answers to
Grumman's request for admissions "that, as part of the
settlement of the CSSC litigation, Data General agreed that
CSSC could use Data General proprietary information that was
defined in the Agreement and the nature of which was then
understood by and agreed to by the parties, to maintain or
repair Data General computers." While the Settlement
Agreement does not bear many of the traits of a traditional
licensing agreement, it does grant some permission to use
DG's intellectual property, at least in certain
circumstances, and therefore creates some type of
"license."35 Consequently, Grumman's defense turns on the
scope of the license.36
35. Because neither party has offered a legal definition of
a license, we will regard the term as carrying its usual
definition: permission to use the property of another.
Black's Law Dictionary 829-30 (5th ed. 1979). A license can
be general, with few or no restrictions, or quite limited.
The use of the word "license" in a contract is clearly
evidence of an intent to permit use, but the absence of the
word is not dispositive, as long as other contract language
grants some permission to use. Cf. 3 Nimmer 10.03[A], at
10-38 (explaining that "[a] nonexclusive license may be
granted orally, or may even be implied from conduct")
(footnotes omitted).
36. DG argues that the Settlement Agreement was not intended
to apply to proprietary information created by DG after
settlement of the 1975 lawsuit. We cannot agree. The
language "`Proprietary Information' of DGC" strikes us as
unambiguous, and unqualifiedly embraces all DG proprietary
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Also worthy of note are undisputed facts concerning
the nature of Grumman's acquisition and use of ADEX. Grumman
did not simply gain access to copies of ADEX left at the
sites of former DG service customers solely for the purpose
of using on-site maintenance tools to service computers at
that site. Rather, Grumman acquired copies of ADEX from
former service customers in an effort to expand its own
library of MV diagnostic software, which Grumman technicians
freely copied and used in servicing the computers of any
Grumman customer with MV equipment. Moreover, there is no
evidence that Grumman acquired ADEX from equipment owners at
a time when those equipment owners were also customers of DG.
Nor is there evidence that Grumman acquired ADEX directly
from DG, or from current or former CMO customers. In
addition, the record reveals that DG service customers were
contractually bound both to prevent ADEX from falling into
the hands of third parties such as TPMs and to return copies
of ADEX to DG after the termination of the relevant service
agreement.37 Thus, Grumman acquired ADEX from those
information, whether in existence in 1976 or not. However,
even if the phrase were ambiguous, an examination of the
extrinsic evidence reveals that DG would still not be
entitled to summary judgment on this basis because there is
extrinsic evidence that would allow a reasonable jury to find
that the Settlement Agreement was intended to apply to
information in the future.
37. For example, in one version of DG's On-Call Service
Agreement, service customers agreed "NOT TO DISCLOSE OR MAKE
AVAILABLE TO ANY THIRD PARTY THE PROPRIETARY ITEMS [installed
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customers who no longer had lawful possession of the program
and had no right to transfer it.38
The question we must resolve is whether the
"maintenance or repair" exception authorized Grumman both to
gain access to and acquire copies of ADEX in the possession
of former DG service customers despite the fact that these
customers had agreed not only to prevent such third-party
access but also to return copies of ADEX to DG after the
termination of their service contract.
at customer locations by DG;] AND . . . TO RETURN ALL THE
PROPRIETARY ITEMS TO [DG] UPON EXPIRATION OR
CANCELLATION/TERMINATION OF THIS AGREEMENT."
38. Grumman also acquired copies of ADEX from former DG
employees who brought copies of the program with them, in
violation of their employment agreements. Grumman does not
maintain that the Settlement Agreement gives it the right to
duplicate and use copies of ADEX acquired in this manner.
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d. Scope of the License
The plain language of the Settlement Agreement does
not answer our question. Despite the fact that the exception
anticipates that Grumman will "copy or utilize" DG
proprietary information for the "maintenance and repair of
DGC equipment," the Settlement Agreement does not specify
whether it merely refers to Grumman's right to gain access to
maintenance tools it finds at a customer site (including the
routine copying and use inherent in the operation of a
computer program), or whether the exception somehow allows
Grumman to acquire such tools for the service of DG computers
at other sites. Similarly, the Settlement Agreement contains
no prescription for resolving potential conflicts between the
"maintenance or repair" exception and provisions in DG's
Service Agreement prohibiting third-party access during the
term of the Agreement and retention of DG proprietary
information thereafter. Accordingly, we turn to the
extrinsic evidence in the record in an attempt to resolve the
ambiguity.
Even when viewed in a light most favorable to
Grumman, the record evidence makes clear that the parties to
the Settlement Agreement intended the "maintenance and
repair" exception to function as what we shall call a "third-
party access agreement," allowing CSSC, Grumman's predecessor
in interest, to gain access to proprietary information that
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DG sold, licensed, or otherwise entrusted to owners of DG
equipment. For example, when called to testify in the STI
litigation, Edward Canfield, CSSC's attorney at the time,
used these words to describe his contemporary understanding
of the "maintenance and repair" exception: "If the customer
had it, [CSSC] had a right to use it."39 In addition, the
language of DG licensing agreements in the 1970s as well as
the pleadings in the 1975 litigation strongly corroborate the
view that the settlement negotiations primarily concerned
CSSC's right to use proprietary information in the hands of
DG equipment owners. As late as 1976, DG licensed
proprietary maintenance information to equipment owners under
an agreement which specifically allowed licensees to grant
access to third parties "on LICENSEE's premises with
LICENSEE's permission for purposes specifically related to
LICENSEE's use of the Licensed Program." Moreover, in its
1975 counterclaim, CSSC intimated that DG had begun to
undermine the ability of TPMs to gain access to maintenance
information in the hands of equipment owners, alleging that
DG had attempted "to prevent owners of DGC Mini-computers
from having their equipment serviced and maintained by any
competitor of DGC . . . by restricting the use those owners
make of their owner maintenance information."
39. The district court accepted a transcript of Canfield's
testimony in STI as part of the summary judgment record in
this case.
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49
There is also specific evidence that the parties to
the Settlement Agreement were not negotiating about the
ongoing transfer of proprietary information directly from DG
to CSSC. For example, during the STI trial, counsel for DG
asked Canfield whether, under the Settlement Agreement, DG
had an "obligation to give [CSSC] something." "No sir,"
replied Canfield, "Data General was not offering to give us
anything."
The nature of the "maintenance and repair"
exception as a third-party access agreement has several
ramifications. As a provision designed to ensure access to
Grumman, the exception was arguably intended to override
contrary restrictions in proprietary legends and
confidentiality agreements. Indeed, there is evidence that
this was the case. A letter to Canfield from Carl Kaplan, a
lawyer who represented DG in the settlement negotiations,
outlined the proposed settlement, stating that improper
utilization of DG proprietary information "would be the use
of that information other than as marked by DGC or without
DGC's express written permission." (Emphasis added.) Kaplan
added that "[u]se of DGC proprietary information for the
maintenance of DGC equipment would expressly be permitted the
defendants." Id. In addition, Canfield's deposition
testimony suggests that his primary concern was for DG to
guarantee CSSC's right to use proprietary information
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distributed to DG equipment owners, notwithstanding future
restrictions on third-party access to such information.
Thus, a jury could reasonably conclude that the Settlement
Agreement allowed Grumman to gain access to information in
the hands of DG equipment owners for the purpose of
maintaining DG computers, even if equipment owners generally
could not allow third parties access to DG proprietary
information.
Characterizing the exception as a third-party
access agreement also means that Grumman's right to use
copies of ADEX in the possession of DG equipment owners is
necessarily derivative of the rights of those equipment
owners. As a consequence, Grumman only has the right to
operate a customer's copy of ADEX for the benefit of that
customer; there is no basis for the proposition that Grumman
can use its third-party access rights to acquire copies of
ADEX for unlimited copying and use in the service of any MV
computer. Indeed, this was the import of Canfield's
testimony in STI. Referring to a CSSC customer as a "party,"
Canfield stated that he understood the Settlement Agreement
to allow "[CSSC] to use whatever [was] on the party's
equipment . . . for the repair and maintenance of that
party's equipment." (Emphasis added).40 Furthermore, to
40. We note in passing that STI appeared to adopt Canfield's
statement in the course of the STI trial. When Judge Motz
characterized Canfield's testimony as stating that
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the extent that an equipment owner no longer has the right to
possess copies of ADEX, as in the case of a former DG service
customer, Grumman's rights as a third party are
extinguished.41
In summary, we conclude that the Settlement
Agreement merely grants Grumman the right to gain access to
copies of ADEX lawfully possessed by a DG equipment owner in
order to service the computers of that particular equipment
owner. Because Grumman's copying and use of ADEX does not
fall within this category, the Settlement Agreement does not
proprietary maintenance tools in the hands of CSSC's
customers "were to be used . . . for the customer's own
computers," counsel for STI responded, "I don't have a
problem with that."
41. Our conclusion that the "maintenance or repair"
exception was intended to be a third-party access agreement
also disposes of Grumman's assertion that the Settlement
Agreement somehow obligates DG to distribute its proprietary
maintenance information either to Grumman's customers or
directly to Grumman. As explained above, the extrinsic
evidence demonstrates that the Agreement concerns Grumman's
right to gain access to proprietary information that DG
distributes to equipment owners. Nowhere does the Agreement
say that DG will distribute to Grumman proprietary
information DG chooses to distribute only to its own field
engineers. Further, it would be unreasonable to interpret
the Agreement as providing for direct licensing of
proprietary information on demand given that the Agreement
did not even allow the individual parties to the Agreement
(Root and Montgomery, both former DG employees) to retain or
purchase any proprietary information they acquired during
their employment with DG. And finally, a mere agreement to
agree to an unspecified future license would be unenforceable
as a matter of contract law. See STI, 737 F. Supp. at 339
(citing First Nat'l Bank v. Burton, Parsons & Co., 470 A.2d
822, 828 (Md. Ct. Spec. App.), cert. denied, 475 A.2d 1201
(Md. 1984)).
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52
serve as a defense either to the infringement action or the
trade secrets claims. The district court did not err in
granting partial summary judgment for DG on Grumman's
Settlement Agreement defense.
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4. Misuse Defense
Grumman claims that DG is not entitled to enforce
its copyrights or its rights under state trade secrets law
because it has "misused" those property rights by engaging in
anti-competitive behavior in violation of federal antitrust
laws. DG argues that there is no "copyright misuse" defense
to a federal copyright infringement claim and no applicable
"unclean hands" defense to the state claim for
misappropriation of trade secrets. Alternatively, DG argues
that it did not violate the antitrust laws.
