Internet Software Piracy Is Not Fair Use

In a decision interpreting the criminal offenses provision of the Copyright Act (17 U.S.C. '506), the Seventh Circuit Court of Appeals has held that a criminal conspiracy to pirate software did not constitute “fair use” simply because the Web site to access the software was operated by a university professor. U.S. v. Slater, 348 F.3d 666 (7th Cir. 2003). The Seventh Circuit found “preposterous” the defendant's argument that Internet piracy could become authorized under the fair use doctrine by using a professor as a Web site operator.

The case arose from the indictment for conspiracy to commit copyright infringement of Jason Slater and Christian Morley, members of an organization called “Pirates With Attitudes” (“PWA”), a group dedicated to unauthorized Internet dissemination of copyrighted software. The FBI disbanded PWA and in 2000, Slater, Morley and 15 other PWA members were indicted under 17 U.S.C. '506(a)(2), 18 U.S.C. '371 and 18 U.S.C. '2319(c)(1). Slater pled guilty, but Morley stood trial and was convicted by a jury. On appeal, the sole issues were: 1) whether the jury should have been instructed on the fair use doctrine and 2) whether the U.S. District Court for the Northern District of Illinois properly evaluated the monetary value of the loss for the purpose of applying the U.S. Sentencing Guidelines (“U.S.S.G.”).

Organized in the 1990s, PWA existed to make large amounts of copyrighted software freely available over the Internet. Although PWA members did not pay money for access to the software, they contributed either their special access to the software (“suppliers”), their ability to delete internal copyright protection from the software code (“crackers”), their ability to test and add descriptive information to the software (“packagers”) or their skills in uploading the pirated software to special PWA Internet sites (“couriers”). The indictment focused on PWA's “Sentinel” site. The Sentinel site was operated by a university professor who hid the computer hardware in a closet on campus, operating it without the university's knowledge or authorization.

When the FBI seized the Sentinel server in 2000, it contained about 5000 programs available to PWA members, as well as files documenting the members' uploading and downloading activities since 1996. Although initially estimating that more than 54,000 programs had been uploaded to Sentinel from 1998-2000, the FBI reduced that figure by 20,000, taking into account nonworking programs. However, the District Court found that only about 4000 programs remained on the server when it was seized, rejecting the FBI's figure because the District Court had “no confidence” in the “questionable, untested theories” of the government's expert witness. The District Court further reduced the number of programs to about 3700, finding from a nonrandom sample of the programs that 6% were nonfunctioning. Based on an average retail value per program of $384, the District Court calculated that the total retail value of the infringing software exceeded $1.4 million. Using that figure, the District Court sentenced Morley to 24 months imprisonment and Slater to 8 months imprisonment and 6 months community custody with supervised release to follow.

Morley appealed the denial of a jury instruction on fair use, and Slater appealed the valuation of the infringing software as applied to the Sentencing Guidelines. The Seventh Circuit reviewed the fair use issue de novo and the valuation issue for clear error and affirmed on both issues.

Section 107 of the Copyright Act (17 U.S.C. '107) provides a “fair use” exception to the exclusive rights of copyright holders “for purposes such as … teaching (including multiple copies for classroom use), scholarship, or research.” However, a number of factors must be considered, including: 1) the purpose and character of the use, such as whether it is a commercial or nonprofit educational use; 2) the nature of the copyrighted work; 3) the amount and substantiality of the copied portion relative to the copyrighted work; and 4) the effect of the use on the potential market for or value of the copyrighted work.

Morley claimed that PWA's use of the copyrighted software was fair use because it was noncommercial and educational. He argued that the PWA members did not pay to download the software, that they learned things from the software, that the operator of the site was a professor and that the computer hardware for the PWA site was located at a university. The Seventh Circuit concluded that these arguments “barely pass the straight-face test,” as the PWA members paid for the software with their bartered services and the professor operated the site without university knowledge or sanction, from a server hidden in a closet. Internet piracy of thousands of unlawful copies of software, the court held, obviously harms the potential market for those copyrighted works. Therefore, a jury instruction on fair use was unnecessary.

Slater contended that the District Court improperly increased his sentence by finding that the retail value of the “infringing items” exceeded $2000. U.S.S.G. '2B55.3(b)(1) (1998). He argued that the retail value of the pirated software was zero because the PWA members paid nothing to obtain the copies. He urged application of the “black market” test ' the full price a willing black market purchaser would pay a willing seller for the goods. The black market test, however, assumes that the copied items are distinguishable from and therefore worth less than the copyrighted works. The Seventh Circuit rejected that approach because the software copies had been purged of their copy-protection features and were thus easier to copy than the originals. A zero value, the court observed, reflected neither the value of the PWA members' services nor the retail value of the original software.

