Copyright Law - Tenth Circuit: Is It Infringement To Repair Hardware That Includes Copyrighted Software?

Breach of Contract, Contractual Damages, Conversion, Post-Contract Damages From Conversion, Preemption of Utah Theft Statute by the Copyright Act, Jury Instructions, Verdict Forms, Expert Testimony, Prejudgment Interest

BC Technical Inc. v. Ensil International Corp., 464 Fed. Appx. 689 (10^th Cir. February 7, 2012)(unpublished).  NY company agrees to repair circuit boards.  Utah company sends circuit boards to be repaired.  NY company does not repair and keeps them for three years following the Utah company’s cancellation of the contract and demand for return.  After litigation commenced NY company claims that the repair required illegal copying of copyright-protected software and thus the repair contract was unenforceable.   NY company moved for judgment as a matter of law before and after trial.   Jury found NY company liable for breach of contract and conversion.  Damages award not limited by economic loss rule governing contracts because NY company converted circuit boards for three years after contract cancelled, supporting additional damages.  Utah’s theft statute preempted by the Copyright Act.   Even if repairing circuit boards required engaging in copyright infringement, contract not proven to be illegal and thus was enforceable.  Trial court’s refusal to include jury instruction on finding a contract requiring copyright infringement to be illegal affirmed.  Legality of contract question for court, not the jury.  Expert’s testimony regarding damages flowing from failure to repair circuit boards was sufficiently reliable to be admissible under Rule 702 of the Federal Rule of Evidence.  Weaknesses in testimony due to omissions in applying methodology were properly attacked on cross-examination.  Since jury was free to use its “best judgment” after listening to conflicting testimony on damages and the amount of damages was not sufficiently “measurable or calculable” under Utah law, prejudgment interest was not appropriate.

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Sixth Circuit - Confidentiality Agreements For the Development of Copyrighted Works - CAD and 3D

Dodge Avenger

Chrysler Sebring

In Multimatic Inc. v. Faurecia Interior Systems USA, 2009 WL 4927957 (6th Cir. Dec. 22, 2009), the Sixth Circuit Court of Appeals considered the question of whether a confidentiality agreement entered into by two parties protected intellectual property (trade secrets and copyright) developed during the course of the confidential relationship.

Multimatic agreed to develop cross-beam systems for the DaimlerChrysler Avenger and Sebring lines for Faurecia, a supplier to Chrysler.   There was no agreement on price, but the agreement implied that if Multimatic used Faurecia's 3D CAD designs, the parties would work together.

Instead, Faurecia gave Multimatic's designs to a third party.  Multimatic sued and won.   The Sixth Circuit opinion contains a good discussion of confidentiality agreements:  they are governed by state law under the state's contract law, but they deal with copyrightable subject matter, the source of Faurecia's rights under the Copyright Act in the 3D models. 17 U.S.C. Section 102(a)(5) ["pictorial, graphic, and sculptural works"].   Drafter's note: the Sixth Circuit found that the use of the PRESENT tense includes FUTURE rights.  Thus, neither the confidentiality agreement nor Multimatic's course of conduct in submitting the designs to Chrysler transferred the copyrights to Faurecia or anyone else, because Multimatic did not sign a writing transferring copyright ownership (as required by Section 204(a) of the Copyright Act) which provides:

§ 204. Execution of transfers of copyright ownership

(a) A transfer of copyright ownership, other than by operation of law, is not valid unless an instrument of conveyance, or a note or memorandum of the transfer, is in writing and signed by the owner of the rights conveyed or such owner's duly authorized agent.

The Federal "Discovery" Rule: Can you sue for infringements occuring more than three years ago?

In Graham v. Haughey, --- F.3d ---, 2009 WL 1564223 (3d Cir. June 5, 2009), the Third Circuit considered the question of whether a victim of copyright infringement may sue for infringements that occurred over three years prior to the commencement of the lawsuit.

At issue is the federal "discovery" rule for accrual of an action versus the "injury" rule. I discuss this distinction in Chapter 5 of my Copyright Litigation Handbook (West 4th Ed. 2009). I was pleased to see that the Third Circuit discussed the cases that I had cited on this conflict (by the way, this fourth edition of Copyright Litigation Handbook just shipped last week).

The question is whether a cause of action for copyright infringement "accrues" when the infringement takes place (the "injury" rule) or whether it accrues when the victim, exercising reasonable diligence, discovers the infringement (the "discovery" rule). Most circuits have ruled that the federal discovery rule applies. But some district courts in the Second Circuit, relying on a powerfully-reasoned decision by Judge Kaplan in Auscape Intern. v. National Geographic Soc., 409 F. Supp.2d 235 (S.D.N.Y. 2004), have applied the "injury" rule.

To illustrate: under the injury rule, a court would either dismiss or grant summary judgment on a pleading that alleged infringements over three years prior to the action being filed.

Under the discovery rule, a court would permit equitable defenses such as tolling for fraudulent concealment and factfinding to determine whether a plaintiff could have, did, or should have discovered infringements over three years old prior to filing suit.

These rules relate to "accrual" of the action. The statute of limitations is always three years under 17 U.S.C. 507(b).

Graham v. Haughey determined that the "discovery" rule applies and that the plaintiff could sue on infringements that occurred over three years prior to the commencement of the action. Graham v. Haughey digs into the legislative history and consists of a point-by-point refutation of the Auscape decision. It also has an excellent discussion of issues relating to burdens of proof on damages, the nexus neccessary for damages to be attributable to copyright infringement, and the role of a judge in reviewing a jury verdict of copyright infringement.

