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August 26, 2003, 9:00 AM ET, Alert No. 726.
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California Supreme Court Rules in DeCSS Trade Secrets Case

8/25. The Supreme Court of the State of California issued its opinion [54 pages in PDF] in DVD Copy Control Association v. Bunner, a case regarding California trade secret law, free speech, and the publication of the DeCSS program in web sites. The trial court issued a preliminary injunction based upon its finding of violation of California trade secrets law. The California Court of Appeal (6th) reversed on free speech grounds. It did not examine the question of whether the injunction was valid under trade secrets law. The Supreme Court reversed the Court of Appeal, and held that the preliminary injunction does not violate Bunner's right to free speech under the U.S. or California Constitutions.

The Supreme Court did not decide the merits of the trade secrets claim. Rather, it remanded to the Court of Appeal with instructions to determine the validity of the preliminary injunction under California trade secrets law. Moreover, the Supreme Court suggested that acquisition of trade secrets by reverse engineering (which is what occurred in this case) may not constitute acquisition by improper means.

Hence, this opinion stands as authority for the proposition that injunctive relief barring the dissemination of misappropriated trade secrets, including copy protection secrets, does not violate the free speech rights of the misappropriators, or others who acquire the trade secrets from them. This is a victory generally for the proponents of trade secrets protections. However, the case is not authority on the question of protection of trade secrets from appropriation by reverse engineering. The Court did not address this issue. And, while the trade secret holder prevailed in this round, it may ultimately loose, if the Court of Appeal holds that there was no violation of California trade secrets law.

Plaintiff. DVD is sometimes known as Digital Versatile Disc. DVDs are capable of holding full length movies in digital format. CSS is a Content Scrambling System for DVD to protect intellectual property rights by means of encryption. The DVD Copy Control Association (DVDCCA) is a trade association of businesses in the movie industry. It controls the rights to CSS. DVDCCA licenses the CSS decryption technology to manufacturers of hardware and software for playing DVDs.

Defendant. DeCSS is a decryption tool that facilitates infringement of movies on DVD. DeCSS consists of computer source code which describes a method for playing an encrypted DVD on a non CSS equipped DVD player or drive. It was written by Jon Johansen, who is not a defendant in this case. He was able to write the program after acquiring proprietary information embodied in the technology by reverse engineering software created by a licensee of CSS. He did this in violation of the users' license agreement, which specifically prohibits reverse engineering. Johansen also published DeCSS program on the web. Andrew Bunner published a copy of DeCSS on his web site. Bunner refused DVDCCA's request to remove the DeCSS program from his web site.

Complaint. The DVDCCA filed a complaint in 1999 in California Superior Court against Andrew Brunner and others alleging violation of the California Uniform Trade Secrets Act in connection with their publishing copies of DeCSS in web sites, or linking to copies of DeCSS.

Preliminary Injunction. The Superior Court for Santa Clara County, Judge William Elfving presiding, issued an order granting a preliminary injunction in January of 2000.

The Superior Court held that the DVDCCA met the requirements for injunctive relief. It found that the CSS technology contained protectable trade secrets because it derived independent economic value from its secrecy and because the DVDCCA made reasonable efforts to maintain its secrecy; it found that Johansen obtained these trade secrets through reverse engineering in violation of his license agreement, and therefore acquired these secrets by improper means; it found that Bunner and other defendants knew or should have known that Johansen acquired these trade secrets by improper means; it found that the trade secret status of the CSS technology had not been destroyed because it had been published on the web; and, it concluded that the DVDCCA would suffer irreparable harm without an injunction. 

Hence, the Superior Court enjoined Bunner and other defendants from "[p]osting or otherwise disclosing or distributing, on their web sites or elsewhere, the DeCSS program, the master keys or algorithms of the Content Scrambling system (‘CSS’), or any other information derived from this proprietary information." The Superior Court's preliminary injunction did not bar linking to copies of DeCSS elsewhere on the web.

The Court of Appeal. The Court of Appeal issued its opinion reversing the Superior Court on November 1, 2001. It reasoned that the DeCSS source code is speech entitled to First Amendment protection. It also noted that unlike copyright, trade secret protection is not secured by the Constitution. The Court of Appeal further reasoned that the Superior Court order constituted a prior restraint of pure speech.

The Court of Appeal opinion was narrow. It did not review the Superior Court's findings in support of the preliminary injunction. It assumed for the purpose of the appeal that the DVDCCA was entitled to injunctive relief under California trade secret law. It addressed only the issue of whether an injunction based on trade secret law would violate freedom of speech.

