Previously, I had written in detail on the arguments presented to the Court at the January 27, 2009 hearing on Psystar’s Motion for Leave to Amend. On February 6, 2009, the Court entered its Order on this Motion, granting in part and denying in part. You may view a copy of the order here.

I will follow the same outline format I used in my previous article to explain my understanding of the Court’s Order. Remember to keep in mind while reading that I am NOT an attorney, and these are merely my personal opinions. Actual legal opinions would have to be given by a properly licensed and qualified attorney.

Issue: Did Psystar Meet the Requirements of the Court’s Prior Order Dismissing Their First Counterclaims?

Ruling of the Court: As for its first two amended counterclaims, the Court agreed that Psystar met the requirements of the Court’s prior Order as it is now arguing an entirely different premise, i.e. copyright misuse rather than antitrust violations.

Editorial Commentary: My prior observation follows:

As Judge Alsup seemed to affirm that he was satisfied that this was a different theory (and thus apparently allowing a broad permissive swath in his prior Order), it is likely that he will reject Apple’s futility of amendment argument. The burden to assert futility is pretty high as it is basically asking the court to not even bother considering proof and arguments as no relevant material can possibly be shown that would not be overcome by dismissal or summary judgment.

Therefore it appears that my initial impression was correct. However, I did also note:

It is of interest to note, however, that the Judge may be between a rock and a hard place inasmuch he already ruled that Apple had the right to limit its software in the way that it has. Here is the Court’s direct ruling:

…here Apple asks its customers to purchase Mac OS knowing that it is to be used only with Apple computers. It is certainly entitled to do so.… Psystar also asks the Court to create a non-existent market. This order declines to do so.

If that opinion remains solid, then Apple is correct; these counterclaims would be futile. It seems as if the Judge will have to reverse himself, nuance his prior comments, or grant Apple’s point.

The Court did recognize this dilemma and took the route of nuancing the prior decision which will be gone into greater detail below.

Issue: Can Psystar Plead Copyright Misuse in Both its Affirmative Defenses and in a Declaratory Action?

Ruling of the Court: The Court ruled that Psystar could plead copyright defense in both a defensive and an offensive posture.

Reasoning of the Court:

Apple contends that copyright misuse may only be asserted as a defense, not as a counterclaim. This order is unconvinced, however, that misuse may never be asserted as a counterclaim for declaratory relief. PsyStar may well have a legitimate interest in establishing misuse independent of Apple’s claim against it, for example, to clarify the risks it confronts by marketing the products at issue in this case or others it may wish to develop. Moreover, if established, misuse would bar enforcement (for the period of misuse) not only as to defendants who are actually a party to the challenged license but also as to potential defendants not themselves injured by the misuse who may have similar interests. See Lasercomb America, Inc. v. Reynolds, 911 F.2d 970, 979 (4th Cir. 1990).

The best analogy is to patent misuse. See Lasercomb America, Inc. v. Reynolds, 911 F.2d 970, 979 (4th Cir. 1990). Apple identifies no rule analogous to the one it here urges barring counterclaims for patent misuse, and in fact patent misuse counterclaims have been permitted. See, e.g., Allan Block Corp. v. County Materials Corp., 512 F.3d 912 (7th Cir. 2008); Glitsch, Inc. v. Koch Engineering Co., Inc., 216 F.3d 1382 (Fed. Cir. 2000) (both discussing patent misuse counterclaims). This order finds no reason to reject plaintiff’s misuse counterclaims as necessarily futile.

It is true that the Ninth Circuit has described the doctrine of copyright misuse as a defense. Altera Corp. v. Clear Logic, Inc., 424 F.3d 1079, 1090 (9th Cir. 2005). The doctrine has, however, been permitted in actions for declaratory relief in this circuit as well. Practice Management, 121 F.3d at 518 (describing the doctrine as a defense, but the issue actually arose in an action for declaratory judgment); Open Source Yoga Unity v. Choudhury, 2005 WL 756558, *8 (N.D. Cal. 2005) (Hamilton, J.) (declaratory relief action). Insofar as other district courts have concluded that the doctrine may not be asserted as a counterclaim, this order respectfully disagrees.

Editorial Commentary: With all proper respect, I completely disagree with the Court on this point. Again, however, I am not an attorney and do not presume to be an equal in expertise or knowledge, but that is my opinion for which I believe I have good basis. Firstly, the characterization that “Apple contends that copyright misuse may only be asserted as a defense, not as a counterclaim” is not properly nuanced in my opinion. Apple was very explicit at the hearing that the question was “If you’ve already asserted this as an affirmative defense can you also assert it as a declaratory relief action?” That is not the same as the Court’s statement of Apple’s position and as such, I feel that renders the Court’s reasoning fatally flawed. After noting that there were no patent law cases that answered that question, Apple produced two California cases which did, and the answer was no. The Court stated that it respectfully disagreed but did not provide an analysis why it disagrees with those two very clear cases setting precedent in California.

