Plaintiff's Memo Supporting Motion for TRO and Prelim. Injunction, in DVD CCA v. McLaughlin, Bunner, et al.

(Memorandum of Points and Authorities in Support of Ex Parte Application for the Issuance of a Temporary Restraining Order and Order to Show Cause Re: Preliminary Injunction Against All Defendants; Dec. 28, 1999)

[19 pages]

WEIL, GOTSHAL & MANGES LLP
JARED B. BOBROW (State Bar No. 133712)
2882 Sand Hill Road
Menlo Park, CA 94025
Telephone: (650) 926-6200
Facsimile: (650) 854-3713

WEIL, GOTSHAL & MANGES LLP
JEFFREY L. KESSLER*
ROBERT G. SUGARMAN*
767 Fifth Avenue
New York, NY 10153
Telephone: (212) 310-8000
Facsimile: (212) 310-8007

Attorneys for Plaintiff
DVD COPY CONTROL ASSOCIATION, INC.

SUPERIOR COURT OF THE STATE OF CALIFORNIA

COUNTY OF SANTA CLARA

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*Pro Hac Vice applications being submitted to the Court.

TABLE OF CONTENTS

I. INTRODUCTION AND SUMMARY OF FACTS

A. Summary of Argument

B. Background and Summary of The Facts

1. DVDs Represent the Next Generation of Technology for the Motion Picture, Computer and Consumer Electronics Industnes
2. CSS Technology is Highly Sophisticated and Stringent Standards Were Put in Place to Protect Its Confidentiality
3. The CSS Technology Was Misappropriated
4. The Misappropriation Has Been Willful and Malicious
5. The Significance of Protecting the CSS Technology/Trade Secrets

II. THE LEGAL STANDARD FOR INTERIM INJUNCTIVE RELIEF

III. DVD CCA IS LIKELY TO PREVAIL IN THIS ACTION

A. The CSS Technology Is A Trade Secret

1. CSS Proprietary Trade Secrets Possesses Independent Economic Value
2. DVD CCA and its Predecessors Took Extraordinary Steps to Maintain the Secrecy of the Proprietary Trade Secrets

B. Defendants Have Misappropriated CSS Trade Secret Information

IV. DVD CCA IS SUFFERING AND WILL CONTINUE TO SUFFER IMMEDIATE AND IRREPARABLE HARM UNLESS A TEMPORARY RESTRAINING ORDER AND PRELIMINARY INJUCTION ARE ISSUED

V. ALL DEFENDANTS ARE SUBJECT TO THE JURISDICTION OF THIS COURT

A. The Defendants Purposefully Availed Themselves of the Privileges of This State

B. Plaintiff's Claim Arises from the Defendants' Forum-Related Activity

C. The Exercise of Jurisdiction Comports with Fair Play and Substantial Justice

CONCLUSION

TABLE OF AUTHORITIES

CALIFORNIA STATE CASES

Cohen v. Board of Supervisors (1985) 40 Cal.3d 277 [219 Cal. Rptr. 467]

Continental Baking Co. v. Katz (1968) 68 Cal.2d 512 [67 Cal. Rptr. 761]

Courtesy Temporary Serv.v. Camancho (1990) 222 Cal.App.3d 1278 [272 Cal.Rptr.352]

IT Corp. v. County of Imperial (1983) 35 Cal.3d 63 [196 Cal.Rptr. 715]

Paul v. Wadler (1962), 209 Cal.App.2d 615 [26 Cal. Rptr. 341]

Quattrone v. Superior Court (1975) 44 Cal.App.3d 296 [118 Cal.Rptr. 548]

Triple A Machine Shop v. California (1989) 213 Cal. App.3d 131 [261 Cal. Rptr. 493]

Vacco Industries, Inc. v. Van Den Berg (1992) 5 Cal.App.4th 34 [6 Cal.Rptr.2d 602]

Vons Companies, Inc. v. Seabest Foods, Inc. (1996) 14 Cal.4th 434 [58 Cal.Rptr.2d 899] cert. denied 522 U.S. 808

FEDERAL CASES

International Shoe Co. v. Washington (1945) 326 U.S. 310

MCA Records Inc. v. Charly Records LTD (9th Cir. 1997) 108 F.3d 338 [1997 WL 76173] cert. denied 522 U.S. 822

MAI Systems Corp. v. Peak Computer, Inc. (9th Cir. 1993) 991 F.2d 511

Maritz, Inc. v. Cybergold, Inc. (E.D. Mo. 1996) 947 F.Supp. 1328

Panavision International, L.P. v. Toeppen (9th Cir. 1998) 141 F.3d 1316

Stomp, Inc. v. Neato, LLC (C.D. Cal. 1999), 61 F. Supp. 2d 1074

The 3DO Company v. Poptop Software (N.D. Cal. 1998) 1998 U.S. Dist. LEXIS 21281

Triad Systems Corp. v. Southeastern Express Co. (9th Cir. 1995) 64 F. 3d 1330 cert. denied 516 U.S. 1145

