SEGA ENTERPRISES LTD. and SEGA of America, Inc., Plaintiffs,

v.

MAPHIA, a business of unknown structure; PARSAC, a business of unknown

structure; PSYCHOSIS, a business of unknown structure; Chad Scherman aka Chad

Sherman aka "Brujjo Digital," and Does 2- 6 aka "Operator," "Firehead," "Lion,"

"Hard Core," "Candyman," all individually and d/b/a MAPHIA and PARSAC; Howard

Silberg by his mother and next friend Ilene Silberg, aka "CAFFEINE," and Does

14- 18 aka "Apache," "Maelstrom," "Gazzer," "Paranoid/Chryseis," "Doom" all

individually and d/b/a PSYCHOSIS and PARSAC; Does 7- 12; Does 19- 25,

Defendants.

1994 WL 378641 (N.D.Cal. 1994)

WILKEN

. . .

FINDINGS OF FACT AND CONCLUSIONS OF LAW IN SUPPORT OF PRELIMINARY INJUNCTION, AND CONFIRMATION OF SEIZURE

1/ This is an action for copyright infringement (under 15 U.S.C. 101 et seq.), federal trademark infringement (under 15 U.S.C 1051 et seq.), federal unfair competition/false designation of origin (under 15 U.S.C. s 1125(a)), California trade name infringement (under California Business & Professions Code s 14400 et seq.), and California unfair competition law (under California Business and Professions Code s 14210, 17200- 17203) against Defendant Chad Scherman and several other individuals operating on- line computer bulletin boards, and the MAPHIA and other bulletin boards as businesses of unknown origin. . . . Pursuant to F.R.C.P. 65(d), the Court makes the following Findings of Fact and Conclusions of Law in support of the preliminary injunction and confirmation of the seizure order:

FINDINGS OF FACT

I. FINDINGS SUPPORTING PRELIMINARY INJUNCTIVE RELIEF

A. The parties and their activities

1. Plaintiff Sega Enterprises, Ltd. ("SEL"), is a corporation organized and existing under the laws of Japan. Compl. P 1

2. Plaintiff Sega of America, Inc. ("SOA"), is a California corporation with a principal place of business in this district in San Mateo, California. SOA is a wholly- owned subsidiary of SEL. SOA and SEL are hereinafter sometimes collectively referred to as "Sega" or "Plaintiffs." Compl. P 2.

3. Defendant MAPHIA is a business of unknown structure doing business and located in San Francisco, California, within this District, engaged in the business of running a computer bulletin board and related activities. Yang Decl. P 12.

4. Defendant Chad Scherman (aka Chad Sherman, aka "Brujjo Digital") is an individual residing in this district in San Francisco, California. Chad Scherman is in possession and/or control of the MAPHIA Bulletin Board, which is run from his residence where the computer and memory comprising the bulletin board are located, and does business as MAPHIA or Maphia Trading Company on such bulletin board. He is also one of the "system operators" of the MAPHIA bulletin board. Keene Decl. PP 2, 11.

B. The Business of Plaintiffs

5. Sega is a major manufacturer and distributor of computer video game systems and computer video games which are sold under the SEGA trademark, a registered trademark of Sega Enterprises, Ltd. (Federal Registration No. 1,566,116, issued November 14, 1989) owned by Sega. Yang Decl. P 3, Exh. A.

6. Sega's computer video game programs are the subject of copyright under the laws of the United States. Yang Decl. P 5; Compl. Exh. B.

7. Sega creates and develops its games and ensures the quality and reliability of the video game programs and products sold under SEGA trademarks. Yang Decl. P 4.

8. The Sega game system consists of two major components sold by Sega: the game console and software programs stored on video game cartridges which are inserted into the base unit. Each cartridge contains a single game program. The base unit contains a microcomputer which, when connected to a television, permits individuals to play the video game stored on the inserted cartridge. Yang Decl. P 6.

9. The computer programs for the Sega video games are stored on a cartridge in a Read- Only Memory ("ROM") chip. Sega's video games cannot be copied using the game console. However, as noted below, running devices, called "copiers," are designed to copy the video game programs from a Sega game cartridge onto other magnetic media such as hard and floppy disks. Yang Decl. PP 6, 21, 23.