With virtually equivalent digital copies of software, the reference to the “normal retail price” of the original works was appropriate, as the Sentencing Guidelines only require a “reasonable estimate of the loss.” U.S.S.G. '2F1.1, cmt. n. 8. Lenience in sentencing was not required because Slater's value of zero was not an equally good measure of loss. In so holding, the Seventh Circuit adopted the position of the Fifth Circuit in U.S. v. Kim, 963 F.2d 65, 69-70 (5th Cir. 1992), which used the retail value of the infringed item where there was little or no evidence of the value of the infringing item. In addition, the “exceptionally conservative” number of infringing items found by the District Court supported use of normal retail value to calculate the loss. Morley's and Slater's sentences were therefore upheld.

Despite the FBI warning that appears on the screen of videotape movies, Section 506, the criminal offenses provision of the Copyright Act, is not applied very often. Section 506(a) provides that willful copyright infringement is punished as a crime under 18 U.S.C. '2319 if the infringement either 1) is for purposes of commercial advantage or private financial gain, or 2) consists of electronic reproduction or distribution during any 180-day period of one or more copyrighted works with a total retail value of more than $1000. The other two criminal statutes in the Slater case, 18 U.S.C. '371 and 18 U.S.C. '2319 are, respectively, conspiracy to violate criminal federal copyright laws and possession of stolen property.

The Justice Department has reported that at least 20 U.S. defendants have been convicted of software piracy under “Operation Buccaneers,” an international operation jointly conducted by the U.S. Bureau of Immigration and Customs Enforcement and the Justice Department's Computer Hacking and Intellectual Property groups. Kirk Patrick St. John, known by the screen name “thesaint,” was indicted in November 2003 as a result of Operation Buccaneer. He is charged with involvement in the “DrinkorDie” international association of Internet pirates associated with “warez” (pronounced “wares”), allegedly formed to steal computer and video games, music albums, movies and other commercial products. DrinkorDie members allegedly removed all copy protection from the goods and made them available on the Internet for unlimited free copying. The government claims that St. John's activities resulted in lost retail sales of several hundred thousand dollars.

In a decision interpreting the criminal offenses provision of the Copyright Act (17 U.S.C. '506), the Seventh Circuit Court of Appeals has held that a criminal conspiracy to pirate software did not constitute “fair use” simply because the Web site to access the software was operated by a university professor. U.S. v. Slater , 348 F.3d 666 (7th Cir. 2003). The Seventh Circuit found “preposterous” the defendant's argument that Internet piracy could become authorized under the fair use doctrine by using a professor as a Web site operator.

The case arose from the indictment for conspiracy to commit copyright infringement of Jason Slater and Christian Morley, members of an organization called “Pirates With Attitudes” (“PWA”), a group dedicated to unauthorized Internet dissemination of copyrighted software. The FBI disbanded PWA and in 2000, Slater, Morley and 15 other PWA members were indicted under 17 U.S.C. '506(a)(2), 18 U.S.C. '371 and 18 U.S.C. '2319(c)(1). Slater pled guilty, but Morley stood trial and was convicted by a jury. On appeal, the sole issues were: 1) whether the jury should have been instructed on the fair use doctrine and 2) whether the U.S. District Court for the Northern District of Illinois properly evaluated the monetary value of the loss for the purpose of applying the U.S. Sentencing Guidelines (“U.S.S.G.”).

Organized in the 1990s, PWA existed to make large amounts of copyrighted software freely available over the Internet. Although PWA members did not pay money for access to the software, they contributed either their special access to the software (“suppliers”), their ability to delete internal copyright protection from the software code (“crackers”), their ability to test and add descriptive information to the software (“packagers”) or their skills in uploading the pirated software to special PWA Internet sites (“couriers”). The indictment focused on PWA's “Sentinel” site. The Sentinel site was operated by a university professor who hid the computer hardware in a closet on campus, operating it without the university's knowledge or authorization.

