IN THE UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF VIRGIN IA

Alexandria Division

x- - - - - - - - - - - - - - - - - - - -x

RELIGIOUS TECHNOLOGY CENTER,

Plaintiff,

VS. CIVIL ACTION

NO. 95-1107-A

ARNALDO PAGLIARINI LERMA, et al.,

Defendants.

x- - - - - - - - - - - - - - - - - - - -x

Friday, September 15, 1995

Alexandria, Virginia

Transcript of motion proceedings in the

above-captioned matter.

BEFORE:

The Honorable LEONIE M. BRINKEMA, Judge

United States District Court

APPEARANCES:

FOR THE PLAINTIFF:

EARLE C. COOLEY, ESQ.

COOLEY MANION MOORE & JONES, P.C.

21 Custom House

Boston, Massachusetts 02110

U S C A A

Ebwarb Ounavan Atc(gov, RIPIR, (ftR

OF-OCIAL COURT RFPOF@-R

200 S. WASHINGTON STREET, ROOM 204

ALEXANDRIA, VIRGINIA 22313

(703) 683-3668

2

APPEARANCES: (Continued)

FOR THE PLAINTIFF (Continued):

WILLIAM C. COOK, ESQ.

WILMAN BRINKS HOFER GILSON & LIONE

2000 K Street, N.W., Suite 200

Washington, D. C. 20006-1809

HELENA KOBRIN, ESQ.

7629 Fulton Avenue

North Hollywood, California 91605

FOR THE DEFENDANTS:

MICHAEL A. GROW, ESQ.

1828 L Street, N.W.

Washington, D. C.

JOHN E. COFFEY, ESQ.

HAZEL & THOMAS

510 King Street, Suite 200

Alexandria, Virginia 22313

ROBERT A. HAGER, ESQ.

VORYS, SATER, SEYMOUR and PEASE

Suite 1111, 1828 L Street, N.W.

Washington, D. C. 20036-5104

LEE LEVINE, ESQ.

MICHAEL SULLIVAN, ESQ.

ROSS, DIXON & MASBACK, L.L.P.

601 Pennsylvania Avenue, N.W.

North Building

Washington, D. C. 20004-2688

CHARLES S. SIMS, ESQ.

CHRISTOPHER WOLF, ESQ.

PROSKAUER ROSE GOETZ & MENDELSOHN

1233 Twentieth Street, N.W.

Suite 800

Washington, D. C. 20036-2396

C 0 N T E N T S

WITNESS: DIRECT CROSS REDIRECT RECROSS

(None)

3

1 P-R-0-C-E-E-D-I-N-G-S

2 THE CLERK: Civil Action No. 95-1107-A, Religious

3 Technology Center vs. Arnaldo Pagliarini Lerma, et al.

4 Are counsel present and ready, please?

5 MR. COOLEY: Counsel for the plaintiff, Mr. Earle

6 Cooley, present and William Cook, present.

7 THE COURT: All right.

8 We have a motion, pro hac vice motion? Why don't

9 we hear that right now.

10 MR. GROW: Your Honor, my name is Michael Grow,

11 counsel for Defendant Digital Gateway Systems in this

12 matter.

13 I would like to move the admission to the Bar of

14 this Court of Robert Alan Hager, who is a member of the Bar

15 of Virginia, as well as the District of Columbia. I believe

16 he has already submitted his paperwork and paid his fee.

17 THE COURT: All right. Mr. Hager, you are a

18 member of the Virgini a Bar?

19 MR. HAGER: That is correct, ma'am-

20 THE COURT: So you are admitted to the Supreme

21 Court of Virginia?

22 MR. HAGER: That is correct, ma'am.

23 THE COURT: I don't see that listed on your form.

24 (Examining document)

25 That looks okay. All right, that's fine. You are

4

1 going to be entering an appearance on behalf of Digit al in

2 this case?

3 MR. HAGER: That is correct, Your Honor.

4 THE COURT: That's fine. We will grant that

5 request, and the clerk will administer the oath to you at

6 this time.

7 (Whereupon, the oath was duly administered.)

8 THE COURT: All right, after court this morning,

9 if you will take that form down to the clerk's office, they

10 will arrange for you to get a certificate.

11 All right, we have Mr. Cooley's appearance on

12 behalf of the plaintiff, Religious Technology Center.

13 MR. COOLEY: That is correct, Your Honor.

14 THE COURT: We have so many lawyers in this room,

15 I only want those who are actually going to be speaking

16 coming to the table.

17 All right, Mr. Hager, you are. going to be

18 representing Digital in this?

19 MR. HAGER: Yes, Your Honor and Michael Grow.

20 THE COURT: All right.

21 MR. LEVINE: Your Honor, my name is Lee Levine.

22 With my partner, Michael Sullivan, we represent Mr. Lerma.

23 THE COURT: Are you both going to be speaking?

24 MR. LEVINE4. Yes.

25 THE COURT: Maybe.

5

1 MR. LEVINE: Maybe, yes.

2 THE COURT: All right. And we have the Washington

3 Post.

4 MR. COFFEY: Your Honor, Jack Coffey, local

5 counsel for the Washington Post defendants. I am not going

6 to be speaking, but I did want to move the admission pro hac

7 vice of Charles Sims, a member of the Bar of New York and

8 and who is with the Proskauer firm and is a partner with

9 Mr. Wolf, who has previously been admitted pro hac vice in

10 this case.

11 THE COURT: Right.

12 MR. SIMS: Good morning, Your Honor.

13 THE COURT: Good morning.

14 All right, that motion will be granted.

15 MR. COFFEY: Your Honor, if I could ask a personal

16 indulgence, I understand from speaking to several of the

17 counsel, this matter could last quite sometime.

18 THE COURT: It's not going to, folks. Don't worry

19 about it.

20 Mr. Coffey, did you want to be excused?

21 MR. COFFEY: Yes, Your Honor.

22 THE COURT: You are excused.

23 MR. COFFEY: Thank you, Your Honor.

24 THE COURT: All right. Now, we have got three

25 motions before us: plaintiff's emergency motion for

6

1 reconsideration and rehearing on the Court's ruling denying

2 the TRO as against the Washington Post. I have the

3 plaintiff's motion for preliminary injunction against the

4 Defendant Lerma, and I have the Defendant Lerma's motion to

5 vacate the writ of seizure and order of impoundment and also

6 a motion to increase the bond. That's what's before me

7 today.

8 Now, on the emergency motion for reconsideration,

9 it is not this Court's practice, and I don't expect to be

10 reconsidering every ruling that I make in this case. Most

11 judges do not like to have to reconsider what they do. I

12 spend the time reading the papers and thinking about matters

13 before I rule, and I, therefore, feel that if I have made a

14 mistake, that is appropriate for the Court of Appeals to

15 correct. I don't have the time to be revisiting each thing

16 that I rule on.

17 I have, however, given the plaintiff the benefit

18 of th6 doubt on this and have, in effect, granted a portion

19 of the motion in that I did, in fact, read their papers. I

20 have considered them. We have worked on them in Chambers,

21 and, therefore, we have in fact reconsidered, and I am going

22 to allow a brief amount of argument on the issues raised in

23 that motion.

24 However, I am concerned that the thrust of that

25 motion took a completely different approach to the issues,

7

1 focusing not so much on copyright and trade-secret issues,

2 but coming down much more on areas of free exercise and

3 establishment issues which it seems to me ought to have been

4 raised in the first place because, after all, the plaintiff

5 stands in the position of a religion and yet was not

6 focusing or emphasizing in that motion that aspect of the

7 case. However, as I said, I will briefly grant some hearing

8 on that.

9 The motion for a preliminary injunction against

10 the Defendant Lerma has a great deal of overlap with the

11 motion for a preliminary injunction -- for a temporary

12 restraining order, which was previously briefed and argued,

13 vis-a-vis, the Washington Post.

14 There are some slight differences, but essentially

15 the same issues are involved. Therefore, while I will hear

16 some argument on that, it does not need to be extensive.

17 Then we will address Defendant Lerma's motion to

18 vacate which, of course, is inextricably interwoven with the

19 motion for a preliminary injunction against Lerma.

20 I do not feel that we need an extensive hearing

21 today, because frankly we have had pleadings by the foot

22 filed with the Court over the last two or three weeks, with

23 extensive deposition transcripts, affidavits and supporting

24 documdnts, and that has been reviewed. Therefore, I am not

25 going to have a whole lot of, first of all, repeat.

8

1 I did also find when I spoke to you all in a

2 telephone conference earlier this week that some of the

3 pleadings said the same thing three or four times. I only

4 need to hear it once. We get it the first time.

5 So anyway, having said all that., Mr. Cooley or

6 whoever is speaking on behalf of the plaintiff in terms of

7 the emergency motion for reconsideration, is there anything,

8 first of all, that was not presented in your motion that you

9 want to present at this time?

10 MR. COOLEY: Well, as I was coming over here this

11 morning, I picked up the New York Times and got some legal

12 research that I didn't have before.

13 Yesterday in the United States District Court in

14 Ohio, a Judge John Fikens (phonetic) in a lawsuit between

15 Proctor & Gamble and Bankers Trust Company had sealed some

16 information, not copyright information, but apparently

17 financial information, relating to a suit on these

18 derivatives that were being sold that Proctor & Gamble

19 looked like it lost a hundred million dollars on, an

20 amendment to add a RICO count, which is quite unusual

21 between the fraternity of giant corporations.

22 In any event, Business Week through a confidential

23 informant obtained that information and started making calls

24 for comment to Proctor & Gamble.

25 Proctor & Gamble went into Judge Fikens, and Judge

9

1 Fikens entered an injunction against the publication of it

2 in the current issue that was going to press to come out

3 this week. All I know is what is in the New York Times. I

4 just have the copy I was reading in the car. I have it

5 available for the Court for the edification of counsel.

6 It appears at page A-16 under the heading National

7 Report in the extreme right-hand column. I note that the

8 Post did not report on the case this morning. I looked for

9 it in there. I may have missed it, but I don't think they

10 did.

11 In addition, I assume the Court might have some

12 interest in what's going on out in Colorado, and the United

13 States Court of Appeals for the 10th Circuit has stayed the

14 order of Judge Kane out there, denying the application for a

15 preliminary injunction, and the order was filed the 13th-

16 We just got a written copy of it this morning.

17 It says that the order in that case is temporarily

la stayed. -The stay shall remain in effect until further order

19 of this Court. Defendants are temporarily enjoined from

20 disseminating or publishing any disputed materials in their

21 possession until further order of this Court, and all

22 parties are ordered to preserve any disputed materials in

23 their possession until further order of this Court. The

24 defendants have been ordered to file a brief by noon today.

25 Of course, here we are. If it's in, we haven't

10

1 got the fax yet. I have a copy of this order for counsel.

2 THE COURT: I will accept that representation,

3 Mr. Cooley. Thank you.

4 MR. COOLEY: Finally, I don't know how this case

5 was missed in the previous searches that we did, but I wish

6 -- and I have a copy of it here, the case is Urantia --

7 U-r-a-n-t-i-a -- Foundation, plaintiff, vx. Kristin Mehara

8 (phonetic), defendant, Civil No. 91-0325, PHX in the United

9 States District Court for the District of Arizona. It's a

10 January 27th, 1995, decision by Judge Urbon, U-r-b-o-n.

11 It involved the plaintiff Urantia Foundation

12 asserting that neither the free-speech provision nor the

13 religion clauses of the First Amendment to the United States

14 Constitution justified or provided the defendant in that

15 case, Kristin Mehara, a viable defense to copyright and

16 trademark infringement claims.

17 What the defendant in that case did is markedly

18 similar to what was done in this case. The plaintiff

19 brought the action to enjoin the defendant from infringing

20 on copyright to the book entitled Urantia -- U-r-a-n-t-i-a

21 -- book, and infringing upon the registered trademarks in

22 the name Urantia. And there were three concentric circles

23 that were associated with the Urantia Foundation that were

24 infringed.

25 The defendant said, well, I can do this, because I

11

1 am relying on the First Amendment, and she states that the

2 claims infringe her right to religious freedom under the

3 First Amendment as well as her right to freedom of speech.

4 The Court said, no such thing. It doesn't apply

5 and ruled that the copyrights and trademark laws,

6 enforcement of those don't violate her rights in any way and

7 that the verbatim copying of the text of the book and the

8 distribution of it to all who are interested violated those

9 rights, and she was out as a matter of law.

10 The Court said, "It would be an unwarranted

11 infringement of property rights to require them to yield to

12 the exercise of First-Amendment rights under circumstances

13 where adequate alternative avenues of communication exist.

14 Such an accommodation would diminish property rights without

15 significantly enhancing the asserted right of free speech.

16 "The alternative avenues of communication

17 available to the defendant are numerous. There are,

18 however, two avenues that must not be ventured down. The

19 defendant may not copy and distribute the text of the

20 Urantia book if the copyright is valid, and the defendant

21 may not use the plaintiff's trademarks in a manner that is

22 confusing to the public."

23 So intellectual property law as it has

24 traditionally been applied in this country was used to

25 overrule those claims of Constitutional superiority to those

12

1 property rights.

2 I have a copy of that decision for the Court and

3 for counsel.

4 Now, that being said, I think I agree certainly

5 with the Court that there has been enough law recited in

6 this case in the papers to obviate the necessity of any

7 significant addressing of further points of law.

8 However, there are some other points that have to

9 ne addressed because of the response that has been filed by

10 Mr. Lerma and his counsel and by the Post and on that motion

11 that attacks jusi about every aspect of the integrity of the

12 client and counsel in connection with the search and the

13 seizure, allegations of misrepresentation as to the Court,

14 broadside attacks on the religious practices of Scientology,

15 broadside attacks on the Scientology and Scientologists --

16 THE COURT: (Interposing) Let me stop this right

17 now because I am not going to hear, I am not spending my

18 time discussing the merits of Scientology as a religion. I

19 am accepting for purposes of this hearing that it is --

20 certainly the Tax Code apparently or the Internal Revenue

21 Service has recognized it as a religion. It gets an

22 exemption from the tax laws of the United States as a

23 religious institution.

24 We don't need to address that today in this court.

25 I am not going to spend a moment doing that. What I am

13

1 concerned about, and let's get this focused, because as I

2 said, Mr. Cooley, I have spent a lot of time on this case

3 this week and before that.

4 The emergency motion for reconsideration and

5 rehearing addresses the Washington Post only, although there

6 is overlapping in issues.

7 MR. COOLEY: Tremendous overlap, Your Honor.

8 THE COURT: But, nevertheless, that is the case

9 where I have already entered an order denying the relief

10 that you have sought. You have now shifted gears to some

11 extent. As I see that motion, you argue -- take a different

12 tack, emphasizing the free-exercise clause and the ways in

13 which you think that that may be impacted by the Court's

14 ruling and the ability of the Post to make fair use of your

15 documents.

16 You have talked about spiritual harm that could

17 apply to both.Scientologists and non-Scientologists from

18 publication-of those materials; and you have again talked

19 about the economic harm and prior restraint. Those are

20 really the four general areas.

21 The last two, frankly, I have really addressed in

22 detail in the previous order of the Court. But we felt that

23 because the first two, that is, the free exercise and the

24 spiritual-harm claims had not really been focused on by you

25 all in the first round, I would give you some opportunity.