C. Defendants' Activities on the MAPHIA Bulletin Board

10. An electronic bulletin board consists of electronic storage media, such as computer memories or hard disks, which is attached to telephone lines via modem devices, and controlled by a computer. Yang Decl. P 12.

11. Third parties, known as "users," of electronic bulletin boards can transfer information over the telephone lines from their own computers to the storage media on the bulletin board by a process known as "uploading." Uploaded information is thereby recorded on the storage media. Third party users can also retrieve information from the electronic bulletin board to their own computer memories by a process known as "downloading." Video game programs, such as Sega's video game programs, are one kind of computer programs or information which can be transferred by means of electronic bulletin boards. Yang Decl. PP 18- 19.

12. Defendants MAPHIA and Chad Scherman operate an electronic bulletin board called MAPHIA (hereinafter "the MAPHIA bulletin board"). The MAPHIA bulletin board is open to the public and, according to Defendant Scherman's Opposition Memorandum, has approximately 400 users. Users of the MAPHIA bulletin board communicate using aliases or pseudonyms. "Brujjo Digital" appears as the alias used by Defendant Chad Scherman as the system operator of the MAPHIA bulletin board, and in communicating with others. Keene Decl. P 2, 11; Yang Decl. P 33.

13. Data from the MAPHIA bulletin board indicates that the MAPHIA bulletin board is economically linked to another electronic bulletin board called PSYCHOSIS. This data also indicate's that Defendant Scherman and the MAPHIA bulletin board are part of or linked to a network of bulletin boards, called PARSEC, for business purposes. Keene Decl. PP 12- 16, Exh. 5A.

14. The evidence establishes that Sega's copyrighted video games are available on and transferred to and from the MAPHIA bulletin board by users who upload and download games. Once a game is uploaded to the MAPHIA bulletin board it may be downloaded in its entirety by an unlimited number of users: Keene Decl. PP 7, 9; Yang Decl. PP 18, 24.

15. It appears that the copies of Sega's video game programs on Defendants' bulletin board are unauthorized copies of Sega's copyrighted video games, having been uploaded there by users of Defendant's bulletin board. Keene Decl. P 9.

16. It has been shown by evidence in the form of printouts from the data on Defendant's bulletin board which was seized pursuant to this Court's Order and on- line data captured from Defendant's bulletin board, that the uploading and downloading of unauthorized copies of Sega's copyrighted video games is particularly known to Defendant Scherman and the MAPHIA bulletin board. This evidence also indicates that Defendant specifically solicited this copying and expressed the desire that these video game programs be placed on the MAPHIA bulletin board for downloading purposes. Keene Decl. PP 7- 16.

17. Notwithstanding contrary assertions of Defendant Scherman, there is evidence that MAPHIA directly or through an affiliate sometimes charges a direct fee for downloading privileges, or barters for the privilege of downloading Sega's games. Information on the MAPHIA bulletin board includes the following passage: Thank you for purchasing a Console Back Up Unit [copier] from PARSEC TRADING. As a free bonus for ordering from Dark Age, you receive a COMPLEMENTARY Free Download Ratio on our Customer Support BBS. This is if you cannot get a hold of SuperNintendo or Sega Genesis games. You can download up to 10 megabytes, which is equal to approximately 20 normal- sized SuperNintendo or Genesis games. After your 10 megabytes is used, you can purchase full months of credit for only $35/month. You can also prepay and order either 1 year of free downloads for $200/year, or a lifetime of free downloads for only $500. Keene Decl. Exh. 5B at 2.

18. Defendant thus provides downloading privileges for Sega games to users in exchange for the uploading of Sega games or other programs or information or in exchange for payment for other goods, such as copiers, or services, such as the provision of credit card numbers to users. See Keene Decl. PP 7- 21.

19. By utilizing the MAPHIA bulletin board, users are able to make and distribute one or more copies of Sega video game programs from a single copy of a Sega video game program, and thereby obtain unauthorized copies of Sega's copyrighted video game programs. Yang Decl. P 24.