The Court agreed with Psystar’s argument that a declaratory action was appropriate as it and other potential competitors need guidance as to their current and future marketing plans. Further, the Court noted that copyright misuse has been allowed as a count in a declaratory action in other cases. That is absolutely true, but in those cases, the declaratory action was filed preemptively as the party knew that there was a danger of imminent suit. Psystar could have done the same. Its President Rudy Pedraza bragged that he knew he was breaking the SLA and thus would have expected suit from Apple. Therefore, I respectfully disagree with the Court based upon my previous comments:

I note that Psystar steered clear of citing Open Source Yoga Unity v. Choudbhury, 2005 WL 756558 (N.D. Cal. April 1, 2005) which it previously seemed to rely pretty heavily upon since it attached the case as an exhibit to one of its recent filings regarding the proposed amended counterclaims. I believe that this may be due to the fact that the Open Source court specifically stated that copyright misuse exists solely as a defense to copyright infringement but goes on to carve out a potential exception when a declaratory action is filed preemptively in light of a reasonable expectation of litigation. Psystar very cleverly attempted to “fit” into this exception by claiming that they are preemptively asking for guidance on future products. I believe this also is specious and would render the specific principle meaningless as any party could claim that they have future business plans that could be affected. Further, Apple’s Amended Complaint has already addressed and pro-actively included Psystar’s future product line that it has publicized (see paragraph 15 of Apple’s Amended Complaint).

Issue: Did Psystar Sufficiently Plead a Basis for Copyright Misuse Allegations?

Ruling of the Court: The Court agreed that Psystar met the burden of sufficient pleading.

Reasoning of the Court:

Apple further argues that amendment would be futile because the proposed amended counterclaims fail to plead sufficient facts to support the claim. In its proposed amended counterclaims, PsyStar alleges that Apple leveraged Mac OS copyrights to secure exclusive rights not within the scope of the monopolies granted by those copyrights, i.e., to Mac OS-compatible computer hardware systems. The complaint avers that Apple accomplished this through its EULA, through allegedly spurious litigation and by other means.

Apple responds that it is within its rights to determine whether, how or by whom its software is reproduced and how it is to be licensed, distributed or used. This may ultimately prove to be true. Apple, however, identifies no reason to bar the claims as a matter of law at the pleading stage. This order declines to find the claims futile.

In Triad, the district court had rejected the misuse defense in the course of issuing a preliminary injunction, and the Ninth Circuit simply agreed with that ruling, finding that Southeastern could “[]not show that it is likely to prevail on its asserted copyright misuse defense.” The issue did not arise in an effort to bar a claim or counterclaim. Moreover, Triad did not clarify the scope of its holding; its entire analysis consisted of four sentences. Apple interprets the decision to have hinged on whether or not Triad had sought to “control the use of its hardware,” but that is not the only interpretation. The decision may eventually be found to provide some degree of guidance, but this order declines to find the proposed pleading futile based on Triad. Apple also cites language from the November 2008 order in this case granting Apple’s motion to dismiss PsyStar’s counterclaims. The order addressed the antitrust issues then before the court; it did not opine one way or the other on the merits of Apple’s instant copyright claims or PsyStar’s misuse allegations. For all of these reasons, PsyStar’s motion for leave to amend is granted with respect to the proposed misuse counterclaims.

Editorial Commentary: I agree with the Court here in isolation. Alleging insufficient facts or futility is a high burden. I qualified my statement with “in isolation” as my prior disagreement would mean that the Court would not even have gotten to the point of reviewing this issue as the counterclaims would be barred on purely procedural grounds. Since the Court rejected the procedural argument, it is completely consistent to then grant this portion of the Motion.

Here is where the Court dealt with the dilemma of reconciling its previous Order with the present Order by nuancing its prior comments stating that Apple had a right to limit the use of its software as it has done as existing solely within the context of Psystar’s antitrust claims as that was the only issue before the Court at that time. It is very important to note that this does not mean that Apple will not prevail on the very same point in the inevitable motion to dismiss that will be filed. The Court simply stated that it had not yet ruled on that point in the context of copyright misuse. I do not find that persuasive, but that is how the Court handled the apparent tension between the two Orders.

Issue: Can Psystar Plead Violations of Unfair Competition Under Section 17200 of the California Business and Professions Code?

Ruling of the Court: The Court denied Psystar’s Motion for Leave to Amend to add these claims.