14

1 And, again, if there is anything you want to add to the

2 pleadings --

3 MR. COOLEY: (Interposing) I have some witnesses

4 here that I would like to have testify for Your Honor, who

5 will testify to the religious aspects of !this matter for

6 them as practicing Scientologists, one staff member and

7 several public Scientologists. I think that would be

8 helpful to the Court.

9 THE COURT: No. I can accept your representations

10 on that. As I said, that is not the issue. The issue is

11 whether or not the interests of your clients in being able

12 to freely exercise their religion, that those interests are

13 coming up against other paramount interests within the First

14 Amendment, that is, the First-Amendment rights of freedom of

15 the press and freedom of expression, part of which, of

16 course, although not explicitly stated, is freedom of

17 thought, which is certainly within the penumbra of those

18' freedoms that we are talking about.

19 The issue is whether or not the fair-use doctrines

20 within the copyright laws of the United States and the

21 First-Amendment interests in freedom of expression and

22 thought and press permit some limited use of these

23 doctrines, even if they rub up against some deeply-held

24 religious views of your particular clients.

25 MR. COOLEY: And I answer the Court on that, that

1 cannot possibly be permitted under the so-called fair-use

2 doctrine, that that is a sacrilege to these Scientologists,

3 to the Religious Technology Center.

4 To begin with, these materials were written by the

5 founder of the religion, L. Ron Hubbard. They were written

6 for Scientologists, for use by Scientologists in a very

7 strictly prescribed gradient approach to the, along the

8 scale of spiritual awareness, each step being prescribed in

9 a scriptural way to be performed and completed before moving

10 on to the next. That no one is to be exposed to those

11 levels before one has reached them in that religious

12 progression is an article of ovdrwhelming faith on the part

13 of Scientologists.

14 Witnesses that I would present to the Court this

15 morning and for whom I will be submitting affidavits would

16 have testified to the Court that it does violence to

17 everything they believe in for these materials to be exposed.

18 in whole or in part before a person has attained the level

19 of spiritual advancement and prequalification necessary to

20 the exercise of the next step, which is represented by these

21 advanced materials.

22 There has never been a question, Your Honor,

23 throughout this case that we were dealing with the advanced

24 technology of the Church of Scientology that was scripture

25 and sacred to Scientologists; that those were the materials

16

1 that we were trying to protect. Albeit in the context of

2 secular war that can be administered according to neutral

3 principles of law, those religious, deeply ingrained

4 religious beliefs could be protected without violence being

5 done to the right to free exercise of their religion and to

6 their beliefs by the exposure of these materials.

7 The reason they are being exposed is to offend

8 that sensibility, to offend that conviction. These are

9 spiteful revelations that are being made. These are not

10 being made by anybody in the interest of news. I mean, the

11 Washington Post, when the Church of Scientology finally

12 disposed of a virtual 30-year running combat with the

13 Internal Revenue Service, and, incidentally, so many of the

14 cases that are cited by the defendant are cases that were

15 decided when the Internal Revenue Service was taking a

16 different approach. The business about former renegade

17 Scientologists, who this management has, purged from their

18 ranks'and not allowed to hold any management offices, did

19 things that were wrong. They were prosecuted for it, and

20 they paid for it. Those things are history.

21 The IRS did a search of the record of every

22 Scientology church, millions and millions of documents, and

23 granted 501-C3 status, and in light of the history of the

24 combat between the two, you imagine how lily white this

25 church had to be to get it.

17

1 So to cite that history is to prove the very point

2 that I am trying to make. They got it. All the churches

3 got it. And they weren't treated in the insulting way that

4 the --

5 THE COURT: (Interposing) Mr. Cooley, we are going

6 to tone it down.

7 MR COOLEY: I'm sorry, Your Honor.

8 THE COURT: I understand you feel deeply about

9 this. Just focus your attention.

10 Is there any additional argument you want to make

11 in open court that was not contained within the briefs that

12 I have already had presented to me for consideration?

13 MR. COOLEY: Well, the violence that the

14 publication and exposure of these materials does to

15 individual Scientologists is something that ought to be

16 stated in open court, and I have to state it for them if

17 they are not allowed to testify.

18 What I am stating for them -- for example, let me

19 give you an example, Your Honor. You remember when we were

20 together the last time, and we were talking about the

21 search, and you were talking about eyes of counsel only, and

22 I told you, I am not allowed to see those materials, because

23 I have not -- I am not qualified.

24 And you said, "Mr. Cooley, they are going to have

25 to let you in on the secret."

18

1 I tell you, Your Honor, that will never happen.

2 That is how strongly they feel. I am here to defend

3 principle, but I am not allowed to see those materials.

4 That should convey to the Court the strength of the

5 religious conviction that is here involved; and these

6 Scientologists would have told the Court that if they knew

7 that I, in compliance with an order of the Court, became

8 familiar with the secret or the material, they would

9 protest, because it is their position that I have no right

10 to do so. I use that as an example.

11 THE COURT: I must tell you that this litigation

12 is going to end real fast, because at some point, someone is

13 going to have to see those documents to determine, number

14 one, whether or not the thing, the documents that are even

15 at issue in this case, are the very same ones that are

16 registered; and if you are telling me right now that that is

17 not going to be a possibility, I can put this case on a fast

18 track to Richmond.

19 MR. COOLEY: You are going to see them. I am not

20 going to see them, but you are.

21 THE COURT: Well, opposing counsel will get to.

22 MR. COOLEY: And opposing counsel is. That's why

23 it's so important to us to have these protective orders and

24 not have a rerun of what has happened in the Fishman Case.

25 THE COURT: I may have misunderstood you. I

19

1 thought you said you can't see them, and you represent

2 them?

3 MR. COOLEY: That is right. I can't and I won't.

4 THE COURT: Well, I will tell you right now, I am

5 not going to look at documents that counsel for the parties

6 are not looking at.

7 MR. COOLEY: I do not understand that at all, Your

8 Honor. You have to make the decision. I can argue the

9 principles. You can lay something side by side with what

10 was published and make this judgment. Is it identical or is

11 it a substantial similarity of expression. In a copyright

12 context, that's the issue Your Honor has to decide, and we

13 recognize that they have to be exposed to you, because we

14 can't be here otherwise.

15 But they won't go an inch further than is

16 necessary to obtain the adjudication. And it's not

17 necessary foreme to see them to argue the principle. But

18 you must see them in order to make the decision.

19 THE COURT: How can you as an officer of this

20 Court, who has got to do a reasonable investigation into the

21 evidence, ask this Court to make an evaluation that you

22 yourself have not first hand?

23 MR. COOLEY: Because I am dealing with a religious

24 principle protected in a secular context, that you have to

25 decide is the expression substantially similar, is the

20

1 expression identical? In a trade-secret context, you have

2 to decide does it convey substantial similarity of ideas.

3 That you can do by making the reading yourself. I

4 can make the argument to the Court, and I will put on

5 Mr. McShane, because one of the things we have to do today

6 is Mr. McShane has to tell Your Honor what the infringements

7 are and has to make the comparison for you to make the

8 decision on the preliminary injunction.

9 I had planned to put him on the witness stand to

10 do that. He has -- we can, I suppose, do it by affidavit,

11 but I felt it would be much more helpful for Your Honor to

12 hear what he had to say on it.

13 I think that one of the things that has to be

14 understood here is that these materials belong to the

15 church. This whole Fishman thing originated with a man who

16 was convicted of trying to frame the Church of Scientology

17 for his own crimes, and in that.context, puts into the

18 record on his affidavit materials he has never even been

19 exposed to and on levels that he never even audited. And

20 they were all stolen to begin with.

21 And yet, the Church of Scientology has to come in

22 here and has to be confronted with the Washington Post claim

23 that it has the right to get those files, know that the file

24 was sealed before they published, and that their rights are

25 superior, their rights under freedom of the press and

2 1

1 freedom of speech are such that those documents originally

2 stolen from the church, central to the core of religious

3 convictions and belief of every Scientologist everywhere can

go 4 be exposed, and that they can even have fair comment on

5 them.

6 And the Court knows that they have a vast amount

p

E 7 of material they haven't used yet; and yet, fair comment

N

G

A

D 8 under the Court's order is permitted, inch by agonizing

c

0

B

A 9 inch.

y

0

N

N

F 10 THE COURT: Well, all right. I have heard enough

0 11 on the reconsideration motion.

7

0

0

2

F 12 Anyone from the Post want to address the

0

R

m

F 13 reconsideration position? Mr. Wolf?

E

D

14 MR. WOLF: If you would like us to be heard, Your

15 Honor.

16 THE COURT: Do you wish to be heard?

17 MR. WOLF: Certainly, briefly, if I may.

18 THE COURT: All right..

19 MR. WOLF: I think Your Honor put the correct

20 focus on this issue when you started the proceedings here

21 today. The issue on reconsideration is whether there is a

22 new issue of fact or a change in the law that was not

23 addressed at the prior proceeding in which Your Honor

24 considered the motion for a preliminary injunction.

25 I think Mr. Cooley demonstrated that, indeed,

22

1 there is not, because his whole argument starts from the

2 proposition that what the Washington Post did was set out to

3 somehow embarrass or ridicule or injure the Church of

4 Scientology. There is absolutely no record to support

5 that.

6 We argued to Your Honor last time and I think Your

7 Honor recognized that what the Post did was report on the

8 news and report on this case and report on an issue of great

9 public importance.

10 There is no question that the Court's ruling of

11 August 30th does absolutely no injury to the Church of

12 Scientology. The Court's ruling does not inhibit the

13 adherents of Scientology to practice their religion in any

14 way they see fit.

15 The ruling which allows the Washington Post to

16 report on the news is absolutely consistent with the law of

17 prior restraint. And there is absolutely no support in the

18 record that anything the Post did was, in Mr. tooley's

19 words, an affront or a sacrilege or somehow designed to

20 injure the Church of Scientology.

21 What the Post did was, as Your Honor recognized,

22 well within the bounds of fair use, minimal use of

23 quotations in context to convey a story involving news

24 reporting of great public importance.

25 To address very briefly the new legal issues that

23

1 Mr. Cooley injected into the proceedings, he report ed on the

2 New York Times article this morning regarding a case in Ohio

3 involving Business Week.

4 I think he himself made the important factual

5 distinction that distinguishs that case from this case, as I

6 understand it. Again, my understanding also comes from this

7 morning's New York Times, and that is that the records in

8 that case were sealed and were provided to Business Week

9 during a time when they were sealed. They were not provided

10 from the open court record as was the case in Cox and

11 Oklahoma Press and their progeny.

12 With respect to the U.S. Court of Appeals

13 decision, I suspect Mr. Levine will address that, but my

14 understanding is that that was a provisional stay so that

15 the Court of Appeals could consider the issue of a stay and

16 has no precedential effect for purposes of today's

17 proceeding.

18 Thank you, Your Honor.

19 MR. COOLEY: Your Honor, if I just may address a

20 couple of the points made there. This argument manifests

21 the need for Scientologists, who are the only people alive

22 who can tell the Court the injury to their religion that he

23 -- that is claimed not to exist. I ask permission to put

24 them on so they can tell that to the Court.

25 In addition, Your Honor, the business of the

24

1 records being sealed, Business Week did not get those

2 records from the court. They got them from a confidential

3 informant. That, of course, is the traditional way that

4 newspapers have used to say they are news gathering. Well,

5 this is one judge that wasn't going to allow it, and he

6 didn't. I don't know where it's going to go. I can be

7 certain it's going to go up.

8 Now, with respect to the Post, there are certain

9 things that came out of Mr. Lermals deposition that relate

10 to this Post that you ought to know about, Your Honor.

11 When we examined Mr. Lerma, we put in, we showed

12 him the Fishman affidavit, the actual papers that he sent to

13 the reporter for the Washington Post, Mr. Leibey.

14 There is a little note at the top of those papers

15 that said these materials include the, quote, "OT-8,11 end of

16 quote, materials that were put into that case and "Arnie."

17 He signs it Arnie.

la I said, why did you put I'bT-811 in quotes, you see,

19 because those OT-8 materials are phony, and they were

20 designed to attribute to L. Ron Hubbard and Scientology a

21 religious belief that,they never held, that they knew would

22 be offensive to Christians everywhere, because it was a --

23 it's just a vicious, disgusting attack on Jesus Christ made

24 up for that purpose.

25 The only thing that the Post was interested in was

25

1 that phony material. Of course, they published the

2 legitimate material, too, but they published the phony

3 material alongside it to try to cut the lines of Scientology

4 to their co-religionists in the Christian religion around

5 the world. It was a vicious thing to do.

6 It demonstrates to me the real motive of the

7 Washington Post not to report at all. It isn't a question

8 of reporting. They gave five columns to the IRS exemption

9 and 27 columns to Mr. Lerma.

10 When they stand up here and say, oh, just fair

11 use, and Your Honor has, in fact, complimented them on their

12 restraint, the restraint is nonexistent. The attack on the

13 religious beliefs and the practice of Scientology is

14 absolutely repugnant to the Constitution and ought not to be

15 allowed to stand. They have mowed down my client's rights

16 with the phony exercise of their own.

17 THE.COURT: Well, Mr. Cooley, what I read between

18 the lines here is a broader argument than simply the

19 doctrines at issue, the documents at issue. What you also

20 seem to be arguing is that the very discussion about

21 Scientology in other than a purely laudatory manner should

22 somehow not be permitted.

23 MR. COOLEY: There is nothing

24 THE COURT: (Interposing) You know that free

25 conunent allows -- even though it may be painful and hurtful,

26

1 free expression involves all kinds of comments.

2 MR. COOLEY: Can I address that issue, Your

3 Honor? That is so important, and Your Honor is just so

4 wrong in reaching that conclusion. I cannot -- I can't tell

5 you the amount of comment that goes by th.e boards.

6 You know, I am chairman of the Board of Trustees

7 of Boston University, and Mr. Lerma and his friends on the

8 Internet have attempted to get me removed. That's their

9 right. But they have accused me of breach of fiduciary

10 duty, of being a member of a vicious cult, of making every

11 attack on Scientology that they can make.

12 I have served that board honorably for 20 years.

13 We don't try to restrain that comment. They have called

14 Scientology every name they can put their tongue to on the

15 Internet. They have called my associate, Helena Kobrin, the

16 most vicious, filthy name you can call a woman, and she is a

17 mother and a wife and a loyal Scientologist. It isn't

18 right.'

19 We don't try to gag these people. They have been

20 criticizing Scientology for years. They will criticize it

21 forever. I am not trying to stop it, and it's unfair to

22 suggest that we are.

23 THE COURT: We are getting far afield. In terms

24 of the Washington Post and the Court's previous ruling, as I

25 said, I have read the briefs. I have allowed argument. I

27

1 am not satisfied that you have been able to -- you have not

2 been able to change my opinion that the original balancing

3 analysis which the Court was required to perform because the

4 legal context in which that motion was brought was a motion

5 for a temporary restraining order. I made the four-part

6 analysis.

7 I understand that your argument today and in your

8 briefs focuses more on the irreparable injury to the

9 plaintiff. That is the real different -- it's not a

10 different tack, but you put more emphasis on that. I have

11 listened to it. I am still not convinced that the limited

12 use of small portions of the allegedly copyright protected,

13 and now you also say religiously sacred documents is such

14 that it justifies the prior restraint which the grant of a

15 temporary restraining order would amount to.