20. This unauthorized copying of Sega video game programs works to decrease Sega's sales of video game cartridges. This unauthorized copying and distribution further deprives Sega of control over the quality of video games bearing its SEGA and other trademarks. The effect on Sega's reputation and market for video game cartridges may be substantial and immeasurable. See Yang Decl. PP 4- 6, 17, 30- 32.

21. Defendant has challenged the preliminary injunction on the basis that he has not profited from the distribution of Sega's programs. However, it appears Defendant profits from the operation of the MAPHIA bulletin board through direct payment and/or barter. There are also several ways Defendant indirectly profits. First, the existence of this distribution network for Sega video game programs increases the prestige of the MAPHIA bulletin board, and Defendant's distribution of Sega games' naturally leads to an increased market for the video game copiers and other goods or services sold by Defendant. Keene Decl. P 9.

22. Defendant further profits from the distribution of Sega programs on the MAPHIA bulletin board because the bulletin board gives rise to a need for telephone communications which naturally leads to an increased market for telephone calling card numbers sold by the Defendant Scherman. Keene Decl. PP 10- 21.

23. The copies of Sega's programs uploaded to and downloaded from the MAPHIA Bulletin board are substantially similar to Sega's video game programs as stored in the cartridges sold by Sega. Yang Decl. P 17. . . .

25. The copies of Sega's video game programs downloaded by users from the MAPHIA bulletin board, according to instructions and facilitated by Defendant Scherman, are further unauthorized copies of Sega's copyrighted video games, which, in addition bear unauthorized use of Sega's registered trademarks.

26. The Sega game programs maintained and distributed through the MAPHIA bulletin board include "pre- release" versions of games which are not available to the public. Yang Decl. P 30.

27. The directory of video game programs available on MAPHIA also contain numerous references to video game programs containing "patches," "fixes," and problems which may have been introduced in the copying process. Yang Decl. P 31.

28. Bulletin board users and/or parties who may receive copies of Sega games from bulletin board users are likely to confuse the unauthorized copies downloaded and transferred from the MAPHIA bulletin board with genuine Sega video game programs.

29. Because Sega is unable to control the quality of the games distributed under its trademarks on the MAPHIA bulletin board as the MAPHIA has altered or may have the opportunity to alter such game programs, and the copies distributed by the MAPHIA bulletin board do not contain the packaging and instruction used by Sega, the Defendants' operation of the MAPHIA bulletin board is likely to damage Sega's reputation and the substantial goodwill which Sega has built up in its trademarks.

D. Infringing Sales and Distribution of "Copiers"

30. There is substantial evidence that Defendant Scherman and the MAPHIA bulletin board are engaged in advertising, distribution and selling video game copiers, such as the so- called "Super Magic Drive" and/or "Multi Game Hunter." See generally, Keene Decl.

31. Defendant's business plan as described by Defendant Scherman's alias "Brujjo Digital," states: As you know we have PARSEC TRADING CO. as our business that sells everything from Copiers to Modems to Hard Drives to Calling Cards (off the record, hehe), and even Pentium Chips now. So, the next step is a MEDIA BLITZ! Time to post advertisements ASCIIS on every bbs you log onto! I'll have some Advertisements ready ... Also, we are selling Super Wild Cards, Pro Fighter Q's and Super Magic Drives for AKIRA and that part of PARSEC will be dedicated for.him but me and CAFFEINE will handle all the business side of that and paying him the money and dealing with the customers, etc. Keene Decl. P 15, Exh. 5A at 3.

32. These copiers by Defendant's own admission are used for the making of unauthorized copies of Sega's video game programs and some purchasers thereof use them so as to avoid purchasing Sega's game cartridges from Sega. See generally, Def.'s Mem. in Opp. to Prelim. Injunction. Users or others who receive copies of the Sega video games on disk do not need to purchase any genuine Sega games, but can play the games directly from the disks using the copiers.

33. The copiers sold and advertised by Defendant come with downloading privileges to the purchaser, giving the purchaser free Sega video game copyrighted programs, so as to be able to duplicate, distribute and play the games without purchase of Sega game cartridges. Keene Decl. Exh. 5B.

34. The copiers thus supplant the need to purchase the genuine Sega video games.

35. Defendant states without support that the copiers are also capable of being used for other purposes, such as game development or making back- up copies, but such incidental capabilities have not been shown to be the primary use of such copiers.

