Date:    October 26, 1998
                                                                             Time:    9:30 a.m.
                                                                             Court:  Hon. Audrey B. Collins

  TABLE OF CONTENTS

INTRODUCTION 2

REVIEW OF FACTS AND SUPPLEMENTARY FACTUAL INFORMATION 2
The Rio Has No Independent Recording Function 4
The Rio Player Obtains Audio Only From The Hard Drive Of A Personal Computer 5
The Rio Is Incapable Of Facilitating Serial Copying 6
Delays in Launch Of The Rio Will Seriously Jeopardize Diamond Multimedia in This Competitive Environment 7

LEGAL ARGUMENT 8

I. The Standard For A Preliminary Injunction 8

II. Plaintiffs Have Not Established A Likelihood Of Success In Proving That Diamond Multimedia's Rio Player Is Governed By The AHRA 8

A. As A Computer Peripheral Wholly Dependent Upon A Personal Computer For A Recording Function, The Rio Is Not A "Digital Audio Recording Device" and Falls Outside The Audio Home Recording Act 8

B. The AHRA Does Not Apply To The Rio Because The Exclusion In 17 U.S.C. § 1001(5)(B)(ii) Indeed Means What It Says, And It Excludes General Personal Computer Storage Media Such As Hard Drives From The Definition of "Digital Musical Recording." 9

1. The Definition of "Digital Musical Recording" Makes The AHRA Inapplicable To The Rio 9

2. The Exclusion Of Personal Computers From The AHRA Necessarily Entails The Exclusion Of Dependent And Complementary Computer Peripherals Such As The Rio 12

III. Even If The Rio Were Governed By The AHRA, Plaintiffs Have Failed To Prove That The Rio Violates The Act 13

A. Plaintiffs Cannot Prove That The Rio Fails To Meet A "Serial Copy Management System"
Requirement 13

1. "Serial Copy Management System" Is Not Defined In Statute Or Regulation 13

2. The Secretary Of Commerce Has Failed To Prescribe Regulations For Compliance With The SCMS Requirements In The Six Years Since The AHRA Was Enacted 15

3. Because The Rio Does Not Permit Serial Copying, It Complies With the SCMS Requirement of the AHRA 15

B. Plaintiffs Cannot Show A Violation Of The AHRA By Diamond's Failure To Perform Acts Before They Are Due 16

C. The Plaintiffs Cannot Assert Claims Against Diamond Multimedia Under AHRA Because Of Constitutional Infirmities 17

IV. Plaintiffs Cannot Show Any Irreparable Harm Arising From Any Violation of the Audio Home Recording Act 19

V. Diamond Multimedia Will be Substantially Harmed by an Injunction and the Balance of Harms Weighs Strongly Against A Preliminary Injunction 20

VI. The Public Interest Weighs Strongly Against A Preliminary Injunction 20

A. The Public Interest Favors Congressional Amendment To The Copyright Laws, Rather Than Judicial Expansion, In Order To Accommodate Technological Developments 20

B. The Public Interest Favors Improved Distribution Of Musical Recordings 21

C. The Public Interest Opposes Legislative And Judicial Interference With Technological Development 22

VII. The Requested Preliminary Injunction is Overbroad 22

VIII. The Court Cannot Issue A Preliminary Injunction Without A Substantial Bond To Protect Diamond Multimedia Against Harms Caused By The Injunction 24

CONCLUSION 25

 CASES
Chase-Riboud v. Dreamworks, Inc., 987 F. Supp. 1222 (C.D. Cal. 1997)  8
Lovell v. City of Griffin, 303 U.S. 444 (1938)  17
NAACP v. Button, 371 U.S. 415, 83 S.Ct. 328, 9 L.Ed.2d 405 (1963)  17
Nintendo of America, Inc. v. Lewis Galoob Toys, Inc., 16 F.3d 1032 (9th Cir. 1994) 24
Red Lion Broadcasting Co. v. FCC, 395 U.S. 367 (1969)  17,18
Sampson v. Murray, 415 U.S. 61 (U.S. 1974)  19
Smith v. Goguen, 415 U.S. 566, 94 S. Ct. 1242, 39 L.Ed. 605 (1974)  17,18
Sony Corp. v. Universal City Studios, 464 U.S. 417, 104 S.Ct. 774 (1983)  20,21
Stanley v. University of Southern California, 13 F.3d 1313 (9th Cir. 1994)  19
Washington Capitols Basketball Club, Inc. v. Barry, 304 F.Supp. 1193 (N.D. Cal. 1969), aff'd, 419 F.2d 472 (9th Cir. 1969)  24
 

 STATUTES
17 C.F.R. § 201  13
17 C.F.R. § 259  13
17 U.S.C. § 101  10
17 U.S.C. § 117  3
17 U.S.C. § 202  11
17 U.S.C. § 1001  11
17 U.S.C. § 1001(1)  9
17 U.S.C. § 1001(3)  9
17 U.S.C. § 1001(3)(A)  19
17 U.S.C. § 1001(5)(A)  10
17 U.S.C. § 1001(5)(B)(ii) 10
17 U.S.C. § 1002  9,13
17 U.S.C. § 1002(a)(2)  15
17 U.S.C. § 1002(a)(3)  15
17 U.S.C. § 1002(b)  15,18
17 U.S.C. § 1002(2)   12
17 U.S.C. § 1003(c)(1) 22
17 U.S.C. § 1003(c)(3)  22
17 U.S.C. § 1004 (a)  17
37 C.F.R. § 201.27(d)  16,22

 MISCELLANEOUS
138 Cong. Rec. H9029-01 (Sept. 22, 1992)  12
H.R. Rep. No 102-780(I), 102d Cong., 2d Sess. (1992)  14
H.R. Rep. No. 102-783(I), 102d Cong., 2d Sess., 13 (1992) 15,16,18
H.R. Rep. No. 102-873 (I), 102d Cong., 2d Sess. 1 (1992) 13,14
H.R. Rep. No. 102-873 (II), 102d Cong., 2d Sess. 1 (1992)  14
Note, Recovery for Wrongful Interlocutory Injunctions Under Rule 65(c), 99 Harv. L. Rev. 828 24
RONALD D. ROTUNDA & JOHN E. NOWAK, TREATISE ON CONSTITUTIONAL LAW, 36 (2d ed. 1992) 17
S. Rep. No. 102-294 at 48 (1992) 9,11
WRIGHT, MILLER, KANE, FEDERAL PRACTICE AND PROCEDURE, §2941 (Civil 2d 1995) 16

