10th Circuit Reverses $321,663 Restitution Order Against Software Counterfeiter
The 10th Circuit Court of Appeals reversed a $321,663 restitution award to Microsoft April 17 after concluding that the government had failed to prove that Microsoft would have sold genuine software to the defendant's customer if the customer had not purchased the defendant's counterfeit software. United States v. Hudson, 2007 WL 1128895 (10th Cir. Apr. 17, 2007). The restitution had been awarded to Microsoft after the defendant pled guilty to the federal crimes of conspiracy to infringe a copyright in violation of 17 U.S.C. § 506(a)(1) and 18 U.S.C. §§ 371 and 2319(b)(1). The defendant's one-year prison sentence was not challenged in the appeal.
Hudson and his co-conspirators had sent faxes to various businesses offering Microsoft software at large discounts. In response to this fax, a Maryland company, Builder’s FirstSource (“BFS”), ordered 537 copies of Microsoft Office 2000 Professional Edition for a price of $85,383. Almost immediately after receiving the software, BFS grew suspicious that it was
counterfeit and contacted Microsoft. After Microsoft confirmed that the software was indeed counterfeit, BFS turned it over to the government. It never paid the $85,383 purchase price to Hudson or his cohorts.
The presentence report (“PSR”) prepared after Hudson entered his guilty plea calculated that the estimated retail price for the counterfeit software was $599.99 per copy and that Hudson was therefore “responsible for a loss of $322,194.63 for guideline calculation purposes and restitution.” The PSR further stated, without providing any specific factual support for the number, that Microsoft had submitted a statement claiming that it was “owed restitution in the amount of $321,663.00.” The trial court used this claimed loss as the basis for its $321,663 restitution order.
On appeal, Hudson argued that the district court should not have ordered restitution because Microsoft did not actually suffer any losses from his delivery of the counterfeit software to BFS. The government argued that Microsoft lost the sale that it would have made to BFS if Hudson had not sold counterfeit Microsoft products to it.
The court of appeals agreed with the Hudson. It stated that it was “very skeptical of the implicit suggestion that BFS’s agreement to purchase 537 copies of the software for a total price of less than $86,000 proves that BFS would have agreed to purchase the same number of copies from Microsoft for more than $321,000.” Additionally, because BFS almost immediately turned the counterfeit software over to the government without paying for it, the court of appeals concluded that Hudson had not prevented Microsoft from selling genuine software to BFS:
“While we can conceive of instances where the distribution of a counterfeit good to a consumer for even a limited period of time could deprive the copyright owner of a potential sale, this case involves professional office software, all copies of which were turned over to the government within fifteen days of receipt and without having been used. There is no reason to believe that the purchaser's demand for this software would have changed within those fifteen days, and thus there is no reason to believe that any sales were diverted from Microsoft by Defendant's actions.”
Stating that it was “unable to see how the order of restitution can be viewed as anything but a windfall for Microsoft,” and that “the government failed to prove that Microsoft suffered any actual loss,” the court held that “no restitution should have been ordered.”