16 Therefore, I am denying the request to overrule

17 myself or vacate that. I am leaving the Court's ruling on

18 that in place.

19 MR. COOLEY: I would like to submit declarations

20 in lieu of the testimony that I wasn't allowed to put on.

21 THE COURT: You may flesh out the record in that

22 respect, and that will be certainly -- and make sure that

23 copies of that are presented to counsel.

24 All tight, now, we move on --

25 MR. COOLEY: (Interposing) Your Honor, before we

28

1 move on, I want the Court to know, I just want to clean up

2 some housekeeping details. I intend to appeal that decision

3 to the United States Court of Appeals for the Fourth

4 Circuit. I ask the Court to stay the effect of its order

5 permitting a fair use of the documents in the Post's hands

6 pending that appeal.

7 THE COURT: Is that the conditional stay that you

8 already filed before we even had the hearing today?

MR COOLEY: Yes. I wanted to make sure that I

9

10 exhaust everything here so I can get to the Fourth Circuit

11 as soon as possible without delay.

12 THE COURT: I am leaving the ruling in place.

13 There was no motion made to stay after the first order was

14 issued. There is no reason to do that, and particularly in

15 light of the fact that we have addressed the issue of prior

16 restraint. So I am denying the request for a conditional

17 stay of my ruling as it applies to the Washington Post.

18 MR. COOLEY: Thank you very much, Your Honor.

19 THE COURT: All right, now, we then have the

20 plaintiff's motion for a preliminary injunction against the

21 Defendant Lerma.

22 MR. COOLEY: Yes.

23 THE COURT: All right.

24 MR. COOLEY: Again, I wish to call witnesses that

25 will testify to the matters that I informed the Court on,

29

1 Mr. Render, who is the commanding officer of the Office of

2 Special Affairs, Church of Scientology International; and I

3 want to address these attacks that have been made on us

4 rather than leave them unresponded to on the record and

5 address the religious issues and the decimation of the

6 Scientology religion represented by these infringements.

7 In addition, I want to call the witnesses, the

8 practicing public Scientologists to give testimony on what a

9 failure to grant a preliminary injunction will do to their

10 religious beliefs in the free practice and exercise of their

11 religion.

12 THE COURT: These are the same -- Ms. Baker and

13 Ms. Stanford, the affidavits you have just filed with the

14 Court?

15 MR. COOLEY: Yes. Is Mr. Render's affidavit there

16 as well?

17 MR. COOK: No, it isn't.

18 MR. COOLEY: I have no affidavit for Render. If I

19 could at least put him on?

20 THE COURT: I will allow Mr. Render to be put on

21 the stand briefly. But we have the rest of these affidavits

22 already here.

23 MR. LEVINE: Your Honor, may I speak to that

24 issue?

25 THE COURT: Yes, Mr. Levine.

30

1 MR. LEVINE: Thank you, Your Honor.

2 Your Honor, I would object on behalf of Mr. Lerma

3 to any of these additional witnesses being called. We

40 4 asked, the defendants asked in discovery for the identity of

5 any witnesses that they might call at this hearing. They

6 identified other people, Mr. McShane, and Mr. Settles. They

p

E 7 did not identify any of these additional witnesses.

N

G

A

D 8 We asked them as recently as yesterday morning if

c

0

8

A 9 they were planning on calling any additional witnesses.

y

0

N

N

E 10 They sent us a letter, which I have and would be happy to

N

i

0 11 hand up to the Court, telling us -- well, actually we sent

7

0

0

2

F 12 them a letter confirming their representation to us that

0

R

m

F 13 they would only call Mr. McShane and that Mr. Settles would

E

D

14 be available at the hearing if it became necessary to call

15 him.

16 They then sent us a letter saying that -- late

17 last night that they had not yet decided whether they were

18 going to call any other witnesses and didni.t identify them

19 to us. We did not hear that they were calling any other

20 witnesses until this morning.

21 THE COURT: Is Mr. Render's testimony essentially

22 along the lines of what the affidavits are?

23 MR. COOLEY: No. It goes considerably further

24 than that, Your Honor. It goes, to the attacks made by them

25 in the papers that we just got earlier this week and have

i

3 1

1 been unable to adequately respond to. I didn't decide on

2 Render until about 1:00 this morning.

3 THE COURT: Well, I am not going to use the court

4 resources or my time to be a referee about attacks. We are

5 a court of law, and we are here to resolve the legal issues,

6 not attacks.

E 7 MR. COOLEY: Except what am I to do when the

N

G

A

D 8 attack is made on me, and I am not allowed to respond?

c

0

B

9 THE COURT: I wouldn't consider an attack on you

y

0

N

N

rt 10 as having any materiality. I am resolving this case as a

N

0 11 judge on legal issues and on facts, so I will go ahead. We

7

0

0

2

F 12 don't need to hear the additional witness. I have accepted

0

R

M

F 13 these declarations on the issue of the irreparable injury to

E

D

14 the plaintiff in terms of impact on what -- I have said for

15 purposes of this hearing, I accept as genuinely held

16 religious beliefs by these people. All right.

17 Now, is there anything in addition that you want

18 to put' on the record, Mr. Cooley?.

19 MR. COOLEY: Yes. I guess I have to make some

20 kind of an offer of proof, since I don't have a declaration

21 from Mr. Render. I only planned on him live. I didn't

22 think that he would be excluded, but in any event,

23 Mr. Render would testify that in his capacity as commanding

24 officer of the Office of Special Affairs International, what

25 attacks on Scientology mean, what the exposure of these

i

7

0

2

32

1 materials means as a matter of sacrilege and as a matter of

2 the free exercise of religion, the religion of Scientology,

3 what it means as to its impact spiritually and

ID 4 ecclesiastically on not only him and every other

5 Scientologist but on every other prospective Scientologist

6 and the religion of Scientology on all of mankind.

p

6 7 He would testify that the kind of attacks that

N

G

A

D B have been mounted here are untrue, that the comparison, the

c

0

B

A 9 lie of saying that the office of Special Affairs

y

0

N

N

E 10 International is the same as the old guardians office is a

N

0 11 lie; that he participated with present management in making

0

F 12 the Church of Scientology the kind of organization that the

0

R

13 IRS, after years, decided was being operated in the public

E

D

14 interest, was not the pernicious evil empire that these

15 lawyers --

16 THE COURT: (Interposing) Mr. Cooley, I'm sorry.

17 I know you feel strongly about this issue, but we are not

18 talking about attacks on Scientology-

19 MR. COOLEY: Their papers are full of it and they

20 go unresponded to. It's intolerable, Your Honor.

21 THE COURT: But the issues before this Court are

22 whether or not there have been violations of the copyright

23 laws of the United States, whether there have been

24 iviolations of the trade-secrets laws of Virginia and whether

25 or not the Court should use its extraordinary power in terms

33

1 of injunctive relief to enter a preliminary injunction.

2 You have already got a temporary restraining order

3 in effect on Digital and on Lerma. You are coming before

4 the Court now and asking for a preliminary -- I think you

5 do, yes -- but you are asking for a preliminary injunction.

6 Now, the issue in this case is not criticism of or

7 even attacks upon the Church of Scientology. That's clearly

8 protected by the First Amendment, as unpleasant as it may

9 be. The issue is simpler than that. It is whether or not

10 Mr. Lerma has publicly used copyrighted materials exceeding

11 fair-use doctrines of the copyright law.

12 You have brought this case initially under the

13 copyright laws of the United States and under trade

14 secrets. Those were the legal theories under which this

15 case was pled or has been pled, and under copyright law,

16 there are exemptions for fair use, all right. Criticism is

17 a fair use in the public -- in the arena of public

18 expression. All righ t?

19 But we are not using this Court or these

20 proceedings to do some sort of vindication of or attack

21 upon --

22 MR. COOLEY: (Interposing) Then I move to strike

23 all of the attacks in their papers in opposition to this

24 application for a preliminary injunction that deal with

25 anything other than the issues that Your Honor has just

i

F

34

1 limited this to.

2 THE COURT: We don't have to worry. There was

3 vitriol on both sides. Let's just focus on the issues.

4 Is there any legal, additional legal authority you

5 want to bring to the Court's attention or legal argument or

6 any factual issues that you want to raise on the preliminary

p

E 7 injunction matter?

N

G

A

D 8 MR. COOLEY: Yes, I am going to put Mr. McShane

c

0

B

A 9 on, with the Court's permission, to show the infringements

y

0

N

N

E 10 and to do a comparison with the materials by having -- the

N

0 11 Court have it side by side and being able to look at it.

7

0

0

2

12 Mr. McShane will point out what it is. We don't plan to put

0

Fi

m

F 13 it in the public record.

E

D

14 Before we do that, I want to address, though, this

15 question of fair use. Where does Mr. Lerma get any right of

16 fair use? He published these things wholesale on the

17 Internet without any comment whatsoever.. He just took them,

18' downloaded them and banged them into ARS. He has no right

19 of fair use.

20 And you have to understand that his deposition

21 shows without any question that he was acting as the agent

22 of Fact Net when he did it. Fact Net is the company we have

23 sued in Colorado. It's a Colorado-based company.

24 They have acknowledged out there that he was

25 acting as agent. He has acknowledged here that he was

35

1 acting as agent. He has testified, and here is the most

2 striking thing, Mr. Lerma has testified in his deposition

3 that he got these papers from Larry Wallersheim and that he

4 knew when he got them that his job was to scan them into his

5 equipment and post them to the Internet.

6 Larry Wallersheim under oath denies that. We have

7 those papers that we have submitted to you. When those two

8 pieces of testimony are placed side by side, there is no

9 doubt that somebody is not telling the truth, but the fact

10 of the matter is that that's all he did.

11 How does that possibly give rise to any fair use

12 on his part? That wasn't fair use. That was infringement.

13 Do we now confront a situation where a flagrant

14 copyright violation, through the copying which itself is a

is direct infringement, is somehow fair use without comment,

16 and then after the fact, after the fact of that violation

17 having been committed, that somehow we are considering the

18 issue of fair use as it applies to Mr. Wallersheim and to

19 Mr. Lerma?

20 This is the very issue presented to the 10th

21 Circuit, so you see, it is a circuitous bootstrapping

22 operation. Mr. Lerma is not a giant -- a miniature

23 Washington Post, by any stretch of the imagination.

24 Mr. Lerma cannot commit a wrong on a wholesale basis and now

25 say, okay, now I'll have some fair use.

36

1 THE COURT: Mr. Levine, let me hear you respond to

2 that, because I think Mr. Cooley raises an important point

3 here.

4 I will accept for purposes of this hearing your

5 argument that an individual person can also get some of the

6 protection of the right to free press, and certainly

7 publishing something on the Internet is a publication.

8 However, the verbatim quotation from these documents, if

9 they are genuinely copyrighted documents, would appear to be

10 beyond the scope of fair use, would it not?

11 MR. LEVINE: I disagree, Your Honor-

12 THE COURT: All right, you think that the

13 wholesale printing of a copyrighted document on the Internet

14 is something that can be done?

15 MR. LEVINE: I have got two responses to that,

16 Your Honor. First, I think that the characterization of

17 Mr. Cooley that this is wholesale copying of copyrighted

18 documeftts is not accurate and is belied by the record in

19 this case. I think it's very important that I have just a

20 couple of minutes to walk Your Honor through that.

21 THE COURT: -I think in your brief you talk about

22 the total number of pages. You did a ratio comparison.

23 MR. LEVINE: Not just the total number of pages,

24 Your Honor, but also the fact that when you compare the

25 materials that they provided to us in response to our

37

1 discovery request, "Tell us what we have infringed," they

2 gave us a confidential exhibit which is a confidential

3 exhibit to the Koch declaration, that sets forth what they

4 claim are the infringed works, their works that we have

5 infringed.

6 You lay those side by side with what Mr. Lerma

7 posted to the Internet, those excerpts from materials that

8 are contained as exhibits to the Fishman declaration, and

9 you are hard pressed to find anything that matches up,

10 certainly very little.

11 So I think that we are much closer as a matter of

12 fact to someone who is quoting excerpts than someone who is

13 doing wholesale copying.

14 But to get to what I think is the gist of the

15 Court's concern, there is no question that wholesale,

16 complete copying or the use of a copyrighted work can be

17 fair. The Supreme Court said that in the SQny Case, made 'it

18 clear that the amount taken is just one factor in the

19 fair-use analysis, and taking the whole thing can be

20 consistent with fair use.

21 We have cited to the Court several other cases in

22 which that is the case. The one that I think is closest to

23 this is the Belmore Case (phonetic), which I have the cited

24 in our brief.'

25 THE COURT: Well, if it's in your brief, we have

38

1 it

2 MR. LEVINE: It's 880 Fed Sup, 673 -- I'm sorry,

3 Your Honor --in which there was a letter that was written, a

4 long letter that the plaintiff claimed copyright in that the

5 defendant claimed needed to be put out there in whole so

6 that there would be no misunderstanding about what this

7 plaintiff had said with respect to a matter of public

8 concern. The Court said that that was fair use.

9 We have also cited the Court to the Rockbar Case

10 (phonetic), where somebody tape-recorded an entire lecture

11 that somebody gave and republished it to show in the face of

12 charges by the plaintiff in that case that he hadn't said

13 what he was supposed to have said, that he did too say it.

14 He did, in fact, say it.

15 In this case, you have heard Mr. Cooley talk quite

16 movingly about their claims that OT-8 is a forgery and that

17 it's.a scurrilous attack on the.religion.

18 That issue, the authenticity of these OT

19 materials, whether or not they accurately reflect what the

20 church is about and what the church does, is debated every

21 day on Religion Scientology on the Internet. It's debated

22 all over the place. Mr. Lerma was posting

23 publicly-available-at-the-time court documents for the

24 purpose ot contributing to'that debate.

25 There is a case in the Supreme Court, Your Honor,

39

1 called Mason vs. The New Yorker Magazine. It's all about

2 the fact that a writer is alleged to have misquoted a

3 source, and the source brought a libel case based on it.

4 The Supreme Court in that case -- the lower courts

5 in that case had made it very clear that there is importance

6 to accurate quotation, because accurate quotation is able to

7 show people that by paraphrasing you aren't misdescribing,

8 you aren't pulling the wool over somebody's eyes about

9 what's actually being said.

10 These materials are the subject of an important

11 public controversy. Putting them out there, the limited

12 portions that are attached as exhibits to the Fishman

13 declaration, are important contributions to that public

14 debate.

15 The last point I want to make, Your Honor, is that

16 the fair-use factor that deals with the amount and

17 substantiality of the amount taken is one of four factors,

18. and the Supreme Court has said that the four factors are not

19 exclusive, that the Court must look at other things.

20 I would suggest to the Court that even if we are

21 not as strong as the Post on that one factor, which I

22 concede we are not because we used more than they did, we

23 are equally as strong on the other three. We are equally as

24 strong on the oth6r factors that we think the Court can and

25 should take into account, especially in the context of this

40

1 request for an injunction.