Because of the extremely fast deadlines for briefing in this case,  Diamond Multimedia will not repeat all of its arguments from the papers opposing the temporary restraining order and order to show cause.  Instead, Diamond Multimedia will focus on the particular issues on which the Court appeared to welcome further elaboration and clarification.  Diamond Multimedia will also furnish additional information and arguments that could not be included in the earlier papers because of time constraints.  Diamond Multimedia also relies upon the declaration of James M. Burger, as well as the supplemental declarations of Kenneth Wirt, Don Spencer, and Andrew Bridges, all of which are being filed with this memorandum.

 Plaintiffs have alleged no contributory copyright infringement by Diamond Multimedia. The suit is brought solely under the Audio Home Recording Act (AHRA), which imposes technology restrictions on specified types of audio recording devices and requires the payment of royalties on those devices.  Diamond Multimedia's Rio player, which is incapable of any independent recording or engaging in serial copying, simply is not a device covered by the AHRA.

Before turning to particular dispositive facts about the Rio and its relation to the AHRA, it is worthwhile to review a number of points of broad practical importance:
-- Computers use copying as an essential function of their activity.  Declaration of James M. Burger ("Burger Decl.")   17; cf. 17 U.S.C. § 117.
-- Computers have been widely used for music applications, including the replay of recorded music.  Burger Decl.   8.
-- Even small laptop and hand held computers are capable of the portable replay of  audio files.  Burger Decl. at  8.
-- MP3 is a popular format for Internet music distribution because of the degree of compression and the reduction of memory needed to store it.  Declaration of Don Spencer ("Spencer Decl.")  2; Declaration of Paul Schatzkin ("Schatzkin Decl.")  14, 15, 20; Declaration of Michael Robertson ("Robertson Decl.")  3.
-- Although the MP3 format may also be used by persons for improper purposes, it has gained critical mass for legitimate use by recording artists and legitimate music distributors.  Declaration of Dennis Mudd ("Mudd Decl.")   11-12.
-- Many recording artists support the Internet, and MP3 compression as a standard format, as a means of gaining wider distribution of their music.  Declaration of Gian Caterine ("Caterine Decl.")  5.
-- Internet record labels look to the Internet as a means of allowing entry into the music distribution business without formidable barriers to entry posed by the cost of manufacturing plants and competition for shelf space in traditional retail stores.  Kohn Decl.  15-17; Schatzkin Decl.  19.
-- Computers cannot allow effective operation of the Serial Copy Management System because the system can be easily defeated.  Burger Decl.  7.
 -- The specifications of the Serial Copy Management System have never been given the force of law by either legislation or regulation.  Supplemental Declaration of Andrew Bridges ("Supp. Bridges Decl.") at  2.
-- The Department of Commerce has failed to develop any regulations regarding the Serial Copy Management System or its equivalents in the six years since the AHRA directed the Secretary of Commerce to promulgate those regulations.  Supp. Bridges Decl.  2.
-- Music recording piracy cannot seriously be increased by devices that themselves cannot facilitate serial copying.
-- The Rio's lack of digital audio output means that it cannot effect any copies of music stored in its memory.  Spencer Decl.  3; Supp. Spencer Decl.  11-12.
-- Consumers have access to computer products, other than the Rio, that can indeed duplicate recorded music illegally, such as recordable CD-ROMs; however, Plaintiffs have apparently taken no legal action against manufacturers regarding those products.  Supp. Bridges Decl.  3 and Exh. A.
-- The Rio holds approximately one hour of music for a cost of approximately $200.  One additional hour's worth of memory upgrade costs approximately $100.  A typical music CD costs approximately $15 at retail.  Wirt Decl.  7, 10.  Use of the Rio, or its memory upgrade, costs so much more than a CD that there is no sense in a consumer's using the Rio to avoid buying a CD.
-- Nonapplication of the AHRA to personal computer products will not immunize behavior that is illegal under the Copyright Act; copyright laws still govern the use of those products. Burger Decl.  13.
Diamond Multimedia now turns to the critical facts that relate to applicability of the Audio Home Recording Act to the Rio.

The Rio Has No Independent Recording Function.
The Rio player is a computer peripheral device that cannot make any recordings without depending on a personal computer to manage the recording process.  Supp. Spencer Decl.  5.

 The dependence on a personal computer is not merely a question of needing the personal computer as the source of the matter being recorded.  The Rio depends on the personal computer to execute the instructions necessary for the recording to occur.  Supp. Spencer Decl.  5.

The Rio has no "record" button.  All recording instructions are made through an attached personal computer, the personal computer's tools such as a mouse and keyboard, and software in the personal computer for compression, file formatting, and file transfer functions.  Supp. Spencer Decl.  3.
The Rio player cannot obtain audio recordings from any source other than a personal computer.  The Rio was not designed to stand on its own, or to connect with any consumer audio device, for a recording function.  It was designed purely to work with a personal computer. Supp. Decl. of Spencer  5, 9.
The Rio player has been advertised and marketed as an audio playback device; indeed it is consistently referred to as a "player," not a "recorder."  It is not advertised or marketed as a recording device because it does not have any independent recording capability.  The recording capability requires a computer.   Supp. Wirt Decl.  12.

In order for the Rio player to play, a personal computer must use software to store MP3 audio files from the personal computer hard drive onto the Rio player's memory.  The Rio software for the personal computer, furnished by Diamond Multimedia, causes the files to be stored in the Rio in a proprietary file format.  This proprietary software allows the personal computer to communicate to the Rio player and provides the interface for the computer user to select and store files onto the Rio player.  The proprietary software prevents the memory upgrade from being interpreted by any other device.  Supp. Spencer Decl.  5, 8.