See, story titled "Cal App Overturns Injunction in DeCSS Case" in TLJ Daily E-Mail Alert No. 300, November 2, 2001.

Supreme Court. On February 20, 2002, the Supreme Court ordered review of the Court of Appeal. See, story titled "California Supreme Court To Review DeCSS Case" in TLJ Daily E-Mail Alert No. 374, February 22, 2002.

The Supreme Court's review in this case is limited. The Supreme Court wrote that "the narrow question before us is whether the preliminary injunction violates Bunner's right to free speech under the United States and California Constitutions even though DVD CCA is likely to prevail on its trade secret claim against Bunner."

The Court first reasoned that computer code is expression, and is therefore protected by the First Amendment of the U.S. Constitution. However, the level of scrutiny to be accorded depends upon whether the injunction is content neutral or content based. In the present case, the Court held that the injunction is content neutral, and thus, entitled to a lower level of scrutiny.

The Court elaborated on content neutrality. It wrote that "the injunction singled out Bunner's communications because of DVD CCA's efforts to maintain the secrecy of the CSS technology and the competitive advantage it enjoyed from those efforts -- and not because of the communications' subject matter or any disagreement with Bunner’s message or viewpoint.  In other words, the trial court issued the injunction to protect DVD CCA's statutorily created property interest in information -- and not to suppress the content of Bunner's communications." The Court added, "Indeed, the governmental purpose behind protecting trade secrets like the CSS technology through injunctive relief is wholly unrelated to their content."

The Court also wrote that "The fact that the preliminary injunction identifies the prohibited speech by its content does not make it content based. ... any injunction remedying this deprivation must refer to the content of that information in order to identify the property interest to be protected. Such an injunction remains content neutral so long as it serves significant governmental purposes unrelated to the content of the proprietary information."

The Court then applied the content neutral test, as articulated by the Supreme Court of the U.S. in Madsen v. Women’s Health Center, 512 U.S. 753 (1994). That is, "when evaluating a content-neutral injunction ... [w]e must ask ... whether the challenged provisions of the injunction burden no more speech than necessary to serve a significant government interest."

The California Supreme Court held that the injunction satisfies this test. It held that "California's trade secret law undoubtedly serves significant government interests." First, the government has an interest in incenting investment in innovation, and trade secret protection, like patent and copyright protection, serve this interest.

 In addition, the Court held that trade secret law furthers the government interest in promoting business ethics. It wrote that "By prohibiting Bunner from exploiting and destroying DVD CCA's trade secrets because of his actual or constructive knowledge of its illegal acquisition, the preliminary injunction merely applies this venerable standard of commercial ethics to a constitutionally recognized property interest in information. Because a person who knowingly exploits the illegal acquisition of property owned by another should be in ``no better position than´´ the illegal acquirer himself ... the injunction burdens no more speech than necessary to serve the government’s important interest in maintaining commercial ethics."

The Court also wrote that "In this case, the content of the trade secrets neither involves a matter of public concern nor implicates the core purpose of the First Amendment.  ... Bunner posted these secrets in the form of DeCSS on the Internet so Linux users could enjoy and use DVD’s and so others could improve the functional capabilities of DeCSS.  He did not post them to comment on any public issue or to participate in any public debate.  Indeed, only computer encryption enthusiasts are likely to have an interest in the expressive content—rather than the uses—of DVD CCA’s trade secrets."

Finally, the Court considered the "prior restraint doctrine". It wrote that "Although the preliminary injunction issued by the trial court survives the Madsen test, we must still determine whether the prior restraint doctrine bars it. Because the injunction is content neutral and was issued because of Bunner’s prior unlawful conduct, we conclude it is not a prior restraint and therefore does not violate the First Amendment." It held that the preliminary injunction in this case is not a prior restraint. Rather, it is based upon "prior unlawful conduct".

So, the Court concluded that "we find that the preliminary injunction at issue here is not a prior restraint. The injunction is content neutral ... , and the trial court found that Bunner had previously disclosed DVD CCA’s trade secrets in violation of California law.  The court therefore issued the content-neutral injunction because of Bunner’s ``prior unlawful conduct.´´"

The Court also briefly disposed of the parallel argument that the Superior Court's preliminary injunction violated the free speech clause of the California Constitution.

Then, the Supreme Court remanded to the Court of Appeal, with instructions. It wrote that "We merely hold that the preliminary injunction does not violate the free speech clauses of the United States and California Constitutions, assuming the trial court properly issued the injunction under California’s trade secret law. On remand, the Court of Appeal should determine the validity of this assumption."

