Apple Strikes Back Against the Clones: Injunction Stops Sale of Third-Party Computers Running Mac OS X

By Edward Dailey.

December 2009 IP Update

After a 17-month pitched battle, Apple has prevailed in its copyright infringement lawsuit against Psystar Corporation, with the trial court ordering a sweeping permanent injunction against the upstart clone maker. This appears to end the quixotic campaign of the shadowy Psystar to sell $555 iMac® clones powered by altered copies of Apple’s OS X® operating systems.

Psystar launched its clones in April 2008. Less than three months later, it was a copyright infringement defendant in California. Its first effort to fend off Apple’s lawsuit included a broadly stated antitrust counterclaim challenging Apple’s OS X license restrictions. Each copy of OS X is sold as a license with use limited to “a single Apple-labeled computer.” Of course, Apple is the sole manufacturer of  “Apple-labeled” computers.

As noted in our February 2009 article, Psystar grounded its antitrust counterclaim in the Supreme Court’s oft-cited but infrequently applied antitrust decision, Eastman Kodak Co. v. Image Technical Services (1992)which held that Kodak could not lawfully impede the ability of independent service companies from servicing Kodak-brand copiers. In February 2009, the federal trial court granted Apple’s motion to dismiss the counterclaim. It ruled first that Apple, with less than 10% of the relevant market for personal computer operating systems, simply lacked the market power to trigger general antitrust concerns.

The court then rejected Psystar’s argument that Apple’s limitation on use of its operating systems was nevertheless an unlawful derivative “lock-in” under Kodak. Citing Digital Equipment Corp. v Uniq Digital Technologies, Inc. (7th Cir. 1996),which held that it is not illegal tying of products for a computer manufacturer to install an operating system on the computers being sold, the court declined to extend the “lock-in” analysis to Apple.

In contrast to Kodak, where the lock-in was not disclosed to buyers, Apple’s clickwrap license agreement clearly discloses the operating system use restriction before purchase. And in a marketplace that is not controlled by Apple, consumers have ready options if they object to the restriction. In this context, there simply is not a plausible restraint on competition.

Seemingly undaunted, Psystar amended its counterclaim last winter and challenged Apple for alleged misuse of its copyright, a cause of action grounded in public policy considerations rather than marketplace impacts. Psystar also raised a host of standard copyright defenses to Apple’s complaint.

Ultimately, however, the court rejected Psystar’s amended counterclaim and all of its defenses to Apple’s lawsuit.  Psystar’s copyright misuse counterclaim was rejected as a misinterpretation of the applicable law. Misuse applies only when the copyright holder attempts, in a way that violates public policy, to bar users of the copyrighted work from using a competitor’s products.

The trial court found that Apple did not impose any restriction on use of competitors’ products, but had instead placed restrictions only on the use of its own product, Mac OS X, oncompetitors’ products. Accordingly, the copyright license restriction was not a misuse of Apple’s copyrights in the OS X systems.

The court went on to reject all of Psystar’s copyright infringement defenses, suggesting that they bordered on the frivolous or misstated key facts. In response to Psystar’s “fair use” defense, the defendant’s systematic copying and alteration of Apple’s systems were rejected as extending far beyond the incidental use contemplated by the fair use doctrine.

Psystar raised the additional defense that it had a “first sale” right under 17 U.S.C. §109 to sell or dispose of the OS X copies it had lawfully purchased. Apple countered that Psystar was a mere licensee, not an owner, under the clickwrap license agreement and, as such, had no right to sell or dispose of the operating systems. The court observed that while the parties had “spill[ed] much ink on whether Psystar was the owner or a licensee,” that distinction did not matter and would  not save the defendant in either circumstance.

Psystar’s business was not merely to resell intact Apple OS X systems in its machines. Rather, the defendant altered the operating systems to defeat code that limited operation to Apple-labeled computers. As a consequence, the court ruled, Psystar was selling or disposing of counterfeit copies of the copyrighted works; and that is not protected by the first sale doctrine or any other copyright or license defense. Moreover, alteration of the operating systems to run on Psystar machines violated Apple’s exclusive right to create derivative works under 17 U.S.C. §106.

In short, Apple alone has the right to alter its operating systems to operate on anything other than “Apple-labeled” computers. And Apple alone has the right to decline such alteration.

Finally, Psystar ran directly into the Digital Millennium Copyright Act, 17 U.S.C. §§1201 et seq. That statute protects digital information systems that are part of the “national information infrastructure” from copying and circumvention. Here, Psystar had routinely circumvented Apple’s encryption routines that otherwise prevented access to system components and prevent use of the software on non-Apple computers. That was a direct violation of the Act.

The court’s decision affirms longstanding copyright canons. And the injunction will put Psystar out of business. Yet, this is just one skirmish in the ongoing contest between Apple and hackers seeking to “jailbreak” its innovative products.

It is far from certain that Apple will have the same success in a contest involving its iPhone or its iTunes store. There, Apple’s market power may well alter a court’s antitrust and copyright analysis.