The Rio Player Obtains Audio Only From The Hard Drive Of A Personal Computer.
 As stated above, the Rio can obtain its audio files only from the personal computer's hard drive.  Supp. Spencer Decl. at  5, 9.   A personal computer stores many computer programs and data files on its hard drive.   A hard drive consists of a solid or "hard" disk on which digital information can be written, a motor to spin the hard disk, and a series of "heads" that are used to read the information from, and write the information to, the spinning hard disk.  Supp. Spencer Decl.  13.

The Rio player is not capable of receiving MP3 audio files from any source other than a personal computer.  It cannot receive files of any sort from another Rio player, stereo receiver, CD player, minidisc ("MD") player, digital audio tape ("DAT") player, radio broadcast, television broadcast, or live performance (the Rio player has no microphone).  Supp. Spencer Decl.  5, 9.

The Rio Is Incapable Of Facilitating Serial Copying.
As the Court has already observed, the Rio is not capable of serial copying.
The Rio is incapable of serial copying for two reasons.  First, the Rio is simply incapable of recording on its own.  This point has been addressed above.  Only an integrated combination of a personal computer and the Rio, acting together, can effect the recording.  Supp. Spencer Decl.  5.

Second, the Rio player's only audio output is the analog output to the headphones.  Supp. Spencer Decl.  10.  The Rio player is not capable of storing any of the files stored in its internal memory to a personal computer or other device.  Supp. Spencer Decl.  12.

Plaintiffs have based their argument about serial copying on the fact that the memory upgrade of the Rio (although not the basic memory itself) is removable.  Although the flash memory upgrade card in the Rio player can be removed and inserted in another Rio player, the audio files on the flash memory card cannot be interpreted by another device either through the Rio player or directly from the flash memory card.  Supp. Spencer Decl.  8.  Thus, no copying of the files can take place.

Moreover, even under the theory that physical removal of a memory upgrade card would constitute "copying," there is no reason to expect that a consumer would use flash memory upgrades, which cost $100 for the storage equivalent of one CD, as a way of distributing illegal copies.  See Wirt Decl. at  7, 10.

 Delays in Launch Of The Rio Will Seriously Jeopardize Diamond Multimedia in This Competitive Environment.
While there are some portable MP3 players already on the market, their high price, low awareness, and limited availability in the United States have not made them popular.  Recognizing the potential in this market, Diamond Multimedia acquired the portable MP3 player technology.  Using this technology, Diamond Multimedia planned to make a lower priced player and make it more widely available using its established channels of advertising and distribution of its other computer peripheral products.  Supp. Wirt Decl.  5.

Diamond Multimedia has already made a substantial investment in getting the Rio player ready for sale.  Diamond Multimedia has invested in the design of the Rio player from the basic portable MP3 player technology; secured parts and manufacturing facilities; arranged partnerships with GoodNoise, mp3.com and others to provide music and software for the Rio player; designed advertising and packaging; and advertised the Rio player.  To date, the company estimates its investment in the Rio player to be over $3 million.  Watkins Decl.  2; Supp. Wirt Decl.  3.

Diamond Multimedia's Rio player is poised to be the first affordable and widely available portable MP3 player on the market.  Being first on the market has obvious significant advantages including awareness, retail shelf space, favorable word-of-mouth, magazine reviews, and early market share leadership.  Supp. Wirt Decl.  6.  Diamond Multimedia's timing also allows it to advertise at COMDEX, the country's largest computer products exhibition which is held each year in mid-November, and to capitalize on the Christmas holiday buying season.  Supp. Wirt Decl.  7.  Diamond Multimedia expects to earn revenues of $200 million from the Rio player for the first two years the Rio player is on the market.  Supp. Wirt Decl.  4; Watkins Decl.  3.

Other companies are very close to having their own portable MP3 players on the market, some stating their intention to bring a product to market by the end of 1998.   Wirt Decl.  8 and Exh. B.  Failure to get the Rio player to market soon will cause Diamond Multimedia not only to miss COMDEX and Christmas, but to lose the key market position of being the first to provide the portable MP3 player.

I. The Standard For A Preliminary Injunction.
This Court has already set forth the standard on preliminary injunction in Chase-Riboud v. Dreamworks, Inc., 987 F. Supp. 1222, 1224 (C.D. Cal. 1997).  The standard is the same standard the Court considered when entering the temporary restraining order.  What has changed are the harms and interests must be considered in light of an injunction that could last years as opposed to merely ten days.