It added that "On remand, the Court of Appeal must therefore ``make an independent examination of the entire record´´  ..., and determine whether the evidence in the record supports the factual findings necessary to establish that the preliminary injunction was warranted under California’s trade secret law ..." (Citations omitted.)

The Supreme Court, in its review California trade secret law earlier in its opinion, hinted as to what the outcome of this review should be. It wrote that the California statute protects holders of trade secrets from misappropriation. Misappropriation occurs when a person acquires a trade secret by improper means. This includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, and espionage; however, the statute provides that "Reverse engineering or independent derivation alone" (citing the California statute).

Jon Johansen originally obtained the DVDCCA's trade secrets by reverse engineering.

Justice Janice Brown wrote the opinion of the Supreme Court. She was joined by Ronald George, Marvin Baxter, Rivera, and Robie.

Other Opinions. There were two other opinions, which both essentially concurred in part and dissented in part. Justice Carlos Moreno wrote a lengthy opinion. He wrote that "I concur in the majority's narrow holding, which, as I understand it, is that the First Amendment does not categorically prohibit preliminary injunctions to enjoin the publication of trade secrets. I further agree that the First Amendment requires independent appellate review of such preliminary injunctions, rather than the deferential review usually accorded such injunctions. I write separately for two reasons. First, I believe there is a need to clarify how the prior restraint doctrine under the First Amendment applies to the publication of alleged trade secrets. Second, I would forgo further proceedings in the Court of Appeal and simply affirm that court's judgment. In my view, the DVD Copy Control Association's (DVD CCA) trade secret claim against Bunner is patently without merit for the reasons explained below."

Justice Kathryn Werdegar wrote a one page opinion. She wrote, "I agree with the majority’s conclusion that the First Amendment to the United States Constitution does not necessarily preclude injunctive relief in trade secret cases. I find in Justice Moreno's concurring opinion, however, a more satisfying reconciliation of that conclusion with the constitutional rules governing prior restraints and content-based restrictions of speech."

Related Cases.

Pavlovich v. Superior Court. In this case, the DVDCCA filed a complaint in the Superior Court for Santa Clara County California against Matthew Pavlovich and others alleging misappropriation of trade secrets and other claims. Pavlovich published the DeCSS program in a web site which he owned and operated. He is not a resident of California. However, he is the President of a technology start up company, and a leader of the open source movement. He also testified that he knew that the movie industry was based in California, and that DeCSS would harm that industry. He sought to quash the summons.

On August 7, 2001, the Court of Appeal of California (6th Appellate District) issued its opinion in Pavlovich v. Superior Court, holding that California's long-arm jurisdiction statute reaches owners, publishers, and operators of web sites when, in violation of California law, they make available for copying or distribution trade secrets or copyrighted material of California companies. See, story titled "California Has Personal Jurisdiction over Non Resident DeCSS Poster" in TLJ Daily E-Mail Alert No. 244, August 8, 2001.

However, on November 25, 2002, the Supreme Court of California issued its 4-3 opinion [53 pages in PDF] in Pavlovich v. Superior Court, reversing the Court of Appeal. The Supreme Court held that the California courts do not have personal jurisdiction over a nonresident individual who had published the DeCSS program his web site. See, story titled "California Has No Personal Jurisdiction Over Non Resident DeCSS Poster", in TLJ Daily E-Mail Alert No. 557, November 26, 2002.

Universal City Studios v. Reimerdes/Corley. This is another DeCSS related case. Although, this case involved copyright law, and specifically, the anti-trafficking provision of the Digital Millennium Copyright Act (DMCA). University City Studios, and other movie studios, filed a complaint in U.S. District Court (SDNY) against persons who had published copies of DeCSS in web sites, or hyperlinked to copies in other web sites.

On August 17, 2000, the District Court issued its opinion (published at 111 F.Supp.2d 294) in Universal City Studios v. Reimerdes. The Court held that posting DeCSS violated the DMCA's provision banning trafficking in technology that circumvents measures controlling access to copyrighted works, that hyperlinking also violates the DMCA, that the DMCA does not violate the First Amendment as applied to decryption software, that the defendants did not engage in protected fair use, that the movie studios are entitled to injunctive relief.

On November 28, 2001, the U.S. Court of Appeals (2ndCir) issued its opinion (published at 273 F.3d 429) in Universal City Studios v. Corley affirming the District Court. See also, story titled "Second Circuit Upholds DMCA and Corley Injunction" in TLJ Daily E-Mail Alert No. 319, December 3, 2001.