A "copyright misuse" defense is not without legal
support. In a carefully reasoned opinion, the Fourth Circuit
recently approved such a defense after noting that it has
long been recognized in the analogous context of patent
infringement. See Lasercomb America, Inc. v. Reynolds, 911
F.2d 970, 976 (4th Cir. 1990) ("[S]ince copyright and patent
law serve parallel public interests, a `misuse' defense
should apply to infringement actions brought to vindicate
either right."); see also 3 Nimmer 13.09[A], at 13-269 to
13-276 (collecting conflicting decisions of lower courts);
Ramsey Hanna, Note, Misusing Antitrust: The Search for
Functional Copyright Misuse Standards, 46 Stan. L. Rev. 361,
404-10 (1994) (charting the development of the copyright
misuse defense). Although DG correctly notes that the misuse
in Lasercomb (conditioning a copyright license on a
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noncompetition agreement) is not identical to the misuse
alleged in this case (tying access to ADEX to the purchase of
DG service and refusing to license ADEX to TPMs), the
reasoning of Lasercomb does not turn on the particular type
of anti-competitive behavior alleged. DG also suggests that
the policy rationale for a copyright misuse defense is weaker
than in the case of patent misuse because an exclusive right
to express an idea in a particular way (a copyright) is a
lesser threat to competition than an exclusive right to use
the idea itself (a patent). We acknowledge that it is often
more difficult to prove an antitrust violation when the claim
rests on the questionable market power associated with a
copyright, but that would not be a reason to prohibit a
defendant from attempting to meet its burden of proof, and
would be a poor reason to refrain entirely from recognizing a
copyright misuse defense.
Nevertheless, this case does not require us to
decide whether the federal copyright law permits a misuse
defense. Nor need we determine whether Massachusetts
recognizes an unclean hands defense to a claim for
misappropriation of trade secrets. Grumman does not claim
that DG misused its copyright or acted inequitably in any
fashion other than through its alleged violations of the
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Sherman Act.42 And, because we conclude infra, Section
III.B., that there is insufficient evidence to justify a
trial on either of Grumman's antitrust counterclaims,
Grumman's misuse and unclean hands defenses are equally
devoid of merit.43
5. Damages
Grumman's principal assault on the jury's award of
$27,417,000 in damages (DG's lost profits and Grumman's
42. Note that the Lasercomb court held that a copyright
misuse defense does not require proof of an antitrust
violation, only proof that "the copyright is being used in a
manner violative of the public policy embodied in the grant
of a copyright." 911 F.2d at 978.
43. Even if Grumman's antitrust counterclaims could survive
summary judgment, Grumman would not necessarily have the
privilege of interposing its counterclaims as defenses.
Lasercomb explains that copyright misuse and its ancestor,
patent misuse, are equitable defenses. See 911 F.2d at 976-
77. If copyright misuse is an equitable defense, a defendant
that has itself acted inequitably may not be entitled to
raise such a defense. Cf. 3 Nimmer 13.09[B], at 13-278 to
13-279 (noting the possible propriety of denying a defense of
unclean hands "when the defendant has been guilty of conduct
more unconscionable and unworthy than the plaintiff's").
Mere infringement may not be inequitable in this context
because a misuse defense would appear to sanction at least
some infringement as a necessary measure of self-help. But
violation of a valid injunction against further infringement
issued pursuant to a court's equitable powers would
constitute blatantly inequitable behavior. Here, the jury
specifically found that Grumman violated the district court's
1988 injunction against the use of ADEX. Grumman does not
appeal that finding. Accordingly, while Grumman may be free
to pursue antitrust counterclaims, cf. Perma Life Mufflers,
Inc. v. International Parts Corp., 392 U.S. 134, 138-40
(1968) (holding that doctrine of in pari delicto is not a
defense to an antitrust suit), it would not necessarily be
entitled to raise a defense of copyright misuse predicated on
antitrust violations.
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nonduplicative profits) is that the district court failed to
give the jury adequate guidance to find the necessary causal
connection between Grumman's infringement and DG's damages.
Because the calculus of causation is partly a function of the
particular theory of damages advanced by the plaintiff, we
divide our discussion accordingly.
a. Actual Damages
A successful plaintiff in an infringement action is
entitled to "actual damages suffered by [it] as result of the
infringement." 17 U.S.C. 504(b). Actual damages are
generally calculated with reference to the loss in the fair
market value of the copyright, often measured by the profits
lost as a result of the infringement. See, e.g., Eales v.
Envtl. Lifestyles, Inc., 958 F.2d 876, 880 (9th Cir.), cert.
denied, 113 S. Ct. 605 (1992); see generally 3 Nimmer
14.02[A], at 14-8 to 14-9.
The plaintiff bears the burden of proving that the
infringement was the cause of its loss of revenue. See
Harper & Row, Publishers, Inc. v. Nation Enters., 471 U.S.
539, 567 (1985); Frank Music Corp. v. MGM, Inc., 772 F.2d
505, 514 n.8 (9th Cir. 1985) (citing Shapiro, Bernstein & Co.
v. 4636 S. Vermont Ave., Inc., 367 F.2d 236, 241 (9th Cir.
1966)). In defining that burden, it is useful to borrow
familiar tort law principles of causation and damages. See
Deltak, Inc. v. Advanced Sys., Inc., 574 F. Supp. 400, 403
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(N.D. Ill. 1983) (Posner, J., sitting by designation)
(referring to "normal tort damages principles" in discussion
of copyright damages), vacated on other grounds, 767 F.2d 357
(7th Cir. 1985); 3 Nimmer 14.02[A], at 14-11, 14-20 to 14-
21 n.49.8 (alluding to notions of "but for" and proximate
causation). Thus, the plaintiff should first establish that
the infringement was the cause-in-fact of its loss by showing
with reasonable probability that, but for the defendant's
infringement, the plaintiff would not have suffered the loss.
See, e.g., Robert R. Jones Assocs. v. Nino Homes, 858 F.2d
274, 281 (6th Cir. 1988); 3 Nimmer, 14.02[A], at 14-9; cf.
Harper & Row, 471 U.S. at 567 (noting that in rebuttal
defendant may "show that this damage would have occurred
[anyway] had there been no taking of copyrighted
expression"); Aro Mfg. Co. v. Convertible Top Replacement
Co., 377 U.S. 476, 507 (1964) (noting that actual damages in
patent infringement case are based on "what [the patent
holder's] condition would have been if the infringement had
not occurred") (citation and internal quotation marks
omitted). The plaintiff must also prove that the
infringement was a proximate cause of its loss by
demonstrating that the existence and amount of the loss was a
natural and probable consequence of the infringement. See
Big Seven Music Corp. v. Lennon, 554 F.2d 504, 509 (2d Cir.
1977) ("[D]amages may be recovered only if there is a
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necessary, immediate and direct causal connection between the
wrongdoing and the damages."). A plaintiff may seek
compensation for both direct and "indirect" losses, as long
as the losses claimed are not unduly speculative. See
Business Trends Analysts, Inc. v. Freedonia Group, Inc., 887
F.2d 399, 404 (2d Cir. 1989) (recognizing possibility of
recovery for loss of "enhanced good will" and "market
recognition"); Abeshouse v. Ultragraphics, Inc., 754 F.2d
467, 471 (2d Cir. 1985) (ruling that claimed harm to
"reputation" and "marketability" of copyrighted poster was
"too speculative to support any award of actual damages");
Sunset Lamp Corp. v. Alsy Corp., 749 F. Supp. 520, 524-25
(S.D.N.Y. 1990) (recognizing possibility of recovery for lost
sales of noninfringed items); 3 Nimmer 14.02[A], at 14-11
to 14-21. At the same time, the plaintiff need not prove its
loss of revenue with mathematical precision. See, e.g.,
Stevens Linen Assocs. v. Mastercraft Corp., 656 F.2d 11, 14
(2d Cir. 1981) ("In establishing lost sales due to sales of
an infringing product, courts must necessarily engage in some
degree of speculation.").
DG argued at trial that ADEX capability was
essential both to service MV computers and attract customers,
and therefore nearly all of Grumman's MV customers would have
remained with DG (or would have switched back to DG) had
Grumman not touted its possession and use of ADEX. In
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opposition, Grumman introduced evidence that ADEX was of
little use to Grumman's field engineers and only a minor
factor in consumer's selection of a service vendor. In
effect, Grumman argued that, even without ADEX, customers
would have switched to (or remained with) Grumman in order to
take advantage of its lower prices and allegedly higher-
quality service.
In its objections to the jury charge, Grumman
expressed concerns about the court's instructions on
causation in the lost profits context. Grumman asked the
court to instruct the jury that it was free to consider
whether factors other than Grumman's infringement enabled
Grumman to win customers from DG. On appeal, Grumman
continues to challenge the adequacy of the district court's
instructions on causation, and raises several questions about
the sufficiency of the evidence.
(1) Jury Instructions
The district court's charge, relevant portions of
which are set forth in the margin, invited the jury to
consider the "diverse factors" that make up a customer's
choice of a service organization, and properly allowed the
jury to consider whether the majority of MV equipment owners
would have turned to DG for service had Grumman not possessed
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and used ADEX.44 The instructions also introduced the jury
to the concept of proximate cause. The charge not only
mentioned the concept by name but also gave it content by
explaining, among other things, that the plaintiff "bears the
burden of proving its damages to a reasonable degree of
certainty," may not be compensated for "purely speculative"
damages, and is entitled only to "reasonable" damages. We
conclude that the charge adequately equipped the jury to
determine whether or not DG had established the requisite
causal link between Grumman's infringement and the profits DG
claimed to have lost.45
44. In its charge, the district court stated:
If you conclude that Grumman would not
have been in the business of servicing MV
computers but for its possession and use
of MV/ADEX, or that some or all of
Grumman's customers would not have hired
Grumman to maintain or repair their
computers if Grumman had not infringed
Data General's copyrights, then you
should consider what percentage of those
customers would have done business with
Data General instead.
You may take into account all the
diverse factors which . . . might bear on
the determination, including price,
customer loyalty and level of customer
satisfaction.
45. Grumman's other challenges to the jury instructions are
either meritless or moot. First, Grumman claims that an
apportionment instruction (the subject of the following
section) would have affected the outcome of the lost profits
analysis. As we explained above, however, the district
court's instructions enabled the jury to make findings about
the relative role of infringing and noninfringing factors in
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(2) Sufficiency of the Evidence
Grumman's challenge to the evidentiary basis for
the jury's award of actual damages is less developed and
equally unavailing. Upsetting a jury's damage award is a
daunting task for any appellant, for we must draw all
reasonable inferences in favor of the verdict, upholding the
award if it derives from "any rational appraisal or estimate
of the damages that could be based on the evidence before the
jury." Anthony v. G.M.D. Airline Servs., 17 F.3d 490, 493
(1st Cir. 1994) (citations and internal quotation marks
omitted). The likelihood of a victorious appeal is
especially remote in the absence of rigorous argumentation.
Cf. Chakrabarti v. Cohen, F.3d , (1st Cir. 1994)
[Nos. 92-1987 and 92-1988, slip op. at 8] (suggesting that,
when challenging the sufficiency of the evidence, a
customers' selection of Grumman over DG. Further examination
of the value added by Grumman to its own products would have
been unnecessary. Second, Grumman contends that it was
impermissible for DG to calculate its lost profits based on
its monopoly prices. This argument is untimely because
Grumman did not raise this issue in its objections to the
jury instructions. In any event, Grumman has not established
that DG's exploitation of its monopoly is unlawful, infra,
Section III.B.2., and has not provided any authority for the
proposition that actual damages cannot be based on the loss
of lawful monopoly profits. Third, Grumman suggests that the
damage award was inflated because the jury was improperly
forbidden from considering the extent to which the 1976
Settlement Agreement authorized Grumman's use of ADEX.
