Court Opinion

ID: 3037323
Source: CourtListenerOpinion
Date Created: 2015-10-13 22:56:11.504257+00
Date Added: 2024-06-11T11:48:45.803781
License: Public Domain

FOR PUBLICATION
 UNITED STATES COURT OF APPEALS
      FOR THE NINTH CIRCUIT

WALL DATA INCORPORATED,               
                Plaintiff-Appellee,
               v.                           No. 03-56559
LOS ANGELES COUNTY SHERIFF’S                 D.C. No.
                                          CV-02-00301-RGK
DEPARTMENT, a division of the
COUNTY OF LOS ANGELES;                       OPINION
COUNTY OF LOS ANGELES,
           Defendants-Appellants.
                                      
       Appeal from the United States District Court
          for the Central District of California
       R. Gary Klausner, District Judge, Presiding

                   Argued and Submitted
            April 7, 2005—Pasadena, California

                    Filed May 17, 2006

 Before: Mary M. Schroeder, Chief Judge, Harry Pregerson,
           and Stephen S. Trott, Circuit Judges.

                Opinion by Judge Pregerson

                           5361
               WALL DATA v. LOS ANGELES COUNTY                 5365

                           COUNSEL

Dennis G. Martin, Blakely, Sofoloff, Taylor & Zafman, Los
Angeles, California, for the defendants-appellants.

Tod L. Gamlen, Baker & McKenzie, Palo Alto, California, for
the plaintiff-appellee.

                            OPINION

PREGERSON, Circuit Judge:

   The Los Angeles County Sheriff’s Department purchased
3,663 licenses to Wall Data’s computer software,1 but

  1
   We use the terms “computer software,” “software application,” and
“computer program” interchangeably.
5366             WALL DATA v. LOS ANGELES COUNTY
installed the software onto 6,007 computers. We are asked to
determine whether the Sheriff’s Department’s conduct consti-
tuted copyright infringement. The wrinkle in this otherwise
smooth question is that, although the software was installed
onto 6,007 computers, the computers were configured such
that the total number of workstations able to access the
installed software did not exceed the total number of licenses
the Sheriff’s Department purchased. We have jurisdiction
under 28 U.S.C. § 1291 and hold that such copying consti-
tutes copyright infringement despite the Sheriff’s Depart-
ment’s configuration. We therefore affirm the district court.

I.   FACTS AND PROCEDURAL HISTORY

   Plaintiff-Appellee Wall Data Incorporated develops, mar-
kets, and sells a line of copyrighted computer terminal emula-
tion software products including RUMBA Office and
RUMBA Mainframe. Both RUMBA products allow personal
computers that use one operating system to access data stored
on computers that use a different operating system. RUMBA
Office is the more expensive and more powerful computer
program.

   Between December 1996 and February 1999, the
Appellants-Defendants, the Los Angeles County Sheriff’s
Department and the County of Los Angeles (collectively,
“Sheriff’s Department”), purchased both of Wall Data’s
RUMBA software products through an approved vendor. In
December 1996, the Sheriff’s Department purchased eight
“units” of Wall Data’s RUMBA Office program. Each of the
eight units contained a RUMBA Office CD-ROM (compact
disc read-only-memory) and a volume license booklet. Each
volume license booklet granted the Sheriff’s Department 250
licenses to RUMBA Office. In total, the Sheriff’s Department
paid $175,220 for 2,000 RUMBA Office licenses, at a
reduced price of $87.61 per license.2
   2
     The Sheriff’s Department argues that it bought 2,000 copies of the soft-
ware, while Wall Data claims that the Sheriff’s Department bought 2,000
licenses to the software. As discussed below, we conclude that the Sher-
iff’s Department bought licenses to, not copies of, Wall Data’s software.
              WALL DATA v. LOS ANGELES COUNTY             5367
   Between November 1997 and February 1999, the Sheriff’s
Department purchased 1,628 licenses to the lower-cost
RUMBA Mainframe program. In all, the Sheriff’s Depart-
ment purchased 2,035 licenses to RUMBA Office and 1,628
licenses to RUMBA Mainframe, for a total of 3,663 licenses.

   At first, the Sheriff’s Department installed RUMBA Office
manually, one computer at a time, onto approximately 750
computers in the Sheriff’s Department’s new detention facil-
ity — the Twin Towers Correctional Facility (“Twin Tow-
ers”). The Sheriff’s Department soon realized that this process
was too time consuming and would delay opening the Twin
Towers. In addition, it was not clear where those employees
who would need to use RUMBA programs would be assigned
to work. To speed up the process of installation and to ensure
that employees would be able to use the RUMBA software
regardless of where they were assigned, the Sheriff’s Depart-
ment decided to install a “baseline” of software applications
onto the hard drives of the remaining computers in its new
detention facility. This was done by simultaneously copying
the entire contents of a single “master” hard drive containing
the baseline of software applications onto the hard drives of
other computers. This method is known as “hard disk imag-
ing,” and saved the Sheriff’s Department from having to
install the software manually onto each computer.

   By the time the Sheriff’s Department finished hard disk
imaging in mid-2001, RUMBA Office was loaded onto 6,007
computers in the Twin Towers, far in excess of the 3,663
RUMBA licenses the Sheriff’s Department had purchased.
Although RUMBA Office was installed onto nearly all of the
computers in the Twin Towers, the Sheriff’s Department con-
figured those computers using a password-based security sys-
tem such that the number of users who could access RUMBA
Office was limited. The Sheriff’s Department claims that, at
5368            WALL DATA v. LOS ANGELES COUNTY
all times, the number of those who could access the software
was limited to the number of licenses it had.3

   Shortly thereafter, Wall Data discovered that the number of
computers in the Twin Towers that had RUMBA Office
installed exceeded the number of licenses held by the Sher-
iff’s Department. As a result, Wall Data claimed that the
Sheriff’s Department violated the terms of its licenses because
the Sheriff’s Department was licensed, at most, to install
RUMBA software onto only 3,663 computers.

