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Saturday, Apr 20, 2024

Recycle Plan Gone Wrong

Editor’s Note This story should reflect these corrections and clarifications: Eric Lundgren was living in China seven years ago when the disc concept began. Lundgren’s former home was in Reseda, not Winnetka as stated in the story. After Lundgren received a warrant, he flew voluntarily to Florida to meet with his accusers and explain his position. Lundgren pleaded guilty after prosecutors changed the description of the offense to reflect that he had copied a restoration version of Microsoft’s software, not a full version with a license and product key. Prosecutors also implied in court papers that Robert Wolff paid Lundgren $92,000 for the discs; Lundgren maintains that money was for other business between the two men, including the purchase of “other green products for refurbishing,” according to a statement from Lundgren. Lundgren and his legal team maintain that the government failed to prove the value of the software. He claims that the software is free to Dell computer refurbishers. The government has provided no evidence of the value of the product Lundgren copied, his legal team said in a brief filed Dec. 15 in the U.S. 11th Circuit Court of Appeals. Microsoft Corp. was not awarded any damages in the case, as no discs were sold. At the time the story was published on Jan. 22, 2018, Lundgren was out on an emergency stay. The case remained open and his legal team had appealed the sentence. . For Eric Lundgren, a 33-year-old self-made millionaire detemined to rid the world of electronic waste, the difference between serving 15 months in federal prison and walking free comes down to the value of a product that many people have have lying in their desk drawers, unopened and forgotten. Last February, Lundgren pleaded guilty to participating in a felony-level counterfeit scheme and violating Microsoft Corp.’s intellectual property rights when he created 28,000 copies of “Dell restore CDs.” The software replaces the Windows operating system on crashed Dell Inc. computers. Lundgren intended to sell the CDs to electronics refurbishers. In addition to prison time, Lundgren’s sentence includes a $50,000 fine and three years of probation. The case led him to step down from his electronics recycling firm, IT Asset Partners in Chatsworth, and to sell his home in Winnetka. Although Lundgren pleaded guilty to the crime, he has appealed his sentence on the basis that the government incorrectly valued the software he counterfeited as a retail version of Windows rather than a restoration copy. Retail copies include a license and product key, neither of which was included with the software Lundgren made, he said. Lungren’s sentence was based on the prosecution’s valuation of the software at $25 a disc, the amount for which Microsoft sells it to authorized computer refurbishers. Lundgren maintains “that this is free, that there’s no cost to download this software.” Meanwhile, he is out on bail while his legal team waits to hear whether the court will approve a request for oral arguments. “Right now I’m just sitting in purgatory,” Lundgren said. He continues to sell recycled electronics through his e-commerce company, Tech Direct Inc. in Chatsworth. Lundgren wonders if his case was a way for Microsoft to set a precedent that would discourage refurbishers from trying to extend the lifespan of computers. Other big names in tech – most notably Apple Inc. – have been accused of intentional obsolesence of their products in recent months. “I think I was just a pawn used to set a precedent that would set allow Microsoft to profit enormously in the future,” Lundgren said. Microsoft declined to comment on the case, but sent court documents to the Business Journal. Chinese e-waste Lundgren’s story begins about five years ago in Shēnzhèn, China, the home of a marketplace called Huaqiangbei that’s the “Silicon Valley” of technology hardware. Customers can buy virtually any type of electronic or electronic component, from wholesale microchips and SD cards to smartwatches and video drones. Lundgren had been living in Shēnzhèn for a few years, studying how the country dealt with e-waste. He would send components back to the United States, where they would be used to refurbish recycled electronics he had purchased from Fortune 500 companies or be sold to other electronics recyclers. One of them, a man named Robert “Bob” Wolff, reached out to Lundgren about making copies of Windows restoration CDs. (Neither Wolff nor his lawyer in the case, Randee Golder, could be reached for comment.) “I’m in China making … proprietary parts for electronics so they don’t have to be thrown away, and this comes across my desk,” Lundgren recalled. “I thought, ‘It’s good for the world, it doesn’t hurt anyone. There’s a need here.’” The plan would work like this: Lundgren would have exact replicas of the original restore CD manufactured in Shēnzhèn, where materials and labor were a fraction of their cost in the U.S. He would ship the discs to Florida, where Wolff was based, and the two would split the profits from selling them to computer refurbishers. The discs would be priced between $3.50 and $4 apiece, Lundgren said. Since consumers can download the software for free, the only value of the disks was convenience, Lundgren believed. Having the software copied was “easier than ordering a pizza,” Lundgren said. He walked into a stall in Huaqiangbei and presented an original disc to a