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Apple v. Psystar takes a darker turn in discovery - Updated
Sunday, August 23 2009 @ 12:47 PM EDT

Psystar has a new lawyer, as you know, and there is action aplenty as the case moves forward in discovery. There are several filings in Apple v. Psystar to tell you about, and this story has taken a darker turn.

Psystar's new lawyer seems to be setting out on a new strategy, and we see shifts on the Apple side as well. This is actually typical to some extent when lawyers change midstream, particularly if what was tried already wasn't working. The new guy has his own plan, and so things are a-changing. The discovery battles are stepping up, now that Psystar has left bankruptcy protection. And Psystar's tone has changed from whiny to aggressive.

Psystar answers Apple's discovery complaints about missing code, code which Apple alleges was deliberately destroyed. Psystar's response [PDF] is essentially that it didn't know it was supposed to keep it, so ... so what? It admits it doesn't have some early versions of master copies, didn't keep them, and blames the previous attorney for failure to advise Psystar to retain everything. But then it makes a claim that you may find surprising, saying if Apple found dsmos, Netkas, or AppleDecrypt on any early Psystar computers, as alleged, Psystar didn't put it there intentionally. It doesn't use any of them and never has, it says.

It may not surprise you, then, to learn that Apple has filed a letter brief [PDF] in which it tells the court that it doesn't trust Psystar to honor a protective order, so it is willing to drop its claims for lost profits, if necessary, because to pursue that particular claim, Apple would need to provide in discovery some very private financial data Psystar is asking for, and it doesn't trust Psystar not to make it public because of something Psystar wrote on its website. Apple says that Psystar has been less than candid with the court and with Apple in the past, and Apple feels it must take steps to protect itself. This is in response to Psystar asking the court for a third opportunity to depose Apple's Philip Schiller (Psystar terminated its last crack at him midstream, Apple says), and Apple asks that this request be denied. Significantly, it tells the court that Psystar's account of what happened at the last deposition "is misleading, leaves out key facts and should be denied." If not denied, if Psystar's discovery request is granted, Apple then reserves its right to pursue lost profits after all.

In short, there is a real breakdown in trust. But I suspect it's also a shifting of the ground under the case, as the new Psystar lawyer takes over the steering wheel.

Psystar's letter about the Schiller deposition is so highly redacted, it's impossible to know fully what the dispute is about. But it's possible that Apple saw Psystar seeking financial information at the Schiller deposition, where Apple says Psystar persisted in asking questions only an expert should answer, and figured out some strategic point that I just don't see yet. In time, we'll probably be able to figure out what it's all about, but there isn't sufficient transparency on this dispute yet to even explain it fully. But it's true that experts testify to certain things that others can't. If you recall the SCO v. Novell litigation, SCO had an expert travel all the way to Delaware to show up at bankruptcy court hoping to put her on the stand so she could testify. It didn't happen, but it illustrates that experts are required for certain types of testimony.

I suspect Psystar's apparently dire financial state, judging from the bankruptcy, may also be a factor, and Apple says this about its decision:

After reviewing the still-incomplete financial records that Psystar finally produced this week, Apple has concluded that the benefit of seeking lost profits as a measure of recovery in this case does not justify the risk of providing its closely guarded margin data to Psystar and its counsel.
Remember when IBM dropped some patent claims against SCO, saying that in discovery it had come to realize that SCO probably couldn't pay damages on patent claims anyway, so it preferred to drop those claims in the interests of getting to trial quicker and no doubt saving the money pursuing patent claims would have entailed? Whoever made that decision was a wise and pragmatic lawyer, as you can see by how things turned out. I think Apple may have done some similar math before making this decision to drop lost profits. If you suspect you'll never get paid, why spend money to get a judgment you'll never get? And now that there is a new lawyer, suddenly Psystar is turning over financial records aplenty, so it may be Apple has a clearer picture of Psystar's finances now.

But I'll tell you this: it's not often that a party tells a judge that it simply doesn't trust the other side, including its lawyer, to obey a protective order.