2 In the Campbell vs. Acock Rose Case, the Supreme

3 Court went out of its way to quote from Judge Levalls

4 article and say that injunctive relief in this context when

5 you are talking about matters of public concern and works to

6 which there is at least a reasonable claim of fair use is a

7 different story than awarding damages after the fact.

8 And that is where the prior-restraint law comes

9 into play. We would suggest to the Court that it is very

10 important that when you consider this motion, which is a

11 preliminary injunction, you realize the extraordinarily

12 heavy burden that they have in the face of Mr. Lerma's claim

13 that these materials, which came from a court document --

14 what is in this record as what Mr. Lerma posted is on its

15 face a declaration, stamped by a court with exhibits

16 attached.

17 THE COURT: All.right. Were.you at all involved

18 -- you would not have been -- but are you aware of how long

19 the preliminary injunction hearing in Colorado went, the one

20 Judge Chambers ruled on?

21 MR. LEVINE: Yes, I am, Your Honor. Mr. Cooley

22 can correct me if I am wrong.

23 MR. COOLEY: Three days, Your Honor.

24 MR. LEVINE: I think that is approximd-Lely

25 correct.

4 1

1 THE COURT: That was a three-day hearing, okay.

2 In that case, because the opinion or the

3 transcript is relatively short, at least what was submitted

4 to me, I guess, by you all, were there the same types of

5 allegations in terms of the pages having been copied from

6 the OT documents?

7 MR. LEVINE: Your Honor, that is a very important

8 point. It is identical. We have attached -- in that filing

9 we made the other day, we have attached their complaint in

10 that case.

11 It is important for the Court to understand that

12 what Fact Net, of which Mr. Lerma is a director,

13 Mr. Wallersheim and Mr. Penny, the three individual

14 defendants in that case were alleged to have done was to

15 sponsor Mr. Lerma's postings of these materials. It's the

16 exact same posting, the exact same allegations, the exact

17 same facts.

18 The only reason they were in Colorado is because

19 they couldn't get a seizure order out of this Court, because

20 you didn't have jurisdiction to enter one; so they went to

21 Colorado.

22 It is exactly the same facts. There is no

23 difference. The Court basically went along with the

24 reasoning that Your Honor had used in her ruling with

25 respect to the Post and went down the line and adopted it.

42

1 That ruling was made available to the Court and was part of

2 the record in that case.

3 So not only would we argue that this Court's

4 ruling with respect to the Post ought to be binding with

5 respect to Mr. Lerma, at least to the extent of the request

6 for a prior restraint and injunctive relief, but the ruling

7 in Colorado is four square with respect to the exact same

8 conduct that is at issue here.

9 Let me make one other point. The order that we

10 would ask the Court to enter in this case is exactly the

11 same one that you entered with respect to the Post and the

12 one that was entered in Colorado.

13 Mr. Lerma doesn't seek to wholesale post this

14 stuff any further and is willing to have an order entered

15 that basically says that he is restricted to making fair use

16 of the works just like the Post is and just like the

17 defendants in Colorado are.

18 What he wants is nd preliminary injunction, a

19 return of all of his seized materials, which my colleague

20 Mr. Sullivan, will speak to those issues, and the ability to

21 basically get back on.with his life as a participant in this

22 democracy.

23 THE COURT: Mr. Cooley?

24 MR. COOLEY: Mr. Lerma is not entitled to those

25 things. How in the world can Mr. Lerma say I want to be

43

1 able to engage in fair use? He didn't engage in fair use

2 to begin with.

3 Now, one thing is clear. The Colorado case is

4D 4 the, just the other-participant aspect of this case, and the

5 reason we didn't bring it here is we were worried about

6 jurisdiction to enter a seizure order for Colorado. So we

p

E 7 went to where the material was; and we got it. And a

N

G

A

D 8 temporary restraining order was issued by a judge other than

c

0

0

A 9 Judge Kane, I might add.

y

0

N

N

E 10 Judge Kane conducted a three-day hearing, you are

N

i

0 11 quite correct. But there is a striking difference there.

7

0

0

2

F 12 We are confronted with the conflicting testimony I told you

0

R

m

F 13 about.

E

14 Judge -- I mean, Larry Wallersheim says, I didn't

15 send Lerma the materials. I didn't tell Lerma to post them,

16 to download them, I mean to scan them into his hard drive,

17 and I didn't tell him to post them to the Internet.

18 Where in the world, I said to him, did Mr. Lerma

19 get the idea that you did? Because Mr. Lerma said he got

20 the materials from Wallersheim, that Wallersheim told him

21 that the materials came out of Wallersheim's optical archive

22 and that he knew when he got them that his job was to scan

23 them into his drive and send them out on the Internet.

24 Well, now, Judge Kane paid no attention to that

25 conflict in testimony. I respectfully submit to Your Honor

44

1 that's a pretty important matter, that there is hard

2 swearing on both sides of that issue by co-directors of the

3 same corporation. So who was kidding whom here?

4 The name of the game, I think the inference is

5 clear, was for Wallersheim to get those things up on the

6 Internet under cover of somebody else. What upset

7 Wallersheim is that his cover got blown, because Lerma did

8 it too quickly.

9 And now Wallersheim had to cover Lerma with his

10 insurance policy in order to protect him so he could defend

11 himself with counsel that could be paid. So he came in and

12 he had to adopt it. We got evidence of phone calls back and

13 forth.

14 We have got the attachment that was, that Mr.

15 Lerma made to the material that he sent to Mr. Wallersheim

16 saying here is the first two-fifths of the material; did

17 that.on July 31st, July 30th. Then on July 31st, he says

18- here is the rest of it, of the material, the other

19 three-fifths.

20 So now, it appears in seven, eight, ten different

21 spots on Wallersheim's computer, okay, and now it's on the

22 Internet. Wallersheim says he never even knew he posted

23 it. I didn't know he posted it.

24 When did he know? September, maybe the 5th, maybe

25 yesterday.

45

1 Well, the fact of the matter is he got it

2 communicated to him with an E-Mail cover letter right

3 attached to it the day before it was posted. It was posted

4 on the 1st and the 2nd of August.

5 So this has been done pursuant to design. It

6 hasn't been done for fair use. Where is the fair use?

7 Where is the comment? Here it is, gang. Download it if you

8 want.

There is no evidence of who has done that, but

9

10 that was what the game plan was, and it was consistent with

11 the ARS game plan. It has been articulated from the

12 beginning, copy, copy, copy, copy, copy because they can't

13 sue us all. So with a push of the electronic button,

14 copyright and trade-secret law is wiped out on the Internet.

15 Well, if that's the direction we are going in

16 under the banner of fair use, I say it repeals

17 Constitutional protection afforded to intellectual property

18 that predates the Bill of Rights, because it was recognized

19 in the Constitution before the first ten amendments were

20 ever enacted.

21 THE COURT: All right.

22 MR. COOLEY: And that's all that's being done

23 here. This fair-use doctrine does not apply, has no

24 application whatsoever in a trade-secret area. No"ei -Lt@is

25 an amorphous kind of a concept to be sure in the copyright

46

1 area, but one thing is pretty clear. I don't know of a

2 single case that has ever applied it in circumstances

3 similar to these.

4 I would like to put Warren McShane on the witness

5 stand to testify to the infringements and the comparisons

6 that counsel has just said don't exist.

7 THE COURT: We have extensive McShane affidavit

8 material or deposition, I forget which it is, but --

9 MR. COOLEY: (Interposing) We don't have the

10 comparison of the materials, Your Honor. See, we now for

11 the preliminary injunction wish to have Mr. McShane present

12 to Your Honor what the list of infringements is, where they

13 came from, and compare them with the copyrighted works. We

14 have got that burden on this. I would like to be able to

15 discharge it.

16 THE COURT: Was that done in the Colorado case?

17 MR. COOLEY: Oh, yes. He was. on twice in the

18 Colorado case, and he did that ver exercise.

.y

19 THE COURT: All right, Mr. Levine?

20 MR. COOLEY: Yes. It was a different infringment

21 hearing, there is no question about that, but he was allowed

22 to do it in Colorado. We can't possibly rest on that. We

23 don't even have the transcript on that hearing yet. This

24 Court has to make independent findings.

25 THE COURT: Mr. Levine?

4 7

1 MR. LEVINE: Let me just make a few points, Your

2 Honor, not that it matters very much anyway but I feel like

3 I need to correct Mr. Cooley on this issue of where the

4 materials came from.

5 Mr. Lerma testified in his deposition and it's

6 quite clear that he got the materials in an envelope from a

7 source he does not know that had a return address that he

8 couldn't remember; that he spoke to Mr. Wallersheim sometime

9 afterwards, told him that he had gotten these materials, and

10 Mr. Wallersheim told him that those materials came from the

11 Fact Net optical archives.

12 There is no question that Fact Net has assumed

13 responsibility for Mr. Lerma's posting, has posted on the

14 Internet far and wide well before they were sued in this

15 case, that Mr. Lerma was doing this pursuant to his role as

16 a director of Fact Net.

17 Fact Net was the initial named party in the suit

18 in Colorado, and there is' no question that that proceeding

19 involved Fact Net through Mr. Lerma's liability fo r doing

20 what he is accused in this case of doing.

21 Second, with respect to the issue of fair use not

22 being applicable in trade secrets, I think that that is

23 probably right, because there is no such thing as a fair-use

24 lpart of the'Virginia trade-secret law. There are

25 definitions, however, of what constitutes a trade secret in

i

0

2

F

F

4 8

1 the Virginia statute. There are definitions about what

2 constitutes use of a trade secret and there are definitions

3 about what constitutes misappropriation of a trade secret,

4 none of which they are able to meet here.

5 More importantly, there is a case that we have

6 cited to the Court called CBS vs. Davis in which Justice

p

E 7 Blackmun sitting as a circuit justice in one of his very

N

G

A

D 8 last acts as an active Justice of the Supreme Court turned

c

0

B

A 9 back the very thing that the plaintiffs are trying to do

y

0

N

N

E 10 here, an attempt by a plaintiff to secure a preliminary

N

0 11 injunction based on a claim of trade secrets. The First

7

0

12 Amendment, Justice Blackmun held, trumps trade-secret law.

0

Fl

m

13 The Supreme Court held in New York Times vs-

E

D

14 Sullivan that we don't care what label a cause of action

15 has. Whether it's libel, obscenity, fighting words,

16 incitement, what have you, it must be measured by standards

17 that satisfy the First Amendment.

18 Trade secrets, Justice Blackmum quite rightly said

19 in the CBS vs. Davis Case, is no different.

20 One other point: I want to make clear for the

21 record that the first-argument in our brief in opposition to

22 their motion for a preliminary injunction is the fact that

23 they have forfeited any right they have to injunctive relief

24 by their unclean hands in connection with the seizure and

25 the search.

4 9

1 As Your Honor pointed out, those issues are

2 inextricably related, but I want to make clear that it's a

3 separate and independent argument as to why the motion for a

4 preliminary injunction should be denied. We are relying on

5 the arguments that my partner, Mr. Sullivan, is prepared to

6 address with respect to the search and the seizure.

7 Finally, with respect to Mr. McShane, I must

8 object to any further testimony by Mr. McShane for the

9 following reasons:

10 He has already submitted, I think, now five

11 declarations in this case. He has been deposed for a

12 day-and-a-half. They have had more than ample opportunity

13 to have Mr. McShane tell this Court anything that he wants

14 to in connection with this case.

15 In the Colorado case, there were no declarations

16 and briefing of the sort that this Court has ordered. They

17 were on a much faster track. It was understood all along,

la that all testimony would be submitted through live

19 witnesses. That is not the case here.

20 But most importantly, this morning at 10:00, as we

21 were getting ready to come over here, we were delivered by

22 Mr. Cooley and his co-counsel an exhibit that we have never

23 seen before, their purported demonstration of the comparison

24 of the infringed works and the infringing works.

25 THE COURT: I don't think we even have that. Do

50

1 we have that?

2 MR. COOLEY: Mr. McShane has that. I was going to

3 put him on and give Your Honor a copy and deal with it

4 orally. But I wanted to serve it on counsel.

5 MR. LEVINE: Yes, an hour befo.Ve the hearing.

6 Their papers also suggest that Mr. McShane has

7 come prepared with charts and things that he is going to

8 refer to in his testimony. We have never seen any of this.

9 It apparently includes things that they claim to have found

10 on Mr. Lerma's hard drive and in his disks which we have

11 never been told about before. We asked them in discovery to

12 tell us what are the infringed works. They produced

13 something to us which we have produced to the Court. We

14 have relied on that.

15 We have asked them to tag for us on the disks that

16 they seized what they claim to be infringing works. We have

17 noticed on this list just based.on a preliminary review of

18 it that there are things on this list that they claim were

19 noninfringing in the stuff that they produced to us in

20 discovery. There are other things that are new.

21 We have not had a fair opportunity. They have had

22 all of Mr. Lermals material since August 12th. I think it

23 would be very unfair to allow Mt. McShane to now come on at

24 the llth-and-a-half hour to come on and put on new

25 allegations, especially when up through almost the entire 30

5 1

1 days that we are talking about, they had all of these

2 materials and we had hardly any of them. So I object.

3 THE COURT: All right.

4 MR. COOLEY: That is really an unfair

5 characterization of the history. These infringing hits were

6 furnished to them on the day after the last hearing, that

7 Saturday, after putting them together, the Court said give

8 them all to them. We gave them to them. They have had them

9 ever since. Mr. McShane has pulled them together, wants the

10 Court to know, that I think there is 128 infringements,

11 point out what the infringements are, where they came from

12 on Mr. Lerma's computer or in his floppies; and then give

13 the Court a document that we furnished this morning that

14 makes the comparison with the actual materials.

15 That it seemed to me was the burden that I had

16 here today to do, and that's what I came prepared to do.

17 For the defendants to claim surprise is totally

18 disingcmnuous.

19 THE COURT: Let me see this document we are

20 talking about because the Court hasn't seen it either.

21 MR. LEVINE: Your Honor, I have never seen that.

22 I have seen athing about this thick.

23 THE COURT: Wait. You are getting it right now.

24 MR. COOLEY: Yes, Your Honor. This is submitted

25 confidentially and under seal, because it contains the

i

F

52

1 original materials of confidential upper-level materials of

2 L. Ron Hubbard.

3 THE COURT: All right. So what I am looking at

co 4 here is a page of handwritten -- handwriting.

5 MR. COOLEY: That's Mr. Hubbard's handwriting,

6 Your Honor.

p

E 7 THE COURT: On the left side, I am seeing

N

G

A

D 8 something in type.

c

0

a

A 9 MR. COOLEY: That's the infringement from

y

0

N

N

E 10 Mr. Lerma's,computer.

N

0 11 THE COURT: And in the course of the discovery

7

0

0

2 12 that went on in this case, was not this analysis asked for,

F

0

R

m

13 Mr. Levine?

E

14 MR. LEVINE: It was, Your Honor.

15 THE COURT: Was it provided?

16 MR. COOLEY: It was not, Your Honor. I cannot --

17 MR. LEVINE: (Interposing) Y.Qur Honor, what we got

18 that was asked -- I can get the specific requests pulled if

19 Your Honor wants to see them.

20 THE COURT: I will tell you what I am going to

21 do. Do you have your stuff here with you? Do you have it

22 here, the requests that you made?

