“Psystar sought to provide a lower cost, higher quality alternative to Apple’s hardware.”

Higher quality? Is that why the man who won the Psystar video contest is so pleased with the quality of his purchase?

And this redefinition of the truth:

“Apple sued Psystar for copyright infringement and violations of the anti-circumvention provision of the DMCA claiming that selling hardware capable of running OS X (and hence competing with Apple in the market for personal computers) is illegal.”

And we thought that Steve Jobs had a reality distortion field. Too bad for Psystar, no one seems to be buying theirs. (double-meaning intended)

A copy of Apple’s filing can be found here.

In addition to her position as Assistant Editor at World of Apple, dizzle runs idrankthekoolaid, an Apple fangrl satire blog, and is an Administrator and Hostess at MyAppleSpace and their vidcast MASTv.

Although Psystar could raise the issue of Rebel EFI with Judge Alsup, it is unlikely that they will proceed any further until the Appeal is heard by the Ninth Circuit. Nothing new has transpired in the Florida case.

I wonder who paid the hefty filing fee of $455.00.

In addition to her position as Assistant Editor at World of Apple, dizzle runs idrankthekoolaid, an Apple fangrl satire blog, and is an Administrator and Hostess at MyAppleSpace and their vidcast MASTv.

In paragraph 4, Pedraza makes a statement that seems to be contradictory to Psystar’s stated position in the Miami Court; that is, the California case does not involve Rebel EFI. How so? Pedraza states that Psystar has ceased selling Rebel EFI in order to comply with the California Injunction, but why do so if that Injunction didn’t apply to that product.

In paragraphs 5 and 6, the details of behind-the-scenes agreements between the parties is revealed. Psystar has agreed to destroy all but one copy of the current version of Rebel EFI and to save a copy of all prior versions. Apparently this agreement was made due to Apple’s concern that Psystar might construe the Injunction as requiring the destruction of all product.

In addition to her position as Assistant Editor at World of Apple, dizzle runs idrankthekoolaid, an Apple fangrl satire blog, and is an Administrator and Hostess at MyAppleSpace and their vidcast MASTv.

Recap of Florida Action

On August 27, 2009, Psystar filed a Complaint against Apple which was amended on October 27, 2009. The Amended Complaint sought a declaratory judgment on the legality of Psystar’s business model including its production of Mac Clones running Snow Leopard and its Rebel EFI software. In this filing Psystar repeated its antitrust allegation and added a new allegation of violation of the Lanham Act claiming that Apple is misleading the public (i.e. lying) in stating that Psystar’s clones are illegal. Apple’s response comprised a Motion to Dismiss or To Transfer Venue (November 24, 2009) on the following grounds (simplified for summary):

1. The suit is “a transparent attempt to re-litigate” the same allegations that were ruled upon in the California suit.

4. This case is not ripe for litigation and as such is improper “anticipatory litigation.”

On December 10, 2009, Psystar filed its Response in Opposition to Apple’s Motion to Dismiss and asserted the following (I have grouped their counter-arguments under the same four points above):

1. The suit is “a transparent attempt to re-litigate” the same allegations that were ruled upon in the California suit.

Psystar responded that the two cases involve totally different products with unique fact patterns that were not present in the California suit. Additionally, while Judge Alsup concluded that “Mac OS compatible hardware” was not a valid market for purposes of the antitrust claims, the present complaint alleges a monopoly in the market for personal computers with a UNIX operating system.

2. This case is “the inseparable twin of the California Action, as the legal claims and issues, the technology, the parties, and most of the facts are virtually identical.”

Psystar contends that the method used for allowing Snow Leopard to run on generic hardware is completely different from the method used for Leopard, both in fact and technology and thus is significantly distinguishable from the California litigation. Additionally, Psystar has since ceased selling its computer with Snow Leopard instead focusing on the software-only product, Rebel EFI, which was not at all a factor in the California case. Lastly, Psystar alleges that the main thrust of this suit is its entirely new allegation that Apple has violated the Lanham Act by claiming that Psystar was selling an illegal product.

3. If both cases were left to stand, it would result in a wasteful duplication of the Court’s and the parties’ resources as well as being in contravention of the “first-filed” rule.

The Florida suit is the first-filed suit concerning Snow Leopard and Rebel EFI which were not part of the California litigation, with Snow Leopard being specifically excluded from that action. Further, Psystar does not object to having two separate cases as it concerns their resources, particularly since all of its key witnesses are in Florida. Lastly, the California case is nearly over. It is not a currently pending case and the case law on the first-filed rule deals with present potential conflicts (forward-looking) and not on past judgments (backward-looking).

4. This case is not ripe for litigation and as such is improper “anticipatory litigation.”

Psystar points out that all declaratory actions contain some sense of being anticipatory litigation as the party is asking the Court to make a legal determination on their rights. In order for a case to be improperly anticipatory, the filing party would have had to first receive written notice that they were about to be sued. Additionally, the case is not solely a declaratory action but also contains affirmative antitrust allegations.

**Editorial note: Incredibly, Psystar actually argued that “Apple had given no specific, concrete indications that it intended to sue Psystar over Snow Leopard or Rebel EFI before Psystar filed this case.” Come on!

On December 21, 2009, Apple filed its Response to Psystar’s Reply and argued as follows:

1. Psystar’s representations of the rulings of the California Court as finding that transfer would be improper are false.

In support of this allegation, Apple quoted Judge Alsup:

This is without prejudice to any motion before Judge Hoeveler to transfer the Florida action here, as to which this order expresses no opinion and is without prejudice, in the event of a transfer, to a new motion to modify the case management schedule.

Apple further stated that this is a pattern and practice of Psystar in its filing, once again quoting Judge Alsup:

Psystar continues to grossly mischaracterize prior rulings in this case…

and

[Psystar has had] a particular facility with taking a word or phrase and somehow making it into a concession on which an entire structural argument is based.

Additionally, Rebel EFI wasn’t even on the market at that time, and even though Judge Alsup had previously refused to allow Snow Leopard to be a part of Apple’s case in chief, he did make a ruling on Snow Leopard, thus demonstrating the Court’s intent to apply the rationale of the injunction to other Psystar products.

2. The first-filed rule must apply as the two cases substantially overlap.

In support of this contention, Apple stated that the California Injunction confirms that the cases overlap in that Judge Alsup not only ruled on Leopard, but also ruled on Snow Leopard and specifically reserved jurisdiction to rule on Rebel EFI. As such, Snow Leopard has definitely been removed from this case and, Apple argues, Rebel EFI is currently before Judge Alsup. The fact that Judge Alsup reserved the right to rule on Rebel EFI, and Psystar already stated its intention to file such a motion with that Court, Apple is not “backward-looking” as Psystar claims, but forward-looking to such a forthcoming ruling.

3. Psystar is repackaging its dismissed anti-trust claims from the California suit.

While Psystar claims that the facts and issues of law are significantly different, Judge Alsup’s Injunctive Order speaks otherwise. Apple specifically said:

Judge Alsup found that Psystar violated the DMCA by manufacturing and trafficking in devices intended to circumvent the technological protection measure in Mac OS X to run Apple’s software on non-Apple hardware. Rebel EFI is simply a repackaged version of Psystar’s circumvention technology. And Psystar has now stated that it will seek from Judge Alsup regarding the legality of Rebel EFI.

And although Psystar is claiming that the antitrust allegations in the Florida case relate to behaviour that happened after those counterclaims were dismissed, it is still the very same behaviour. And still just as appropriate under the law.

4. Psystar’s First Amended Complaint is Anticipatory.

Although Psystar is relying upon the lack of a cease and desist letter to justify an anticipatory action, the notice requirement is just that: notice. Psystar cannot claim that it was on notice that Apple would sue to protect its rights in OS X as it had already done so, aggressively pursued adding new products when they were relevant, and apparently convinced Psystar enough that it alleged in its own Amended Complaint that it “stands threatened” by a future suit brought by Apple. Psystar cannot have it both ways. Any other affirmative claims are repackaged assertions of the issues already adjudicated by Judge Alsup.

Where things stand now

It appears that both parties have requested that the Court allow oral argument. The Court is not obligated to grant this request and may choose to simply rule on the filings. We need to wait and see.

As a follow-up to my earlier article reporting that Psystar had been listing Rebel EFI as being out of stock, their site now reads:

Psystar has voluntarily suspended the sale of our Rebel EFI software product. Psystar feels it would be prudent to halt the sale of Rebel EFI while we explicitly ask the court for clarification on the legality of Rebel EFI. Our patience has been tested but our resolve is unwavering. Psystar’s vision of bringing the Mac OS to generic PC hardware is and always will be unyielding. Although Rebel EFI may be temporarily unavailable for purchase on the Psystar online store, those who purchase a t-shirt or donate over twenty dollars will receive one free copy of Rebel EFI once the court has ruled in our favor on this issue. We respectfully disagree with courts notion that we are “hardcore copyright infringers”. Psystar has never, and will never, condone software piracy. It’s your software, you should be able to use it where you want to. If you purchase an off-the-shelf copy of OS X Snow Leopard, its your right to use that software. A publisher cannot forbid you from reading a book in the bathroom or listening to a music disc while riding your bicycle. There should be no difference in the software realm, no matter how much money Apple or anyone else throws at it. That is the real issue here and what we have always been fighting for. Psystar will continue to support all of its existing customers of hardware and software through this transitional period. Warranties on hardware will continue to be honored as long the customer has a valid warranty. Rebel EFI support for existing customers, as always, will remain exclusively available through email and the built-in ticket interface.

Wow. A few comments are in order. First though, the interested reader may want to read the transcript of the injunction hearing in California. You may find a full copy here, and as far as I have seen, only freely available here at World of Apple.

Our patience has been tested but our resolve is unwavering.

Poor things, their patience has been tested. Isn’t that a bit like a tic complaining when the dog finally scratches it off?

…once the court has ruled in our favor on this issue.

Courts generally do not care for braggadicio.

We respectfully disagree with courts notion that we are “hardcore copyright infringers”.

Grammar problems aside, is this the same Court that Psystar just assured us would rule in its favour? Dissonance much?

Just so that it is obvious that the Court didn’t make that statement as an offhand comment, here is what was said (page 19 of transcript):

I want to be clear. While this record is sketchy on Rebel EFI, it is not sketchy on the hardcore infringement of your client.

On page 19, the Court expressed its rationale for granting a very broad injunction:

The normal rule is that an injunction is always almost always broader than the four corners of the complaint, because, otherwise, it would be too easy to let an infringer just move on to the next problem. It would always be Zeno’s Paradox at work.

Zeno’s Paradox FTW! “Contumacious conduct” (page 13) comes in close second.

If you purchase an off-the-shelf copy of OS X Snow Leopard, its your right to use that software. A publisher cannot forbid you from reading a book in the bathroom or listening to a music disc while riding your bicycle. There should be no difference in the software realm, no matter how much money Apple or anyone else throws at it. That is the real issue here and what we have always been fighting for.

Psystar once again tries to paint itself as the champion of the oppressed, but really, they are opportunistic champions of their own self-interests. They have zero respect for the Hackintosh community, and for the most part, that feeling is mutual. Apparently they don’t have much respect for their customers either as they blatantly misrepresent the transaction as a sale when they well know that it is a license; a license which has been held up by the Court in a most explicit manner at the very beginning of this suit. It gets no better with their attempt at logic. Apple does not forbid someone from using their licensed software in a particular locale, but on a particular device. If Rudy wants to use a Macbook while he is on the loo, I am sure that Apple couldn’t care less.

Psystar will continue to support all of its existing customers of hardware and software through this transitional period.

Like this guy?

In reading this transcript (particularly pages 8 through 9), I have a feeling where Psystar might attempt to take this case; into an individual user’s rights under Section 117. Rudy Pedraza, for example, might bring suit in his own name alleging that he is representative of a class of people who need their rights clarified as to their legal standing to purchase Rebel EFI. In so doing, Psystar could attempt to work from the user backwards and claim that if a consumer can legally buy Rebel EFI, then Psystar should be able to legally sell it. Although I do not claim to know the law in that situation, in sheer logic, however, that simply does not follow. Additionally, the courts have consistently held that Section 117 is an affirmative defense to suit, not a basis for suit itself. Thus, if Apple sued an individual user for making a Mac clone (which Apple has not done), then that user could plead Section 117 as a defense. However, in the absence of suit (or perhaps a letter threatening suit), the user could not offensively pursue Apple under the same Section. Not that Psystar has ever been bothered by a pesky thing like facts.

And of couse we have the appeal to the Ninth Circuit on Judge Alsup’s grant of summary judgment to Apple on the issue of copyright misuse to keep us amused for years to come.

In addition to her position as Assistant Editor at World of Apple, dizzle runs idrankthekoolaid, an Apple fangrl satire blog, and is an Administrator and Hostess at MyAppleSpace and their vidcast MASTv.

Well it has been a while since I have reported on this case due to personal family troubles, and truth is, I have not completely kept up with all of events. Rather than never finding time to go back and read front the point I left off, I am going to start with the latest developments and go back and read the most relevant items. I welcome reader input as to any fact or nuance that I might have missed.

A few days ago, I was reading my RSS feeds and noticed multiple sites proclaiming that Psystar was dead. I thought to myself, ”Self, I bet that turns out to be completely wrong. None of these stories deal with the two million reasons Psystar has to keep things going.” It was this bit of failure to be skeptical of a sound byte quote that motivated me to jump back into the game.

So let’s back up a bit. On December 15, 2009, Apple prevailed in its attempt to obtain a permanent injunctive order against Psystar for any clones produced running Leopard or Snow Leopard. Psystar had been desperately trying to make Snow Leopard a separate issue but failed. I think that failure is finally righting a very bad ruling made earlier in the case in which Judge Alsup punished Apple for its battle to keep Snow Leopard out of that litigation primarily because it wasn’t released yet. That decision completely baffled me, but finally it appears that Judge Alsup has corrected himself in a roundabout way.

This Order does effectively end Psystar’s future as a trash-talking Mac cloner. There is no ambiguity or wiggle-room in that facet. However, Judge Alsup refused to exclude Psystar’s product, Rebel EFI (did I mention how much I hate cheesy, self-serving names?), from the injunction. Here is the precise wording (apologies for the lengthy quote; it is necessary):

B. REBEL EFI
Since the terms of an injunction must be “reasonable to prevent or restrain” further infringement of a copyright or violation of the DMCA, it follows that an injunction must be limited as “to restrain acts which are the same type or class as unlawful acts which the court has found to have been committed or whose commission in the future, unless enjoined, may fairly be anticipated from the defendant’s conduct in the past.” Orantes-Hernandez v. Thornburgh, 919 12 F.2d 549, 564 (9th Cir. 1990) (quoting NLRB v. Express Pub. Co., 312 U.S. 426, 435 (1941)); 17 U.S.C. 502(a), 1203(b)(1).

Consistent with this standard, a permanent injunction against Psystar should, at a minimum, encompass the acts found unlawful in this action. In other words, an injunction should at least cover Psystar’s acts constituting infringement of Apple’s reproduction, distribution, and derivative-work rights under the Copyright Act, Psystar’s acts constituting contributory infringement of Apple’s reproduction right under the Copyright Act, and Psystar’s acts violating the anti-circumvention and anti-trafficking provisions of the DMCA, as found at summary judgment (Dkt. No. 214).

Psystar does not dispute this legal standard (Dkt. No. 237 at 4). Instead, Psystar concentrates its fire on obtaining an exclusion for its aforementioned Rebel EFI product from any injunction issued by this order. Psystar advances three reasons for such an exclusion: (1) Rebel EFI only works with Apple’s Snow Leopard product, and Snow Leopard should be excluded from the injunction; (2) the method by which Rebel EFI operates does not fall within “the same type or class” of acts found to be infringing or unlawful in this action, and raises legal issues not litigated by the parties; and (3) an injunction that does not exclude Rebel EFI would cause substantial interference with the sovereignty of in the United States District Court in the Southern District of Florida, where a separate action involving Rebel EFI is pending (Dkt. No. 237).

Since this order has already determined that an express exclusion for Snow Leopard is improper, Psystar’s first argument fails. With respect to Psystar’s second argument that Rebel EFI differs materially from this case in both fact and law, Psystar cites to no decisions where the terms of an injunction under the Copyright Act or DMCA specifically excluded a non-litigated product of the accused infringer. Instead, Psystar attempts to distinguish the decisions cited by Apple and this order — such as Walt Disney — supporting the extension of injunctive relief to non-litigated works of the copyright holder as being “cases where the additional, non-litigated conduct was the same in all legally relevant respects to the actually litigated conduct” (Dkt. No. 237 at 5).

Psystar’s argument belies even a casual reading of these decisions. Walt Disney and its progeny addressed the issue of whether non-litigated copyrighted works of the copyright holder should be included within the scope of a court’s injunction. Here, Apple is the copyright holder whose rights have been asserted, and therefore Walt Disney is clearly applicable as to whether Snow Leopard should be included in an injunction. By contrast, Rebel EFI is a product of Psystar, the accused infringer in this case (See Dkt. No. 237 at 4). And whether a non-litigated act or product of an accused infringer falls within the ambit of an injunction goes to the enforceability, rather than the scope, of the injunction. See In re Lorillard Tobacco Co., 370 F.3d 982, 986 (9th Cir. 2004) (noting that the three fundamental characteristics of an injunction are that it is directed to a party, enforceable by contempt proceedings, and designed to protect the substantive relief sought by a complaint in more than a temporary fashion) (citations omitted) (emphasis added).

In other words, distinguishing the Walt Disney line of decisions provides no protection to Psystar with respect to its own product, Rebel EFI. Whether Rebel EFI violates the terms of the injunction set forth in this order is a factual issue more appropriate for a contempt action. See Jerry’s Famous Deli, Inc. v. Papanicolaou, 383 F.3d 998, 1001 (9th. Cir. 2004) (affirming a contempt order after factual findings by the district court indicated that the defendant violated a permanent injunction directed to prevent infringement of the plaintiff’s trademarks).

Common sense also supports this distinction between the terms and enforceability of an injunction. As Psystar readily admits, Rebel EFI has not been litigated in this action and was not subject to discovery. Moreover, Psystar’s opposition brief appears to purposefully avoid providing a straightforward description of what Rebel EFI actually does (See Dkt. No. 237). Thus, it is not only inappropriate, but impossible to determine on this record whether Rebel EFI falls within “the same type or class of unlawful acts” found at summary judgment. This order declines to “bless” a product about which it knows little of substance. Psystar’s second argument is therefore rejected, and Psystar — if it continues to do so — sells Rebel EFI at its peril.

Finally, Psystar asserts that issuing an injunction without excluding Rebel EFI would “invade the jurisdiction of Judge Hoeveler of the United States District Court for the Southern District of Florida” (Dkt. 237 at 3). To support their argument, Psystar cites to United States v. AMC Entertainment, 549 F.3d 760, 770 (9th Cir. 2008), quoting in relevant part:
[W]hen exercising its equitable powers to issue an injunction, a court must be mindful of any effect its decision might have outside its jurisdiction. Courts ordinarily should not award injunctive relief that would cause substantial interference with another court’s sovereignty.

What Psystar conveniently omits, however, are the paragraphs immediately following the quoted language. As the remainder of the decision clearly explains, the district court’s granting of a nationwide injunction in AMC Entertainment was improper because the injunctive relief directly conflicted with an existing decision by the Fifth Circuit, and circuit courts “expect [their] pronouncements [to] be the final word within the [c]ircuit’s geographical area, subject only to en banc or Supreme Court review.” Id. at 771. Since neither the United States District Court for the Southern District of Florida nor the Eleventh Circuit Court of Appeals has issued any pronouncement on the legality of Rebel EFI under the Copyright Act or DMCA, Psystar’s argument lacks merit. Moreover, as explained above, whether Rebel EFI or any future or non-litigated Psystar product violates the injunction issued by this order is a question more appropriate for contempt proceedings. This order does note, however, that if such contempt proceedings are brought against Psystar, comity with respect to the action before Judge Hoeveler in Florida will be properly considered. This determination would, of course, also examine the harm that delay would cause Apple, the stage of the proceedings in the Florida case, and whether the record before the undersigned provides a more complete framework to do justice to the issues presented. But these questions are for another day.

