Alcatel Usa, Inc., Plaintiff-Counter-Defendant-Appellee-Cross-Appellant v. Dgi Technologies, Inc., Defendant-Counter-Claimant-Appellant-Cross-Appellee

The complex intellectual property action that we hear on appeal today involves a multifaceted dispute between two competitors in the telecommunications equipment manufacturing industry. Plaintiff-Counter-Defendant-Appellee-Cross-Appellant Alcatel USA, Inc. (formerly DSC Communications Corporation (“DSC”)) filed suit against De-fendanh-Counter-Claimanh-Appellanl^Cross-Appellee DGI Technologies, Inc. (“DGI”), alleging that DGI infringed DSC’s copyrights, misappropriated its trade secrets, and engaged in unfair competition by misappropriating its time, labor, skill and money. DGI, in turn, asserted that DSC violated § 2 of the Sherman Act, interfered with DGI’s prospective business relations, and also engaged in unfair competition. After a lengthy trial, the district court entered a set-off judgment in favor of DSC and an order enjoining DGI from selling the infringing products.

For the reasons explained below, we affirm the district court’s grant of a judgment as a matter of law (“JML”) in favor of DSC, dismissing DGI’s antitrust claim. We also affirm the jury’s determination that damages are due to DSC on its claim of misappropriation of trade secrets, and the district court’s injunction against DGI, based in part on this claim. Because DSC misused its copyrights, however, we reverse the portions of the injunction tailored by the district court as relief from DGI’s copyright infringement. Concluding that DSC’s state law claim of unfair competition by misappropriation is preempted, we also reverse the district court’s denial of a JML in favor of DGI on this issue, and vacate all legal and equitable relief awarded to DSC for this claim, including the portion of the damage award attributable thereto. Because the monetary damages award to DSC was not sufficiently itemized to permit us to modify the district court’s judgment and render a modified judgment, we remand for that court to do so, taking into account the elimination of state unfair competition damages. Finally, we reverse the award of damages in favor of DGI on its claims for tortious interference and unfair competition, concluding that these claims are not supported by the evidence.

I

FACTS AND PROCEEDINGS

DSC designs, manufactures, and sells equipment (“switches”) comprising telephone switching systems. Its customers are long-distance telephone service providers, such as MCI and Sprint. A telephone switch routes long distance telephone calls to their destinations. 1 DSC switches are controlled by its copyrighted operating system software. DSC regularly implements new features in its switches by upgrading its software, a process that costs DSC millions of dollars.

DSC does not sell its operating system software — as it does the switches — but instead licenses its use pursuant to a licensing agreement. The licensing agreement provides that (1) the operating system software remains the property of DSC; (2) the customer has the right to use the software only to operate its switch; (3) the customer is prohibited from copying the software or disclosing it to third parties; and (4) the customers are authorized to use the software only in conjunction with DSC-manufactured equipment.

The record evidence shows that DSC’s customers, like other long distance providers, frequently need to expand the call-handling capacity of their switches. One way to ex *778 pand the call-handling capacity of DSC switches is to add groups of “cards” to the switch. Prior to 1989, DSC was the only manufacturer of expansion cards for its own switches. In 1989, DGI was founded to design and sell such cards for use with DSC switches.

DGI contends that it developed its cards by analyzing DSC’s unpatented products and then duplicating their functionality — a process referred to as “reverse engineering.” DGI initially obtained a used DSC switch containing a multitude of cards and a set of switch owners manuals (“DSPs” or “DSP manuals”) from an investor. Once DGI had determined the functionality of DSC’s products, it designed its own to perform these same functions using newer-generation electronics and adding additional features. DGI further insists that, from its inception, DSC repeatedly attempted to thwart DGI’s entry into the market. For instance, DSC threatened to insert a software “patch” in its operating system software to render DGI’s cards inoperable on DSC-manufactured switches, and in fact did insert such a patch, but was never successful in disabling the DGI products. DGI also notes that in 1991, before it had introduced its first product for sale, DSC sent a letter to its switch owners, threatening to void their switch warranties if they used DGI cards and claiming that DGI refused to provide DSC a card to test, an assertion that DGI maintains was untrue. Finally, DSC (1) refused to inform its customers of the compatibility of DGI’s cards, even after testing them, and (2) hired investigators to go through DGI’s trash.