I confess it really amazes me to see Psystar claim it never used Netkas or anything like it:

Apple focuses its complaints on three non-Psystar and non-Apple files allegedly discovered on Pystar machines sold in the past: dsmos.kext (“dsmos”), AppleDecrypt.kext (“AppleDecrypt”), and Netkas. Psystar acknowledges that it has previously downloaded and evaluated these binary files. It is possible that any or all of these files may have accidentally appeared on a production machine, since evaluation often occurred on the same machine used to manage the master copy for production machines. Psystar is a small business and cannot afford the equipment or personnel needed to fully isolate all of its activities to prevent these kinds of mishaps.

However, none of these files (a) have ever formed a part of the Psystar system; (b) have been necessary to run a Psystar computer; or (c) currently exist in any form on Psystar production machines. Nor has Psystar ever possessed or viewed the source code to dsmos, AppleDecrypt, or Netkas....

An essential component of Pystar’s product is a kernel extension that facilitates the decryption by OS X of certain binaries licensed to OS X users. Pystar has always performed this step with a kernel extension known as “OpenCojones.” In the past, Psystar has downloaded and evaluated binary versions of other kernel extensions known to function similarly. Two such kernel extensions are dsmos and AppleDecrypt. Psystar has never intentionally incorporated these external kernel extensions into its product.

Apple acknowledges that Psystar has produced the source code for OpenCojones. But they complain that their expert has found copies of dsmos and AppleDecrypt on certain Psystar machines sold in the past. As discussed earlier, Psystar acknowledges the possibility that copies of either or both of these kernel extensions may have been accidentally transferred to the hard drive image of Psystar machines sold in the past. But Psystar never deleted or failed to produce the source code for dsmos or AppleDecrypt, because Pystar has never possessed or even viewed that source code. The two kernel extensions - dsmos and AppleDecrypt - are widely available on the internet (see Exhibit A) in binary form and can be downloaded by anyone. This is how Psystar obtained its copies.

Uh huh. The new law firm may not know this, but some of us remember what Tom Krazit on CNET News reported when Psystar first showed up on the scene:
In other Psystar news, the developer who created the firmware emulator that allows the Open Computer to bypass Apple's restrictions on Mac OS X is peeved that the company is using his technology without his permission.

Netkas, who created the EFI v8 emulator, says he released the software under a strict noncommercial license. For a while, Psystar had not even acknowledged his contribution, but the company has added an "open source" section to its site noting his authorship of the EFI v8 emulator and saying, "Psystar will promote Open Source projects in every way possible."

The second link doesn't work any more, of course, which speaks to whether Psystar suffers from short term memory loss or just wants us to. But if you go to Google, and search for http://www.psystar.com/open_source.html you can find many, many references to what it said on that disappeared page, namely that it gave credit to Netkas. So the evidence from the time indicates Psystar did use something written by Netkas. I don't know precisely what Apple says it found, but here's one example, a comment on ZDNet:

NOW there is a page up at Psystar, where they acknowledge "the Open Source community" and Netkas as the author of PC EFI.

http://www.psystar.com/open_source.html

Wonder what's next ...

And the next followup message said:
A violation was cited, and the violator immediately corrected the problem. Isn't that how it's supposed to work?
Here's another example, where one comment on the Hackinto0sh message board pointed to that page, calling Psystar "a Hackint0sh wannabe":
netkas,

http://www.psystar.com/open_source.html
"Open Computers like PC EFI by Netkas"

Suggestions are made that he should sue Psystar, etc. Excuse the language on that page, but this is evidence. "More and more I lose faith in mankind and the stability of society," one guy writes. It's geek humor, I suspect, given the purpose of the code, but there was real anger too at Psystar for using the Netkas code without credit at first, and it's also evidence that indeed that page eventually credited Netkas for his work, the need to give credit indicating use by Psystar, as I read it. Here's a longer quotation from the now missing Psystar page, in another TalkBack comment on ZDNet:
Says it all? Yeah, but not what you think it says.

This is what the netkas site says to me:

The NEW version netkas uploaded with the NEW license can't be used commercially.

