This story has been updated with statements from Microsoft and additional information about how refurbishers obtain restore disks.
The appeals court upheld a federal district judge’s ruling that the disks made by Eric Lundgren to restore Microsoft operating systems had a value of $25 apiece, even though they could be downloaded free and could be used only on computers with a valid Microsoft license. The U.S. Court of Appeals for the 11th Circuit initially granted Lundgren an emergency stay of his prison sentence, shortly before he was to surrender, but then affirmed his original 15-month sentence and $50,000 fine without hearing oral argument in a ruling issued April 11.
Lundgren, 33, has become a renowned innovator in the field of “e-waste,” using discarded parts to construct things such as an electric car, which far outdistanced a Tesla in a test on one charge. He built the first “electronic hybrid recycling” facility in the United States, which turns discarded cellphones and other electronics into functional devices, slowing the stream of harmful chemicals and metals into landfills and the environment. His California-based company processes more than 41 million pounds of e-waste each year and counts IBM, Motorola and Sprint among its clients.
“This is a difficult sentencing,” Senior U.S. District Judge Daniel T.K. Hurley told him last year, “because I credit everything you are telling me, you are a very remarkable person.”
Before he launched his company, IT Asset Partners, Lundgren lived in China, learning about the stream of e-waste and finding ways to send cheap parts to America to keep electronics running. One of his projects was to manufacture thousands of “restore disks,” usually supplied by computer-makers as a way for users to restore Windows to a hard drive if it crashes or must be wiped. The disks can be used only on a computer that already has a license for the Windows operating system
, and the license transfers with the computer for its full life span. But computer owners often lose or throw out the disks, and though the operating system can be downloaded free on a licensed computer, Lundgren realized that many people didn’t feel competent to do that, and were simply throwing out their computers and buying new ones.
Lundgren had 28,000 of the disks made and shipped to a broker in Florida. Their plan was to sell the disks to computer refurbishing shops for about 25 cents apiece, so the refurbishers could provide the disks to used-computer buyers and wouldn’t have to take the time to create the disks themselves. In turn, the new users might be able to use the disks to keep their computers going the next time a problem occurred.
But Lundgren’s assertions about restore disks don’t apply to computers that go to refurbishers, the court concluded. While software licenses transfer when computers change hands among individuals, commercial sellers like refurbishers must buy new licenses for $25, according to Microsoft. The company said refurbishers would not be creating new restore disks, but would instead get them with the license purchase and supply those to its customers.
But in 2012, U.S. customs officers seized a shipment of disks and began investigating. The disks were never sold. Eventually, the Florida broker, Robert Wolff, called Lundgren and offered to buy the disks himself as part of a government sting, Lundgren said. Wolff sent Lundgren $3,400, and the conspiracy was cemented. Both were indicted on a charge of conspiracy to traffic in counterfeit goods and criminal copyright infringement. Wolff made a plea deal and received a six-month home-arrest sentence.
Lundgren pleaded guilty but argued that the value of his disks was zero, so there was no harm to anyone. Neither Microsoft nor any computer manufacturers sell restore disks. They supply them free with new computers and make the software available for free downloading for those who have paid for the software and received a license — typically a sticker with a “Certificate of Authenticity” number on it. Lundgren said that he was trying to make the disks available for those who needed them and that they could be used only on licensed computers.
Initially, federal prosecutors valued the disks at $299 each, the cost of a brand-new Windows operating system, and Lundgren’s indictment claimed he had cost Microsoft $8.3 million in lost sales. By the time of sentencing, a Microsoft letter to Hurley and a Microsoft expert witness had reduced the value of the disks to $25 apiece, stating that was what Microsoft charged refurbishers for such disks.
But both the letter and the expert were pricing a disk that came with a Microsoft license. “These sales of counterfeit operating systems,” Microsoft lawyer Bonnie MacNaughton wrote to the judge, “displaced Microsoft’s potential sales of genuine operating systems.” But Lundgren’s disks had no licenses and were intended for computers that already had licenses.
Glenn Weadock, a former expert witness for the government in its antitrust case against Microsoft, was asked, “In your opinion, without a code, either product key or COA [Certificate of Authenticity], what is the value of these reinstallation disks?”
“Zero or near zero,” Weadock said.
Why would anybody pay for one? Lundgren’s lawyer asked.
“There is a convenience factor associated with them,” Weadock said.
Still, Hurley decided Lundgren’s 28,000 restore disks had a value of $700,000, and that dollar amount qualified Lundgren for a 15-month term and a $50,000 fine. The judge said he disregarded Weadock’s testimony. “I don’t think anybody in that courtroom understood what a restore disk was,” Lundgren said.
A three-judge panel of the 11th Circuit deferred to Hurley in his judgment that Weadock was not credible and that “while experts on both sides may have identified differences in functionality in the discs, [Hurley] did not clearly err in finding them substantially equivalent.” The ruling was written by Judges William H. Pryor Jr., Beverly B. Martin and R. Lanier Anderson.
Randall Newman, Lundgren’s lawyer on the appeal, said there was no basis to seek a rehearing from the full 11th Circuit. Lundgren said an appeal to the Supreme Court would be a costly long shot.
But he said the court had set a precedent for Microsoft and other software-makers to pursue criminal cases against those seeking to extend the life span of computers. “I got in the way of their agenda,” Lundgren said, “this profit model that’s way more profitable than I could ever be.”
Microsoft said it did not initiate the prosecution of Lundgren.
But the company said it participated in the case to discourage both counterfeiting and the spread of malware within counterfeit software. “Microsoft actively supports efforts to address e-waste and has worked with responsible e-recyclers to recycle more than 11 million kilograms of e-waste since 2006,” the company said in a statement issued Wednesday. “Unlike most e-recyclers, Mr. Lundgren sought out counterfeit software which he disguised as legitimate and sold to other refurbishers. This counterfeit software exposes people who purchase recycled PCs to malware and other forms of cybercrime, which puts their security at risk and ultimately hurts the market for recycled products.”
The idea of spreading dangerous malware was not discussed in Lundgren’s case. But Microsoft said that when a computer system is prepared for refurbishment, its hard drive is wiped clean of data and its original software. The license for the operating system does not transfer, as Lundgren claimed, and refurbishers are required to obtain new licenses which Microsoft offers at a discounted price of approximately $25, a Microsoft spokesman said.
After articles on the case were published, Microsoft responded with a blog post. In part it says “the evidence in the case shows Mr. Lundgren used his knowledge of the PC recycling community to scam the very community he claimed to champion and to evade the law.”
Lundgren said he wasn’t sure when he would be surrendering. He said prosecutors in Miami told him he could have a couple of weeks to put his financial affairs in order, including plans for his company of more than 100 employees. “But I was told if I got loud in the media, they’d come pick me up,” Lundgren said. “If you want to take my liberty, I’m going to get loud.”
A spokeswoman for the U.S. attorney’s office in Miami declined to comment Monday.
“I am going to prison, and I’ve accepted it,” Lundgren said Monday. “What I’m not okay with is people not understanding why I’m going to prison. Hopefully my story can shine some light on the e-waste epidemic we have in the United States, how wasteful we are. At what point do people stand up and say something? I didn’t say something, I just did it.”