DSC, on the other hand, asserts that DGI did not engage in legitimate reverse engineering, but rather misappropriated DSC’s intellectual property by wrongfully obtaining schematics and manuals provided only to DSC customers on the express condition that there be no disclosure to third parties. DSC also notes that each manual contained a plainly visible copyright notice.

In any event, between 1992 and 1994, DGI developed and introduced four DSC-compatible cards — the Digital Trunk Interface (“DTI”), 2 the Bus Terminator (“BT”), 3 the Digital Tone Detector (“DTD”), 4 and the Pulse Code Modulation Interface (“PCMI”). None of these initial DGI cards were microprocessor cards, however. A microprocessor card contains firmware, which is software embedded in a memory chip on the card. When installed in a switch, a microprocessor card controls the “boot up” — that is, it downloads DSC’s copyrighted operating system software into its random access memory (“RAM”). A DTI, DTD, or BT card alone cannot expand the capacity of a switch; a customer must install a group of cards together with a microprocessor card to achieve expansion. For this reason, DGI obtained DSC microprocessor cards — then known as MP-2s — in the used market to sell along with three DGI cards. This enabled DGI to offer a customer a complete expansion card complement, which it did.

In 1995, as a result of a new dialing plan implemented by the Federal Communications Commission (“FCC”) 5 and customer demands for new features, DSC revised and expanded its operating system software. These changes required DSC customers to upgrade to a new microprocessor card — the MP-8. As few MP-8 cards were available on the used market, DGI was no longer able to offer a complete card complement. Its marketing problems were exacerbated by DSC’s practice of offering substantial discounts to customers who purchased whole complements of cards from DSC, but charging much higher prices for individual MP-8 cards. This motivated DGI to develop its own microprocessor card — the DMP-2800.

*779 To develop a microprocessor card, DGI had to overcome several difficulties. First, DGI needed to understand DSC’s firmware. For this purpose, DGI purchased an MP-8 card and, using a “burner” to remove the DSC firmware from a memory chip, obtained the machine-readable object code. DGI engineers then used a process called “disassem-bly” to convert the firmware into human-readable form. In this way, DGI was able to write its own firmware — which it claims is not substantially similar to DSC’s firmware^ — for its DMP-2800 microprocessor card. DSC asserts that DGI violated the copyright on its firmware when it copied DSC’s firmware several times in this process.

Second, the DGI microprocessor card had to accept a download from the switch of the DSC operating system. To obtain the software needed for this function, several DGI engineers took an MP-8 card to NTS Communications (“NTS”), a DSC switch owner/ software licensee and DGI customer. There, Ernie Carrasco, an NTS employee who also consulted for DGI, placed the MP-8 card into an NTS switch and copied the operating system to a laptop computer. DGI engineers then took the laptop back to DGI. DSC maintains that DGI never told NTS that it was copying and removing DSC’s copyrighted software, only that it was “testing” MP-8 cards.

DGI engineers returned to NTS several times to test MP-8 cards containing versions of DGI’s firmware. To avoid having to perform all this testing at NTS, DGI modified an MP-8 card to include a device called a “punch” card or “snooper” card, which monitored the firmware during the operating system download. Using this snooper card, DGI was able to understand which parts of the DSC firmware were accessed during the “boot” of the operating system. DSC maintains that DGI used this snooper card to copy the messages contained in DSC’s copyrighted operating system software. It insists that, but for DGI’s “theft” of DSC’s operating system, it would have been extremely expensive and time-consuming for DGI to develop its own microprocessor card.

DGI counters that the copy was used only to discern the size of the operating system download to the MP-8 card, as it was investigating the possibility of upgrading the older MP-2 card. DGI insists that, as the content of the software was irrelevant in determining its size, it never even disassembled the operating system software from unreadable machine language.

DSC filed suit in 1994, alleging that DGI misappropriated its trade secrets, and engaged in unfair competition by taking advantage of the time, labor, skill, and money that DSC had invested in its switches and cards. DGI counterclaimed, asserting that DSC (1) violated the Sherman Act by monopolizing or attempting to monopolize the relevant product market for expansion products compatible with DSC telephone switches; (2) tortiously interfered with DGI’s contractual relations; and (3) engaged in unfair competition. In 1995, DSC filed a supplemental complaint, asserting direct and indirect copyright infringement claims. 6 The district court preliminarily enjoined DGI from removing DSC’s operating system software from customer facilities, and we affirmed. 7

After a three week trial, the jury returned a mixed verdict, finding that DSC violated the Sherman Act, interfered with DGI’s contractual relations, and engaged in unfair competition, and that DGI infringed certain DSC copyrights, engaged in unfair competition by misappropriating DSC’s time, labor, skill, and money, and misappropriated DSC’s *780 trade secrets. The jury also determined that both parties had “unclean hands.”