However, as illustrated supra, Section III.A.3., Grumman did
not present trialworthy evidence that the Settlement
Agreement authorized the acquisition and use of ADEX in any
meaningful sense.
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defendant-appellant must make a "serious effort . . . to
analyze the evidence taking it in the light most favorable to
[the plaintiff] and resolving credibility issues in [the
plaintiff's] favor"). Moreover, the calculation of lost
profits will always involve "some degree of speculation."
Stevens Linen Assocs., 656 F.2d at 14. As a result, we rely
on the appellant to specify with some precision the manner in
which unduly speculative reasoning is likely to have infected
the jury's verdict.
Grumman raises several specific concerns. First,
Grumman complains that the jury had no basis to conclude that
Grumman would not be in the MV business because DG's damage
expert, Alan Friedman, did not consider the relative
infrequency of Grumman's use of ADEX, or the value Grumman
added to its product through "substantially lower prices,
superior service and higher level of customer satisfaction."
Grumman's ultimate concern is that "no attempt at
apportionment was made." But Friedman did not set out to
show that there was nothing attractive about Grumman service
apart from its possession and use of ADEX. Instead, he
reported -- and the jury apparently believed -- that, for
most owners of MV equipment, ADEX capability was the critical
attribute in a service vendor. As a result, Friedman
concluded, ADEX capability was the sine qua non of Grumman's
success in its chosen niche as a national vendor of MV
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service. Drawing all reasonable inferences in favor of DG,
we conclude that a reasonable jury was free to agree.
Grumman also argues that the jury must have
improperly followed Friedman's lead in adding to the lost
profits figure all of the service and hardware needs of
Grumman's MV customers that DG was capable of filling.
Grumman notes that Friedman based his testimony on evidence
that customers prefer to have a single vendor of service, but
claims that this evidence deserves little weight because
"customers that had gone to [Grumman] had already
demonstrated their particular price/service sensitivity."
Viewed in a light most favorable to the verdict, however, the
record evidence adequately supports the inference that
Friedman invited the jury to draw. For example, while MV
equipment owners may have switched to Grumman in search of
lower prices and better service, the evidence suggests that
none of them had to give up a preference for single sourcing
to do so. Indeed, the evidence suggests that Grumman's
drawing power was due in part to its ability to be a single
source of service, particularly for customers with multiple
brands of computer equipment. Nor did Grumman attempt to
rebut Friedman's view with evidence of MV equipment owners
who sacrificed their preference for single sourcing in
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certain circumstances.46 More importantly, Friedman did
not presume that customers would be entirely insensitive to
issues of price and quality. In calculating DG's lost
profits, he reduced the figure by an estimate of the business
DG would itself have lost to competition from TPMs.47
Finally, we note that DG did not seek compensation for a loss
in "goodwill" or "market recognition" that was difficult to
ascertain, cf. Business Trends, 887 F.2d at 404, but rather
for the loss of a reasonably verifiable number of customers
with a limited and predictable set of service needs and a
demonstrated tendency to satisfy those needs by turning to a
single vendor. In short, the evidence does not suggest that
the jury's award of actual damages falls outside the "`wide
range of arguable appropriateness.'" Toucet v. Maritime
46. Such rebuttal evidence, if it existed, should have been
easily within Grumman's reach. For example, the evidence
suggests that purchasers of DG equipment generally used DG
service in the initial warranty period. Thus, owners of DG
equipment might periodically upgrade a portion of their
equipment, and therefore there would be times when one owner
will have some newly upgraded equipment still under warranty
and some older equipment no longer under warranty. Grumman
could readily have introduced evidence that some of these
equipment owners ignored their single-vendor preference by
turning to a TPM for service of equipment not under warranty.
Similarly, it would not have been difficult for Grumman to
discredit Friedman's opinion by showing that DG had a
significant number of price-conscious service customers who
regularly turned to other vendors when purchasing new
equipment, or that customers who purchased DG service on a
"time and materials" basis often used TPMs as well.
47. In estimating this "volume loss," Friedman assumed that,
without ADEX, Grumman would not have been among the TPMs
competing for MV-related business.
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Overseas Corp., 991 F.2d 5, 11 (1st Cir. 1993) (quoting
Wagenmann v. Adams, 829 F.2d 196, 216 (1st Cir. 1987)).
b. Infringer's Profits
In addition to actual damages, a copyright
plaintiff may also recover the infringer's nonduplicative
profits, i.e., "any profits of the infringer that are
attributable to the infringement and are not taken into
account in computing the actual damages." 17 U.S.C.
504(b). In the context of infringer's profits, the plaintiff
must meet only a minimal burden of proof in order to trigger
a rebuttable presumption that the defendant's revenues are
entirely attributable to the infringement; the burden then
shifts to the defendant to demonstrate what portion of its
revenues represent profits, and what portion of its profits
are not traceable to the infringement. See id.; Frank Music,
772 F.2d at 514; Cream Records, Inc. v. Jos. Schlitz Brewing
Co., 754 F.2d 826, 828 (9th Cir. 1985). Specifically,
Section 504(b) provides:
In establishing the infringer's profits,
the copyright owner is required to
present proof only of the infringer's
gross revenue, and the infringer is
required to prove his or her deductible
expenses and the elements of profit
attributable to factors other than the
copyrighted work.48
48. Contrary to DG's unsupported assertions, a defendant in
a Massachusetts trade secrets action appears to have the same
right to ask for apportionment along with the same burden of
proof. Citing 17 U.S.C. 504(b) as persuasive authority,
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DG introduced evidence that, of Grumman's gross
revenue from MV-related business during the period 1984 to
1990, $5.4 million consisted of business eliminated from the
calculation of DG's lost profits. Although no further proof
was required, DG accepted Grumman's estimates of its profit
margin, and concluded that Grumman's nonduplicative profits
amounted to approximately $1.6 million.49 Anticipating
Grumman's attempt to prove the need for apportionment, DG
also argued that, without ADEX, Grumman would not have been
in the MV service business on a national scale, and that
the Massachusetts Supreme Judicial Court has set forth the
following rule for apportionment in trade secrets cases:
Once a plaintiff demonstrates that a
defendant made a profit from the sale of
products produced by improper use of a
trade secret, the burden shifts to the
defendant to demonstrate those costs
properly to be offset against its profit
and the portion of its profit
attributable to factors other than the
trade secret.
USM Corp. v. Marson Fastener Corp., 467 N.E.2d 1271, 1276
(Mass. 1984). See also Jet Spray Cooler, Inc. v. Crampton,
385 N.E.2d 1349, 1358-59 n.14 (Mass. 1979) (citing, inter
alia, Sheldon v. Metro-Goldwyn Pictures Corp., 106 F.2d 45,
48 (2d Cir. 1939), aff'd, 309 U.S. 390 (1940)).
49. This amount included DG's estimated "volume loss" and
"excluded revenue." "Volume loss" represents the MV-related
business that DG would have lost in competition with TPMs
even if DG had been the only service vendor with ADEX
capability. "Excluded revenue" represents the MV-related
business that DG did not have the capacity or the desire to
seek, such as service contracts for certain systems with at
least one non-DG CPU or service contracts for certain non-DG
peripheral equipment attached to DG CPUs.
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therefore Grumman would not have earned the remainder of its
MV-related profits. In other words, DG's theory was that
because ADEX capability was generally essential to attract
customers with MV computers, few such customers would have
chosen Grumman as a service vendor, causing Grumman to leave
(or perhaps never enter) the national market for service of
MV-related equipment. Thus, according to DG, Grumman's
nonduplicative profits were the indirect result of consumer
choices distorted by Grumman's infringement.
It is unclear whether Grumman contested DG's theory
on the merits, although Grumman did introduce some expert
testimony that owners of MV equipment were relatively
indifferent to the ADEX issue in their choice of service
vendors. As amplified by its arguments on appeal, however,
Grumman's primary strategy was to invite the jury to take
Grumman's infringement as a given, and focus instead on why
its customers were willing to pay for Grumman service.
Grumman argued that factors other than its possession and use
of ADEX contributed to its customers' willingness to pay, and
that it was entitled to retain a corresponding share of the
resulting profits. Grumman introduced some evidence tending
to show that its customers attached high value to the price
and quality of Grumman service, as well as Grumman's ability
to service non-DG equipment in a mixed-equipment system.
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Recognizing that DG's "but for" theory focused on a
different aspect of consumer behavior than Grumman's
"contributing factors" theory, Grumman argued below that the
court's instructions should leave the jury free to adopt
either line of reasoning. Grumman's suggested method of
doing so was for the court to instruct the jury on the
concept of apportionment of infringer's profits set forth in
Section 504(b). The district court agreed that the jury
could adopt the approach best suited to the circumstances,
but refused to give an explicit instruction on apportionment.
Assuming for the moment that Grumman was entitled
to invite the jury to adopt its analytical framework, we do
not believe that the court's instruction "properly
apprise[d]" the jury of the validity of such an approach.
Joia v. Jo-Ja Serv. Corp., 817 F.2d 908, 912 (1st Cir. 1987),
cert. denied, 484 U.S. 1008 (1988). Although the district
court instructed the jury to include among infringer's
profits only those revenues "attributable to the
infringement," at no point did the court fully reveal or
explain the relatively difficult statutory concept of
"elements of profit attributable to factors other than the
copyrighted work." 17 U.S.C. 504(b). As noted in the
preceding section, the court did refer (at least in its
instruction on actual damages) to "diverse factors" which
might have influenced customers' choice of Grumman over DG,
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but the court did not inform the jury that there may have
been many reasons for customers' willingness to pay for
Grumman service apart from the fact that Grumman possessed
and used ADEX. Cf. Walker v. Forbes, Inc., No. 93-1273, 1994
WL 287173, at *7 (4th Cir. June 30, 1994) (praising district
court's "rich and detailed instructions . . . explaining . .
. the correct apportionment of profit attributable to the
infringement, [and] faithfully explaining the rules and
procedures set out in the statute").
It is unclear why, if the district court chose to
reject Grumman's proposed instruction, it did not simply read
to the jury the language of Section 504(b). We may overlook
its failure to do so only if there is no basis in law or fact
for the application of Grumman's theory. See Joia, 817 F.2d
at 912 (holding that "all parties are entitled to an adequate
jury instruction upon the controlling issues"); cf. Allen v.
Chance Mfg. Co., 873 F.2d 465, 470 (1st Cir. 1989) (holding
that remand on basis of instructional error is required only
if error "may have unfairly affected the jury's
conclusions"). For the reasons set forth below, we believe
that Grumman's theory is firmly rooted in the law of
copyright and the record of this case.