MISCELLANEOUS

2 Witkin, Cal. Procedure (4th ed. 1997) Jurisdiction, Section 129

6 Witkin, Cal. Procedure (4th ed. 1997) Provisional Remedies, Sections 286, 296, 298

Civ. Code, Section 3426 et seq

Cal. Code Civ. Proc. Section 410.1012

Code Civ. Proc., Section 527(c)

MEMORANDUM OF POINTS AND AUTHORITIES

I. INTRODUCTION AND SUMMARY OF FACTS

A. Summary of Argument

This Application for a Temporary Restraining Order, Order to Show Cause and Preliminary Injunction is brought by DVD Copy Control Association, Inc. ("DVD CCA"), a not-for-profit trade association with its principal place of business in Morgan Hill, California, to stop the defendants who have been able, through the theft of proprietary information and trade secrets licensed by plaintiff, illegally to copy and distribute the most valuable assets of the motion picture industry -- its copyrighted motion pictures stored on digital video discs, or "DVDs." Unless enjoined, defendants' actions will allow wholesale additional infringement and will cause irreparable injury to (i) DVD technology, (ii) plaintiff DVD CCA (which is the sole licensor of the trade secrets which are being stolen), (iii) the motion picture industry (which is primarily located in California), and (iv) the more than 400 licensees of the CSS technology through DVD CCA (73 of which are located in California)¹ who have invested millions of dollars and employ thousands of people creating the hardware and software necessary to access the digital images on DVDs.

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1 Of the 73 licensees located in California, 42 are located in Santa Clara County and an additional 17 are in other Bay Area locations. (Hoy Decl., Paragraph33).

B. Background and Summary of The Facts

The facts relevant to this Application are established in the declarations of John Hoy ("Hoy Decl."), Frederic Hirsch, Esq. ("Hirsch Decl."), Harvey Shapiro, Esq. ("H. Shapiro Decl."), Jonathan S. Shapiro, Esq. ("J. Shapiro Decl."), and Bruce H. Turrbull, Esq. ("Turnbull Decl.") filed in support thereof.

1. DVDs Represent the Next Generation of Technology for the Motion Picture, Computer and Consumer Electronics Industries

Just as compact discs ("CDs") have replaced records, Digital Video Discs ("DVDs") are the next generation of technology allowing consumers to view motion pictures in their homes. DVDs provide high quality images which are digitally formatted on a convenient 5-inch disc that is resistant to wear and damage and allows for attractive consumer features not presently available in other video formats. DVDs containing motion pictures in encrypted form can be played either on special purpose machines ("DVD Players") or personal computers ("PCs") with DVD drives. Encryption is necessary to prevent copying of the copyrighted material on the DVD. To play a copyrighted motion picture, either form of player device requires the implementation of certain algorithms and "master keys" to carry out the decryption of the data stored on the disc. The implementation that provides this decryption function is developed by DVD CCA's licensees using detailed specifications known as the Contents Scramble System ("CSS"), provided by DVD CCA to such licensees. (Hoy Decl., Paragraph 5; Complt., Paragraph 30).

2. CSS Technology is Highly Sophisticated and Stringent Standards Were Put in Place to Protect Its Confidentiality

Before allowing their copyrighted motion pictures to be used on the DVD format, the motion picture companies insisted on a viable copy protection system to prevent users from making copies of the digital motion pictures. Such protection is necessary to prevent copying from discs that are rented or borrowed and to prevent broader scale piracy through widespread transmission of these motion pictures over the Internet and widespread distribution of "pirated" discs in competition with the authorized prerecorded discs. Without motion picture companies' copyrighted content for DVDs, there would be no viable market for computer DVD drives and DVD players, as well as the related computer chips and software, which runs these devices and, thus, there would be no DVD industry for video applications. (Hirsch Decl., Paragraphs 5-6; Hoy Decl., Paragraphs 6-9; Complt., Paragraphs 31-32). Without copy protection, Motion Picture Association ("MPA") members would not have agreed to distribute their motion pictures on DVDs. (Hirsch Decl., Paragraph 6).

CSS is proprietary trade secret technology that was developed to provide the protection demanded by the motion picture companies against unauthorized copying of their copyrighted material. DVD CCA is the sole duly authorized licensor for the CSS technology. Any party desiring lawfully to use the CSS technology must do so through a license from DVD CCA. (Hoy Decl., 2Paragraph 10-13; Complt., Paragraph 33)

Beginning on or about October 31, 1996, DVD CCA's predecessor-in-interest began licensing CSS technology pursuant to an agreement that later became the AMENDED AND RESTATED CSS INTERIM LICENSE AGREEMENT, including the related CSS PROCEDURAL AND AMENDED AND RESTATED TECHNICAL SPECIFICATIONS (collectively, the "CSS Agreement") with hundreds of licensees. The CSS Agreement sets forth the conditions under which the CSS licensing entity (currently DVD CCA) would grant licenses to, among others, manufacturers of DVD players, DVD drives and related hardware and software. Licensees were granted the right to use the security system on DVD products and agreed to safeguard CSS technology from public disclosure. (Hoy Decl., Paragraph 14; Complt., Paragraphs 34, 56-58).