Fortunately for Psystar, they are using the OLD version with the OLD license. Yes, they are hosed on future versions of PC EFI, but they should be fine as long as they keep using the version they already have.

Regarding the netkas claim that no credit is given: I went to the Psystar web site, and I clicked on "Open Source" on the left side of the page, which took me here:

http://www.psystar.com/open_source.html

I quote:
"We use Open Source software in the Open Computers like PC EFI by Netkas, the GRUB bootloader, Ubuntu Linux, and many other Open Source efforts out there."

While I totally agree that Psystar should try to compensate netkas fairly for using their open source software, I think too much is being made of this "used without permission" angle, since the version they are using was released as open source with no specific restrictions about how it was to be used that I could see. *shrug*

Netkas was so hopping mad he issued another license, which forbids any use commercially, binary or source. So. You be the judge. I also recall that in the very beginning Psystar claimed that it was shipping unmodified MacOSX. Now it says it has always used OpenCojones (what a name!) to decrypt certain OS X binaries. So which is it?

Here's the excuse about the missing code:

For efficiency and consistency, Psystar creates a master hard drive image from which a copy is made to each production machine. Psystar has produced for Apple the master hard drive image (“master copy”) that it used for versions 10.5.4 and 10.5.6 of the OS X operating system. Psystar acknowledges that minor changes to the 10.5.4 master copy were made during the production run, and that not every change was saved as a separate version in the course of business. The only deliberate changes made to the 10.5.4 master the device driver software. (Psystar provides custom device drivers for hardware not available from Apple).

At no point did Pystar take affirmative action to either destroy or not preserve these intermediate master copies. Rather, Psystar innocently failed to initiate new measures to preserve certain of its electronic data. Previous counsel never informed Psystar of the need to implement substantial alterations in its business practices to accommodate the requirements of litigation discovery. Psystar was not timely informed, for example, that they needed to implement source code control, or to save all copies of electronic data, even files not commonly conceived as “documents”.

I find that part about the prior law firm hard to believe, given that the firm is very skilled, and even a bad attorney would tell you about your discovery obligations. The Carr & Ferrell firm did the Burst v. Microsoft case, after all, so there is no lack of skill, legal or technical.

So, why doesn't Apple trust Psystar? Aside from the above, I mean. Apple noticed that Psystar has asked the public for questions to ask at depositions, including offering to eventually make public as much as it can. If you compare the page as it is today, you'll find it's been altered. Apple attaches the page as it looked originally. You can discern the changes by one of the comments, which reads, "Perhaps I’m missing the point here. But blatantly writing 'Apple’s Super Secret Protective Order' surely can’t be a healthy way to approach a hearing?"

That may give us a clue why Apple doesn't trust Psystar to obey any protective order, and indeed if you look at the exhibit carefully and compare it with today's page, you'll see that what was removed was this:

Bear in mind that we might not be able to release the answers to said questions until the conclusion of this litigation (re: Apple's Super Secret Protection Order) but we are still allowed to use them amongst our legal counsel and in court.
"Until the conclusion of this litigation" would seem to indicate they view the protection order as being only for now. No wonder Apple is writing to the judge. Psystar said it would take the top ten most highly moderated questions for each person to be deposed. That indicates they thought the Apple community, or lots of people anyway, would flood in and help them. They have not.

If it ever was, this is no longer a normal lawsuit. I am sorry to say this, but I think we have another SCO-like object on the radar. I am starting to wonder, are weirdo lawsuits involving companies with nothing much to lose and claims and defenses that seem doomed from the start going to happen to *all* of Microsoft's competitors?