II. Plaintiffs Have Not Established A Likelihood Of Success In Proving That Diamond Multimedia's Rio Player Is Governed By The AHRA.
Plaintiffs have the burden of establishing a likelihood of success on the merits.  Plaintiffs must demonstrate that they will likely be able to prove that the Rio player not only falls under the AHRA, but that it does not carry the Serial Copy Management System or its functional equivalent.  Plaintiffs can prove neither.
A. As A Computer Peripheral Wholly Dependent Upon A Personal Computer For A Recording Function, The Rio Is Not A "Digital Audio Recording Device" and Falls Outside The Audio Home Recording Act.
There can be no dispute: the Rio is a computer peripheral with no independent recording function.  Unless the Rio is attached to a personal computer by a cable, and unless software on that personal computer is used to manage the transfer of files, the Rio will not record anything.  See pages 4-5 above.
The legislative history quoted twice by plaintiffs in their reply brief on the TRO application makes it clear that this device is not covered by the AHRA:
Although the typical personal computer would not fall within the definition of a "digital audio recording device," a separate peripheral device with an independent recording function would be a "digital audio recording device" if the recording function was designed or marketed for the primary purpose of making digital audio copied recordings for private use.  In that case, only the peripheral device would be subject to the royalty payment requirements of subchapter B.
 S. Rep. No. 102-294 at 48 (1992)(emphasis added)(quoted in Plaintiffs' reply brief on TRO at pages 4, 7).  Plaintiffs have even acknowledged the importance of the "independent recording function":  "A separate peripheral device with an independent recording function is still a digital audio recording device within the meaning of the AHRA."  Plaintiffs' Reply Memorandum on TRO at 7:17-19 (emphasis added).
As explained at the TRO hearing, what bothers the RIAA -- and what distinguishes the Rio from other personal computer music products -- is that the Rio is capable of independent playback.  The AHRA does not prohibit devices that are capable of independent playback.
B. The AHRA Does Not Apply To The Rio Because The Exclusion In 17 U.S.C. § 1001(5)(B)(ii) Indeed Means What It Says, And It Excludes General Personal Computer Storage Media Such As Hard Drives From The Definition of "Digital Musical Recording."
1. The Definition of "Digital Musical Recording" Makes The AHRA Inapplicable To The Rio.
The Rio is covered by the AHRA only if it is a "digital audio recording device."  See 17 U.S.C. § 1002.  A "digital audio recording device" is capable of, and designed or marketed for the primary purpose of, making "a digital audio copied recording" for private use.  See 17 U.S.C. § 1001(3).  A "digital audio copied recording" is "a reproduction in a digital recording format of a digital musical recording, whether that reproduction is made directly from another digital musical recording or indirectly from a transmission."  See 17 U.S.C. § 1001(1).  Thus, the definition of "digital musical recording" is the crux of the question of applicability of the AHRA to the Rio.  If the hard drive from which the Rio gets its music does not qualify as a "digital music recording," the Rio is not a "digital audio recording device."
 "Digital musical recording" is defined by the statute as a "material object" with certain characteristics.  See 17 U.S.C. § 1001(5)(A).  The definition also excludes certain types of material objects, namely those
in which one or more computer programs are fixed, except that a digital musical recording may contain statements or instructions constituting the fixed sounds and incidental material, and statements or instructions to be used directly or indirectly in order to bring about the perception, reproduction, or communication of the fixed sounds and incidental material.
17 U.S.C. § 1001(5)(B)(ii)(emphasis added).
The Court expressed uncertainty whether the exclusion of "a material object . . . in which one or more computer programs are fixed . . ." from the definition of "digital musical recording" in 17 U.S.C. § 1001(5)(B)(ii) was intended by Congress to be broad enough to include a hard drive of a personal computer.

The simple answer is that the exception is much broader than simply hard drives.  Hard drives are merely one species of items excluded from the definition of "digital musical recording."  Many other things are also excluded:  floppy diskettes, Zip drives, integrated circuits, circuit boards and the like.  A hard drive is merely one type of "material object in which one or more computer programs are fixed."  The declaration of James M. Burger, who represented the computer industry in negotiations leading to the inclusion of this language, explains the rationale at length.  See Burger Decl. at  14-20.

The Copyright Act contains numerous references making it clear that a "material object" can include a wide variety of products. See, e.g., 17 U.S.C. § 101 (definitions of "audiovisual works," "copies," "literary works," "motion pictures," "phonorecords," and "sound recordings").  The definition of "sound recordings" is particularly instructive:
"Sound recordings" are works that result from the fixation of a series of musical, spoken, or other sounds . . . regardless of the nature of the material objects, such as disks, tapes, or other phonorecords, in which they are embodied.
 17 U.S.C. § 101 (unnumbered paragraph defining "sound recordings").  In this statute the Copyright Act expressly includes "disks" and "tapes" as examples of "material objects."  "Disks" encompasses hard drives.

Moreover, the statute also distinguishes among copyrights, works, and material objects.  The use of "material object" in the exception to the definition of "digital musical recording" reflects an important and often discussed distinction between copyrights in works and material objects embodying those works:
Ownership of a copyright, or any of the exclusive rights under a copyright, is distinct from ownership of any material object in which the work is embodied.  17 U.S.C. § 202.

When Congress said "material object," it knew what it meant.  The phrase appears enough times in copyright laws, and involves such a critical distinction in section 202, that it was not casual language.  A hard drive is a material object; a computer program is a work.  The "digital musical recording" of section 1001(5) is not defined with the word "work."  It is defined by reference to a "material object."  The critical exclusion is also defined by reference to "a material object" -- namely a material object on which computer programs are fixed.  17 U.S.C. § 1001 (5)(B)(ii).

Congress' failure to specify "hard drive" or "Internet" in the exclusion was not an omission.  Because the exclusion is far broader than hard drives or the Internet, use of such specific words would have been unduly restrictive:  Congress' intent was to exclude the personal computer industry.  Hard drives and the Internet are merely particular products or areas of business of that industry.  Burger Decl.   11-16.
As explained in Diamond Multimedia's brief opposing a temporary restraining order, the Congress steered clear of the personal computer industry:
In crafting this legislation, the committee intends to address the longstanding issue of audio recording, and only audio recording. . . . The committee has been careful to make clear that this legislation is limited to this issue and to avoid affecting other technologies or other interests even by implication.
 S. Rep. 102-294 at 131-2 (1992).  Again, Representative Collins, a principal sponsor of the Act, explained as the legislation was being passed in the House that "the legislation does not cover products primarily marketed by the computer industry . . . ."  138 Cong. Rec. H9029-01 at H9036 (Sept. 22, 1992).
The fact that section 1001(5)(B)(ii) contains one of only two references to the computer industry in the Act  underscores the intended breadth of the exception to "digital musical recording."  The computer industry exclusion was understood to be broad; likewise the definition of "digital musical recording" implemented that broad industry exclusion by excluding a broad range of computer storage media.

2. The Exclusion Of Personal Computers From The AHRA Necessarily Entails The Exclusion Of Dependent And Complementary Computer Peripherals Such As The Rio.
The parties agree that general purpose computers are excluded from coverage of the AHRA.  The exclusion for general purpose personal computers entails an exclusion for a product like the Rio which necessarily depends upon a general purpose personal computer for operation.

The AHRA addresses copying by looking at both the input and the output of the recording function.  In section 1001(1), a "digital audio copied recording" is "a reproduction in a digital recording format of a digital musical recording, whether that reproduction is made directly from another digital musical recording or indirectly from a transmission."  This has two necessary elements:  (a) the input -- a digital musical recording from which the reproduction is made and (b) the output -- a reproduction in a digital recording format.  In the case of the Rio, there is no digital musical recording from which the reproduction is made, because the hard drive on which the Rio depends is excluded from the definition of "digital music recording."