Nine months later, in November 1997, the district court entered its Final Judgment and Permanent Injunction. Noting that the jury verdict afforded both parties some measure of double recovery, the court awarded DSC $4.3 million in actual damages and $7 million in punitive damages, and awarded DGI $2 million in actual damages and $9 million in punitives — resulting in a set-off judgment of $300,000 for DSC. The district court dismissed DGI’s antitrust claim, stating that DGI had failed to prove the relevant product market under Eastman Kodak Co. v. Image Technical Sewices, Inc. 8 and that its damages model was “hopelessly flawed.” Finally, the court permanently enjoined DGI from developing any new microprocessor cards with the assistance of DSC’s operating system software and from selling any other DGI microprocessor card designed to use DSC’s software. The court also ordered DGI to turn over all DMP-2800 microprocessor cards to DSC for destruction, but the court stayed that order pending resolution of this appeal. DGI timely appealed, and DSC timely cross-appealed.

II

ANALYSIS

A. DGI’s Antitrust Claim

The jury found DSC liable under § 2 of the Sherman Act for monopolization of the expansion and enhancement market for DSC-manufactured switches and awarded DGI $750,000 in lost profits and $1.5 million in future lost profits on that claim. The district court overturned this verdict, however, holding that (1) there was insufficient evidence to establish that expansion cards are the relevant market for antitrust purposes, and (2) DGI’s damage model was hopelessly flawed.

1. Standard of Review

We review the district court’s grant of a JML de novo, applying the same standards as those employed by the district court. 9 The district court may grant a motion for a JML only if “there is no legally sufficient evidentiary basis for a reasonable jury to find for that party on that issue.” 10

2. Waiver

As a preliminary matter, DGI asserts that DSC waived its right to challenge the sufficiency of DGI’s antitrust evidence. Although DSC submitted a Rule 50 motion at the close of DGI’s case-in-chief, it did not renew this motion after the rebuttal evidence.

“[I]t is well established that a party waives the right to challenge the sufficiency of the evidence with a JNOV unless a motion for directed verdict is made or renewed at the close of all evidence.” 11 We have approached this requirement with a “liberal spirit,” 12 however, and in some circumstances, we have excused technical noncom-plianee with Rule 50(b) if the deviation is “de minimis.” 13 “Whether technical noncompliance with Rule 50(b) precludes a challenge to the sufficiency of the evidence on appeal ‘should be examined in the light of the accomplishment of its particular purposes as well as in the general context of securing a fair trial for all concerned in the quest for truth.’ ” 14 We have articulated two purposes *781 for this rule: “to enable the trial court to reexamine the sufficiency of the evidence as a matter of law if, after verdict, the court must address a motion for judgment as a matter of law, and to alert the opposing party to the insufficiency of his case before being submitted to the jury.” 15 Circumstances which have led us to deem a technical violation of Rule 50(b) “de minimis” include, inter alia, (1) the trial court’s having reserved a ruling on an earlier motion for a JML made at the close of plaintiffs evidence; (2) the defendant’s calling no more than two witnesses before closing; (3) the elapse of only a small amount of time between the motion for a JML and the conclusion of all evidence; and (4) the plaintiffs introducing no rebuttal evidence. 16

In this case, we perceive no prejudice that would result from waiving .technical compliance with Rule 50(b). DSC moved for a JML on DGI’s antitrust claim on a Friday afternoon, at the close of DGI’s evidence, and the district court specifically reserved ruling on the motion. That same afternoon, DSC called only its antitrust expert witness, Dr. Teece, whose testimony was, of course, favorable to DSC. The parties had the weekend and Monday off, and before resting their cases on Tuesday DSC and DGI called but one additional witness each — neither of whom testified on antitrust issues. Thus, although three calendar days elapsed between DSC’s motion and the close of all evidence, this period was attributable only to the intervening weekend and the district court’s need to tend to its criminal docket on Monday. As DGI presented no evidence to shore up its antitrust case after DSC made its JML motion, that motion sufficed under these circumstances to alert DGI to the insufficiency of its ease. Furthermore, the district court did not dismiss the antitrust claim until the passage of more than nine months after the end of trial, only then concluding on its own that the evidence was not sufficient to support the jury’s verdict.