23 MR. LEVIME: Yes, Your Honor.

24 THE COURT: Rather than wasting my time, we will

25 take a brief recess. You find where it is in your papers,

53

1 all right? Because this was absolutely the analysis that

2 needed to be performed. If it was not performed before

3 today, that is, if counsel for Mr. Lerma was not given this

4 before today, it is absolutely inappropriate for them to

5 have to respond to it by the seat of the pants.

6 And therefore, since the burden is on the

7 plaintiff to make its case, and everybody got discovery so

8 that these types of matters could be fairly presented to

9 both sides, so each side had a right to respond, I will be

10 concerned about that.

11 So you see whether or not it's been asked for. I

12 am going to take a look at this briefly in Chambers. Recess

13 about 15 minutes.

14 (Whereupon, at 10:28 o'clock p.m., a 15-minute

15 recess was taken.)

16 THE COURT: All right, let's go. Is Mr. Levine

17 here? From Mr. Lermals side, is Mr. Levine here?

.18 (Whereupon, Mr. Levine entered the courtroom.)

19 THE COURT: All right, have you found where the

20 request was made?

21 MR. LEVINE: Yes, Your Honor.

22 THE COURT: Just read it in the record, please.

23 MR. LEVINE: It was actually made in two places,

24 Your Honor.

25 For your ease of reference and if you don't have

54

1 it, we have a second binder that we can hand up to the

2 Court.

3 THE COURT: Just read it to me real fast. We have

4 got them here, but rather than my having to look at them.

5 What volume?

6 MR. LEVINE: The declaration of Merril Hirsch.

7 It's Exhibit E to that document, an August 30th, 1995,

8 letter from Mr. Hirsch to counsel, which attaches Defendant

9 Lerma's second set of interrogatories to the plaintiff.

10 Those interrogatories specifically ask them to do what they

11 have now apparently done.

12 I would like to read to the Court, if I might --

13 THE COURT: (Interposing) Yes, go ahead.

14 MR. LEVINE: -- a sentence or two from the cover

15 letter that went with those interrogatories.

16 THE COURT: Just read me what the interrogatory

17 specifically asks for.

MR. LEVINE: Okay, that's fair enough. "Identify

19 by disk number, page and quotation those portions of the

20 materials on disks Nos. 1 through 58 described in the letter

21 attached as Exhibit 1,11 which is their letter to us.

22 THE COURT: Okay. Just say that slower, please?

23 MR. LEVINE: I'm sorry. "Identify by disk number,

24 page and quotation those portions of ttie material on disk

25 Nos. I through 58, described in the letter attached as

55

1 Exhibit 1, and listed in the attachment to that letter that

2 plaintiff maintains infringes any copyright held by

3 plaintiff."

4 That was a letter that we got from them giving us

5 the disks that they alleged contain infringing material.

6 The second interrogatory says, "Identify by disk

7 number, page and quotation those portions of the material on

8 disks Nos. 1 through 58 described in the letter attached as

9 Exhibit I and listed in the attachment to that letter the

10 plaintiff maintains misappropriates any trade secret of the

11 plaintiff."

12 So we had copyright in the first interrogatory and

13 trade secrets in the second.

14 THE COURT: What answer did you get to that?

15 MR. LEVINE: Well, we got nothing for a long time,

16 and then we got a box. The box contained disks with little

17 yellow sticky.tabs, printouts of the disks with little

18 yellow sticky tabs with no explanation on places. So we

19 wrote them a letter dated September 7th, which is attached

20 as Exhibit J to the Hirsch declaration.

21 It says, "Third, we wanted to discuss RTC's

22 response to Mr. Lerma's second set of interrogatories.

23 Among the materials we received from you on Monday

24 afternoon, September 4th, was a box that appears to us

25 without page-by-page comparison" -- I want to emphasize that

56

1 -- "Without page-by-page comparison to be a printed version

2 of the documents on disks 1 through 58 with yellow post-it

3 notes at various places. Although we appreciate receiving

4 this material, we have not received an explanation of what

5 the post-it notes are intended to indicate.

6 "The two interrogatories in our second set

7 respectfully ask that the RTC separately identify those

8 portions in the materials on disks 1 through 58 that the RTC

9 maintains, one, infringes any of its copyrights, and two,

10 misappropriates any trade secrets.

11 "As discovery was supposed to be completed

12 yesterday, we would appreciate it if you would provide us

13 with a sworn written response today."

14 We got a letter on September -- I'm sorry. We

15 didn't hear anything the next day. Your Honor will recall

16 the deadline for submitting briefings was September llth, so

17 on September 8th, we wrote them another letter following up

18 and asking what was going on and.why we hadn't received that

19 information. That's Exhibit K to the Hirsch declaration.

20 And then finally, on September llth, and that's

21 Exhibit N to the Hirsch declaration, as our brief was going

22 out the door, we got a letter from the plaintiff's counsel

23 in which they say -- this is a week after the close of

24 discovery -- not attaching that big book or even the chart

25 that we got this morning but saying, "Each of the documents

57

1 you received on Monday, September 4th, 1995, is a printed

2 copy of one of the 58 disks, containing copyright

3 infringements and/or trade-secret misappropriations. The

4 yellow post-it notes mark the specific offending sections of

5 those documents."

6 That's what they told us on that day. That was

7 September llth.

8 This morning, we got this document, which was

9 delivered at 10:00 this morning with the service copy of

10 their filings this morning. It contains a chart that is

11 supposed to or purports to compare infringing --

12 infringements by Mr. Lerma with their infringed works.

13 our very quick review of this this morning as one

14 of my colleagues was sitting in court suggests that there

15 are a number of things included on this list that they

16 identified as noninfringing in their responses to our

17 discovery. There are a number of things that have now been

18 added to this list that cut in the opposite direction.

19 What we appear to have been given today, this big,

20 thick book of stuff that we never saw before, appears -- is

21 basically what we were asking for all along and never got.

22 I am prepared very preliminarily, Your Honor, to

23 address what's wrong with it, but I think the Court should

24 not accept it at this juncture.

25 THE COURT: Tell me what you think is wrong with

58

1 it.

2 MR. LEVINE: A number of things. First of all, it

3 is very deceptive in that it does not contain the whole of

4 any infringing work. When you look at it, they have taken

5 each time Mr. Lerma they claim used a passage from any of

6 their works and they have broken it up into a separate page

7 to make it appear there are a lot more infringements than a

8 reasonable viewing of it would even say is arguable; and

9 then they attach a small portion of the work they claim is

10 infringed, but they never attach the whole work, so you

11 don't know how big the work is.

12 You don't know where it fits in the context of the

13 work. You don't know conversely whether what Mr. Lerma has

14 done in the context of its whole is an infringement or not.

15 So we think it's -- based on our very preliminary

16 review, it is very deceptive. Second of all, it appears to

17 include things they have previously told us are

18 noninfringing and they are now coming back and alleging are

19 infringing.

20 THE COURT: All right.

21 MR. COOLEY: To begin with, Your Honor, the tabs,

22 we tabbed the material that we gave to them. The tabs

23 marked the start and the end of what we claim to be the

24 infringing material. All they had to do was read between

25 those tabs, and they had the infringing material.

59

1 That's all they asked us for. They never asked us

2 to do the comparison and sit down and put together the kind

3 of exhibit we put together here for the Court.

4 We gave them the start and the end, and they had

5 it, and we defined it for them. That's what they asked

6 for.

7 You won't find anywhere a request from these

8 people saying, will you please now do the comparison for us

9 with the original works?

10 We gave them the full portion that was infringed

11 of both the original and of the copy. And in order to be

12 able to compare volume, we gave them the totality of what

13 was registered with the Copyright Office so that you can at

14 least see the thickness of it and the size of it as compared

15 to what was infringed. The Copyright Office copy, of

16 course, is masked, but the volume is clearly addressed.

17 Moreover, these upper-level materials are

1& copyrighted as a series, with each series listed in the

19 copyright. So the series applies to each issue. To talk in

20 terms of deception, to suggest that everything in the work

21 has to be considered on the issue of fair use is again, I

22 believe, disingenuous. Each issue is listed in the

23 copyright, and Mr. McShane is prepared to point that out to

24 the Court, and the issues-that have been infringed are

25 clearly before the Court.

60

1 What they are saying is they want the work product

2 that we did to prepare to come in here, which incidentally,

3 didn't get finished until the wee hours of this morning, and

4 wanted to have it in advance so that the work that we do, we

5 should have done for them.

6 We gave them what they asked for. And for them to

7 suggest that they have been caught by surprise is really

8 foolish. They have had it. They know what we claim

9 infringes.

10 If they have got some questions on

11 cross-examination of Mr. McShane, then they can ask them.

12 They have had an opportunity to depose him for two days and

13 go over what he claimed the infringes to be, and I don't see

14 how they can possibly come in here now and block us from

15 putting in the case that we need to put in as a prerequisite

16 to the preliminary injunction.

17 I might also add that we have returned to

18 Mr. Lerma his -- a computer with a sanitized hard drive. He

19 has got everything back except the stuff that's in issue in

20 this case.

21 And for them.to be suggesting that he somehow is

22 being prejudiced by his failure to have the infringing

23 materials it seems to me is preposterous.

24 THE COURT: When you say how much stuff is

25 infringing, what kind of stuff are we talking about?

6 1

1 MR COOLEY: We are talking about specific issues.

2 That's in this big book that Your Honor has, where

3 Mr. McShane lays side by side the infringing material

4 published by Mr. Lerma and the actual material from which

5 the infringement was taken.

6 THE COURT: In other words, you are telling me

7 that what has not been returned to Mr. Lerma at this point

8 would be the yellow highlighted text that's on the left side

9 of this book. The printed stuff on the left side is the

10 allegedly infringing --

11 MR. COOLEY: (Interposing) The stuff that we found

12 in his computer that we are now telling you infringes.

13 Everything else has gone back.

14 THE COURT: For example, though, let's just take

15 the first tab.

16 MR. COOLEY: I want to make sure. Just a moment.

17 (Counsel conferring off the record.)

18 MR.. COOLEY: The file that contains it has not

19 gone back. It's being held by an independent, the

20 independent person that we agreed upon, the independent

21 company. After the I-Net was replaced, and we agreed to

22 another company, they are holding it.

23 But, you see, it appeared in a file, and so the

24 entire file is being held by that company.

25 THE COURT: And so how many files are still being

i

62

1 held by the company? Does anybody know?

2 MR. LEVINE: Fifty-eight this morning they have

3 not returned.

4 THE COURT: Fifty-eight files have not been

5 returned?

6 MR. SULLIVAN: Fifty-eight disks, Your Honor.

p 7 MR. COOLEY: Fifty-eight disks containing the hits

E

N

G

A

D 8 are in the hands of the independent custodian.

c

0

THE COURT: All right, and everything else has

A 9

y

0

N

E 10 been returned to Mr. Lerma at this point.

N

0 11 MR. HIRSCH: Your Honor?

7

0

0

2 12 THE COURT: Yes, sir?

F

0

F4

m 13 MR. HIRSCH: My name is Merril Hirsch. Owing to

F

E

D

14 the time --

15 THE COURT: (Interposing) Come up to the lectern.

16 MR. HIRSCH: -- different people have worked on

17 different things, so I am a little more familiar with this.

18 What has been returned to Mr. Lerma is his C hard

19 drive, sanitized of all of the 114 hits, files, that

20 contained hits that at one time a Scientologist said, "Oh,

21 this is a hit. Let's put it on a disk and spend more time

22 looking at it."

23 That 114 contains more than the 20 files that they

24 currently maintain hits, and each file contains in some

25 cases vastly more pages than the ones that they claim are

63

1 infringement. You have files with 250 pages of E-Mails, and

2 they claim that a page or two or 10 or 20 of those are

3 infringing.

4 So that what you have are -- plus, in addition to

5 that, you have all of the disks on which any file was found,

6 disks, I mean by floppy disks, separate from his hard drive,

7 all of the disks on which any single file was found that was

8 originally declared a hit, whether or not they maintained it

9 was infringing after they looked at it on August 25th or

10 whether they maintained it was infringing after they gave us

11 that box of stuff on September 4th or whether they

12 maintained it is infringing now.

13 So it's the complete disk that contains any of

14 those files. There are 25 total files, according to

15 Mr. Settles' testimony, that were on floppy disks.

16 Now, in addition, they are also continuing to hold

17 his complete D hard drive, which is a substantial mirror of

18 his C hard drive but .contains some difference of files.

19 That is also being held at command.

20 MR. COOLEY: We are not holding anything, Your

21 Honor.

22 THE COURT: Well, it's being held.

23 MR. HIRSCH: They are continuing to impound

24 through that command, Your-Honor.

25 THE COURT: I have to tell you, Mr. Levine, in

64

1 looking at this book quickly, and again, no one has had time

2 to really study it, there would appear to be significant

3 lines of duplicated material here; and they are, I guess,

4 just as an example, let's look at the first tab, tab one

5 under OT Roman numeral III.

6 On the right is handwriting, and we have looked at

7 it in Chambers during the recess, and the majority of the

8 text, the printed text, which is that which was printed off

9 the computer, is verbatim.

10 This quote, for example, that I am just looking at

11 right now is, I think, longer than what I saw in the

12 Washington Post article, and, of course, there are numerous

13 ones. In some cases, in a couple of cases, I think, the

14 entire page that's on the right side is also copied on the

15 left side.

16 What confuses the Court is that on the left side,

17 the left being, again, I'll call it the.Lerma data, I don't

la know what the context is of that statement. In other words,

19 I don't know if that is a quote. Mr. Cooley has represented

20 to the Court today that there was wholesale publication of

21 verbatim material that didn't have any comment or discussion

22 around it.

23 Now, that is very different from the Washington

24 Post situation in which those quotes appeared within the

25 context of the news story with analysis and giving the

65

1 quotes as examples or illustrative or whatever. So the

2 factual situation here is somewhat different, it seems to

3 me.

4 I want you to address that, please.

5 MR. LEVINE: I will, Your Honor. It is somewhat

6 different, I concede, and I would like to explain to th6

7 Court.

8 THE COURT: All right.

9 MR. LEVINE: What I understand this to be and then

10 why I don't think it's a distinction with a difference.

11 There is no question that the exhibits to the

12 Fishman declaration that Mr. Lerma posted to the Internet

13 contained portions of excerpts from some of their

14 materials. We have arguments in our brief that explain why

15 some of those materials that they claim were infringed are

16 no longer in use and haven't been since the late '70s, and I

17 won't go into that.

18 But what you have here -- but there is no question

19 that there were excerpts, some as many as ten or so pages

20 that are attached as exhibits to the Fishman declaration.

21 What you can't glean from looking at this exhibit

22 is that these particular excerpts are parts of 300-page

23 documents or 200-page documents. OT 2 is 300 pages. OT 3

24 is 200 pages, I believe, and that he did nut post nearly all

25 of the entirety of the work as they claim.

66

1 But we are not denying and have never denied that

2 the attachments to the Fishman declaration contained

3 portions of materials that they claim is copyrighted.

4 What we are saying, and this is very important, is

5 that Mr. Lermals copying of that constitutes a fair use.

6 The reason it constitutes a fair use is threefold.

7 Number one, if you go through the four fair-use

8 factors as this Court did with respect to the Post, we are

9 identical to the Post on three of the four factors. We win

10 on three of the four factors. This is a noncommercial use.