The definition of a "digital audio copied recording" is complementary, with two parts, because a recording function is complementary, with input and output.  The Act also envisions that SCMS information is transmitted and acted upon between complementary devices.  See 17 U.S.C. § 1002(2)(requiring that information be sent, received, and acted upon between devices).

 Personal computers, not being subject to AHRA, do not have any Serial Copy Management System.  Nor would the SCMS be effective on them.  Burger Decl.  7.  The computers are not configured, and need not be configured,  to implement the system by placing codes on computer files.

Because the computers are not so configured, the computer peripherals that depend on the computers cannot rely on the computers to pass along or generate SCMS data, and there is therefore no complementary system with which to interact.  That explains why the statute defines terms in such a way that the Rio, as a matter of law, cannot be making a reproduction of the statutorily defined "digital musical recording" and cannot be making a statutorily defined "digital audio copied recording" from the personal computer memory.  Because it does not make a "digital audio copied recording," the Rio is not a "digital audio recording device" and does not fall within the scope of the AHRA.

III. Even If The Rio Were Governed By The AHRA, Plaintiffs Have Failed To Prove That The Rio Violates The Act.
A. Plaintiffs Cannot Prove That The Rio Fails To Meet A "Serial Copy Management System" Requirement.

1. "Serial Copy Management System" Is Not Defined In Statute Or Regulation.
The plaintiffs cannot prove that Diamond falls short of a legal standard where that standard has not been legally established.  As shown below, the legislative process resulted in the intentional omission of any definition of the standard.

 The AHRA was a compromise designed to protect the rights of consumers, recording artists, record companies and the electronics industry.  The compromise was embodied in the definition of "digital audio recording devices" covered by the Act.  A distributor must register with the Copyright Office within 45 days after first distribution of the devices and pay royalties to the Copyright Office, and the devices must contain the Serial Copy Management System or its functional equivalent.  17 U.S.C. §1002; H.R. Rep. 102-873(I), 15 (1992).  The procedure for payment and distribution of royalties has been set out in the Code of Federal Regulations.  See 17 C.F.R. §§ 201 and 259.  As shown below, the definition and requirements of the Serial Copy Management System (SCMS) or its functional equivalent, are deliberately absent from the AHRA.  There have been no implementing regulations.  Supp. Bridges Decl.  2.
In 1986, digital audio tape (DAT) technology was introduced to the consumer electronics world.  H.R. Rep. No. 102-873 (II), 102d Cong., 2d Sess. 1, 2 (1992).  Concerned about the ability of DAT recorders to make "perfect" copies, the Recording Industry Association of America threatened legal action against any company that attempted to market DAT recorders in the United States. H.R. Rep. No 102-780(I), 102d Cong., 2d Sess. (1992).  This threat had the effect of preventing the introduction of digital audio recording technology for consumers in the United States.  H.R. Rep. No. 102-873(II) at 2.

To resolve the impasse, the recording industry and DAT manufacturers began negotiations to include copy prevention circuitry.  H.R. Rep. No. 102-873 (I), 102d Cong., 2d Sess. 1, 12 (1992).  After negotiations between the groups failed and after further failures by the recording industry to invent a satisfactory copy control technology, the "Serial Management Copy System" (SCMS) was developed.  Id.
More negotiations took place, resulting in a July 1989 agreement between the record companies and DAT hardware manufacturers.  Id. at 9-10.  The agreement mandated that legislation requiring the incorporation of SCMS would be sought.  Id.  In 1990, legislation that reflected this agreement was introduced in Congress.  Id.

After further disputes and negotiations over other issues, the DAT manufacturers and the record companies negotiated legislation introduced in 1991 which eventually became the AHRA.  Id. at 12.
That 57-page bill originally incorporated by reference a 37-page "Technical Reference Document" which contained the specifications for the SCMS.  Id. at 13.  The legislation spent a year in committee during which it was reduced from 57 pages to 28.  Id.  A significant portion of the reduction was a result of Congress' decision to exclude from the Act the entire Technical Reference Document.  Id. at 14.  Congress also stated, "Although current section 1002(a)(1) specifies that the "Serial Copy Management System" is an acceptable system for preventing serial copying, the term is left undefined." Id.
 
Congress was very careful to spell out in the legislative history the reasons for these deletions:
As introduced, the bill mandated use of the SCMS . . . .  By contrast, the approach now taken in the bill is result-oriented:  SCMS and systems that have the same functional characteristics as and are compatible with SCMS automatically qualify under the bill.  Any other system certified by the Secretary of Commerce as prohibiting serial copying of copyrighted works embodied in digital musical recording meets the requirements of the Act.Id. at 15.  Thus, the Congress consciously failed to legislate a technical standard.

2. The Secretary Of Commerce Has Failed To Prescribe Regulations For Compliance With The SCMS Requirements In The Six Years Since The AHRA Was Enacted.
Even if the Rio player is a device regulated by the AHRA, plaintiffs have the burden of proving Diamond Multimedia did not comply with the Act.  The Rio player will comply with the Act if it conforms to a "system that has the same functional characteristics as the Serial Copy Management System . . . ."  17 U.S.C. § 1002(a)(2).  The Act charges the Secretary of Commerce with establishing a procedure to verify that a system meets with this standard.  17 U.S.C. § 1002(b).   Additionally, the Secretary of Commerce has the authority to certify that a system "prohibits unauthorized serial copying."  17 U.S.C. § 1002(a)(3).
Although six years have passed since the AHRA was enacted, the Department of Commerce has not established a procedure to verify that an alternative system to the SCMS has its same functional characteristics.  It also has not established any regulations or procedures to certify systems as prohibiting unauthorized serial copying.  Supp. Bridges Decl.  1.  The lack of any measurable standard makes it impossible for plaintiffs to meet their burden to show Diamond Multimedia failed to comply with that standard.