We hold that DSC did not waive its challenge to the sufficiency of DGI’s antitrust evidence by failing to reassert its motion for JML. at the close of all the evidence. Having so determined, we now consider DSC’s substantive challenges to DGI’s case.

3. Relevant Market

“ ‘The offense of monopoly under § 2 of the Sherman Act has two elements: (1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.’ ” 17 Thus, to prove a monopolization claim, the plaintiff must first establish the relevant product market. 18 DGI disputes the district court’s conclusion that it failed to prove that the “capacity enhancement and expansion products” market for DSC-manufactured switches is the relevant market for antitrust purposes.

As DGI stresses, in determining the relevant product market, “the reality of the marketplace must serve as the lodestar.” 19 DGI advances that market realities dictate that the relevant market in this ease is the capacity expansion market. For instance, it asserts that the evidence shows that DSC’s officers, employees, customers, and internal documents, as well as DGI’s officers, salesmen, and economic experts, defined the relevant market as the market for expansion products. 20 DGI insists that users of DSC *782 switches are “locked-in” to DSC in the aftermarket. This assertion is strengthened, it maintains, by the fact that DSC’s software license allows its customers to use its copyrighted software only in conjunction with the unpatented DSC hardware.

DGI adds that the district court’s reference to Kodak is not apt, and in fact urges that Kodak supports DGI’s claim by establishing that aftermarket monopolization is actionable under the Sherman Act. In that case, defendant Kodak sold plain paper copiers in a market with several rivals. The Court assumed that, at the time of sale, Kodak sold replacement parts, giving users the option either to repair their copiers or to hire independent service organizations (“ISOs”) to do so. Later, Kodak changed its policy and refused to sell parts to ISOs. The ISOs alleged that, as Kodak’s equipment was unique and its competitors’ parts incompatible with Kodak machines, this altered practice allowed Kodak to capture the repair business for itself, at “supra-competitive” prices. 21 Kodak argued that, “either presumptively or as a matter of law, vigorous competition in the copier market would prevent Kodak from raising its parts and servicing contract prices above competitive levels, because any such price increases in these ‘derivative aftermarkets’ would become known to copier-equipment consumers, and eventually cause Kodak to lose ground to its competitors in copier sales.” 22

The Court rejected Kodak’s argument, concluding that summary judgment was not appropriate. It reasoned that, at the time of their original copier purchases, some consumers might not have cost-efficient access to pricing information needed to evaluate the total “life-cycle” cost of the entire Kodak package, i.e., the price of the copier, likely replacement parts, and product-lifetime servicing. 23 Likewise, the Court explained that, inasmuch as Kodak’s customers found it prohibitively expensive to replace their equipment with another manufacturer’s product, they might tolerate some level of aftermarket price increase before changing brands. 24 The Court thus decided that the undetermined “information costs” and “switching costs” represented material issues of fact that precluded summary judgment. DGI argues here that, in a similar manner, DSC could substantially raise its aftermarket card prices before DSC switch owners would consider replacing DSC switches, and that DSC was thus able to maintain supra-competitive prices in the expansion products aftermarket.

DGI’s reliance on Kodak is misplaced. As we previously noted in United Farmers Agents Association v. Farmers Insurance Exchange, 25 “[t]he Supreme Court’s decision in Kodak was a rejection of Kodak’s assertion that market power could never exist over repair parts in any case where the defendant did not have market power over earlier-purchased machines needing those parts.” 26 We pointed out that, “[cjritieally, the plaintiffs in Kodak produced evidence that Kodak was charging above market prices for its service and was engaging in price discrimination in favor of the knowledgeable customers who could most easily obtain information or switch companies.” 27 Indeed, the Court in Kodak concluded that “[i]t may be that [Kodak’s] parts, service, and equipment are components of one unified market, or that the equipment market does discipline the aftermarkets so that all three are priced competitively overall, or that any anti-competitive effects of Kodak’s behavior are outweighed by its competitive effects.” 28 The Court simply was not prepared to permit this factual determination to be made at the summary judgment stage.