11 This was a use, the purpose of which was to contribute to

12 public debate on Scientology.

13 THE COURT: How does it contribute to public

14 debate if there is no discussion or comment with these

15 texts?

16 MR. LEVINE: That is a very good question, Your

17 Honor- That is the difference, I think, the essential

18 differt-nce between the Internet and a news group on the

19 Internet and a single edition of the Washington Post.

20 We have submitted declarations from Professor

21 Cleat (phonetic), a professor of computer science, we have

22 submitted a declaration from Mr. Lerma, Digital has

23 submitted a declaration that make clear that this Alt

24 Religion Scientology news group is essentially a newspaper

25 without editor, a town meeting, if you will, in which people

67

1 are constantly debating issues back and forth, bringing to

2 each other's attention the source material on which they are

3 basing their comments and criticisms.

4 It's a data-rich medium in which people regularly

5 post on the Internet the materials about which they are

6 talking. There is undisputed testimony in the record that

7 Mr. Lerma didn't just post this declaration in isolation.

8 He has posted dozens of affidavits and court pleadings and

deposition transcripts from court cases relevant to

9

10 Scientology that he believed were relevant to the public

11 debate.

12 It is true that within the four corners of this

13 particular posting, Mr. Lerma did not say, "Here I am

14 posting this document, and here are my views on it," but it

15 is undisputed that -- well, there was hardly any after

16 because the stuff was seized, but before and for a long

17 period of time, Mr. Lerma and others, as testified to by

18 Professor Cleat among others,in his declaration, were out

19 there discussing the legitimacy of these materials,

20 discussing their role in coercive mind control, discussing,

21 in short, an issue of very great public importance.

22 I think that it would be an incorrect analysis of

23 the Internet and news groups on the Internet specifically to

24 Itie ourselves down to old technology versions of what

25 constitutes fair use by looking at a single posting in

6 8

1 isolation.

2 THE COURT: Let's go back to the Washington Post.

3 Let's assume the Washington Post, rather than the article on

In

4 religion in cyberspace or whatever it was that the Post did

5 that, I think, was at issue the other day, rather than the

6 Post writing that article had taken text from the documents

7 and simply published it in the pages of the Washington Post,

8 no comment, no explanation, no critique, just these are

9 these paragraphs from it, I am not convinced the Washington

10 Post would have won the motion, because fair use doesn't

11 mean we are going to just broadside it. It means, it's

12 being used in a certain kind of context. All right.

13 I don't think the example I have given you is any

14 different from what you are telling me. I don't think that

15 the Internet necessarily opens that kind of a door.

16 MR. LEVINE: Let me give Your Honor a twist on

17 that, if I might, that might illuminate it.

18 THE COURT: All right.

19 MR. LEVINE: I think context, but broader context,

20 is all important. If the Washington Post on Monday wrote

21 the article that they wrote, and said at the bottom of the

22 page, "Tomorrow, we are going to publish the full Fishman

23 declaration and his exhibits so that our readers can see

24 exactly what is at issue here and what this public

25 controversy is all about," I think that the Court would

69

1 weigh that next day's publication in the context of

2 determining whether or not the fair-use doctrine applies.

3 I don't say for sure because I don't know what all

4 the factors would be how you would come out on that fair

5 use, but it would not be determinative against the

6 Washington Post that the story ran on Monday and the

7 excerpts ran on Tuesday.

8 I think, moreover, in any fair-use case, it is

9 important that the Court look at all four factors and

10 determine whether in the totality, including the flexible

11 additional factors that we think are explained here, whether

12 the fair-use doctrine applies.

13 And lastly, and I think most importantly, and the

14 Court has recognized this itself in its ruling with respect

15 to the Post, we are talking here about an injunction,

16 whether or not they ultimately prevail on the issue of

17 whether the one posting that we are focused on was fair use.

la We have raised sufficiently serious questions

19 going to whether it was or not, and the additional factors

20 relating to irreparable harm, balance of hardships and the

21 public interest that the Court identified in connection with

22 its ruling on the Post motion apply as well here that

23 injunctive relief is not the way to go.

24 I say that for an additional reason, and that is,

25 look at the Cleat declaration. Look at the additional

70

1 materials that we have put into this record showing the

2 wide, wide dissemination of this material both on the

3 Internet and elsewhere before Arnie Lerma ever posted a

4 single word from this Fishman declaration.

5 There is a decision in the Ninth Circuit -- it is

6 unpublished -- but there is a decision in the Ninth Circuit

7 that we cite in our papers in which the Ninth Circuit

8 observes that OTs I through 3, the ones where there is, in

9 Your Honor's view on this page-by-page comparison, a lot of

10 copying, had been widely available or widely disseminated.

11 That's a quote from the Ninth Circuit.

12 The balance of hardships here, the fact that these

13 materials are broadly available suggests that injunctive

14 relief is as much a violation of Mr. Lerma's First Amendment

15 rights as it is of the Washington Post's. That's

16 essentially what the judge in Colorado held looking at this

17 exact same material.

18 So I think that whatever happens on ihe remedy of

19 damages, the issue of prior restraint and injunctive relief

20 is much, much different.

21 The Supreme Court said that in the Campbell vs.

22 Acock Rose Case. It said courts better start thinking about

23 injunctions as a different kind of and more serious remedy

24 in the copyright area than damages, especially when the

25 injunction seeks to prohibit the dissemination of materials

7 1

1 on matters of public concern.

2 In that regard, let me make one more point and I

3 will sit down. The point is that Mr. Lerma is more than

4 happy to abide by an order of the kind that the Court

5 entered with respect to the Post, that the Court in Colorado

6 entered with respect to the defendants there, and that is

7 that Mr. Lerma's future use of this until this proceeding

8 finally determines itself will be limited to fair use of

9 these materials.

10 That is important, because these defendants --

11 these plaintiffs, I'm sorry -- have shown an incredible

12 penchant for taking any kind of court order that they get

13 and misusing it to stifle the very kind of criticism that's

14 at the heart of the First Amendment.

15 I invite the Court to take a look at paragraph 16

16 of Mr. Cleat's declaration. In that declaration, he talks

17 about how he himself participating in this debate on the

18 Intern@t quoted one or two sentences from some Church of

19 Scientology work.

20 He got a letter ordering him to cease and desist

21 doing that from the church's lawyers. The admission of the

22 university on which he is on the faculty got a letter

23 demanding that they order him to cease and desist from doing

24 it, and that letter made the bald statement that any use of

25 an unpublished work constitutes copyright infringement.

72

1 They have sued the Washington Post over its minor

2 use of these works in its published materials, and today

3 they have filed a motion with this Court asking that our

4 briefs in this case be sealed because although they don't

5 quote from or reference any of these materials, they talk

6 about the same subject matter.

7 They will misuse and have misused any order that

8 is given them in the nature of injunctive relief, and that

9 is an additional reason why a preliminary injunction should

10 not issue here. Thank you, Your Honor.

11 THE COURT: All right.

12 MR. COOLEY: We have misused no order, Your

13 Honor. We are trying to protect these materials. Fair use,

14 you see, in the interim that they are now advocating for,

15 when the use to begin with wasn't even remotely fair, is

16 fair use defined by Lerma, and he has already defined what

17 he means by fair use; posting.

18 They come up now and say he is not going to post

19 them again. He already did that. But to reward him with an

20 ongoing right of fair use when he posted without comment,

21 without any journalistic input, and now what they attempt to

22 do is to bootstrap a comment on the ARS in as the context in

23 which it occurred. Where is that comment? It's not in

24 evidence here, from which the Court could even begin to

25 decide that if such a far-out principle were to apply, that

7 3

1 there is a context.

2 He talks about Lerma posted other affidavits.

3 That's right, and we didn't sue him for them because they

4 didn't contain copyrighted trade-secret material.

5 We only sue, Your Honor, notwithstanding the brush

6 with which we have been tarred, when it does get into that

7 area. We haven't sued for -- he could post affidavits that

8 call us names until the cows come home, and that's what he

9 has done. That's okay, because it doesn't infringe. It

10 doesn't misappropriate. But when you cross that line,

11 that's when the church's back is to the wall, and they have

12 to bring the suit.

13 I don't know of any case anywhere that stands for

14 the proposition that has just been argued to this Court that

15 he can post them. Counsel even suggests that if the Post

16 did what he says in successive of days that it might be a

17 problem, I don't know. I don't have to deal with that

18 issue. I have got enough trouble dealing with.the issue as

19 it happened. But I know one thing, that Arnie Lerma didn't

20 even say, here is the stuff we have been talking about lo

21 these many months, because they hadn't.

22 He didn't say, you remember the debate that we

23 were having here on this thread? Here is these materials.

24 He didn't say that. He just banged them up there, period.

25 That was the end of the inquiry.

74

1 Now he says as a reward for having done that, he

2 should during the pendency of this case be rewarded with a

3 fair-use right. Your Honor, there is no case.

4 Now, counsel knows there is no case, and so what

5 does he say? He says we are dealing with a new technology.

6 This is really where we are at, Your Honor. Because there

7 is substantial advocacy on the Internet that the new

8 technology has repealed intellectual property law, that the

9 new technology has done that to copyright.

10 The Copyright Office just came out with a white

11 paper. I don't know if you have had a chance to see it.

12 It's sweeping in its scope and its implications.

13 one of the things that they destroy right off the

14 bat is Mr. Lerma's corporation's claim that because it was a

15 preservational archive, it could keep these materials; and

16 the white paper clearly shows the Congressional debate that

17 makes it very clear that facsimile reproduction or

18- photographic reproduction is what they are talking about,

19 and that electronic or digital reproduction is not

20 sanctioned by the archival section of Section 108.

21 Now, the same thing is true on the library

22 exemption. The library exemption deals with specific

23 factors that have to apply, and Mr. Wallersheim immediately

24 eliminated those as being the stuff is not available to the

25 public. We don't even use it. It's only accessible by me

75

1 and by Penny. It has no role in the functioning of our

2 service, and nonetheless, one of the issues the Tenth

3 Circuit will be addressing is how he can possibly show any

4 balance of equitites in his favor under those

5 circumstances.

6 But it goes in spades for Mr. Lerma. All

7 Mr. Lerma did was follow the marching orders of his

8 co-director. I don't think, Your Honor, that fair use has

9 any application.

10 The reason I have Mr. McShane here is -- of

11 course, Your Honor has already done a pretty good job of

12 looking side by side and seeing the quote. He will tell you

13 what portions are involved, how many pages of the total, but

14 these are separate issues copyrighted as a series.

15 THE COURT: Let me ask this question. It's on a

16 slightly different subject. The computer specialist that's

17 holding the documents and the files, the disks and that sort

-18 of thing, is there any reason why they don't have the

19 ability to go through the files and simply make a copy of

20 the file with the specific prohibited information

21 excerpted?

22 I am concerned from what I am hearing, and again,

23 the nature of the technology makes this more complicated.

24 If this were a simple hard copy, document case, you could

25 just go through somebody's file, remove the specific files

7 6

1 that were at issue, and the rest of the file would be

2 returned.

3 MR. COOLEY: There is no question that that can be

4 done. That's called sanitizing the hard drive, and we would

5 be more than happy to do that.

6 THE COURT: The hard drive -- I am talking about

7 -- I understood -- maybe I misunderstood -- that there was

8 a complaint as well that there are floppy disks.

9 MR. COOLEY: Oh, there are. Could those be

10 sanitized? Yes, the answer is yes, they could.

11 THE COURT: The third party has the ability to do

12 that, the entity that's holding these documents, the

13 materials, Mr. Levine? Do you know that?

14 MR. COOLEY: He hasn't been asked to do it.

15 THE COURT: But they have the capability of doing

16 it?

17 MR. COOLEY: They have the capability, and we

18 could furnish them with the stuff.with other counsel present

19 that we are presenting to this Court as being the infringing

20 material. He can have back the rest.

21 THE COURT: All right. The concern I have got --

22 my job is to do a balancing at this point as well. I am

23 very concerned about the allegations that Mr. Lerma has made

24 about the far-reaching scope of the seizure, the fact of

25 such things as lists of addresses of people were caught up

77

1 in this search, in this seizure and that sort of thing.

2 Clearly, anything that is beyond the scope of what

3 I thought was a narrowly-drafted warrant does not belong in

4 the hands of anybody but Mr. Lerma. The only material

5 that's at issue in this case are the specific verbatim

6 documents that we have been talking about.

7 And if the technology exists, and again, it's

8 controlled by a third party to this litigation, to return to

9 Mr. Lerma sanitized disks, sanitized hard drives, then the

10 only thing that he is not going to have access to at this

11 point are the very documents that are at issue. He is not

12 restricted from talking about the documents. He is not

13 restricted from commenting on Scientology, commenting on

14 this case, that sort of thing.

15 I have to tell you, Mr. Levine, I am concerned

16 about the amount of verbatim duplication of the allegedly

17 protected materials that I see here on very quick first

18 glance, and even you have to'admit, there are pages -- I

19 understand you are talking quantity and whether or not that

20 is appropriate. I am still troubled by the context.

21 As I say, your situation is quite different from

22 the Washington Post's in several respects.

23 What I intend to do is the following: I am going

24 to take under advisement the motion for the preliminary

25 injunction so that I can look at this document, and I am

7 8

1 going to give Mr. Lerma an additional -- can you respond to

2 this thing in a week, an additional week to look through

3 this, because your argument is that this somehow skews the

4 Court's view of what went on here. I am willing to let you

5 have a chance to give me further information as to why you

6 think this misrepresents the quantity of material that has

7 been copied and published.

8 MR. LEVINE: We could do that, Your Honor. I

9 would respectfully suggest, though, that that is more

10 properly done in the context of the ongoing litigation after

11 this motion is decided, both with respect -- and our motion

12 with respect to vacating the seizure order.

13 I would think that before we did anything like

14 that on an expedited basis, the Court should hear argument

15 on and have an opportunity to rule both on the issue of our

16 motion to vacate the seizure order and our ability to argue

17 that that conduct disentitles the plaintiff to. injunctive

18 relief, no matter what that comparison reveals.

19 THE COURT: You filed a brief on that. Again, I

20 have looked at that. Is there anything you want to add that

21 is not already in that brief?

22 MR. LEVINE: If the Court pleases, Mr. Sullivan is

23 prepared to address that.

24 THE COURT: I'm-sorry, Mr. Sullivan, go ahead.

25 MR. SULLIVAN: Good afternoon, Your Honor.

7 9

1 THE COURT: Yes, sir.

2 MR. SULLIVAN: The last time we were before this

3 Court on August 25th, you directed us to get a sense of what

4 it was that was within the scope of our client's materials

5 that the Scientologists had reviewed. We have now done that

6 review. You also said to us -- that was on August 25th --

7 you said, "Look, you come back to me if it appears to you

8 upon conducting that review that it was excessive," and that

9 is why we are here before Your Honor this afternoon.

10 At that last hearing, you were informed, the Court

11 was informed by the plaintiff that they conducted three

12 key-word searches, as you may recall, Your Honor, OT course,

13 Hubbard and thatan (phonetic).

14 The Court inquired upon hearing that, you saidi

15 Hubbard, quote, "That would encompass almost the entire

16 universe of scientology documents, and in a search you try

17 to narrow what you are searching for, not expand it."