The CSS Agreement gives licensees the right to use the technology and provides the necessary descrambling technology and "master keys" to do so. The trade secrets are not accessible to unlicensed third parties because they are incorporated in hardware devices -- chips -- or made tamper resistant if distributed in the form of actual software. The trade secret technology cannot be accessed by non-licensees. Each licensee is assigned a set of "master keys" unique to each licensee. When the DVD system was created, approximately 400 such "master keys" were predesignated, to be assigned to licensees, and each DVD disc contains, in a part of the disc not normally read by the player device, a file containing the 400 "master keys." The system will not operate unless the "key" contained in the licensee's decryption software matches one of the keys stored on the DVD disc. (Hoy Decl., Paragraph 15; Complt., Paragraph 35).

The CSS Agreement requires licensees to maintain the confidentiality of certain defined pieces of information, such as the proprietary algorithms and "master keys" and, as such, licensees are subject to a stringent set of rules to maintain confidentiality within the group of licensees. (Hirsch Decl., Paragraph 6; Hoy Decl., Paragraph 16; Complt., Paragraph 36). Among the safeguards taken is the requirement that only those licensees that absolutely need to know a particular algorithm and/or master key are provided with such information. (Hoy Decl., Paragraph 17; Complt., Paragraph37).²

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2 For example, a manufacturer of semiconductor chips for descrambling CSS content in stand-alone DVD players is provided with information necessary for manufacturing such chips but not with information concerning the scrambling process itself or the authentication between DVD drives and the descrambling module used for computer-based implementations. Companies that merely assemble parts and components produced by others may be required to be licensees in order to purchase such parts and components, but these companies are not provided with the CSS trade secrets at issue. (Hoy Decl., Paragraph 17; Complt., Paragraph 37).

The CSS Agreement mandates that licensees provide CSS trade secrets to the minimum number of their employees requiring access to the information, beginning with three employees and increasing only upon notification to the licensor. Licensees who violate these requirements are subject to liquidated damages in the amount of $1 million per violation (with a cap based on profits made from the sale of licensed products). (Hoy Decl., Paragraph 18; Complt., Paragraph 38).

Additionally, licensees implementing authentication and descrambling functions in the software must do so only in a manner that obscures the CSS trade secrets, to frustrate anyone seeking to obtain such proprietary information.³ Failure to abide by these operating restrictions can subject the licensee to injunctions prohibiting the sale of the product in which the failure occurs, through actions brought either by the licensor or by third party beneficiary content owners (motion picture companies that are CSS licensees and have made copyrighted content available on DVD discs encrypted using CSS technology). (Hoy Decl. Paragraph 19; Complt., Paragraph 39).

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3 Specific means of accomplishing this protection requirement are provided to licensees to illustrate the measures to be taken and the level of technical skill that must be employed to defeat such measures.

DVD CCA's predecessor-in-interest began the process of licensing companies to use the technology pursuant to copy protection rules contained in the "procedural specifications" associated with the CSS Agreement. The companies in the DVD business (motion picture, computer, and consumer electronics companies) recognized that the licensing of CSS technology ought to be controlled and administered by the companies in the three industries together and that the costs associated with such critical intellectual property protection should be borne by the hundreds of companies involved in the DVD business. (Hoy Decl., Paragraphs 20-21; Complt., Paragraph 40). Thus, the DVD Copy Control Association, Inc. was formed in December 1998.

In mid-December 1999, DVD CCA's predecessor-in-interest assigned its licensing interests under the CSS Agreement making DVD CCA the sole licensing entity which grants licenses to the CSS technology in the DVD format. Additionally, DVD CCA was given direct rights to enforce the CSS Agreement. (Hoy Decl., Paragraph 24; Complt., Paragraph 44).

3. The CSS Technology Was Misappropriated

On or about October 25, 1999, the source code of a program named DeCSS appeared on an Internet web site operated by Jon Johansen, a Norwegian citizen. (Hirsch Decl., Paragraph 7; Hoy Decl., Paragraph 25). The DeCSS program embodies, uses and/or is a substantial derivation of trade secrets which DVD CCA licenses under the CSS Agreement. The DeCSS program, and links to other sites with the DeCSS program, were removed by Mr. Johansen from the web site after a demand was sent to him by an attorney from Simonsen & Musaeus, a Norwegian law firm retained by the MPA. (Hirsch Decl., Paragraph 9; Hoy Decl., Paragraph 25; Complt., Paragraph 45). On information and belief, the DeCSS program first appeared in the United States on or about October 25, 1999, on a web site operated by defendant Pavolich. (Hoy Decl., Paragraph 26; Complt., Paragraphs 45-46).

