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District Court Enters Preliminary Injunction Prohibiting Former Exclusive Distributor from Further Sales of Video Game Components Containing Plaintiff's Copyrighted Software and Trade Secrets

Wednesday, February 22, 2012
Berster Technologies, LLC v. Christmas, No. 11-CV-01541, 2012 BL 3792 (E.D. Cal. Jan. 6, 2012) The U.S. District Court for the Eastern District of California granted a video game software developer's motion for a preliminary injunction to prohibit its former business associates from using, distributing, and selling a variety of software programs, circuit board designs, and other game technologies that allegedly were developed by the plaintiff. Among other things, the court determined that the plaintiff was likely to succeed on the merits of its claims of copyright infringement and misappropriation of trade secrets, and that the defendants were unlikely to succeed in asserting defenses of the first sale doctrine and an implied license.

Flexboard Technology

As explained by the court, plaintiff Berster Technologies, LLC claimed that through its employee, Stephen Frasier, and several independent contractors, it designed a video game modification flexboard—a computer circuit board that could be installed in a video game controller manufactured by another company in order to alter its performance—which it called "Intensafire." Berster at 5. The Intensafire flexboard contained a chip programmed with software whose copyrights Berster allegedly owned. The software code was protected from access and download by means of a key which the plaintiff controlled. Defendant Coy Christmas is the chief executive officer of three privately-held companies called BGRMods, LLC, Calibur11 LLC, and Einsteinmodz, LLC. In July 2009, the plaintiff entered into an exclusive reseller agreement with BGRMods, giving BGRMods the exclusive rights to promote and distribute the plaintiff's Intensafire flexboards. In the agreement, BGRMods agreed that it would not appropriate the plaintiff's intellectual property or attempt to reverse engineer the hardware or software. BGRMods also agreed that it would cease distributing the products and return to the plaintiff all master material and confidential information upon termination of the agreement. BGRMods fell behind on payments and failed to meet a minimum purchase requirement of the agreement. In June 2011, the plaintiff terminated the reseller agreement and demanded that BGRMods cease selling Intensafire products and return all confidential information. The plaintiff appointed a new exclusive distributor. Christmas and BGRMods did not respond to the plaintiff's demands and continued selling Intensafire products through the website of Einsteinmodz and other outlets. Although Christmas later claimed that he had hired developers to write new code for Intensafires, a Chinese manufacturer allegedly informed the plaintiff that Christmas had asked it to reverse engineer the plaintiff's product to build a competing flexboard. Plaintiff claimed that when it obtained samples of the products sold by BGRMods after the termination of the agreement, it determined that the modules contained source code identical to the plaintiff's own code.

Game Vault Technology

In addition to developing and licensing the Intensafire technology, in 2010, the plaintiff entered into discussions with Christmas and one of his business associates about forming a new company to market a new interactive casing product, called Game Vault, which would integrate with Microsoft's Xbox 360 video game console and add light and sound features to games. According to the plaintiff, the parties informally agreed that the plaintiff would develop computer code and circuit boards for the Game Vault. In return, the plaintiff would receive a 20% ownership interest in the new company, which would be called Calibur11, LLC. The plaintiff delivered to Christmas the code for a Game Vault designed for use with Major League Gaming ("MLG") games and another Game Vault for use with the Gears of War video game. However, in May 2011, Christmas allegedly reneged on the agreement and claimed that the plaintiff had been a service contractor, which was only entitled to engineering fees. The plaintiff subsequently purchased Game Vaults marketed by Christmas's companies and allegedly determined that their circuit boards and the source codes embedded in them were "exact matches" to the plaintiff's codes. Berster at 11. The plaintiff sued Christmas and the three companies he controlled alleging, among other things, that they were liable for copyright infringement and misappropriation of trade secrets. The plaintiff moved for a preliminary injunction to restrain the defendants from copying, selling, or otherwise distributing products containing its intellectual property. In support of its motion, the plaintiff submitted, among other things, testimony of an expert witness who compared the products sold by the defendants with the plaintiff's computer code and circuit designs and declared them to be identical. The defendants opposed the motion.