Here are the filings:

08/18/2009 - 91 - Letter Brief filed by Psystar Corporation. (Welker, David) (Filed on 8/18/2009) (Entered: 08/18/2009)

08/18/2009 - 92 - First MOTION PERMITTING THE FILING UNDER SEAL OF CONFIDENTIAL PORTIONS OF LETER BRIEF filed by Psystar Corporation. (Welker, David) (Filed on 8/18/2009) (Entered: 08/18/2009)

08/19/2009 - 93 - Letter Brief filed by Psystar Corporation. (Attachments: # 1 Exhibit Exhibit A)(Welker, David) (Filed on 8/19/2009) (Entered: 08/19/2009)

08/20/2009 - 94 - MEMORANDUM in Opposition re 91 Letter Brief filed by Apple Inc.. (Attachments: # 1 Exhibits 1-5)(Related document(s) 91 ) (Chung, Megan) (Filed on 8/20/2009) (Entered: 08/20/2009)

08/20/2009 - 95 - MOTION to Seal Document 94 Memorandum in Opposition filed by Apple Inc.. (Attachments: # 1 Affidavit, # 2 Proposed Order)(Chung, Megan) (Filed on 8/20/2009) (Entered: 08/20/2009)

[Update: There's another paralegal following this case, which makes me happy. And it's interesting, because he or she has noticed some exhibits attached to the bankruptcy filing that show the prior law firm's strategy, some Requests for Admission Psystar served on Apple and Apple responded to just before Psystar filed for bankruptcy. What is so fascinating is to see the close match between what Psystar wrote and the comments we find being left on each and every article on Groklaw about this litigation. The documents are provided on World of Apple, so enjoy! I did.

Also I wanted to let you know that we have a Psystar Timeline page now in our menu, both the civil litigation and the bankruptcy, so you can find the documents and articles we have here handily. - End update.]

[ Update: Here's an example of the kind of thing Apple is afraid of, where a company is suing its prior law firm for allegedly revealing trade secrets, materials it says were supposed to be attorneys' eyes only.]

Here are Psystar's two letters, as text, first the one about the Schiller deposition and then the one in which it admits to not keeping earlier versions of the code, followed by Apple's letter brief regarding lost profits and answering the Schiller material:

*********************************

August 19, 2009

Judge William H. Alsup
United States District Court
[address]

Re: Apple Inc. v. Psystar Corp., Case No. CV-08-3251-WHA

Dear Judge Alsup:

Psystar has not destroyed evidence or acted in bad faith in its discovery responses. Apple has in its possession all materials in Psystar’s possession and relevant to its discovery requests. The only materials not produced, because Psystar does not have copies, are (a) one previous version of the first Psystar bootloader ("psybootefi"), in which about three lines of code differ from the current version that was handed over to Apple; and (b) certain “master copies” of Psystar’s hard drive images that vary in minor respects from the master copies produced to Apple.

We provide here a full explanation of each issue raised by Apple. Since Psystar acted in good faith to comply with its discovery duties, and the minor discovery violations alleged by Apple result in no discernible prejudice to Apple, the proposed relief should be rejected. Alternatively, if Apple genuinely believes that the subset of machines sold in the past, and that are affected by the discovery problems revealed, give rise to separate and different liability, then the proper course is to bifurcate the case and resolve any issues relating to that subset of machines separate from the claims arising from and relating to recent and future Psystar systems.

Psystar’s recent systems have been the subject of full discovery and Apple raises no discovery issues related to these systems. Important legal issues, for Psystar as well as the computer software and hardware industries, are implicated by the design and sale of these systems. This case deserves to be resolved on the merits. While Apple would achieve its purpose of destroying a competitor and leaving the law ambiguous, a grant of relief in the form of infringement and DMCA claims resolved entirely in favor of Apple would be a gross distortion of justice.

I. Master Copies

For efficiency and consistency, Psystar creates a master hard drive image from which a copy is made to each production machine. Psystar has produced for Apple the master hard drive image (“master copy”) that it used for versions 10.5.4 and 10.5.6 of the OS X operating system. Psystar acknowledges that minor changes to the 10.5.4 master copy were made during the production run, and that not every change was saved as a separate version in the course of business. The only deliberate changes made to the 10.5.4 master

the device driver software. (Psystar provides custom device drivers for hardware not available from Apple).