vendor, who could make exact replicas of the CDs – including the label. For 5 cents extra, the vendor could hack them so they could be used without a product key. Lundgren refused. “I knew that if I were to have changed a single bit or byte on that CD, it would have made me a pirate,” Lundgren said. The resulting products looked exactly like the original discs that came with a new Dell computer. Lundgren later claimed this was done with consumers’ best interests in mind, but government prosecutors disagreed, pointing to an email exchange between Lundgren and Wolff as evidence the men were attempting to deceive customers. “‘Lundgren told Wolff that: ‘You would have to be an expert with a magnifying glass to … see such tiny differences,’” the prosecution quoted in a brief filed Nov. 17. “‘[Wolff] should be able to sell these … back to anyone whom [sic] is not trying to sell them directly back to Bill Gates.’” Lundgren sent two shipments of discs in September 2012 to Florida and New York. Both packages were intercepted by customs, according to court documents. Eventually, Lundgren mailed 28,000 discs to Wolff. In exchange, Wolff sent $92,000 to Lundgren through PayPal, according to court documents. Home raid In the early morning hours of Aug. 22, 2013, Homeland Security agents stormed Lundgren’s home in Winnetka. By then, Lundgren had returned to the U.S. and set up IT Asset Partners in Chatsworth as the country’s first plant for “hybrid recycling,” a method that involves removing components from electronics and salvaging the remains for use in new electronics. “I had just finished meeting with RadioShack in Dallas about recycling some of their assets when I found out (about the raid),” Lundgren recalled. Lundgren flew immediately to Florida, as directed by the warrant the agents left at his house. There he met District Attorney Lothrup Morris, who informed Lundgren of the charges against him. Lundgren insisted that his crime was far less serious than the one he was accused of committing. “He said, ‘My hands are tied – Microsoft wants your head on a silver platter,’” Lundgren recalled. He returned to Chatsworth after the meeting, and heard nothing for months. Nearly a year later, just before the statute of limitations on his crime was up, he learned he had been charged with 19 counts, including federal copyright violations, yielding a potential sentence of an $8.4 million fine and 43 years in prison. The ensuing legal battle dragged on for three years. At first, the prosecution claimed that the CDs Lundgren had copied were worth $300 each, and Lundgren refused to plead guilty until the prosecution adjusted the cost downward. The plea deal dropped the value to $25 a disc, resulting in a $50,000 fine and 15 months in prison. Wolff received six months house arrest and four years probation. Valuing free software Lundgren appealed his sentence almost immediately. The true value of the software was zero, he and his legal team insist. “Anyone who had that (refurbished) computer could use that key to get a free copy of that software,” Randall Newman, one of Lundgren’s attorneys, said. “The value of what the government says was infringed … we think it’s a lot less than that.” Josh Geller, an attorney with the firm Greenburg Glusker, said such cases are difficult to settle because the potential profits lost by the intellectual property rights holder often differ greatly from what the defendant would have sold the product for. “Both of these perspectives can be valid and applicable, depending on the case,” Geller said. “Microsoft can look at what they missed out on or what they would have made if the defendant had not done alleged infringing activity.” Microsoft’s decision to bring criminal charges against Lundgren, who by the end of the case was left with a relatively small fine, suggests that their motive might have been to discourage others from violating the company’s intellectual property rights. The company’s actions are in keeping with a trend among large corporations, Geller noted. “I’m speculating on this, but especially recently a lot of larger companies have been taking (these rights) extremely seriously,” he said. “It’s not surprising to me to see them looking to criminal sanctions.” As to the valuation, the fact that Microsoft has a program in place for refurbishers to purchase restoration software works against Lundgren’s argument that the counterfeit CDs were valueless, copyright attorney Warren Bleeker, partner at Lewis Roca Rothgerber Christie in Glendale, said. Lundgren was selling the discs to refurbishers, not consumers, at a lower price than they would have paid if they had purchased the product through Microsoft. “It’s really a technical issue of how the license works,” Bleeker said. “If the retail value was nothing, then why did he sell it?” To that question, Lundgren answered that efficiency matters. “When I talked to refurbishers, they were saying, ‘Eric, we can’t afford the time-energy-effort to download (the restoration software),’” Lundgren said. “We were charging the equivalency of shipping, logistics, manufacturing and convenience.” The goal of his effort was to prevent more computers from ending up in landfills, a consequence that has serious implications for the environment, Lundgren said. “My entire life has been about trying to make things more efficient,” he said. “If you can turn the waste stream back into something that can be reused, the whole world can benefit.”

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