In sum, Rebel EFI will not be expressly excluded from the terms of the injunction. It should be clear, however, that this ruling is without prejudice to Psystar bringing a new motion before the undersigned that includes real details about Rebel EFI, and opening itself up to formal discovery thereon. This would serve the purpose — akin to a post-injunction motion vetting a “design-around” in a patent action — of potentially vetting (or not vetting) a product like Rebel EFI under this order’s decree. Moreover, Psystar may raise in such a motion any defenses it believes should apply to the factual circumstances of its new product, such as the 17 U.S.C. 117 defense raised in its opposition and at oral argument. Whether such a defense would be successful on the merits, or face preclusion or other hurdles, this order cannot predict. What is certain, however, is that until such a motion is brought, Psystar will be selling Rebel EFI at its peril, and risks finding itself held in contempt if its new venture falls within the scope of the injunction.

In short, Judge Alsup refused to expressly exclude Rebel EFI from the injunction. That wording is significant in light of other statements in the Order indicating that Judge Alsup was none too pleased with Psystar selective quotation of case law and misquoting the Court’s Orders by failing to put them within their proper context. Judge Alsup in this Order and a separate Final Judgment Order expressly retained enforcement jurisdiction.

Why did Judge Alsup possibly leave the door open to Psystar? He was not clear on Rebel EFI actually worked, though he strongly suspected that once he did, it would violate the clear guidance articulated in the portions of the Order describing why the clones were enjoined. He basically put the equivalent of a “Bad Dog” sign outside the fence and asked Psystar if they really want to open that gate. They might not like what they find inside.

So what will Psystar’s next move likely be? Exactly what the Judge told them to do. Don’t sell Rebel EFI without filing a new motion in which more details on the product are given so that a firm decision can be made. And, as of this date, Rebel EFI is listed on Psystar’s site as being “out of stock.” Of course that is not precisely true, let’s just say its slightly true, because Rebel EFI is a software program; it is not possible for it to be “out of stock.” I guess it would have just killed the Pedrazian pride to say that it was unavailable until further notice. I expect to see such a Motion from Psystar in the immediate future.

To sum things up, why was I suspicious when I read that Psystar was giving up the ghost? Well, their prior settlement with Apple in which they agreed to pay over two million dollars in damages is tolled until all of the legal avenues, including appeal, have been exhausted. It is in Psystar’s best interest to keep this horse alive as long as possible. And Attorney Camara might not mind losing fees for the priceless publiclity he and his firm have been receiving for this case. I believe that Camara knows that the case is a dog but hopes that it will put his name out there for some career-making technology case.

Also, I keep wondering, what ever happened to the ten John Does? I don’t see where Apple ever struck them as parties. It is as if they were mentioned and vanished into the virtual ether.

In addition to her position as Assistant Editor at World of Apple, dizzle runs idrankthekoolaid, an Apple fangrl satire blog, and is an Administrator and Hostess at MyAppleSpace and their vidcast MASTv.

• Copying, selling, offering to sell, distributing, or creating derivative works of plaintiff’s copyrighted Mac OS X software without authorization from the copyright holder;
• Intentionally inducing, aiding, assisting, abetting, or encouraging any other person or entity to infringe plaintiff’s copyrighted Mac OS X software;
• Circumventing any technological measure that effectively controls access to plaintiff’s copyrighted Mac OS X software, including, but not limited to, the technological measure used by Apple to prevent unauthorized copying of Mac OS X on non-Apple computers;
• Manufacturing, importing, offering to the public, providing, or otherwise trafficking in any technology, product, service, device, component, or part thereof that is primarily designed or produced for the purpose of circumventing a technological measure that effectively controls access to plaintiff’s copyrighted Mac OS X software, including, but not limited to, the technological measure used by Apple to prevent unauthorized copying of Mac OS X on non-Apple computers;
• Manufacturing, importing, offering to the public, providing, or otherwise trafficking in any technology, product, service, device, component, or part thereof that is primarily designed or produced for the purpose of circumventing a technological measure that effectively protects the rights held by plaintiff under the Copyright Act with respect to its copyrighted Mac OS X software.

Judge Alsup stated in the injunction that he doesn’t want to see Psystar “engage in defiant or unreasonable conduct”. Psystar has until December 31st 2009 to comply and Psystar “must immediately begin this process, and take the quickest path to compliance; thus, if compliance can be achieved within one hour after this order is filed, defendant shall reasonably see it done.”

Additionally Psystar must “immediately destroy any technology, product, device, component, or part thereof in its custody or control that has been used to circumvent any technological protection measure that effectively controls access to plaintiff’s copyrighted Mac OS X software, or effectively protects the rights held by plaintiff under the Copyright Act with respect to its copyrighted Mac OS X software”.

On one really exciting note, it is possible that I might be able to personally attend significant hearings since the Court is only about 90 minutes away from where I reside. The only problem with that is when hearing dates change at the last moment and obviously I have to give my employer advance notice. If there are any World of Apple readers who will be attendance at some of the same hearings, I look forward to meeting you.

Apple’s Letter Brief dated August 10, 2009

You may read this Letter Brief in full here.

As you can see, Apple outlines the history of the discovery of the destruction of certain data. It is interesting that Psystar filed for its bankruptcy protection right after Apple notified Psystar of this spoliation and other deficiencies in the Court-ordered production. Despite this, Psystar didn’t take any corrective measures until months after Apple’s notification.

Even though the deleted code featured so prominently in discussions, please note footnotes 3 and 5 of the Letter Brief:

Footnote 3 [the text to which this footnote refers is redacted]: When asked why, Psystar’s counsel stated that Psystar’s email and customer support software (SupportSuite) randomly “deleted or loses” emails. While counsel says that Psystar has contacted SupportSuite regarding this issue, Psystar has yet to find any emails or chat messages showing such contact with that vendor. Psystar also has not provided evidence of, and Apple is unaware of, any other steps taken by Psystar to halt the deletion of relevant emails by Psystar’s email system. Moreover, Psystar did not inform the Court of this email deletion at the two CMCs [case management conferences] in this case or at the last motion to compel hearing where Psystar’s emails and attachments were at issue.

Footnote 5 [the text to which this footnote refers is redacted]: Psystar has produced one version of the bootloader and just last week provided its July 2009 bootloader. However, Psystar has not produced the other bootloaders it previously used on its computers.

In its request for relief, Apple asks for sanctions citing general case law on the scope and breadth of the Court’s authority in this regard, but specifically requests:

If Psystar does not produce all prior versions of its code, then Apple respectfully requests that the Court exercise its inherent authority by granting Apple an inference adverse to Psystar on its copyright and DMCA claims and by awarding Apple its fees and costs associated with bringing this motion or as the Court otherwise sees fit.

This Letter Brief was authored by Mr. Gililand who, although he was present at the August 20, 2009 hearing, did not argue the issues.

Psystar’s Response Letter Brief dated August 19, 2009

You may read this Letter Brief in full here.

This filing is, quite literally, a piece of work. Let me count the ways.

Psystar has not destroyed evidence or acted in bad faith in its discovery responses.

Really? Psystar has not destroyed evidence?

The only materials not produced…

Why were they not produced? BECAUSE THEY WERE DESTROYED! Is Mr. Camara suffering from cognitive dissonance in this filing?

Since Psystar acted in good faith to comply with its discovery duties…

Did it? In my world, “good faith” means actually being knowledgeable about what your duties are. As Apple pointed out, the Court’s Supplemental Order governing discovery stated that the parties must “take affirmative steps as are necessary to preserve evidence.” And, quoting from Apple’s Letter Brief:

Moreover, as stated in the October 30, 2008 Joint Case Management Statement, Psystar’s principals were put on notice of this duty to preserve and a document preservation notice was sent out to Psystar’s employees.

Yet we are to believe that (even if their prior attorney never advised them, which I absolutely do not believe) that poor little “cash-strapped” Psystar was too stupid to figure out that a lawsuit about their alleged wrongful use of code would require the preservation of the code that was at the heart of the case!

As the parties agreed in their list of legal issues at issue, this topped the list:

3. Legal Issues: The Parties submit the following list of legal issues in dispute:
a. Whether Psystar’s alleged use, reproduction, creation of derivative works, distribution and/or
display of Apple’s copyrighted works constitutes direct and/or contributory copyright infringement
under the federal Copyright Act, 17 U.S.C. §501 et seq.

We aren’t talking about their July 2008 order for pencils and staples or even the precise brand of packing peanuts that were found by a South Florida service technician inside a Psystar box when it was opened up to be serviced, but the very issues that are being litigated. And if this were so, why just some of the code? Why wasn’t all the code other than the current generation being used erased if this was just standard operating procedure for this “small, understaffed” persecuted start-up?

As did Apple, I draw the readers’ attention to the Court’s Supplemental Order to Setting Initial Case Management Conference docketed July 21, 2008.

4. Pursuant to FRCP 26(d), no formal discovery shall be initiated by any party until after the meet-and-confer session required by FRCP 26(f), except by stipulation or prior court
order. As soon as a party has notice of this order, however, the party shall take such affirmative
steps as are necessary to preserve evidence related to the issues presented by the action, including, without limitation, interdiction of any document-destruction programs and any ongoing erasures of e-mails, voice mails, and other electronically-recorded material.

Umm, “electronically-recorded material”? Should that be unclear to a technology company?

But even more telling is Psystar’s own statement in the JOINT proposed Case Management Statement docketed October 30, 2008:

6. Evidence Preservation

Psystar’s Statement. Counsel for Psystar has personally counseled the principals of Psystar as
to the retention of documents and other information as they pertain to the issues in this lawsuit. A
retention notice was subsequently issued to the principals of Psystar memorializing the same.
Retention of documents includes but is not limited to electronic mail, physical documents and things,
and other electronically-recorded materials.

So who is lying here? I also have to wonder in these numerous allegations of malpractice by Psystar’s former counsel whether or not there has been a limited waiver of the attorney-client privilege so that Apple could depose Colby Springer on this issue. Hey this is just me, but I would be hesitant to so openly bad-mouth and throw under the bus a business to whicht you owe $80,000.00.

Mr. Camara goes on to state:

This case deserves to be resolved on the merits. While Apple would achieve its goal of destroying a competitor and leaving the law ambiguous, a grant of relief in the form of infringement and DMCA claims resolved entirely in favor of Apple would be a gross distortion of justice.

It is a gross distortion to suggest that such extreme measures are what Apple requested. I quoted above what was specifically requested and what would amount to summary judgment on the DMCA and infringement claims is noticeable by its utter absence.

In describing Psystar’s (Mr. Camara also makes the mistake of mispelling his own client’s name at least two times in his filing) procedures, he admits that each Psystar unit loaded with OS X is not in fact loaded with an individually purchased disk for each unit. In fact, what Psystar has done is to create one or more “master copies” that are used to produce the merchandise. Thus in fact, Psystar has not stepped in the shows of an initial purchaser that allegedly has the right to do what it wishes with its purchased copy (this is wording things in a light most favourable to Psystar when in fact I do not agree that it is a purchased copy but rather a purchased license). That purchased copy is never installed. An improper and (in my opinion) clearly illegal COPY is. This explains what appeared to be the utterly inane Requests for Admissions asking for Apple to admit that any two or more copies of the “Mac OS” install disk are the same for all intents and purposes, such as Requests for Admissions number 174, 177, and 179 discussed in a prior article.

Continuing:

Apple focuses its complaints on three non-Psystar and non-Apple files allegedly discovered on Pystar machines sold in the past: dsmos.kext (“dsmos”), AppleDecrypt.kext (“AppleDecrypt”), and Netkas. Psystar acknowledges that it has previously downloaded and evaluated these binary files. It is possible that any or all of these files may have accidentally appeared on a production machine, since evaluation often occurred on the same machine used to manage the master copy for production machines. Psystar is a small business and cannot afford the equipment or personnel needed to fully isolate all of its activities to prevent these kinds of mishaps. However, none of these files (a) have ever formed a part of the Psystar system; (b) have been necessary to run a Psystar computer; or(c) currently exist in any form on Psystar production machines. Nor possessed or viewed the source code to dsmos, AppleDecrypt, or Netkas.

First, let’s have a moment of silence to mourn Psystar, of whom we must be continually reminded that they are only a small leech and cannot afford the equipment or personnel needed to comply with discovery requirements. Ahem. More seriously, is this paragraph true? And did Psystar seriously claim that it never used AppleDecrypt and Netkas and that these may have “accidentally” appeared on a production machine? Did Mr. Camara actually see his client’s nose growing when those representations were made?

From the hearing:

1 MS. BOROUMAND SMITH: Okay.
2 So in order to run Mac OS X on nonApple hardware,
3 Psystar had to do two things: They had to use the kernel
4 extensions that I’ve been talking about, and they also had to
5 modify the operating system by using different boot loader

Compare that with Mr. Camara’s statement that:

However, none of these files (a) have ever formed a part of the Psystar system; (b) have been necessary to run a Psystar computer; or (c) currently exist in any form on Psystar production machines.

Mr. Camara is being very slippery here. Technically he can say that those specific files are not necessary to run a Psystar computer, but that is highly misleading as either those files or their equivalents ARE in fact necessary. He would also have us believe that Apple just happened to find those files which his client has never used that Casper the Friendly Ghost slipped in on one of his midnight jaunts. Come on.

Observations from the August 20, 2009 Hearing

Now I shall defend why I was disappointed in Apple’s performance at this hearing. As you can see above, the statements and activities are pretty outrageous, at least in my opinion. Yet Apple’s counsel walked into this hearing fully prepared to simply enter into a Stipulation with opposing counsel that this code can be assumed for sake of argument to have been on all Psystar machines produced prior to September 2008. Mr. Camara was about to be handed the not only the golden goose but a nice golden egg it laid.

MR. CAMARA: We would, but we have offered to
5 stipulate that until the time the computers had open Cojones on
6 them, we will stipulate that all of them had this code on them.

MS. BOROUMAND SMITH: So that’s stipulation works,
21 so long as it’s presented to the jury.
22 THE COURT: Of course it would be.

3 MR. CAMARA: If what we are telling the jury is that Apple
4 decrypt dsmos and the Netkas boot loader were on all Psystar
5 computers shipped before a certain date, we are happy to have
6 that be an instruction to the jury.
7 What I was talking about was if the Court were to
8 prefer a more prejudicial instruction, like Psystar destroyed
9 evidence.
10 THE COURT: What’s wrong with telling the jury that
11 you destroyed the evidence?
12 MR. CAMARA: Well, Your Honor, we think —
13 THE COURT: Is there an issue of bad faith in this
14 case?
15 MR. CAMARA: Yes, Your Honor.
16 THE COURT: Well, if there is an issue of bad faith
17 and somebody’s been destroying evidence, that’s highly
18 relevant.

6 THE COURT: If your people happened to destroy
7 evidence along the way that’s relevant, then the jury is going
8 to hear about it. And that’s your problem if it’s prejudicial
9 because, you know, evidence can be prejudicial, but rightly so.
10 And if somebody is destroying evidence, that’s your — to my
11 mind, a jury can at least say, hey, they’ve been out destroying
12 evidence, they’re guilty as sin.

13 THE COURT: Well, let me give you some general
14 principles. I’m missing something in this discussion, so I
15 want you to help me understand what I’m missing.
16 One way to go here is to just let Apple prove —
17 we’ll have no stipulations. One way to go is no stipulations,
18 and then Apple just prove it up at trial that all this stuff
19 was destroyed. That happens in a lot of trials, and the jury
20 then says, ah-hah, they destroyed evidence, I don’t like these
21 people, they are trying to infringe.
22 But the jury gets all that information because it’s
23 highly relevant to the issue of intent. That’s one way to go.
24 Another way to way go would be have a stipulation,
25 but if you have a stipulation, you can’t have it both ways.
1 You can’t then start putting in the same evidence that the
2 stipulation goes to. So you would just have a cold two or
3 three sentence stipulation that says here is what we did, here
4 is what we did not do. And then you just argue it to the jury
5 that there is bad faith, based on — you wouldn’t be putting in
6 additional evidence because that would be superfluous.
7 Those are two different ways to try a case, one with
8 a stipulation that knocks out a lot of the Q and A, one without
9 it but you don’t get the benefit of the stipulation but you
10 would then get the Q and A.
11 Ms. Smith, what bothers me about your approach is
12 you want me to instruct — I’m not going to do all this
13 instructing the jury. I can tell them that if somebody
14 destroys evidence, they can consider that on the issues of bad
15 faith, sure I can do that. But I’m not going to say that there
16 has been bad faith. I’m not going to say that there has been
17 destruction, unless something — if you all were to stipulate
18 and say here is what was destroyed, here is what is not
19 destroyed, then I can instruct the jury along those lines, of
20 course.
21 But then that would preclude you from — maybe not
22 100 percent, but 90 percent from getting into the details of
23 that with evidentiary material because that is the whole point
24 of the stipulation. So what am I missing here?
25 Now, I’ll give you one other — some lawyers in your
position, Ms. Smith, would be delighted to have all this
2 evidence, and you would just throw it in front of the jury and
3 say look how bad these people are. And you would not want a
4 stipulation. You would not — so what is it you are trying to
5 ask me to — be careful what you wish for, because you might
6 get it and regret it at trial.

The Court goes on in its explanation but as you can see, it appears that Judge Alsup saw that Ms. Smith was about to willingly lose a huge potential advantage at trial and spoon-fed her on why she might want to reconsider that position.

The final agreement was discussed in this portion:

2 THE COURT: Here is one thing that I think should be
3 done, and this is not a stipulation, per se, it’s going to be a
4 court ordered interrogatory.
5 But Ms. Smith, you are going to write it. I don’t
6 want a big firm — I don’t want a big firm thing with
7 definitions and instructions, just a plain interrogatory with
8 no lead-in that says something like, do you admit that Apple
9 decrypt was used on computers? You make it, you know, refine
10 that.
11 Then I assume your answer is going to be “yes.”
12 MR. CAMARA: Well, Your Honor, I think so, too, but
13 we haven’t seen the basis for their motion. They haven’t
14 supplied the expert testimony.
THE COURT: They don’t need to.
16 Listen, you ought to go what was on your own
17 computers. If you don’t know what’s on your own computers, I’m
18 going to get upset.
19 MR. CAMARA: We have offered that as a stipulation,
20 and the answer will be yes, Your Honor.

I chuckled at the Court’s statement that if Psystar doesn’t know what is on their own computers he is going to be upset.

The hearing went on to discuss the specifics and requirements for these interrogatories and the subjects that should be covered. The bottom line was:

THE COURT: Now, the jury may take into account that during the
16 course of discovery you tried to clean up the problem. But
17 they can also figure out, probably, that there was some monkey
18 business going on earlier. And maybe that indicates bad faith,
19 and that’s up to them.
20 If they want to — you know this would be classic
21 evidence that goes to intent, if they were lying about whether
22 the Apple decrypt was used or not. So that part I think should
23 be done.

During this portion, Apple could have also emphasized much more how Psystar was not in compliance with the Court’s prior Order on discovery with regards to email and attachments and the concoction of the new story of how their email provider just deletes random emails willy-nilly. That is quite a tall tale. Heck, I am smaller (and possibly even more cash-strapped) than even poor little teensy-weensy Psystar, and I have three full backups of all of my data at any one given time so if Google decides to randomly delete emails, I still have them. Yet, we are to believe that this just did not occur to these guys who fancy themselves the champions of Open Source hacking? I couldn’t even hack into my own computer, and it occurs to me. I am gullible, but I am not THAT gullible.

Lastly, the Court asked Ms. Smith what relief Apple was seeking:

7 THE COURT: Now, how much are you asking for by way of
8 sanctions?
9 MS. BOROUMAND SMITH: We are seeking the amount that
10 we expended on filing this motion.
11 THE COURT: How much is that?
12 MS. BOROUMAND SMITH: I haven’t done the
13 calculation. I apologize.
14 THE COURT: You get $5000.
15 MS. BOROUMAND SMITH: Okay, thank you, Your Honor.
16 THE COURT: Probably a lot less than you really
17 spent. But —
18 You going to complain about $5000?
19 MR. CAMARA: No, Your Honor.

Of course he isn’t going to complain. He knows his client just dodged a potentially crippling bullet. I would bet my biscuits that the actual amount was closer to $15,000.00. I am not an attorney and am not privy to their strategy etc., but as a lay observer and backseat driver it seems to me that Ms. Smith should either have come prepared with that figure or been able to throw out some calculations on the fly that would have given the Court something to work with rather than having to pull a round number out of the air. This is especially so considering the fact that Psystar doesn’t have two pennies to rub together and such a sanction could greatly motivate them to go away for a nuisance sum.

Now lest the reader think that the Court unfairly led Apple into a situation that would be more favourable to them at trial, in a future article I will show where something similar was done for Psystar (in addition to the Court’s very merciful sanctions).

