A company is about to introduce an innovative new smartphone and is engaged in negotiations to license a software platform for the new mobile devices. But the licensing negotiations fail, and the smartphone is about to go to market. If you're Google, you include Oracle's Java software platform in your Android phones without a license, and when you're sued for copyright infringement, claim “fair use.” After years of litigation between two of the industry's largest technology companies, the U.S. Court of Appeals for the Federal Circuit has held such conduct is copyright infringement, not fair use. Oracle America v. Google, Nos. 2017-1118 and 2017-1202 (Fed. Cir. March 27, 2018).

At issue is Google's use of Oracle's Java platform software that writes and runs programs in the Java programing language (API). The Java API is a collection of pre-written Java source code programs that allows programmers to build functions into their own programs, rather than write their own code from scratch. Although Oracle makes the Java platform freely available to programmers, it charges a licensing fee to those who want to use the API in competing platforms, or embed them in electronic devices such as smartphones. Although Oracle made available a free open source license version of Java, any company that improved on the software had to “give away those changes for free to the Java community.” Oracle's Java quickly became the leading platform for developing and running apps on mobile phone. Google sought to develop a platform that would attract Java developers to build apps for its newly acquired Android. After licensing negotiations with Oracle came to an impasse, Google used Oracle's copyrighted code contained in 37 API packages. Google then wrote its own implementing code so that the packages would work on its own Android smartphones. Although Google provides the Android platform free of charge to smartphone manufacturers, it has generated over $42 billion in revenue from related advertising. Oracle also lost customers such as Amazon and its Kindle tablet device to Android, who cited the Android platform as a reason to demand discounts for continuing with Oracle.

Oracle commenced a copyright infringement lawsuit in U.S. District Court for the Northern District of California in Google's infringement of 37 out of 166 of Oracle's copyrighted API packages. Google claimed, among other things, its use constituted “fair use” under copyright law. After years of trial, appeal, remand, trial and appeal, the Ninth Circuit reversed the California District Court's finding that Google's use of the copyrighted work constituted fair use, and held “there's nothing fair about taking a copyrighted work. Id. at 54.

The fair use defense is defined in the 1976 Copyright Act as a limited exception to a copyright holder's exclusive rights in its use of a copyrighted work if it is “for purposes such as criticism, comment, news reporting, teaching, … scholarship, or research.” 17 U.S.C. §107. Whether a particular use of a copyrighted work is fair, and thus not infringing, calls for a consideration of four nonexclusive factors: (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 relation to the copyrighted work as a whole;” and (4) “the effect of the use upon the potential market for or value of the copyrighted work.” 17 U.S.C. §107. The Supreme Court has cautioned against adopting a bright-line rule and has emphasized that all of the statutory factors “are to be explored, and the results weighed together, in light of the purposes of copyright.” Campbell v. Acuff-Rose Music, 510 U.S. 569, at 578 (1994).

The Federal Circuit also clarified the standard of review, often murky, because fair use is a mixed question of law, reviewed de novo and reviewable only for clear error. In its determination, the Federal Circuit cites to the recent Supreme Court decision, which found there were three components to such an inquiry: (1) determining the legal standard governing the question posed and what types of historical facts are relevant to that standard; (2) finding the historical facts in the case at hand; and (3) assessing whether the historical facts found satisfy the legal test governing the question to be answered. As the court explained, the first of these is a purely legal question to be reviewed de novo on appeal, the second involves factual questions which “are reviewable only for clear error, [and] the third is what the Court characterized as the “mixed question.” U.S. Bank Nat'l Ass'n ex rel. CWCapital Asset Mgmt., No. 15-1509, 2018 WL 1143822, at *5 (U.S. March 5, 2018).

Applying the Supreme Court standard, the Federal Circuit concludes the fair use inquiry is reviewed de novo. Whether findings relating to any relevant historical facts were correct are questions which are reviewed with deference, and whether the use at issue is ultimately a fair one is also reviewed de novo.

