Psystar's bankruptcy protection filing could minimize Apple suit

Psystar, the controversial Florida company trying to sell so-called clones of Apple computers, says it doesn't have the money to fend off Apple's legal dogs. But with the company's Chapter 11 bankruptcy protection petition filed last week, it looks like Psystar could have minimized the damages it may have to pay Apple.

The bankruptcy petition filed last week shows that Psystar, the maker of the Open Computer, a Mac clone, is more than $250,000 in debt, due to poor sales. Most of the debt is owed to shipping companies, PC parts makers, and more importantly, its law firm Carr & Ferrell, which is representing the company in a suit brought by Apple. Apple sued Psystar last year for copyright and trademark infringement for selling Mac OS X on non-Apple hardware.

But now it looks like Apple will have to get in line. Under normal circumstances, when a defendant in a copyright infringement case files for bankruptcy protection, the copyright case is terminated and there is a hearing, or mini trial, held in the context of the bankruptcy proceeding that will quickly determine if there is indeed money owed to the copyright holder, according to Jesse Fried, co-director of the Berkeley Center for Law, Business and the Economy. In this case, that could mean an accelerated version of the copyright case brought by Apple, which was scheduled to begin hearings in November, to determine if Psystar did indeed infringe on Apple's trademark.

In some cases, the bankruptcy court will allow another court to determine a judgment first--in this case, the U.S. District Court of Northern California, where the copyright claim was filed. But that is a very expensive proposition, and one that's usually unlikely for companies that don't have a lot of money.

Either way, though Apple had asked the court for monetary damages and Psystar's profits it is not likely to get much.

"The bankruptcy court may say this company (owes) Apple $10 million. But that doesn't mean Apple will get that money," said Fried. "They'll be treated like an unsecured creditor."

Unsecured creditors are last in line after secured creditors, which usually means lenders, business debts, and back taxes. Secured creditors can usually recoup the amount owed to them in a bankruptcy. Unsecured creditors get to divide whatever is left over equally.

Essentially, what Psystar's bankruptcy protection filing has done is pressed the fast-forward button on the copyright proceedings and minimized what it could owe.

"They (probably) hope to have Apple's suit quickly resolved, have the dollar amount figured out, and pay Apple only a fraction of the dollar amount determined by court," noted Fried.

Psystar could not be reached for comment. But by filing Chapter 11, which allows companies to pay off their debts and re-emerge as a business in the future, they can pay unsecured creditors like Apple through equity in a new company or debt in a new company, he said.

And because Apple might only get a few cents on the dollar with Psystar now in bankruptcy proceedings, it may not have an incentive to continue with more litigation. Apple had no comment on Psystar's bankruptcy protection filing.