Tag Archives: software

Customer violated software license by letting attorneys use application

The Compliance Store v. Greenpoint Mortgage Funding, — F.3d —, 2010 WL 4056112 (5th Cir. October 18, 2010)

A federal court in Texas has decided a case that could have notable implications for both providers and users of software. The court took a narrow view of the rights that licensees of software have to authorize third parties (i.e., independent contractors) to use software on behalf of the licensee.

Plaintiff software provider sued its customer for breach of the software license agreement after plaintiff learned that the customer allowed its attorneys to input data using the software. Plaintiff claimed that the use was not permitted by the terms of the license agreement.

Customer moved for summary judgment on the breach of software license claim and the district court granted the motion. Plaintiff software provider sought review with the Fifth Circuit Court of Appeals. On appeal, the court reversed.

The appellate court held that the license agreement should not be read to permit use of the software by a third party not expressly provided for in the agreement, even though such third party’s use of the software was on behalf of or for the benefit of the licensee.

The district court had relied on two earlier Fifth Circuit cases — Geoscan v. Geotrace Technologies and Hogan Systems v. Cybresource International — to look beyond the express language of the license agreement and hold that use of the software by defendant’s attorneys was permitted. The district court found such use to be permitted because it was done on behalf of or for the benefit of defendant.

But the appellate court distinguished Geoscan and Hogan Systems, finding that neither case stands for such an expansive proposition. Unlike the agreements in those cases, the license in this case contained no provision that permitted use by third parties on behalf of the licensee. Moreover, among other things, defendant was expressly prohibited from transferring or sublicensing the technology and was prohibited from assigning its rights under the license agreement. The software license agreement also contained a provision that served to excluse all third party beneficiaries to the agreement.

Photo courtesy Flickr user coiax under this Creative Commons license.

Vernor v. Autodesk: does it matter in an age of cloud computing?

Today the Ninth Circuit issued an opinion in the case of Vernor v. Autodesk [PDF], making an important ruling about copyright, software and the first sale doctrine. At a fundamental level, however, one could wonder whether the case is all that big a deal, since the first sale doctrine concerns rights that the owner of a physical copy of a work has. For software — especially these days when an increasing amount of software is either distributed over the internet or provided in the cloud — questions about the rights associated with physical copies are becoming increasingly irrelevant.

No doubt the distribution of physical copies of software is less important than it was in the past. But the Vernor case is worth looking at inasmuch as the ruling could translate into some potentially wacky arrangements depending on the desires of copyright owners and the accompanying restrictions they may put on the uses of their works. The holding of the case is not limited to software, but to any copyrighted work capable of being distributed in physical form. As Vernor’s attorney Greg Beck has written, “there is no obvious reason why other publishing industries couldn’t begin imposing the same terms. If they do, it may be the end of ownership of books and music.” (I’m proud to mention that Beck has been a guest blogger here at Internet Cases.)

What the case was about

Vernor bought several used copies of AutoCAD software from a customer of Autodesk, which is the software’s original distributor and copyright owner. Vernor then tried to sell those copies on eBay. Autodesk asserted that this sale of the copies violated Autodesk’s exclusive rights under the Copyright Act to distribute the software. So Vernor filed suit to ask the court to declare that such sales were not infringing. (Cases like these, where the accused goes on a preemptive offensive, are called declaratory judgment actions.)

The trial court found in Vernor’s favor. Autodesk sought review with the Ninth Circuit. On appeal, the court reversed, holding that Vernor could not rightly assert that his conduct was protected under copyright law’s first sale doctrine, and that Vernor’s customers’ installation of the software was not protected by the essential step defense.

These defenses failed because the court found that Vernor (and his customers) were merely licensees of the software, not owners.

The Software License Agreement

When Autodesk sold the software to CTA (the company from whom Vernor bought the discs before trying to sell them on eBay), it included a shrinkwrap license agreement, as well as a screen containing the same terms that appeared during the installation agreement.