*783 In contrast to Kodak, the instant case comes to us after a full-blown jury trial. Also unlike Kodak, here there is no evidence that DSC has a superior or unique product that allows it to charge supra-competitive prices. Indeed, although DGI presented testimony that DSC’s cards are extremely expensive, it never compared DSC’s prices to its competitors’ prices. And unlike the plaintiffs in Kodak, DGI did not prove that DSC’s customers face substantial information and switching costs. To the contrary, the evidence shows that many DSC switch owners engage in life-cycle pricing, that is, they factor in not only the purchase price of 'the equipment, but also the post-acquisition costs of operation, maintenance, and expansion at the time of purchase. By engaging in life-cycle pricing, a customer links together the primary equipment market and any aftermarket for parts and service for the equipment of particular manufacturers.

And, as noted, DGI did not prove that a change in any of DSC’s pricing, warranty, or other policies served to subject DSC switch owners to substantial additional information or switching costs. From the beginning, DSC’s licensing agreement for its operating system software authorized its, customers to use the software only in conjunction with equipment manufactured by DSC. This was- a long-standing policy, not a response to DGI’s entry into the market. True, there was some evidence that DSC threatened to cancel its warranties on switches that used equipment not manufactured by DSC. The evidence also shows, however, that despite referring to DGI by name, the letter threatening to void the warranties was sent before DGI ever offered its first product for sale. As DSC was the sole manufacturer of expansion products for DSC switches before DGI entered the market, this alleged change in policy could not substantially increase the information costs for DSC customers; when they purchased the DSC switches, they could not have reasonably expected suppliers of expansion products other than DSC to enter the aftermarket. Several circuits have held that such a change in policy is a crucial factor in establishing an aftermarket monopoly claim. As the Sixth Circuit held, “an antitrust plaintiff cannot succeed on a Kodak-type theory when the defendant has not changed its policy after locking-in some of its customers, and the defendant has been otherwise forthcoming about its pricing structure and service policies.” 29

We agree with the district court’s determination that DGI’s characterization of the expansion products market as the relevant market is at odds with market realities. The record shows that the prices for two-thirds of all of DSC’s cards are set at the time a telephone company purchases a switch, either because the customer purchases the one frame that the switch must have to operate, or through a future or life-cycle pricing scheme negotiated at the time of purchase. DGI’s model excludes all these cards from its relevant market, not an insignificant flaw in the model.

Furthermore, DGI’s proposed market does not acknowledge that the purchase of a new frame with cards is only one of several ways a telephone company can expand its call-handling capacity. For instance, a company can purchase a new switch from DSC or from another switch manufacturer, purchase a used switch from DSC or a broker, or trade for or lease capacity in another company’s network. In addition, as many of DSC’s customers, such as MCI, are dual-sourced— that is, they own switches built by more than one manufacturer — they can purchase a new frame for one of their non-DSC switches. All of these capacity handling options are also omitted from DGI’s relevant market.

*784 We are convinced that DGI, like the plaintiff in United Farmers, is “trying to define the market as narrowly as possible (in order to make it look as if [defendant] had market power).” 30 Because (1) DGI did not present legally sufficient evidence that DSC’s customers faced significant information and switching costs, and (2) DGI’s proffered relevant market does not comport with market realities, its aftermarket monopoly claim fails as a matter of law. As such, the district court did not err in granting DSC’s motion for a JML dismissing DGI’s antitrust claim.

B. DSC’s State Law Damages Claims

The district court awarded DSC $4.3 million in compensatory damages and $7 million in punitive damages on its Texas state law claims for (1) misappropriation of trade secrets and (2) unfair competition. 31 DGI challenges both grounds on which these damage awards were made.

1.' Misappropriation of Trade Secrets

The jury found that DGI misappropriated DSC’s trade secrets in its operating system software and MP-8 firmware. DGI asserts that the evidence is legally insufficient to support these claims, so that the district court erred in denying its motion for a JML. As previously noted, we review a district court’s rulings on motions for a JML de novo, using the same standards as did the district court.