This proprietary information was obtained by willfully "hacking" and/or improperly reverse engineering software created by CSS licensee Xing Technology Corporation ("Xing"). Xing's software is and was licensed to users under a license agreement which specifically prohibits reverse engineering. (Hoy Decl., Paragraph 27; Complt., Paragraph 47).

Since the October 25, 1999 appearance of DeCSS, proprietary CSS information been displayed on at least 118 web sites (or by web sites "linking" to other web sites which display the information) in at least 11 states and l l countries throughout the world. Extensive investigative efforts were immediately undertaken by DVD CCA and the MPA's anti-piracy task force to locate web sites which were posting and/or "linking" to other sites posting the trade secrets, and Internet service providers which were hosting such sites. (Hirsch Decl., Paragraphs 3-4, 7-9; H. Shapiro Decl., Paragraphs 3-4; J. Shapiro Decl., Paragraphs 4-8; Hoy Decl., Paragraph30; Turnbull Decl., Paragraphs 4-9; Complt., Paragraph 48). The MPA sent notices to about 66 web sites and Internet service providers demanding that this information be removed immediately. (H. Shapiro Decl., Paragraphs 6-7; J. Shapiro Decl., Paragraph 8; Hoy Decl., Paragraph 30; Complt., Paragraph 48; Hirsch Decl., Paragraphs 7-9). After receiving such notice, approximately 25 of these web sites and Internet service providers voluntarily removed the proprietary information or "links" to the information at issue. (Hoy Decl., Paragraph 30; Complt., Paragraph 48).⁴

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4 On information and belief, all named defendants (with the exception of defendant Hanson) and Does l, 8, 10 through 14, 16, 26, 28, 31, 32, 33, 35, 48 through 54, and 62 through 72 have received notice through the MPA and refused to remove the information at issue. Defendant Hanson and the other Doe defendants who were not previously identified have now received notice of this action through various means. (J. Shapiro Decl. Paragraph 17: Complt., Paragraph 48).

4. The Misappropriation Has Been Willful and Malicious

Defendants knew or should have known when they posted or provided "links" to the DeCSS program on their web sites that it was being made available by virtue of the unauthorized use of trade secrets and that they were misusing trade secrets gained through improper means. This is because the DeCSS program was specifically designed to defeat DVD encryption software, thus allowing users illegally to pirate copyrighted motion pictures on DVDs -- activity which is irreparably harmful to the DVD video format, the motion picture industry, and the hundreds of computer and consumer electronics companies whose businesses rely on the viability of the digital format. (Hoy Decl., Paragraph 29; Turnbull Decl., Paragraph 5; Complt., Paragraph 49). Information posted on Defendants' web sites establishes that they are fully aware that, in posting or "linking" to the DeCSS program, they are wrongfully appropriating trade secrets. For example:

(a) Defendant McLaughlin explains to visitors of his site: "Mark of the scofflaw! Here's my local copy of the CSS decryption software, enjoy[;]"

(b) Defendant Baugh acknowledges that "I may very well be sued.. . [;]"

(c) Doe defendant 14 challenges: "I have the money to go to court. Your call[;]"

(d) In response to the MPA and DVD CCA's anti-piracy efforts, defendants Vogt, Blank and Doe defendants 4, 9, 23, and 37 provide a "Note to the lawyers and other scum . . . It was the DVD consortium that f***up, . . . [;]"

(e) Similarly, defendant Jones explains: "Listen, lawyers, and those you represent: This is none of your concern. The horse has been let out" and mocking the "trained weasels you call lawyers[;]" and

(f) Doe defendant 35 states: "F[_ _ _] da feds! ... "[h]uh? Aren't these files legal? Oh, well, I didn't know that!" (expletive omitted).

(Complt., Paragraph 50; see also Complt., Paragraphs 56-64).

5. The Significance of Protecting the CSS Technology/Trade Secrets

The theft of CSS has had a substantial adverse effect. DVD encryption technology was (and is) critical to the adoption and utilization of the DVD format. Without such copy protection, the motion picture companies would not have allowed their copyrighted motion pictures to be available in this new digital video format. (Hirsch Decl., Paragraphs 5-6; Hoy Decl., Paragrapht 6; Complt., Paragraph 51). Without motion picture content, there would be no viable market for computer DVD drives and DVD players, as well as the related computer chips and software necessary to run these devices. (Hoy Decl., Paragraphs 6, 31; Hirsch Decl., Paragraph 5; Complt., Paragraph 51). Accordingly, if the defendants are permitted to continue to misappropriate CSS trade secrets, the DVD industry will be irreparably harmed, and DVD CCA's very existence will be threatened because its sole business purpose is to be the tri-industry (motion pictures, computers and consumer electronics) licensing entity and administrator of the CSS technology. (Hoy Decl., Paragraph 32).