   The parties tried unsuccessfully to settle the dispute. After
settlement efforts failed, the Sheriff’s Department removed
RUMBA Office from the computers in the Twin Towers for
which it did not have a license. The Sheriff’s Department
installed the less expensive RUMBA Mainframe program
onto many computers to replace the copies of RUMBA Office
that were removed.

   On January 11, 2002, Wall Data filed suit against the Sher-
iff’s Department. Although Wall Data raised several claims in
its complaint, the only claim that went to trial (and the only
claim at issue here) was copyright infringement. Wall Data
alleged that the Sheriff’s Department “over-installed”
RUMBA Office onto computers in the Twin Towers and vio-
   3
     Specifically, a Sheriff’s Department computer network administrator
would limit user access to the RUMBA Office program by assigning “log-
ical units” to each computer workstation. These logical units were unique
identification numbers that the workstation electronically presented to the
host computer. The host computer would then determine whether the elec-
tronic identification number matched one of the workstations authorized
to communicate with the host computer through the RUMBA software. If
the workstation was not on the list of assigned logical units, the installed
copy of the RUMBA software would remain installed, but unused, in the
hard drive of that workstation. Hard drive imaging ensured that employees
could access RUMBA software on any workstation in the facility, so long
as that workstation had been assigned a logical unit by the network admin-
istrator.
                  WALL DATA v. LOS ANGELES COUNTY                      5369
lated the terms of Wall Data’s shrink-wrap license,4 click-
through license,5 and volume license booklets.

   In response, the Sheriff’s Department contended that it had
not violated the terms of Wall Data’s licenses and that it was
entitled to the following affirmative defenses: (1) a “fair use”
defense under 17 U.S.C. § 107; and (2) an “essential step”
defense under 17 U.S.C. § 117(a)(1). As described above, the
Sheriff’s Department argued that, even though it had installed
RUMBA Office onto 6,007 workstations, it had configured
the software so that the software could only be accessed by
3,663 workstations at a time. The Sheriff’s Department
argued that this constituted a fair use under 17 U.S.C. § 107
because the number of “useable” copies of the software did
  4
     A shrink-wrap license is a form on the packing or on the outside of the
CD-ROM containing the software which states that by opening the pack-
aging or CD-ROM wrapper, the user agrees to the terms of the license.
See, e.g., Specht v. Netscape Commc’n Corp., 306 F.3d 17, 22 n.4 (2d Cir.
2002).
   5
     A “click-through license” is a form embedded in computer software
which requires the person initially installing the software onto a computer
to affirmatively click a box or an “accept” button indicating that the user
accepts the terms of the license in order to complete the software installa-
tion and to use the software after it is installed. See, e.g., SoftMan Prods.
Co. v. Adobe Sys. Inc., 171 F. Supp. 2d 1075, 1080 (C.D. Cal. 2001). The
grant clause of the standard RUMBA click-through license at the time of
the 1996 purchase stated that:
      Wall Data . . . grants you (“You”), the end user, a non-exclusive
      license to use the enclosed software program . . . on a single Des-
      ignated Computer for which the software has been activated. A
      “Designated Computer” is either (i) a stand-alone workstation, or
      (ii) a networked workstation which does not permit the Software
      to be shared with other networked workstations. You may not use
      the Software in any other multiple computer or multiple user
      arrangement. You may not use the Software other than on a Des-
      ignated Computer, except that You may transfer the Software to
      another Designated Computer and reactivate it for use with such
      other Designated Computer not more than once every 30 days,
      provided that the Software is removed from the Designated Com-
      puter from which it is transferred.
5370          WALL DATA v. LOS ANGELES COUNTY
not exceed the number of licenses held by the Sheriff’s
Department. The Sheriff’s Department also argued that the
copying was an “essential step” under 17 U.S.C. § 117(a)(l),
because the hard drive imaging process was a necessary step
of installation. Based on these arguments and affirmative
defenses, both parties moved for summary judgment.

   The district court made its initial ruling on the parties’ sum-
mary judgment motions on May 2, 2003, and concluded that
neither party was entitled to summary judgment. On May 15,
2003, both sides filed numerous motions in limine. The dis-
trict court ruled on these motions on June 17, 2003; it
excluded evidence offered by the Sheriff’s Department on its
fair use defense, and other evidence that the district court
ruled irrelevant, time consuming, or confusing to the jury. On
the same day, the district court reconsidered its earlier ruling
on summary judgment, and granted Wall Data’s motion for
summary judgment on the basis that the Sheriff’s Department
was not entitled to a fair use defense.

   Following these rulings on the parties’ motions in limine,
a four-day jury trial took place. The only issues remaining for
trial were whether the Sheriff’s Department had infringed on
Wall Data’s copyright and whether any defense barred Wall
Data’s copyright infringement claim. At the end of trial, the
jury returned a general verdict finding the Sheriff’s Depart-
ment liable for copyright infringement and awarding Wall
Data $210,000 in damages. Subsequently, Wall Data filed a
motion under 17 U.S.C. § 505 requesting over $1.5 million in
attorneys’ fees and nearly $150,000 in costs. The district court
granted Wall Data $516,271 in attorneys’ fees and approxi-
mately $38,000 in costs. After the district court entered final
judgment against the Sheriff’s Department, the Sheriff’s
Department timely appealed.

   The Sheriff’s Department now challenges (1) the district
court’s order granting summary judgment against its § 107
fair use defense; (2) the district court’s evidentiary rulings on
              WALL DATA v. LOS ANGELES COUNTY               5371
motions in limine including those affecting its § 107 fair use
defense and § 117 essential step defense; (3) the district
court’s jury instructions regarding, inter alia, the Sheriff’s
Department’s § 117 essential step defense; and (4) the district
court’s order granting Wall Data costs and attorneys’ fees.

II.    ANALYSIS

   The 1976 Copyright Act defines a “computer program” as
“a set of statements or instructions to be used directly or indi-
rectly in a computer in order to bring about a certain result.”
17 U.S.C. § 101. We have long held that a computer program
is copyrightable as a “tangible medium of expression.” Apple
Computer, Inc. v. Formula Int’l, Inc., 725 F.2d 521, 524-25
(9th Cir. 1984).

