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A federal judge in Fort Lauderdale, Fla., has awarded a Boca Raton, Fla., software sales company $1.1 million in damages because software giant Microsoft and one of its business partners engaged in a “scheme” to defraud and deceive the firm as part of Microsoft’s effort to protect its copyrights. U.S. District Judge James I. Cohn issued the bench verdict against Houston-based Wetmore Printing in February after a weeklong trial in December. Microsoft was not a party to the case, styled HGI Associates Inc. v. Wetmore Printing Co., but it was part of the fraud, Cohn said in his ruling. Amy Petty, a spokeswoman for Microsoft, declined comment. Ron Swartz, the owner of Lauderhill-based HGI Associates Inc., sued Wetmore in July 2001 for breach of contract, alleging that Wetmore failed to deliver thousands of licensed software kits it promised to sell him for $2.50 each. The suit was filed in federal court on diversity grounds. Swartz claimed he suffered nearly $1 million in lost profits and lost future earnings of $16.7 million. In HGI’s amended complaint, the company contended that Wetmore and Redmond, Wash.-based Microsoft conspired to enter into a sales agreement with him for the sole purpose of determining whether HGI was violating software copyrights. Cohn found the plaintiff’s contentions meritorious. The attorney for HGI, Michael L. Feinstein, said Microsoft’s arrangement with Wetmore to essentially entrap his client was typical of the software giant’s aggressive efforts to protect against copyright infringement, but that this time the firm went too far. “It’s clear this was their standard operating procedure,” Feinstein said. “Their whole lifeblood is protecting the integrity of their distribution network.” Wetmore’s lawyer, Rick Hutchison, a partner at Holland & Knight in Fort Lauderdale, denied that his client committed any fraud, and has filed a notice of appeal. “They were trying to protect consumers from buying unlicensed software,” Hutchison said. HGI’s business is the so-called secondary software market. It sells software at a reduced price, mostly to businesses in Europe. It acquires the software largely from computer manufacturers that have purchased the products through software companies’ authorized distribution chains, and have left-over kits, which include certificates of authenticity. In 2001, a federal judge in California found such transactions legal. The judge ruled in Softman v. Adobe that businesses that do not install software they have purchased may legally resell it on the secondary market regardless of the manufacturer’s end user license agreement. Wetmore was an authorized Microsoft “replicator.” Microsoft sent Wetmore software kits with user guides, and the company printed and produced the user guides, certificates of authenticity and computer disks themselves for Microsoft and its customers, including personal computer manufacturers Dell and Compaq. Last year, Wetmore’s parent company merged with Ontario-based Moore Corporation Ltd. Then, in February, Moore merged with Chicago-based R.R. Donnelley, the world’s largest commercial printing company. Microsoft no longer authorizes Wetmore to print its products. During discovery, HGI learned that Wetmore only agreed to deliver the software kits because Microsoft asked Wetmore for its help in investigating Swartz for possible copyright violations. His name was on a watch list after software certificates of authenticity he had bought turned out to have been stolen. The Palm Beach County Sheriff’s Office investigated, but never charged Swartz. According to Cohn’s 36-page factual findings, Swartz cold-called Wetmore looking to buy second-hand software. Wetmore informed Microsoft, which asked its vendor to invite Swartz to lunch in Houston. According to court records, Bruce Roenigk, Microsoft’s director of direct original equipment, e-mailed Wetmore executives. “Thanks a lot for doing this for [Microsoft],” he wrote. “One of the main things we are trying to accomplish is to get Swartz to admit that what he is doing is not a licensed/legal way to distribute [Microsoft] products … I need you to record the conversation.” In February 2001, Swartz flew to Houston and secured a deal with Wetmore over a meal at a Steak & Ale restaurant. Without Swartz’s knowledge or consent, Wetmore sales manager Todd Bone recorded the conversation on his MP3 player. In Texas, it’s not illegal to record a conversation under these circumstances without the other party’s consent. The recording contained no admission by Swartz that he knew or contemplated that buying and selling second-hand software products was a violation of copyright law. Indeed, according to Cohn, Swartz explicitly said he believed he was not required under law to pay royalties. After the contract was signed, HGI started placing orders with Wetmore, which sent him a few thousand software kits. In anticipation of buying more, Swartz rented a warehouse. But his fourth and fifth orders were never delivered. Wetmore officials told him that, from the start, sending him the software kits had been a mistake, and they asked him to return the kits for a full refund. But HGI already had sold many of the kits and didn’t want the arrangement to end. So HGI filed suit to enforce the contract. In February, Cohn found that Wetmore had breached its contract with HGI and had engaged in a scheme to deceive Swartz. “In every instance that Wetmore sent Microsoft product to HGI, it was approved by Microsoft,” Cohn said in his ruling. “Microsoft, in concert with Wetmore, pursued a course of conduct designed to defraud, deceive and mislead HGI into believing that it had a legitimate business relationship with Wetmore.” In addition, Cohn found that by approving the shipments to HGI, Microsoft waived its right to collect royalties on what HGI bought from Wetmore. He ordered Wetmore to pay HGI for lost orders and the cost of renting the warehouse. Both sides have filed notices to appeal. Feinstein said HGI was appealing because Swartz thinks he’s entitled to several million dollars in future lost earnings.

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