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Re: Open source - Free software

From: Alexander Terekhov
Subject: Re: Open source - Free software
Date: Fri, 29 Sep 2006 20:41:37 +0200

Alexander Terekhov wrote:
> David Kastrup wrote:
> [... DAK Indus. ...]
> > You seem to have a problem understanding the difference between "copy"
> > and "content".
> The content is the same, dak. (In DAK Indus., the content was "Windows

Err, the content was Word, not Windows.

DAK filed its chapter 11 case after it began distributing Word, but
before it had paid the last two installments under the License
Agreement. During the next eleven months, DAK distributed at least 7,600
copies of Word without paying anything at all to Microsoft. During this
period, Microsoft (belatedly) sought to force DAK to assume the License
Agreement. DAK succeeded in delaying any decision on assumption or
rejection until the license expired by its own terms, at which time DAK
rejected the license and contended that the unpaid installments were
nothing more than prepetition, unsecured claims. Microsoft, in turn,
sought payment of over $340,000 in administrative expenses based upon
DAK's postpetition use of its software (7,600 units @ $45 per unit). The
Bankruptcy Court denied Microsoft's request in its entirety, and the
Ninth Circuit affirmed. Thus, DAK was not required to make any
administrative payments to Microsoft, even though DAK made significant
use of the software license following the chapter 11 filing.

The agreement provided that DAK would pay a "royalty rate" of $55 per
copy of Word that it distributed. Upon signing the agreement, DAK became
obligated to pay Microsoft a "minimum commitment" of $2,750,000 in five
installments, regardless of how many copies of Word it sold. The payment

[snip schedule]

DAK's $2,750,000 minimum commitment paid Microsoft royalties at the $55
per unit price for the distribution of 50,000 copies of Word. DAK could
sell any and all of those copies to consumers at any time during the
term. The agreement provided that if DAK sold more copies than those
paid for by the minimum commitment, DAK would pay Microsoft $55 for each
additional copy sold. However, if DAK sold fewer copies than those paid
for by the minimum commitment, Microsoft would not refund any of the
commitment. Microsoft did not perfect a security interest in any of
DAK's property, which might have protected it against DAK's failure to
pay the entire minimum commitment in the event of bankruptcy.

Sometime between July and December of 1991, the parties amended the
agreement by reducing the royalty rate to $45. As a result of the
amendment, the minimum commitment paid royalties for the sale of more
than 50,000 copies of Word.

The first payment date was December 30, 1991. In accordance with the
payment schedule, DAK paid the first three installments, totaling
$1,354,167. On June 11, 1992, DAK filed a petition for bankruptcy. The
debtor has not paid the final two installments, totaling $1,395,833.

On December 1, 1992, Microsoft moved in the bankruptcy court for an
order compelling the debtor to assume or reject the executory contract
with Microsoft. On January 12, 1993, Microsoft filed a motion for the
payment of an administrative expense, claiming it should be compensated
for the debtor's post-bankruptcy petition "use" of the license
agreement, because the debtor continued to distribute Word.

On February 3, 1993, the bankruptcy court denied Microsoft's
administrative expense claim. The court concluded that the payment
structure of the agreement was more analogous to payments on a sale of
goods than to royalty payments for the continuing use of an intellectual
property. As such, the debt was a prepetition unsecured claim, not a
postpetition administrative expense claim. The court also concluded that
the agreement was an executory contract, and that the debtor had until
May 4, 1993, to assume or reject the agreement.

In April 1993, Microsoft moved for reconsideration of the denial of its
administrative expense claim. The bankruptcy court denied that motion on
June 16, 1993. The debtor rejected the agreement on May 4, 1993. The
parties agree that DAK had sold approximately 13,244 copies of Word
prior to filing for bankruptcy on June 11, 1992. They also agree that
the debtor sold approximately another 7,600 copies between June 11,
1992, and January 21, 1993, a date one week before the bankruptcy court
hearing on Microsoft's administrative expense claim. The record does not
reflect how many copies of Word the debtor sold between January 21,
1993, and May 4, 1993, the date when it formally rejected the agreement
and stopped selling Word. 1 

[ Footnote 1 ] 

In its brief to this court, DAK calculates that at the amended royalty
rate of $45 per copy, it could have sold a total of 30,092 copies before
exceeding the number for which it had paid prior to bankruptcy.
According to this calculation, DAK could have sold 9248 additional
copies between January 21, 1993, and May 4, 1993. (9248 + 7600 + 13,244
= 30,092).

[ End Footnote 1 ]

Microsoft appealed the bankruptcy court's denial of its administrative
expense claim to the district court. The district court concluded that
the debtor had received benefits from its postpetition distribution of
Word. However, the court concluded that the payment schedule resembled
installment payments for the sale of goods, not periodic royalties for
the use of intellectual property. Therefore, the obligations for the
amounts due under the agreement were incurred prepetition. The court
also concluded that Microsoft was neither induced to nor continued to
provide software units at its expense after the filing of the petition.
Accordingly, Microsoft had provided no postpetition consideration to
debtor. The court rejected Microsoft's administrative expense claim,
thereby leaving the remaining amount due under the agreement as a
prepetition, unsecured claim. 


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