   As the owner of a copyright, Wall Data has exclusive rights
in its copyrighted work. See 17 U.S.C. § 106. Exemptions,
compulsory licenses, and defenses found in the Copyright Act
narrow Wall Data’s rights as a copyright owner. See id. at
§§ 107-122. Here, the Sheriff’s Department claims that two
defenses found in the Copyright Act apply: the § 107 fair use
defense and the § 117 essential step defense. As discussed
below, we hold that neither of these defenses save the Sher-
iff’s Department from liability to Wall Data for copyright
infringement, and we affirm the district court in full.

  A.    The Sheriff’s Department Is Not Entitled to a § 107
        Fair Use Defense

   For more than a century, courts have excused certain other-
wise infringing uses of copyrighted works under the fair use
doctrine. See Folsom v. Marsh, 9 F. Cas. 342 (C.C.D. Mass.
1841); Horace G. Ball, The Law of Copyright and Literary
Property 260 (1944). The Copyright Act codified the fair use
defense and identified six examples of fair uses: “criticism,
comment, news reporting, teaching (including multiple copies
for classroom use), scholarship, or research.” 17 U.S.C. § 107.
5372          WALL DATA v. LOS ANGELES COUNTY
The fair use defense buttresses the basic goal of copyright
law: to put copyrighted works to their most beneficial use so
that “the public good fully coincides . . . with the claims of
individuals.” The Federalist No. 43, at 267 (J. Madison) (New
American Library ed. 1961) (1788); see also Sony Corp. of
Am. v. Universal City Studios, Inc., 464 U.S. 417, 480 n.33
(1984) (“[W]e must take care to guard against two extremes
equally prejudicial; the one, that men of ability, who have
employed their time for the service of the community, may
not be deprived of their just merits, and the reward of their
ingenuity and labour; the other, that the world may not be
deprived of improvements, nor the progress of the arts be
retarded.” (quoting Sayre v. Moore, 1 East 361 n.(b), 102 Eng.
Rep. 139, 140 n.(b) (K.B. 1785)); Mattel, Inc. v. Walking
Mountain Prod., 353 F.3d 792, 799 (9th Cir. 2003) (“At its
core, the Act seeks to promote the progress of science and art
by protecting artistic and scientific works while encouraging
the development and evolution of new works.”); Dr. Seuss
Enters., L.P. v. Penguin Books USA, Inc., 109 F.3d 1394,
1399 (9th Cir. 1997) (holding that fair use “permits courts to
avoid rigid application of the copyright statute when, on occa-
sion, it would stifle the very creativity which that law is
designed to foster”) (citing Iowa State Univ. Research
Found., Inc. v. Am. Broad. Cos., 621 F.2d 57, 60 (2d Cir.
1980)).

   In this case, the district court granted summary judgment
against the Sheriff’s Department on its fair use defense. We
review de novo the district court’s grant of summary judg-
ment. See Smith v. Jackson, 84 F.3d 1213, 1218 (9th Cir.
1996). We also review de novo the district court’s finding of
fair use under the Copyright Act, a mixed question of law and
fact. See Mattel, 353 F.3d at 799.

    1.   The Four Fair Use Factors

   To determine whether the Sheriff’s Department’s use was
fair, we must balance four factors. See id. at 800. These fac-
              WALL DATA v. LOS ANGELES COUNTY               5373
tors are: (1) the purpose and character of the use, including
whether such use is of a commercial nature or is for nonprofit
educational purposes; (2) the nature of the copyrighted work;
(3) the amount and substantiality of the portion used in rela-
tion to the copyrighted work as a whole; and (4) the effect of
the use upon the potential market for or value of the copy-
righted work. See Dr. Seuss, 109 F.3d at 1399-1404.

   Not all of the four factors must favor the Sheriff’s Depart-
ment. See Sega Enters. Ltd. v. Accolade, Inc., 977 F.2d 1510,
1522 (9th Cir. 1992). As we balance these factors, we bear in
mind that fair use is appropriate where a “reasonable copy-
right owner” would have consented to the use, i.e., where the
“custom or public policy” at the time would have defined the
use as reasonable. Subcomm. on Patents, Trademarks &
Copyrights of the Sen. Comm. on the Judiciary, 86th Cong.,
2d Sess., Study No. 14, Fair Use of Copyrighted Works 15
(Latman) (Comm. Print 1960).

    2.   Balancing of the Four Fair Use Factors

   The Sheriff’s Department claims that it is entitled to a fair
use defense, because it has done nothing more than apply
technology to make the broadest authorized use of its licenses.
We are mindful that fair use is a tool for adapting copyright
law to brisk technological advances and for tempering the
over-technical application of copyright law. Nonetheless, in
re-weighing the four fair use factors on appeal, “in light of the
purposes of copyright,” Campbell v. Acuff-Rose Music, Inc.,
510 U.S. 569, 578 (1994), we conclude that the Sheriff’s
Department is not entitled to the fair use defense. See Los
Angeles News Serv. v. CBS Broad., Inc., 305 F.3d 924, 942,
as amended, 313 F.3d 1093 (9th Cir. 2002) (“As fair use is
a mixed question of fact and law, so long as the record is ‘suf-
ficient to evaluate each of the statutory factors,’ we may
reweigh on appeal the inferences to be drawn from that
record.”) (quoting Harper & Row, Inc. v. Nation Enters., 471
U.S. 539, 560 (1985)).
5374          WALL DATA v. LOS ANGELES COUNTY
       a.   First Fair Use Factor: Purpose and Character
            of the Allegedly Infringing Use

  [1] We first consider the nature of the work: whether the
new work is transformative or simply supplants the original
work, and whether the work is commercial in nature. See
Campbell, 510 U.S. at 579.

