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Media Rights Technologies, Inc. v. Microsoft Corp.

United States Court of Appeals, Ninth Circuit

May 2, 2019

Media Rights Technologies, Inc., Plaintiff-Appellant,
v.
Microsoft Corporation, Defendant-Appellee.

          Argued and Submitted December 17, 2018 San Francisco, California

          Appeal from the United States District Court for the Northern District of California Sallie Kim, Magistrate Judge, Presiding D.C. No. 3:17-cv-01925-SK

         COUNSEL

          Ian N. Feinberg (argued), Elizabeth Day, Marc Belloli, and David Alberti, Feinberg Day Alberti & Thompson LLP, Menlo Park, California, for Plaintiff-Appellant.

          Jonathan J. Lamberson (argued) and Alana C. Mannigé, Fish & Richardson P.C., Redwood City, California, for Defendant-Appellee.

          Before: Ronald M. Gould and Marsha S. Berzon, Circuit Judges, and Frederic Block, [*] District Judge.

         SUMMARY[**]

         Claim Preclusion / Copyright

         The panel affirmed in part and reversed in part the district court's dismissal of claims of copyright infringement, violation of the Digital Millennium Copyright Act, and breach of contract.

         Media Rights Technologies, Inc. ("MRT") developed a technology to protect electronic files from content piracy. MRT claimed that Microsoft Corp. developed a similar technology following exchanges between the parties and in doing so used information learned from MRT. In 2013, MRT brought a patent infringement suit against Microsoft. Later, MRT filed this suit.

         The panel held that claim preclusion would apply if the patent infringement suit involved the same claim or cause of action as the later suit, reached a final judgment on the merits, and involved identical parties or privies. The parties disagreed whether MRT could have raised its claims in the prior patent infringement suit (on the theory they did not accrue until after commencement of that action) and whether the two suits involved the same claim or cause of action.

         Affirming in part, the panel held that claim preclusion barred MRT's claims that had accrued at the time of its patent infringement action: namely, copyright infringement claims arising from the sale of Microsoft products before MRT filed its patent infringement suit; the DCMA claim; and the breach of contract claims. The panel concluded that these claims all arose from the same events-Microsoft's alleged misappropriation of MRT's software-as the prior patent infringement claims and merely offered different legal theories for why Microsoft's alleged conduct was wrongful. The panel held that the two suits involved the same claims or causes of action.

         Reversing in part, the panel held that claim preclusion did not bar MRT from asserting copyright infringement claims that accrued after it filed its patent-infringement suit: namely, claims arising from the sale of Microsoft products after MRT filed its patent infringement suit.

          OPINION

          GOULD, Circuit Judge.

         This case requires that we apply longstanding principles of claim preclusion to a contemporary set of facts. Plaintiff-Appellant Media Rights Technologies, Inc. ("MRT") developed a technology in the early 2000s to protect electronic files, such as music files, from content piracy. MRT claims that Defendant-Appellee Microsoft Corporation developed a similar technology following exchanges between the parties and in doing so used information learned from MRT. In 2013, MRT brought a patent infringement suit against Microsoft. After a court in a separate proceeding declared one of the patents at issue invalid, MRT voluntarily dismissed that suit with prejudice.

         But that dismissal did not end the dispute in which the parties were embroiled. MRT then filed this suit against Microsoft, asserting claims for copyright infringement, violation of the Digital Millennium Copyright Act ("DMCA"), and breach of contract. The key question before us is whether MRT's first suit for patent infringement precludes this later suit for copyright infringement under the doctrine of claim preclusion even though the current claims have different elements.

         We hold that claim preclusion bars the claims in this suit that had accrued at the time of MRT's patent-infringement action: namely, (1) copyright infringement claims arising from the sale of Microsoft products before MRT filed its patent-infringement suit; (2) the DMCA claim; and (3) the breach of contract claims. These claims all arise from the same events-Microsoft's alleged misappropriation of MRT's software-as the prior patent infringement claims. They merely offer different legal theories for why Microsoft's alleged conduct was wrongful. We affirm the district court's dismissal of these claims.

         However, we hold, under Howard v. City of Coos Bay, 871 F.3d 1032 (9th Cir. 2017), that claim preclusion does not bar MRT from asserting copyright infringement claims that accrued after it filed its patent-infringement suit: namely, claims arising from the sale of Microsoft products after MRT filed its patent-infringement suit. We reverse the district court's dismissal of these copyright infringement claims, and remand for further proceedings.