At no point did Pystar take affirmative action to either destroy or not preserve these intermediate master copies. Rather, Psystar innocently failed to initiate new measures to preserve certain of its electronic data. Previous counsel never informed Psystar of the need to implement substantial alterations in its business practices to accommodate the requirements of litigation discovery. Psystar was not timely informed, for example, that they needed to implement source code control, or to save all copies of electronic data, even files not commonly conceived as “documents”. Further, it was not part of Psystar’s normal operations to perform these steps. Now fully informed, Psystar has corrected these deficiencies. Apple has not complained that discovery related to recent versions of the Psystar systems has, in any manner, been compromised.

Apple focuses its complaints on three non-Psystar and non-Apple files allegedly discovered on Pystar machines sold in the past: dsmos.kext (“dsmos”), AppleDecrypt.kext (“AppleDecrypt”), and Netkas. Psystar acknowledges that it has previously downloaded and evaluated these binary files. It is possible that any or all of these files may have accidentally appeared on a production machine, since evaluation often occurred on the same machine used to manage the master copy for production machines. Psystar is a small business and cannot afford the equipment or personnel needed to fully isolate all of its activities to prevent these kinds of mishaps. However, none of these files (a) have ever formed a part of the Psystar system; (b) have been necessary to run a Psystar computer; or (c) currently exist in any form on Psystar production machines. Nor has Psystar ever possessed or viewed the source code to dsmos, AppleDecrypt, or Netkas.

II. Kernel Extensions

An essential component of Pystar’s product is a kernel extension that facilitates the decryption by OS X of certain binaries licensed to OS X users. Pystar has always performed this step with a kernel extension known as “OpenCojones.” In the past, Psystar has downloaded and evaluated binary versions of other kernel extensions known to function similarly. Two such kernel extensions are dsmos and AppleDecrypt. Psystar has never intentionally incorporated these external kernel extensions into its product.

Apple acknowledges that Psystar has produced the source code for OpenCojones. But they complain that their expert has found copies of dsmos and AppleDecrypt on certain Psystar machines sold in the past. As discussed earlier, Psystar acknowledges the possibility that copies of either or both of these kernel extensions may have been accidentally transferred to the hard drive image of Psystar machines sold in the past. But Psystar never deleted or failed to produce the source code for dsmos or AppleDecrypt, because Pystar has never possessed or even viewed that source code. The two kernel extensions - dsmos and AppleDecrypt - are widely available on the internet (see Exhibit A) in binary form and can be downloaded by anyone. This is how Psystar obtained its copies.

Since Apple asserts that it now has a copy of the dsmos and AppleDecrypt binaries from Psystar machines, the discovery complaint is largely moot.

2

III. Bootloaders

A bootloader is a computer program that starts operating systems when a user turns on a computer system. As such, the bootloader is in many respects conceptually separate from an operating system, though a distribution of an operating system may include its own bootloader.

Psystar has used two bootloaders in its product to start OS X. Originally it used a bootloader called psybootefi, derived from the open source program known as “boot132” (see e.g. http://www.insanelymac.com/forum/index.php?showtopic=113288). More recently, Psystar replaced psybootefi with a new bootloader, written by Psystar, called “dubl.” Apple has all copies of the source code for dubl. They also have a copy of the source code for the most recent version of psybootefi.

There is one previous version of psybootefi that has not been produced because Psystar did not have adequate source control software in place at the time the source code was modified. Sometime in 2008, Psystar fixed a bug in psybootefi related to reading data from the hard drive. Psystar failed to save a copy of the code before the bug fix. The changes amounted to about three lines of code, according to Rudy Pedraza, Psystar’s CEO. Although Psystar cannot produce the original source code file, they are willing to explain the change to satisfy any concern that Apple might have regarding the potential significance of the missing three lines of code.

“Netkas” is a bootloader available on the internet (see e.g. http://netkas.org/?p=74). Psystar acknowledges it has downloaded the binary form of this bootloader for evaluation, but has never used it as part of the Psystar system. Psystar was not aware that this bootloader was included on any past machines, though again acknowledges the possibility that it may have been accidentally transferred to the master hard disk image used to create production machines. At no time has Psytar possessed or viewed any source code for Netkas. Apple also apparently has a copy of this binary from a Psystar machine.