   [2] Of primary concern is whether the Sheriff’s Depart-
ment’s use was transformative; the more “transformative the
new work, the less will be the significance of the other fac-
tors.” Id. A use is considered transformative only where a
defendant changes a plaintiff’s copyrighted work or uses the
plaintiff’s copyrighted work in a different context such that
the plaintiff’s work is transformed into a new creation. See,
e.g., id. at 578-79. The Sheriff’s Department created exact
copies of RUMBA’s software. It then put those copies to the
identical purpose as the original software. Such a use cannot
be considered transformative. See Kelly v. Arriba Soft Corp.,
336 F.3d 811, 819 (9th Cir. 2003) (finding that reproducing
music CDs in computer MP3 format is not a transformative
use because the resulting use of the copyrighted work was the
same as the original use, i.e., entertainment). In cases where
“ ‘use is for the same intrinsic purpose as [the copyright hold-
er’s] . . . such use seriously weakens a claimed fair use.’ ”
Worldwide Church of God v. Philadelphia Church of God,
Inc., 227 F.3d 1110, 1117 (9th Cir. 2000) (quoting Weissman
v. Freeman, 868 F.2d 1313, 1324 (2d Cir. 1989)).

   [3] Next, the Sheriff’s Department’s use of hard drive
imaging to copy RUMBA Office did not promote the
advancement of knowledge and the arts — goals that copy-
right intends to secure. “[C]opyright law ultimately serves the
purpose of enriching the general public through access to cre-
ative works,” Fogerty v. Fantasy, Inc., 510 U.S. 517, 527
(1994). But the Sheriff’s Department did not “provide the
marketplace with new creative works,” nor was there any
advancement of public knowledge in this case. Triad Sys.
              WALL DATA v. LOS ANGELES COUNTY              5375
Corp. v. Southeastern Express Co., 64 F.3d 1330, 1336 (9th
Cir. 1995). Thus, allowing such a “fair use” would not further
the ultimate goals of copyright law.

   [4] Finally, the Sheriff’s Department use was commercial
in nature. The Sheriff’s Department alleges that its use was
“commercially insignificant” because not all of the copies of
Wall Data’s computer software were actually used, and
because the Sheriff’s Department is a government agency that
does not compete with Wall Data. We disagree. As we
explained in Worldwide Church of God, “repeated and
exploitative copying of copyrighted works, even if the copies
are not offered for sale, may constitute a commercial use.”
227 F.3d at 1118. A commercial use “is demonstrated by a
showing that repeated and exploitative unauthorized copies of
copyrighted works were made to save the expense of purchas-
ing authorized copies.” A&M Records, Inc. v. Napster, Inc.,
239 F.3d 1004, 1015 (9th Cir. 2001); see also Worldwide
Church of God, 227 F.3d at 1118 (concluding that a user is
“commercial” where the infringer profited from its infringe-
ment because “it gained an ‘advantage’ or ‘benefit’ from its
distribution and use of [the plaintiff’s product] without having
to account to the copyright holder”).

   [5] The terms of Wall Data’s RUMBA license clearly
restricted the Sheriff’s Department’s use to a “single desig-
nated computer” and prohibited the Sheriff’s Department
from using “the Software in any other multiple computer or
multiple user arrangement.” Despite this condition, the Sher-
iff’s Department loaded an entire suite of software, including
RUMBA Office, onto nearly all of the computers in the Twin
Towers. By using hard drive imaging, the Sheriff’s Depart-
ment saved man-hours and eliminated possible errors associ-
ated with separately installing the individual software
packages onto each computer in the Twin Tower facility.
Hard drive imaging also ensured that those users who needed
to use RUMBA would be able to access the software at what-
ever computer they were assigned to work. Such flexibility
5376             WALL DATA v. LOS ANGELES COUNTY
could only have been achieved by purchasing licenses for
each of the computers on which the software was loaded, or
by negotiating with Wall Data for a less restrictive license.
Accordingly, we conclude that “the purpose and character” of
the Sheriff’s Department’s use was commercial, because the
copies “were made to save the expense of purchasing autho-
rized copies,” Napster, 239 F.3d at 1015, or at least the
expense of purchasing a more flexible license. Thus, the dis-
trict court did not err when it decided that the Sheriff’s
Department’s use was not “for a legitimate, essentially non-
exploitative purpose,” and that the commercial aspect of the
Sheriff’s Department’s use was not “of minimal significance.”
Sega, 977 F.2d at 1522-23.6

   [6] The Sheriff’s Department’s installation of the RUMBA
Office software onto nearly all of its computers in the Twin
Towers was not transformative, did not promote an advance-
ment of the arts, and was commercial in nature. The first fac-
tor therefore weighs against a finding of fair use.

        b.    Second Fair Use Factor: Nature of the
              Copyrighted Work

   [7] In analyzing the second fair use factor, we look at the
nature of the copyrighted work, creative works being “ ‘closer
to the core of intended copyright protection’ than informa-
tional and functional works.” Dr. Seuss, 109 F.3d at 1402
(quoting Campbell, 510 U.S. at 586). Our sister circuits have
also considered, under this factor, whether the copyrighted
work represents “substantial investment of time and labor . . .
  6
    To be clear, we do not hold that a fair use defense is not available sim-
ply because the infringer uses technology to make efficient use of its
licenses. The problematic aspect of the Sheriff’s Department’s use is that
it took in excess of what it bargained for, not that it was technologically
efficient. Thus, for example, if the Sheriff’s Department had saved time
and money by hard drive imaging RUMBA software onto the number of
computers for which it had licenses, its “efficiency” would not create a
problem.
              WALL DATA v. LOS ANGELES COUNTY               5377
in anticipation of a financial return.” MCA, Inc. v. Wilson, 677
F.2d 180, 182 (2d Cir. 1981). Although the RUMBA software
products are not purely creative works, copyright law none-
theless protects computer software. See Sega, 977 F.2d at
1519 (“[T]he 1980 amendments to the Copyright Act unam-
biguously extended copyright protection to computer pro-
grams.”). In addition, Wall Data presented undisputed
evidence that RUMBA software products were developed
over several years, and required a multi-million dollar invest-
ment on Wall Data’s part. We therefore conclude that the
nature of the copyrighted work weighs against a finding of
fair use.

       c.   Third Fair Use Factor: Amount                   and
            Substantiality of the Portion Used

