Recycling innovator Eric Lundgren loses appeal on computer restore discs, must serve 15-month prison term

[Leroy N. Soetoro]

https://www.seattletimes.com/nation-world/recycling-innovator-eric-
lundgren-loses-appeal-on-computer-restore-discs-must-serve-15-month-
prison-term/

A California man who built a sizable business out of recycling electronic
waste is headed to federal prison for 15 months after a federal appeals
court in Miami rejected his claim that the “restore discs” he made to
extend the lives of computers had no financial value, instead ruling that
he had infringed Microsoft’s products to the tune of $700,000.

The appeals court upheld a federal district judge’s ruling that the discs
made by Eric Lundgren to restore Microsoft operating systems had a value
of $25 apiece, even though they could be downloaded free and could only be
used 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 do things such as construct 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 also finding ways to send cheap
parts to America to keep electronics running. One of his projects was to
manufacture thousands of “restore discs,” supplied by computer makers as a
way for users to restore Windows to a hard drive if it crashes or must be
wiped. The discs can only be used 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 discs, 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 discs made and shipped to a broker in Florida.
Their plan was to sell the discs to computer refurbishing shops for about
25 cents apiece, so the refurbisher could provide the discs to a used
computer buyer, and the refurbisher wouldn’t have to take the time to
create the discs themselves. And the new user might be able to use the
disc to keep their computer going the next time a problem occurred.

But in 2012, U.S. Customs officers seized a shipment and began
investigating. The discs were never sold. Eventually, the Florida broker,
Robert Wolff, called Lundgren and offered to buy the discs 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 discs was zero,
so there was no harm to anyone. Neither Microsoft nor any computer
manufacturers sell restore discs. 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
he was trying to make the discs available again for those who needed them,
and that they could only be used on licensed computers.

Initially, federal prosecutors valued the discs at $299 each, or 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 discs to $25, stating that was what Microsoft
charged refurbishers for the discs.

But both the letter and the expert were pricing a disc which 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
discs had no license, 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 discs?”

“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 that Lundgren’s 28,000 restore discs had a value of
$700,000, and that dollar amount qualified Lundgren for a 15-month term
along with a $50,000 fine. The judge said he disregarded Weadock’s
testimony. “I don’t think anybody in that courtroom understood what a
restore disc 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 U.S. 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.”

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.”


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