Likelihood of Success - Copyright Claims

The court found that the plaintiff was entitled to preliminary injunctive relief. The court explained that a party seeking a preliminary injunction must establish that "he is likely to succeed on the merits, that he is likely to suffer irreparable harm in the absence of preliminary relief, that the balance of equities tips in his favor, and that an injunction is in the public interest." Winter v. Natural Resources Defense Council, Inc., 555 U.S. 7, 20 (2008). To establish a defendant's liability for copyright infringement, a plaintiff must establish that (1) it owns a valid copyright in the work alleged to have been copied; and (2) copying of the protected elements of the work. See Apple Computer, Inc. v. Microsoft Corp., 35 F.3d 1435, 1442 (9th Cir. 1994). The court pointed out that in the present case, the plaintiff produced copyright registration certificates covering the software in question. Such certificates constitute "prima facie evidence of the validity of the copyright and of the facts stated in the certificate." Berster at 11-12. Moreover, the plaintiff presented evidence of copying by the defendants in the form of expert witness testimony that the registered code was identical to the code with which the devices sold by the defendants were programmed. The court rejected "naked assertions" by the plaintiffs that the code must be different because they had redesigned the object code after ending their relationship with the plaintiff, finding that those assertions were entirely unsupported by evidence. Id. at 12. In addition, the court found no merit in the defendants' contention that their actions with regard to the Interfire products were shielded by the first sale doctrine, which gives the purchaser of a copyrighted work the right to resell or otherwise dispose of the copyrighted article. "As plaintiff gave BGRMods only a license to promote and distribute the product," the court concluded that "the doctrine does not apply." Id. at 13. Nor, according to the court, was there any evidence supporting the defendants' defense that the units they continued selling after BGRMods's contract was terminated were simply previously purchased items remaining in inventory. The defendants argued that they commissioned the plaintiff to create the initial Game Vault code, and thus that code was subject to an implied license allowing them to sell Game Vault products programmed with that code. However, the court observed that the defendants never paid the plaintiff any remuneration, either in the form of fees or an interest in Calibur11, as consideration for its creation of the Game Vault code. Therefore, even assuming, arguendo, that the code had been subject to an implied license, the absence of consideration rendered the license revocable. The court found that the plaintiff's demand that the defendants cease distributing products with its code was sufficient to revoke any such implied license. Because the plaintiff established a prima facie case that the defendants committed multiple infringements of its copyrights, the court found it likely that the plaintiff would succeed on the merits of those claims.

Likelihood of Success—Trade Secrets

A successful claim of misappropriation of trade secrets under California law requires proof that (1) the plaintiff owned a trade secret; (2) the defendant acquired, disclosed, or used the trade secret through improper means; and (3) the defendant's actions injured the plaintiff. See Silvaco Data Systems v. Intel Corp., 184 Cal. App. 4th 210, 220 (Cal. Ct. App. 2010). "A trade secret is information that derives independent economic value from not being generally known to those who can obtain economic value from its disclosure and is the subject of efforts to maintain its secrecy." Berster at 14. The instant court found that the plaintiff met the burden of showing a likelihood of success on its trade secret misappropriation claims. Although the defendants argued that the plaintiff failed to identify the alleged trade secrets with sufficient specificity, the court found that the plaintiff had satisfactorily identified the secrets by alleging that they consisted of computer code for three products, as well as the circuit design and board of the Gears of War Game Vault. The court also rejected the defendants' argument that there could be no trade secrets in the Game Vault products because the products were displayed at a gaming convention. There was no evidence that the plaintiff's circuit design was publicly displayed at the convention. Moreover, the plaintiff controlled access to its code by means of a key system. Although the defendants allegedly reverse engineered that code, the court credited evidence from the plaintiff that such reverse engineering is difficult and requires a high degree of experience. In addition, the court pointed out that the plaintiff required its contractors to sign nondisclosure agreements pertaining to the code and other confidential information. "These measures," the court ruled, "are sufficient to show plaintiff's reasonable attempts to protect its trade secrets from disclosure." Id. at 16. The instant court found that the plaintiff met the burden of showing a likelihood of success on its trade secret misappropriation claims. Although the defendants argued that the plaintiff failed to identify the alleged trade secrets with sufficient specificity, the court found that the plaintiff had satisfactorily identified the secrets by alleging that they consisted of computer code for three products, as well as the circuit design and board of the Gears of War Game Vault. The court also rejected the defendants' argument that there could be no trade secrets in the Game Vault products because the products were displayed at a gaming convention. There was no evidence that the plaintiff's circuit design was publicly displayed at the convention. Moreover, the plaintiff controlled access to its code by means of a key system. Although the defendants allegedly reverse engineered that code, the court credited evidence from the plaintiff that such reverse engineering is difficult and requires a high degree of experience. In addition, the court pointed out that the plaintiff required its contractors to sign nondisclosure agreements pertaining to the code and other confidential information. "These measures," the court ruled, "are sufficient to show plaintiff's reasonable attempts to protect its trade secrets from disclosure." Id. at 16.

Remaining Factors Establishing Entitlement to Preliminary Injunction

The court determined that the plaintiff established a likelihood that it would suffer irreparable injury as a result of "loss of goodwill and the inability to use its intellectual property completely." Berster at 17. Similarly, the court found that the balance of the equities favored entry of an injunction. The court observed that "a defendant who knowingly infringes another's copyright cannot complain of the harm that will befall it when properly forced to desist from its infringing activities." Id. at 18 (quoting Cadence Design Systems, Inc. v. Avant! Corp., 125 F. 3d 824, 829 (9th Cir. 1997)). In addition, the court concluded that entry of the requested preliminary injunction would serve the public interest in preventing the misapplication of creative elements with which a copyrighted work is invested. Because the defendants submitted no evidence about any potential harm that might be caused by entry of the preliminary injunction, the court declined to require the plaintiff to post a bond prior to the effective date of the injunction.DisclaimerThis document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.

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