   [8] Next, we consider whether the “amount and substantial-
ity of the portion used in relation to the copyright work as a
whole,” 17 U.S.C. § 107(3), is “reasonable in relation to the
purpose of copying,” Dr. Seuss, 109 F.3d at 1402. The Sher-
iff’s Department copied RUMBA Office in its entirety to
ensure that all of the computers in the Twin Towers had iden-
tical copies of the software. And although “entire verbatim
reproductions are justifiable where the purpose of the work
differs from the original,” Mattel, 353 F.3d at 804, the Sher-
iff’s Department put its copies to the exact purpose for which
the original software licenses were purchased. Consequently,
the Sheriff Department’s “verbatim” copying of the entire
copyrighted work also weighs against a finding of fair use.
See Worldwide Church of God, 227 F.3d at 1118 (“While
wholesale copying does not preclude fair use per se, copying
an entire work militates against a finding of fair use.”) (inter-
nal quotation marks omitted).

       d.   Fourth Fair Use Factor: Effect of the Use Upon
            the Potential Market

  [9] In addressing the final fair use factor, we focus on “the
normal market for the copyrighted work” and whether the
5378          WALL DATA v. LOS ANGELES COUNTY
allegedly infringing use threatens the potential market for, or
value of, a copyrighted work. See Harper & Row, 471 U.S.
at 568 (noting that the fourth fair use factor is concerned with
“use that supplants any part of the normal market for a copy-
righted work”) (quoting S. Rep. No. 473, 94th Cong., 1st
Sess. 65 (1975)). We have said:

    [t]his inquiry attempts to strike a balance between
    the benefit the public will derive if the use is permit-
    ted and the personal gain the copyright owner will
    receive if the use is denied. The less adverse effect
    that an alleged infringing use has on the copyright
    owner’s expectation of gain, the less public benefit
    need be shown to justify the use.

Mattel, 353 F.3d at 804-05.

   The Sheriff’s Department contends that its copying was
solely an attempt to use efficiently its licensed copies of the
RUMBA software products, and accordingly, there was no
negative impact on Wall Data’s market. It points to its own
statements that it would not have purchased additional copies
of the license had it known that its configuration went beyond
its license. We are not persuaded. The Sheriff’s Department
bought a few licenses and found a way to install the program
onto all of its computers without paying the fee required for
each installation. The Sheriff’s Department could have bar-
gained for the flexibility it desired, but it did not. Whenever
a user puts copyrighted software to uses beyond the uses it
bargained for, it affects the legitimate market for the product.
Thus, although hard drive imaging might be an efficient and
effective way to install computer software, we conclude that
“unrestricted and widespread conduct of the sort engaged in
by the defendant” would nonetheless lead to over-use of the
software. Campbell, 510 U.S. at 590 (quoting 3 Melville B.
Nimmer & David Nimmer, Nimmer on Copyright
§ 13.05[A](4), at 13-102.61 (1993)).
                WALL DATA v. LOS ANGELES COUNTY                    5379
   Equally important, ghost copies of the software lay dor-
mant and were unuseable only until a Sheriff’s Department
network administrator decided to activate RUMBA Office on
that computer. The Sheriff’s Department thus created its own
“sub-licensing” system where it granted users permission to
use the software and, in essence, asked Wall Data to “trust”
that it was not using RUMBA in excess of its authorization
under the license. We recognize that computer licensing is
generally an “honor system,” in that there is little to stop a
person with physical possession of software from installing it
on multiple computers. But in this case, the Sheriff’s Depart-
ment’s system made tracking infringement almost impossible,
because Wall Data could not independently verify which of
the computers had been used to access RUMBA and which
ones had not — it had to trust the Sheriff’s Department that
its system was not allowing over-use. In fact, after Wall Data
brought the over-use of RUMBA to the Sheriff’s Depart-
ment’s attention, a Sheriff’s Department employee admitted,
in an email, that he was not sure how to tell which computers
had accessed RUMBA.7 This system therefore made copy-
right infringement easier (because no physical installation was
necessary) and made detection of over-use more difficult.

  [10] In recognition of the ease with which software can be
over-used, courts have been cautious to extend protection to
methods that would make copyright infringement of software
any easier:

      Software fundamentally differs from more tradi-
      tional forms of medium, such as print or phono-
      graphic materials, in that software can be both, more
      readily and easily copied on a mass scale in an
      extraordinarily short amount of time and relatively
      inexpensively. One of the primary advantages of
  7
    The Sheriff’s Department has argued that this document is inadmissi-
ble. As discussed more fully below, we believe the district court did not
err in allowing this document to be introduced.
5380          WALL DATA v. LOS ANGELES COUNTY
    software, its ability to record, concentrate and con-
    vey information with unprecedented ease and speed,
    makes it extraordinarily vulnerable to illegal copying
    and piracy. [Thus,] it is important to acknowledge
    these special characteristics of the software industry
    and provide enhanced copyright protection for its
    inventors and developers.

Adobe Sys., Inc. v. Stargate Software Inc., 216 F. Supp. 2d
1051, 1059 (N.D. Cal. 2002). We believe that “widespread
use” of hard drive imaging in excess of one’s licenses could
seriously impact the market for Wall Data’s product. See
Campbell, 510 U.S. at 590 (citations omitted). Therefore, we
conclude that the fourth factor also weighs against a finding
of fair use.

                             ***

   [11] In considering the four fair use factors — the purpose
and character of the work, the nature of the use, the amount
and substantiality of the portion used, and the effect on the
plaintiffs’ market — none militate in favor of the Sheriff’s
Department’s fair use defense. We therefore hold that the
Sheriff’s Department is not entitled to a fair use defense, and
we affirm the district court’s order granting summary judg-
ment on the Sheriff’s Department’s fair use defense.

  B.   The District Court’s Evidentiary Rulings Were Not
       Erroneous

   We review a district court’s evidentiary rulings for an
abuse of discretion. See Columbia Pictures Television, Inc. v.
Krypton Broad. of Birmingham, Inc., 259 F.3d 1186, 1195
(9th Cir. 2001). Prejudice must be shown to warrant a rever-
sal. See id. As explained below, the district court did not
abuse its discretion when it ruled against the Sheriff’s Depart-
ment on the admissibility of certain evidentiary matters.
              WALL DATA v. LOS ANGELES COUNTY              5381
    1.   Exclusion of Irrelevant Evidence

   The district court did not abuse its discretion when it ruled
against the Sheriff’s Department on the admissibility of the
following evidence: (1) excerpts from Wall Data’s 10k report
to the Securities and Exchange Commission (“SEC”); (2) the
Sheriff’s Department’s Master Vendor Agreements; and (3)
evidence regarding Wall Data’s communications with other
customers and its instructions to its sales personnel describing
RUMBA software licenses. We agree with the district court
that the evidence offered by the Sheriff’s Department was
irrelevant, would have consumed an unreasonable amount of
time, would have caused jury confusion, or would have
unduly prejudiced Wall Data. See Fed. R. Evid. 401, 402,
403. In any event, we find that any error in excluding the evi-
dence was harmless.