In addition, the effect of defendants' unlawful activities both on the motion picture industry, centered in California, and the companies which provide the software and hardware to allow consumers to access the digital images, many of which are located not just in California, but in Santa Clara County, is immeasurable. Apart from the substantial resources that the motion picture industry has invested in the adoption of the DVD format, the wholesale copying and distribution of copyrighted motion pictures destroys the industry's ability to protect its most valuable asset -- its copyright in its motion pictures. (Hirsch Decl., Paragraphs 10-11, 13; Hoy Decl., Paragraph 33). There can be no doubt that the primary purpose of the defendants is to encourage wholesale copying and distribution of copyrighted motion pictures. Further, there can be no dispute that all defendants knew or should reasonably have known that the heart of the motion picture industry is located in California. As stated, the unwillingness of the motion picture industry to provide content for DVDs would destroy DVD CCA and the DVD business of hardware and software companies that have developed products to enable consumers to access the digital images contained on DVDs, the licensees of CSS technology. (Hoy Decl., Paragraph 7; Hirsch Decl. Paragraphs 5-6).⁵

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5 Additionally, the "hack" and disclosure of the CSS proprietary information has already had a very serious adverse effect on consumers, in California and elsewhere, in that the introduction of a related product -- DVD audio -- has been delayed. (Hoy Decl., Paragraph 34; Complt., Paragraph 54; Hirsch Decl., Paragraph 12). The major music companies have indicated that they are not prepared to use a "compromised" system to protect their content and have insisted on the creation of a new encryption technology to protect the DVD audio system. The launch of DVD audio products, planned for December 1999, has, thus, been postponed for at least six months while new copy protection technology is developed, agreed upon, and implemented. (Hoy Decl., Paragraph 34; Complt., Paragraph 54).

II. THE LEGAL STANDARD FOR INTERIM INJUNCTIVE RELIEF

The primary purpose of a preliminary injunction is to preserve the status quo until a court can make a final determination on the merits of the action. (See Continental Baking Co. v. Katz (1968) 68 Cal.2d 512, 528 167 Cal. Rptr. 7611). A temporary restraining order ("TRO") is properly granted on ex parte notice in order to maintain the status quo or to prevent irreparable injury pending a hearing on the Application for a preliminary injunction. (Code Civ. Proc., Section 527(c); see also 6 Witkin, Cal. Procedure (4th ed. 1997) Provisional Remedies, Section 286, p. 227).

The test most frequently used by California trial courts in deciding whether to issue a TRO and/or preliminary injunction requires the evaluation of two interrelated factors: (1) the likelihood that the plaintiff will succeed on the merits of its claims at trial; and (2) the harm that plaintiff is likely to suffer if the TRO and/or preliminary injunction does not issue, balanced against the harm that the defendant is likely to suffer if they do issue. (Cohen v. Board of Supervisors (1985) 40 Cal.3d 277, 286 [219 Cal. Rptr. 467]; IT Corp. v. County of Imperial (1983) 35 Cal.3d 63, 69-70 [196 Cal.Rptr. 715]; 6 Witkin, supra, Section 296, pp. 235-236). When addressing these factors, the plaintiff must prove the likelihood that it will suffer immediate and irreparable harm due to the inadequacy of other, legal, remedies. (Triple A Machine Shop v. California (1989) 213 Cal.App.3d 131, 138 [261 Cal. Rptr. 493]).

The Uniform Trade Secrets Act ("UTSA") (Civ. Code, Section 3426 et seq.) specifically provides that "actual or threatened misappropriation [of trade secrets] may be enjoined." (Civ. Code, Section 3426.2). Where injunctive relief is authorized by statute and the statutory conditions for its issuance have been satisfied, irreparable injury need not be shown to obtain injunctive relief. (6 Witkin, supra, Section 298, p. 238; see also IT Corp. v. County of Imperial, supra, 35 Cal.3d 63; Paul v. Wadler (1962) 209 Cal. App. 2d. 615, 625 [26 Cal. Rptr. 341] ["where an injunction is authorized by statute, a violation is good and sufficient cause for its issuance"]).⁶

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6 The Paul court also held that "the same rule should apply to the less drastic relief afforded by temporary restraining order." Paul, 209 Cal.App.2d at 625.

As discussed below, each of these factors strongly militiates in favor of the issuance of the interim injunctive relief sought by DVD CCA.