I think that’s enough for now. Talk to you more soon!

08/24/2009 – 96 – Minute Entry: Discovery Hearing held on 8/20/2009 before William Alsup (Date Filed: 8/24/2009). Supplemental briefs due by 8/27/09. Deft shall pay pltf $5,000 in attys fees. (Court Reporter Sahar McVickar.) (dt, COURT STAFF) (Date Filed: 8/24/2009) (Entered: 08/24/2009)

However, before reporting on what transpired, a brief review of the filings that led to this hearing is in order. Rather than delaying the publication of this information so that I might digest this information down, I refer the reader to Groklaw’s excellent articles on the subject:

EULAs, Psystar, and the Reality Principle – Updated

Apple v. Psystar takes a darker turn in discovery – Updated

I have some additional thoughts that I would like to add to what Groklaw has reported, but I shall do so in subsequent articles during the “downtime” until the deadline for additional filings which is August 27, 2009 with another ruling no sooner than the end of August.

So What Happened at the Hearing?

Preamble

In this article, I am going to boil the proceedings down to the most basic facts so that the World of Apple readers can understand why Psystar was sanctioned and additional briefs were ordered to be filed. However, this transcript is dense with additional items of interest and areas in which I have some pretty strong editorial opinion. I will reserve that additional analysis for the coming days so that the information can be teased out in reasonable-sized portions. While I might derive some sick enjoyment from reading hundreds of pages of legalese, I realize that most peoples’ eyes will become Krispy-Kremeified long before mine.

I must once again remind the readers that I am not a lawyer and legal opinion would have to be obtained from a properly licensed and qualified attorney. Also, the reader may wonder why I don’t provide a copy of the transcript but rather only excerpts. There are two reasons. First, typically the court docket will indicate that transcripts are not full public record until after a certain date at which point they may be assessed through the PACER database. This particular docket entry does not contain such a restriction though I believe that is an oversight. However, the second reason is one of professional courtesy to the Court Reporter who makes the majority of her income through the purchases of her transcripts, and I will not unfairly deprive her of any potential income.

Although there were more than two issues raised in the various filings, only two were the subject of substantive discussion leading to rulings. Mr. Camara and three colleagues appeared on behalf of Psystar; and Ms. Smith and two colleagues appeared on behalf of Apple with Mr. Camara and Ms. Smith making the oral arguments.

Issue: Did Psystar improperly dispose of relevant evidence?

Ms. Smith informed the Judge that the parties agreed that Psystar had destroyed relevant evidence consisting of two kernel extensions and a bootloader prior to September 2008. The only issue before the Court therefore was one of damages since the parties agreed that the evidence should have been preserved. Explanations of the significance (or lack thereof) of the lost evidence were given to the Judge. Additionally Mr. Camara argued that Psystar’s prior counsel failed to properly advise their client on evidence preservation and that the destruction was therefore innocent and not willful.

However, things got much more interesting in this portion of the transcript:

THE COURT: What is the relief that you are getting
3 that is — warrants attorney’s fees?
4 MS. BOROUMAND SMITH: Well, it’s the fact that had
5 they not lied to us in their 30(b)(6) deposition, Your Honor,
6 and told us that they did — we basically went down this whole
7 path trying to find all of this information. We have spent
8 time meeting and conferring with them, writing briefs, only to
9 find out today what we should have known back in May –
10 THE COURT: Go back over all that. That sounds
11 plausible. Go back through that chronology of how you got
12 misled on this.
13 MS. BOROUMAND SMITH: Sure.
14 So back in March, we had a 30(b)(6) deposition of
15 Psystar’s CEO, Rudy Pedraza. At that deposition, we asked him
16 whether he knew what the dsmos kernel extension was, whether
17 Psystar used the dsmos kernal extension –
18 THE COURT REPORTER: Slow down just a little for me.
19 MS. BOROUMAND SMITH: I’m sorry.
20 And similarly, we asked him about the Apple decrypt
21 kernel extension and whether or not Psystar used that kernel
22 extension: The answers to all of those questions were “no.”
23 We then –
24 THE COURT: Stop just a second.
25 MS. BOROUMAND SMITH: Yes.

1 THE COURT: That’s totally false, isn’t it?
2 MR. CAMARA: Well –
3 THE COURT: I mean, sounds totally false based on
4 what I’m hearing today that that testimony was just false.
5 MR. CAMARA: Well, here’s what happened. They –
6 the people at Psystar — well, I won’t defend that, Your Honor,
7 I think those answers were false.
8 THE COURT: All right.
9 MR. CAMARA: Coming from a 30(b)(6) deponent.
10 THE COURT: All right.
11 MR. CAMARA: Robert Pedraza at the business was in
12 charge of this, but, certainly, Rudy Pedraza should have had
13 that information at the 30(b)(6) deposition.

I believe that was the tipping point for the Judge to award sanctions. Both sides agree that evidence was destroyed though they disagree to an extent as to the reasons why that happened. However, Mr. Camara wisely decided to not even attempt to justify Rudy Pedraza’s completely false testimony. But for that false testimony, it is possible that no sanctions would have been ordered for reasons that I will outline in a follow-up piece.

So that is the bare bones of what happened to lead to the $5,000.00 sanction award with the really “juicy” part extracted.

Issue: Is Psystar entitled to the breadth of information it sought in Mr. Schiller’s deposition?

Judge Alsup at the beginning of the hearing stated that he was not going to decide any other issue that day other than that of the destruction of evidence. There was quite a bit of preparatory discussion on the issue of Mr. Schiller’s testimony, and it is to that issue that the Court ordered the parties to prepare briefs for his further and later consideration. This issue ended with the following discussion:

THE COURT: Well, you ought to go ahead and do the
11 depositions on what they are willing to provide. And then in
12 the meantime, I’m going to ask you to submit by Monday briefs
13 on the issue of whether or not Townsend is correct that the
14 profit margins for the plaintiff are irrelevant, irrevocably
15 irrelevant.
16 MS. BOROUMAND SMITH: Your Honor, may we be
17 permitted to do the deposition on the topic that — on the
18 information that we are willing to provide next week?
19 THE COURT: Go ahead and do that, yes. Because, I
20 mean, I won’t rule on this, probably, next week. I won’t even
21 be here next week.
22 MS. BOROUMAND SMITH: Okay, Your Honor.
23 THE COURT: So I won’t be able to rule on it. But
24 you can get the briefing done — in fact, I’ll give you till
25 Thursday of next week. My law clerk can be looking at it. And

1 both sides simultaneously submit, and as soon as I get back,
2 I’ll try to rule on it around August 31.
3 MS. BOROUMAND SMITH: So submit by Thursday of next
4 week?
5 THE COURT: You got all these problems: I may have
6 to undo the trial date if you continue to have all these
7 problems because, see, now you are putting me in a position
8 where you are going to come in and say, oh, we go to redo the
9 experts, oh, we got to do all this after-the-fact discovery.
10 I’m not going to undo the trial date yet, but this
11 is what — all these discovery motions put a lot of pressure on
12 the trial date and the schedule.
13 MS. BOROUMAND SMITH: We understand that, Your
14 Honor.
15 MR. CAMARA: Your Honor, given that the witness
16 designated to testify on damages refused to do so, might we
17 request that that deposition take place in Houston, which would
18 be far more convenient for us and for our cash-strapped client?
19 MS. BOROUMAND SMITH: Your Honor, they are out here
20 next week for depositions for Rudy Pedraza, anyways, because
21 one point that Mr. Camera didn’t mention was the fact that all
22 of their financials documents were not provided to us until
23 last Friday.
24 THE COURT: All right, do all of that out here. I
25 don’t think it’s warranted to go to Houston yet.

1 Is there another dispute you have, or is that it?
2 MR. CAMARA: That is all on our side, Your Honor.
3 MS. BOROUMAND SMITH: I believe that’s it for us
4 right now, as well, Your Honor.

Remember, these are just the bare facts explaining the $5,000.00 sanction and the request for additional briefs, but I will state that although this development has been represented by some as Apple wiping the floor with Psystar, that is not at all what happened. In fact, it is my opinion that Apple’s counsel delivered a somewhat lackluster performance, and that it was not at all the case that Judge Alsup clearly favoured Apple and gave Psystar the smack-down. As much as I would like that to be the case, that is not how I view the transcript of the proceedings. I intend to support this assertion in the promised follow-up articles.

I think that got your attention. And it is my hope that this douse of cold water will bring the reporting of this development down to reality. While I have a disfavourable opinion of Psystar and the honesty of its representatives, the gratuitous dissing of their attorneys that has regularly occurred is uncalled for. These professional men and women are not stupid though reading some reports one might get the impression that they regularly run face-first into brick walls. In fact, Mr. Camara is the youngest person to matriculate at Harvard Law School. Here is a point of trivia: the “K” stands for Kiwi. Face it, any kid who had to grow up with the name “Kiwi” had to toughen up unless that is a common Filipino name, and I am showing cultural ignorance.

And yes, I do find it humourous that Kiwi is going against Apple and Mr. Papaya is the friendliest of fruits. (the two people on the planet who got that last part without having to click-through are now wiping liquid off of their monitors)

Be on the lookout for analysis of the finer details of the hearing in the upcoming days.

ORDERED AFTER HEARING
Parties shall file supplemental briefs by 8/27/09. Defendant shall pay Plaintiff $5,000.00 in attorneys fees for bringing the motion.

Maybe now Psystar will figure out that it is not all fun and games with silly threats and contests on your website when dealing with the Federal Court System. Note that it was Psystar itself that was sanctioned, not their law firm.

Since, oddly enough, the English word “sanction” also has the opposite meaning of “to approve,” Wikipedia’s concise layman’s summary of legal sanctions is helpful:

Sanctions are penalties or other means of enforcement used to provide incentives for obedience with the law, or with rules and regulations.[1] Criminal sanctions can take the form of serious punishment, such as capital punishment, prison time, or severe fines. Within the civil law context, sanctions are usually monetary fines, levied against a party to a lawsuit or his/her attorney, for violating rules of procedure, or for abusing the judicial process. The most severe sanction in a civil lawsuit is the involuntary dismissal, with prejudice, of a complaining party’s cause of action, or of the responding party’s answer. This has the effect of deciding the entire action against the sanctioned party without recourse, except to the degree that an appeal or trial de novo may be allowed because of reversible error.

Since no further detail was given, all we can really conclude is that Judge Alsup was annoyed to the tune of $5,000.00. Lauren could have bought herself a totally tricked out Mac Pro for that.

In minor news, the Bankruptcy Court recently corrected a clerical error in its prior Order making it clear that the case was dismissed with prejudice for a period of twelve months (and not six as it had mistakenly said in one part of the prior Order).

In addition to her position as Assistant Editor at World of Apple, dizzle runs idrankthekoolaid, an Apple fangrl satire blog, and is an Administrator and Hostess at MyAppleSpace and their vidcast MASTv.

Typically, in Federal Court, discovery requests and answers are not filed with the Court unless there is some dispute, and even then, they are often heavily redacted as we have already seen with the Letter Brief filed by Apple on April 29, 2009. In fact, the parties had earlier requested, and had been granted, a Protective Order allowing the redaction (or filing under seal) of certain areas of inquiry in any discovery which must be used as an attachment in support of any filing. Due to these circumstances, we know precious little about precisely what types of inquiries were propounded by both parties. However, attached to Rudy Pedraza’s Declaration filed with the Bankruptcy Court were copies of Apple’s Answers to Psystar’s First, Second, and Third Requests for Admission (comprising 181 separate Requests).

General Information on Requests for Admission

 
Before discussing the contents of the filings uncovered, I will give a short primer for the layperson on the nature and purpose of the discovery avenue of “Requests for Admission.”

Requests for Admission are covered under Rule 26 of the Federal Rules of Civil Procedure. The interested reader can go to the link to read the rule and its technicalities in full. But to put it simply, Requests for Admissions are used to determine what items that the parties can agree are true or false and thus will not need to be proven at trial. For example, in an auto accident case, one party may ask the other to admit that it was not raining at the location of the accident at the time of the accident. This would obviate the need to obtain official weather records in order to prove that particular fact. Another common use of Requests for Admissions are to establish the authenticity of documents so that the original author or records custodian of the documents is not required to come into Court at trial simply to tell the jury that the document is genuine and kept in the ordinary course of business. My general philosophy is that attorneys should not ask stupid Requests for Admissions (with stupid being my subjective standard—the Rules are pretty lenient so that worthwhile requests are not chilled, and the responding party has the protection of objecting in detail). My personal opinion of an example of such would be asking the other party to admit that the basis for their case is entirely without merit (which Psystar did in fact do in their requests). That is just inane, and well, insulting to the intelligence of the recipient and contributes to the public perception that a great deal of law practice is silly showboating. Unfortunately, that is the nature of the beast at times in American jurisprudence.

In my particular job as a legal assistant, some cases tend to be very document-intensive. In such situations, Requests for Admissions are very helpful to both sides to get document authentication out of the way which will shorten the trial and spare the jury from strictly pro forma testimony.

Now however boring all of that might seem, one can glean a great deal of a party’s trial strategy and case theories from the Requests made.

Rudy Pedraza’s Representations Regarding Apple’s Responses to Psystar’s Requests for Admissions Numbered 1 through 181

 
Here are the discovery documents that Pedraza provided.

Apple Inc.’s Responses to Psystar Corporation’s First Set of Requests for Admission (Nos. 1–53)
Apple Inc.’s Responses to Psystar Corporation’s Second Set of Requests for Admission (Nos. 54–84)
Apple Inc.’s Responses to Psystar Corporation’s First Set of Requests for Admission (Nos. 85–181)

First, I wonder if Pedraza obtained the permission of Apple of make these publicly available considering that the parties had agreed to keep certain discovery private. In fact, in Apple’s request to the Bankruptcy Court for relief from the automatic stay, its main exhibit was filed under seal to maintain the privacy of the discovery process. I found it difficult to imagine that Apple agreed to this publication.

Here is what Pedraza stated in his sworn Declaration to the Bankruptcy Court:

Notice that Pedraza alleged that Apple failed to answer and instead has objected to all Interrogatories and/or Requests for Admissions in an attempt to further bury Psystar in legal bills without providing any information, and as example, he provides the Bankruptcy Court with Psystar’s 181 REQUESTS FOR ADMISSION! Hello Mr. Pot, there is a kettle over here that suspects you and he share a colour. In examining these Requests we can get a good glimpse into Psystar’s thought processes as to their discovery and litigation strategy. I will extract some broad areas for examination in this article (not intending to cover every minutiae).

Is it TRUE that Apple “failed to answer and instead has objected to all Interrogatories and/or Requests for Admissions”?

 
Short Answer: No, it is not true.

Long Answer: For those with no experience in the legal field, a review of Apple’s responses may appear to support Pedraza’s assertions. However, Apple’s responses are typical form and practice in the legal industry. Lawyers are paid and trained to advocate zealously for their clients to the best of their abilities within the bounds of professional ethics. As such, they look for even the slightest advantage or phrase that they can use to help their client. Therefore, in written discovery, unless a question/request is very straightforward, nearly every answer will be prefaced by certain objections so that they are preserved, and then, the answer will say something to the effect of “however, without waiving said objections, Plaintiff/Defendant responds XYZ.” Pedraza is correct in that Apple provided objections to all the Requests for Admissions (and as I will show, some of Psystar’s requests are just plain ridiculous and tiresome), he is absolutely duplicitous in his claim that Apple failed in toto to answer. Pedraza is not some innocent illiterate from the boondocks who “gosh golly gee” didn’t know that prefacing answers with objections are typical legal pracitce. In fact, I would LOVE to know if Psystar did the exact same thing. Here is a typical Request and Answer from the very first Request propounded (the General Objections referred to are typical prefaces to all discovery responses that form the first few pages):

Apple responded as is typical in legal proceedings. It protected itself as best as possible from any vulnerabilities in poor wording or ambiguity in the Request and then answers to what it represents is the best of its ability. Nearly every single Request and Answer follows this pattern. There are only few that were objected to in full without a denial or admission. In fact, I had to read all the way to Request Number 47 to find the first example. Did Apple use invisible magic ink so that Pedraza could swear to the Court that Apple failed to answer and only objected to ALL Requests for Admissions? Truth has not been Psystar’s trademark. It is not surprising that they conjure up fake facts considering that they make fake Macs.

In fact, the only Requests that were objected to in full were Requests numbered 47, 48, 49, 50, 51, and 53. That is 6 out of 181. Mr. Pedraza appears to have a bit of an exaggeration problem. In my review, Apple readily admitted to numerous issues of fact. In my own job, I have seen Responses come back in which every (or nearly every) Request is denied. However, all that being said, stepping back from my perspective of being accustomed to such filings, I can understand how Pedraza would be frustrated though I find it difficult to have any sympathy since he answered “I don’t know” over 80 times to questions about the finances of his “very small company” (his representation as he loves to continually whinge in order to represent Apple as the fat bully in the sandbox).

While we are talking about Pedraza’s internal reality distortion field, let’s compare these two statements.

First, from Psystar’s response to Apple’s request to the Bankruptcy Court to lift the automatic stay:

Okay, so Apple has not filed a motion for injunctive relief though it is requested in its Amended Complaint. Now notice what Pedraza says:

It seems that in Rudy-land “has not” is equivalent to “unable to” and evidences that Apple’s case is not clear. Interesting. Why? Because Psystar asked for injunctive relief as well in its Amended Counterclaims but also has not filed a motion for same. Will Pedraza apply the same standard to Psystar? Long live Janus.

And let us not forget this zinger:

Is it true that Psystar ”made every effort to provide them all the documents in our possession”? Well only if you believe not even bothering to print out email attachments and giving potentially contradictory statements as to whether they even still exist comprises making every effort. In my world, the sky is blue, and that is not making every effort.

Moving on…

What can we glean about Psystar’s case strategy from these Requests for Admissions?

 
Obviously I cannot bore you to death by going through all 181 requests individually. Well, technically I could, but I won’t. I have grouped what seems to be the most important and interesting categories for brief discussion with selected example Request(s) and Answer(s) for examples.

Category: Vendors other than Apple sell the “Mac OS.”

Apparently Psystar believes that it is somehow pertinent that users may obtain OS X from entities other than Apple. How that is relevant is beyond me. The consumer does not buy Windows directly from Microsoft; does that somehow denigrate Microsoft’s interest in controlling their intellectual property? The consumer does not generally buy books directly from the authors; does that mean they can produce unauthorized derivative works at will? I would conjecture that Psystar is attempting to piggy-back a case that since the OS is available outside of Apple that Apple has no right to dictate how it can be used. This seems even more likely to be the goal when considering the next category.

Category: Consumers can buy a retail box of the “Mac OS” without purchasing any other Apple product.

Once again, the relevance fails me. A person may buy a copy of Leopard and use it for kindling if they wish. A person can be given a Macintosh upon which they install the product. This is inanity. My guess, again, is that Psystar is attempting to show that although Apple has placed restrictions on the use of the product; it has not required any proof or point of sale proof of being able to actually enforce the restrictions.

Category: It is possible to install and run the “Mac OS” without modifying the “Mac OS” on machines manufactured by vendors other than Apple.

And

Okay, this category is more substantive and appears to be geared towards defeating Apple’s claim of violation of the DMCA which requires anti-circumvention technology. Yet, and interestingly separated by over thirty Requests, Psystar appears to pursue a completely different admission as follows (for example):

I have noted this contradictory tension in prior articles here and here. I must note, however, it is not unusual in Requests for Admissions for a party to ask for two contradictory admissions in order to pin the opposing party to commit one way or the other.

Category: Apple has no copyright rights on any code which is licensed to Apple under an open source license.

I think that is a very valid and interesting point raised by Psystar. I know basically nothing about code and programming so I can only comment on the issues it may pose in this case taking what Psystar is alleging as true. Is Apple’s code a derivative work? and if so, how does that affect the intellectual property rights? My gut reaction is that this argument is NOT good for the open source community or organizations pushing for open standards. Why would a company want to risk losing its intellectual property rights simply because it mixed open source code with its proprietary code? This is just one of the many points that irritates me about some Psystar supporters. Get this straight: Psystar is NO friend of the open source community and “open-ness.” They are just a couple of guys looking to make a buck without much care of how it affects anyone or anything else. There is a reason why the osx86 Project creator is no fan.

Category: Ahhh, we’re right! Just admit it!

 
I am sorry, but I found these next Requests hilarious along the lines of “when did you stop beating your wife?” These are allowable under the Rules as far as I can see, but in my personal opinion this is the type of nonsense that causes people to think poorly of the law and attorneys.