The defendant's burden under the apportionment
provision of Section 504(b) is primarily to demonstrate the
absence of a causal link between the infringement and all or
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part of the profits claimed by the plaintiff. See Walker,
1994 WL 287173, at *3-4 (describing Section 504(b) as "a rule
of causation"). Because the rebuttable presumption of
causation represents a presumption as to both cause-in-fact
and proximate cause, there are two avenues of attack
available to a copyright defendant. First, the defendant can
attempt to show that consumers would have purchased its
product even without the infringing element. See, e.g., id.
at *4 (holding that district court properly allowed the
defendant to show that an unauthorized reproduction of a
photograph in an issue of its magazine had no causal relation
to "amounts of revenue . . . committed to the issue sight
unseen").50 Alternatively, the defendant may show that the
existence and amount of its profits are not the natural and
probable consequences of the infringement alone, but are also
the result of other factors which either add intrinsic value
to the product or have independent promotional value. See,
e.g., Sheldon v. Metro-Goldwyn Pictures Corp., 309 U.S. 390,
407-08 (1940) (approving apportionment where profits of
defendant's film were largely attributable not to the
plaintiff's pirated story but rather to the "drawing power"
of the star performers and the artistry of others involved in
50. Note, however, that if the plaintiff cannot prove actual
damages and the defendant shows that none of its gain is
attributable to the infringement, the plaintiff would still
be entitled to elect statutory damages. See 17 U.S.C. 504(c)
(1988); see generally 3 Nimmer 14.04, at 14-47 to 14-79.
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the creation of the film); Abend v. MCA, Inc., 863 F.2d 1465,
1480 (9th Cir. 1988) (remanding for apportionment where
factors other than the underlying story -- particularly the
talent and popularity of Alfred Hitchcock, Jimmy Stewart, and
Grace Kelly -- "clearly contributed" to the success of the
film "Rear Window"), aff'd on other grounds, 495 U.S. 207
(1990); Sygma Photo News, Inc. v. High Soc'y Magazine, Inc.,
778 F.2d 89, 96 (2d Cir. 1985) (apportioning profits from
sales of "Celebrity Skin" magazine where promotional cover
contained not only infringing photograph of Raquel Welch but
also a list of other nude celebrity photographs contained
within); Cream Records, 754 F.2d at 828-29 (upholding
apportionment of profits from malt liquor sales apparently
based on popularity of noninfringing product and promotional
value of noninfringing elements of defendant's commercial);
cf. USM Corp., 467 N.E.2d at 1277 (trade secrets; recognizing
that apportionment would have been proper if defendant had
demonstrated that factors such as "management skill" or
"capital investment" had contributed to the success of its
product). Grumman apparently wished to tread the second
path, and it was unquestionably entitled to do so.
Grumman also suggests on appeal that the jury
should have been instructed that it could not accept DG's
theory on the apportionment issue because DG gave little or
no weight to Grumman's contributions. But the only argument
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presented to the district court was that the court should add
an instruction to inform the jury that it was permitted to
apportion Grumman's profits. It is usually imprudent for a
court of appeals to pass on an issue not presented to the
district court in the first instance, and we decline to do so
in these circumstances. See, e.g., Mariani v. Doctors
Assocs., 983 F.2d 5, 8 n.4 (1st Cir. 1993) ("We have
repeatedly warned that we will not entertain arguments made
for the first time on appeal.") (citing FDIC v. World Univ.,
Inc., 978 F.2d 10, 13 (1st Cir. 1992)); United States v.
Zannino, 895 F.2d 1, 17 (1st Cir.) ("[A] litigant has an
obligation to spell out its arguments squarely and
distinctly, or else forever hold its peace.") (citations and
internal quotation marks omitted), cert. denied, 494 U.S.
1082 (1990).
We are compelled to add, however, that an
instruction on apportionment would not rob DG's theory of all
possible meaning. In the first place, DG was free to argue
that Grumman's infringement was a "but for" cause of
Grumman's nonduplicative profits, even if the court should
have explained to the jury that Grumman could still satisfy
its burden by demonstrating the absence of proximate
causation. In addition, DG was entitled to argue that
Grumman's infringement should be viewed as the sole or
overriding cause of Grumman's profits. Cf. Frank Music, 772
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F.2d at 518 (noting that "no one element was the sole or
overriding reason" for the success of defendant's infringing
"Hallelujah Hollywood" stage show).
Moreover, although apportionment primarily depends
on questions of causation, it is ultimately a delicate
exercise informed by considerations of fairness and public
policy, as well as fact. The doctrine of apportionment was
"established upon equitable principles" in the analogous
context of patent infringement. Sheldon, 309 U.S. at 401.
And, in adopting the principle of apportionment for copyright
cases, the Court observed that "[e]quity is concerned with
making a fair apportionment so that neither party will have
what justly belongs to the other." Id. at 408 (emphasis
added). See also 3 Nimmer 14.03[C], at 14-42 (noting that
Copyright Act of 1976 "expressly adopted" the apportionment
principle announced in Sheldon). In fact, the burden-
shifting rule in Sheldon (and Section 504(b)) is itself an
equitable response to an infringer who has frustrated the
task of apportionment by co-mingling profits. See Sheldon,
309 U.S. at 401 ("[T]he defendant, being responsible for the
blending of the lawful with the unlawful, had to abide the
consequences, as in the case of one who has wrongfully
produced a confusion of goods.") (referring to Callaghan v.
Myers, 128 U.S. 617 (1888)). Equitable factors may also
affect the substance of the apportionment analysis. For
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example, where the plaintiff cannot prove actual damages and
the defendant's profits are only from the sale of a
noninfringing product, the only way to prevent unjust
enrichment may be to place more weight on the profit-
generating effect of an infringing sales tool used to promote
that product. See, e.g., Konor Enters. v. Eagle
Publications, Inc., 878 F.2d 138, 140 (4th Cir. 1989)
(suggesting that defendant may not be entitled to retain any
of the profits from sale of advertising space where it is
"plausible . . . that all profits were a direct result" of
infringing marketing information distributed to potential
advertisers).
Similarly, the policies underlying the Copyright
Act may play some role in the apportionment of profits. For
example, Sheldon and its progeny suggest that apportionment
is almost always available in the context of infringing
derivative works, perhaps in part because original expression
added by the infringer is itself entitled to copyright
protection. Furthermore, where the plaintiff is seeking to
vindicate its right to exclude others rather than its right
to collect a licensing fee, see 17 U.S.C. 106 (1988 & Supp.
IV 1992) (describing rights of copyright owner), it may be
more appropriate to view the infringement as an "overriding"
cause of the defendant's profits. In such cases, rigid
isolation of the value of the infringement to the defendant
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(which would approximate a "reasonable" licensing fee) would
effectively condone a license the plaintiff never wished to
grant. Lastly, we note that an unjust enrichment theory aims
to strip the defendant of its ill-gotten gains, see, e.g., 3
Nimmer 14.01[A], at 14-6, encourage compliance with the
Copyright Act, see, e.g., Walker, 1994 WL 287173, at *2
(noting that an award of infringer's profits "makes the
infringer realize that it is cheaper to buy than to steal"),
and perhaps "compensate" a plaintiff unable to prove actual
damages, see Sheldon, 309 U.S. at 399 (describing the goal of
an award of infringer's profits as "just compensation for the
wrong"). Therefore, apportionment of infringer's profits may
be particularly appropriate where a concurrent award of
actual damages significantly serves all three purposes.51
In light of the discussion above, we hold that
Grumman was entitled to an instruction on apportionment in
order to allow the jury to determine whether and to what
51. Our discussion of equitable and policy considerations is
intended to aid courts in apportioning profits when the
parties submit the issue of infringer's profits to the court,
see Sid & Marty Krofft Television Productions, Inc. v.
McDonald's Corp., 562 F.2d 1157, 1175 (9th Cir. 1977) (noting
that parties may stipulate to bench trial on issue of
infringer's profits), and to provide some rational
explanation for the discordant aspects of the case law on
apportionment. While a court may instruct the jury that
damages should be "reasonable" (as the court in this case did
without objection from either party), we do not hold that a
court may ask the jury itself to weigh matters of equity and
public policy.
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extent apportionment of its nonduplicative profits was
reasonable under the circumstances of this case.
Whether a remand is necessary is a different
question, but one readily resolved. Grumman clearly
introduced evidence that would have permitted a jury to find
that Grumman's customers were willing to pay for Grumman
service for reasons beyond its possession and use of ADEX.
Indeed, we believe that Grumman's evidence is sufficiently
compelling that Grumman is entitled to some apportionment as
a matter of law. Because the absence of an explicit
instruction on apportionment "may have unfairly affected the
jury's conclusions," Allen, 873 F.2d at 470, we remand the
case to the district court for an appropriate resolution of
theissue ofapportionment ofGrumman's nonduplicativeprofits.52
52. In order to avoid undue confusion and unnecessary
proceedings, we add the following procedural notes to assist
the district court in resolving the issue of apportionment of
Grumman's nonduplicative profits.
Cognizant of our authority to take whatever action "may
be just under the circumstances," 28 U.S.C. 2106, we
believe that remittitur would provide the most equitable and
efficient means of remedying the error. The factual record
was highly developed at trial on the issue of Grumman's
profits, leaving a trail adequate to allow the district court
to approximate the effect of the erroneous instruction on the
jury's verdict. See 6A James Wm. Moore, et al., Moore's
Federal Practice 59.08[7], at 59-207 (2d ed. 1994)
(explaining that if "the effect of [an erroneous instruction]
can be reasonably approximated to a definite portion of the
amount of the verdict, the appellate court may condition its
affirmance on the plaintiff remitting that amount of the
verdict which is apparently traceable to the error below").
Moreover, Grumman requested remittitur as an alternative
remedy in its Rule 59 motion.
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6. Attorney's Fees
Because it appears that an award of attorney's fees
has not been quantified, see Grumman VII, 825 F. Supp. at 370
(ordering DG to resubmit its application for attorney's
fees), the merits of such an award are not before this court.
Nonetheless, Grumman mounts a procedural attack that does
appear to be ripe for review. Grumman claims that (1) DG
"elected" the state trade secrets remedy over any remedy
available under the Copyright Act, and (2) since attorney's
fees are only available under the Copyright Act, and not
We are aware that the jury did not separately award
actual damages and infringer's profits. Nevertheless, the
verdict is relatively close to the amount DG requested and it
is extremely unlikely that the jury would not have relied
primarily on one or the other of the competing expert
theories. DG requested $28,003,000 in damages, consisting of
$26,364,000 in lost profits and $1,639,000 in nonduplicative
profits. The jury awarded DG a total of $27,417,000 in
damages -- $586,000 less than the requested amount. As a
result, DG appears to have won infringer's profits of at
least $1,053,000 ($27,417,000 - $26,364,000) and at most
$1,639,000. While we do not mandate this particular
analysis, we are confident that the district court, with its
superior understanding of the voluminous record, will be able
to estimate either the relevant figures or, if necessary, the
"maximum effect" of the error on the jury's verdict. See id.
59.09[7], at 59-207 to 59-208 ("Even when the effect of the
error cannot be allocated to a distinct portion of the
verdict, remittitur may still be used if the maximum effect
of the error can be established.").
If DG were to refuse remittitur in favor of a new jury
trial on the issue of apportionment of Grumman's
nonduplicative profits, we hope that the parties will
negotiate in good faith to settle the remanded portion of the
case or at least agree to a more expeditious procedure. See,
e.g., Sid & Marty Krofft, 562 F.2d at 1175 (noting that right
to jury trial extends to adjudication of claim for
infringer's profits but that parties may stipulate to bench
trial).