Under Texas law, trade secret misappropriation is established by showing: “(a) a trade secret existed; (b) the trade secret was acquired through a breach of a confidential relationship or discovered by improper means; and (c) use of the trade secret without authorization from the plaintiff.” 32 DGI disputes the jury’s findings with regard to the second element — that DGI used improper means or the breach of a confidential relationship to appropriate DSC’s trade secrets in its operating system software and firmware.

DGI argues first that, as a matter of law, it could not have misappropriated DSC’s trade secrets in its firmware. As DSC and DGI never formed a contractual or confidential relationship, urges DGI, DSC must prove that DGI used “improper means” to misappropriate its firmware trade secrets. DGI contends that the firmware was embedded on a chip in every DSC MP-8 card sold, and that it bought a card and analyzed the firmware through “disassembly” — the translation of machine code into human-readable form. DGI insists that this disassembly does not constitute “improper means,” but is a lawful practice. 33

DGI likewise maintains that, as a matter of law, the evidence was insufficient to show that it misappropriated DSC’s operating system software trade secrets. DGI points out that it was under no contractual obligation to DSC and did not learn of the software by breaching any confidence reposed in it by DSC. DGI also advances that it did not use improper means to obtain the trade secrets; to the contrary, it insists, a copy of part of the operating system was obtained during a test at the site of NTS, a DSC switch customer with whom DGI had an ongoing relationship. As NTS gave its permission for DGI to test its cards, concludes DGI, it cannot be liable for trade secret misappropriation.

DSC counters that there was sufficient evidence to support the jury’s conclusion that DGI misappropriated its trade secrets in its firmware and operating system software. As to the firmware, DSC urges that DGI did not use legitimate disassembly or reverse engineering to acquire DSC’s trade secrets. DSC points out that even Jay Gentry, one of *785 DGI’s engineers responsible for developing its version of the firmware, testified that DGI would not have been able to understand DSC’s firmware if it had not unlawfully obtained a copy of DSC’s operating system software. Thus, reasons DSC, DGI used improper means to acquire the trade secrets in DSC’s firmware. Similarly, DSC argues that DGI used improper means to obtain DSC’s operating system trade secrets. Even though DGI did not have a contractual or confidential relationship with DSC regarding the nondisclosure of the software, NTS did. DSC adduced evidence that DGI misled NTS’s employee, Ernie Carrasco, by informing him that it needed to “test” a DGI card, but never told him that it planned to copy and remove DSC’s software. As such, DGI duped NTS into breaching its own contract with DSC — an act which DSC submits constitutes improper means.

Our review of the record satisfies us that there was ample evidence to support the jury’s determination that DGI obtained DSC’s trade secrets through improper means. In E.I. duPont deNemours & Co. v. Christopher, 34 we stated: “A complete cata-logue of improper means is not possible. In general they are means which fall below the generally accepted standards of commercial morality and reasonable conduct.” 35 DSC adduced evidence showing that DGI unlawfully made a copy of DSC’s operating system software at NTS’s place of business by misleading an NTS employee who, at least inferentially, was particularly susceptible of being hoodwinked because of his moonlighting as a consultant to DGI; and that DGI then used the knowledge it gained from the purloined software to interpret the trade secrets contained in DSC’s firmware. As a reasonable jury could have found that such means “fall below the generally accepted standards of commercial morality and reasonable conduct,” the district court did not err in denying DGI’s motion for a JML on the trade secret claims.

2. Unfair Competition by Misappropriation

Next, DSC asserted — and the jury found — that DGI’s use of DSC’s firmware, operating system software, and DSP manuals in developing its own DMP 2800 microprocessor card, DTD card, BT card and PCMI card, constituted misappropriation under the Texas common law of unfair competition. In contending that the district court erred when it denied DGI’s motion for a JML, DGI argues that DSC’s state law misappropriation action is preempted by federal copyright law. We agree.