18- That's what.you said, Your Honor.

19 We have now had an opportunity to take a little

20 discovery and find out what's gone on. Your Honor hit the

21 nail on the head. What has gone on here is they conducted

22 an extremely broad search, which revealed much more than was

23 pertinent in this litigation. Mr. Settles testified in his

24 deposition that, in fact, these hits that we keep hearing

25 about, the 139-some odd disks that we hear about, there

80

1 there were two-third more disks that they reviewed that they

2 never copied so we don't know fully what they saw.

3 You say, well, why is that troubling? Why does

4 that trouble you?

5 It troubles us for this reason, Your Honor.

6 Mr. McShane testified in his deposition that that's how they

7 learned that Mr. Lerma was acting as a, quote, "Net

8 researcher" for the Washington Post. How did they learn

9 that? That didn't come up in any hit. What they did was

10 they got a hit, an E-Mail that did contain, for example, the

11 search word "Hubbard." He purports to have scrolled up and

12 scrolled down to see the messages that preceded and

13 succeeded the message containing the hit.

14 And oh, that Net researcher business, that just,

15 quote, "happened to catch his attention." Your Honor,

16 Mr. Lerma will never know, he will never know what else

17 happened to catch Mr. McShane's attention.

18 What they did when they determined something was a

19 hit, they then copied it onto a floppy disk for further,

20 quote, "in-depth" review. Then they started their secondary

21 process which commenced after the Court on August 25th said,

22 look, we are going to get this thing straightened out here,

23 and you directed them to distinguish what it was this case

24 was all about.

25 In response to your direction, they then called in

81

1 what Mr. Cooley represented was a very highly placed

2 Scientology attorney, a gentleman by the name of Mr. Moxin

3 (phonetic), an attorney from Los Angeles, who we were told

4 had obtained the requisite spiritual level to review these

5 materials.

6 Now, we got back 58 disks that allegedly contained

7 the infringing materials. We went through those disks. We

8 went through three of those disks. We printed out some of

9 the shorter ones and went through them in the 30(b)6

10 deposition that we conducted, and the plaintiffs designated

11 Mr. McShane, the President of the RTC, as its 30(b)6

12 witness.

13 We went through three of these documents,

14 presented to him in their entirety. What did we find out?

15 One that they designated as an infringement was this OT 8

16 document that Mr. Cooley speaks of with great passion, that

17 it's a forgery. It's an outrageous slander against Jesus

18 Christ.' They designated that and impounded it, Your Honor.

19 They seized it from Mr. Lerma and they impounded it, the

20 same document this they lambast the Washington Post for

21 printing excerpts of.

22 Now, what's the explanation that we are offered in

23 response when we questioned them at the deposition? Well,

24 we are told that obviously Mr. Moxin does not know which

25 documents are which.

82

1 We submit to this Court that if Mr. Moxin, a

2 highly placed church attorney, could not make the

3 distinction between which is which, how can Mr. Lerma be

4 expected to act at his peril?

5 Now, there are other examples, Your Honor. In

6 these 58 disks that have been seized and impounded from

7 Mr. Lerma, they have things like disk 34, Appellant Baynes'

8 (phonetic) opening brief filed in the Ninth Circuit. That's

9 been seized, impounded, designated as infringing.

10 The Washington Post December 25th article, it's

11 disk 3, Your Honor, it was seized and impounded, and yet

12 when they go to drag the Washington Post into this thing,

13 they attach the article to their own first amended

14 complaint.

15 Now, we said looking at this, we said, well, how

16 are we supposed to figure out what's infringing? We asked

17 them in that interrogatory. What we gqt back, and we were

18 hard pressed to figure what It actually was, but we counted

19 up the pages. It's 427 pages as near as we can figure out

20 of roughly 3,100 contain what we are told is offending

21 material.

22 We get this morning served upon us a brief in

23 response to my motion here where they now tell us that there

24 are 20 disks. So now they have admitted that their

25 designation was overbroad by a full two-thirds. We have

83

1 looked through that in the quickest way we could. We see

2 that stuff that they didn't say was infringing when they did

3 their interrogatory answer they now say is infringing and

4 conversely stuff that wasn't -- we are hard pressed. We are

5 shooting at a moving target here.

6 Then we look at the disks 59 through 139, which

7 were also taken and wiped off of Mr. Lermals hard drive.

8 They now concede in the letter that was produced when we got

9 those disks on August 26th, they concede that these

10 materials were seized for their evidentiary value.

11 Even more disturbing than that, Your Honor, is

12 that a review of many of those disks reveals that they don't

13 contain any of the three search terms.

14 If you look at disk 61, you will see an E-Mail

15 there for Mr. Leiby, Washington Post reporter, to Mr. Lerma-

16 They discuss Wako, and they discuss Ruby Ridge. You will

17 look in vain to find the words "OT course," "thatan" or

18 "Hubbard" in that E-Mail.

19 Disk 37, there are other files, 37 files all

20 together, 37 computer disks that contained no search terms,

21 no "thatan," no "OT course," no "Hubbard.11

22 So you ask yourself, Your Honor, how did they get

23 these disks? How did they get access to this, all right?

24 We find out, lo and behold, we find out this

25 morning they file their opposition and they say the

84

1 following. They say, "Lerma attempts to create consid erable

2 confusion and concern over disks which allegedly do not

3 contain any of the search terms on them or any infringing

4 language."

5 I will agree with one thing. We are concerned.

6 Then they go on to say, "What Lerma does not say

7 which he would have learned in the depositions he cites if

8 his counsel had asked additional questions is that an

9 additional search was done in certain segments of the

10 directory where the titles of the directories suggested that

11 they could be repositories for the intellectual property

12 violations."

13 Well, Your Honor, I would submit to you that you

14 perhaps are guilty of the same failing as us because at the

15 hearing on August 25th when you asked these folks, how did

16 you, what searches did you perform, you, too, didn't get the

17 answer

18, THE COURT: (Interposing) What plea ding are you

19 reading from right now?

20 MR. SULLIVAN: This, Your Honor, is their

21 opposition to our motion for, to vacate the writ of

22 seizure. We sent a messenger over to get this out of the

23 court this morning when it was filed. It is file stamped

24 today.

25 THE COURT: That's why we didn't see it.

85

1 MR. SULLIVAN: If you would like to see my copy, I

2 would be happy to share it.

3 THE COURT: No, we have it in Chambers. I have

4 been on the Bench all day.

5 They said there was a fourth search term or

6 concept used.

7 MR. SULLIVAN: Your Honor, they say if we had

8 asked additional questions, we would have found out that

9 there was an additional search was done in certain segments

10 of the directory where the titles of the directories

11 suggested they could be repositories for the intellectual

12 property violations.

13 You were not told that on August 25th. I was not

14 told that on August 25th. We deposed these fellows. We

15 didn't find that out. We find that out this morning.

16 This is a dirty search, Your Honor. It's a dirty

17 seizure.

18 Now, what does the law have to say about all

19 this? The copyright statute authorizes no search of any

20 premises. All that it authorizes is a seizure. What is the

21 purpose of the seizure? The seizure is to impound the

22 offending goods for their eventual destruction should it

23 turn out that after a full trial they are determined to be

24 infringing.

25 Why is that? The reason is is because it was

86

1 never intended that these seizure orders would be used the

2 way these plaintiffs are using them in these Internet

3 seizure cases.

4 Your Honor, what this was all set up for is you go

5 in and you find some guy knocking off Louie Vuitton bags.

6 You go in and you find out he is working out of some

7 warehouse. You go in there with a seizure order marshal.

8 You say, okay, here is the offending bag. I see here is the

9 equipment they are using to make these bags. Lock those

10 up. Let's get this decided after trial, and if it turns out

11 that, indeed, they are infringements, we burn them, we

12 destroy them, we do whatever.

13 We don't do that in this country with expressive

14 materials, but what do they do? They converted the writ of

15 seizure issued by this Court into a general warrant, and

16 then they went and they conducted an exploratory search of

17 Mr. Lerma's home from attic to basement, all right.

18 What they do in this br@ef that they have just

19 filed, they come back and they focus all their attention on,

20 oh, well, the search was okay. The search was okay. It

21 wasn't that egregious.

22 Your Honor, the egregious violation of Mr. Lerma's

23 Fourth-Amendment rights, it wasn't just what they did when

24 they searched his house top to bottom. The violation

25 continued when they took this material back and then went

87

1 through it, looked at his E-Mails, opened E-Mail after

2 E-Mail after E-Mail.

3 Now, is that proper? Not at all. The mandate of

4 the Fourth Amendment is clear, and that says that you cannot

5 place the scope of the search nor the decision whether to

6 seize and impound these materials in the hands of the

plaintiff.

7

8 The other thing, Your Honor, is where a seizure

9 order involves expressive materials, the Fourth-Amendment

10 protections are at their zenith because of the danger of a

11 prior restraint.

12 The best thing we can look at for an analogy is

13 the Supreme Court's obscenity jurisprudence. It makes plain

14 that because of the risk of prior restraint, you can't do

15 what the plaintiffs did here. You cannot proceed ex parte.

16 The law requires that there be an adversary hearing.

17 Now, if that is clear in the context of obscenity,

18 material which the Supreme Court has said is so low on the

19 hierarchy of First-Amendment values that if, indeed, it is,

20 in fact, found to be obscene, it is deemed to have no

21 value.

22 If that's true there, then it's clearly here, Your

23 Honor, where this material has and involves a matter of

24 public concern, it has First-Amendment value.

25 Now, given the conduct that the plaintiff has

88

1 engaged in here, what remedies are appropriate? We submit

2 that this Court as an initial matter should vacate the writ

3 and order that all the materials, the copies, what have you,

4 wherever they have disseminated them to, whoever they have

5 shared them with, they need to come back, and they need to

6 come back right now.

7 Secondly, under the unclean-hands doctrine, we

8 submit that plaintiff by its conduct has clearly forfeited

9 any right it might have otherwise had to proceed in equity.

10 The law on that is clear. You can't come into a

11 court and act inequitably and expect the Court to use its

12 good offices under its powers of equity in your behalf. You

13 simply cannot.

14 Now, the third thing we have argued, Your Honor,

15 is that the exclusionary rule should be applied in this

16 instance. The RTC must be barred from any use directly or

17 indirectly of any evidence obtained from this

18 unconstitutional search and seizure.

19 THE COURT: Has the exclusionary rule ever been

20 applied in a civil context?

21 MR. SULLIVAN: Not to my knowledge, Your Honor. I

22 don't have a case that I can cite you. But I will say

23 this. In the criminal area, it is deemed necessary to do

24 two primary things.

25 One is to insure that our citizens get what the

89

1 Constitution guarantees to them. Secondly, it's to insure

2 that courts -- it's to preserve judicial integrity so you

3 are not acting, Your Honor, on bad evidence.

In

4 Now, if we as a society are prepared to do that in

5 the criminal area, and we have cited you cases, and I'm sure

6 Your Honor is well aware, who suffers when you apply the

7 exclusionary rule in the criminal context? We, the

8 citizens, suffer because a criminal may go free because the

9 constable has blundered.

10 Think about the application here. Who suffers?

11 The only person who suffers is the RTC. Why did they

12 suffer? They suffer because of their own misdeeds. That is

13 imminently fair. What better way for them to finally get

14 the message thou shalt not proceed ex parte to obtain a

15 warrant to seize expressive materials based on a showing

16 that is less than forthright.

17 We submit that it's appropriate at this instance,

18 Your Honor, to send them a strong message, both to vindicate

19 the Constitutional rights of Mr. Lerma and to deter them in

20 the future from doing this very same thing to some other

21 citizen. It's entirely appropriate.

22 THE COURT: All right. Who wants to respond to

23 that?

24 Since I have not had a chance to read the brief

25 that was filed in morning, I am very interested in hearing

9 0

1 what your answer is on the point that additional searches

2 were conducted.

3 MR. COOK: Thank you, Your Honor. My name is Bill

4 Cook. I will try and address that issue.

5 THE COURT: All right, Mr. Cook.

6 MR. COOK: I think it would be appropriate as part

7 of my discussion here to essentially proffer what I

8 anticipate Jim Settles would testify if you wanted to hear

9 him. He is available to do so here, obviously.

10 I would like --

11 THE COURT: (Interposing) Just tell me, what other

12 hit words were used in any additional searches?

13 MR. COOK: The initial search done by I-Net and

14 Jim Settles at the office was the three words given by

15 Mr. McShane. Those form the basis of the entire search and

16 resulted in 139 hits, which were then downloaded to disks.

17 Each file contained one disk. Copies of all of that

18 material were turned over to counsel.

19 After the McShane three-word sweep was done,

20 additional searches were done and were anticipated. You

21 will recall, in fact,.that in open court, Mr. Settles

22 explained to you that searches were ongoing on the material

23 to focus on the material and that there were additional

24 search expressions that had been suggested, and you said not

25 to do any more searches at that time, and that's what

9 1

1 happened.

2 But what happened is that after the initial 139

3 hits took place, the material was reviewed against the file

4 directory, and specified areas in the file directory that

5 indicated from a gloss review that they may be related to

6 church activity or church materials contained on the hard

7 drive, that search was conducted after Mr. McShane had left

8 here and gone to Denver.

9 It was done under the direction of another member

10 of the Church of Scientology, but it was at all times before

11 the August 25th appearance in front of this Court, where the

12 Court limited additional searches.

13 THE COURT: You represented in court clearly when

14 we discussed how this search was conducted so that I would

15 have an idea of the scope and how this was being done, you

16 gave me three hit words, and I don't recall any discussion

17 of additional.categories that were used for.reviewing these'

18 materials. -Now, I am sure someone has got a transcript.

19 You all have got almost everything else there. But is that

20 or is that not the case?

21 MR. COOK: I have not read the transcript against

22 that, so I would have to find out. Some of us here seem to

23 recall that in his statements to the Court, Mr. Settles may

24 have made the statement that a directory search had taken

25 place and that there were additional searches that were

92

1 foreseen, at which point, as I have indicated, the Court

2 said I don't want any more word searches or searches done.

3 In terms of the scope, as in any investigation

4 where a search is done, what essentially you are looking at

5 is an effort to find and retrieve relevant information.

6 What you have in every respect is essentially a

7 reverse pyramid, where you start with focusing the universe

8 into the material that is relevant for subsequent

9 presentation in court. The first sweep or first level of

10 the reverse pyramid, the broadest level was 139 disks, which

11 were copied and turned over to counsel.

12 THE COURT: Yes, but this search never authorized

13 a search for evidence. It specifically was intended to

14 authorize solely a search for materials that would violate

15 the copyright, nothing else.

16 MR. COOK: Yes, Your Honor, that is quite

17 correct.

18 In an effort to comply with that, the individual

19 from Scientology in Los Angeles came to Washington,

20 Mr. Moxin -- I guess that is the pronunciation of his name

21 -- and he reduced the number from 139 to 58, which was then

22 subsequently refined still further to 20 documents which are

23 currently -- or 20 files.

24 THE COURT: I seem to recall that we did the ex

25 parte request on the record, and there is a transcript of

F

9 3

1 that here. There were extensive representations made to me,

2 I think, by Mr. Cooley as to the ground rules for how this

3 seizure was going to be conducted.