         I

         A[1]

         In the early 2000s, MRT's cofounder, Hank Risan, developed a technology that came to be known as the Controlled Data Pathway ("CDP"). MRT claims that its CDP technology was the first digital rights management ("DRM") technology to prevent various types of content piracy, such as the piracy of music files. For the years thereafter, MRT incorporated that technology into its X1 Recording Control software, BlueBeat SeCure Player, BlueBeat SeCure Player for Windows Media Player, and BlueBeat SeCure Player for Microsoft Vista (collectively, the "MRT Software"). MRT holds several patents on its CDP technology (the "CDP Patents").

         To help identify any unlawful copying of the MRT Software's source code, [2] MRT inserted a piece of inert code (the "Watermark"). The Watermark appears as follows: if (FindWindow((TCHAR *) 32770, szProdName)

if (FindWindow((TCHAR *) 32770, szProdName) != (HWND) 0) { /* indicate application found */ nRetVal = 1; }

         The Watermark is detectable in object code[3] compiled from any source code containing the Watermark. In other words, if a party copied the portion of the MRT Software's source code that contains the Watermark, MRT could detect such copying by looking for the Watermark in the object code of the other software. Thus, the Watermark served to reveal copying.

         In 2003, the recording and motion picture industries took notice of MRT's X1 Recording Control software and its potential to prevent content piracy. The Recording Institute of America and the Motion Picture Association of America evaluated the software, and, after concluding that it effectively prevented content piracy, recommended to Microsoft that Microsoft implement the X1 Recording Control software in its own products.

         Shortly after, in August 2004, Microsoft's Chief Technology Officer contacted MRT concerning a potential investment from Microsoft. MRT and Microsoft entered a nondisclosure agreement (the "2004 NDA") prohibiting Microsoft from, among other things, reverse engineering MRT technology shared under the agreement. MRT, in turn, gave Microsoft information regarding its CDP technology, a copy of MRT software containing the Watermark, and information regarding the CDP Patents. Following evaluation, Microsoft offered to invest $50 million in MRT in return for a 51% stake in the company. MRT declined the offer as too low.[4]

         One year later, in 2005, Microsoft began testing its Protected Media Pathway ("PMP") software. Like the MRT Software, Microsoft's PMP software is a DRM technology designed to prevent content piracy. MRT alleges that Microsoft had been trying for years to develop its own effective DRM software, but had been unable to do so until MRT provided Microsoft information concerning its CDP technology. MRT contends that Microsoft used the information it learned from MRT to create the PMP software. The PMP software allegedly "contains a copy and/or derivative work of the MRT software," as evidenced by the presence of the Watermark.

         In January 2007, Microsoft released the first commercial version of the Vista operating system, which included Microsoft's PMP software. Since Vista, Microsoft has incorporated its PMP software into other products.

         B

         On April 25, 2013, MRT filed its first suit against Microsoft ("MRT I"). MRT claimed that Microsoft had built its PMP software-which Microsoft included in Windows Vista, Windows 7, Windows 8, Windows Media Center, and Windows Media Player-using information that MRT had shared with Microsoft. Based on those facts, MRT alleged that the PMP software infringed four CDP Patents. However, the district court stayed the case in January 2014, when a district court in a separate action declared one of the patents at issue invalid. See Media Rights Techs., Inc. v. Capital One Fin. Corp., No. l:13-cv-476, 2013 WL 6506176 (E.D. Va. Dec. 9, 2013).

         While MRT I was stayed, MRT decided to investigate whether Microsoft had copied the MRT Software's source code. MRT hired a technical expert to do so. In April 2014, MRT's technical expert identified the Watermark in Windows XP Service Pack 3, Windows Vista, Windows 8, Windows 10, Windows Media Player 11, Windows Media Player 12, Windows Media Player SDK, Internet Explorer 8, Internet Explorer 9, Internet Explorer 10, and Internet Explorer 11. The expert identified Microsoft's PMP software as the source of the Watermark in each of these products. Because MRT never provided Microsoft access to the MRT Software's source code, the expert concluded that the Watermark was present as a result of Microsoft reverse engineering that source code and copying it in Microsoft's PMP software.

         On September 4, 2015, the Federal Circuit affirmed the district court decision invalidating one of the CDP Patents at issue in MRT I, holding that the claims in the patent were indefinite. Media Rights Techs., Inc. v. Capital One Fin. Corp., 800 F.3d 1366, 1375 (Fed. ...


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