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state trade secrets law, DG is not entitled to any attorney's
fees. Grumman is wrong in both respects. DG did not simply
elect state law remedies. DG proposed a judgment form,
wholly adopted by the district court, that included (1) the
compensatory damages awarded by the jury,53 (2) state law
statutory damages, (3) state law prejudgment interest, and
(4) federal law attorney's fees. Nor was DG required to
forsake nonduplicative elements of the various federal and
state law remedies. See Foley v. City of Lowell, 948 F.2d
10, 17 (1st Cir. 1991) (suggesting that, as long as the
damages are "segregated into federal and state components,"
plaintiff need not choose one body of law under which all
damages will be paid); cf. Freeman v. Package Mach. Co., 865
F.2d 1331, 1343-45 (1st Cir. 1988) (holding that plaintiff
may not receive award based on federal and state law so as to
receive double recovery for same element of relief);
Schroeder v. Lotito, 747 F.2d 801, 802 (1st Cir. 1984) (per
curiam) (approving judgment for state law accounting of
profits and federal law attorney's fees). Because DG has not
requested a double award of attorney's fees, there was no
error in the award of attorney's fees under federal law.
53. The jury awarded the same amount of compensatory damages
for both the federal copyright infringement claim and the
state trade secrets claim.
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B. Grumman's Antitrust Counterclaims
The district court granted DG's motions for summary
judgment with respect to Grumman's tying claim under Section
1 of the Sherman Act as well as its monopolization claim
under Section 2. We affirm both rulings, although on
somewhat different grounds.
1. Illegal Tying
Section 1 of the Sherman Act prohibits a seller
from "tying" the sale of one product to the purchase of a
second product if the seller thereby avoids competition on
the merits of the "tied" product. See 15 U.S.C. 1 ("Every
contract . . . in restraint of trade or commerce . . . is
declared to be illegal."); Jefferson Parish Hosp. Dist. No. 2
v. Hyde, 466 U.S. 2, 9-18 (1984); Lee v. Life Ins. Co. of N.
Am., 23 F.3d 14, 16 (1st Cir. 1994); Grappone, Inc. v. Subaru
of New England, Inc., 858 F.2d 792, 794-97 (1st Cir. 1988)
(Breyer, J.); Wells Real Estate, Inc. v. Greater Lowell Bd.
of Realtors, 850 F.2d 803, 814-15 (1st Cir.), cert. denied,
488 U.S. 955 (1988). In addition to outlawing "positive"
ties likely to restrain competition, Section 1 also forbids
"negative" ties -- arrangements conditioning the sale of one
product on an agreement not to purchase a second product from
competing suppliers. See Eastman Kodak Co. v. Image
Technical Servs., Inc., 112 S. Ct. 2072, 2079 (1992) (citing
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Northern Pac. Ry. Co. v. United States, 356 U.S. 1, 5-6
(1958)); Lee, 23 F.3d at 16.
There are essentially four elements of a per se54
tying claim: (1) the tying and tied products are actually
two distinct products; (2) there is an agreement or
condition, express or implied, that establishes a tie; (3)
the entity accused of tying has sufficient economic power in
the market for the tying product to distort consumers'
choices with respect to the tied product; and (4) the tie
forecloses a substantial amount of commerce in the market for
the tied product. See, e.g., Kodak, 112 S. Ct. at 2079-81;
Grappone, 858 F.2d at 794; see also STI, 963 F.2d at 683.
Grumman claims that DG unlawfully restrained
competition in the sale of MV service by tying access to ADEX
(the tying product) to an equipment owner's promise to either
purchase service from DG (a positive tie) or not purchase
service from any other vendor (a negative tie). While a
substantial amount of commerce is potentially involved, DG's
motions for summary judgment claimed that there was no proof
of any of the first three elements of a tying claim. The
district court denied DG's first motion for summary judgment
54. Grumman does not argue at this stage that DG violated
the "rule of reason" and proceeds only on a "per se" theory.
See Jefferson Parish, 466 U.S. at 29-31 (noting that in
absence of per se liability, antitrust plaintiff must prove
that defendant's conduct had an "actual adverse effect on
competition").
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but then granted its renewed motion, stating in a sparse
opinion that, as in STI, there was "no evidence which would
warrant a finding of the existence of a tying agreement."
Grumman V, 834 F. Supp. at 485. See also STI, 963 F.2d at
686 ("[STI's] evidence at bottom shows nothing more than a
unilateral decision by Data General to license MV/ADEX to
CMOs but not to others."). We agree with the district
court's conclusion that there is insufficient evidence of a
negative tying arrangement, but believe that the allegation
of a positive tie falters at an earlier step.
a. Two Products
To establish the existence of two separate
products, Grumman must identify the products at issue in each
tie and demonstrate that "there is `sufficient demand for the
purchase of [the tied product] separate from [the tying
product] to identify a distinct product market in which it is
efficient to offer [the tied product] separately from [the
tying product].'" STI, 963 F.2d at 684 (brackets in
original) (quoting Jefferson Parish, 466 U.S. at 21-22. See
also Jefferson Parish, 466 U.S. at 40 (O'Connor, J.,
concurring) ("When the economic advantages of joint packaging
are substantial the package is not appropriately viewed as
two products, and that should be the end of the tying
inquiry."); Lee, 23 F.3d at 16 n.6 (noting that there must be
evidence of "sufficient consumer demand for each individual
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product, and not merely as part of an integrated product
`package'") (emphasis in original).
While Grumman has characterized the tying product
in general terms as "access to ADEX," Grumman actually
identifies two different tying products: ADEX service (a
service) and ADEX software (a good). With respect to the
positive tie, Grumman alleges that DG will not provide ADEX
service (i.e., use of ADEX by a DG service technician) to
equipment owners unless they also purchase DG support
services. With respect to the negative tie, Grumman alleges
that DG will not license ADEX software to equipment owners
unless they agree not to purchase support services from a
TPM.
Grumman has not introduced evidence that ADEX
service is a product separate from other components of
service. There is no evidence that any customer has
purchased, or would wish to purchase, ADEX service separately
from the purchase of other components of service. Nor is
there evidence that it would be efficient for any entity to
provide ADEX service separately from other components of
service.55
55. The Fourth Circuit came to a similar conclusion on a
nearly identical record when it rejected STI's tying claim:
If "access to" MV/ADEX and repair
services are considered to be the
products in question, appellants have
clearly failed to produce sufficient
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In contrast, the record does contain evidence that
ADEX software is a product separate from support services.
It is undisputed that CMO customers wish to license -- and
have licensed -- ADEX software without purchasing support
services from DG or a TPM. There is also evidence that some
of Grumman's customers would consider licensing ADEX from DG
so that Grumman could continue to service their MV computers.
In addition, the summary judgment record would support a
finding that for many years DG provided diagnostics and other
service "tools" to computer purchasers as part of a computer
equipment package, regardless whether the owner performed
self-maintenance or hired DG or a TPM to maintain the
computers. In fact, there is evidence that through the early
1980s, DG provided service "tools" -- including diagnostic
software other than ADEX -- directly to TPMs. Finally, there
is some evidence that other computer manufacturers (IBM,
Digital Equipment Corporation, and Wang) have licensed or
sold diagnostics to those other than their service customers.
evidence that the products are in fact
separate. On the record before us,
demand for mere "access to" MV/ADEX, in
contrast to demand for licenses to use
MV/ADEX, is indistinguishable from demand
for repair services. Appellants have
introduced no evidence that there are
customers who would purchase MV/ADEX-
assisted diagnostic services separately
from all other repair services for Data
General equipment.
STI, 963 F.2d at 685 n.9.
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Viewed in a light most favorable to Grumman, the record
reveals a genuine dispute as to whether ADEX software and
support services for DG computers are distinct products for
the purposes of a tying analysis.56 Consequently, we may
proceed to determine whether Grumman has introduced
sufficient proof that DG has conditioned the licensing of
ADEX to CMOs on the agreement of these customers not to
purchase service from TPMs.
b. Tying Arrangement
Proof of a tying arrangement generally requires
evidence that the supplier's sale of the tying product is
conditioned upon the unwilling purchase of the tied product
from the supplier or an unwilling promise not to purchase the
tied product from any other supplier. See, e.g., Jefferson
Parish, 466 U.S. at 12 ("[T]he essential characteristic of an
invalid tying arrangement lies in the seller's exploitation
of its control over the tying product to force the buyer into
the purchase of a tied product that the buyer either did not
want at all, or might have preferred to purchase elsewhere on
different terms."); Wells Real Estate, 850 F.2d at 814
("Tying arrangements involve the use of leverage over the
market for one product . . . to coerce purchases of a second
product . . . ."). In the absence of an explicit tying
56. Again, the Fourth Circuit reached a similar conclusion
for similar reasons. See STI, 963 F.2d at 684-85.
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agreement, conditioning may be inferred from evidence
indicating that the supplier has actually coerced the
purchase or non-purchase of another product. See Amerinet,
Inc. v. Xerox Corp., 972 F.2d 1483, 1500 (8th Cir. 1992),
cert. denied, 113 S. Ct. 1048 (1993); Advanced Computer
Servs., Inc. v. MAI Sys. Corp., 845 F. Supp. 356, 368
(E.D.Va. 1994) (citing John H. Shenefield & Irwin M. Stelzer,
The Antitrust Laws: A Primer 72 (1993) ("In the absence of an
explicit agreement requiring the purchase as a condition of
the sale, courts will accept proof suggesting any kind of
coercion by the seller or unwillingness to take the second
product by the buyer.")); see also Tic-X-Press, Inc. v. Omni
Promotions Co., 815 F.2d 1407, 1418 (11th Cir. 1987) ("It is
well established that coercion may be established by showing
that the facts and circumstances surrounding the transaction
as a practical matter forced the buyer into purchasing the
tied product."). In essence, whether the conditioning is
explicit or implicit, we will not consider the anti-
competitive effects of a tie to be unreasonable per se unless
there is evidence that the supplier of the tying product has
actually used its market power to impose the condition.
Grumman points to only one alleged negative tying
arrangement, asserting that DG's Cooperative Maintenance
Agreement ("CMO Agreement") contains an explicit tying
condition. The CMO Agreement indeed states that DG designed
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the CMO program for "customers who perform their own
maintenance" and that one qualifying criterion for CMO status
is that the customer "[m]aintain[] systems which were
purchased either for itself or for resale to its customers
[as an official DG distributor]." And, although the record
suggests that CMOs may still purchase DG service (and
presumably TPM service) on a "time and materials" basis,57
CMOs do not enter contracts with either DG or TPMs for
ongoing support services. DG and Grumman both agree that
CMOs cannot allow TPMs to use copies of ADEX licensed by a
CMO.
Grumman's allegation of an illegal tie cannot go to
a jury on a record so sparse. Before turning to the
principal flaw in Grumman's case, we note that these facts
lend only modest support to the accusation that CMOs have
actually promised not to purchase support services from TPMs.
The CMO Agreement does require that participants maintain
their own computers, but nowhere does the agreement define
self-maintenance status in detail or elaborate on the
consequences to a CMO if it enters a service contract with a
57. Frederick Raley, Jr., a DG official, testified at his
deposition that "self-maintaining" CMO customers would still
be able to use DG service, except that "they wouldn't be a
contract customer, they would be a time and materials
customer." This portion of Raley's deposition was actually
placed in the record by Grumman as part of an exhibit to an
affidavit supporting Grumman's opposition to one of DG's
motions for summary judgment.