Category: Lack of Real Damages

Basically Psystar wants to establish that even if there were some violation of copyrights or other intellectual property rights; Apple suffered no quantifiable damages from Psystar, presumably because Psystar paid full retail price for each of its copies of Leopard (allegedly) and that its customer base wouldn’t have purchased an Apple-labeled computer due to the higher cost. This of course ignores other intangible losses such as brand dilution and the like (though Psystar did address those in separate Requests).

Category: The Clone program was profitable. Or was it?

Eh? So if Apple made money, then the big, bad corporation wants to make more money (as if that is inherently wrong), and if they didn’t, well that is why they want to persecute poor little Psystar. Tails Psystar wins, Heads Apple loses. Ahem.

Category: Go ahead Apple, admit you want to make money.

Apple is not a charity and wants to make the most money possible. Shocking I know. Somehow I suspect that Psystar would also like to make as much money as possible. In fact, I have it through the grapevine that Rudy has bragged about his own ambitions to be filthy rich.

Category: Ignorant Consumers

Shall Apple waterboard them until they do? Seriously, if anyone states that they have read and agree to certain terms and conditions, the other party has every legal reason to rely upon that declaration (assuming mental competence, age, etc.) I admit it; I have never read any EULA. But I also would never claim that my agreement to something I didn’t read is anyone’s problem but my own. Further, its not as if the end-users are agreeing to something that is a well-kept secret or outlandish.

Category: Apple is the exclusive licensor of “Mac OS,” and has in the past licensed it to other entities who then sold Macintosh “clones” to the public.

It seems, Psystar wants to establish the foundation that Apple as a company had no issue with a business model that included third-party licensing. The inference that Psystar might want to draw from this is that Apple should not have an issue with it today; and it was a viable business model in the past. My response: So? Businesses can change their models for whatever legal reason they choose. Psystar puts some distance between these Requests and the following:

Category: It’s all Steve’s fault (and he’s a hypocrite).

The video linked to above has since been removed, but here is another copy of it (light profanity warning).

Last year my best friend said she would give me a thousand dollars and has since changed her position after figuring out that she was better off keeping it. That basically is what their argument amounts to. It is so vapid I am almost without words. Will Psystar be suing Apple when they eventually include the Bag ‘O Hurt also known as Blu Ray? Psystar has changed its positions faster than Linda Blair has spun her head so I find this beyond chutzpah or the Dunning Syndrome on their part.

Category: All Steve Jobs stated that Apple wanted from its licensees was that they pair their “fair share” for the licensing rights and that said “fair share” would be the retail cost.

Psystar seems poised to argue that it is fulfilling what Steve Jobs wanted prior cloners to do: pay full retail price. Yes, this is hopelessly naive and simplistic, but that appears to be their point. And I hate to give them a much needed reality-check: the technology world is not the same as it was a decade ago.

Category: Apple is picking on us!!! Or put another way, Apple is aware of other third parties who are violating the EULA, such as the osx86 project, but has not sought to enforce the EULA against them.

That sound you hear is Psystar attempting to throw the Hackintosh hobbyist community under the bus so that they can make a buck off of someone else’s work. In legal strategy, they seem to be claiming selective enforcement and waiver. However, I think this will be a tough row to hoe since Rudy was well aware that they were purposefully spitting in Apple’s pie and didn’t really care if they got sued.

Category: Apple informs the public that a purchaser owns the actual physical media which contains the software. Further, Apple has never requested the return of the physical media.

I feel dumber just reading and writing that. Let’s move on.

Category: Installing the software creates a copy on the user’s machine and in the RAM each time the software is executed.

I didn’t think it could get worse. It did. It has already been decided in a case cited earlier (I could get the case if someone really, really wants it) that the machine loading a “copy” into RAM isn’t a license violation and basically is a useless argument against licenses.

Category: Licensing rather than sale is done to circumvent 17 U.S.C. §109, §117

 
and

Category: Apple’s EULA defining the software as licensed and not sold is intended to keep the software from being installed on machines made by other vendors.

This right now is their best argument, but unfortunately for them; the District in which this suit is filed has not been persuaded by this line of reasoning in the past.

Category: Apple hardware is not covered by any Apple copyrights, and Apple-labeled hardware is not expressly defined in Apple’s filings.

and

Category:Apple has alleged that Psystar has violated multiple sections of U.S.C. 17 and one or more licenses attached to Apple’s filings.

This line of argumentation was discussed pretty thoroughly here for the interested reader. Again, this is part of their stronger points (the word “stronger” being used in a very loose manner).

Category: Apple distributes labels that resemble the Apple logo with the “Mac OS” and that people can put those stickers on any computer.

Oh come on!!! You’ve have GOT to be kidding me. That is almost as bad as this:

Category: Apple-labeled computers may be purchased from Apple’s websites.

Okay……

Category: Exhibits 13 through 15 from the March 19, 2009 deposition of Rudy Pedraza cannot by authenticated or verified by Apple.

Without knowing what these documents are, it is difficult to comment. Apparently there are documents that Psystar doesn’t like and wishes to put as much distance between it and them as possible.

Category: Apple purchased computers from Psystar both before and after July 3, 2008.

Okay….. so now we know who bought the ones that were sold to entities other than Engadget and the like.

Category: Apple dissembled, decompiled, and reverse-engineered a Psystar restore disc.

Okay…..

Category: Any two or more copies of the “Mac OS” install disk are the same for all intents and purposes.

I am not at all sure what they are driving it besides a colossal tribute to Captain Obvious. Well this look into their prior discovery will assist in my upcoming articles on the newest bizarre twists that this case has taken over the past week. Be on the lookout for more! Oh goody!

Remember, I am NOT an attorney and any legal opinions would have to be determined by a properly licensed and qualified attorney.

In addition to her position as Assistant Editor at World of Apple, dizzle runs idrankthekoolaid, an Apple fangrl satire blog, and is an Administrator and Hostess at MyAppleSpace and their vidcast MASTv.

Additionally Apple has filed numerous documents under seal (private) with the California Federal Court. World of Apple is determining what little information may be gleaned as a matter of public record. From the brief review, Apple is contending that Psystar purposefully and willfully destroyed relevant evidence that it infringed upon Apple’s code. Specifically, while Psystar may not NOW be using Apple’s code (arguably), it has in the past and has conveniently lost all evidence of that fact. The plot thickens. It seems that Psystar are precisely the bad boys I have suspected.

The last activity we reported in the California case was the news that Psystar requested leave for substitution of counsel. Their proposed new lead law firm is none other than Camara & Sibley, LLP of Houston, Texas; the firm that represented Jammie Thomas against the RIAA in which Ms. Thomas not only lost, the RIAA was awarded even more monetary damages than sought. I am not so certain that such a recent track record should recommend itself to Psystar who’s less than forthright activities and thus far shaky legal position are not exactly pristine. Ms. Thomas’ loss was due to a combination of many factors and cannot be placed solely, if at all, at the feet of the skill of her attorneys (and I agree with Groklaw that the damages are unconscionable). Case decisions involve many complex relations that cannot be reduced so easily, and it appears that the jury followed the law as written—law which is highly hated by many and arguably unduly oppressive. That being said, however, if I were Psystar, I would be concerned that perhaps their new firm cannot rehabilitate their blackened case and image; fair or not. Jammie was a sympathetic defendant; Psystar is not.

Previously, I had been curious and speculated as to why Psystar might have retained a Texas law firm. One theory, which I stated as absolutely pure speculation, now appears extremely unlikely. The Texas location of the new firm appears to be entirely coincidental to the notorious reputation of one Texas court District. Camara & Sibley positions itself as a flat fee/contingency fee firm that allows their clients to limit their legal fee exposure and “make intelligent decisions about whether and when to settle or compromise.” For Psystar, who “may” (they aren’t talking) be planning on stiffing their prior counsel, that would be an attractive benefit (the cost part—I am not convinced of the intelligent part considering that their CEO answered “I don’t know” over eighty times to basic financial questions during his 30(b)(6) deposition). The firm’s home page boasts this image:

I called their offices to confirm that the yellow dots represented active matters rather than local offices. The caption of “active matters nationwide” appeared after my phone call. Their representative did tell me that the website was under active construction and not yet complete. As you can see, there is a South Florida connection which may be how they became involved with Psystar. I performed a Florida Southern District check and could not find either named partner as being listed as counsel on any case, active or otherwise. I also performed searches in the state court system dockets for Miami-Dade, Monroe, and Broward counties without success. As the firm’s page does not list associate attorneys it is possible that there is an associate involved in an active case or that there is a specialty docket that I did not search as I made the assumption that the most likely case involvement would be in the civil state court or civil federal court system for the South Florida area.

Recent Case Activity

July 23, 2009: The parties filed an agreed Stipulation to Continue Settlement Conference due to the fact they are they busily conducting discovery, and Psystar’s recently retained counsel needs time to get up to speed so that the conference can meaningfully proceed. On July 24, 2009 the Court agreed to postpone the settlement conference until October 6, 2009 (see page three of previous link). This date change does not affect the trial date or any other deadlines.

July 27, 2009: The Court granted Kiwi Camara’s Application to Appear Pro Hac Vice on behalf of Psystar. Wikipedia provides a good definition of “pro hac vice” for those unfamiliar with the term:

Pro hac vice, Latin for “for this occasion” or “for this event,” (literally, “for this turn”) is a legal term usually referring to a lawyer who has not been admitted to practice in a certain jurisdiction but has been allowed to participate in a particular case in that jurisdiction.

Lastly, the transcript of the January 22, 2009 hearing regarding Psystar’s copyright misuse counter-claim is now publicly available. World of Apple had purchased a copy right after the hearing and reported on it here.

In addition to her position as Assistant Editor at World of Apple, dizzle runs idrankthekoolaid, an Apple fangrl satire blog, and is an Administrator and Hostess at MyAppleSpace and their vidcast MASTv.

On the Bankruptcy docket there are just two entries which do not have associated filings as follows:

07/17/2009 46 Meeting of Creditors Held and Concluded Filed by U.S. Trustee Office of the US Trustee. (^UST13, DD) (Entered: 07/17/2009)

07/17/2009 47 Until Further Notice, the United States Trustee Will Not Appoint a Committee of Creditors Pursuant to 11 USC Section 1102. Filed by U.S. Trustee Office of the US Trustee. (^UST13, DD) (Entered: 07/17/2009)

To put this in context, here is the prior entry from July 2, 2009:

07/02/2009 45 Notice of Hearing (Re: 44 Motion to Dismiss Case Voluntary Filed by Debtor Psystar Corporation.) Hearing scheduled for 08/04/2009 at 02:00:00 PM at 51 SW First Ave Room 1406, Miami. (Howlan, Elaine) (Entered: 07/02/2009)

Apparently there was a confidential meeting of the creditors held, and it was decided at this time that a committee will not be appointed. I suspect that this is due to the prior docket entry showing there is a pending hearing date upon which Psystar might be released from bankruptcy. Remember, that is not a dead certainty despite the fact that Psystar misrepresented that it was to its customers via its newsletters.

Basically, this is all pro forma at this points, but it shows that both Courts are moving their dockets along.

Now here is my speculation. It seems apparent that there was some conflict of interest over the outstanding legal bills which were disclosed in Psystar’s Bankruptcy filings, thus, a change was needed on those grounds. However, my attention was drawn immediately to the retention of Texas counsel. It could mean absolutely nothing, but Texas courts are well-known (though this reputation is disputed) for being friendly to Plaintiffs in intellectual property cases. For example:

Juries in East Texas, unlike those in Houston, Dallas or Austin, are much less likely to have a member with any technical training or education, which exacerbates the problem from the defense perspective, but makes East Texas federal courts an attractive venue for would-be plaintiffs, who know that the jury will, instead, gravitate toward softer or superficial issues that are difficult to predict.” The result is to facilitate the activities of what Tyler calls “patent pirates”: enterprises that exist to file patent suits rather than to manufacture products, and which benefit from asymmetrical costs of litigation (discovery in a patent case can cost the manufacturer-defendant a million dollars or more, while the plaintiff license-holder may have few or no documents worth discovering).

(via Overlawyered)

Even though that quote deals more with patent cases, the same reputation is true of intellectual property cases in general. Psystar would definitely benefit from a less technically savvy jury pool. So, you might ask, how is this relevant since Psystar is the Defendant? Well, don’t forget that they are also a Plaintiff in their countersuit, and not liking the cool reception in California, might want to try their hand in Texas. This is sheer speculation. I have no idea or basis as to how it would be possible to get this case moved or a sister case opened in Texas. It may be totally impossible. However, I find it hard to find it merely coincidental that a Texas attorney was retained. Perhaps it was simply for his experience in similar successful cases. I am positive more information will be forthcoming.

It is the responsibility of counsel to ensure that whatever discovery is needed for all sides to evaluate the case for settlement purposes is completed by the date of the settlement conference.

Does this mean that someone who can do more than answer “I don’t know” more than 80 times when asked financial questions about Psystar will give a 30(b)(6) deposition within the next several weeks? Will those elusive email attachments be printed and produced to Apple?

Any party who is not a natural person shall be represented by the person or persons not directly involved in the events which gave rise to the litigation but with full authority to negotiate a settlement.

This may be common in California, but I have never seen such a stipulation in mediation orders on cases that I have worked on as a legal assistant. This means that although Rudy Pedraza may attend (as he certainly will), he cannot be the person at the conference who has the authority to settle the case. This is somewhat illusory since whatever authority any other designated person is given will have been given by Rudy, but I suspect the reason for this provision is to have such authority given outside of the mediation itself which can get highly emotional. This way, the amount of potential settlement is decided in a more calm state of mind.

Also, it appears that the Court is ordering a second mediation by its statement in Paragraph 18:

This matter is hereby REFERRED to MAGISTRATE JUDGE BERNARD ZIMMERMAN for MEDIATION/SETTLEMENT.

No deadline for this second mediation is given, thus I expect that to be designated in a future Order, likely coming from Magistrate Judge Zimmerman.

Here is the entire Order if you would like to read all of the nitty-gritty.

A Closer Look at the Declaration of Rudy Pedraza

Though I was reluctant to definitively state in “my last article that the motivation for, and the timing of, Psystar’s bankruptcy was to elude complying with the Court order to pony up financial information and produce a representative that could say more than “I don’t know” at deposition, upon multiple readings of the Pedraza Declaration, there is no doubt. He basically admits as much in his “Declaration. How so? Remember that the context of this Declaration is Psystar’s opposition to Apple’s request to the Bankruptcy Court to life the automatic stay of the California case. Let’s connect the dots.

One. Pedraza unilaterally claims that there are no issues of fact before the Court.

That is patently untrue. Just off the top of my head without even going line by line through Apple’s Amended Complaint, Apple alleged that Psystar has modified Apple’s code (a disputed matter of fact), did not purposefully lead the public to associate itself with Apple by using the name “OpenMac” (a disputed matter of fact), and that they are in cahoots with ten as-yet-unidentified John Does (a disputed matter of fact). Unless Psystar is now admitting all of these issues, those are disputed issues of fact. It is simply ludicrous and less-than-honest to claim in a sworn document to a court that such is the case. It may turn out that any issues of fact turn out to be trivial; however, the Court has not declared that as of this date. To borrow a line from Psystar’s attorney Colby Springer, just because Pedraza wishes this to be the case does not make it so. In other words, if wishes were fishes we would all cast nets.

Two. Pedraza claims that Apple has engaged in extensive and unnecessary motion practice. I am sorry, but Pedraza is either woefully ignorant of complex legal cases or his nose grew when he swore to this. Let’s look at the facts.

On September 30, 2008, Apple filed a Motion to Dismiss Psystar’s Counterclaims. Up until this point, the two law firms were acting very judiciously by agreeing to give each other extensions for various items (and continued to do so) rather than running to the Court. Since this Motion was granted by the Court, I think it can hardly be called an unnecessary motion.

On November 26, 2008, Apple filed a Motion for Leave to File an Amended Complaint. Psystar agreed to this motion obviating any need for further Court involvement. That hardly seems like an unnecessary motion.

On December 8, 2008, Psystar filed a Motion for Leave to File an Amended Countersuit.

On December 30, 2008, Apple filed its opposition to the Amended Countersuit, which was granted in part. Again, obviously not unnecessary.

On February 25, 2009, the parties filed a JOINT Motion for Protective Order.

On April 29, 2009, Apple filed its Letter Brief alleging non-compliance with discovery. Apple prevailed in this regard. Obviously, once again, a meritorious filing.

I am sorry folks, but the above history is hardly indicative of extensive and unnecessary motion practice. I would love for Mr. Pedraza to take a look at some of the cases that I routinely work on. The records are publicly available. This particular case has gone rather smoothly between the two law firms with minimal need for motion practice and Court involvement.

Three. Pedraza claims that Apple simply pursued frivolous discovery in an attempt to stonewall and bury them.

The Court record proves otherwise. Judge Alsup found it was unreasonable that a computer company could not figure out that it should simply print-out email attachments if they had some file corruption that prevented them from being electronically duplicated; that Psystar did not make a good-faith attempt to get basic requested records; and that answering “I don’t know” over 90 times to relevant questions in a 30(b)(6) deposition was not acceptable. Project much Mr. Pedraza? I agree there was stonewalling going on, but the fingers pointing back at Psystar are the four fingers of the truthpocalypse.

Four. Pedraza asked the Bankruptcy Court to lift the stay, but hobble Apple so that it could not pursue its discovery rights that were granted by the California court.

It is crystal clear. Things didn’t not work out as Pedraza had hoped and someone is going to finally have to answer those questions that Apple has been asking. Methinks Mr. Pedraza doth protest too much.

I believe it is helpful to provide a timeline of events leading up to the current posture of this matter, and I have done so at the conclusion of this piece with links for additional reference and past World of Apple analysis to those who are interested. Additionally, within the timeline I have provided copies of previously obtained transcripts that have not been posted elsewhere. I am able at this time to post them as the time limit noted in the Federal Court docket for public release has passed.

Current Status

On June 11, 2009, the Bankruptcy Court denied Psystar’s request for continued use of its check stocks and deposit slips but granted Psystar’s request to continue to use its business forms. This has been misreported in several places leaving the impression that Psystar was allowed to use none of its business documents while in fact they were allowed the use of some.

However, it is significant that they were denied access to their bank accounts. The exact reasons are somewhat mystifying as it is my understanding that such requests are routinely granted, though often with the requirement of a notation on the forms indicating that the business is in bankruptcy status. One factor may certainly be the fact that Psystar’s two requests did not satisfy the Local Rules for such requests which require the amounts in said accounts to be disclosed.

(J) Motions for Authority to Maintain Prepetition Bank Accounts. A motion seeking authority to maintain prepetition bank accounts shall include:

(1) a schedule listing each prepetition bank account which the debtor seeks to maintain postpetition;

(2) the amount on deposit in each such account as of the petition date; and

(3) whether the depository is an authorized depository pursuant to 11 U.S.C. §345(b).

If the debtor is unable to provide the foregoing information, the motion shall set forth the reason why such information is not available, and provide an estimate as to when the debtor shall be able to supplement its motion with such information.

This appears to be yet another example of Psystar desiring to hide financial information at worst or sloppy lawyering at best. There simply isn’t enough information to form a solid theory though the pattern and practice of Psystar’s hiding the financial ball certainly is the circumstantial culprit.

On June 5, 2009, Apple requested that the Bankruptcy Court lift the automatic stay of proceedings in the California Court case and argued that the outcome of that case must be adjudicated as Psystar’s very business model depends upon its being able to use intellectual property claimed by Apple. Psystar opposed arguing that it would be prohibitively costly for it to maintain both proceedings simultaneously. On June 19, 2009, the Court granted Apple’s request. If in fact Psystar was hoping that the bankruptcy would stall Apple’s probe into their finances and potential backers; it didn’t succeed. That was certainly Apple’s theory as to the timing:

What I found odd in Apple’s request is that in its description of its amendments to its original complaint, the ten John Doe defendants are glaring in their absence:

However, there was another document filed at this time that has received little to no attention from the Apple web: the Declaration of Rudy Pedraza. In that document, Psystar openly declared that it is considering a second bite at the anti-trust apple in a future suit filed under Florida state laws rather than Federal.

On July 1, 2009, Psystar requested a voluntary dismissal from the bankruptcy proceeding. Below are the pertinent portions distilling their position.