36. There is no need to make archival copies of ROM game cartridges. This is because the ROM cartridge format is not susceptible to breakdown and because defective cartridges are replaced by Sega. Yang Decl. 25- 28.

37. The copiers are advertised and sold by Defendant's MAPHIA bulletin board for $350. Keene Decl. Exh. 3. The video game programs advertised by Sega sell for between $30 and $70. Compl. P 15. It is unlikely that customers would purchase a copier to back- up games, which are on reliable cartridges, for this price.

38. The only substantial use of video game copiers is to avoid having to buy video game cartridges from Sega by copying the video game program.

II. FINDINGS SUPPORTING COLLECTION AND SEIZURE OF EVIDENCE

39. Sega undertook to collect evidence of the above activities by having a Sega employee gain access the MAPHIA bulletin board under a pseudonym, as individuals generally do on the bulletin board, using information supplied by an authorized user who was an informant. Yang Decl. PP 11- 13.

40. Pursuant to the ex parte Temporary Restraining Order and Seizure Order issued by Judge Smith on December 9, 1993, a search of Defendant Scherman's premises, where the computer and memory were located, was conducted. Pursuant to the Order, Defendant Scherman's computer and memory devices were seized, the memory copied and returned to Defendant Scherman, with the Sega games deleted. Keene Decl. PP 1- 6.

41. The Court made substantial findings in its Order of December 9, 1993, in support of the restraining and seizure order, which appear to have been verified by the program copies and evidence obtained from the memory devices comprising the "MAPHIA" bulletin board, thus confirming the seizure of such evidence. Keene Decl. PP 7- 21.

CONCLUSIONS OF LAW

. . .

8. The unauthorized copying of copyrighted computer programs is prima facie an infringement of the copyright. See Mai Systems Corp. v. Peak Computer, Inc., 991 F.2d 511, 518 (9th Cir.1993), cert. dismissed, 114 S.Ct. 671 (1994).

9. Sega has established a prima facie case of direct copyright infringement under 17 U.S.C. s 501. Sega has established that unauthorized copies of its games are made when such games are uploaded to the MAPHIA bulletin board, here with the knowledge of Defendant Scherman. These copied games are thereby placed on the storage media of the electronic bulletin board by unknown users.

10. Sega has established that unauthorized copies of these games are also made when they are downloaded to make additional copiers by users, which copying is facilitated and encouraged by the MAPHIA bulletin board. See Mai Systems, supra, 991 F.2d at 519.

11. "[O]ne who, with knowledge of the infringing activity, induces, causes or materially contributes to the infringing conduct of another," may be held liable as a contributory infringer. Casella v. Morris, 820 F.2d 362, 365 (11th Cir.1987) (quoting Gershwin Publishing Corp. v. Columbia Artists Management, Inc., 443 F.2d 1159, 1162 (2d Cir.1971)).

12. Even if Defendants do not know exactly when games will be uploaded to or downloaded from the MAPHIA bulletin board, their role in the copying, including provision of facilities, direction, knowledge and encouragement, amounts to contributory copyright infringement. Id.; see also Playboy Enterprises, Inc. v. Frena, - - - F.Supp. - - - , 1993 WL 522892 at p. 3. (M.D. Fla. Dec. 9, 1993).

13. Sega has established a likelihood of success on the merits of showing a prima facie case of direct and contributory infringement by Defendants' operation of the MAPHIA bulletin board.

14. Sega has also established a strong likelihood of success on the merits of showing a prima facie case of contributory infringement by Defendants' advertising, sale and distribution, directly or through its affiliated PARSEC bulletin board network, of video game copiers. See Atari, Inc. v. JS & A Group, Inc., 597 F.Supp. 5 (N.D. Ill.1983).

15. Because of the large number of users of the MAPHIA bulletin board, and the potential of each user to download an unknown number of copies of Sega video game programs through the MAPHIA bulletin board, Defendants' infringement cannot be viewed as a de minimus circumstance. See Fisher v. Dees, 794 F.2d 432, 434- 35 (9th Cir.1986); Playboy v. Frena, supra, 1993 WL 522892 at p. 5.

