Recent Rulings Highlight Software Licensing Disputes

Licensed computer software is fully integrated into many companies' business in today's technology-driven environment. Licenses for the software or related content are sometimes tenaciously negotiated.

Licensees, though, cannot withstand unexpected license terminations, because of the lead time it would take to substitute another product, and the costs and business interruptions associated with migrating data to a different platform.

Conversely, licensors are under pressure to maximize revenues and to ensure that licensees are in full compliance with the license scope. Often, even if the language of the agreement is carefully drafted, the licensor and licensee may interpret the same license clause, such as scope of use, differently.

This article discusses software licenses generally, the availability of copyright and contract claims in the event of a breach, and other areas of disagreement that may arise in a software-licensing dispute.

Defining a License

A software license is defined by the scope of use a licensee acquires from the licensor. The license should delineate precisely which rights are being transferred. The scope of use provision establishes, among other things, the:

• Organization licensing the software;
• Number of persons who may use the software;
• Types and numbers of computers on which the software may be run, and;
• Locations where the software may be used.

The scope may also limit the type of business applications or purposes for which the software can be used.

Scope, Rights and Permissions

A licensee may be limited to using the software for its own internal business use, or may be permitted to incorporate the software in its products; similarly, licenses may grant only the right to execute the licensed software, or also to copy, modify, maintain or create derivatives, or authorize third parties to do so.

In the end, the more accurately the licensee anticipates the license's desired uses, the less likely it will be that the software license will require later amendments or increased fees ' or be the subject of litigation.

A copyright owner that grants a non-exclusive license to use its copyrighted material generally waives its right to sue the licensee for copyright infringement and can sue only for breach of contract. See, Sun Microsystems Inc. v. Microsoft Corp., 188 F.3d 1115, 1121-22 (9th Cir. 1999). However, when a license is limited in scope and the licensee acts outside the scope, the licensor can bring an action for copyright infringement.

In evaluating a licensor's claims, a court must determine whether a licensor has established that the disputed terms of the license are limitations on the scope of the license, and thus an issue of copyright, or independent contractual covenants, and, in turn, are contractual rights.

In short, a breach of a covenant or a contractual promise remains a state contract claim, but if the licensee's improper action constitutes a failure to satisfy a condition of the license, then that use is unauthorized and may constitute copyright infringement. See, Graham v. James, 144 F.3d 229, 237-38 (2d Cir. 1998).

For example, in McRoberts Software Inc. v. Media 100 Inc., 329 F.3d 557 (7th Cir. 2003), the parties to a software agreement disputed whether the use of specific hardware in conjunction with the licensed software was a condition of the license, a breach of which would result in copyright liability.

The appeals court upheld a verdict against the licensee and concluded that it was reasonable for the jury to decide that the license limited the licensee's use of the software to Macintosh hardware only, and that the licensee exceeded the scope of the license and infringed the licensor's copyright through its unauthorized modification and distribution of the source code in hardware using a Windows operating system.

Several recent decisions have highlighted the barriers faced by licensors seeking to bring copyright claims for certain breaches of the license. One ruling is instructive in that it shows that a single contract can contain contractual covenants and limitations on the scope of the license.

In Netbula, LLC v. Storage Technology Corp., 2008 WL 228036 (N.D. Cal. Jan. 18, 2008), the court found that the limitation of one user per license in the agreement did not appear to limit the scope of the license, but was a separate contractual promise that could not form the basis of an infringement claim.

The court also found that the licensee's failure to pay for licenses to distribute additional copies of the software above and beyond those initially purchased was merely a contractual covenant regarding the way payment was to be tendered.

However, the court ruled that the provision that explicitly limited the operating systems that could be used with the licensed software limited the breadth of the license, though the court concluded that the licensor did not set forth sufficient evidence to succeed on this copyright claim.

Artistic License

In Jacobsen v. Katzer, 535 F.3d 1373 (Fed. Cir. 2008), the terms of the open-source Artistic License, which contained restrictions on the users' modification and distribution rights in the downloadable software, were deemed to limit the scope of the license and could form the basis of a cognizable copyright-infringement claim.

The appeals court vacated the lower court's order and remanded for further factual findings regarding the plaintiff's motion for a preliminary injunction.

On remand, the district court denied the plaintiff's motion for a preliminary injunction because the plaintiff's claims of irreparable potential harm based on defendant's alleged copyright infringement (i.e., delays and inefficiency in development, and time lost in the open-source development cycle), were not supported by evidence of actual harm, or any evidence of a real or immediate threat of imminent harm. See, Jacobsen v. Katzer, 2009 WL 29881 (N.D. Cal. Jan. 5, 2009)).

In a further proceeding, the district court granted the plaintiff's motion for summary judgment on his copyright claim on liability only, and also granted in part the plaintiff's motion for summary judgment on his Digital Millennium Copyright Act (“DMCA”) claim. See, Jacobsen v. Katzer, 2009 WL 4823021 (N.D. Cal. Dec. 10, 2009). The parties subsequently settled the dispute.

But back to the Federal Circuit's 2008 ruling in Jacobsen: The court found that the open-source license, on its face, created “clear and necessary” conditions by requiring users who modified or distributed the copyrighted software to make certain disclosures, and that the plaintiff had made out a prima facie case of copyright infringement based on the defendant's incorporation of the software into one of its own commercial software packages.

The court commented that the defendant acted outside the scope of the license when it modified and distributed the copyrighted materials without adhering to the stated license terms, and that compliance with such open-source requirements ' different from traditional licensing fees ' were entitled to no less legal recognition.

Most recently, in Experexchange Inc. v. Doculex Inc., 2009 WL 3837275 (N.D. Cal. Nov. 16, 2009), a software developer licensed its product under a non-exclusive license allowing the licensee to incorporate the software into a specific stand-alone program.

From the outset, however, the licensee transmitted royalty reports to the licensor that listed multiple products incorporating the software, yet the licensor did not notify the licensee that it was exceeding the scope of the license until litigation commenced eight years later. In the interim, the licensor continued to accept royalty payments for those products, repeatedly renewed the license agreement and encouraged the licensee to incorporate the software into additional products.

The court granted the licensee's motion for summary judgment, dismissing the licensor's copyright and trademark claims. Among other reasons, it found that the licensor's copyright and trademark claims were barred by laches due to the unreasonable delay in bringing suit.

The court found that the licensor had constructive notice that the licensee was incorporating the software into unauthorized products, and that the licensee would suffer prejudice as a result of the delay, given that during the past eight years, it expended resources in developing products in reliance on its presumed right to use the licensed software.

Additional Concerns

Beyond the principal issue of the scope of the license, there are other notable software-licensing terms and acts that become the center of disputes.

Payment terms. A number of courts have held that payment terms are covenants where permission for use precedes payment, forming a contract, but not a copyright-infringement claim. For example, in Madison River Mgmt., Co. v. Business Mgmt. Software, Corp., 387 F. Supp. 2d 521 (M.D.N.C. 2005), the licensor alleged that the licensee made excessive use of the licensed database without payment.