I personally believe that there is an elephant in Psystar’s warehouse that is left unmentioned in this pleading: a bankruptcy trustee could unilaterally reach a settlement with Apple if the case is ongoing. I might be mistaken in this as I am not an attorney and do not claim significant knowledge of bankruptcy proceedings, but that was one of my first thoughts which was also mentioned by P.J. at Groklaw:

[T]his is an argument they have to make to persuade the judge that this motion should be granted instead of just shutting the company down in Chapter 7, with a trustee appointed to take over for the current management, who could settle the litigation, maybe tell Apple who was behind all this, and turn out the lights. Leaving Chapter 11 is their best option, they argue. Maybe their one and only, others might be thinking. Or, it’s all just chess. If Psystar has secret backers, then they maybe could afford to do both, but they’d prefer not to continue with a strategy that didn’t pan out.

As discussed above, Apple has yet to response to Psystar’s request.

Psystar’s Attempt at Rehabilitating its Public Image

As I am on Psystar’s mailing list, a few days ago I received this tactless email (in my personal opinion which is founded on my belief that Psystar is an opportunistic leach of a company—yes, that is an entirely subjective personal opinion):

Upon receipt, I immediately forwarded a copy to Apple and its attorneys. The part that I found particularly tasteless was Psystar’s attempt to paint itself as some champion of the “little people,” when in fact their own EULA is hypocritically more restrictive than Apple’s. Further, the twist on the common lemonade saying to “When life gives you apples, make applesauce,” is embarassingly unfunny. Life didn’t “give” them apples. They purposefully sought a fight and are not some innocent victims. Additionally, their parasitic business model depends upon the very company that they boast to grind into sauce. Without Apple’s work, there would be no Psystar. The analogy that comes to mind is a virus that requires its host to survive but mindlessly kills it at times.

All that aside, there is some interesting information revealed. Apparently this new product announcement is going to be the mystical goose that laid the golden clone in order to convince the bankruptcy judge that they should be released from the bankruptcy proceedings because they have found a viable product to revitalize their business. That is a very slim reed. Psystar also brazenly claims that they will be formally discharged by the Bankruptcy Court. I would suggest that Apple file a Motion to Inspect Psystar’s Crystal Ball.

What’s Next?

Now that the Bankruptcy Court has lifted its Stay, and Psystar apparently agrees, the California Federal Court will proceed. However, due to the interpolated bankruptcy case the Scheduling Order may need to be amended, and a hearing to discuss that issue is scheduled for 7/9/09. Additionally, since it is unknown whether Psystar met the 5/18/09 deadline to produce financial records, that may also be an outstanding issue to be addressed by the Court. If Psystar failed to meet that deadline (which was prior to its bankruptcy filing), they will likely be required to pay Apple’s attorney’s fees with regards to that portion of the discovery dispute. A new date for the supplementary 30(b)(6) deposition will need to be decided as the prior date became mute when Psystar filed for bankruptcy before it arrived. Additionally, as already mentioned, Apple has yet to file a response to Psystar’s request for voluntary dismissal (if they are permitted a response—I do not know bankruptcy cases well enough to say for certain, but since Apple features so prominently in Psystar’s request, it would seem reasonable to presume Apple would be permitted to respond.)

Timeline of Major Events

The majority Northern District case docket can be found at Justia with hyperlinks to the actual filings. As Justia can be about one week behind, here is a copy of the docket as it existed on 7/4/08.

April 2008: Miami-based Psystar begins selling desktop Mac clones from its website.

June 2008: Psystar adds a rack-mount server Mac clone to its line-up.

3 July 2008: Apple files its Complaint against Psystar in the Northern District Court of California.

8 August 2008: Psystar files its Apple files its Motion to Dismiss Psystar’s Counterclaims.

16 October 2008: Psystar files its Opposition to Apple’s Motion to Dismiss. World of Apple reported on this filing here.

23 October 2008: Apple files its Reply to Psystar’s Opposition to its Motion to Dismiss. World of Apple reported on this filing here.

6 November 2008: Case Management Conference held before Judge Alsup.

6 November 2008: Hearing held on Apple’s Motion to Dismiss Psystar’s Counterclaims. World of Apple reported on this filing here. Now for the first time, and only on World of Apple, a copy of the entire transcript of this hearing may be found here.

7 November 2008: The Court enters the Case Management Scheduling Order. World of Apple reported on this filing here.

18 November 2008: The Court enters its Order Granting Apple’s Motion to Dismiss. World of Apple reported on this filing here and here.

26 November 2008: Apple requests Leave of Court to file its Amended Complaint with Psystar’s Consent. World of Apple reported on this filing here.

2 December 2008: Apple files its Amended Complaint adding ten “John Doe” co-defendants and a DMCA count. See article above for our commentary.

8 December 2008: Psystar files its Motion for Leave to File its First Amended Counterclaims. World of Apple reported on this filing here and here.

16 December 2008: Psystar files its Answer to Apple’s Amended Complaint. World of Apple reported on this filing here.

30 December 2008: Apple files its Opposition to Psystar’s Motion for Leave to File its First Amended Counterclaims. World of Apple reported on this filing here and also provided a four-part issue analysis:

• Part One
• Part Two
• Part Three
• Part Four

8 January 2009: Psystar files its Reply to Apple’s Opposition to its Motion for Leave to File its First Amended Counterclaims. World of Apple reported on this filing here.

22 January 2009: Hearing held on Psystar’s Motion for Leave to File its First Amended Counterclaims. World of Apple reported on this filing here. Again for the first time, and only on World of Apple, a copy of the entire transcript of this hearing may be found here.

6 February 2009: The Court enters its Order Granting in Part and Denying in Part Psystar’s Motion for Leave to File First Amended Counterclaims. World of Apple reported on this filing here.

12 February 2009: Psystar files its Amended Counterclaim for Declaratory Relief Against Apple based on its new theory of copyright misuse. World of Apple reported on this filing here.

18 February 2009: Mediation conducted. No settlement was reached.

3 March 2009: The Court enters its Order Granting the Parties’ Joint Motion for Protective Order. World of Apple reported on this filing here.

4 March 2009: Apple files its Answer to Psystar’s First Amended Counterclaims. World of Apple reported on this filing here.

20 March 2009: Deposition taken of Psystar CEO Rudy Pedraza.

29 April 2009: Apple files its Letter Brief Regarding Discovery Dispute. World of Apple reported on this filing here.

4 May 2009: Psystar files its Letter Brief in Response to Apple. World of Apple reported on this filing here.

5 May 2009: Hearing held on discovery dispute between the parties.

8 May 2009: The Court enters its Order Compelling Psystar’s Production of Financial Documents and 30(b)(6) Deposition.

18 May 2009: Court-ordered deadline for Psystar to produce certain categories of financial documents.

The entire Bankruptcy docket may be viewed here.

21 May 2009: Psystar files for Chapter 11 Bankruptcy in the United States Bankruptcy Court for the Southern District of Florida and also requests that it be allowed to maintain its existing bank accounts.

26 May 2009: Psystar files its Suggestion of Bankruptcy with Attached Copy of Bankruptcy Petition with the California Court.

1 June 2009: The California Court enters its Order Staying Case.

3 June 2009: Court-ordered deadline for Psystar to produce a knowledgeable representative for a 30(b)(6) deposition regarding Psystar’s finances.

5 June 2009: Apple requests the Bankruptcy Court for relief from the automatic stay. World of Apple reported on this filing here.

9 June 2009: Bankruptcy schedules filed by Psystar. A virtual storm of inaccuracies blew through the Apple web over the $75,000.00 value that was assigned to the Apple lawsuit. World of Apple reported on this filing and the many misconceptions here.

11 June 2009: The Bankruptcy Court denies in part and grants in part Psystar’s request to continue to use its business forms and records. This is discussed above.

15 June 2009: Psystar’s files its Response to Apple’s Request to Lift Automatic Stay.

19 June 2009: The Bankruptcy Court grants Apple’s request to lift the automatic stay.

25 June 2009: Apple puts the California Court on Notice that the Bankruptcy Court granted its request to lift the automatic stay.

26 June 2009: A Case Management Conference for the California case is set for 7/9/09.

1 July 2009: Psystar files its request to the Bankruptcy Court for Voluntary Dismissal.

9 July 2009: Scheduled date of Case Management Conference with the California Court.

4 August 2009: Hearing scheduled for Psystar’s request to the Bankruptcy Court for Voluntary Dismissal.

Apple has yet to respond to Psystar’s request. This is discussed above.

I had been feeling under the weather for about a month and thus the delay in getting this information to my readers. Thank you for your patience, support, and loyalty. [Editors note – big thanks to dizzle for this superb work.]

Please look for a summary of the status thus far as well as some interesting tidbits not yet reported here (or elsewhere that I have seen) over this weekend.

Several days ago (I have been a bit ill and could not write this piece until now), Psystar filed its required Summary of Schedules with the Florida Bankruptcy Court. A copy of this filing may be viewed here. On Page 10, as part of “Schedule F — Creditors Holding Unsecured Nonpriority Claims,” Apple’s claim is listed as being valued at $75,000.00.

Misinformation from the Apple Web. Again.

Recently, Macworld reported that Psystar claimed that Apple has a $75,000.00 claim against them and proceeded to ignorantly speculate on how that dollar figure was calculated. Specifically:

It’s possible that all or part of the $75,000 represents Mac OS X orders Psystar placed with Apple. At the list retail price of $129 per license, the $75,000 translates into 581 copies of Leopard.

Umm. What? It is apparent that the writer of this piece knows very little about the law. Anyone at all familiar with the Federal Court system would know immediately why that figure was chosen.

Please see Section 1332 of the United States Code:

(a) The district courts shall have original jurisdiction of all civil actions where the matter in controversy exceeds the sum or value of $75,000, exclusive of interest and costs, and is between—
(1) citizens of different States;
(2) citizens of a State and citizens or subjects of a foreign state;
(3) citizens of different States and in which citizens or subjects of a foreign state are additional parties; and
(4) a foreign state, defined in section 1603 (a) of this title, as plaintiff and citizens of a State or of different States.

Notice the value there? $75,000.00. If we return to Apple’s Amended Complaint, Paragraph 19, under the heading, Jurisdiction and Venue, we read:

This Court has subject matter jurisdiction pursuant to 28 U.S.C. sections 1331, 1332 and 1338 because this action arises under the copyright and trademark laws of the United States, there is complete diversity of citizenship between the parties, and the amount in controversy exceeds $75,000.00.

Apple’s Prayer for Relief did not name a sum certain so the only certainty as to the value of Apple’s claim (if successful) is that Apple has claimed that it meets the $75,000.00 threshold (technically, the threshold is $75,000.01) required for Federal jurisdiction. That is all that bankruptcy filing means. This is really basic stuff here folks. Right next to that amount Psystar acknowledged that the claimed amount was unliquidated. Here is a definition of that term as used in law:

DAMAGES, UNLIQUIDATED. The unascertained amount which is due to a person by another for an injury to the person, property, or relative rights of the party injured. These damages, being unknown, cannot be set off against the claim which the tort feasor has against the party injured.

So there is no need to speculate. It is a matter of routine.

Now, there is something MUCH more interesting in the bankruptcy filing and that is that Psystar claims over $3,011,682.80 in assets. Yes, you read me correctly. $3,011,682.80 in assets. Their personal property comprising inventory, office equipment, and a small bank account is valued at $11,682.80; so where is the remaining $3,000,000.00? Here is what Psystar claims is worth that amount (see Page 6):

Proprietary bootstrap technology, operating system interoperability technology, manufacturing process technology and safeupdate screening technology.

Sidenote: I thought these guys were the champions of non-proprietary software? Oh yeah, that’s right. Their EULA is even more restrictive than Apple’s.

Additionally, the filing reveals that Rudy Pedraza’s investment of $120,000.00 previously mentioned is actually credit card debt (see Page 12). Ouch.

On a final front, Apple’s Motion for Relief from Stay is scheduled for hearing on June 17, 2009.

(1) whether relief would result in a partial or complete resolution of the issues;
(2) lack of any connection with or interference with the bankruptcy case;
(3) whether the other proceeding involves the debtor as a fiduciary;
(4) whether a specialized tribunal with the necessary expertise has been established to hear the cause of action;
(5) whether the debtor’s insurer has assumed full responsibility for defending it;
(6) whether the action primarily involves third parties;
(7) whether litigation in another forum would prejudice the interests of other creditors;
(8) whether the judgment claim arising from the other action is subject to equitable subordination;
(9) whether movant’s success in the other proceeding would result in a judicial lien avoidable by the debtor;
(10) the interests of judicial economy and the expeditious and economical resolution of litigation;
(11) whether the parties are ready for trial in the other proceeding; and
(12) the impact of the stay on the parties and the balance of harms.

In my opinion, the essence of Apple’s strongest arguments are contained in the following statements:

As applied to the facts presently before the Court, not only will the Debtor suffer little, if any, prejudice should the stay be lifted, but denying the Motion and maintaining the stay will prejudice Apple. Apple, like all owners of intellectual property, has a strong interest in making sure that its property rights are protected from unauthorized use. Refusing to grant relief from stay will cause delay in protecting those rights.

Indeed, having these issues resolved before the District Court is essential to the determination of whether the Debtor can successfully reorganize and emerge from Chapter 11. At some point prior to any attempted reorganization, it must be determined whether the Debtor’s current business model – selling computers running Apple’s proprietary Mac OS X Leopard operating system without permission or authorization from Apple – is a viable business or, instead, unlawful copyright and trademark infringement, and, if the latter, whether an alternative business model would support a successful reorganization. The Debtor has no legitimate property rights in an infringing product and cannot pursue reorganization of its business affairs based on the sale of products that violates applicable non-bankruptcy law.

Indeed, Psystar commenced this bankruptcy case just weeks before the June 26, 2009 close of all fact discovery and the affirmative expert report deadline in the Infringement Action, shortly after the May 8, 2009 granting of Apple’s motion to compel additional documents from Psystar, and just prior to a June 4, 2009 scheduled deposition resulting from that motion to compel. After a brief period for expert discovery, the pre-trial conference was scheduled for October 26, 2009, in advance of the November 9, 2009 trial date.

Since the filing of this case, there is no evidence that Psystar has altered its business model or in any way ceased its infringing conduct. Its website remains operational and it continues to offer for sale Open Computers running Mac OS X Leopard. Thus, it appears that Psystar’s post-petition operations are identical to its pre-petition conduct in all relevant respects, thus subjecting the Debtor to ongoing claims of infringement.

Translation: Psystar is going on with business as usual and continuing to harm Apple such that an injustice to Apple and impediment to the bankruptcy case would take place if the case was not allowed to continue as scheduled. Further, in reading between the lines, Psystar’s timing of its declaration of bankruptcy follows on the heels of a potentially damaging discovery Order from Judge Alsup. Lastly, Apple cannot properly exert its claims as a creditor, nor can Psystar put forth any reasonable reorganization plan, until their dispute is resolved.

Apple anticipated that Psystar may argue that continued litigation costs would cause it irreparable injury. In response, Apple cited substantial case law purporting to state that such costs are not to be considered irreparable harm in bankruptcy cases that are filed in the midst of ongoing litigation.

Obviously, Apple makes numerous nuanced arguments in its 24-page filing. However, I believe that this summary gives the World of Apple readers an understandable snapshot of Apple’s position. I will interact with Apple’s arguments in more detail if and when Psystar files a Motion in Opposition.

Psystar, in the meantime, filed a request for an Order of the court authorizing the employment of Lazaro J. Lopez, Esq., to represent it in the bankruptcy proceedings. An emergency hearing is scheduled on that request for today.

Here are copies of Apple’s filings:

Motion of Apple, Inc. for Relief From Stay

Exhibit 1 to Motion for Relief From Stay

In light of the bankruptcy filing, all proceedings are hereby STAYED until the automatic stay lifts at which time the parties must immediately notify the Court and arrange for a case management conference. A case management conference will be held in any event on December 10, 2009 at 11 a.m. to survey the status.

There has been nothing new filed in the Bankruptcy Court since my last report.

05/27/2009 18 Transcript of 5/26/2009 Hearing [Document Image Available ONLY to Court Users]. Redaction Request Due By 06/3/2009. Statement of Personal Data Identifier Redaction Request Due by 06/17/2009. Redacted Transcript Due by 06/29/2009. Transcript access will be restricted through 08/25/2009. (Ouellette and Mauldin) (Entered: 05/27/2009)

05/28/2009 19 Notice Regarding Filing of Transcript and Deadline for Filing Notice of Intent or Motions to Request Redaction of Transcript. (Re: 18 Transcript of 5/26/2009 Hearing [Document Image Available ONLY to Court Users]. (Covington, Katrinka) (Entered: 05/28/2009)

These entries are somewhat confusing as they reference a hearing that took place on 5/26/09. However, the docket does not reflect an actual hearing on that date, but rather simply the filing of a Notice for a future hearing.

05/26/2009 16 Notice of Meeting of Creditors. Meeting of Creditors to be Held on 6/24/2009 at 02:30 PM at 51 SW First Ave Room 1021, Miami. Deadline to File a Complaint to Determine Dischargeability of Certain Debts is 8/24/2009. Proofs of Claim due by 9/22/2009. (Covington, Katrinka) (Entered: 05/26/2009)

As I do not work in bankruptcy law, it is possible that there is something that I am missing here procedurally. I welcome any input from someone in that particular area of law. Perhaps further filings will clear up this minor mystery.

Remember, if this case interests you, be sure to check World of Apple frequently as I have made it my personal goal to report not just the big events which catch the attention of the Apple web at large, but also the smaller events which can turn out to be quite significant in the long run.

05/27/2009 17 Notice of Appearance and Request for Service of Pleadings and Other Papers by Paul Steven Singerman Esq Filed by Creditor Apple, Inc.. (Singerman, Paul) (Entered: 05/27/2009)

Apple v. Psystar: Things Just Got Really Interesting

Psystar Responds to Apple’s Discovery Allegations, Calls Blogosphere “Rabid”

Apple v. Psystar: Apple Submits Joint Proposed Discovery Order to the Court

The hearing resulted in an order requiring the following:

Based on the parties’ agreement and the Court’s resolution of the disputes, the Court now orders that Psystar produce by NOON ON MAY 18, 2009, the following categories of documents:
• All the underlying documents used to prepare the June 2008 profit and loss statement and balance sheet bates stamped PS010327-328, to the extent the documents have not been produced.
• All the underlying documents used or being used to prepare the aggregated financial statement referenced in Psystar’s opposition letter brief (Dkt. No. 61).
• All of the tabulations created by Jennifer Perez regarding the components needed to build Psystar’s products.
• Documents bates stamped PS01383-2000.
• Bank statements for all of Psystar’s accounts from Commerce Bank and TD Bank from April 2008 through September 2008. To the extent that said statements are not immediately in the possession of Psystar either in physical or electronic form, Psystar shall ask Commerce Bank and TD Bank for these statements on an every other day basis until Commerce Bank and TD Bank provide said statements.
• A copy of all attachments to all previously produced emails and a copy of the corresponding email in hard copy or in electronic form.
In addition, Psystar will provide a designated representative to supplement Apple’s previously noticed 30(b)(6) deposition on Topic 2 (financial information) on JUNE 3, 2009, starting at 9 a.m. at the San Francisco office of Townsend and Townsend and Crew LLP. This date may be changed to another day during the week of June 3 so long as the Parties agree in writing in advance of the deposition date.
If Psystar does not completely produce the aforementioned financial documents by May 18, 2009, Apple will be allowed to take a deposition after the fact discovery deadline regarding any documents produced after the Court’s deadline of May 18, 2009. Should Psystar fully comply in producing all the financial documents listed above by May 18, Psystar does not have to pay Apple’s attorney’s fees and expenses.

In the coverage provided by other sites that I have read thus far, the timing of the bankruptcy filing has not been related to the deadline bolded above. I, however, cannot help but think that the two are closely related. I would speculate that Psystar did not produce the documents by that date and was facing monetary sanctions which provided the impetus for the bankruptcy filing as the straw which broke the cloner’s back.