III. DVD CCA IS LIKELY TO PREVAIL IN THIS ACTION

California has adopted a version of the Uniform Trade Secrets Act ("UTSA") (Civ. Code, Section 3426.1 et seq). The UTSA defines a trade secret as

information, including a formula, pattern, compilation, program, device, method, technique or process that:

(1) Derived independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and

(2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy

(Id., Section 3426.1 (d)). The UTSA further defines "misappropriation" of a trade secret as:

(1) Acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or

(2) Disclosure or use of a trade secret of another without express or implied consent by a person who:

(A) Used improper means to acquire knowledge of the trade secret; or

(B) At the time of disclosure or use, knew or had reason to know that his or her knowledge of the trade secret was:

(i) Derived from or through a person who had utilized improper means to acquire it;

(ii) Acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or

(iii) Derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; . . .

(Id., Section 3426.1 (b)). To prove a misappropriation of trade secrets, plaintiff must prove that a trade secret exists and that its acquisition, disclosure or use by defendants is improper. (See Courtesy Temporary Serv. v. Camancho (1990) 222 Cal.App.3d 1278, 1287-88 [272 Cal.Rptr. 352]).

DVD CCA has demonstrated that it is highly likely to be able to prove the elements of a cause of action for misappropriation of trade secrets under the UTSA.

A. The CSS Technology Is A Trade Secret

1. CSS Trade Secrets Possesses Independent Economic Value

A trade secret must derive "independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use." (Civ. Code, Section 3426.1(d)(1)). By its very nature, CSS derives independent economic value from not being generally known to the public. Indeed, its secrecy is the foundation for the survival of the DVD industry because CSS prevents unauthorized copying and distribution of copyrighted motion pictures. If this technology were to become freely disseminated, the CSS trade secrets would be used, as it has been by the defendants, to create decryption programs that would allow piracy of the motion pictures contained on DVDs.

2. DVD CCA and its Predecessors Took Extraordinary Steps to Maintain the Secrecy of the Proprietary Trade Secrets

As discussed on pp. 2-5 above, the trade secrets at issue are protected by stringent controls including:

a. The CSS Agreement requires licensees to maintain the confidentiality of certain defined pieces of information, such as the algorithms and "master keys" and, as such, licensees are subject to a stringent set of rules to maintain confidentiality. (See MAI Systems Corp. v. Peak Computer, Inc. (9th Cir. 1993) 991 F.2d 51 1, 521 [applying California UTSA; plaintiff took reasonable steps to ensure secrecy when it required those with access to proprietary inforrnation to sign confidentiality agreements]).⁷

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7 Non-California cases are appended in a separate exhibit filed herewith.

b. Only those licensees that absolutely need to know a particular algorithm and/or master key are provided with such information.

c. The CSS Agreement mandates that licensees only provide CSS trade secrets to the absolute minimum number of its employees requiring access to the information.

d. Licensees implementing authentication and descrambling functions in software must do so in a manner that obscures the CSS trade secrets. (Hoy Decl., Paragraphs 15-19; Complt., Paragraphs 36-39).

B. Defendants Have Misappropriated CSS Trade Secret Information

The Content Scramble System is clearly protectable as a trade secret under California law. Defendants have misappropriated this information and are improperly using it.

Defendants knew or should have known when they posted or provided "links" to the DeCSS program on their web sites that it was available by virtue of the unauthorized use of trade secrets and that they were misusing trade secrets gained through improper means. (Hoy Decl., Paragraph 29). Indeed, the DeCSS program has no use other than to defeat DVD encryption software and allow users illegally to pirate the copyrighted motion pictures contained on DVD videos. As established above, the defendants' knowledge of the illicit nature of their conduct is demonstrated by their own comments posted on their web sites. (Complt.Paragraph 50; see also Complt., Paragraphs 56-64). In fact, the only reason defendants posted or linked to other sites posting CSS trade secrets was to enable others to take this misappropriated information and use it for the sole purpose of making unlawful copies of copyrighted motion pictures contained on DVD videos.

IV. DVD CCA IS SUFFERING AND WILL CONTINUE TO SUFFER lMMEDIATE AND IRREPARABLE HARM UNLESS A TEMPORARY RESTRAINING ORDER AND PRELIMINARY INJUNCTION ARE ISSUED

Defendants' use of the trade secrets which DVD CCA licenses is, by itself, sufficient to establish the requisite level of harm to justify the grant of a preliminary injunction. (See Paul v. Wadler, supra, 209 Cal.App.2d 615, 625). Their dissemination of the encryptiondecryption technology also threatens the very existence of DVD CCA, the sole licensor of the trade secrets defendants are stealing. (Hoy Decl., Paragraph 32). Motion picture studios agreed to provide their copyrighted product only on the assurance that it would not be copied. (Hirsch Decl., Paragraph 56; Hoy Decl., Paragraphs 6, 8). If those assurances are compromised, the DVD industry will be threatened with irreparable harm, including the motion picture industry (headquartered in California) and the more than 400 licensees (73 of which are located in California) who have invested millions of dollars and employ thousands of people in this State to develop, manufacture and distribute the hardware and software necessary for consumers to access the digital images contained on DVDs. (Hoy Decl., Paragraphs 31-33). The theft of CSS allows infringement of motion picture copyrights and, if not enjoined, that will continue. (Hirsch Decl. Paragraph 13). That infringement is presumed to cause irreparable injury. (See Triad Systems Corp. v. Southeastern Express Co. (9^th Cir. 1995) 64 F. 3d 1330, 1335 cert. denied 5l6 U.S. 1145 (copyright infringement action, showing of reasonable likelihood of success on the merits raises presumption of irreparable harm).