When the FBI seized the Sentinel server in 2000, it contained about 5000 programs available to PWA members, as well as files documenting the members' uploading and downloading activities since 1996. Although initially estimating that more than 54,000 programs had been uploaded to Sentinel from 1998-2000, the FBI reduced that figure by 20,000, taking into account nonworking programs. However, the District Court found that only about 4000 programs remained on the server when it was seized, rejecting the FBI's figure because the District Court had “no confidence” in the “questionable, untested theories” of the government's expert witness. The District Court further reduced the number of programs to about 3700, finding from a nonrandom sample of the programs that 6% were nonfunctioning. Based on an average retail value per program of $384, the District Court calculated that the total retail value of the infringing software exceeded $1.4 million. Using that figure, the District Court sentenced Morley to 24 months imprisonment and Slater to 8 months imprisonment and 6 months community custody with supervised release to follow.

Morley appealed the denial of a jury instruction on fair use, and Slater appealed the valuation of the infringing software as applied to the Sentencing Guidelines. The Seventh Circuit reviewed the fair use issue de novo and the valuation issue for clear error and affirmed on both issues.

Section 107 of the Copyright Act (17 U.S.C. '107) provides a “fair use” exception to the exclusive rights of copyright holders “for purposes such as … teaching (including multiple copies for classroom use), scholarship, or research.” However, a number of factors must be considered, including: 1) the purpose and character of the use, such as whether it is a commercial or nonprofit educational use; 2) the nature of the copyrighted work; 3) the amount and substantiality of the copied portion relative to the copyrighted work; and 4) the effect of the use on the potential market for or value of the copyrighted work.

Morley claimed that PWA's use of the copyrighted software was fair use because it was noncommercial and educational. He argued that the PWA members did not pay to download the software, that they learned things from the software, that the operator of the site was a professor and that the computer hardware for the PWA site was located at a university. The Seventh Circuit concluded that these arguments “barely pass the straight-face test,” as the PWA members paid for the software with their bartered services and the professor operated the site without university knowledge or sanction, from a server hidden in a closet. Internet piracy of thousands of unlawful copies of software, the court held, obviously harms the potential market for those copyrighted works. Therefore, a jury instruction on fair use was unnecessary.

Slater contended that the District Court improperly increased his sentence by finding that the retail value of the “infringing items” exceeded $2000. U.S.S.G. '2B55.3(b)(1) (1998). He argued that the retail value of the pirated software was zero because the PWA members paid nothing to obtain the copies. He urged application of the “black market” test ' the full price a willing black market purchaser would pay a willing seller for the goods. The black market test, however, assumes that the copied items are distinguishable from and therefore worth less than the copyrighted works. The Seventh Circuit rejected that approach because the software copies had been purged of their copy-protection features and were thus easier to copy than the originals. A zero value, the court observed, reflected neither the value of the PWA members' services nor the retail value of the original software.

With virtually equivalent digital copies of software, the reference to the “normal retail price” of the original works was appropriate, as the Sentencing Guidelines only require a “reasonable estimate of the loss.” U.S.S.G. '2F1.1, cmt. n. 8. Lenience in sentencing was not required because Slater's value of zero was not an equally good measure of loss. In so holding, the Seventh Circuit adopted the position of the Fifth Circuit in U.S. v. Kim , 963 F.2d 65, 69-70 (5th Cir. 1992), which used the retail value of the infringed item where there was little or no evidence of the value of the infringing item. In addition, the “exceptionally conservative” number of infringing items found by the District Court supported use of normal retail value to calculate the loss. Morley's and Slater's sentences were therefore upheld.

Despite the FBI warning that appears on the screen of videotape movies, Section 506, the criminal offenses provision of the Copyright Act, is not applied very often. Section 506(a) provides that willful copyright infringement is punished as a crime under 18 U.S.C. '2319 if the infringement either 1) is for purposes of commercial advantage or private financial gain, or 2) consists of electronic reproduction or distribution during any 180-day period of one or more copyrighted works with a total retail value of more than $1000. The other two criminal statutes in the Slater case, 18 U.S.C. '371 and 18 U.S.C. '2319 are, respectively, conspiracy to violate criminal federal copyright laws and possession of stolen property.

The Justice Department has reported that at least 20 U.S. defendants have been convicted of software piracy under “Operation Buccaneers,” an international operation jointly conducted by the U.S. Bureau of Immigration and Customs Enforcement and the Justice Department's Computer Hacking and Intellectual Property groups. Kirk Patrick St. John, known by the screen name “thesaint,” was indicted in November 2003 as a result of Operation Buccaneer. He is charged with involvement in the “DrinkorDie” international association of Internet pirates associated with “warez” (pronounced “wares”), allegedly formed to steal computer and video games, music albums, movies and other commercial products. DrinkorDie members allegedly removed all copy protection from the goods and made them available on the Internet for unlimited free copying. The government claims that St. John's activities resulted in lost retail sales of several hundred thousand dollars.