   [12] First, the district court did not err when it excluded
from evidence an excerpt from Wall Data’s 10k report to the
SEC. The relevant excerpt consisted of a general statement
that Wall Data’s shrink-wrap licenses “may be unenforce-
able.” Such licenses were clearly enforceable in California
and Washington, the relevant jurisdictions in these actions.
See, e.g., Lozano v. AT&T Wireless, 216 F. Supp. 2d 1071,
1073 (C.D. Cal. 2002); M.A. Mortenson Co. v. Timberline
Software Corp., 998 P.2d 305, 313 (Wash. 2000). The 10k
report was irrelevant because it did not deal specifically with
the action at hand. Therefore, the district court’s decision to
exclude such evidence was not an abuse of discretion.

   [13] Next, the district court did not abuse its discretion
when it excluded evidence of Master Vendor Agreements
governing the Sheriff’s Department’s purchase of software.
The Sheriff’s Department ordered RUMBA software products
through one of the Sheriff’s Department’s resellers, an
approved Los Angeles County vendor, who in turn, ordered
the products from a Wall Data distributor. The Master Vendor
Agreements governed the relationship between the Sheriff’s
5382            WALL DATA v. LOS ANGELES COUNTY
Department and the reseller, not the relationship between the
Sheriff’s Department and Wall Data. Because Wall Data was
not a party to the Master Vendor Agreements, the district
court ruled that the Sheriff’s Department could only introduce
such documents for purposes of estoppel if the Sheriff’s
Department could prove that Wall Data had knowledge of
them. The Sheriff’s Department conceded that it had no evi-
dence that Wall Data knew of the agreements. Because Wall
Data had no knowledge of the agreements, we agree with the
district court that the Master Vendor Agreements were not
binding on Wall Data and were therefore irrelevant to the pro-
ceeding. We thus conclude that the district court did not abuse
its discretion in excluding the Master Vendor Agreements.

   [14] The district court properly excluded evidence related
to Wall Data’s communications with other customers and
existence of another Wall Data software product, CYBER-
PRISE. We agree with the district court that Wall Data’s com-
munication with other customers regarding licenses for the
products they purchased was irrelevant to the case at hand.
The court also acted properly when it excluded all evidence
related to CYBERPRISE. Unlike RUMBA, which was
designed to be installed on physical workstations, CYBER-
PRISE was accessed through the internet. CYBERPRISE was
also licensed under a concurrent user licensing system, which
made the physical location of the user irrelevant.8 Because
there were clear difference between the two products, infor-
mation about CYBERPRISE would distract the jury from the
relevant issues in this case. Accordingly, the district court did
not err in excluding evidence relating to CYBERPRISE.

   [15] Finally, the district court decision to exclude Wall
  8
    A concurrent user license allows multiple users to access the same soft-
ware, but limits the number of simultaneous computer users to the number
of licenses purchased. For example, where a licensee purchases five con-
current use licenses, five people would be able to access the software, but
when the sixth person tried to access the software, access would be denied.
              WALL DATA v. LOS ANGELES COUNTY               5383
Data’s instructions to sales personnel describing RUMBA
software licenses was not reversible error. The licenses
clearly state that reliance should not be placed on representa-
tions made by Wall Data employees. In addition, even though
the district court granted a motion in limine excluding this
evidence, the Sheriff’s Department nonetheless introduced
testimony regarding conversations between its employees and
Wall Data employees. The Sheriff’s Department did not point
to any evidence that they were prevented from offering
because of the district court’s ruling. The Sheriff’s Depart-
ment has not shown any prejudice based on the district court’s
ruling on the motion in limine, and therefore any error was
harmless.

   The district court did not abuse its discretion when it found
that the above evidence would confuse or mislead the jury.
Accordingly, the district court’s evidentiary rulings on these
points are affirmed.

    2.   Admission of the Sheriff’s Department’s Internal
         Memorandum

   Before trial, the district court ruled that internal Sheriff’s
Department communications concerning settlement negotia-
tions between Wall Data and the Sheriff’s Department would
be excluded. The district court later allowed Wall Data to
introduce an internal memorandum dated March 23, 2001,
prepared by a Sheriff’s Department employee related to the
dispute. In the memorandum, a Sheriff’s Department
employee admitted that he “did not know how to tell which
[computers] RUMBA is used on and on which ones it has
never been used.” The Sheriff’s Department objected on the
basis that the memorandum was prepared in aid of settlement
discussions. The district court overruled the Sheriff’s Depart-
ment’s objection and allowed Wall Data to introduce the doc-
ument.

   On appeal, the Sheriff’s Department claims that admission
of the document constitutes reversible error because the mem-
5384          WALL DATA v. LOS ANGELES COUNTY
orandum was prepared in aid of settlement discussions. Not
so. The district court properly determined that the parties’ set-
tlement discussions did not crystallize until March 29, 2001,
almost a week after this memorandum was written. This
memorandum merely recounted a meeting between Sheriff’s
Department employees and Wall Data to discuss possible
over-use of the RUMBA licenses. Because the memorandum
did not contain evidence “furnishing or offering or promising
to furnish . . . valuable consideration in compromising or
attempting to compromise a claim which was disputed as to
either validity or amount,” Fed. R. Evid. 408, and because the
memorandum was written before settlement discussions
began, admission of the memorandum by the district court did
not constitute reversible error.