V. ALL DEFENDANTS ARE SUBJECT TO THE JURISDICTION OF THIS COURT

The defendants in this action reside in various locations, including California. This court has personal jurisdiction over all of them.

The defendants residing in California are subject to the court's jurisdiction because they are domiciled in this state. (2 Witkin, Cal. Procedure (4th ed. 1997) Jurisdiction, Section 129, p. 671.) The other defendants, while not residing in California, have nonetheless established contacts with this forum by taking actions contemplated to cause severe injury in California. First, defendants have misappropriated intellectual property rights solely licensed by DVD CCA, which has its principal place of business in California. Second, defendants have injured the motion picture industry in California, by posting material which allows copying of its copyrighted motion pictures on interactive web sites available to all California Internet users. Third, the impact of defendants' illegal activities threatens the economic welfare of the more than 400 CSS licensees -- the companies that make the hardware and software that enables consumers to view digital images on DVDs. Of the 73 licensees which are located in California, 42 are located in Santa Clara County and an additional 17 are in other Bay Area locations. As discussed below, these minimum contacts are sufficient to establish jurisdiction over the out-of-state defendants under the California long-arm statute.

Specific jurisdiction, which is relevant in this action, applies when the plaintiff's cause of action is related to the defendant's contact with the forum. (See Vons Companies, Inc. v. Seabest Foods, Inc. (1996) 14 Cal.4th 434, 446-447 [58 Cal.Rptr.2d 899] cert. denied 522 U.S. 808).⁸ California courts apply a three-part test to determine whether specific jurisdiction exists. First, the defendant must have purposefully availed himself or herself of the forum. Second, the controversy must arise from the defendant's contacts with the forum. Finally, once it has been decided that a defendant purposefully established minimum contacts with the forum, the court will consider these contacts in light of other factors to assure that the exercise of jurisdiction would comport with "fair play and substantial justice." (Id.) The defendants satisfy all three prongs of the specific jurisdiction test.

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8 The limits of the California long-arm statute are co-extensive with the limits of due process. (Cal. Code Civ. Proc. Section 410.10). The Constitution requires a defendant to have minimum contacts with a state such that the assertion of jurisdiction does not violate "traditional notions of fair play and substantial justice." (International Shoe Co. v. Washington (1945) 326 U.S. 310, 316).

A. Defendants Purposefully Availed Themselves of the Privileges of This State

The defendants satisfy the purposeful availment requirement of specific jurisdiction. California courts have held that the "purposeful availment" requirement may be satisfied if a defendant's conduct causes harmful effects within the state. See Quattrone v. Superior Court (1975) 44 Cal.App.3d 296 [118 Cal.Rptr. 548]). Under the "effects test," personal jurisdiction may be based upon (1) intentional actions (2) expressly aimed at the forum state (3) causing harm which is suffered -- and which the defendant knows or reasonably should have known is likely to be suffered -- in the forum state. (Panavision International, L.P. v. Toeppen (9th Cir. 1998) 141 F.3d 1316, 1321 [applying California law] citing Calder v. Jones (1984) 465 U.S. 783).⁹

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9 The effects test applicable in tort cases is properly applied in a cause of action arising under the Uniform Trade Secrets Act. Prior to the enactment of the California UTSA in 1984, a cause of action for misappropriation of trade secrets was a common law tort. (See Vacco Industries, Inc. v. Van Den Berg (1992) 5 Cal.App.4th 34 [6 Cal.Rptr.2d 602]). See also Panavision International, L.P. v. Toeppen (9th Cir. 1998) 141 F.3d 1316, 1321, finding a claim for trademark infringement "akin to a tort case" and applying the effects test where the defendant used the plaintiff's name in a web site domain name.