The agreement provided, among other things, that the software was being provided under a limited license and that Autodesk retained ownership of the copyright in the software. It also placed onerous restrictions on the use and transfer of the software, e.g., the user could not rent, lease or transfer it to other users, or transfer it out of the Western Hemisphere, either physically or electronically.

The first sale doctrine

In general, the owner of a copyright in a work has the exclusive right to determine how copies of the work are distributed. The century-old first sale doctrine, however, is an exception to this general rule.

Under Section 109 of the Copyright Act (17 USC 109), the “owner of a particular copy” of a work may sell or dispose of his or her copy without the copyright owner’s authorization. Selling the copy of a painting you by at an art auction, for example, should not subject you to copyright infringement.

The essential step defense

The Copyright Act also provides that the owner of the copyright in a work has the exclusive right to make copies of the work. But there’s an exception to that exclusivity when it comes to software — the RAM copy made when the software is being used, according to Section 117 of the Copyright Act, cannot give rise to an infringement if that copying is being done by the “owner of a copy” of the software as an “essential step” in using the program.

The lower court’s decision

Vernor won at the lower court level because the court held that he was the “owner” of the copies of software he had bought, and therefore was protected by the first sale doctrine. His customers, also as owners, would be protected by the essential step defense.

Why these defenses failed

The court of appeals held otherwise, namely, that Vernor (as well as the company from whom he had bought the copies, and his customers) were merely licensees and not owners of the software. Only “owners” can claim protection under the first sale doctrine and the essential step defense.

The court looked to the circumstances surrounding the transfer of the software, and formulated the following test to determine that a software user is merely a licensee when the copyright owner: (1) specifies that the user is granted a license, (2) significantly restricts the user’s ability to transfer the software, and (3) imposes notable use restrictions.

In this case, all these criteria were met. Since neither Vernor nor the company he bought the software from were “owners,” these defenses were not available.

Room for criticism

The decision is subject to criticism in a number of ways. First, it might go against the sensibilities of many ordinary folks who think, quite naturally, that when you buy something (like a CD containing software), you own it. This case confirms that that is not always the case.

A second possible criticism is how the case makes possible some strange situations not involving software. What’s to stop hard copy book publishers from entering into shrinkwrap agreements with people who buy the books, purporting to retain ownership and calling the arrangement a license, while placing restrictions on use and transfer? Under the test in this case, it could be an infringement to lend or sell or otherwise distribute that book. Seems like a dangerous way to lock up information. But I guess it’s better than including curses as DRM.

Finally, the case lends itself to criticism in the way it gives great power to the software companies to really tie up tangible media to the detriment of consumers. Once an application has been sold once, where’s the harm to the software company if it’s transferred to someone else? The company has already been paid once, why must it insist on getting paid again? This grabbiness is really no surprise, though, especially when one sees that the likes of the Business Software Alliance joined as amici on the side of Autodesk.

In any event, tangible media for software is becoming a thing of the past. To the extent this case allows some negative consequences, the move to the cloud will mitigate that negativity.

CFAA requires intent to cause harm, not merely intent to transmit

Kalow & Springnut, LLP v. Commence Corporation, 2008 WL 2557506 (D.N.J. June 23, 2008)

The federal Computer Fraud and Abuse Act (CFAA), 18 U.S.C. §1030 et seq. creates civil liability for anyone who “knowingly causes the transmissions of a program, information, code, or command, and as a result of such conduct intentionally causes damage without authorization, to a protected computer.” Does this mean that the defendant has to intend to cause harm, or does it simply mean that the defendant merely intended to cause the transmission? The U.S. District Court for the District of New Jersey chose the former in the recent case of Kalow & Springnut, LLP v. Commence Corporation, 2008 WL 2557506 (D.N.J. June 23, 2008).

Plaintiff Kalow got hooked on the defendant’s software, which converted and stored plaintiff’s data in a proprietary format. In March 2006 the software stopped working because of a purported “time bomb” that defendant included in the application. To get the program working again, Kalow had to upgrade at a cost of over $15,000.