IV. Conclusion

For the foregoing reasons, Psystar respectfully requests that this Court recognize its good faith efforts to comply with discovery and the lack of discernible prejudice to Apple or its case, and to deny the relief requested by Apple.

Respectfully submitted,

/s/ K.A.D. Camara
K.A.D. Camara

/s/ David Welker
David Welker

Counsel for Psystar Corporation

3

Signature Attestation

Pursuant to General order No. 45(X)(B), I hereby attest that I have obtained the concurrence in the filing of this document from all the signatories indicated by (/s/name) within this e-filed document.

August 19, 2009

By: /s/ David Welker

David Welker

****************************************
****************************************

Camara & Sibley

August 18, 2009

Judge William H. Alsup
United States District Court
[address]

Re: Apple Inc. v. Psystar Corp., Case No. CV-08-3251-WHA

Dear Judge Alsup:

Apple designated Senior Vice President of Worldwide Product Marketing Philip W. Schiller to testify as Apple's corporate representative on "[t]he injury suffered by Apple as a result of the allegedly unlawful acts about which Apple complains in this action." Mr. Schiller appeared at his deposition wholly unprepared and unwilling to testify on this subject. [redacted]

I. Psystar's 30(b)(6) Notice and Apple's Response

Apple designated Mr. Schiller as its corporate representative with respect to the following topic:

3. The injury suffered by Apple as a result of the allegedly unlawful acts about which Apple complains in this action and the injury that Apple is likely to suffer if these acts continue, including but not limited to the amount and manner of calculation of any lost profits, and distinguishing between the injury caused by each unlawful act in which Apple alleges that Psystar engaged.
Psystar Corporation's Notice of Deposition Pursuant to Federal Rule of Civil Procedure 30(b)(6) at 3.

Apple objected to this topic on a variety of grounds, but ultimately stated that it would provide a witness to testify about "[t]he injury suffered by Apple":

Subject to and without waiving these objections and the General Statement and Objections, Apple will provide a witness to testify on

injury suffered by Apple as a result of the unlawful acts committed by Psystar that Apple complains about in this action.
Apple's Objections to Psystar Corporation's Notice of Rule 30(b)(6) Deposition of Apple Inc. (Topic Nos. 1-18) at 4-5 (emphasis added).

Nowhere in its objections or in any other correspondence or communications between counsel did Apple take the position that topic (3) was limited to irreparable injury or even that Mr. Schiller's testimony would be limited to irreparable injury. Even Apple's initial disclosures disclose Mr. Schiller as having information about "[h]arm to Apple."

[redacted]

30(b)(6) Deposition of Philip W. Schiller ("Schiller Depo.") at 6:2-6:8. When the depositions in this case were being scheduled, everyone understood Mr. Schiller's deposition to be the Apple deposition on injury.

II. Mr. Schiller's Refusal to Testify About Injury

[redacted]

2

[redacted]

III. Relief Requested

Apple's furnishing a witness on injury who was wholly unprepared to testify about that subject is a discovery violation that relates to a core issue in this case, the harm, if any, that Apple suffered as a result of Psystar's conduct. Psystar respectfully requests that this Court (1) order Apple to properly prepare Mr. Schiller for his deposition as corporate representative on injury, (2) require that Mr. Schiller appear for a continuation of his deposition in Houston, at the offices of Psystar's lead counsel, within the next fourteen days, and (3) pay Psystar's attorneys' fees associated with Mr. Schiller's deposition, this letter brief, and subsequent proceedings.