In this case, defendants intentionally launched a direct attack on the plaintiff and on three of California's largest and most important industries -- the motion picture industry, the computer industry and the consumer electronics industry -- by posting the proprietary technology on interactive web sites, thereby enabling countless Internet users to make pirated copies of DVD movies. That these actions were directly aimed at the motion picture industry is self-evident from the fact that the only ,surpose of someone disclosing the CSS trade secrets is to make improper copies of copyrighted motion pictures. (Hoy Decl., Paragraph 29). It is further evidenced by the defendants' statements made on various web sites at which the harmful material was posted. (See discussion supra at p.6; Complt., Paragraph 50, Paragraphs 56-64). This conduct also threatens the very existence of DVD CCA, which has its principle place of business in Morgan Hill, California and is the sole licensor of the intellectual property misalvpropriated by the defendants, as well as the more than 400 CSS licensees, and is causing serious injury to the motion picture, computer and consumer electronics industries in California. (Hirsch Decl., Paragraph 12; Hoy Decl., Paragraphs 31 -33).

The defendants all knew or reasonably should have known that posting the DVD decryption program on their web sites would cause significant harm in California. (See Hoy Decl ., Paragraph 33; Panavision International L.P. v. Toeppen, supra, 141 F.3d 1316, 1321 [defendant knew the brunt of harm would be in California because, among other things, "the heart of the theatrical motion picture and television industry is located there"]). Indeed, it would be unreasonable for any defendant to claim it did not know that the heart of the motion picture industry was in California. Further, most of the defendants were further informed that injury was being felt in California when the MPA sent letters to defendants demanding that they remove the trade secrets from their web sites. Nonetheless, 41 of the 66 web sites contacted by the MPA refused to do so. (Hirsch Decl., Paragraph 8; Turnbull Decl., Paragraph 8; Hoy Decl., Paragraph 30). It is self-evident that all defendants intended to and did cause harm in California. Consequently, they purposefully availed themselves of the privilege of conducting activities in this state. (See MCH Records Inc. v. Charly Records LTD (9th Cir. 1997) 108 F.3d 338 [1997 WL 76173] cert. denied 522 U.S. 822 [finding jurisdiction over Panamanian licensor and its Danish licensee under the effects test because effect of their trademark infringement was felt by California plaintiffl).

The defendants also purposefully availed themselves of this state's privileges by posting the trade secrets on interactive web sites, which allows Internet users to download the program, and in many cases, communicate with the web site operator. Courts in several jurisdictions, including California, have held that interactive web sites establish a basis for personal jurisdiction. (See 3DO Company v. Poptop Software (N.D. Cal. 1998) 1998 U.S. Dist. LEXIS 21281 [finding jurisdiction over a Missouri corporation where "the defendants have posted interactive, not passive, web sites which encourage and facilitate users in California and elsewhere to download allegedly infringing copies of the [plaintiff's computer game]"]).¹⁰

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10 See also Stomp, Inc. v. Neato, LLC (C.D. Cal. 1999) 61 F.Supp.2d 1074 ljurisdiction based on web site allowing Internet users to purchase products]; Maritz Inc. v. Cybergold, Inc. (E.D. Mo. 1996) 947 F.Supp. 1328 [jurisdiction where web site forwards advertisements to users after they submit inforrnation through the site].

B. Plaintiff's Claim Arises from the Defendants' Forum-Related Activity

The misappropriation of CSS trade secrets occurred when the defendants posted material on their web sites which they knew or should have knew to be improperly misappropriated by "hackers." (Hoy Decl., Paragraphs 28-29). The postings are the direct cause of the injury suffered in California and also made the misappropriated material available to all California Internet users through interactive web sites. Accordingly, specific jurisdiction is appropriate here.

C. The Exercise of Jurisdiction Comports with Fair Play and Substantial Justice

It is most certainly fair play for the defendants to be subject to the jurisdiction of this Court. California maintains a "strong interest in providing an effective means of redress for its residents tortuously injured by commercial misappropriation." (MCA Records Inc. v. Charly Records LTD, supra, 108 F.3d 338 [1997 WL 76173, *6]). Defendants who misappropriate valuable trade secrets and inflict injury on major interests in this State cannot be left untouchable simply because they chose to conduct their illegal activities on the Internet. The Internet is a useful and extraordinary communication tool, yet it will become a haven for intellectual property thieves if states are not able to exercise jurisdiction to redress injuries caused by web site activity directed at the State. It is only fair that defendants who deliberately chose to injure interests in this state be required to answer for their actions.

CONCLUSION

For the reasons stated in Plaintiff's Application for a Temporary Restraining Order and Order to Show Cause, the supporting Declarations, this Memorandum and the Complaint, the Court should grant Plaintiff's application.

Dated: December 28, 1999
Menlo Park, California

Respectfully submitted,

WEIL GOTSHAL & MANGES LLP
JARED B. BOBROW (State Bar No. 133712)

By: [Signature]
Jared B. Bobrow

Attorneys for Plaintiff
DVD COPY CONTROL ASSOCIATION, INC.

OF COUNSEL:

WEIL, GOTSHAL & MANGES LLP
JEFFREY L. KESSLER*
ROBERT G. SUGARMAN*
EDWARD J. BURKE
JONATHAN S. SHAPIRO*

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* Pro Hac Vice application being submitted to the Court.

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