Reasoning of the Court:

Both sides agree that “unfair” conduct under Section 17200 is conduct that threatens or harms competition. Cel-Tech Communications v. Los Angeles Cellular Telephone Co., 20 Cal.4th 163, 186–87 (1999) (requiring “that any finding of unfairness to competitors under section 7200 be tethered to some legislatively declared policy or proof of some actual or threatened impact on competition”). Thus, although the misuse doctrine does not hinge on antitrust violations, plaintiff’s Section 17200 claims survive only if the complaint pleads conduct that “threatens an incipient violation of [] antitrust law[s], or violates the policy or spirit of one of those laws.” Id. at 187.

PsyStar’s single-product-market theory was previously rejected (Dkt. No. 33). Plaintiff fails otherwise to identify an actual or incipient violation of antitrust laws or the spirit thereof—harm to competition. PsyStar argues that the alleged misuse is, “at the least, unfair in that Apple has attempted (and continues to attempt) to extend the reach of its copyrights by tying them to computer hardware not otherwise protected by the Copyright Act” (Reply at 12). It fails to explain, however, how this conduct constitutes harm to competition or a violation of the spirit of the antitrust laws. In the context of single-firm conduct, tying requires monopolization. PsyStar has identified none — other than the limited monopolies inherent in the copyrights themselves. The Section 17200 claims, therefore, are futile. PsyStar’s motion for leave to amend the Section 17200 claims is denied.

Editorial Commentary: I completely agree with the Court on this point and had previously stated that I did not even believe that Psystar expected that portion to be granted.

Court’s Conclusory Remarks

For all of the above-stated reasons, PsyStar’s motion for leave to amend is GRANTED IN PART AND DENIED IN PART. PsyStar should file its amended counterclaims, to the extent here permitted, within seven days of the date of entry of this order and Apple must answer within 20 calendar days. No more motion practice shall be allowed on the pleadings without leave of the Court. Both sides should be taking discovery and preparing themselves for trial and/or summary judgment.

Editorial Conclusory Remarks

It is general practice that the judges do not write the Orders themselves but give instructions to their law clerks who perform the task of authoring the document. The judge then approves and signs it so that it becomes his work product. The same practice occurs daily in law offices. It is part of my job to draft correspondences for my boss’ signature, and once she reviews and signs, it becomes her work product. Now I bring this up because it is very obvious (at least I think so) in comparing this Order to the prior Order Granting Apple’s Motion to Dismiss that they have different authors. The style of the first Order was much more succinct, careful, and easy to understand. I found this second Order to be less clear and certainly less careful as it spelled the Defendant’s name as “PsyStar” which is incorrect (and does not even do so consistently). However, I am not too quick to criticize that law clerk as Psystar’s own attorneys committed that same error in the past.

Several issues arose in my mind after completing my analysis. Neither side had a complete victory, though Psystar certainly gained a bargaining advantage in that there is a possibility that summary judgment on its declaratory counterclaims could open the door for not only Psystar to continue in its business practices, but for other companies to immediately follow. It did not gain an advantage as far as the allowance of copyright misuse allegations in general as they were already part of the case in its affirmative defenses.

I am fairly positive I am of one mind with Apple’s attorneys insofar as the Court’s granting of the declaratory action counterclaims for copyright misuse. So, is this Order appealable? As it is an Order that did not take place in a trial or other dispositive setting, it would be an interlocutory order which has pretty rigid barriers to be overcome in order to appeal prior to the conclusion of the case. This decision can always be used in a post-trial appeal. In order for Apple to be able to appeal this decision at this time it would have to prove irreparable harm if it were forced to wait until the conclusion of the case. There may be other factors that I am unaware of. Appellate practice is highly specialized, and I am speaking in generalities. Within those generalities, it seems that a cogent and compelling argument could be advanced for irreparable harm.

The Court has also ordered that the parties may not engage in any further motion practice on the pleadings prior to the filing of Apple’s Answer within twenty days after the filing of Psystar’s First Amended Counterclaims. I am in some confusion as to whether or not the Court can actually forbid any motion practice on the pleadings if it would consider a motion for reconsideration as falling within that category. Although the Federal Rules of Civil Procedure do not specifically allow motions for reconsideration, it is well-established case law that the courts have found that such a motion would fall under F.R.C.P. 59(e) which must be served within ten days of the entry of the order or judgment. If the Court would consider such a motion to be a motion on the pleadings, then it would seem as if both parties would be denied their right to file a motion for reconsideration if they so desired based upon an assertion that the Order reflects a manifest error in the law or some other allowable basis.

The next significant event to occur in this matter is the mediation scheduled for next week. I was promised an update by my contact with Psystar which I will report as soon as I have it.