3. Because The Rio Does Not Permit Serial Copying, It Complies With the SCMS Requirement of the AHRA.
 The object of the SCMS is to prevent the digital copying of a digital copy.  H.R. Rep. No. 102-783(I) at 19.  "[C]onsumers are free to copy from the original but they may not copy from the copy." Id.  Congress carefully recorded its determination that the technological method provided by SCMS was not the only system that would satisfy the requirements of section 1002(a).  Id.  "[A]ny other system besides SCMS that prohibits unauthorized serial copying of such works may also be utilized."  Id.   As has been discussed, the Rio has no digital output capability.  Therefore, no further copies may be made from files stored in the Rio or on its flash memory.  The Rio satisfies the purpose of the SCMS and the Rio functions as efficiently as the SCMS to prevent copying.  Since the legislation was result-oriented as described above, and since the Rio satisfies the results, the Rio complies with the SCMS requirement.
If the Rio were found to fall under the governance of the AHRA, as an alternative to formal SCMS compliance Diamond Multimedia would be required to obtain a certification from the Commerce Department regarding prevention of serial copying, but no procedure for obtaining the certification has been established as required by section 1002(b).   Therefore, Diamond Multimedia would need to turn elsewhere for a determination of compliance.

An injunction is an equitable remedy.  WRIGHT, MILLER, KANE, FEDERAL PRACTICE AND PROCEDURE, §2941 (Civil 2d 1995).   In the exercise of its equitable powers, the Court may, in this instance, under the doctrine of cy pres, make a judicial determination that the Rio satisfies the requirements of the AHRA in the absence of the regulations that the Department of Commerce was obliged to create.

B. Plaintiffs Cannot Show A Violation Of The AHRA By Diamond's Failure To Perform Acts Before They Are Due.
Plaintiffs seek an injunction barring Diamond from selling Rio devices before registering with the Register of Copyrights and without paying royalties.

 Registration with the Register of Copyrights is due 45 days after first sale of a digital audio recording device.  37 C.F.R. § 201.27(d).  Because Diamond has sold no Rio products, that obligation has not yet matured.

Similarly, royalties on the sale of digital audio recording devices are not due until distribution of the products.  Under 17 U.S.C. § 1004 (a),  royalty obligations are triggered by "import and distribution" or "manufacture and distribution."  No royalties are due because there has been no distribution.
There is no principled reason why Plaintiffs are entitled to an injunction regarding obligations that are not yet due, and as to which there have been no violations.

C. The Plaintiffs Cannot Assert Claims Against Diamond Multimedia Under AHRA Because Of Constitutional Infirmities.
Freedom of speech is a fundamental right protected from congressional infringement by the First Amendment.  Lovell v. City of Griffin, 303 U.S. 444, 449 (1938).  The First Amendment protects not only the rights of the speaker (in this case the artist) but also "the right of the public to receive suitable access to social, political, aesthetic, moral, and other ideas and experiences."  Red Lion Broadcasting Co. v. FCC, 395 U.S. 367, 390 (1969)(addressing the constitutionality of regulations governing radio broadcasts).
Many musicians and smaller record companies must rely on the Internet for publication of their works to the general public.  Robertson Decl.  5.  This necessarily means that the public must rely on the media that serve Internet distribution to receive suitable access to these otherwise unavailable aesthetic ideas and experiences.  Regulation of the media which carries free speech must be undertaken with great care.  First Amendment freedoms "are delicate and vulnerable, as well as supremely precious in our society."  NAACP v. Button, 371 U.S. 415, 433, 83 S.Ct. 328, 338, 9 L.Ed.2d 405 (1963).   Statutes that purport to regulate fundamental constitutional rights are subject to review to insure that such regulations are not vague.  RONALD D. ROTUNDA & JOHN E. NOWAK, TREATISE ON CONSTITUTIONAL LAW, 36 (2d ed. 1992).

 The "void-for-vagueness" doctrine "requires legislatures to set reasonably clear guidelines thereby avoiding "arbitrary and discriminatory enforcement."  Smith v. Goguen, 415 U.S. 566, 572-73, 94 S. Ct. 1242, 1247, 39 L.Ed. 605 (1974).  If a statute is capable of reaching expression sheltered by the First Amendment, "the doctrine demands a greater degree of specificity than in other contexts."  Id.
Congress, in enacting the AHRA, deliberately left the term "Serial Copy Management System" undefined. H.R. Rep. No. 102-783(I), 102d Cong., 2d Sess., 13-15 (1992).  Furthermore, Congress provided that regulation should be prescribed that would establish criteria for compliance with the statute.  17 U.S.C. §1002(b).  No regulations have ever been promulgated.  This leaves any manufacturer who desires to create a device that complies with the Act by using a "functional equivalent" of the SCMS, completely without guidance, particularly vulnerable to arbitrary and discriminatory enforcement.

The AHRA reaches expression that is sheltered by the First Amendment.   "[T]he people as a whole retain their interest in free speech by [broadcast media] and their collective right to have the medium function consistently with the ends and purposes of the First Amendment.  It is the right of the viewers and listeners, not the rights of the broadcasters, which is paramount."  Red Lion Broadcasting Co., 395 U.S. at 390.  Manufacturers who wish to provide the relevant media are inhibited from entering and nurturing the marketplace of ideas embodied by Internet music distribution because, in the absence of a clear legislative or regulatory standard,  they have no way to know whether they are designing a device that will satisfy the "functional equivalence" requirements of the regulating statute.  Once their device is designed, they are vulnerable to threats regarding violations of the Act against which they are powerless to defend, because there is no procedure for verifying compliance.  If the Rio is found to be covered by the AHRA, then Diamond Multimedia is placed in an untenable position of uncertainty regarding compliance with the statute, and a medium of choice for musicians, music distributors, and music consumers will be chilled.

The vagueness of the Act causes the market to be perilous to enter and, therefore, has the effect of inhibiting artists' and listeners' rights to have the medium function in accordance with First Amendment protections.  In these circumstances, the Act is unconstitutional on its face and as applied.
 

 IV. Plaintiffs Cannot Show Any Irreparable Harm Arising From Any Violation of the Audio Home Recording Act.
Plaintiffs fail to show that they will suffer irreparable harm as a result of any alleged violation of the AHRA by Diamond Multimedia.  To obtain an injunction, plaintiffs must show that the irreparable harm would flow from the violation of the Act.  It is not sufficient to show that the product merely causes plaintiffs harm.  See Stanley v. University of Southern California, 13 F.3d 1313, 1324-5 (9th Cir. 1994) (nexus required between harm and alleged violation).