9th Circuit Holds No Private Right of Action for Violation of Payphone Compensation Rules

8/25. The U.S. Court of Appeals (9thCir) issued its opinion [PDF] in Greene v. Sprint, affirming the District Court's dismissal of a complaint brought by PSPs against an IXC alleging violation of Section 276 of the Communications Act, on the grounds that there is no private right of action for violation of Section 276.

Zane Greene and other payphone service providers (PSPs) filed a complaint in U.S. District Court (CDCal) against Sprint Communications, and several of its facilities based resellers, alleging violation of regulations promulgated by the Federal Communications Commission (FCC) pursuant to 47 U.S.C. § 276, which requires interexchange carriers (IXCs) to compensate payphone service providers for dial around calls made from their payphones.

Section 276(b) provides, in part, that "In order to promote competition among payphone service providers and promote the widespread deployment of payphone services to the benefit of the general public ... the Commission shall take all actions necessary (including any reconsideration) to prescribe regulations that (A) establish a per call compensation plan to ensure that all payphone service providers are fairly compensated for each and every completed intrastate and interstate call using their payphone ..."

The FCC promulgated regulations that require carriers and facilities-based resellers to compensate PSPs for all completed coinless calls where the caller uses a carrier other than the payphone's presubscribed carrier. The regulations also requires carriers to track or arrange for tracking of each compensable coinless call carried over its network.

The District Court dismissed the action. The Appeals Court affirmed. Both courts held that there is no private right of action for the alleged violations of Section 276, and the implementing regulations.

The Appeals Court reasoned that a private right of action must be created by the Congress. The Congress, in passing the Telecom Act of 1996, did not include a private right of action in Section 276. Moreover, while Section 206 does make a carrier liable for any violation of "this chapter", which includes Section 276, and Section 207 creates a right of action in U.S. District Court, Section 276 does not create a right of PSPs to be paid by carriers.

The Court wrote that "there is no language in § 276 expressly conferring upon PSPs a right to fair compensation from IXCs. For this reason, there is no violation of the Act to be remedied through the private right of action afforded by §§ 206 and 207. Neither does § 276 itself, or through §§ 206 and 207, provide a private right of action to enforce regulations promulgated pursuant to § 276."

This case is Zane Greene, et al. v. Sprint Communications Company, et al., No. 02-56339, an appeal from the U.S. District Court for the Central District of California, D.C. No. CV-02-03841-LGB, Judge Lourdes Baird presiding.

Tuesday, August 26

The House is in recess until September 3. Senate is in recess until September 2. The Supreme Court is in recess until October 6. (The Supreme Court will meet in special session to hear oral arguments in McConnell v. FEC on September 8.)

1:30 PM. Mark Cooper, of the Consumer Federation of America (CFA), will host a call-in media briefing to provide an initial analysis of the Federal Communications Commission's (FCC) triennial review order [576 pages in PDF], and to outline CFA's plans for a legal response to the new rules. To participate, call 888 243-0818, and provide passcode 247209. To listen to a playback, call 888 266-2081 and provide passcode 247209. For more information, contact Mark Cooper at 301 384-2204.

Thursday, August 28

10:00 - 11:45 AM. The American Enterprise Institute (AEI) will host a panel discussion titled "Is There Any Development in the Doha Development Agenda?" The speakers will be Michael Finger (AEI), Arvind Panagariya (University of Maryland), and Sarath Rajapatirana (AEI). See, notice. Location: AEI, 12th Floor, 1150 17th Street, NW.

Sunday, August 31

Deadline to submit comments to the National Institute of Standards and Technology (NIST) regarding its second public draft [62 pages in PDF] of its publication titled "Guide for the Security Certification and Accreditation of Federal Information Systems". This is NIST Special Publication 800-37 authored by Ron Ross and Marianne Swanson. Comments may be submitted to

Monday, September 1

Labor Day. The FCC, USITC and other federal government agencies will be closed.

Tuesday, September 2

The Senate will return from its August recess.

The Treasury Department's and the Internal Revenue Service's (IRS) will hold a public meeting regarding their notice of proposed rulemaking (NPRM) regarding regulations that "affect certain taxpayers who participate in the transfer of stock pursuant to the exercise of incentive stock options and the exercise of options granted pursuant to an employee stock purchase plan (statutory options)." See, notice in the Federal Register, June 9, 2003, Vol. 68, No. 110, at Pages 34344 - 34370.

Wednesday, September 3

The House will return from its August recess.