With a few exceptions, all causes of action falling within the scope of the Copyright Act are expressly preempted. 36 Section 301 of the Act 37 sets forth two conditions, both of which must be satisfied, for preemption of a right under state law to occur: First, the work in which the right is asserted must come within the subject matter of copyright as defined in sections 102 38 and *786 103. 39 Second, the right that the author seeks to protect must be equivalent to any of the exclusive rights within the general scope of copyright as specified by section 106. 40

We begin our analysis under the first prong by noting that the Copyright Act protects expression, not facts. 41 A compilation of facts is not entitled to copyright protection unless the compilation itself possesses some degree of originality. 42 Moreover, even if a compilation is original by virtue of the selection or arrangement of its component facts, the copyright is limited to that selection or arrangement and does not extend to the information contained in it. 43

DSC rejects preemption of its misappropriation claim based on these fundamental principles. In the instant case,' contends DSC, DGI’s offense was not the use of DSC’s firmware, software, and manuals, but rather the use of uncopyrightable information— presumably facts 44 — contained within these copyrightable works. This assertion is belied by the fact that DSC has consistently framed its misappropriation count in the context of DGI’s use of its firmware, operating system software and DSP manuals. Without objection, the district court instructed the jury on DGI’s use of these works, and not specific pieces of information contained in them. In response, the jury found that DGI had impermissibly relied on DSC’s firmware, software, and manuals in developing its competing microprocessor and expansion cards. Because the jury also found DSC to be the owner of copyrights in these works, these works, by definition, “come within the subject matter of copyright.” Consequently, we conclude, the first prong of the preemption analysis is satisfied.

*787 The second prong is more complex, however, requiring a comparison of the nature of the rights protected under federal copyright law with the nature of the state rights for which DSC seeks protection. If these rights are determined to be “equivalent,” then the state law cause of action is preempted. We evaluate the equivalency of rights under what is commonly referred to as the “extra element” test. 45 According to this test, if the act or acts of DGI about which DSC complains would violate both misappropriation law and copyright law, then the state right is deemed “equivalent to copyright.” 46 If, however, one or more qualitatively different elements are required to constitute the state-created cause of action being asserted, then the right granted under state law does not lie “within the general scope of copyright,” and preemption does not occur. 47

The purpose of copyright law is to promote and protect creativity. 48 For a work to qualify for copyright protection, it must be original. 49 And originality, as the term is used in copyright, requires both “independent creation” and “a modicum of creativity.” 50 The requisite level of creativity is extremely low. 51 Nevertheless, without some creative spark — “no matter how crude, humble or obvious” 52 — the labor that goes into independently creating (as opposed to simply reproducing) a work is insufficient to bring that work within the scope of copyright. 53 And, if a work is entitled to copyright protection, its author is granted exclusive rights over its reproduction, 54 adaptation, 55 distribution, 56 performance, and display. Use of a copyrighted work by one who does not own the copyright constitutes infringement under federal law, 57 provided the use falls within *788 the scope of a copyright owner’s exclusive rights. 58

In contrast to federal copyright law, which focuses on the value of creativity, state misappropriation law is specifically designed to protect the labor-the so-called "sweat equity"-that goes into creating a work. 59 This purpose is evident in the elements of proof required to succeed under a Texas misappropriation claim. These elements, as articulated by the Texas Court of Appeals in United States Sporting Products, Inc. v. Johnny Stewart Game Calls, Inc., 60 include:

(i) the creation by plaintiff of a product through extensive time, labor, skill and money; (ii) the use of that product by defendant in competition with plaintiff, thereby giving the defendant a special competitive advantage because he was burdened with little or none of the expense incurred by plaintiff in the creation of the product; and (iii) commercial damage to plaintiff. 61

Despite the seemingly divergent purposes of federal copyright law and state misappropriation law, we conclude that, under the discrete facts of this case, the rights protected under these laws are equivalent.

This conclusion is supported by our holding in Daboub v. Gibbons. 62 Daboub involved the performance by the band ZZ Top of music that the plaintiffs alleged originally belonged to them. The eomplained-of acts centered around ZZ Top’s live performances and sales of studio recordings of this music. 63 Plaintiffs brought suit alleging various Texas state law claims, including misappropriation, but we held that plaintiffs’ state claims were preempted by the Copyright Act. In so doing, we stated that “[plaintiffs’] state claims center on the improper copying of the song, an interest clearly protected by the Copyright Act.... The core of each of [their] state law theories of recovery ..., without detailing the specific elements comprising each claim, is the same: the wrongful copying, distribution, and performance of the lyrics of Thunderbird.” 64 We held that the *789 state claims were preempted because plaintiffs had failed to “allege or produce evidence of ‘any element, such as an invasion of personal rights or a breach of fiduciary duty’,” 65 which would have rendered their claims different in kind from copyright infringement.