Transcript of Discovery Hearing

As part of our effort to go a bit farther, I have obtained a copy of the transcript of the discovery dispute hearing which sheds even more light on events leading up to the declaration of bankruptcy. Specifically, as I predicted, Judge Alsup was in no mood for discovery shenanigans. He came as close as professionally possible to telling Psystar’s attorney Colby Springer that he wasn’t buying Psystar’s story whatsoever without outright calling anyone a liar. Specifically, please note this portion of the transcript beginning on Page 4:

THE COURT: These are issues that you agreed on, or
18 things that you want me to decide?
19 MS. CHUNG: No. These two issues are still
20 outstanding.
21 And we have agreed, in the sense that Mr. Springer
22 will check on the attachments to the e-mails which have not
23 been produced.
24 And now I understand that some of the e-mails
25 attachments were corrupted, as well as some of the attachments.
1 In the conversion from Psystar to its counsel, the export did
2 not function or did not work correctly.
3 MR. SPRINGER: That’s generally correct, your Honor.
4 The document attachments to e-mails that — Psystar
5 has produced a number of e-mails. A number of those e-mails
6 that have been produced reference the existence of an
7 attachment. In a number of instances, those attachments have
8 not been produced. It is a result of — not because Psystar is
9 withholding the attachments for any reason, but because the
10 attachments have been corrupted. And it appears that that
11 corruption of the attachment has something to do with the
12 e-mail system that they use as a whole.
13 So we have identified the make and model of the
14 e-mail system, as it were. And we’re going to try to work to
15 do something. Either the file itself — the original file is
16 still present with Psystar, we believe. And we’re going to try
17 to find some way that we can get Apple to have access to those
18 original attachments, those original documents somehow, because
19 there’s a problem moving the file from the electronic form into
20 the form that is actually produced to them. The corruption
21 occurs somewhere between there.
22 THE COURT: But if you went to Psystar now and went
23 on their e-mail system and sat in one of the employees’ desks
24 and called up that e-mail and opened the attachment, would it
25 be gobbledygook, or would it be a real — you know, would it
1 read properly?
2 MR. SPRINGER: I don’t want to say for certain. My
3 understanding is that if they were able to open — if someone
4 was sitting in front of a terminal and clicked on a file, or
5 whatever the case might be, some indication of — that there’s
6 an attachment — my understanding is that they would be able to
7 open the attachment.
8 The issue —
9 THE COURT: Why don’t you just open them up and print
10 them out in hard copy?
11 MR. SPRINGER: Because we’ve been producing documents
12 in electronic copy.
13 THE COURT: You can either do this. Produce them in
14 hard copy or electronically. You’ve got to do it one way are
15 the other.
16 MR. SPRINGER: Absolutely.
17 THE COURT: When are you going to do this?
18 MR. SPRINGER: It’s not an issue of are we not going
19 to do it. It’s an issue of: what’s the best way to do it?
20 THE COURT: And also when?
21 MR. SPRINGER: If Apple would like us to go back and
22 manually print out e-mails, to the extent that that’s possible,
23 if that’s the solution they want us to do, that’s the solution
24 we’ll take. If they’d rather have an electronic format —
25 THE COURT: The discovery cutoff in this case is
1 June 26th.
2 MS. CHUNG: Yes.
3 THE COURT: If it turns out this is a delay, I’m
4 going to let them take depositions the rest of the year —
5 MR. SPRINGER: Understood.
6 THE COURT: — because it sounds like a stall to me,
7 Mr. Springer.
8 MR. SPRINGER: It’s absolutely not, your Honor.
9 THE COURT: I’m going to take it as a good-faith
10 sign, but you — that’s it’s not a stall. I’ve never herd of
11 such a thing; of documents being corrupted. This is a new one
12 on me. So you’d better fix it, and fix it promptly.
13 And, Ms. Chung, if it turns out you need more time to
14 take depositions, your side’s going to get an extension if it
15 relates to these documents.
16 MS. CHUNG: I understand.
17 THE COURT: Now, if it’s not relating to these
18 documents, you don’t get an extension; but this doesn’t sound
19 right to me. All right.
20 MS. CHUNG: Well, regarding this issue we are also
21 still talking about how we could get the attachments so that
22 they come with the e-mail, because right now, they produce —
23 some are separate.
24 THE COURT: If they have to write — print it out,
25 they’re going to put on top of it, “This went with e-mail dated
1 June 28th,” or whatever.
2 Look. In the old-fashioned way, we used to do this
3 all the time: hard-copy documents. You could live with that
4 system, if you need to.

Note that this answer is entirely different from Psystar’s prior representations to the Court regarding the email attachments.

Apple’s Assertion

Financial Projections. Apple also requested financial projections for Psystar’s products (RFP No. 25). Psystar has produced one financial projection but has not produced the drafts of that financial projection. (See PSY009277.) Those drafts clearly exist. In fact, Psystar has produced emails sending such drafts *** as attachments to e-mails. Psystar, however, has not produced any attachments to e-mails in this case. Psystar should be required to produce the drafts of financial projections and all attachments to e-mails.

Psystar’s Assertion

Psystar has produced the financial projections related to its products that exist and that are in its possession or control. Despite Apple’s assumption to the contrary, drafts of the financial projection document that Psystar created to obtain funding do not exist. The document ultimately sent to possible venture capital investors was a work in progress; Psystar did not print and save a hard copy whenever a change to the document was made. Because Apple wants a document to exist does not make it so.

Let’s all sing: One of these things is not like the other!

Similarly, Judge Alsup was not satisfied with the efforts that Psystar had made in attempting to secure copies of missing bank records:

14 THE COURT: Well, but the customer can go, you know,
15 and complain. Maybe it’s not enough to just ask once. They’ve
16 got to ask, you know, every other day, “Where is it? Where is
17 it,” until they finally get it to you.

Also during the hearing it was disclosed that the deposition of Roberto Pedraza had also been taken. Roberto is the other director of the company with his brother Rodolfo (Rudy) Pedraza. That solves my prior question as to whether or not Roberto was really the one with the financial information, and thus, it appears not. So no one knew a thing? That might explain why they went bankrupt; it might be as simple as that. Or of course it can some more devious, such as trying to hide the identity of any financial backers that may be the entities referred to by Apple as John Does 1 through 10.

The Bankruptcy

Psystar filed for Chapter 11 Reorganization, not Chapter 7 Liquidation (Chapter 7 would be total liquidation and not Chapter 13 as erroneously reported by at least one blog). This means that they intend to attempt to get back on their feet. Whether that is realistic or not considering their debt to assets ratio remains to be seen. They may plan on getting an additional cash infusion in the future.

In its filings, Psystar does not blame the litigation with Apple for its current sorry state of financial affairs, but rather states:

Due to the weakened economy, Debtor has had no alternative but to commence these Chapter 11 proceedings. Debtor sales have been greatly affected by the decrease in consumer spending. The financial crisis has also caused creditors to tighten up their terms and become more demanding for immediate payment. Debtor’s vendors due to their own financial problems are not being able to supply all necessary items to allow Debtor to produce their product, thus, forcing Debtor to pay higher prices for parts in order to fulfill customer orders in a timely manner and to assure satisfaction with the product. These factors seriously contribute to the Debtor not being able to turn a significant profit in each sale. Debtor has continued doing business in this manner with diminutive profit in hopes of a turn around in our present economy but find that the long term roots of this crisis can only be overcome by directly implementing the restructuring of Debtor s business plan and can only do so with the requested Chapter 11 protection. Debtor plans on emerging from this Chapter 11 with a strong and effective plan to make an increasingly higher profit and still provide the consumer with the product that they have grown to enjoy and trust. Debtor possesses valuable intellectual property which will be implemented in a well thought out and more profitable business plan.

It seems like the cheap PC market isn’t the magic bullet that some people want Apple to bite.

Psystar filed its list of its top twenty unsecured creditors (twenty is the amount required to be disclosed by law, Psystar didn’t even have that many) which includes multiple credit card companies, shipping charges, the IRS, and Carr & Farrell, the law firm representing it in its case against Apple to the tune of $88,468.84. That amount is very likely NOT the total amount incurred thus far as the firm has likely already been paid substantial sums; this is just the balance due. The highest unsecured creditor is none other than Rudy Pedraza himself for the sum of $120,000.00 which was noted as an “officer loan.” Where did a kid still living at home with mom and dad get that kind of bling?

The latest filing in the bankruptcy court announces a meeting of Psystar’s creditors:

05/26/2009 – 16 – Notice of Meeting of Creditors.
Meeting of Creditors to be Held on 6/24/2009 at 02:30 PM at 51 SW First Ave Room 1021, Miami. Deadline to File a Complaint to Determine Dischargeability of Certain Debts is 8/24/2009. Proofs of Claim due by 9/22/2009. (Covington, Katrinka) (Entered: 05/26/2009)

Now the Apple web has been virtually (pun intended) salivating with the speculation that at long last, the shadowy deep pockets behind Psystar will be required to be disclosed. Just one moment’s careful reflection reveals the flaw in that logic. If there are backers who wish to remain secret, do we really believe that they are so unsophisticated that they had not thought of this? If they have decided Psystar is a lost cause, all they have to do is forgive the debt (if any), and all of a sudden they are not creditors that are required to be disclosed to the bankruptcy court. It took me about two seconds to think of that. I am sure that any large investors are way smarter than I am. Pamela at Groklaw made the same observation:

I’ve seen a couple of articles claiming that at the hearing we’ll find out who the investors were who were backing this adventure. However the same articles are saying that the investors have backed away, so both can’t be so. If they have pulled out, Psystar will not have to list them in their filings, I don’t think. That may be the point.I think this means we may never know.

Really the possibilities are myriad. Rather than investors bailing on Psystar it may be that this was part of their agreement all along if it looked like they were about to be outed. We just don’t know. However, I think the reasoned and undramatic bet would be that nothing spectacular is going to be revealed during the bankruptcy proceedings. I know that doesn’t make for much of a “wow!” story, but I suspect it is closer to the truth, which is by far more important.

The unsecured creditors have already been revealed and these alleged investors could easily be unsecured creditors. These names, if any, will almost certainly remain as shadowy as ever. Now is it possible that this may happen? Sure. Is it likely? No. However, I would be remiss not to note that there are some creditors who apparently have not yet been revealed:

8 – Filed: 05/21/2009 Entered: 05/22/2009 – Notice of Deficiency Re: Schedules
Notice of Deficiency. List of Equity Security Holders due 6/5/2009. Summary of Schedules due 6/5/2009. Schedule A due 6/5/2009. Schedule B due 6/5/2009. Schedule D due 6/5/2009. Schedule E due 6/5/2009. Schedule F due 6/5/2009. Schedule G due 6/5/2009. Schedule H due 6/5/2009.Statement of Financial Affairs Due 6/5/2009.Declaration Concerning Debtors Schedules Due: 6/5/2009. [Incomplete Filings due by 6/5/2009]. (Covington, Katrinka)

It would be prudent to wait until then before looking for the man behind the curtain.

Just Filed

A Suggestion of Bankruptcy has just been filed with the California Court putting it on notice of the Florida Bankruptcy proceeding. An automatic stay of proceedings is now in effect.

As this is a joint document, it gives us an insight as to what the parties have understood to be the Court’s ruling on this issue (to which both parties also agreed).

Here are the rulings in the Proposed Order:

Based on the parties’ agreement and the Court’s resolution of the disputes, the Court now orders that Psystar produce by NOON ON MAY 18, 2009, the following categories of documents:

If Psystar does not completely produce the aforementioned financial documents by May 18, 2009, Apple will be allowed to take a deposition after the fact discovery deadline regarding any documents produced after the Court’s deadline of May 18, 2009. Should Psystar fully comply in producing all the financial documents listed above by May 18, Psystar does not have to pay Apple’s attorney’s fees and expenses.

It seems that the Court did not find Psystar’s somewhat petulant response compelling.

A copy of the Proposed Order was uploaded above.

Much thanks to reader Anthony for pointing out an error made in the first sentence, which I have fixed.

Apple’s filing serves no other purpose than to serve as fodder for a blogosphere otherwise rabid for new details on this litigation or to incur unnecessary expense on behalf of Psystar.

That is quite an outburst. While I appreciate the ad hominem attack, I would really like to know how Psystar can prove such motivations on the part of Apple. Apple certainly has ignored my requests for information or clarification so they really don’t seem too hungry to feed this rabid writer.

Here though is the very interesting portion:

Psystar has produced the financial projections related to its products that exist and that are in its possession or control. Despite Apple’s assumption to the contrary, drafts of the financial projection document that Psystar created to obtain funding do not exist. The document ultimately sent to possible venture capital investors was a work in progress; Psystar did not print and save a hard copy whenever a change to the document was made. Because Apple wants a document to exist does not make it so.

Can anyone say spoliation of evidence? I can. Psystar from the beginning knew that it was acting contrary to Apple and that there was a very good chance that a lawsuit would ensue. Rudy Pedraza made it a point to openly mock and challenge Apple. As such, generally speaking (a qualified attorney would need to give a definitive opinion on this, I am not an attorney), Psystar had a duty to preserve all relevant documentation. Psystar claims that it has retained all of the documentation that it generated since it retained counsel. I wonder: what counsel? This current firm or any counsel? I ask because I find it VERY DIFFICULT to believe that they did not have legal counsel from the beginning to assist them, and I cannot imagine any prior counsel not cautioning them to keep everything.

Now with regard to the supplementary dates for the continuation of a Rule 30(b)(6) deposition and Psystar’s insinuation that Apple filed a letter brief on an issue that was already moot (which would be in bad faith), I believe that Psystar has left out some very important facts. Apple did not merely ask for a Motion to Compel the testimony. It asked for any such costs for this additional deposition to be paid by Psystar. Did Psystar agree to that already? If they didn’t, it is Psystar who is giving incomplete facts to the Court as well as Apple (for if there were already dates on the table, Apple should have disclosed that fact).

A copy of the letter brief filed by Psystar may be found here.

Short Recap of Necessary Background History

The last filing in the case was March 4, 2009 when Apple filed its Answer to Psystar’s First Amended Counterclaims. My commentary on that filing can be found here. On the previous day the Court had entered an Order Approving Stipulated Protective Order Subject to Stated Conditions . My commentary on that order can be found here. If you recall, at that time I had concluded:

Reading between the lines: Judge Alsup will NOT look favourably upon any gamesmanship during discovery.

At that point the case entered the “discovery” process during which the parties take depositions, perform inspections, exchange documents (Requests for Production), answer written questions under oath (Interrogatories), obtain documents from non-parties (Subpoenas Duces Tecum), and narrow the issues to be proven at trial (Requests for Admissions). Unlike State Court (at least in Florida where I live, and most likely California as well), discovery is not filed with the Court. The only time any filings regarding discovery will be brought before the Court is when there is a dispute between the parties. The most common filing in this regard would be a Motion to Compel one party to adequately answer certain discovery requests which the other party believes were answered inadequately. The Case Management Scheduling Order in this case was docketed as stating:

CASE MANAGEMENT SCHEDULING ORDER: Discovery due by 6/26/2009. Jury Trial set for 11/9/2009 07:30 AM in Courtroom 9, 19th Floor, San Francisco. Motions due by 8/20/2009. Pretrial Conference set for 10/26/2009 02:00 PM in Courtroom 9, 19th Floor, San Francisco. Signed by Judge William Alsup on 11/7/2008. (whasec, COURT STAFF) (Filed on 11/7/2008)

A copy of the complete Scheduling Order may be found here.

So, it is quite expected that things would appear to settle down as far as the Court docket is concerned until the expiration of the discovery deadline of June 26, 2009. After that date the really exciting, potentially dispositive pleadings will be filed. There is nothing like a good Motion for Summary Judgment for a great read. Yes, I am a legal geek.

I hope that made things clear so far.

Federal Rules of Civil Procedure 30(b)(6) Depositions

The Federal Rules deal with the issue of obtaining the deposition of businesses which will bind the business to testimony. Below is the Rule in question:

Rule 30. Deposition by Oral Examination

(a) When a Deposition May Be Taken.
******
(b) Notice of the Deposition; Other Formal Requirements.
****
(6) Notice or Subpoena Directed to an Organization.
In its notice or subpoena, a party may name as the deponent a public or private corporation, a partnership, an association, a governmental agency, or other entity and must describe with reasonable particularity the matters for examination. The named organization must then designate one or more officers, directors, or managing agents, or designate other persons who consent to testify on its behalf; and it may set out the matters on which each person designated will testify. A subpoena must advise a nonparty organization of its duty to make this designation. The persons designated must testify about information known or reasonably available to the organization. This paragraph (6) does not preclude a deposition by any other procedure allowed by these rules.

In plain English, in this case it means, for example, Apple can provide notice that it wishes to take the deposition of a Psystar representative with the most knowledge concerning certain listed areas of inquiry and documents. The organization to be deposed can designate one or more persons to testify on behalf of the organization. With large corporations it is common for several people to be so designated. For example, I work with insurance companies. The person with the most knowledge of underwriting may not be the same person with the most knowledge of the claim in question. A sample of some Rule 30(b)(6) areas of inquiry may be found here. Obviously those questions would not be the ones in this case, but it gives you an idea of how the areas of inquiry are specified so that the other party can make an informed decision who to designate, and it limits the scope of that deposition.

Are you still with me?

Psystar Appears to be Playing Games

With the above information in hand, you are in a better position to understand what yesterday’s filing means. Apple is requesting that the Court accept under seal a letter brief with redacted portions, one un-redacted document (Exhibit C). and three other documents redacted in full (Exhibits A, B, and D). Even though the letter brief is redacted, it is VERY interesting. Here is a link to the PDF file of the letter. I am going to reproduce the un-redacted portions here with asterisks (***) inserted where redaction occurs.

Apple’s Letter to Judge Alsup Dated April 29, 2009

Dear Judge Alsup:

Despite numerous meet and confer sessions, defendant Psystar Corporation (“Psystar”) has failed to provide, either through documents or testimony, clearly relevant financial information. Psystar has produced no monthly profit and loss statement, balance sheets or other financial statements and only a small subset of revenue and cost-related receipts. Moreover, at the 30(b)(6) deposition regarding Psystar’s revenues, profits, asserts and liabilities (including investors, lenders or other sources of financial support), taken on March 20, 2009, Psystar’s CEO and founder Rudy Pedraza, the person designated by Psystar to testify on this topic, would not answer basic questions about Psystar’s financials. *** Mr. Pedraza, who runs this small company, stated approximately 90 times during the deposition that he did not know or recall answers to basic questions about Psystar’s sales, its general costs and profits, its costs and profits by product line, how it determined its prices and profit margins, ***.

***

*** Yet, as of the March 20 deposition, no customer purchase receipts or order documents had been produced by Psystar. Indeed, despite a supplemental production on April 13, 2009, Psystar still has not produced customer purchase receipts/invoices from at least April 2008, when it began selling its computers, to October 2008. Additionally, only a subset of vendor invoices³, from December 2008 to March 2009, were produced (and those just one day before the deposition). Similar documents from April to November 2008 are still missing. Due to these deficiencies in both Psystar’s document production and its 30(b)(6) testimony (along with others described below), Apple submits this letter brief requesting an order compelling Psystar to (1) produce financial documents sufficient to determine Psystar’s revenues, costs, profits, assets and liabilities and (2) to make available a knowledgeable 30(b)(6) designee for another deposition on this topic at Psystar’s expense.

I. Procedural Background

On November 4 and 11, 2008 Apple served its First and Second Requests for Production in which it requested Psystar documents related to sales, revenue, costs, profits, asserts, liabilities and financial projection. (RFP Nos. 25, 31, 33–34, 42, 49 and 58&ndash63, language reproduced in Ex. B.)⁴. After numerous meet and confer sessions on December 17 and 19, 2008 and February 13 and 20, and March 9, 2009, Psystar stated that it would produce documents responsive to these requests after entry of a protective order.⁵ On March 16, 2009, Apple again reminded Psystar that it had not produced any financial documents (other than a few purchase records through a payment processor) and demanded production before the upcoming 30(b)(6) deposition. One day before the deposition, Psystar produced only a small subset of the vendor invoices mentioned above. After the deposition, Apple sent another letter identifying the documents Mr. Pedraza had testified were produced or may exist at Psystar. (Ex. D.) One week later, and three weeks after the deposition, Psystar produced purchase receipts from October 2008 through March 2009. No additional relevant documents have been produced even though Psystar has been selling computers since April 2008 and Mr. Pedraza testified that Psystar had not destroyed any documents. (Ex. A at 46:14–16.)

II. Categories of Missing Documents

P&L Statements, Balance Sheets and Other Financial Statements. Psystar should be compelled to produce its financial statements. *** Psystar has not produced that data or any financial statement. Moreover Psystar has not produced information that would allow Apple to conduct its damages analysis ***.

Underlying Documentation to Show Sales, Revenue, Costs, Etc. Psystar should also be compelled to produce underlying documentation that is necessary to create a profit and loss statement or balance sheet. *** Based on third-party productions, it is also evident that Psystar exchanged documents with its payment processors that show Psystar’s sales and returns along with the fees paid to those payment processors. Psystar has not produced documents showing all of its sales and revenues from April 2008 to the present.