  C.   The District Court’s Jury Instructions Were Not
       Erroneous

   We review de novo whether a jury instruction misstates the
law. See White v. Ford Motor Co., 312 F.3d 998, 1012 (9th
Cir. 2002). We review a district court’s formulation of civil
jury instructions for an abuse of discretion. See Monroe v.
City of Phoenix, 248 F.3d 851, 857 (9th Cir. 2001). An error
in instructing the jury in a civil case does not require reversal
if that error is harmless. See id. at 860.

   The district court concluded that many of the parties’ pro-
posed jury instructions were “slanted or argumentative one
way or the other” and “were not appropriate or were confus-
ing to the jury.” For this reason, the district court fashioned
jury instructions for the parties. As discussed below, the dis-
trict court’s jury instructions fairly and adequately covered the
issues presented, correctly stated the law, and were not mis-
leading. See Duran v. City of Maywood, 221 F.3d 1127, 1130
(9th Cir. 2000).
              WALL DATA v. LOS ANGELES COUNTY               5385
    1.   Jury Instructions Related to the Essential Step
         Defense Under 17 U.S.C. § 117 Were Not
         Erroneous

   The Sheriff’s Department requested that the district court
instruct the jury on the difference between a “licensee” and an
“owner” for purposes of a § 117 “essential step” defense. We
conclude that the district court did not abuse its discretion
when it declined to do so.

   [16] The essential step defense attempts to strike a balance
between the interests of software users and software develop-
ers. See 17 U.S.C. § 117. This section permits the owner of
a copy of a copyrighted computer program to make (or autho-
rize the making of) another copy of the program, if the copy
is created as an “essential step in the utilization of the com-
puter program in connection with the [computer, and] is used
in no other manner.” Id. The “essential step” defense also
ensures that a software user does not infringe when the user
“copies” the software from the computer’s permanent storage
(the hard drive, for example) onto its active memory (the ran-
dom access memory, for example). Section 117 also allows
the owner to make a copy of the computer program if the
copy is “for archival purposes only and . . . all archival copies
are destroyed in the event that continued possession of the
computer program should cease to be rightful.” Id.

   [17] Section 117, by its own terms, applies only to “the
owner of a copy of the computer program.” 17 U.S.C. § 117
(emphasis added). In the leading case on ownership under
§ 117, we considered an agreement in which MAI, the owner
of a software copyright, transferred copies of the copyrighted
software to Peak under an agreement that imposed severe
restrictions on Peak’s rights with respect to those copies. See
MAI Sys. Corp. v. Peak Computer, Inc., 991 F.2d 511 (9th
Cir. 1993). We held that Peak was a licensee and not an
owner of the copies of the software for purposes of § 117 and
consequently did not enjoy the rights conferred on “owners”
5386             WALL DATA v. LOS ANGELES COUNTY
under that statute. See id. at 518 n.5. Thus, under MAI, if a
software developer retains ownership of every copy of soft-
ware, and merely licenses the use of those copies, § 117 does
not apply.

   [18] Here, we conclude that the Sheriff’s Department
received licenses to the RUMBA software. Generally, if the
copyright owner makes it clear that she or he is granting only
a license to the copy of software and imposes significant
restrictions on the purchaser’s ability to redistribute or trans-
fer that copy, the purchaser is considered a licensee, not an
owner, of the software. In this case, as in MAI, the licensing
agreement imposed severe restrictions on the Sheriff’s
Department’s rights with respect to the software. Such restric-
tions would not be imposed on a party who owned the soft-
ware. The Sheriff’s Department’s use of and rights to the
RUMBA software products were restricted under the terms of
the click-through and volume booklet licenses. These restric-
tions were sufficient to classify the transaction as a grant of
license to Wall Data’s software, and not a sale of Wall Data’s
software. For these reasons, under MAI, the Sheriff’s Depart-
ment is not the “owner” of copies of Wall Data’s software for
purposes of § 117.

  Even if we were to accept that the Sheriff’s Department
was the “owner of copies” of RUMBA for § 117 purposes,9
   9
     We recognize that our decision in MAI has been criticized. See Nimmer
on Copyright § 8.08[B][1][c], at 8-136; see also DSC Commc’ns Corp. v.
Pulse Commc’ns, Inc., 170 F.3d 1354, 1360 (Fed. Cir. 1999). Indeed, the
first sale doctrine rarely applies in the software world because software is
rarely “sold.” See Adobe Sys. Inc. v. One Stop Micro, Inc., 84 F. Supp. 2d
1086, 1091 (N.D. Cal. 2000) (“[V]irtually all end users do not buy — but
rather receive a license for — software. The industry uses terms such as
‘purchase,’ ‘sell,’ ‘buy,’ . . . because they are convenient and familiar, but
the industry is aware that all software . . . is distributed under license.”).
By licensing copies of their computer programs, instead of selling them,
software developers maximize the value of their software, minimize their
liability, control distribution channels, and limit multiple users on a net-
                WALL DATA v. LOS ANGELES COUNTY                    5387
the Sheriff’s Department’s conduct was not an “essential
step,” and therefore any error in instruction was harmless. The
Sheriff’s Department argued that “it was inherently necessary
to copy the entire RUMBA package onto hard drives, albeit
within the constraints of a security system that made the chal-
lenged copies unusable.” This argument is unpersuasive. Sub-
stantial evidence demonstrates that the Sheriff’s Department’s
decision to copy the RUMBA software products was not an
essential step, but a matter of convenience. It copied the soft-
ware onto 75 computers without the aid of hard drive imag-
ing, and switched to hard drive imaging because its deadline
in opening Twin Towers loomed large, not because manual
installation had become more difficult. Even under time pres-
sure, there was no need for the Sheriff’s Department to copy
the RUMBA Office software onto the hard drives of nearly
all of its Twin Towers computers. Instead, the Sheriff’s
Department could have used hard drive imaging to install
RUMBA software onto the number of computers for which it
had licenses. Its decision not to do so was an effort to save
time and preserve flexibility, and was not a necessity. We
conclude that the essential step defense was not intended to
cover such situations. Consequently, any failure by the district
court to instruct the jury on the distinction between an owner
and a licensee was harmless.