4 Now, I seem to recall that there was a discussion

5 about a third party, that is, I-Net -- because I remember I

6 looked at I-Net's qualifications before I signed off on this

p

E 7 -- was going to be the reviewing entity.

N

G

A

D 8 Do I misremember what went on there?

c

0

0

A 9 MR. SULLIVAN: Would you like me to quote for the

y

0

N

N

E 10 record?

N

i

0 11 THE COURT: Yes. Let me hear it.

7

0

0

2 12 MR. SULLIVAN: Okay, fair enough.

F

0

Fl

m

13 "THE COURT: My concern is to some degree if he

E

D

14 uses the computer," pardon me, "that computer for legitimate

15 personal business, and you are downloading from that

16 computer, you may be getting access to client information or

17 other information that is not only irrelevant to this case

18 but confidential information of innocent third parties that

19 really shouldn't bell

20 At this point, the transcript reads:

21 "MR. COOLEY: (Interposing) This is why we have

22 this independent expert who would see to it. We have no

23 interest in doing that."

24 THE COURT: The clear picture I get, and the clear

25 impression I had was that there were not going to be party

94

1 representatives running the search, that you had all brought

2 Mr. Settles or I-Net into this so that there would be, in

3 effect, a clean search, and I am getting a very clear

4 picture from both the previous pleadings and now from what I

5 am hearing about what was filed this morning, that is not

6 how this search was conducted or this seizure conducted. It

7 wasn't a search.

8 MR. COOK: The search at least in the offices of

9 Willian & Brinks was conducted under the complete direction

10 of Jim Settles except for a day or two when another

11 representative of I-Net was there.

12 When a hit was found, a Scientologist was brought

13 in to verify that that might be relevant, at which point it

14 was segregated, and a file was made with respect to that.

15 And same is true of the directory search that I

16 have referred to. A Scientologist looked and determined,

17 and if there was relevant-material, then a copy was made of

18- that. That material is the material that makes up the 139

19 disks, which have been now whittled down to 20.

20 THE COURT: Is there anything else you wanted to

21 argue?

22 MR. COOK: Just that if there was any confusion,

23 it was probably over the fact that Mr. Settles was not given

24 a full opportunity, we don't think, to explain what the

25 search techniques he was involved with were when he was here

95

1 on the 25th.

2 If he had been asked by counsel about other

3 searches that were done, other than the three-word sweep, he

4 certainly would have told this to counsel during the course

5 of the deposition. I mean, probably one of the other facts

6 that shows that there is no effort or any activity of any

7 type of collusive or improper conduct is the fact that the

8 material was copied and turned over, notwithstanding the

9 fact that it was outside the scope of the sweep words.

10 If there was any effort to conceal what was done,

11 certainly, that would be the kinds of things that you

12 wouldn't have turned over but, in fact, that material was

13 turned over, and is part of the record in this case.

14 So every effort has been made to try and provide

15 counsel with a complete record and reflection of what that

16 investigation and search was all about.

17 THE COURT: Anything further? Mr. Cooley?

18 'MR COOLEY: Since I am the one that addressed the

19 Court at the ex parte application, and I mentioned I-Net, it

20 wasn't then, and it isn't now the intention of my client or

21 anybody on this side of the table to use material that --

22 you see, we didn't put it all in one place. We didn't dump

23 it all into one hard drive.

24 One of the problems of finding what you have to

25 find to make your infringement case is that these things are

9 6

1 mixed together. You can't -- it's impossible to sterilize

2 the search and then be certain that you have gotten

3 everything. There has been no effort on our part to intrude

4 into the private materials about which Your Honor was

5 concerned about, but as I recall, Mr. Settles -- could I

6 have that, please -- as I recall Mr. Settles when he was

7 here on the 25th, that he told the Court that the 139 hits

8 were the result of searches one and two and that both

9 searches were done before the August 25th hearing.

10 He did say on that occasion that a second search

11 was done, but he didn't give the details of what terms were

12 used. Those terms were used because it appeared likely that

13 infringing material might be included under those.

14 If you make a search so narrow, Your Honor, that

15 it is couched only to turn up a single document, you have no

16 assurance that you are going to get the document from every

17 file in which it reposes. That was the only intention that

18 we had; We have no intention -- whatever other matters may

19 relate to Mr. Lerma that are relevant on a trial on the

20 merits, we can get to that, as the Court said, that's for

21 discovery. We will get to things like that in discovery.

22 But we don't have that material. Everything has

23 been turned over, and we are now here focused on the

24-- infringements that Mr. Lerma has been guilty of.

25 RTC is the victim here of the infringement, and

9 7

1 Mr. Lerma is attempting to paint himself as a victim, but he

2 is not a victim. The search had to be sufficient to get the

3 documents.

4 Now, I, at the time when I mentioned to the Court

5 the three search terms, I don't recall whether it was in the

6 context of what we wanted to do hereafter, and you asked me

7 what terms do you want to use. And I told you, and you

8 said, no more searches, and no more searches were done from

9 that date forward.

10 We returned everything to them. Everything now is

11 in the hands of an independent custodian, and there was no

12 intention to go beyond anything. The only intention was to

13 get all of what had been infringed, and we are not entirely

14 certain that we did, because we would have liked to conduct

15 that further search afterwards. We can't be certain. We

16 think that we have got most of it.

17 And.these people put it in more different files

18 and more different places than is imaginable. The same

19 thing happened out in Colorado. To do the search and get it

20 all, you have to be able to look at things because of the

21 way they are kept on the electronic computer, the way they

22 are kept, they are mixed in with other things. It's

23 impossible to do a totally sterile search.

24 THE COURT: All right. I am going to rule. To

25 take the words out of Mr. Cooley's mouth, the same thing

98

1 that happened in Colorado, I am going to do the same thing

2 here.

3 I have listened carefully, and I am very concerned

4 about how the seizure was conduct. Coming out of the

5 practice of criminal law myself, I am vegy much aware about

6 the concept of the general warrant and how the Fourth

7 Amendment has always been significantly opposed to that kind

8 of warrant use.

9 When a party does come to the Court and ask the

10 Court for the extraordinary remedy of giving such a --

11 giving a right to enter a person's residence and seize

12 materials and when that is done in an ex parte fashion, it's

13 got to be done in complete good faith, and it's got to be

14 narrow.

15 I thought I had sufficient safeguards in place so

16 that this seizure could be properly authorized within the

17 scope of Fourth-Amendment sensitivity. I am concerned that

18 it was not conducted in certainly the spirit of what had

19 been intended, and it certainly was not the Court's

20 intention to turn that seizure warrant into a wholesale

21 license to literally go through Mr. Lermals residence and

22 possessions willy nilly and with a fine-tooth comb. This is

23 a case that has gotten somewhat out of control, and I need

24 to put it into control.

25 I am concerned about the plaintiff having

99

1 sufficiently clean hands to actually come into a court of

2 equity. And, as I said, I have already found in balancing

3 the four factors in the context of the Washington Post that

4 I felt that there were -- the plaintiff could not make out

5 its case sufficiently at this state of the proceedings to

6 justify injunctive relief.

7 Although Mr. Lerma's situation is different from

8 the Post's in that the copying may be more of a problem, I

don't feel at this point there is any reason to continue any

9

10 kind of injunctive authority over him in part because I am

11 not at all convinced the plaintiff has proceeded in good

12 faith in this matter.

13 And therefore, I am going to go ahead, and I am

14 going to deny the plaintiff's request for a preliminary

15 injunction as to Mr. Lerma, and Digital has not said

16 anything in this case but you all have sort of been the

17 silent partner, but clearly, any liability you have got is

18- directly -- you are on the coattails of Mr. Lerma.

19 Both the defendants would be absolved of any

20 obligation under previous restraining orders of this Court.

21 I am going to direct that all materials that were seized --

22 I am going to vacate the seizure warrant and direct that all

23 materials seized, including hard drives, floppy disks, et

24 cetera, be returned forthwith to Mr. Lerma.

25 Mr. Lerma will be under the order of the Court

100

I that those materials are to only be, they are limited to

2 fair use, and, furthermore, since Mr. Lerma has counsel, I

3 feel that there are additional safeguards in terms of the

4 rights of the plaintiff, because counsel, as officers of the

5 Court, are to make sure, as have counsel for the Post, by

6 the way, very responsibly, handled these materials sensitive

7 to the issues that have yet to be litigated in this

8 lawsuit.

9 I am going to prepare a memorandum opinion, but I

10 think you all need to know the ruling of the Court so I have

11 given it to you in summary. I will elucidate some of these

12 reasons in writing.

13 In terms of applying the exclusionary rule in a

14 civil context, it's a very interesting concept. Versions of

15 that happen in terms of the Court sanctioning parties in a

16 civil suit for discovery abuses, of course, and that sort of

17 thing.

18 The Fourth Amendment itself, the pure exclusionary

19 rule arises out of concepts of limitations on the power of

20 the Government, and so to that extent, this would be an

21 inappropriate party against which to apply that doctrine.

22 However, there is this interesting issue about a

23 private party using the power of the Government, i.e., an

24 order of this Court, to intrude upon the Fourth-Amendment

25 rights of Mr. Lerma.

101

1 I am going to think about that issue. I am not at

2 all sure I am going to grant that, but it's certainly one

3 worth thinking about.

4 And that is the ruling of the Court. All right.

5 MR. COOLEY: Your Honor, I respectfully move the

6 Court to stay the effect of that order to give us an

7 opportunity to seek a stay, or if the Court stays it, we

8 won't have to, because we are going to appeal to the Court

9 of Appeals for the Fourth Circuit; and I would ask that the

10 effect of the Court's order be stayed pending appeal.

11 THE COURT: To do that would be to perpetrate the

12 very problem that we have here, which is that there has been

13 a restriction on the full rights of Mr. Lerma to have access

14 to these materials, and I think, no, let the Fourth Circuit

15 look at this. I am not going to. The district judge in

16 Colorado also did not. I am comfortable just letting it go.

17 We have got counsel in place to make sure that appropriate

18 use isomade of those materials.

19 MR. COOLEY: Your Honor, all I am asking what I

20 would ask now is that it be stayed long enough to let us get

21 to the Court of Appeals. In other words, Your Honor is

22 denying a stay, but I would hope that the materials wouldn't

23 be returned before we get a chance now to apply for a stay

24 in the Fourth Circuit. That's what I am trying to avoid.

25 THE COURT: It's 10 of 3:00 -- I think it's 10 of

102

1 3:00. The Court is still open. I am not staying anything.

2 Thank you.

3 MS. KOBRIN: Your Honor, may I just speak for a

4 moment? I am one of the counsel. My name is Helena Kobrin.

5 I was not here at the beginning of the hearing.

6 Your Honor, I am very concerned about the fact

7 that you consider that these things were not done in good

8 faith. I was at Mr. Lerma's house when the search was

9 conducted. We did go through his house because the only way

10 you can know if something is there is if you see it there,

11 and so we went through and we looked. We did not remove one

12 single piece of paper from his house, because in the papers

13 that that were there, which we glanced over long enough just

14 to see that they weren't the copyrighted and trade-secret

15 materials, we saw they weren't. We didn't take a single

16 piece of paper.

17 But when we left his house, there was no way way

18 of knowing what was in the computer media that were there.

19 So those things were taken. They were part of the order,

20 and they were taken in good faith pursuant to the Court's

21 order.

22 The searches that were done were the words that,

23 you know, that have been discussed, and out of -- I don't

24 know how many hundreds of directories, a few directories

25 which had names which appeared like they very directly would

103

1 have these materials. Mr. Settles, in briefing counsel on

2 some of the things told us that, in fact, the people he was

3 working with who looked at the directories saw other ones

4 and said, those look like they are, you know, probably

5 personal matters of Mr. Lerma or bills of Mr. Lerma or this

6 sort of thing. We don't want to see any of those. That has

7 nothing to do with this case. We are not interested in

8 seeing those things.

9 So I am really concerned with the impression

10 that's being given, because it's a big smoke screen being

11 created. It's not, in fact, what has occurred here. It's

12 painting an impression that's not fair.

13 If we wanted to abuse something, we would have

14 taken all of the pieces of paper out of his house. He had

15 stacks and stakes of papers, you know, about whatever

16 subjects he was involved in. We weren't interested in

17 those, just enough to see that they weren't.part of this.

18 THE COURT: All rig4t. Well, I have ruled,

19 Ms. Kobrin, but-your statements are on the record. Thank

20 you.

21 We will recess Court for the afternoon.

22 (Whereupon, at 2:57 o'clock p.m., the

23 above-captioned proceedings were concluded, and court stood

24 recessed

25

104

1 CERTIFICATE OF OFFICIAL REPORTER

2 COMMONWEALTH OF VIRGINIA )

) ss.

3 CITY OF ALEXANDRIA

4 I, EDWARD DONOVAN McCOY, Registered Professional

5 Reporter and Official Court Reporter for.the United States

6 District Court for the Eastern District of Virginia,

7 appointed pursuant to the provisions of Title 28, United

8 States Code, Section 753, do hereby certify that I was

9 authorized to report, and did so report in Stenotype, the

10 foregoing proceedings;

11 THEREAFTER, my Stenotype notes were reduced to

12 typewriting under my supervision; and I further certify that

13 the pages herein numbered contain a true and correct

14 transcription of my Stenotype notes taken herein.

15 DONE and signed, this day of

16 -, 19_, in the City of Alexandria,

17 Commonwealth of Virginia.

18-

19

20

21

EDWARD DONOVAN McCOY, RPR

22 Official Court Reporter

23

24

25

IN THE UNITED STATES DISTRICT COURT FOR THE

EASTERN DISTRICT OF VIRGINIA

Alexandria Division

RELIGIOUS TECHNOLOGY CENTER

Plaintiff,

V. Civil Action No.95-1107-A

ARNALDO PAGLIARINA LERMA,

DIGITAL GATEWAY SYSTEMS,

THE WASHINGTON POST,

MARC FISHER, and

RICHARD LEIBY,

Defendants.

0 R D E R

For the reasons stated in open Court, to be further developed

in a written opinion to be issued,

Plaintiff Religious Technology Center (IIRTCII) I s Motion for

Reconsideration and Rehearing and

Motion for a Preliminary Injunction Against Defendant Lerma

are DENIED.

Defendant Lermals Motion to Vacate the Writ of Seizure and

order for Impoundment is GRANTED and it is hereby

ORDERED that RTC shall immediately return and restore to

Defendant Lerma all seized materials in their exact original

condition. This includes both Lerma's hard drives and all floppy

discs; and it is further

ORDERED that Defendant Lerma shall maintain the status quo as

to possession of all the allegedly copyrighted materials at issue

in this case and is restricted to employing them only in a fair use

capacity. Lerma and his counsel are specifically prohibited from

making any additional copies of the materials or transferring them

in any manner or publicizing them other than in the context of fair

use.

This action moots the issue of increased bond relating to the

seizure, so Defendant Lermals Motion to Increase Bond is DENIED.

Plaintiff RTC's Motions for Provisional Stays Pending Appeal

to the Fourth Circuit are DENIED.

The Clerk is directed to forward copies of this order to

counsel of record.

Entered this 15th day of September, 1995.

a

U ted ,tates strict Judge

Alexandria, Virginia