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TPM. In fact, as we have noted, there is some evidence in
the record that CMOs are free to purchase support services
from others without adverse consequences, at least on a "time
and materials" basis.
More importantly, there is virtually no evidence
that any CMO has unwillingly chosen to maintain its own
computers. Although there is some evidence that DG officials
designed the CMO program in part to prevent loss of DG
revenue to TPMs, there is no evidence that consumers became
CMO customers for any reason other than their belief that the
CMO program was a "product" superior to TPM service. Indeed,
while Grumman has argued tirelessly that DG service customers
are forced to swallow overpriced and inferior support
service, Grumman has offered no evidence that CMO customers
are similarly disadvantaged. There is not a single affidavit
in the record in which a CMO customer expresses either
displeasure with the CMO program or an unfulfilled desire to
switch to a TPM.58 Nor is there any other type of evidence
that DG equipment owners capable of maintaining their own
equipment would be more satisfied as TPM customers than as
CMO customers. Consequently, the evidence in the record
58. Likewise, there is no evidence in the record that former
TPM customers have reluctantly terminated their relationship
with Grumman in order to participate in the CMO program.
Cf. Kodak, 112 S. Ct. at 2081 (noting that record contained
evidence that "consumers have switched to Kodak service even
though they preferred [TPM] service").
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would not allow a reasonable jury to find that the CMO
program is "an inferior or overpriced product," Amerinet, 972
F.2d at 1501, protected from competition by DG's exploitation
of its control over ADEX.
In conclusion, Grumman's allegation of a positive
tie between ADEX service and DG support services fails in the
absence of proof that these services are truly two distinct
products. Grumman's allegation of a negative tie between
ADEX software and non-purchase of TPM support services fails
in the absence of proof that DG coerced consumers to accept
such an arrangement. Accordingly, the district court did not
err in granting DG's motion for summary judgment on Grumman's
tying counterclaim.
2. Monopolization
In addition to alleging unlawful tying, Grumman
accused DG of willfully maintaining its monopoly in the
aftermarket for service of DG computers in violation of
Section 2 of the Sherman Act, 15 U.S.C. 2, which prohibits
the monopolization of "any part of the trade or commerce
among the several States." To survive summary judgment on
its willful maintenance claim, Grumman must demonstrate a
genuine dispute about the existence of two elements: (1) DG's
possession of monopoly power in the market59 for support
59. DG does not seriously dispute Grumman's contention that
the aftermarket for service of DG computers comprises the
"relevant market" for purposes of antitrust analysis.
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services of DG computers; and (2) DG's maintenance of that
power through "exclusionary conduct." Town of Concord v.
Boston Edison Co., 915 F.2d 17, 21 (1st Cir. 1990) (Breyer,
C.J.) (citing, inter alia, United States v. Grinnell Corp.,
384 U.S. 563, 570-71 (1966)), cert. denied, 499 U.S. 931
(1991). The district court assumed the existence of monopoly
power but granted summary judgment on the grounds that
Grumman had not demonstrated the need for a trial on the
element of exclusionary conduct. We follow suit.60
"Exclusionary conduct" is defined as "`conduct,
other than competition on the merits or restraints reasonably
"necessary" to competition on the merits, that reasonably
appears capable of making a significant contribution to
creating or maintaining monopoly power.'" Town of Concord,
915 F.2d at 21 (quoting Barry Wright Corp. v. ITT Grinnell
Corp., 724 F.2d 227, 230 (1st Cir. 1983) (Breyer, J.), and 3
Phillip Areeda & Donald F. Turner, Antitrust Law 626, at 83
Accordingly, and in view of our disposition of this case on
other grounds, we need not consider this issue.
60. We note, however, that the record does contain evidence
of DG's monopoly power in the assumed service aftermarket for
DG computers. In addition to DG's monopoly share (over 90%)
of the service aftermarket, the record contains evidence of
barriers to entry (e.g., costs to TPMs of obtaining
diagnostics and other service "tools"), market imperfections
(e.g., high information costs for computer purchasers and
high switching costs for DG equipment owners), and more
importantly, supracompetitive service prices and price
discrimination among DG service customers.
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(1978) (hereinafter "Areeda & Turner")). We label as
improper that conduct which harms the competitive process and
not conduct which simply harms competitors. Id. That
process is harmed when conduct "obstructs the achievement of
competition's basic goals -- lower prices, better products,
and more efficient production methods." Id. at 21-22. Cf.
Olympia Equip. Leasing Co. v. Western Union Tel. Co., 797
F.2d 370, 375 (7th Cir. 1986) (describing shift in the
emphasis of "antitrust policy . . . from the protection of
competition as a process of rivalry to the protection of
competition as a means of promoting economic efficiency"),
cert. denied, 480 U.S. 934 (1987). In contrast, exclusionary
conduct does not include behavior which poses no unreasonable
threat to consumer welfare but is merely a manifestation of
healthy competition, an absence of competition, or a natural
monopoly. See, e.g., United States v. Grinnell Corp., 384
U.S. 563, 570-71 (1966) (holding that Section 2 punishes only
"willful acquisition or maintenance [of monopoly power] as
distinguished from growth or development as a consequence of
a superior product, business acumen, or historic accident").
Grumman's primary contention is that DG's
unilateral refusal to license ADEX to anyone other than
qualified self-maintainers constitutes exclusionary
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conduct.61 Grumman also attacks as exclusionary DG's
refusal to provide other service tools directly to TPMs. We
first review the principles governing the analysis of a
monopolist's unilateral refusal to deal, and then discuss
whether a unilateral refusal to license a copyrighted work
might ever deserve to be condemned as exclusionary. We hold
below that the desire of an author to be the exclusive user
of its original work is a presumptively legitimate business
justification for the author's refusal to license to
competitors. We hold further that Grumman has not presented
sufficient proof to rebut this presumption and thereby avert
summary judgment. In particular, we find no merit in
Grumman's contention that DG acted in an exclusionary fashion
in discontinuing its liberal policies allowing TPM access to
diagnostic software. Finally, we conclude that no reasonable
jury could find that DG's restrictions on TPM access to other
service tools amount to exclusionary conduct.
a. Unilateral Refusals to Deal
Because a monopolization claim does not require
proof of concerted activity, even the unilateral actions of a
monopolist can constitute exclusionary conduct. See 15
61. Grumman also seeks to portray the alleged positive and
negative tying arrangements as exclusionary conduct violative
of Section 2. We do not consider this argument because of
our determination in the previous section that DG's ADEX
policies cannot properly be described as arrangements
conditioning the sale of one product on the purchase or non-
purchase of another.
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U.S.C. 2 (referring to "[e]very person who shall monopolize
. . . or combine or conspire with any other person . . . to
monopolize") (emphasis added); Moore v. Jas. H. Matthews &
Co., 473 F.2d 328, 332 (9th Cir. 1973) (observing that
"section 2 is not limited to concerted activity"). Thus, a
monopolist's unilateral refusal to deal with its competitors
(as long as the refusal harms the competitive process) may
constitute prima facie evidence of exclusionary conduct in
the context of a Section 2 claim. See Kodak, 112 S. Ct. at
2091 n.32 (citing Aspen Skiing Co. v. Aspen Highlands Skiing
Corp., 472 U.S. 585, 602-05 (1985)). A monopolist may
nevertheless rebut such evidence by establishing a valid
business justification for its conduct. See Kodak, 112 S.
Ct. at 2091 n. 32 (suggesting that monopolist may rebut an
inference of exclusionary conduct by establishing "legitimate
competitive reasons for the refusal"); Aspen Skiing, 472 U.S.
at 608 (suggesting that sufficient evidence of harm to
consumers and competitors triggers further inquiry as to
whether the monopolist has "persuade[d] the jury that its
[harmful] conduct was justified by [a] normal business
purpose"). In general, a business justification is valid if
it relates directly or indirectly to the enhancement of
consumer welfare. Thus, pursuit of efficiency and quality
control might be legitimate competitive reasons for an
otherwise exclusionary refusal to deal, while the desire to
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maintain a monopoly market share or thwart the entry of
competitors would not. See Kodak, 112 S. Ct. at 2091
(discussing the validity and sufficiency of various business
justifications); Aspen Skiing, 472 U.S. at 608-11 (same); see
generally 7 Areeda & Turner 1504, at 377-83; 9 Areeda &
Turner 1713, 1716-17, at 148-61, 185-239. In essence, a
unilateral refusal to deal is prima facie exclusionary if
there is evidence of harm to the competitive process; a valid
business justification requires proof of countervailing
benefits to the competitive process.
Despite the theoretical possibility, there have
been relatively few cases in which a unilateral refusal to
deal has formed the basis of a successful Section 2 claim.
Several of the cases commonly cited for a supposed duty to
deal were actually cases of joint conduct in which some
competitors joined to frustrate others. See Associated Press
v. United States, 326 U.S. 1 (1945); United States v.
Terminal R.R. Ass'n, 224 U.S. 383 (1912). Prior to Aspen
Skiing, the case that probably came closest to condemning a
true unilateral refusal to deal was Otter Tail Power Co. v.
United States, 410 U.S. 366 (1973), which condemned the
refusal of a wholesale power supplier either to sell
wholesale power to municipal systems or to "wheel power" when
Otter Tail's retail franchises expired and local
municipalities sought to supplant Otter Tail's local
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distributors. The case not only involved a capital-intensive
public utility facility -- which could not effectively be
duplicated and occupied a distinct separate market -- but the
Supreme Court laid considerable emphasis on "supported"
findings in the district court "that Otter Tail's refusals to
sell at wholesale or to wheel were solely to prevent
municipal power systems from eroding its monopolistic
position." 410 U.S. at 378.
In Aspen Skiing, the Court criticized a
monopolist's unilateral refusal to deal in a very different
situation, casting serious doubt on the proposition that the
Court has adopted any single rule or formula for determining
when a unilateral refusal to deal is unlawful. In that case,
an "all-Aspen" ski ticket -- valid at any mountain in Aspen -
- had been developed and jointly marketed when the three
(later four) ski areas in Aspen were owned by independent
entities. 472 U.S. at 589. Some time after Aspen Skiing
Company ("Ski Co.") came into control of three of the four
ski areas, Ski Co. refused to continue a joint agreement with
Aspen Highlands Skiing Corp. ("Highlands"), the owner of the
fourth area. Id. at 592-93. Although there was no
"essential facility" involved, the Court found that it was
exclusionary for Ski Co., as a monopolist, to refuse to
continue a presumably efficient "pattern of distribution that
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had originated in a competitive market and had persisted for
several years." Id. at 603.
It is not entirely clear whether the Court in Aspen
Skiing merely intended to create a category of refusal-to-
deal cases different from the essential facilities category
or whether the Court was inviting the application of more
general principles of antitrust analysis to unilateral
refusals to deal. We follow the parties' lead in assuming
that Grumman need not tailor its argument to a preexisting
"category" of unilateral refusals to deal.
b. Unilateral Refusals to License
DG attempts to undermine Grumman's monopolization
claim by proposing a powerful irrebuttable presumption: a
unilateral refusal to license a copyright can never
constitute exclusionary conduct. We agree that some type of
presumption is in order, but reach that conclusion only after
an exhaustive inquiry touching on the general character of
presumptions, the role of market analysis in the copyright
context, existing responses to the tension between the
antitrust and patent laws, the nature of the rights extended
by the copyright laws, and our duty to harmonize two
conflicting statutes.
