IP Law Daily Infringement suit against Microsoft over anti-piracy technology proceeds only for sales after April 2013
Friday, May 3, 2019

Infringement suit against Microsoft over anti-piracy technology proceeds only for sales after April 2013

By Robert B. Barnett Jr., J.D.

Dismissal on claim preclusion grounds of suit brought by Media Rights Technologies, Inc., mostly affirmed, but reversed as to products that Microsoft sold after the date when MRT filed a patent infringement suit against Microsoft involving the same set of operative facts, which had been dismissed.

The U.S. Court of Appeals in San Francisco has mostly affirmed a California federal district court’s dismissal of a suit by Media Rights Technologies, Inc. (MRT) against Microsoft for (1) copyright infringement, (2) violations of the Digital Millennium Copyright Act, and (3) breach of contract, based on the fact that a prior suit by MRT against Microsoft for patent infringement involving the same technology had been dismissed with prejudice. However, the Ninth Circuit reversed the district court’s decision as to any copyright infringement claims arising after MRT filed its original patent infringement suit. Claim preclusion applied to the earlier sales because the patent infringement suit and the copyright infringement suit arose out of the same operative facts, which involved allegations that Microsoft stole anti-piracy technology from MRT and used it in Microsoft products. The post-filing copyright infringement claims were allowed to proceed, however, because each time Microsoft sold a product containing the allegedly stolen code, it committed a new copyright infringement violation. Thus, MRT could pursue copyright infringement claims for sales occurring after April 25, 2013, on the theory that those claims did not exist when MRT filed the original patent infringement suit (Media Rights Technologies, Inc. v. Microsoft Corp., May 2, 2019, Gould, R.).

MRT obtained patents for its technology, called Controlled Data Pathway, to protect electronic files, including music files, from piracy. After the Recording Institute of America and the Motion Picture Association of America both recommended to Microsoft that it consider adding the protection to its software products, Microsoft reached out to MRT. The two parties signed a non-disclosure agreement, which allowed Microsoft behind-the-scenes access to MRT’s technology. According to MRT, Microsoft used that access to reverse-engineer the MRT technology and produce its own piracy protection version, called Protected Media Pathway. MRT contends that it knows that Microsoft stole the technology because it hid a watermark (a piece of inert code) in its code, which showed up in the coding for Microsoft’s products. Microsoft’s Vista operating system, released in January 2007, was the first product containing Protected Media Pathway. Subsequently, it has been built into Windows XP Service Pack 3, Windows 8 and 10, Windows Media Player 11 and 12, Windows Media Player SDK, and Internet Explorer 8, 9, 10, and 11.

On April 25, 2013, MRT filed a patent infringement suit against Microsoft. At some point thereafter, a different federal court determined that one of the MRT patents was invalid, a decision that the Federal Circuit upheld on September 4, 2015. MRT then voluntarily dismissed its suit with prejudice in April 2016. During the period after the suit was dismissed, MRT contended that it discovered the hidden watermark in Microsoft’s products, and it filed a second suit against Microsoft in April 2017, this time asserting three claims: (1) copyright infringement, (2) violations of the Digital Millennium Copyright Act, and (3) breach of contract. The district court, however, granted Microsoft’s motion to dismiss on the ground of claim preclusion, and MRT appealed the decision to the Ninth Circuit.

Claim preclusion. Claim preclusion applies, the Ninth Circuit said, if the first suit (1) involved the same claim or cause of action, (2) reached a final judgment on the merits, and (3) involved identical parties. The only area of contention here was the first one, whether the two suits involved the same claim or cause of action. Importantly, claim preclusion does not apply to claims that accrue after the filing of the first complaint.

Copyright infringement. In looking at when the copyright infringement cause of action accrued, the court applied the "separate-accrual rule," which holds that in copyright law, when a defendant commits successive violations, the statute of limitations runs separately from each violation. Each time an infringing work is distributed, the infringer commits a new wrong. Each wrong gives rise to a discrete claim. The court then rejected MRT’s argument that its copyright infringement suit did not accrue at all until after the first suit was filed because that was when it discovered the watermarks. MRT could reasonably have discovered those watermarks much earlier, the court said, before the first suit was filed, if it had been more diligent. Thus, with respect to the copyright infringement claim, only those sales occurring after April 25, 2013, were not precluded. Microsoft, in turn, made two arguments for precluding the post-filing claims. First, Microsoft argued that claim preclusion did not apply where claims depended on occurrences after an event that the plaintiff knew about before the event. This was nonsense, the court said, because, taken to its logical extreme, Microsoft’s interpretation would allow a violator after the event to continue violating the copyright, free in the knowledge that the other party could not stop it. Second, Microsoft argued that MRT was precluded because it sought prospective relief in the first suit. A Supreme Court ruling, however, which said that prospective relief did not automatically mean preclusion, foreclosed that argument (Lawlor v. Nat’l Screen Serv. Corp., 349 U.S. 322, 328-29 (1955)). As a result, the Ninth Circuit reversed the lower court ruling to the extent that the copyright infringement claim sought recovery for claims arising after April 25, 2013.

DMCA. The DMCA claim was subject to the same three-year statute of limitations as the copyright infringement claim. In examining the DMCA claim, the Ninth Circuit reiterated its earlier finding that the pre-filing claims were precluded, because the DMCA claim arose out of the same events as the copyright infringement claim. Unlike for copyright infringement, however, the DMCA claim had no separate-accrual rule. The entire claim, therefore, accrued before the first suit was filed. As a result, the entire DMCA claim was precluded, and the court affirmed the lower court’s dismissal of that claim.

Breach of contract. The Ninth Circuit ruled that, because the contract claim was built on the same set of facts as the pre-filing copyright infringement and DMCA claim, the breach of contract claim accrued before MRT filed the first suit. As a result, it too was fully precluded, and the Ninth Circuit affirmed the dismissal of the breach of contract claim.

Pre-filing claim. Having concluded that the post-filing copyright claim was not precluded, the Ninth Circuit then turned its attention to whether the original patent infringement claim was the "same claim or cause of action" as the copyright infringement claim. The court applied a transaction test, which involved looking at whether the two claims were part of the same transaction or series of transactions. The primary focus is on the facts or events from which the alleged harms arose. The Ninth Circuit concluded that a look at whether the two claims were based on the same common nucleus of facts in this case favored a finding of claim preclusion. The factual basis for the patent infringement claim and the factual basis for the copyright infringement claim were the same: Microsoft allegedly wrongfully took what it learned from MRT, created its own software, and then sold the products. The common-nucleus criterion is the most important criterion to consider. In this case, the court said, it was "outcome determinative." As a final matter, the court noted that it was not holding that copyright infringement and patent infringement claims will always be preclusive. It depends upon the fact of the case. As a result, the court said, all pre-filing claims were precluded, and the lower court’s ruling to that extent was affirmed.

This case is No. 17-16509.

Attorneys: Ian N. Feinberg (Feinberg Day Alberti & Thompson LLP) for Media Rights Technologies, Inc. Jonathan J. Lamberson (Fish & Richardson PC) for Microsoft Corp.

Companies: Media Rights Technologies, Inc.; Microsoft Corp.

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