16. Defendants raise fair use as a defense to copyright infringement. 17 U.S.C. s 107 states: Notwithstanding the provisions of sections 106 and 106A, the fair use of a copyrighted work, including such use by reproduction in copies or phonorecords or by any other means specified in that section, for purposes such as criticism, comment, news reporting, teaching ..., scholarship, or research is not an infringement of copyright. In determining whether the use made of a work in any particular case is a fair use the factors to be considered shall include- - (1) the purpose and character of the use ...; (2) the nature of the copyrighted work; (3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (4) the effect of the use upon the potential market for or the value of the copyrighted work.

17. "To invoke the fair use exception, an individual must possess an authorized copy of a literary work." Atari Games Corp. v. Nintendo of America, Inc., 975 F.2d 832, 843 (Fed. Cir.1993). Defendant Scherman has stated that he does not own any Sega game cartridges. Scherman Decl. at 1.

18. When copying is for the purpose of making multiple copies of the original, and thereby saving users the expense of purchasing additional authorized copies, this militates against a finding of fair use under the purpose of the use factor. American Geophysical Union v. Texaco, Inc., 802 F.Supp. 1, 14- 16 (S.D.N.Y.1992).

19. Because users of the MAPHIA bulletin board are likely and encouraged to download Sega games therefrom to avoid having to buy video game cartridges from Sega, by which avoidance such users and Defendants both profit, the commercial purpose and character of the unauthorized copying weighs against a finding of fair use. See Atari, Inc. v. JS & A Group, Inc., 597 F.Supp. 5, 8 (N.D. Ill.1983); c.f. Lewis Galoob Toys, Inc. v. Nintendo of America. Inc., 964 F.2d 965, 971 (9th Cir.1992), cert. denied, 113 S.Ct. 1582 (1993).

20. Because Sega video game programs are for entertainment uses and involve fiction and fantasy, consideration of the nature of the copyrighted work weighs against a finding of fair use. Harper & Row Publishers, Inc. v. Nation Enterprises, 471 U.S. 539, 563 (1985); Playboy, supra, 1993 WL 522892 at p. 4.

21. Because it appears that the entire game programs,are copied when Sega video game programs are transferred over the MAPHIA bulletin board, consideration of the amount and substantiality of the portion copied weighs against a finding of fair use. Id. at 5; 3 Nimmer s 13.05[A][3]; see also American Geophysical Union, supra, 802 F.Supp. at 17.

22. "The fourth factor, the effect of the use upon the market for or value of the copyrighted work, 'is undoubtedly the single most important element of fair use.' " Los Angeles News Service v. Tullo, 973 F.2d 791, 798 (9th Cir.1992) (quoting Harper & Row, supra, 471 U.S. at 566).

23. "[T]o negate fair use one need only show that if the challenged use 'should become widespread, it would adversely affect the potential market for the copyrighted work.' " Harper & Row, supra, 471 U.S. at 568 (quoting Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417, 451 (1984)) (emphasis in original); Playboy, supra, 1993 WL 522892 at 5; Lotus Dev. Corp. v. Borland Int'l, Inc., 831 F.Supp. 223, 243 (D.Mass.1993).

24. Based on Defendants' own statement that 45,000 bulletin boards like MAPHIA operate in this country, it is obvious that should the unauthorized copying of Sega's video games by Defendants and others become widespread, there would be a substantial and immeasurable adverse effect on the market for Sega's copyrighted video game programs. Consideration of the effect on the market for Sega's copyrighted works weighs heavily against a finding of fair use. See Def.'s Opp. at 7.

25. Accordingly, it is unlikely that Defendants will be able to establish a fair use defense at trial, and Sega is likely to succeed in establishing that Defendant's MAPHIA bulletin board activities represent direct and contributory infringement under the Copyright Law.

. . .

46. The ex parte temporary restraining order and seizure order issued by Judge Smith on December 9, 1993, is confirmed as appropriate procedure here for Defendant's computer bulletin board. The counterfeit and unauthorized copies of Sega's video game programs were believed to be, and found to be, located on Defendant Scherman's premises, and such items were found on that Defendant's computer and memory.