Dun & Bradstreet Software Services v. Grace Consulting

Citation

Dun & Bradstreet Software Servs., Inc. v. Grace Consulting, Inc., 307 F.3d 197 (3d Cir. 2002) (full-text).

Factual Background

Plaintiff, Geac Computer Systems Inc. (Geac), formerly known as Dun & Bradstreet Software Services, Inc., is the owner of certain proprietary, copyrighted software titled Millennium. Millennium contains highly confidential information and trade secrets that were designed and developed by Geac at great effort and expense. Geac complained that Defendant, Grace Consulting Inc., its founder, president, and chief executive officer Anthony Ilutzi, and a related enterprise, Grace Maintenance, (collectively Grace) infringed on Geac’s copyrighted software while providing consulting and maintenance services to companies licensed by Geac to use its software.

Geac’s system known as Millennium keeps track of a host of business information such as account payables, taxes payable, accounts receivable, fixed assets, and others. Trade secrets and highly confidential information are found in a wide variety of materials relating to Millennium. Geac faces substantial competition for all of its Millennium products, and its confidential information and trade secrets allow it to compete effectively and advantageously.

Grace is engaged in the business of computers and software consulting as well as providing a program of maintenance support services for Millennium. In 1993, Grace began to offer and perform services for Geac’s licensees, including customizing Millennium software for their specific needs, fixing “bugs” in Millennium software, providing tax and regulatory updates, and modifying Geac’s programming language code. Grace then began offering Millennium licensees Grace’s “Remain on Release” program, which provided Geac customers with Grace’s own version of Geac’s W-2 program. Grace’s W-2 program was initially developed by Cook & Reynolds Services, Inc., a company formed by two former Geac employees. Grace purchased the rights to CNR’s W-2 programs, revised it, and renamed the individual programs to begin with a “GMI” prefix instead of “CNR.”

Geac brought suit against Grace in March 1994 . Grace filed an answer together with counterclaims for breach of contract and tortious interference with existing contractual relationships.

Geac’s Licensing Agreements

Geac had two standard Millennium licensing agreements that were at issue: the DBS and the McCormack and Dodge agreements. The DBS License Agreement prohibited anyone from modifying Geac’s Millennium software without Geac authorization. The M&D License Agreements permitted a third party consultant, in limited instances, to modify the Geac code, provided it satisfied the Agreement’s non-disclosure and work for hire prerequisites for accessing the code. Both of Geac’s License Agreements prohibit the removal of the Geac code from the licensee’s site and bar the distribution of modified versions of the code. It was undisputed that approximately 35% of Grace customers were subject to the DBS license agreement and 65% were subject to the M&D license agreement.

Geac alleged that it never authorized defendants to market or license Millennium software or upgrades, either to the general public or to specific business clients. Geac further alleged that Ilutzi and Grace illegally and without Geac’s permission copied and used the confidential information to solicit directly in competition with Geac existing Geac licensees and provide them with software and maintenance services for Geac software. Geac alleges as a result, Grace has been able to offer their services at prices significantly lower than those charged by Geac because it was able to avoid the substantial investment in time and money that Geac found necessary to develop the Millennium confidential package.

Trial Court Proceedings

Geac’s claims of copyright infringement can be divided into three general categories. First, Geac claims that the defendants have infringed upon the aforesaid copyrights not only by copying and obtaining unauthorized copies of Millennium programs and documentation but loading such copies into computer memory and delivering unlawful copies to Grace’s customers, and amending the Millennium software. Second, it claims that Grace’s W-2 program contains literal copying of Geac’s PAYTXABR package. Third, it also asserts that Grace’s use of the Copy and Call commands to access Geac’s software infringes.

Grace stated that it had entered into one or more Consultant’s Confidentiality Agreements with Geac, but denies generally all other allegations of copyright infringement alleged in the complaint. It claims that the consulting services it performed did not infringe because: (1) no copying was performed; (2) no derivative works were created; (3) any copying, if performed, was inadvertent and de minimis; (4) the “call and copy” command used in providing services were non-infringing; (5) Geac licensing agreements authorized its customers to use maintenance services like Grace; and (6) the services Grace performed comported with “standard industry practice” and Geac’s licensing agreements.