Kalow sued, and claimed, among other things, violation of the Computer Fraud and Abuse Act. The defendant moved to dismiss, and the court granted the motion with leave to amend.

In its complaint, Kalow had alleged that the defendant “intentionally transmitted a software code” to Kalow’s computer system and that the “software code [that defendant] intentionally transmitted to these computer systems caused damage to them.” The court found that these allegations were insufficient, as Kalow had not actually averred that defendant intended to cause harm.

The court rejected Kalow’s reliance on the case of Shaw v. Toshiba America Information Systems, Inc., 91 F.Supp.2d 926 (E.D.Tex.1999), concluding that the plaintiffs therein not only pled that the defendants knowingly had transmitted code, but that the defendants “knew [it] would cause the loss and corruption of data….” The court similarly rejected Kalow’s reliance on North Texas Preventive Imaging, LLC v. Eisenberg, No. 96-0071, 1996 U.S. Dist. LEXIS 19990, observing that the 1994 amendments to the CFAA embodied Congress’s aim to emphasize harmful intent and resultant harm rather than just unauthorized access.

Software distributor agreement violated New York’s Rule Against Perpetuities

McAllister Software Systems, Inc. v. Henry Schein, Inc., No. 06-0093, 2008 WL 922328 (E.D. Mo. April 2, 2008)

This case came out about three months ago, and I should have blogged about it then but it slipped by. It’s a quirky holding, what with the Rule Against Perpetuities, so it’s worth going back to pick it up. As it turns out, the Rule comes into play in real life, not just on the bar exam or in first year of law school Property class.

In 1990, McAllister and Schein entered into an Exclusive Distributor Agreement (EDA) whereby Schein would have the exclusive right to promote and sell veterinary management software. In 2006, McAllister sued, asking the court to declare the EDA void ab initio (from its creation), claiming that terms of the EDA violated New York’s Rule Against Perpetuities. (The EDA provided that New York law would apply).

McAllister moved for summary judgment on its claim, and the court granted the motion. And now for the legalese, because I know that’s the real reason you’re here.

The New York Estate Powers and Trust Law at Article 9, Section 1.1 prohibits the suspension of the absolute power of alienation of any present or future estate for a period beyond lives in being at the creation of the estate plus twenty-one years. Although usually thought of as a real property question, under New York law, the Rule applies to personal property as well. Yawn.

The court found that two provisions of the EDA violated the Rule because they permanently restrained McAllister from freely selling the software and developing and marketing new software in the same market space.

One provision provided that

Schein shall have the right to be the exclusive distributor of any other software designed for the Market that [McAllister Software] produces, develops, or acquires the rights to, hereafter.

Another provision stated that

McAllister Software will keep and maintain a current version of the Software’s source code and supporting documentation (“Escrow Materials”) in escrow with its attorney or a professional computer software escrow agent (“Escrowee”) …If [McAllister Software] fails to support the Software to the reasonable satisfaction of Schein and Schein’s customers or if [McAllister Software] ceases to do business, Schein shall have the right to immediately obtain the source code from the Escrowee, and [McAllister Software], by its execution hereof, hereby authorizes Escrowee to release the source code to Schein only under said circumstances.

Both the parties were corporations so there were no “measuring lives” to use for purposes of the Rule Against Perpetuities calculation. So the court simply considered whether the power of alienation was suspended for at least 21 years. This situation fit the bill, so the EDA was void.

New guide to open source issues

[Update: Thanks, Dad, for alerting me to the typo. It's a relief to know I'll always have at least one reader!] 

The Software Freedom Law Center, one of the leading influencers in the free and open source software movement, has released what appears to be a helpful guide on understanding the legal issues associated with the use and development of open source software. As anyone involved with open source (whether on the legal side or the technical side) knows, these kinds of issues are erudite at best, and incomprehensible at worst. Having a comprehensive review in one place provides a helpful tool. Thanks to my friend Alex Newson for pointing out this publication.