Furthermore, Psystar has not produced any summary document sufficient to show its costs from when it first began selling products in April 2008 through the present. Even if Psystar does not have a summary document, it should then produce documentation that would allow Apple to determine Psystar’s costs. Psystar has not produced any documents that show its operating costs or overhead costs, including payroll. It has not even produced all the invoices from its own vendors and consultants.⁶ Rather, Psystar has produced only a smattering of invoices that cover products purchased from December 2008 through March 2009. *** These documents are important to determine Psystar’s profits and margins and must be produced.

Financial Projections. Apple also requested financial projections for Psystar’s products (RFP No. 25). Psystar has produced one financial projection but has not produced the drafts of that financial projection. (See PSY009277.) Those drafts clearly exist. In fact, Psystar has produced emails sending such drafts *** as attachments to e-mails. Psystar, however, has not produced any attachments to e-mails in this case. Psystar should be required to produce the drafts of financial projections and all attachments to e-mails.

Apple respectfully requests pursuant to Rule 37(c) that Psystar be compelled to produce all documents responsive to the categories described above, to provide another knowledgeable witness to complete the 30(b)(6) deposition, and to pay Apple reasonable expenses, including attorney’s fees caused by Psystar’s inordinate failure to produce and testify.

Editorial Commentary

The reader can examine the footnotes in the linked PDF file of the document as well as the exhibit which sets forth the requests that were propounded to Psystar (Exhibit C). Basically what this boils down to is an alleged willful and knowing failure of Psystar to produce complete financial information. I personally find this very interesting in light of the issue of the still-unidentified ten “John Doe” defendants. Apple may be attempting to obtain that information in this parenthetical statement:

(including investors, lenders or other sources of financial support)

Taking the above-letter as absolutely true and unbiased for the sake of argument; it certainly appears that Psystar has run afoul of good-faith discovery. Federal Court Judges usually have little tolerance for such tactics. If it is indeed true that Rudy Pedraza either would not, or could not, answer financial information 90 times that would be bad for Psystar. If Rudy doesn’t know, who does? Is he protecting someone?

In a bit of trivia, it appears that at least nearly 10,000 documents have either been produced so far or marked by Apple as pertinent to the case. How do I know this? Did you notice the statement referring the Court to “PSY009277.” That is a Bates-stamping convention. The document referred to is number 9277 of a batch identified with the prefix “PSY.” I can’t speak for the legal assistants on this case, but that prefix is how I would usually identify documents produced by the opposing party and not internal documents or documents provided by the client.

What’s Next Regarding This Issue?

Psystar will likely file a response or the Court will request a hearing to sort out this dispute. If things are as they appear, I would not be at all surprised to see Psystar monetarily sanctioned as requested by Apple.

Here is a link to the list of all of the prior commentary articles I have written on this case. However, I would draw the reader’s particular attention to the following:

Apple Petitions Court for Leave to Amend Its Complaint Against Psystar [Updated]

Did Psystar Really Deny the Involvement of Others?

On February 12, 2009, with permission of the Court via its Order dated February 6, 2009, Psystar filed its First Amended Counterclaims for Declaratory Relief. The Court Order required Apple to “answer” within twenty calendar days of Psystar’s filing. As noted in a previous article, I had fully expected Apple to file a Motion to Dismiss, but upon further reading of the Court’s prior Order, I see that the Court denied Apple the right to do so. Is that an appealable matter? I don’t know, but obviously if it is, Apple will wait until the conclusion of the case to do so.

For the reader’s reference, copies of the filings in the case may be accessed here. Further, World of Apple’s catalog of past detailed analysis of this case may be found here.

The reader should not assume that by answering Apple is abandoning the arguments it used in its opposition to Psystar’s Motion for Leave to Amend. That would not necessarily end up as arguing defeated points as the burdens to overcome are different as the case progresses and leaves to amend are liberally granted. The same arguments which could not defeat a Motion to Amend could succeed in a Motion for Summary Judgment, as noted by the Court itself.

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.

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.

The reader should not (in my opinion) confuse the declaration that there was no reason to “bar” the claims as a matter of law to be equivalent to no reason to render summary judgment on the claims as a matter of law. The context of the Court’s statement was Apple’s argument of futility which the Court rejected as a basis to deny leave to amend only. However, once again, I remind the reader that I am not an attorney and any legal opinion would have to be given by a properly licensed professional.

Psystar’s filing, though long, boils down to the follow two elements for which its preceding paragraphs were offered as background proofs. Apple admitted and denied some of the background proofs which I will detail in a follow-up article as they consist primarily of issues of technicality. Apple and Psystar agree on most of the “facts” of the case. What they disagree upon is the application of the law to the facts.

Psystar’s First Claim for Relief (Declaration of Unenforceability for Copyright Misuse (EULA))

74. PSYSTAR is therefore entitled to a declaratory judgment finding APPLE’s copyrights to be unenforceable until that time that APPLE discontinues the use of the EULA in conjunction with the misuse of its copyrights.

Psystar’s Second Claim for Relief (Declaration of Unenforceability for Copyright Misuse (DMCA))

87. PSYSTAR is therefore entitled to a declaratory judgment finding APPLE’s copyrights to be unenforceable until that time that APPLE discontinues the use of the DMCA in conjunction with the misuse of its copyrights.

Apple’s Answers to the above were quite simple and are encapsulated it in its sole Affirmative Defense:

APPLE’S AFFIRMATIVE DEFENSE

(Failure To State A Claim Upon Which Relief Can Be Granted Under F.R.C.P. 12(b)(6))

88. Psystar has failed to state a claim for declaratory relief based on copyright misuse resulting from Apple’s licensing practices.

89. Psystar has failed to state a claim for declaratory relief based on copyright misuse resulting from Apple’s assertion of the Digital Millennium Copyright Act.

Basically, Apple reiterated its prior position so that it reserved the right to argue it again in future filings. I fully expect that much more interesting filings will soon come down the pike, including Motions for Summary Judgment. Both parties will likely wait to have at least a bit of discovery under their belt. Those future filings will likely be heavily redacted, hobbling any attempt at meaningful commentary or analysis.

A copy of Apple’s Answer may be found here.

1. The parties must make a good-faith determination that any information designated “confidential” truly warrants protection under Rule 26(c) of the Federal Rules of Civil Procedure. Designations of material as “confidential” must be narrowly tailored to include only material for which there is good cause. A pattern of over-designation may lead to an order un-designating all or most materials on a wholesale basis.

2. In order to be treated as confidential, any materials filed with the Court must be lodged with a request for filing under seal in compliance with Civil Local Rule 79-5. Please limit your requests for sealing to only those narrowly tailored portions of materials for which good cause to seal exists. Please include all other portions of your materials in the public file and clearly indicate therein where material has been redacted and sealed. Each filing requires an individualized sealing order; blanket prospective authorizations are no longer allowed by Civil Local Rule 79-5.

3. Chambers copies should include all material — both redacted and unredacted — so that chambers staff does not have to reassemble the whole brief or declaration. Although chambers copies should clearly designate which portions are confidential, chambers copies with confidential materials will be handled like all other chambers copies of materials without special restriction, and will typically be recycled, not shredded.

4. In Kamakana v. Honolulu, 447 F.3d 1172, 1179 (9th Cir. 2006), the Ninth Circuit held that more than good cause, indeed, “compelling reasons” are required to seal documents used in dispositive motions, just as compelling reasons would be needed to justify a closure of a courtroom during trial. Otherwise, the Ninth Circuit held, public access to the work of the courts will be unduly compromised. Therefore, no request for a sealing order will be allowed on summary judgment motions (or other dispositive motions) unless the movant first shows a “compelling reason,” a substantially higher standard than “good cause.” This will be true regardless of any stipulation by the parties. Counsel are warned that most summary judgment motions and supporting material should be completely open to public view. Only social security numbers, names of juveniles, home addresses and phone numbers, and trade secrets of a compelling nature (like the recipe for Coca Cola, for example) will qualify. If the courtroom would not be closed for the information, nor should any summary judgment proceedings, which are, in effect, a substitute for trial. Motions in limine are also part of the trial and must likewise be laid bare absent compelling reasons. Please comply fully. Noncompliant submissions are liable to be stricken in their entirety.

5. Any confidential materials used openly in court hearings or trial will not be treated in any special manner absent a further order.

6. This order does not preclude any party from moving to undesignate information or documents that have been designated as confidential. The party seeking to designate material as confidential has the burden of establishing that the material is entitled to protection.

7. The Court will retain jurisdiction over disputes arising from the proposed and stipulated protective order for only NINETY DAYS after final termination of the action.

Reading between the lines: Judge Alsup will NOT look favourably upon any gamesmanship during discovery.

Now, before anyone fires the sensationalism gun, this is typical in intellectual property cases. It would be shocking if such a Stipulation were not entered into which is beneficial to both parties. This request was not made unilaterally by Apple, but was joined by Psystar who also has information it wishes to protect.

Of further note, the ten John Does have re-appeared in the case caption. There is no particular significance to that other than pointing out that their omission in prior filing captions was sloppy work on both sides. The caption now is a bit more complex since the entry of Psystar Amended Counterclaims as the case is now basically two suits in one. This is how the caption now appears.

APPLE INC., a California Corporation,
Plaintiff,
v.
PSYSTAR CORPORATION a Florida
corporation, and DOES 1-10, inclusive,
Defendants.
___________________________________

PSYSTAR CORPORATION a Florida
corporation,
Counterclaimant,
v.
APPLE INC., a California Corporation,
Counterdefendant,

I would expect that the Court will approve this routine request.

I note that Psystar is still using the terminology of “subsidiary market” which is a theory that the Court has previously rejected. The statement that literally makes me sick to my stomach remains:

PSYSTAR is informed and believes, and thereon alleges, that there are substantial barriers to entry in the market for operating systems, including the Mac OS market. It is prohibitively difficult, time-consuming, and expensive to create any operating system much less one that would offer substantially identical functionality, security, stability, and other aspects offered by the Mac OS. In general, a new operating system manufacturer faces an almost insurmountable barrier to successful entry to the operating system market. Those barriers would be raised even higher with respect to an operating system that would directly compete with the Mac OS.

Cry me a river, and tell that to the Linux open-source community who not only have created a competitive operating system, they don’t even charge for it.

First, I note that the Court has rejected the idea of a separate “Mac OS market.” Second, allow me to give a non-legalese translation of this statement: we can’t create something as good so Apple should be forced to help us. I find that immoral and against the principles of the American free-market system (in which both of these companies exist). Apple didn’t run off to the courts asking for cellular phone makers to have to help them create a phone; they just did it. From my economic perspective, if this were to be granted, it would be hideously unjust.

As the filing continues, the references to previously-rejected market theories remain. I believe these are subject to easy attack from Apple on a Motion to Dismiss. These references to various markets appear to be yet another attempt to back-door in anti-trust issues under another name. Without these references to various markets, the claims seem to fall flat.

For a complete run-down of my analysis on these various issues, I refer the reader to my collection of articles on this case from its inception, most particularly ones published within the last month.

Mediation is scheduled for February 18, 2009. While Psystar does have this declaratory action in its hip pocket as a negotiating tool, I believe that Apple has already planned on how it will nullify any potential loss and prevent any further upstarts. These plans could include ceasing sale of retail boxed versions of the OS, providing licensed copies at prices that are not subsidized by the profit margin of Apple hardware (which they in fact are), or as 9to5 Mac has noted, a proprietary hybrid ARM chip. My opinion is that Psystar should take whatever go-away money is offered, if any, and run.

If the case does not settle, Apple’s responsive pleading is due in the beginning of March. That pleading can take the form of an Answer or a Motion to Dismiss (or perhaps some other strategy that I have not thought of). It might be to Apple’s tactical advantage to file a Motion to Dismiss prior to mediation so that risk is on the table to convince Psystar that it might be wise to settle.

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.

Psystar Corporation’s Notice of and Motion for Leave to Amend

Apple Inc.’s Opposition to Psystar Corporation’s Motion for Leave to Amend its Counterclaims

Psystar Corporation’s Reply to Apple Inc. and in Support of Psystar’s Motion for Leave to Amend

The entire case docket can be found at Justia.

As part of World of Apple’s commitment to give its readers the most up-to-date news possible on this case, I am now in possession of the actual word-for-word transcript of the hearing and thus can provide a summary. Rather than following the order of the statements made in the transcript, which can be a bit chaotic, I will separate the main disputes into their own sections and give summaries of the comments/arguments made by Psystar, Apple, and the Court on those particular points. If I have any commentary, I will offer it at the end of that section before moving on. Hopefully this will make this material more understandable to those outside of the legal field. 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.

As background, I had previously authored a four-part series discussing the most important issues that were to be decided as a result of this hearing. For reference, here are links to those prior pieces:

Part One
Part Two
Part Three
Part Four

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

On November 18, 2008, the Court dismissed without prejudice Psystar’s Counterclaims with the following instructions:

Psystar may move for leave to amend within twenty calendar days of the date of entry of this order. Any such motion should be accompanied by a proposed pleading and the motion should explain why the foregoing problems are overcome by the proposed pleading.

Psystar’s Argument:

Psystar first argued for the principle that motions to amend are generally favoured by courts and are denied based upon at least one of four factors, only one of which Apple has alleged: futility of amendment. The Court was then advised briefly of the four baseses for its counterclaims which Psystar contends do not duplicate or depend upon the previously dismissed theories. Their argument was summed up thusly (quotes are directly from the transcript):

So the issues that led to the dismissal of the prior cross-complaint, namely market definition, et cetera, none of those issues are present here. Henceforth, we have overcome the Court’s Order or we’re [sic] addressed the Court’s issue with respect to how this present complaint overcomes the motion to dismiss previously.

Apple’s Argument:

Apple reminded the Court of its prior dismissal of Psystar’s theory of separate markets and argued that Psystar is basically making a very similar argument under a different name. Apple maintains that the very same issues remain; namely, whether or not there can be a claim of leveraging (which is basically the type of copyright abuse that Psystar is claiming) without a determination of relevant markets and market power. Thus, Apple alleges that Psystar failed to make arguments which overcame the Court’s prior Order dismissing their arguments on market theory, among other factors. Here is the entirety of Apple’s oral argument on this issue (after Judge Alsup commented that Psystar has brought forward a new theory):

So essentially what Psystar has done is taken exactly the same pleading and said: “Well, if it’s not antitrust violation, then we’re going to claim that this is copyright misuse.” At some point in this case we will have to resolve the question of whether or not in the course of intellectual property rights there could be a claim of leveraging without the definition of a relevant market and without any kind of market power. That issue will be resolved here, but it can be resolved in the course of the copyright misuse defense. And there’s no reason for the Court to have to resolve it now. Apple believes that these counterclaims, if asserted, would be futile, because we have the right, as the copyright holder, to restrict who copies our software.

Judge’s Comments:

The discussion quickly delved into the issues of the definition of and support for legitimate copyright misuse allegations, so there was very little judicial commentary on this particular issue. However, Judge Alsup did flatly state to Attorney Gilliland that Psystar has alleged a new theory.

Editorial Commentary:

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. Initially, after reviewing this part of the hearing, the only portion of Psystar’s Motion to Amend which I believed may be denied under this argument were the two unfair competition counts discussed below. In isolation, my thoughts would remain the same. However, Apple made a strong argument in the next portion—though more procedural in nature—that this type of action is simply not a legally recognized remedy given the procedural history of this case. If Apple prevails on that particular point, the futility argument would enter through the back door as it would be futile to attempt to introduce a cause of action which is not recognized by law. In my prior four-part discussion of the issues to be argued at this hearing, I did not address this issue, so I cannot compare any prior thoughts to what was actually argued. 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.

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

Brief Definitions: An affirmative defense is an allegation that a party raises to defend themselves in full or in part against the offensive allegations against them. For example, in a libel case, a defendant may use the affirmative defense of asserting that the alleged libelous statement was true and that truth is an absolute defense to libel. So in this case, Apple alleged Psystar had infringed upon its copyrights. Psystar claims that Apple has misused its copyrights as a defense to that allegation.

A declaratory action is an offensive pleading. It’s purpose is to proactively ask a court to rule on an issue of law to give guidance in an area where the parties are unclear as to their rights and obligations. So the question here in more folksy terms is whether or not Psystar can double-dip and claim the same allegation in both a defensive and an offensive posture. This obviously is not an extensive definition of these two concepts, but it is enough to understand what is in dispute.

Psystar’s Argument:

Psystar acknowledged that Apple is relying upon three cases in support of its position, but argues that they are not applicable to the present matter.

1. Altera Corp. v. Clear Logic, Inc., 424 F.3d. 1079 (9th Cir. 2005): Psystar noted that although that court did refer to copyright misuse as a defense, the case is completely factually distinguishable from this case since there were no offensive allegations of copyright infringement.

2. MGM Studios Inc. v. Grokster, Ltd., 269 F. Supp. 2d 1213 (C.D. 2003) and Ticketmaster L.L.C. v. RMG Technologies, Inc., 536 F. Supp 1191 (C.D. Cal. 2008): Psystar conceded that these respective courts did deny the allowance of copyright misuse in the context of declaratory actions. However, Psystar contended that neither court held to a “per se rule prohibiting copyright misuse [in a declaratory action].” Psystar claimed that MGM Studios dealt with issues of damages with regard to copyright misuse and that Ticketmaster didn’t contain any analysis of the issue. Implicit in this line of argumentation is the fact that Psystar’s First Amended Counterclaims do not contain prayers for monetary damages apart from attorneys’ fees and costs.

Apple’s Argument:

Apple’s arguments are contained in its responses to the Judge’s comments below.

Judge’s Comments to Psystar:

Judge Alsup cut right to the chase and asked Psystar what additional relief or advantage would be gained by the declaratory action that was not already covered by its affirmative defenses. Further, the Judge inquired as to the potential impact of a successful declaratory action; specifically, would such a decision impact this case alone or would it render Apple’s copyrights unenforceable as against the whole world.

Psystar’s Responses to the Judge’s Comments:

Psystar responded that there will be products in controversy that are not yet in existence; therefore, a declaratory ruling would give Psystar direction in their continuing research and development. Psystar then argued that because of these future plans of Psystar, the cases that speak of copyright misuse as a preemptive action support their points. Further, Psystar conceded that such a ruling would extend to the whole world if the factual baseses were similar to this case.

Judge’s Comments to Apple:

Judge Alsup inquired what the potential harm was if the duplication of the allegation was allowed. Additionally, he noted (without citing any specific cases by name) that he has observed that such duplicative allegations in both defensive and offensive postures are routinely observed in patent cases. Judge Alsup reiterated his belief that there are patent cases dealing with this issue after Apple asserted that they were unable to find any such cases.

Apple’s Responses to the Judge’s Comments:

Apple pointed out that since copyright misuse has already been alleged, the issue is already ripe between the parties, and more importantly, it is limited to Psystar and Apple and not all of known civilization. Apple acknowledged the Judge’s point with regards to patent misuse cases but asserted that there are no patent cases in which this specific issue was addressed (which basically nullified the prior acknowledgment). In other words, Apple was unable to find a patent misuse case which answered the question: If you’ve already asserted this [patent misuse] as an affirmative defense can you also assert it as a declaratory relief action? In light of the Judge’s insistence that there were such cases, Apple countered that those cases involved fact patterns of fraud on the patent office. Apple furthered countered that while there are no patent cases that directly answer this question, there are two California cases (MGM and Ticketmaster) which do in fact directly answer this question in relation to copyright misuse with procedural postures which are virtually identical to this case, including a dismissal of antitrust counterclaims and attempts to defensively and offensively claim copyright misuse. The following portion is a good summary of Apple’s argument:

In both of those cases the defendant had also pleaded patent [sic—transcriptionist error or accidental misstatement by Attorney Gilliand as the cases involve copyright] misuse as a defense. In both of those cases they then tried to plead copyright misuse as a counterclaim. And in both of those cases the court said:

“That’s unnecessary, improper use of the declaratory judgment act and needlessly complicates an already complex case.”

The issue as between Psystar and Apple is already joined, and we don’t need to add another counterclaim to say the same thing over again. The Ticketmaster case called them:

“Duplicative and a needless waste of judicial resources.”

And the Grokster case said:

“The declaratory judgement act is not intended to provide a forum for establishing the legal relations between declaratory defendants and all the world the misuse issue is already here in our case, and that’s sufficient.”