Grace pled counterclaims for breach of contract and tortious interference. The District Court struck the following defenses: (1) copyright misuse defense; (2) de minimis defense; (3) waiver defense; (4) estoppel defense; (5) 17 U.S.C. §117 defense; and (6) fair use defense.

Geac presented two motions for judgment as a matter of law during trial and one after the jury returned its verdict for the defendants. The trial court denied each of them. In denying plaintiff’s motion for judgment as a matter of law, the trial judge stated that she believed there was ample evidence on which the jury could have decided that the defendants were not liable for copyright infringement. She offered no explanation on what evidence she relied for her conclusion. The court granted summary judgment to the providers on the misappropriation claim and entered judgment on a jury verdict in favor of the providers on the infringement claim.

Appellate Court Proceedings

Motion for judgment as a matter of law

The Appellate Court reversed an order denying judgment as a matter of law, because upon review of the record, it was apparent that the verdict was not supported by legally sufficient evidence. The Court held that when the record was distilled, filtered, and shaken down, it was apparent that there is no legal basis for dismissal of the copyright infringement claim.

Copyright infringement

To establish a claim of copyright infringement, a plaintiff must establish: (1) ownership of a valid copyright; and (2) unauthorized copying of original elements of the plaintiff's work. In the present case, the ownership of the copyrighted material is undisputed, as is its validity. Plaintiff's claim of copying is supported by evidence from Grace's president and its other witnesses.

After Grace expanded its activities beyond maintenance service to include providing Geac's customers with software, Geac viewed the expanded activities as a violation of its exclusive rights under the Copyright Act to reproduce and distribute derivative works of its Millennium programs. Grace offered and sold a program that it obtained by copying and modifying Geac's copyrighted Millennium product known as PAYTXABR. Grace distributed and sold it as its CNRTXABR program, which it acquired from Cook and Reynolds.

Reynolds testified that the W-2 program was in no way similar to the Millennium program, but his own testimony contradicted his statement. Reynolds stated that he had made a copy of the PAYTXABR program and renamed it CNRTXABR and also acknowledged that it should have stayed with the client and the program should not have been distributed with the other code. Ilutzi further admitted that CNRTXABR was created by copying and modifying Geac's program PAYTXABR and that Grace's "CNRTXABR was used in the making of GMITXABR," both of which supplied the same tax program. Ilutzi conceded that CNRTXABR should not have been in the CNR W-2 program because it was copied from PAYTXABR. Grace's expert acknowledged that Grace's distribution was contrary to "standard industry practice" but did not consider the distribution a copyright infringement because it was de minimis.

In supporting its de minimis defense, Grace asserts that the quantitative infringement amounted to only twenty-seven lines out of 525,000 lines. The court found the argument to be irrelevant as a matter of law. A de minimis defense does not apply where the qualitative value of the copying is material. The Appellate Court agreed with the trial judge appropriately striking the de minimis defense with respect to PAYTXABR from her jury charge, and rejected the argument as well.

Geac's second claim of infringement arises out of Grace's consulting and maintenance activities. Geac argues that Grace's witnesses admitted to copying Geac's copyrighted source code while fixing bugs, creating tax updates, customizing Millennium, modifying the program language code, and compiling, link editing and testing Millennium. Ilutzi admitted to modifying many of Geac's programs in all twelve millennium applications. Grace consultants modified DBS's source code and acknowledged that it was cheaper for his customers for his consultants to copy and modify Geac's source code than to create a program from scratch.