     2.   The District Court’s Refusal to Instruct the Jury
          on Rules of Contract Formation

  The district court ruled that the click-through, shrink-wrap,
and volume booklet licenses constituted the operative con-

work from using software simultaneously. See Christian H. Nadan, Soft-
ware Licensing in the 21st Century: Are Software “Licenses” Really
Sales, and How Will the Software Industry Respond?, 32 AIPLA Q.J. 555.
We decline to revisit our precedent in this case, because the Sheriff’s
Department’s “essential step” defense fails for a more fundamental reason
— that hard drive imaging was not an essential step of installation — and
thus any error is harmless.
5388          WALL DATA v. LOS ANGELES COUNTY
tracts, and declined to instruct the jury on the rules of contract
formation and construction, as suggested by the Sheriff’s
Department. Because contract formation and interpretation
are questions of law for the court to determine, see In re Ben-
nett, 298 F.3d 1059, 1064 (9th Cir. 2002), the district court
did not abuse its discretion when it declined to instruct the
jury as to formation and construction of a contract. Moreover,
because the sole issue to be resolved at trial was whether the
Sheriff’s Department violated the terms of Wall Data’s
licenses, instructions related to contract formation and inter-
pretation were unnecessary.

    3.   Jury Instructions Regarding Damages

   The district court gave the following jury instructions
related to damages:

    Damage means the amount of money which will rea-
    sonably and fairly compensate Wall Data for any
    injury you find was caused by the Los Angeles sher-
    iff’s department. . . . Your award must be based on
    evidence and not speculation, guesswork, or conjec-
    ture. . . . Actual damages means the amount of
    money to adequately compensate the copyright
    owner for the reduction of the market value of the
    copyrighted work caused by the infringement. The
    reduction of the market value of the copyrighted
    work is the amount a willing buyer would have been
    reasonably required to pay a willing seller at the time
    of the infringement for the actual use made by the
    Los Angeles Sheriff’s department of the plaintiff’s
    work. That amount also could be represented by the
    lost license fees Wall Data would have received for
    the unauthorized copies.

We conclude that such instructions properly state the law of
damages in a copyright infringement suit. “Actual damages
are usually determined by the loss in the fair market value of
              WALL DATA v. LOS ANGELES COUNTY              5389
the copyright, measured by the profits lost due to the infringe-
ment or by the value of the use of the copyrighted work to the
infringer.” Polar Bear Prods., Inc. v. Timex Corp., 384 F.3d
700, 708 (9th Cir. 2004) (quoting McRoberts Software, Inc. v.
Media 100, Inc., 329 F.3d 557, 566 (7th Cir. 2003)). “[I]t is
not improper for a jury to consider either a hypothetical lost
license fee or the value of the infringing use to the infringer
to determine actual damages, provided the amount is not
based on ‘undue speculation.’ ” Id. at 709 (quoting McRoberts
Software, 329 F.3d at 566). The district court properly
instructed the jury in line with our circuit’s caselaw, and
accordingly this instruction was proper.

   Moreover, the jury’s finding was appropriate and was not
speculative, and therefore any error was harmless. Specifi-
cally, the jury heard testimony from Wall Data’s vice presi-
dent that the average price Wall Data charged the vendor that
sold software to the Sheriff’s Department was $189. She
admitted on cross-examination that government entities were
charged $113 per copy. The jury returned a general verdict
awarding Wall Data damages of $210,000. It is not clear how
the jury calculated this award: At one extreme, if the jury
found that the Sheriff’s Department infringed on 2,344 copies
(6,007 computers — 3,663 total RUMBA Office and
RUMBA Mainframe licenses), the award was approximately
$90 per copy. At the other extreme, if the jury found that the
Sheriff’s Department infringed on 3,962 copies (6,007 com-
puters — 2035 RUMBA Office licenses), the award was $53
per copy. Either way, these amounts were within an accept-
able range — $85 original price paid by the Sheriff’s Depart-
ment and $189 average price. Because “the jury’s verdict[ ]
find[s] substantial support in the record and lie[s] within the
range sustainable by the proof,” any error in instruction was
harmless. Los Angeles Mem’l Coliseum Comm’n v. Nat’l
Football League, 791 F.2d 1356, 1365 (9th Cir. 1986).

  D.   Wall Data’s Attorneys’ Fees

  [19] The Copyright Act provides for an award of reason-
able attorneys’ fees “to the prevailing party as part of the
5390          WALL DATA v. LOS ANGELES COUNTY
costs.” 17 U.S.C. § 505. A district court may consider (but is
not limited to) five factors in making an attorneys’ fees deter-
mination pursuant to § 505. These factors are (1) the degree
of success obtained, (2) frivolousness, (3) motivation, (4) rea-
sonableness of losing party’s legal and factual arguments, and
(5) the need to advance considerations of compensation and
deterrence. See Smith v. Jackson, 84 F.3d 1213, 1221 (9th Cir.
1996) (citations omitted). We review a district court’s deci-
sion regarding the award of attorneys’ fees under the Copy-
right Act for an abuse of discretion. See Mattel, 353 F.3d at
814.

   [20] In this case, the district court cited the above-listed
factors in its order granting Wall Data’s motion for attorneys’
fees. It found that Wall Data was the prevailing party, even
though Wall Data’s ultimate recovery was less than that
which it originally sought. Contrary to the Sheriff’s Depart-
ment’s argument, this was not an abuse of discretion. See
Nimmer on Copyright § 14.10[B], at 14-176 to -177 (“The
plaintiff will ordinarily be regarded as the prevailing party if
he succeeds at trial in establishing the defendant’s liability,
even if the damages awarded are nominal or nothing.”). The
court therefore concluded that attorneys’ fees furthered the
goal of copyright law. It found that the attorneys’ rates were
reasonable within the prevailing market, but reduced the total
award based on the experience of the attorneys and the com-
plexity of the issues. Reversal is not appropriate here because
we lack a definite and firm conviction that the district court
committed a clear error of judgment in the conclusion it
reached upon a weighing of the relevant factors. See Smith, 84
F.3d at 1221.

III.   CONCLUSION

   For the foregoing reasons, we AFFIRM the district court’s
orders entering final judgment following a jury trial against
the Sheriff’s Department and awarding Wall Data attorneys’
fees and costs.