Editorial Commentary:

The most recent case cited was the 2005 Altera case which was in support of Apple’s position. The Altera case specifically stated that the doctrine of copyright misuse has no place “beyond ‘its logical place as a defense to a claim of copyright infringement.’” Psystar attempted to deflect the force of this statement by claiming that it appeared in a mere recital of the history of the case. I believe this deflection is specious as the court was hearing a case on appeal and would not have repeated without comment a principle of law that was blatantly incorrect. The Altera court gave also gave background information on the creation of the doctrine of copyright misuse and specifically stated that it was defined as a defense against an offensive claim of copyright infringement. While Psystar is correct that the facts are distinguishable, it appears to me that the distinctions do not affect the basic legal principles relied upon by Apple. In fact, the Altera case contains this specific quote:

The intent of the parties is the governing notion of contract law. Altera’s intent is clear from the language of its license agreement: Altera sought to prevent competitors from benefiting from its software. The district court correctly gave effect to the terms of the contract and the intent of the parties and we affirm the district court’s denial of Clear Logic’s motion for summary judgment on that issue.

We must remember that the copyright infringement case does not appear in isolation and arguably does not even primarily involve the installation of OS X on non-Apple-labeled hardware, but Psystar’s modification of Apple’s code in order to enable it to do so. The installation issue was addressed primarily in breach of contract allegations.

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).

In MGM, the court specifically rejected a contention that a duplicative copyright misuse allegation in a declaratory posture would serve an important public purpose in notifying the rest of the world that the plaintiff’s conduct was improper and unenforceable. The court stated that this was simply an attempt to have a universal decision made that is independent of whether or not this defendant prevailed upon its own specific affirmative defense of copyright misuse. That is precisely what Psystar is attempting to do here as explicitly stated in pages 5 through 6 of its Reply in Opposition:

These unsupported arguments are nothing more than window dressing for Apple’s true concern—the nuclear fallout from a declaratory judgment as to [the] unenforceability [sic] of Apple’s copyrights. such a judgment would ‘have the force and effect of a final judgment’ not only with respect to Psystar but to other parties attempting to compete alongside Apple.

I do not see how Psystar’s intent could have been made any plainer, and as such, appears to be in direct opposition to the MGM precedent.

The Ticketmaster case is equally blunt and damaging to Psystar’s arguments, even citing Psystar’s primary case (Practice Mgmnt., to be discussed later) as well as Apple’s primary cases (Altera and MGM) in support of this position:

Ticketmaster argues that “copyright misuse” is an affirmative defense to a claim for copyright infringement, and does not support an independent claim for damages. The Court agrees. Altera Corp. v. Clear Logic, Inc., 424 F.3d. 1079, 1090 (9th Cir. 2005) (affirming district court’s refusal to “extend[ ] the doctrine of copyright misuse beyond ‘its logical place as a defense to a claim of copyright infringement’ “); Practice Mgmt. Info. Corp. v. American Medical Ass’n., 121 F.3d 516, 520 (9th Cir. 1997) (adopting rule that “misuse is a defense to copyright infringement”); Metro-Goldwyn-Mayer Studios, Inc. v. Grokster, Ltd., 269 F. Supp. 2d 1213, 1225 (C.D. 2003) (noting that, as even defendant conceded, “copyright misuse cannot found a claim for damages”). Accordingly, Ticketmaster’s motion to dismiss is hereby GRANTED as to RMG’s Second Counterclaim for “Misuse of Copyright.” And as this holding is not based on the way in which this claim was pled, but on the fact that no such claim can ever be pled, the dismissal of this claim is WITH PREJUDICE, as no possible amendment could save it.

This issue seems to highly in Apple’s favour. It further appears to falsify Psystar’s assertion that the Ticketmaster case contained no analysis. The above-quoted paragraph certainly appears to be an analysis.

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

Although these counterclaims appear last in the actual filing, I am addressing them out of order in this article as the hearing did not conclude with this issue. In fact, it was addressed only briefly.

Psystar’s Argument:

With the exception of a single mention of the existence of these counterclaims, Psystar did not use any of its time to argue these points. Arguments could be said to be implied, however, in its arguments for a proper pleading of copyright misuse.

Apple’s Argument:

Apple asserted that the two California unfair competition counterclaims are basically the same claim repeated twice, and the Court has already ruled that Apple did not violate these codes.

Editorial Commentary:

These two counterclaims are entirely dependent upon the copyright misuse counterclaim (though the converse is not true), thus it is understandable that not much time was spent on them. In fact I suspect that Psystar doesn’t expect these to stand.

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

Psystar’s Argument:

As noted above, Psystar relies heavily upon Practice Mgmt. Info. Corp. v. American Medical Ass’n., 121 F.3d 516 (9th Cir. 1997) for its justification of the existence of copyright misuse theory (which Apple never denied,) but more importantly, for its definition of copyright misuse as an attempt to expand the limited monopoly granted to the copyright holder into areas that are not covered by the copyright without regard to issues of market or market power. Specifically, Psystar argues that Apple has used its software copyrights (and implies that it may later dispute that OS X, in at least its “expressive elements,” can even meet the requirements of a work that is eligible to be copyrighted) to control hardware which is outside the scope of the software copyrights and itself is not a copyrightable work. It is Psystar’s position that copyright only covers expression, and that Apple is attempting to combine its copyrights with its software license and its newly alleged DMCA claim to control hardware which is outside of the scope of the limited monopoly rights on its software.

Psystar further argues that Apple’s actions are in violation of fair use (without explaining how), the first sale doctrine, and Section 117 of the Copyright Code; and as such, is eliminating rights that are granted to purchasers of copyrighted works. Additionally, Psystar takes particular care to note that these claims do not require proof of antitrust elements, specifically market issues.

Apple’s Argument:

Apple stated in summary:

We have the right to restrict who distributes our software. If this had been a novel, we could only license out the right to publish it in a hard copy book. And we could reserve to ourselves the digital rights for an audio book, for example. Such restrictive licensing occurs frequently and is not unlawful in the absence of market power.

Additionally, Apple addressed Psystar’s primary case (Practice Mgmnt.) by pointing out significant factual differences. Specifically, in Practice Mgmnt., the licensee of copyrighted medical codes was forbidden to use a competitor’s medical codes in any publication produced by the health organization. In the present case, Apple’s licensing agreement does not forbid the use of any other operating system nor the development of any competing operating system which facts would be required for it fall under the precedent of Practice Mgmnt.

Judge’s Comments to Apple:

Judge Alsup notes that Psystar does allege that Apple has market power.

Apple’s Responses to the Judge’s Comments:

Apple pointed out that the Court has already previously ruled that there cannot be a market limited solely to Apple, and in the context of the entire personal computer market, Apple does not have the requisite market power. At one point Apple appears to imply that this case might be one of first impression (i.e., an issue which has not yet been addressed by an appropriate court) with regards to the issue of whether the type/kind of copyright misuse alleged in this case can even exist without corresponding market power since it is a thinly disguised leveraging allegation which would fall under antitrust law.

In addition to the issue of market power, Apple pointed out that its licensing agreement does not control hardware at all, but only the use of the software, much in the same way that a publisher may publish a book only in hardcover without danger of being accused of attempting to expand its copyright into the control of the binding market. In support, Apple cited to Triad Systems Corp. v. Southeastern Express Co., 64 F.3d 1330 (9th Cir 1995), in which software was limited by its copyright owner for use only on Triad’s computer hardware, and the court ruled that this was not copyright misuse.

Psystar’s Rebuttal:

Psystar once again emphasized that case law indicates that market power and antitrust elements need not be proven in a copyright misuse “defense.” [I put defense in quotes because Psystar is not arguing for a defensive claim of copyright misuse but an offensive one.]

Judge’s Comments to Psystar with Psystar’s Interaction:

Judge Alsup strongly questioned Psystar as to its position that Apple does not have the right to control its licenses. Psystar responded by falling back to the concept of the limited monopoly grants of copyright works which are sold, though the Judge was specifically dealing with licensure. When pressed on licensure, Psystar responded that Apple is using its license to leverage its copyright to bring in its own hardware. The Judge conceded the leveraging point but proceeded to ask Psystar to answer two hypothetical scenarios:

Scenario One: Apple writes software and limits its use to its own internal employees. Psystar asks for a license, and Apple refuses. How is that copyright abuse?

Psystar simply responded that the situation is not the same as the one at hand, to which the Judge agreed, and noted that they both would agree that there would be no copyright misuse in that scenario.

Scenario Two: Apple writes software and chooses to sell it only to people who buy Apple computers—or more specifically license it to be used only with their computers. While this may be leveraging, the Judge inquired how this is any different than the first scenario.

At this time Psystar pointed to the fact that Apple will sell anyone a boxed copy of OS X. It is sitting on retail shelves, and anyone can come in and purchase it. Psystar argues that this factual scenario results in the elimination of certain rights that Apple previously held due to the first sale doctrine. Judge Alsup then—surprisingly—asked what the issue was if Psystar is allowed to buy the software as if he were suddenly unclear as to the nature of the dispute. Psystar once again explained their position with regards to an unlawful expansion of copyright privileges.

Editorial Commentary:

I must admit that I became concerned with this portion of the arguments as the Court seemed to be genuinely confused over basic computer terminology and knowledge. The Judge stated that he has never heard of OS X but has heard of Apple. He further expressed confusion as to what copyright was alleged as being infringed, at one point stating that he thought it was the use of word “Apple,” which is not anywhere close to what is at issue. Additionally, later comments of the Judge seemed to imply that he believed that Apple was disputing the validity of the very idea of copyright misuse, which is not the case.

There is a very important and nuanced point here that cannot be missed. Psystar is relying upon a case (at least in the oral arguments) in which a licensor restricted the licensee from using an equivalent category of competing product. That is not the case here. Practice Mgmnt. compared like kind works (medical billings codes) to like kind works (a competitor’s medical billing codes). At the risk of writing a bad pun, Practice Mgmnt. was comparing apples to apples. In order for this case to be analogous to Apple’s license, the licensing agreement for OS X (an operating system) would have to place restrictions upon the use of a product of like kind (a competitor’s operating system). It simply isn’t applicable in my opinion, but I fear this distinction may be lost in the shuffle. It took a bit of digestion for me to understand Apple’s point, but once grasped, it is blindingly obvious. Apple has placed no restriction on its hardware. A consumer can buy Apple hardware and use it to run competing operating systems. Apple has placed no restriction on the use of competing software, in fact, competing software can be ran alongside OS X.

Some of my concerns as to possible confusion on the part of the Court could be due to the nature of reading a transcript where only bare words, and sometimes only sentence fragments, are recorded without the benefit of non-verbal cues. Additionally, it appears that the Court was rushed for time as an attorney in the next case scheduled for hearing had arrived, so this hearing had to be wrapped up somewhat abruptly. I really would have liked Apple to have had the opportunity to drive home the above-referenced nuances as I don’t think they were made clear in oral arguments; however, they are made very clear in Apple’s written opposition.

The Court concluded the hearing as follows:

I don’t the answer to this. I’ll have to study it more, so I have to bring it to a close. It’s under submission.

For a discussion as to what is meant by “under submission,” please read my earlier article on that issue.

Editorial Conclusory Remarks

So what will this pending decision mean for the parties? If the Court rules against Psystar and disallows the filing of the amended complaint, it does not mean that Psystar has lost its defense of copyright misuse as it is still preserved in its affirmative defenses. It will mean that they will have lost their strategic position of holding the potential threat of a global determination of un-enforceability of Apple’s software copyrights which Psystar describes on the scale of “nuclear fallout.” It has become clear to me that this is the primary, if not the sole, reason that this route was even chosen. Obviously, if the Court allows the filing of the amended counterclaims, this additional threat level pressure will be placed on Apple. In short, these issues are more strategic at this point rather than dispositive (in my lay opinion).

Due to the limited time allotted for hearings, the attorneys have to pick and choose what arguments they wish to raise. There are several points that I would have loved to have been addressed; namely, Psystar’s incongruous arguments that Apple did not employ technological protective measures, and Psystar’s crafty attempts to skirt around the licensing issue in its written response through the “creative” use of strategically placed ellipsises. In comparing my thoughts anticipating the arguments of counsel, I was pretty much right on target with two exceptions. First, I gave greater detail than Apple actually did to many of the issues. This was undoubtedly due to the realities of limited time and difficult choices to be made as to what material to present orally. The second exception is far more interesting. Psystar’s argument that its declaratory counterclaims are in fact preemptive as there are future products planned came completely out of the blue in my world; it wasn’t even on the edge of a potential thought.

As an aside I note that the court reporter’s transcript caption also does not list the ten John Doe defendants. It is as if they were added and then fell off the face of the earth without any definitive identification of who they were other than the secondhand information that I have from my source close to Psystar who said that they were definitely not the OSx86 project developers. I take that information with a grain of salt as my source is not particularly sophisticated in the technological issues in this case.

Correction to previous article: The mediation was previously scheduled for the end of January, but the parties have since stipulated to conduct mediation on February 18, 2009. If my source for Psystar is correct, and the Judge promised a ruling within ten to twelve days, this would nullify my prior thought that the Judge might be holding off on ruling in order to give the parties motivation to settle. Now that I have the transcript, the reason (at least in part) for any delay in ruling is known: the Judge said that he needed to research the case law. I note that the only source for the information that a ruling could be expected within that time frame is from someone close to Psystar President Rudy Pedraza who received the information from Mr. Pedraza. Since the transcript did not record any promise of a decision time-frame, I went back to my source and discovered that Psystar’s attorneys had advised Psystar to expect a ruling within that time frame based upon the usual pattern and practice of that Judge and not based upon any overt commitment from him. So in short, he may rule tomorrow, he may not rule for 120 days, after which the parties may request a ruling. This Judge does seem to be very quick in docket turnaround, so I would expect a fairly quick ruling, but would not be terribly surprised if it is delayed until after the mediation.

Note: Although this linked article is couched within the framework of the European Union, it makes some compelling points regarding the purpose of prohibiting leveraging in some cases and not in others. Specifically:

Second, in markets where innovation and investment are particularly important, consumers may place a higher value on receiving new or better services than on the price of these services. In these markets, most of the value to consumers is created by maintaining the firm’s incentives to innovate and invest. These benefits may not be immediate, but may only unfold and be realized in the longer run. When leveraging takes place in such markets, intervention by a regulator often means imposing remedies that may, at best, alter, distort, or reduce, and at worst, eliminate the incentives to invest and innovate. In these cases, the risks and costs of intervening, when the authority should not, could be more serious than in other cases.

Harm and benefits to the consumer and competition must be viewed in the long-term to fulfill the spirit of these regulations. Similar wording has appeared in discussions of similar American jurisprudence.

*minor grammatical corrections made after publication

I have been promised to be given a quick update after the mediation regarding how the discussions went. Even though I quite obviously do not believe that Psystar has a good case legally (or ethically in my personal opinion); they have appreciated the way that I have been careful to accurately represent what they are actually saying and busting the myth that they would claim something so obviously silly as Apple not copyrighting OS X.

Part One
Part Two
Part Three
Part Four

So what happened? The only thing known right now for certain is that the Judge did not rule from the Bench but instead took the Motion under Submission. There are time frames provided for decisions on such motions in the Local Rules for the Northern District of California as follows:

7-13. Notice Regarding Submitted Matters.

Whenever any motion or other matter has been under submission for more than 120 days, a party, individually or jointly with another party, may file with the Court pursuant to Civil L.R. 5-1 a notice that the matter remains under submission. If judicial action is not taken, subsequent notices may be filed at the expiration of each 120-day period thereafter until a ruling is made.

My guess is (sheerly a guess from my own experience) that the Judge is waiting to see if the case settles at the scheduled mediation on January 31, 2009. Once I find out anything for certain, I will report it here. I really doubt that the Judge is going to leave this motion hanging out there for the time frames mentioned in the Local Rules.

I believe that Psystar will not be able to overcome the issues outlined in the first three pieces, and if they do not, the Court will not even get to this question as it requires success in the issues surrounding declaratory copyright misuse counterclaims that are duplicative of claimed affirmative defenses. Now, please note what this means if I am correct. It does not mean that Psystar has lost on their claim of copyright misuse. It will only mean that the Court decided that it should be dealt with in the already-filed affirmative defenses and not as declaratory counterclaims. In fact, even if the Court fully denies Psystar’s Motion to Amend with prejudice, all of the same issues are still alive in their affirmative defenses.

Due to the above, I did not spend too much time on this particular question. However, out of all the points raised by Psystar, it is the only one in which they have a scintilla of a chance to succeed in my opinion. So instead of examining the case law at this time I wanted to re-focus attention on a point that Psystar absolutely requires: the software must be an outright purchase and not a license. To this end, I believe that Psystar pulled a very sneaky move in their filings that although I pointed it out before, bears repeating.

Sneaky, Sneaky Psystar, You Didn’t Get This Past Me, and You Won’t Get it Past the Judge

In addition to my legal background, I have over a decade of experience in high-intensity debate. I am not the best debater out there, but I can take the average comer. One thing my years on the battlefield has taught me is that the innocuous-appearing ellipsis can be the opposition’s equivalent of white-out for the words that they do not want you to see. Here is a classic example. Psystar uses this quote multiple times in its filing:

[Apple will decide] “whether, how or by whom its software is … distributed or used.”

Tisk, tisk. Here is the full quote from Apple without the white-out:

“Apple is well within its rights to determine whether, how or by whom its software is reproduced and how it is to be licensed, distributed or used.

Apple then proceeds to directly quote the Court’s support for this position. Notice how Psystar conveniently omitted the word “licensed”? I certainly did. That is NOT a good faith quote. Licensure versus ownership is a core issue in this case and other similar cases involving EULAs.

Not only does Psystar’s case rely upon the software being declared an outright sale, it appears that it also relies upon the rejected sub-market theories previously put forth. Just consider this. Should someone be able to take the operating systems of game consoles, build their own consoles, and then sell them? Now I understand this is not an exact analogy as these operating systems are not sold outside of the consoles (to my knowledge, I admit I am not a gamer), but the principle remains the same. Apple could easily stop selling its OS separately making any Psystar “victory” completely hollow. And if Apple could not do that, then neither can gaming console makers. I do not think the Court is going to open Pandora’s box.

Additionally, Psystar once again contradicted itself, and I fervently hope this is noticed by Apple. While Psystar is now avoiding the L-word just as doggedly as Microsoft is avoiding the V-word; they weren’t quite so shy in their proposed amended counterclaim. How so?

On page 8 when describing the history of the clone program, Psystar alleges “that as part of APPLE’s Clone Program, Macintosh ROMs and system software were licensed to other computer hardware manufacturers….” [emphasis added] Oops.

If It Quacks Like a Duck

In preparing for this final segment, I was struck even more fully than before by Psystar’s double-speak. Psystar goes into great detail about the technological measures that Apple has put in place so that its OS cannot be installed on non-Apple-labeled hardware and how they had to develop code to bypass these “checks.” Yet within the same breath, Psystar denies that Apple has implemented technological copyright protective measures. How do they accomplish this shell game? They sanitize their obvious circumvention by calling it “interoperability.” My balogna detector exploded at that point. But adding insult to injury, Psystar itself referred to a UCLA Law Review article “Anti-circumvention Misuse,” and if I remember correctly, actually attached a copy of this article to one of their filings in support of their arguments.

The problem is that in that same article under the subheading of “Technical Measures,” the following process is described:

Copyright holders might prefer a world in which the rights granted under statute or asserted via license became self-enforcing. Something close to this can be achieved through the employment of technological devices accompanying copies of a work as they are distributed. Such devices may take a variety of forms as hardware, software, or some combination of the two.

Moving down a bit further:

Consequently, where technological controls are software based, and software can be scripted to accommodate a variety of user behaviors, technological controls can be scripted to incorporate restrictions that might otherwise be the subject matter of a written license. Lawrence Lessig and Joel Reidenberg have each observed that because of these characteristics, technological control and legal conrol may be substituted in a variety of instances. However, technological control and legal control do differ, notably in the degree of discretion afforded to the user. Because of this, content owners may prefer to instantiate the terms of use as computer code, rather than as contract or copyright law. Where legal regulation constitutes the barrier to use of content, users may breach it at their discretion, avoiding penalty until they are apprehended and legal process is complete. Technological barriers may be less difficult for content owners to police and enforce: Unless users are technologically sophisticated, unauthorized uses are simply impossible.

That certainly sounds suspiciously similar to Apple’s technological measures that Psystar is denying are technological measures. Once again, as in the Open Source Yoga case, Psystar attaches an exhibit that refutes their own points.

Well that’s it for now. I eagerly await the availability of the transcript for the hearing to see if I was in the ballpark or way off base.