Grace argues that both the terms of the License Agreements and Geac's course of conduct confirm that Geac expressly permitted computer consultants to provide maintenance to its licensees. The appellate court reviewed the License Agreements and found them to be crucial to the trial of the case. The record supported plaintiff's arguments that many of the defendant's witnesses admitted to conduct which in the absence of authorization from Geac, amounted to infringement of Geac's copyrights. The License Agreements provided that third parties, including customer consultants, may have access to confidential information, including the Millennium program, upon execution of a non-disclosure agreement acceptable to Geac prior to disclosure. Grace failed to point to any evidence of non-disclosure agreements signed by it or its employees with any of its customers; it claims a blanket authorization under the "Hutto-VA" agreement permitting access to Millennium.

The Appellate Court saw no error in the District Court's conclusion that "there's not a requisite quantum of evidence that the contract entered into between the parties had a meeting of the mind." Grace them emphasized that it was industry practice to allow programs off-site and that customers required such off-site work, especially in emergency situations. However, the Appellate court stated that custom and practice in the computer industry, and the evidence of it in this record is vague and conclusory, is no authority to disregard or trump the specific terms of a valid license agreement] or the provisions of the Copyright Act. Extrinsic evidence may not be used to nullify or modify the terms of a valid, unambiguous license agreement.

The Copyright Act gives the copyright owner the exclusive right to prepare derivative works based on the copyrighted material. The District Court defined a derivative work to the jury as "a new created work based on the original copyright work." Grace's W-2 program using Copy and Call commands copies Geac's computer copyright code. Thus, it is a derivative work; making Grace's W-2 programs infringing, derivative works of Geac's copyrighted software.

Geac's third claim was Grace's use of Copy and Call commands to Geac's W-2 program. Grace contends that the Call and Copy commands are used to access customer data, that such data belongs to the customer, and is not protectable. Further, the Copy command does not modify the code but admitted that its W-2 programs required copying Geac's software and link editing the Geac code. Geac argued that the trial admissions compel the conclusion that, "as a matter of Law," Grace's W-2 programs are infringing because they contain copies of Geac's copyright code and are derivative works of Millennium. The Appellate Court agreed.

The interpretation of the License Agreements was a question of law and not of fact. The defenses raised by defendants were unacceptable as a matter of law. The Appellate Court reversed the Order of the District Court denying Geac judgment as a matter of law on its copyright infringement claims, stating that it was evident that the verdict was not supported by legally sufficient evidence.

Misappropriation of trade secrets

Geac also pled a state law claim for misappropriation of trade secrets with respect to Grace's use of Millennium software. Geac argued that Grace breached multiple duties of confidentiality in creating and distributing its W-2 programs and other derivative works. The District court granted Grace’s motion for summary judgment because it held that Geac’s claim was preempted by § 301 of the Copyright Act, 17 U.S.C. §301.

The Appellate Court reviewed de novo as to the question of law whether §301 preempts a state cause of action for misappropriation of trade secrets. Geac argued that “the district court erroneously concluded that Geac’s software... claims were based simply on the use and copying of the software, rather than Grace’s breach of its duties to keep Geac’s software and client list confidential.” The Appellate Court agreed that the extra element precludes preemption, that if their misappropriation of trade secrets claim were based on such breach of duty of trust and confidentiality, it would survive preemption.

Grace did not dispute that the customer lists were not subject to copyright and presumably escape preemption for that reason pursuant to § 301 (b) (1) nor did it contest that customer lists could constitute valid trade secrets. In entering summary judgment, the District Court failed to consider evidence that Geac’s customer lists were not copyrightable material and, therefore, that claims alleging a violation of state laws were not preempted. The claims that Grace misappropriated Geac’s client lists were not preempted and the District Court as a matter of law should not have dismissed them.

Because of the error of law and disputed issues of material facts, the entry of partial summary judgment was improper and was vacated. The issue of misappropriation of trade secrets was remanded to the District Court for further proceedings.

The Appellate Court concluded that Grace and Ilutiz’s cross appeal on numerous issues did not have any merit. Furthermore, it held that the District Court erred in denying Geac’s motion for judgment as a matter of law. The District Court’s judgment rejecting Geac’s claim for misappropriation of trade secrets was vacated and the District Court’s order dismissing defendant’s counterclaims was affirmed.