POSTPONED. 1:00 PM. The House Commerce Committee's Subcommittee on Telecommunications and the Internet will hold a hearing titled "Digital Dividends and Other Proposals to Leverage Investment in Technology". The hearing will be webcast. See, notice. Location: Room 2123, Rayburn Building.

Deadline to submit comments to the Federal Communications Commission (FCC) in response to its notice of proposed rulemaking (NPRM) regarding making more spectrum available for unlicensed devices, including WiFi, in the 5 GHz band. See, stories titled "FCC Adopts NPRM to Increase Unlicensed Spectrum" in TLJ Daily E-Mail Alert No. 663, May 16, 2003; "FCC Releases NPRM Regarding Increasing Amount of Unlicensed Spectrum" in TLJ Daily E-Mail Alert No. 674, June 5, 2003, and "Delegates Discuss World Radiocommunications Conference" in TLJ Daily E-Mail Alert No. 703, July 22, 2003. See also, notice in the Federal Register, July 25, 2003, Vol. 68, No. 143, at Pages 44011 - 44020. This is ET Docket No. 03-122. The FCC adopted this NPRM on May 15, 2003, and released June 4, 2003.

Thursday, September 4

The Federal Communications Commission's (FCC) changes to its media ownership rules, announced on June 2, 2003, take effect. See, notice in the Federal Register that recites and describes the rules changes. See, Federal Register, August 5, 2003, Vol. 68, No. 150, at Pages 46285 - 46358.

Friday, September 5

9:30 - 11:30 AM. The American Enterprise Institute (AEI) will host a seminar titled "The New World of E-Commerce Taxation". The speakers will be Michael Greve (AEI), Daniel Shaviro (NYU School of Law), and Kevin Hassett (AEI). See, notice. Location: 12th Floor, AEI, 1150 17th Street, NW.

Deadline to submit reply comments to the Federal Communications Commission (FCC) in response to its Notice of Inquiry [21 pages in PDF] in its proceeding titled "In the Matter of Inquiry Regarding Carrier Current Systems, including Broadband over Power Line Systems". See, notice in the Federal Register, May 23, 2003, Vol. 68, No. 100, at Pages 28182 - 28186. See also, story titled "FCC Announces NOI Regarding Broadband Over Powerlines" in TLJ Daily E-Mail Alert No. 628, April 24, 2003, and story titled "FCC Releases NOI on Broadband Over Power Lines" in TLJ Daily E-Mail Alert No. 656, May 7, 2003.This is ET Docket No. 03-104. For more information, contact Anh Wride at 202 418-0577 or

12:00 NOON. Deadline to submit requests to testify orally at the September 18, 2003 hearing of the U.S. Trade Representative's (USTR) interagency Trade Policy Staff Committee (TPSC) to assist it in preparing its annual report to the Congress on the People's Republic of China's compliance with the commitments that it made in connection with its accession to the World Trade Organization (WTO). See, notice in the Federal Register, July 21, 2003, Vol. 68, No. 139, at Pages 43247 - 43248.

5th Circuit Affirms Dismissal in Goldstein v. MCI WorldCom

8/25. The U.S. Court of Appeals (5thCir) issued its opinion [42 pages in PDF] in Goldstein v. MCI WorldCom, a class action securities fraud case.

Harriet Goldstein and others filed a complaint in U.S. District Court (SDMiss) against MCI WorldCom, Bernie Ebbers and Scott Sullivan alleging violation of federal securities laws. The District Court dismissed for failure to plead scienter in conformity with the heightened pleading requirements of the Private Securities Litigation Reform Act (PSLRA). The Appeals Court affirmed.

The Court released its original opinion on July 28. The Court released this revised opinion on August 25.

This case is Harriet Goldstein, et al. v. MCI WorldCom, Bernard Ebbers and Scott Sullivan, Nos. 02-60322 and 03-60248, appeals from the U.S. District Court for the Southern District of Mississippi.

More News

8/25. U.S. Trade and Development Agency (USTDA) announced in a release that it will "provide funding to develop a regulatory framework in Kosovo designed to attract the private sector to the telecommunications industry in that country. The technical assistance (TA) will be provided by a U.S. firm under the auspices of the European Bank for Reconstruction and Development (EBRD) and is expected to contribute to sector loans by the EBRD to benefit the telecommunications sector in Kosovo."

8/25. The ACLU released a memorandum regarding the Computer Assisted Passenger Pre-screening System (CAPPS II). It is titled "The Five Problems With CAPPS II: Why the Airline Passenger Profiling Proposal Should Be Abandoned". See also, ACLU release.

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