Plaintiffs cannot show that Diamond Multimedia, whose product is incapable of serial copying, threatens to cause irreparable harm from any failure to have a Serial Copy Management System or any failure to be certified by the Secretary of Commerce's nonexistent certification process.

RIAA and AARC claim that they will suffer irreparable harm if the Rio player is let loose on the marketplace and somehow contributes to increasing the illegal copying of copyrighted music.  This speculative harm does not arise out of the alleged violation of the AHRA, which is concerned with copying by consumers on devices intended for private use, and which specifically does not apply to professional equipment.  See 17 U.S.C. § 1001(3)(A).  Nor is any genuine prospect of harm proved by plaintiffs' arguments or by the facts.  The Court has recognized that the Rio device is incapable of making serial copies; in fact, the Rio is incapable of any independent recording function.  How such a device can contribute to illegal copying is wild conjecture unsupported by the evidence.  It should be noted that RIAA and AARC have not accused Diamond Multimedia of contributory copyright infringement.

If the device does fall under the AHRA, RIAA's and AARC's complaint is reduced to the question of Diamond Multimedia's obligation to pay royalties to the Copyright Office as required by the AHRA.   The courts have long acknowledged that monetary losses are not irreparable and cannot form the basis for a preliminary injunction.  See Sampson v. Murray, 415 U.S. 61, 90 (U.S. 1974) ("temporary loss of income, ultimately to be recovered, does not constitute irreparable injury").

 V. Diamond Multimedia Will be Substantially Harmed by an Injunction and the Balance of Harms Weighs Strongly Against A Preliminary Injunction.
As explained above, Diamond Multimedia has already made a substantial investment in the Rio player, most if not all of which will be lost if it is enjoined from offering the product.  Even a short delay in release of the Rio player will cause Diamond Multimedia to lose all the market advantages of being first to market, which are difficult to measure monetarily.  Moreover, Diamond Multimedia stands to lose $200 million in lost sales revenue over the next two years while it is denied the ability to manufacture and sell the Rio player pending the resolution of this litigation.

The RIAA claims the sound recording industry loses $300 million annually to music piracy. Supp. Bridges Decl.  3 and Exh. B.  It is inconceivable that the plaintiffs and their members would lose anywhere near an additional $200 million to piracy in the next two years -- equal to Diamond's projected revenues from the Rio over the same period -- because of the Rio player, and certainly not because of any alleged violations of AHRA by the Rio.  There is no principled basis for conjecture that a violation of AHRA by Rio will increase U.S. music piracy in all its forms by one-third, which would be the necessary harm to balance Diamond Multimedia's losses from an injunction.  The balance of harms therefore urges denial of an injunction.

VI. The Public Interest Weighs Strongly Against A Preliminary Injunction.
A. The Public Interest Favors Congressional Amendment To The Copyright Laws, Rather Than Judicial Expansion, In Order To Accommodate Technological Developments.
In Sony Corp. v. Universal City Studios, 464 U.S. 417, 104 S.Ct. 774 (1983)("Sony-Betamax"), the Supreme Court stated:

 From its beginning, the law of copyright has developed in response to significant changes in technology.  Indeed, it was the invention of a new form of copying equipment--the printing press--that gave rise to the original need for copyright protection.  Repeatedly, as new developments have occurred in this country, it has been the Congress that has fashioned the new rules that new technology made necessary. . . . [L]ong before the enactment of the Copyright Act . . . it was settled that the protection given to copyrights is wholly statutory.  The remedies for infringement are only those prescribed by Congress.  The judiciary's reluctance to expand the protections afforded by the copyright without explicit legislative guidance is a recurring theme.  Sound policy, as well as history, supports our consistent deference to Congress when major technological innovations alter the market for copyrighted materials.  Congress has the constitutional authority and the institutional ability to accommodate fully the varied permutations of competing interests that are inevitably implicated by such new technology.
Id. at 430-431(citations omitted).

B. The Public Interest Favors Improved Distribution Of Musical Recordings.
The domination of the major record companies over avenues of distribution created roadblocks which proved insurmountable to the majority of artists.  Kohn Decl. 16; Caterine Decl.  4-6; Robertson Decl.  5; Schatzkin Decl.  19.  To inhibit the growth of the MP3 market by restricting the very tools which enable the public to participate in this emerging, legitimate market would be to deny artists access to audiences and to prevent the broad public availability of new music which is the ultimate aim of the copyright laws.  Kohn Decl., 19.

Plaintiffs assert that the Rio will encourage infringement and that therefore its distribution would result in irreparable harm to the plaintiffs.  The Court, in Sony-Betamax, stated that an injunction of videotape recorders, based on the possibility of infringing activities by others, would deprive the public of the ability to use the apparatus for non-infringing activities.  Id. at 443.  Quoting the opinion of the Central District of California, the Court confirmed that "[w]hatever the future percentage of legal versus illegal home-use recording might be, an injunction which seeks to deprive the public of the very tool or article of commerce capable of some non-infringing use would be an extremely harsh remedy, as well as one unprecedented in copyright law."  Id. at 444.

 Furthermore, as the Sony-Betamax decision recognized, copyright owners may well have reasons for permitting certain kinds of copying to occur without receiving direct compensation. Id. n.28 at 446.  "It is not the role of the courts to tell copyright holders the best way for them to exploit their copyrights: even if [plaintiffs'] competitors were ill-advised in authorizing home [recording], that would not change the fact that they have created a substantial market for a paradigmatic non-infringing use of [defendant's] product." Id.   Many recording artists are building audiences using the new MP3 media as a promotional vehicle.  Schatzkin Decl., 5 and 15.  Preventing distribution of the Rio, an apparatus which will play an important role in the burgeoning Internet music industry, would effectively allow one group of copyright interests to limit the exercise by other owners of their rights under the Copyright Act.  As a consequence, on the basis of the public interest, the Court should deny a preliminary injunction.

C. The Public Interest Opposes Legislative And Judicial Interference With Technological Development.
It is ill advised for government to dictate to the personal computer industry how best to design and build personal computers.  See Burger Decl.  23.  Nor should the Court fashion rules that may affect an entire industry and upset a political balance reflecting a legislative compromise without grave necessity.  It should certainly not do so with a preliminary injunction, before a complete evaluation of the relevant facts and marketplace context that would require a full trial.

