Microsoft v. Software Wholesale Club

Citation: Microsoft Corp. v. Software Wholesale Club, Inc., 129 F.Supp.2d 995 (S.D. Tex. 2000).

Factual Background
Plaintiff, Microsoft Corporation (“Microsoft”), is a business engaged in developing, marketing, distributing and licensing computer software programs. Among its many titles, Microsoft developed and distributed a computer program known as Microsoft Office 97 Professional Edition (“Office Pro 97”). The program was part of a suite that combined various applications in a single kit. The kit contained a jewelcase, diskettes and/or CD-ROM, an end user license agreement (“EULA”), an instruction manual and a certificate of authenticity. Any user wishing to purchase multiple copies of Office Pro 97 was not required re-purchase the entire package, rather, Microsoft allowed Office Pro 97 customers to procure additional EULAs, known as License Paks, which allowed installation of the software on additional computers. Defendant, Software Wholesale Club, Inc. (“SWC”), is a corporation in the business of selling computer software at discount prices to dealers and retail distributors. One of SWC’s primary business strategies included purchasing low-cost software from businesses that are either overstocked, going out of business, or have “old” or damaged software and selling the products to customers well below market rate.

In 1998, Microsoft became aware that SWC distributed a counterfeit copy of Office Pro 97. Upon learning of the distribution, Microsoft sent a cease-and-desist letter to SWC, notifying the company of its infringement and requesting that it cease all such illegal sales. Several months later, in May 1999, Microsoft hired a private investigator to set up a “trap purchase” of a stand-alone EULA from SWC. The private investigator successfully purchased the EULA and, upon further analysis, the copy was determined to contain discolored Microsoft logos and fraudulent typeface.

Microsoft then filed suit against SWC for violating federal copyright and trademark laws. Additionally, Microsoft alleged the right to recover enhanced statutory damages and attorney’s fees. SWC countered Microsoft’s claims, alleging that Microsoft defamed SWC when it published an announcement on its website that several companies, including SWC, were distributing counterfeit software and licenses.

Subsequently, both parties filed motions for summary judgment.

Trial Court Proceedings
At trial, the court granted Microsoft’s motions for summary judgment as to the copyright and trademark infringement claims. Furthermore, the court concluded that Microsoft was entitled to collect attorney’s fees for SWC’s copyright infringement. In concluding SWC infringed Microsoft’s copyright, the court applied the standard found in 17 U.S.C. §501. When doing so, the court determined that the validity of Microsoft’s software copyrights was undisputed. Therefore, the burden shifted to the defendants to submit evidence raising a genuine issue of material fact to either the claim that Microsoft owned a valid copyright or that the defendants violated Microsoft’s public distribution right. Since SWC only alleged in their complaint that they “lack[ed] knowledge of the counterfeit nature of the software sold”, they failed to raise a genuine issue of material fact as to Microsoft’s copyright allegation. Accordingly, Microsoft’s motion for summary judgment on this issue was granted.

Second, the court found that Microsoft was entitled to summary judgment on the trademark infringement claim. In reaching this conclusion, the district court relied on “undisputed evidence that [SWC] sold counterfeit EULA bearing the ‘Microsoft’ trademark.” This evidence consisted of “actual proof of confusion” from an SWC customer as well as the counterfeit software that contained forged Microsoft logos and symbols. Since SWC failed to offer any evidence that contravened Microsoft’s proof of trademark infringement, Microsoft’s motion for summary judgment was granted.

Next, the court found that Microsoft had submitted enough evidence to support an award of ordinary statutory damages toward “the upper end of the applicable range”. Given that Microsoft did not seek enhanced damages, the court did not need to find that SWC “willfully” infringed the plaintiff’s copyright. Since the court already determined that SWC infringed both Microsoft’s copyright and trademark, the court ordered SWC to pay Microsoft $15,000.00 for each of the six separate copyright infringements and $50,000.00 for each of the seven separate trademark infringements for a total of $440,000.00. Additionally, the court awarded Microsoft “reasonable attorney’s fees and costs incurred pursuing the copyright claim”.

Finally, the court denied both the defendant’s motion for summary judgment for copyright infringement and their claim that Microsoft defamed them. First, the court determined that the First Sale Doctrine, which “protects purchase from both authorized and unauthorized distributors or any other seller in the secondary market”, was inapplicable since SWC failed to illustrate that Microsoft sells, rather than license it’s software. Next, the court determined that Microsoft was not liable for the statement’s they published on the company website regarding SWC’s infringement. In support of this ruling, the court pointed out that “truth is a defense” to an allegation of defamation. Since the truth of Microsoft’s statement was reinforced by the court’s grant of summary judgment, SWC’s defamation claim failed as a matter of law.