(1) The Propriety of a Presumption
We begin our analysis with two observations.
First, DG's rule of law could be characterized as either an
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empirical assumption or a policy preference. For example, if
we were convinced that refusals to license a copyright always
have a net positive effect on the competitive process, we
might adopt a presumption to this effect in order to preclude
wasteful litigation about a known fact. On the other hand,
if we were convinced that the rights enumerated in the
Copyright Act should take precedence over the
responsibilities set forth in the Sherman Act, regardless of
the realities of the market, we might adopt a blanket rule of
preference. DG's argument contains elements of both
archetypal categories of presumptions.
Second, we note that the phrase "competitive
process" may need some refinement in order to evaluate either
an empirical assumption or a policy presumption concerning
the desirability of unilateral refusals to license a
copyright. Antitrust law generally seeks to punish and
prevent harm to consumers in particular markets, with a focus
on relatively specific time periods. See, e.g., Jefferson
Parish, 466 U.S. at 18 (holding that "any inquiry into the
validity of a tying arrangement must focus on the market or
markets in which the two products are sold, for that is where
the anticompetitive forcing has its impact"). Thus, in
determining whether conduct is exclusionary in the context of
a monopolization claim, we ordinarily focus on harm to the
competitive process in the relevant market and time period.
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See generally 3 Areeda & Turner 517-28, at 346-88, 533-
36, at 406-431. Confining the competitive process in this
way assists courts in deciding particular disputes based
primarily on case-specific adjudicative facts rather than
generally-applicable "legislative" facts or assumptions. The
use and protection of copyrights also affects the
"competitive process," but it may not be appropriate to judge
the effect of the use of a copyright by looking only at one
market or one time period.
We now consider what appears to be an empirical
proclamation from DG: "[T]he refusal to make one's
innovation available to rivals . . . is pro-competitive
conduct."62 As support, DG cites Grinnell, 384 U.S. at
570-71, in which the Court held that willful maintenance of
monopoly does not include "growth or development as a
consequence of a superior product." It is not the
superiority of a work that allows the author to exclude
others, however, but rather the limited monopoly granted by
copyright law. Moreover, one reason why the Copyright Act
fosters investment and innovation is that it may allow the
author to earn monopoly profits by licensing the copyright to
others or reserving the copyright for the author's exclusive
62. Elsewhere in its brief, DG adds that DG's "refus[al] to
allow Grumman to use MV/ADEX is . . . the precise conduct
that the antitrust and copyright laws are designed to
encourage."
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use. See Sony Corp. of Am. v. Universal City Studios, Inc.,
464 U.S. 417, 429 (1984) (explaining that the limited
copyright monopoly "is intended to motivate the creative
activity of authors and inventors by the provision of a
special reward"). Thus, at least in a particular market and
for a particular period of time, the Copyright Act tolerates
behavior that may harm both consumers and competitors. Cf.
SCM Corp. v. Xerox Corp., 645 F.2d 1195, 1203 (2d Cir. 1981)
("[T]he primary purpose of the antitrust laws -- to preserve
competition -- can be frustrated, albeit temporarily, by a
holder's exercise of the patent's inherent exclusionary power
during its term."), cert. denied, 455 U.S. 1016 (1982).
DG does not in fact argue that consumers are better
off in the short term because of the inability of TPMs to
license ADEX. Instead, DG suggests that allowing copyright
owners to exclude others from the use of their works creates
incentives which ultimately work to the benefit of consumers
in the DG service aftermarket as well as to the benefit of
consumers generally. In other words, DG seeks to justify any
immediate harm to consumers by pointing to countervailing
long-term benefits. Certainly, a monopolist's refusal to
license others to use a commercially successful patented idea
is likely to have more profound anti-competitive consequences
than a refusal to allow others to duplicate the copyrighted
expression of an unpatented idea (although such differences
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may become less pronounced if copyright law becomes
increasingly protective of intellectual property such as
computer software). But by no means is a monopolist's
refusal to license a copyright entirely "pro-competitive"
within the ordinary economic framework of the Sherman Act.
Accordingly, it may be inappropriate to adopt an empirical
assumption that simply ignores harm to the competitive
process caused by a monopolist's unilateral refusal to
license a copyright. Even if it is clear that exclusive use
of a copyright can have anti-competitive consequences, some
type of presumption may nevertheless be appropriate as a
matter of either antitrust law or copyright law.
(2) Antitrust Law and the Accommodation of
Patent Rights
Antitrust law is somewhat instructive. Although
creation and protection of original works of authorship may
be a national pastime, the Sherman Act does not explicitly
exempt such activity from antitrust scrutiny and courts
should be wary of creating implied exemptions. See Square D
Co. v. Niagara Frontier Tariff Bureau, Inc., 476 U.S. 409,
421 (1986) ("[E]xemptions from the antitrust laws are
strictly construed and strongly disfavored."); cf. Flood v.
Kuhn, 407 U.S. 258 (1972) (holding that the longstanding
judicially created exemption of professional baseball from
the Sherman Act is an established "aberration" in which
Congress has acquiesced). The Supreme Court has suggested
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that an otherwise reasonable yet anti-competitive use of a
copyright should not "be deemed a per se violation of the
Sherman Act," Broadcast Music, Inc. v. CBS, Inc., 441 U.S.
1, 19 (1979), but a monopolistic refusal to license might
still violate the rule of reason, see Rural Tel. Serv. Co. v.
Feist Publications, Inc., 957 F.2d 765, 767-69 (10th Cir.)
(analyzing reasonableness of monopolist's unilateral refusal
to license copyrighted telephone listings to a competing
distributor of telephone directories), cert. denied, 113 S.
Ct. 490 (1992).63 Should an antitrust plaintiff be allowed
63. It is in any event well settled that concerted and
contractual behavior that threatens competition is not immune
from antitrust inquiry simply because it involves the
exercise of copyright privileges. See, e.g., Kodak, 112 S.
Ct. at 2089 n.29 ("The Court has held many times that power
gained through some natural and legal advantage such as a
patent, copyright, or business acumen can give rise to
liability if `a seller exploits his dominant position in one
market to expand his empire into the next.'") (quoting Times-
Picayune Publishing Co. v. United States, 345 U.S. 594, 611
(1953) (tying case)); United States v. Paramount Pictures,
Inc., 334 U.S. 131, 143 (1948) (holding that horizontal
conspiracy to engage in price-fixing in copyright licenses is
illegal per se); id. at 159 (holding that block-booking of
motion pictures -- "a refusal to license one or more
copyrights unless another copyright is accepted" -- is an
illegal tying arrangement); Straus v. American Publishers'
Ass'n, 231 U.S. 222, 234 (1913) ("No more than the patent
statute was the copyright act intended to authorize
agreements in unlawful restraint of trade . . . ."); Digidyne
Corp. v. Data General Corp., 734 F.2d 1336 (9th Cir. 1984)
(affirming finding of illegal tie between copyrighted
software and computer hardware), cert. denied, 473 U.S. 908
(1985); cf. Miller Insituform, Inc. v. Insituform of N. Am.,
Inc., 830 F.2d 606, 608-09 & n.4 (6th Cir. 1987) (describing
ways in which patent holder may violate the antitrust laws),
cert. denied, 484 U.S. 1064 (1988); United States v.
Westinghouse Elec. Corp., 648 F.2d 642, 646-47 (9th Cir.
1981) (same).
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to demonstrate the anti-competitive effects of a monopolist's
unilateral refusal to grant a copyright license? Would the
monopolist then have to justify its refusal to license by
introducing evidence that the protection of the copyright
laws enabled the author to create a work which advances
consumer welfare?
The courts appear to have partly settled an
analogous conflict between the patent laws and the antitrust
laws, treating the former as creating an implied limited
exception to the latter. In Simpson v. Union Oil Co., 377
U.S. 13, 24 (1964), the Supreme Court stated that "[t]he
patent laws which give a 17-year monopoly on `making, using,
or selling the invention' are in pari materia with the
antitrust laws and modify them pro tanto." Similarly, we
have suggested that the exercise of patent rights is a
"legitimate means" by which a firm may maintain its monopoly
power. Barry Wright, 724 F.2d at 230. Other courts have
specifically held that a monopolist's unilateral refusal to
license a patent is ordinarily not properly viewed as
exclusionary conduct. See Miller Insituform, 830 F.2d at 609
("A patent holder who lawfully acquires a patent cannot be
held liable under Section 2 of the Sherman Act for
maintaining the monopoly power he lawfully acquired by
refusing to license the patent to others."); Westinghouse,
648 F.2d at 647 (finding no antitrust violation because
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"Westinghouse has done no more than to license some of its
patents and refuse to license others"); SCM Corp., 645 F.2d
at 1206 (holding that "where a patent has been lawfully
acquired, subsequent conduct permissible under the patent
laws cannot trigger any liability under the antitrust laws");
see also 3 Areeda & Turner 704, at 114 ("The patent is
itself a government grant of monopoly and is therefore an
exception to usual antitrust rules."). This exception is
inoperable if the patent was unlawfully "acquired." SCM
Corp., 645 F.2d at 1208-09 (analyzing legality of Xerox's
acquisition of plain-paper copier patent); see generally 3
Areeda & Turner 705-707, at 117-45 (discussing effect of
patent acquisition, internal development of patents, and
improprieties in patent procurement on applicability of
antitrust laws).
The "patent exception" is largely a means of
resolving conflicting rights and responsibilities, i.e., a
policy presumption. See, e.g., Miller Insituform, 830 F.2d
at 609 (declaring summarily that "[t]here is no adverse
effect on competition since, as a patent monopolist, [the
patent holder] had [the] exclusive right to manufacture, use,
and sell his invention.") (emphasis added). At the same
time, the exception is grounded in an empirical assumption
that exposing patent activity to wider antitrust scrutiny
would weaken the incentives underlying the patent system,
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thereby depriving consumers of beneficial products. See,
e.g., SCM Corp., 645 F.2d at 1209 (holding that imposition of
antitrust liability for an arguably unreasonable refusal to
license a lawfully acquired patent "would severely trample
upon the incentives provided by our patent laws and thus
undermine the entire patent system").
(3) Copyright Law
Copyright law provides further guidance. The
Copyright Act expressly grants to a copyright owner the
exclusive right to distribute the protected work by "transfer
of ownership, or by rental, lease, or lending." 17 U.S.C.
106. Consequently, "[t]he owner of the copyright, if [it]
pleases, may refrain from vending or licensing and content
[itself] with simply exercising the right to exclude others
from using [its] property." Fox Film Corp. v. Doyal, 286
U.S. 123, 127 (1932). See also Stewart v. Abend, 495 U.S.
207, 229 (1990). We may also venture to infer that, in
passing the Copyright Act, Congress itself made an empirical
assumption that allowing copyright holders to collect license
fees and exclude others from using their works creates a
system of incentives that promotes consumer welfare in the
long term by encouraging investment in the creation of
desirable artistic and functional works of expression. See
Feist Publications, Inc. v. Rural Tel. Serv. Co., 111 S. Ct.