Likewise, the acts that form the basis of DSC’s misappropriation claim touch on interests clearly protected by the Copyright Act, including (1) the reproduction of its firmware, software, and manuals; (2) the use of these materials in the preparation of allegedly derivative works — DGI’s microprocessor and expansion cards; and (3) the distribution of these works in competition with DSC. Nevertheless, DSC insists, its claim is not preempted because Texas misappropriation law requires proof of elements qualitatively different from those necessary to establish copyright infringement.

First, submits DSC, state law requires proof that DSC’s product was created through “extensive time, labor, skill and money” whereas, under the Copyright Act, this proof is irrelevant. As previously noted, however, copyright protection is awarded only to those works in which independent creation and creativity converge. DSC is correct in its observation that no amount of time, labor, skill, and money can bestow copyright eligibility on a work that is devoid of creativity. While proof of these elements is not sufficient to establish copyright protection, however, these elements are fundamental to the independent creation of a work, proof of which is necessary under the Copyright Act. Thus, under circumstances in which a work has been granted copyright protection — such as the circumstances that are before us in the instant case — the time, labor, skill, and money expended by the author in creating the work are necessarily contemplated in that copyright.

Next, submits DSC, a Texas misappropriation claim requires proof that DGI used DSC’s firmware, software, and manuals “in competition with” DSC. Because an unauthorized act of reproduction would violate copyright law but would not, in itself, offend the competition requirement of state law, DSC argues, its misappropriation claim is qualitatively different. This type of reverse reasoning defies logic. The owner of a copyright has a claim under federal law for the infringement of his exclusive rights to reproduce, adapt, distribute, perform, and display his works. Whether the infringing act touches on all of these rights or just one is irrelevant for the purposes of copyright law. In the instant case, alleges DSC, DGI reproduced works created by DSC, prepared derivative works based on those creations, and then distributed its product in competition with DSC. To establish a claim under state law, proof of this final infringing act is necessary. Although not necessary, such proof is sufficient to establish a claim under federal copyright. That proof of reproduction would, in itself, be sufficient to establish a copyright claim as well means only that the scope of protection afforded by copyright law is broader than that afforded by state misappropriation.

We conclude that, because DSC has failed to demonstrate the presence of any element that renders different in land its rights under state and federal law, DSC’s state misappropriation claim is preempted by federal copyright law. Consequently, the district court erred in denying DGI’s motion for a JML on this issue, and its award of damages on DSC’s claim of unfair competition by misappropriation must be vacated. Unfortunately, however, the monetary damages awarded to DSC were not itemized, and we have no way of parsing that award to reduce its quantum appropriately and render it. Therefore, we have no choice but to remand this particular issue to the district court for it to recalculate the damages in accordance with this opinion and render a revised judgment accordingly.

C. Injunction

The jury found, and the district court agreed, that as a result of DGI’s trade secret misappropriation, unfair competition by misappropriation, and copyright infringement DSC would be irreparably harmed in the future with respect to its operating system software. The court therefore issued a per *790 manent injunction (1) requiring DGI to produce for destruction all of its existing microprocessor cards, and (2) prohibiting DGI from selling any microprocessor cards developed with the assistance of DSC’s operating system software or designed to use DSC’s operating system software. DGI urges that none of the grounds relied on by the district court justify the issuance of the injunction. We address each of these grounds in turn, reviewing the underlying claims and the reasons proffered by DGI for its contention that equitable relief was improper.

1. Standard of Review

We review a district court’s issuance of a permanent injunction for abuse of discretion. 66 A district court abuses its discretion if it “(1) relies on clearly erroneous factual findings when deciding to grant or deny the permanent injunction^] (2) relies on erroneous conclusions of law when deciding to grant or deny the permanent injunction, or (3) misapplies the factual or legal conclusions when fashioning its injunctive relief.” 67

2. Copyright Infringement 68

a. Sufficiency of the Evidence

The jury found that DGI directly infringed DSC’s copyrights in its pulse code modulation interface manual and printed circuit board assembly, its MP-8 firmware, and its operating system software. The jury also concluded that DGI had not contributorily infringed DSC’s copyright in its operating system software.

To succeed on a claim for direct copyright infringement, a plaintiff must prove two elements: (1) ownership of the copyrighted material and (2) copying by the defendant. 69 A copy is legally actionable if (1) the alleged infringer actually used the copyrighted material to create his own work, and (2) substantial similarity exists between the two works. 70 A party is liab