Graham's facts are interesting because the infringement was committed by an ex-employee. The new employee used the infringing documents to generate millions in profits, but the publications were in proposals kept confidential by both the infringer and the recipient of the proposals for many years. After these secret transactions were finally revealed, the copyright owner sued and obtained a jury verdict in excess of $16 million.

This case involved an ex-employee breaching a contract not to retain or use copyrighted materials, so is an important cautionary tale for both new employers who don't want millions in liabilities and old employers who wish to protect their materials.

This is the odd case where a "publication" was not "public".

The Third Circuit remanded on apportionment issues.

Graham's counsel David J. Wolfsohn of Philadelphia's Woodcock Washburn (who was successful on the appeal and is pictured above) informs me that the matter is in abeyance pending Haughey's cert petition (due Sept 3). Haughey was represented by Floyd Abrams of Cahill Gordon & Reindell.

Nondisclosure Agreements and Software Development: Where To Sue?

You are in Illinois. You file an action in state court. The adversary removes the action to federal court. In federal court, the adversary moves to transfer to California. You move to remand to state court in Illinois. The federal judge doesn't decide your remand motion, but decides to transfer the action to California. What are your options?

In re Limitnone LLC, -- F.3d---, 2008 WL 5254359 (7th Cir. December 19, 2008) gives us the answer. You may properly file a writ of mandamus. The decision on Findlaw is here. The original petition for a writ of mandamus is filed directly with the Court of Appeals, in this case the Seventh Circuit.

The factual underpinnings of the case are of great interest to software developers. Google and Limitnone signed a nondisclosure agreement ("NDA"). The NDA related to a program Limitnone had developed to move information from Microsoft Office apps to Google's competing apps. The program was called gMove. The NDA had a dispute resolution clause that venued all disputes in California.

Limitnone provided a Beta version of its program to Google. The Google employee had to click "I accept" on a "Beta License Agreement" to use the Beta version of the gMove. Months passed, and Google announced that it was launching an app that did what gMove did and would give it away for free. The Beta License Agreement specified Illinois courts and Illinois law.

The district court and Seventh Circuit found that the Beta License Agreement was not valid because it was not signed and was not in writing, and thus transferred the case to California. The odd thing is that the basis for the removal to federal court was that was that the Copright Act preempted the Illinois trade secrets statute relied on by Limitnone.

The Seventh Circuit held out the possibility that Limitnone might still make a motion for a remand.

If the action was improperly removed to federal court, then Limitnone might end up in a state court after all.

Creative Commons, Open Source, Copyright and Contract Law

For a number of years, activists dismayed at how commercial enterprises exploited copyright agitated to change the nature of how copyrighted works affected creative collaboration. They imagined a world of greater creative collaboration where everyone would still be able to make a living.

Authors, artists and musicians who wished to have their works used in others' materials could signify their interest.

Information and tools to understand this movement, including the "creative commons" marking and sample licenses are available at the Creative Commons website.

Wikipedia is a stunning example of this type of creative collaboration.

But what about the making money part? If you put your work on the internet and tell everyone that they can use it, are these very creative "creative commons" licenses going to eventually help you make a living? Can these licenses be enforced? And if someone ventures beyond the terms of the license, is that a breach of contract or is it copyright infringement?

The issue went from an interesting and hotly debated academic question to a tremendous commercial reality with the advent of the "open source" software movement, which adopted a creative commons-type license. Essentially, software programmers put up programming code that anyone can download, modify, use and distribute for free, as long as the "borrowed" or "open source" code is clearly indicated and enabled for the distributee to copy, download and use.

On August 13, 2008, the Court of Appeals for the Federal Circuit decided Jacobsen v. Katzer, 2008 WL 3395772, a decision that reviewed a district court's denial of a preliminary injunction to the owner of programming code who sued a person who downloaded his code, removed the identifying materials, and sold a new software package commercially.

The district court found that the open source license was an intentionally broad non-exclusive license unlimited in scope. Rather than being a matter of "copyright infringement", the issue became one of "breach of contract". The district court's holding meant that the owner of the open source code would be stripped of powerful rights and remedies available in federal court to copyright owners who are victims of copyright infringement, including the right to injunctive relief.

Generally, a copyright owner who grants a nonexclusive license to use copyrighted materials waives the right to sue the licensee for copyright infringement. But where a license is limited in scope and the licensee acts outside the scope, the licensor can sue for copyright infringement.

The Court of Appeals framed the issue as follows: if, under California law the terms of the open source license were "conditions" for the use of the copyrighted materials, then use outside such conditions would be copyright infringement. If, however, the terms of the open source license were "covenants" under state contract law, then the open source owner would be limited to remedies for breach of contract.

Analyzing the terms of the open source license, the Court of Appeals found that its provisions were "enforceable copyright conditions" for the use of the copyrighted material and that copyright remedies would be available to the owner.

The Court of Appeals decision contains an excellent discussion of the commercial benefits flowing from open source collaboration that cannot be measured in terms of traditional royalties. This is a well-reasoned opinion that is a strong victory for the owners of these copyrighted works. According to Creative Commons, it is estimated that approximately 100,000,000 works are licensed under various Creative Commons licenses. The court noted that both Creative Commons and the Wikimedia Foundation filed friend of the court (amicus curiae) briefs in support of the appeal.

While the question of how or if many of these copyright owners will seek or achieve returns on their investments is an open one, this case is a clear victory for the rights of copyright owners who want to make their works available through the digital commons.