Oracle argued that each of the four statutory factors weighs against a finding of fair use. Specifically, it submits that: (1) the purpose and character of Google's use was purely for commercial purposes; (2) the nature of Oracle's work is highly creative; (3) Google copied 11,330 more lines of code than necessary to write in a Java language-based program; and (4) Oracle's customers stopped licensing Java SE and switched to Android because Google provided free access to it.

The first factor in the fair use inquiry has two primary components: (1) whether the use is commercial in nature, rather than for educational or public interest purposes; and (2) “whether the new work is transformative or simply supplants the original.” 17 U.S.C. §107(1).

The Federal Circuit rejected Google's arguments that (1) because it gives Android away for free under an open source license the jury could have concluded that Android has non-commercial purposes; and (2) the jury could have reasonably found that Google's revenue flows from the advertisements on its search engine which preexisted Android. The Federal Circuit held that the standard is not whether the sole motive of the use is monetary, but whether the user stands to profit from exploitation of the copyrighted material without paying the customary price. The court finds there was substantial evidentiary support in the record for the finding Google's use of Oracle's API packages were commercial. Oracle, supra.

The court then looks to whether and to what extent the infringing work is “transformative.” To be transformative, the new work must either alter the original with new expression, meaning or message, or serve a new purpose distinct from that of the original work. The court finds that Google's use of the API packages is not transformative, since Google concedes that its use was for the same purpose, and serves the same function in both works.

In evaluating the purpose and character of the use, the court finds that, although it is clear that the 37 API packages at issue involved some level of creativity, reasonable jurors could have concluded that functional considerations were both substantial and important. Based on that factual finding, the court concludes that factor two favors a finding of fair use. The Ninth Circuit recognized, however, that this second factor “typically has not been terribly significant in the overall fair use balancing.” Dr. Seuss Enters., L.P. v. Penguin Books USA, 109 F.3d 1394, 1402 (9th Cir. 1997).

The third factor focuses on the amount and substantiality of the portion used in the context of the copyrighted work, not the infringing work. Thus, the percentage of work copied is not dispositive where the portion copied was qualitatively significant. The parties agree that only 170 lines of code were necessary to write in the Java language; however, Google copied 11,500 lines of code, 11,330 more lines than necessary to write in Java. Thus the court finds that Google copied more than necessary, weighing against a finding of fair use.

The fourth and final factor focuses on “the effect of the use upon the potential market for or value of the copyrighted work.” 17 U.S.C. §107(4). This factor reflects the idea that fair use “is limited to copyright by others which does not materially impair the marketability of the work which is copied.” Likely, market harm can be presumed where a use is “commercial and not transformative.” When a commercial use amounts to mere duplication of the entirety of an original, it clearly “supersede[s] the objects,' of the original and serves as a market replacement for it, making it likely that cognizable market harm to the original will occur.” Oracle, supra.

The court found Android competed directly with Java SE in the market for mobile devices, undercutting Google's no market harm arguments. With respect to tablets, the evidence showed that Oracle licensed Java SE for the Amazon Kindle. After Android's release, however, Amazon was faced with two competing options—Java SE and Android—and selected Android. Amazon later used the fact that Android was free to negotiate a steep discount to use Java SE in its newer e-reader. In other words, the record contained substantial evidence that Android was used as a substitute for Java SE and had a direct market impact. Id.

The court concludes that “unrestricted and widespread conduct of the sort engaged in” by Google would result in “a substantially adverse impact on the potential market for the original” and its derivatives. Balancing all four factors, the court concludes that Google's use of 37 of Oracle's API packages was not fair use as a matter of law. Allowing Google to commercially exploit Oracle's work will not advance the purposes of copyright. Although Google could have furthered copyright's goals of promoting creative expression and innovation by developing its own APIs, or by licensing Oracle's APIs for use in developing a new platform, it chose to copy Oracle's creative efforts instead. The court concludes there is nothing fair about taking a copyrighted work verbatim and using it for the same purpose and function as the original in a competing platform. The case is remanded to the Northern District of California for determination of damages.

David P. Miranda is a partner with the law firm of Heslin Rothenberg Farley & Mesiti P.C., dedicated exclusively to intellectual property law. He can be reached at 518-452-5600 or at [email protected].