VII. The Requested Preliminary Injunction is Overbroad.
Plaintiffs' requested preliminary injunctive relief is so overbroad that it is in no way connected to the violations of the AHRA of which Diamond Multimedia is accused.

As the Court already noted during the TRO hearing, the AHRA does not regulate advertising and Plaintiffs tread on Diamond Multimedia's First Amendment rights when they seek to enjoin Diamond Multimedia from advertising.  All references to restrictions on Diamond Multimedia's advertising cannot be included in a preliminary injunction.

 The AHRA does not prohibit the manufacture, import and distribution of "digital audio recording devices" for which the owner has not previously registered with the Registrar of Copyrights or paid royalties.  The implementing regulations provide the deadline for filing initial notice to the Registrar of Copyrights is 45 days after first distribution.  37 C.F.R. § 201.27(d).  Royalty payments under the AHRA, triggered by distribution of a covered device, are due on a quarterly basis.  17 U.S.C. § 1003(c)(1) and (3).  A preliminary injunction that bars Diamond Multimedia from immediate manufacture, import or distribution of any "digital audio recording device" for failure to register or pay royalties reaches beyond the prohibitions of the AHRA.  If nothing else, plaintiffs' request is premature.

Prohibitions on import and manufacturing "digital audio recording devices" without SCMS restricts activities that Diamond Multimedia may engage in entirely within the company, such as the development of new products, product testing, and modification of products even if to make products conform with the AHRA.  Any restrictions on import or manufacture of "digital audio recording devices" in a preliminary injunction should be narrowly tailored to prevent the plaintiffs' perceived harm;  these activities are not perceived by the plaintiffs as harmful.  As such, a preliminary injunction should restrict manufacture and import of non-conforming devices intended to be distributed to consumers.

The AHRA does not prohibit destruction, alteration or modification of "digital audio recording devices."  Indeed, one might argue that it encourages the destruction of non-conforming devices and the alteration or modification of non-conforming devices to make them comply with the requirements of the Act.  Plaintiffs can demonstrate no irreparable injury stemming from these activities and the preliminary injunction should not restrict Diamond Multimedia's ability to destroy, alter or modify anything.
Finally, plaintiffs seek to enjoin Diamond Multimedia from "destroying, modifying or altering any and all business records (including documents and computer files) related in any way to the operation of defendant's business."  The AHRA does not prohibit or even regulate anyone's business records, so the relation of this request to the relief plaintiffs seek is impossible to draw.  If what plaintiffs fear is Diamond Multimedia's destruction of relevant documents, they can muster some proof to substantiate that fear and bring that request separately to the Court.  The burdensome nature of requiring a company the size of Diamond Multimedia to keep intact every piece of paper it has is obvious.  Plaintiffs' request should be entirely disregarded.
 

 VIII. The Court Cannot Issue A Preliminary Injunction Without A Substantial Bond To Protect Diamond Multimedia Against Harms Caused By The Injunction.

If this Court were to enter an injunction against Diamond Multimedia in this case, the Court must require that the Plaintiffs give adequate security to compensate Diamond for any damages it will suffer because of the injunction.  Rule 65(c) of the Federal Rules of Civil Procedure states, in part:
No restraining order or preliminary injunction shall issue except upon the giving of security by the applicant, in such sum as the court deems proper, for the payment of such costs and damages as may be incurred or suffered by any party who is found to have been wrongfully enjoined or restrained.
The main purpose of the injunction bond is to safeguard defendants from costs and damages incurred as the result of a preliminary injunction improvidently issued.  Washington Capitols Basketball Club, Inc. v. Barry, 304 F.Supp. 1193 (N.D. Cal. 1969), aff'd, 419 F.2d 472 (9th Cir. 1969).  Thus, under Rule 65(c), the Court should require that RIAA post a bond in an amount which would be adequate to compensate Diamond fully for its potential damages which will result from it being wrongfully enjoined.  See Note, Recovery for Wrongful Interlocutory Injunctions Under Rule 65(c), 99 Harv. L. Rev. 828, 835 (quoted favorably in Nintendo of America, Inc. v. Lewis Galoob Toys, Inc., 16 F.3d 1032 (9th Cir. 1994).

For purposes of evaluation of a bond, this case resembles Nintendo where the district court, upon ordering an injunction, protected the defendant with a $15 million dollar bond.  That case was a case of first impression and the district court there, as here, faced a novel application of copyright law to digital technology.  After trial on the merits, the court reversed itself and dissolved the injunction.  The bond was awarded, with interest, to the defendant after the case was concluded.  See Nintendo, 16 F.3d at 1033-4.

 For Diamond Multimedia, the potential damages it will suffer if it is wrongfully enjoined, are enormous.  As stated above, Diamond has invested over $3 million in bringing the Rio to market.  Watkins Decl.  2.  Diamond has projected revenues from Rio products of $10 million in the next three months, and over $200 million in the next two years.  Id.  An injunction against Diamond would result in the loss of these anticipated sales of the Rio device.  In the case of a preliminary injunction, these sales cannot be characterized as "delayed" but must be viewed as irretrievably lost in light of the severe consequences of preventing Diamond to take its place as first to market.  Such a delay could prove fatal to the product altogether, resulting in massive losses of both out-of-pocket expenditures and revenues.  Wirt Decl.  14; Watkins Decl.  4.

The sales and profits which Diamond would have expected to realize if not enjoined, are proper considerations for the Court to take into account should the Court issue a preliminary injunction.  The Court considered a $500,000 bond appropriate protection for a 10 day injunction.  The protection required from a bond that contemplates years rather than days must reflect the substantial increase in potential harm to Diamond Multimedia.

Based on the above facts, financial numbers, and market reality, the Court should impose a bond requirement in the amount of $200 million in the event the Court issues an injunction.

Dated: October 20, 1998   Respectfully submitted,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
By: __________________________________
Andrew P. Bridges
Attorneys for Defendant
DIAMOND MULTIMEDIA SYSTEMS, INC.