Respectfully submitted,

K. A. D. Camara
Counsel for Psystar Corporation

3

David Welker

Counsel for Psystar Corporation

4

*****************************************
*****************************************
*****************************************

James G. Gilliland, Jr.
[phone, email]

[Townsend letterhead]

August 19, 2009

Via Electronic Filing

Honorable William Alsup
United States District Court
[address]

Re: Apple Inc. v. Psystar Corp., Case No. C 08-03251 WHA

Dear Judge Alsup:

Psystar's request for the continued 30(b)(6) deposition of Phillip Schiller is nothing more than an effort to harass one of Apple's senior executives and prematurely seek expert testimony. Psystar's letter brief is misleading, leaves out key facts and should be denied. In Topic 3 of its 30(b)(6) deposition notice, Psystar sought testimony regarding injury suffered by Apple as a result of Psystar's illegal acts. Apple agreed to designate a witness to testify on the injury suffered by Apple but objected to Topic 3 to the extent it sought expert testimony regarding damages. (See Ex. 1, Excerpts of Apple's Objections to Psystar's Notice of 30(b)(6) Deposition.) Psystar did not confer with Apple about these objections before the deposition.

On August 13, 2009, during several hours of deposition testimny in his individual capacity, Mr. Schiller testified about Apple's injury.[redacted] (See, e.g., Schiller Dep. at 44-5-46:22; 86:8-91:23, attached as Ex. 4.) Thereafter, Mr. Schiller sat for Apple's 30(b)(6) deposition on Topic 3. (Id. at 23:20-24:10.) From the outset, Psystar's counsel disregarded the scope of testimony for which Mr. Schiller was designated. (Id. at 5:13-6:15.) Despite Apple's objections, Psystar's counsel sought testimony on the quantification of damages - the subject of expert testimony - rather than the injury suffered by Apple. (See e.g., id. at 22:20-23:20.)1

Mr. Schiller was fully prepared to discuss the non-quantifiable, irreparable injury to Apple but Psystar's counsel chose to not ask those questions and terminated the deposition instead. (Id. at 26:18-27:23.)

Moreover, the profit margin information that Psystar seeks is irrelevant. After reviewing the still-incomplete financial records that Psystar finally produced this week, Apple has concluded that the benefit of seeking lost profits as a measure of recovery in this case does not justify the risk of providing its closely guarded margin data to Psystar and its counsel.2 This choice was made as a result of Psystar's decision to litigate this case in the press. Indeed, despite the prohibition in the Protective Order (Dkt. No. 54-2 at 15), Psystar has stated its intent

townsend.
August 19, 2009
Page 2

to provide the public with information sought in discovery in this case after the case is completed. (See Ex. 2, http://community.psystar.com: "Below is the list deponents by date, feel free to post your questions as comments or email them directly to press@psystar.com if you feel that the question would be better unleashed via surprise attack. Bear in mind that we might not be able to release the answers to said questions until the conclusion of this litigation (re: Apple's Super Secret Protective Order) but we are still allowed to use them amongst our legal counsel and in court." (emphasis added)).

Apple attempted to obtain the information necessary to determine the scope of lost profits starting in November of 2008. As the Court is aware, Psystar did not produce that information, requiring Apple to file a motion to compel. In opposing Apple's motion, Psystar's counsel represented that Psystar had "produced all responsive financial documents in its possession" (see Dkt. No. 61 at 1). The Court granted Apple's motion on May 8, 2009, and ordered Psystar to produce financial data within 10 days. On May 18, 2009, Psystar produced a limited set of documents and represented that it had complied with the Court's Order. (See Ex. 3, May 18, 2009 Grewe letter.) Shortly thereafter, Psystar filed for bankruptcy.

After the bankruptcy stay was lifted, on August 6th and 7th, Apple took the depositions of Psystar employees Maria Guernsey and Jennifer Perez. [redacted] Despite Psystar's repeated assurances to the Court and to Apple that it had produced all relevant financial documents, this was the first time that Psystar disclosed its use of accounting software.4

Moreover, Psystar did not produce either financial documents from this database or other outstanding financial information until last Friday, August 15, 2009, and, as of Tuesday of this week, was still producing thousands of pages of additional financial documents.