1282, 1290 (1991) ("The primary objective of a copyright is
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not to reward the labor of authors, but `[t]o promote the
Progress of Science and useful Arts.'") (brackets in
original) (quoting U.S. Const. art. I. 8, cl. 8); Sony
Corp., 464 U.S. at 429 (discussing goals and incentives of
copyright protection); Twentieth Century Music Corp. v.
Aiken, 422 U.S. 151, 156 (1975) ("The immediate effect of our
copyright law is to secure a fair return for an `author's'
creative labor. But the ultimate aim is, by this incentive,
to stimulate artistic creativity for the general public
good."). We cannot require antitrust defendants to prove and
reprove the merits of this legislative assumption in every
case where a refusal to license a copyrighted work comes
under attack. Nevertheless, although "nothing in the
copyright statutes would prevent an author from hoarding all
of his works during the term of the copyright," Stewart, 495
U.S. at 228-29 (emphasis added), the Copyright Act does not
explicitly purport to limit the scope of the Sherman Act.
And, if the Copyright Act is silent on the subject generally,
the silence is particularly acute in cases where a monopolist
harms consumers in the monopolized market by refusing to
license a copyrighted work to competitors.
We acknowledge that Congress has not been entirely
silent on the relationship between antitrust and intellectual
property laws. Congress amended the patent laws in 1988 to
provide that "[n]o patent owner otherwise entitled to relief
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for infringement . . . of a patent shall be denied relief or
deemed guilty of misuse or illegal extension of the patent
right by reason of [the patent owner's] refus[al] to license
or use any rights to the patent." 35 U.S.C. 271(d) (1988).
Section 271(d) clearly prevents an infringer from using a
patent misuse defense when the patent owner has unilaterally
refused a license, and may even herald the prohibition of all
antitrust claims and counterclaims premised on a refusal to
license a patent. See Richard Calkins, Patent Law: The
Impact of the 1988 Patent Misuse Reform Act and Noerr-
Pennington Doctrine on Misuse Defenses and Antitrust
Counterclaims, 38 Drake L. Rev. 192-97 (1988-89).
Nevertheless, while Section 271(d) is indicative of
congressional "policy" on the need for antitrust law to
accommodate intellectual property law, Congress did not
similarly amend the Copyright Act.
(4) Harmonizing the Sherman Act and the
Copyright Act
Since neither the Sherman Act nor the Copyright Act
works a partial repeal of the other, and since implied
repeals are disfavored, e.g., Watt v. Alaska, 451 U.S. 259,
267 (1981), we must harmonize the two as best we can, id.,
mindful of the legislative and judicial approaches to similar
conflicts created by the patent laws. We must not lose sight
of the need to preserve the economic incentives fueled by the
Copyright Act, but neither may we ignore the tension between
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the two very different policies embodied in the Copyright Act
and the Sherman Act, both designed ultimately to improve the
welfare of consumers in our free market system. Drawing on
our discussion above, we hold that while exclusionary conduct
can include a monopolist's unilateral refusal to license a
copyright, an author's desire to exclude others from use of
its copyrighted work is a presumptively valid business
justification for any immediate harm to consumers.64
c. DG's Refusal to License ADEX to non-CMOs
Having arrived at the applicable legal standards,
we may resolve Grumman's principal allegation of exclusionary
conduct. Although there may be a genuine factual dispute
about the effect on DG equipment owners of DG's refusal to
license ADEX to TPMs, DG's desire to exercise its rights
under the Copyright Act is a presumptively valid business
justification.
Apparently sensing the uphill nature of its
allegation of an exclusionary refusal to license, Grumman
seeks to overcome any obstacles primarily by characterizing
DG's licensing policies as a monopolist's exclusionary
withdrawal of assistance within the framework of Aspen
64. Wary of undermining the Sherman Act, however, we do not
hold that an antitrust plaintiff can never rebut this
presumption, for there may be rare cases in which imposing
antitrust liability is unlikely to frustrate the objectives
of the Copyright Act.
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Skiing. Citing Aspen Skiing, Grumman contends that DG's
refusal to license ADEX to TPMs, in light of the fact that DG
previously allowed TPMs to use DG diagnostics, is
exclusionary conduct because "[a] monopolist that has helped
a market develop may not withdraw its support without
legitimate business justifications."
Assuming that such a claim can overcome the
presumption that a refusal to license is not exclusionary, we
nevertheless hold that Aspen Skiing cannot apply to the facts
of this case. The reasoning of Aspen Skiing has little to do
with the fact that defendant Ski Co. withdrew assistance upon
which competitors may have relied when entering the market.
Rather, the decision turns on a comparison of the behavior of
firms in a competitive market (the Aspen ski market) with a
monopolist's behavior once competition has been curtailed.
The Court noted that the rich soil of competition had
produced the all-mountain ticket in Aspen and other
multimountain areas, justifying an "infer[ence] that such
tickets satisfy consumer demand in free competitive markets."
472 U.S. at 603. See also Olympia Equip., 797 F.2d at 377
(suggesting that the facts in Aspen Skiing indicate that
"competition required some cooperation among competitors" in
the Aspen ski market). Ski Co.'s decision to eliminate the
ticket in later years was a sign that the weeds of monopoly
had begun to take hold, to the possible detriment of consumer
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welfare. Aspen Skiing, 472 U.S. at 604. Finally, after
canvassing evidence of consumer preferences concerning skiing
options at Aspen, the Court concluded that Ski Co.'s new
policies did in fact harm consumers. Id. at 605-607. In
short, instead of prescribing a categorical approach, Aspen
Skiing ultimately calls for an inquiry that is relatively
routine in antitrust analysis: namely, whether the
monopolist's actions unjustifiably harm the competitive
process by frustrating consumer preferences and erecting
barriers to competition. Cf. Olympia Equip., 797 F.2d at 379
("If [Aspen Skiing] stands for any principle that goes beyond
its unusual facts, it is that a monopolist may be guilty of
monopolization if it refuses to cooperate with a competitor
in circumstances where some cooperation is indispensable to
effective competition.").
Grumman attempts to analogize this case to Aspen
Skiing by focusing on the fact that DG once encouraged firms
to enter the DG service aftermarket by allowing liberal
access to service tools, but no longer does so. The
analytical framework of Aspen Skiing cannot function in these
circumstances, however, because we are unable to view DG's
market practices in both competitive and noncompetitive
conditions. While TPMs have made inroads in the market for
service of DG computers, DG has always been a monopolist in
that market, and competitive conditions have never prevailed.
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Therefore, it would not be "appropriate to infer" from DG's
change of heart that its former policies "satisfy consumer
demand in free competitive markets." Aspen Skiing, 472 U.S.
at 603.
Nor does it appear that Grumman would be able at
trial to overcome the presumption on any other theory. There
is no evidence that DG acquired its ADEX copyrights in any
unlawful manner; indeed, the record suggests that DG
developed all its software internally. Cf. 3 Areeda & Turner
706, at 127-28 (arguing that although an internally
developed patent may be as exclusionary as one acquired from
outside a firm, labelling the former as exclusionary would
"discourage progressiveness by monopolists"). And, while
there is evidence that DG knew that developing a "proprietary
position" in the area of diagnostic software would help to
maintain its monopoly in the aftermarket for service of DG
computers, there is also evidence that DG set out to create a
state-of-the-art diagnostic that would help to improve the
quality of DG service. Cf. id. 706, at 128-29 (suggesting
that "nearly all commercial research rests on a mixture of
motivations" and that a search for an overriding "antisocial"
motivation would be unilluminating). In fact, there is
clearly some evidence that ADEX is a significant benefit to
owners of DG's MV computers. ADEX is a better product than
any other diagnostic for MV computers. The use of ADEX
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appears to have increased the efficiency and reduced the cost
of service because technicians can locate problems more
quickly and, through the use of the software's "remote
assistance" capability, can arrive at customer sites having
determined ahead of time what replacement parts are
necessary. In addition to the possibility of lower prices
occasioned by such gains in efficiency, ADEX also promises to
lower prices through gains in effectiveness. For example,
customers may save the cost of replacing expensive hardware
components because the use of advanced diagnostics increases
the possibility that technicians can locate a problem and
repair the component.
d. DG's Other Restrictive Policies
Grumman's other allegations of exclusionary conduct
are equally devoid of merit and require no extended analysis.
It is essentially undisputed that DG will not provide spare
parts, depot repair services, certain documentation, change
order kits, or schematics to TPMs. But there is no evidence
of any resulting harm to DG equipment owners. DG makes most
of these items available directly to equipment owners.
Equipment owners "may purchase . . . depot repair services,
rev-ups [change order kits], and spare parts directly from
DG, regardless of whether their computers are serviced by DG,
TPMs, or themselves." Grumman II, 761 F. Supp. at 189. We
cannot presume that elimination of an intermediate seller of
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such items harms consumers; indeed, consumers are likely to
benefit by not having to accept TPMs' mark-up of DG prices.
Further, a direct sales policy does not act as a significant
barrier to market entry by competitors offering lower prices
for higher quality support services. TPM technicians may
identify broken parts for the customer to send to DG's repair
depot, use the change order kits to upgrade a customer's
computer, and install spare parts the customer has ordered
from DG.
Neither equipment owners nor TPMs may purchase
schematics (blueprints of equipment that often contain
manufacturing secrets), but Grumman has not introduced
sufficient evidence that this policy constitutes exclusionary
conduct. Grumman's theory below was that DG's refusal to
sell schematics to TPMs prevented TPMs from acquiring the
information necessary to develop fully competitive
substitutes for ADEX. Even a monopolist, however, "may
normally keep its innovations secret from its rivals as long
as it wishes." Berkey Photo, Inc. v. Eastman Kodak Co., 603
F.2d 263, 281 (2d Cir. 1979), cert. denied, 444 U.S. 1093
(1980). DG's policy might be exclusionary if DG had sought
to alter its equipment (and therefore the schematics
describing that equipment) in order to prevent technological
advances by TPMs. But, as the district court noted, "Grumman
. . . makes no allegations that DG has in fact attempted to
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subvert competitors' efforts to develop and implement
competing diagnostics." Grumman II, 761 F. Supp. at 191.
In conclusion, Grumman has not produced evidence
from which a jury could find that DG engaged in exclusionary
conduct by unilaterally refusing to license ADEX or sell
schematics to TPMs, or by only selling other service tools
directly to equipment owners. Therefore, there was no error
in the district court's entry of summary judgment on
Grumman's monopolization claim.
IV.
CONCLUSION
For the foregoing reasons, we affirm the district
court in every respect save for its failure to instruct the
jury on its duty to consider Grumman's plea for apportionment
of Grumman's nonduplicative profits.65 We remand the case
to the district court for the sole purpose of resolving that
issue.
So ordered.
65. We have considered all of Grumman's other arguments, and
find none of sufficient merit to alter our conclusions.
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Data General Corp. v. Grumman Systems Support Corp.
Court: Court of Appeals for the First Circuit
Date filed: 1994-09-15
Citations: 36 F.3d 1147
Copy CitationsCombined Opinion