In light of Apple's decision not to seek lost profits and Psystar's stated intent to disclose Apple's confidential information, Apple now seeks a protective order specifically precluding discovery by Psystar of Apple's non-public profit margins on the sale of individual products or product lines. Indeed, Apple believes that discovery of its non-public financial information should be limited to revenues, R&D and advertising costs related to Mac computers and Mac OS X. One explicit basis for issuance of a protective order is to limit the disclosure of "confidential research, development or commercial information." Fed. R. Civ. P. 26(c)(1)(G); U.S. v. Columbia Broadcasting System, Inc., 666 F.2d 364, 369 (9th Cir. 1982). Apple must show that the information is indeed confidential and that disclosure would harm it. Then the burden shifts to Psystar to prove the information is relevant to the subject matter of the litigation.

townsend.
August 19, 2009
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Courts will balance the risk of disclosure of the confidential information and resulting harm against the risk that a protective order will impair the prosecution or defense of the claims. Brown Bag Software v. Symantec Corp., 960 F.2d 1465, 1471 (9th Cir. 1992) (noting that "none of the trade secrets were themselves relevant"); see also Johnson v. Mortham, 164 F.R.D. 571 (ND. Fla. 1996) (granting plaintiffs' motion for protective order limiting discovery to matters relevant to the issues not disposed of on summary judgment.

[redacted] Profit margin data is not relevant in is case as Apple is not seeking lost profits. Moreover, while Psystar's profit margin is relevant to determining the appropriate level of statutory damages for copyright infringement, Apple's is not. N.AS. Import, Corp. v. Chenson Enterprises, Inc., 968 F.2d 250, 252 (2d Cir. 1992) ("In determining an award of statutory damages ... a court may consider 'the expenses saved and profits reaped by the defendants in connection with the infringements, the revenues lost by the plaintiffs as a result of the defendant's conduct, and the infringers' state of mind -- whether willful, knowing, or merely innocent.'") (quoting Nimmer on Copyright § 14.04(B), at 14-41 (1991)); Fitzgerald Pub. Co. v. Baylor Pub. Co., 807 F.2d 1110, 1117 (2d Cir. 1986) ("the expenses saved and the profits reaped by the infringers are considered. Other factors -- not dependent on particular defendant's culpability -- are also examined, including the revenues lost by the plaintiff, the value of the copyright, and the deterrent effect on others besides the defendant. Some factors do focus upon an individual defendant's culpability, for instance, whether the defendant's conduct was innocent or willful, or whether a defendant has cooperated in providing particular records from which to assess the value of the infringing material produced. Finally, the potential for discouraging the defendant is factored into the determination of the award.") (internal citations omitted; emphasis added).

Psystar is actively seeking publicity about this case, going so far as to seek questions from the public for depositions of Apple's witnesses and promising to disclose information it learns about Apple after the completion of the lawsuit. While Psystar's counsel has represented that neither he, nor his clients, will violate the Protective Order, Psystar has not been entirely candid with Apple, or this Court, on previous occasions. Since profit margin data is of the utmost importance to Apple, it does not want to risk having this information publicized and is willing to forego lost profits to prevent this. Accordingly, Apple respectfully requests that this Court deny Psystar's motion to compel and grant Apple's request for a Protective Order.

Very truly yours,

/s/

James G. Gilliland, Jr.
Counsel for Apple Inc.


1 In fact, Psystar's counsel began asking questions relating to an entirely different 30(b)(6) topic, Topic 8, seeking testimony regarding costs, revenues and profis including profit margins associated with Apple's computers and Mac OS X operating system. (See Ex. 1.)

2 Apple's decision to forego lost profits is based on its desire not to risk disclosure of its closely guarded margin data. To the extent this information is compelled, Apple reserves its right to claim lost profits.

3 [redacted] This mischaracterization was repeataed at the hearing on May 5, 2009.

4 Indeed, in its May 18, 2009 letter, Psystar represented that Psystar's June 2008 profit and loss statement was an informal document created by Diana Bustillo in Microsoft Excel. (Ex. 3.) [redacted]

5 Apple is prepared to submit a further declaration from its Finance Department regarding the extremely sensitive, and closely guarded, nature of this information, as well as the impact on the company of its inadvertent disclosure, if the Court deems it necessary.


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