• When Do You Have an Exclusive Copyright License?

    by  • May 12, 2011 • copyright

    I’ve been hanging on to a decision from the Seventh Circuit since January, but it’s still worth some exposure because it explains one way to determine whether a copyright license is exclusive.

    A claim for copyright infringement may only be brought by the “legal or beneficial owner of an exclusive right under a copyright.” 17 U.S.C. § 501(b). To have standing a licensee doesn’t have to own all rights in a copyright, just some portion of them, but it must own that portion exclusively.

    HyperQuest, Inc. v. N’Site Solutions, Inc. is about the licensing of software called “eDoc,” used for collision claims management. Defendant N’Site had a non-exclusive license from the original owner of the software to use it internally. The original owner then sold the software, including the copyright, to Safelite Group Inc. Safelite then licensed the eDoc software to HyperQuest so that HyperQuest could commercialize it. HyperQuest thought N’Site was exceeding the scope of its license and sued N’Site. The district court kicked the suit, finding that HyperQuest was not an exclusive licensee and therefore did not have standing.

    The three rights implicated were the right of reproduction, the right to prepare derivative works, and the right to distribute. But how much exclusivity is enough? 

    [E]ach of the three rights it has identified can themselves be subdivided into smaller bundles of rights. Although one would reach the point of absurdity going too far down that line, it does not follow that any subdivision is too much. To the contrary, HyperQuest is correct to observe that subdivision is possible.
    The appeals court backed into the analysis by looking at the others who had rights – N’Site and Safeflite.  First, N’Site’s pre-existing license was for internal use only, without any right of reproduction, distribution, or the right to create derivative works. This license therefore did not disprove HyperQuest’s claim of an exclusive license in those fields.

    Next, the court looks at the rights retained by the licensor, Safelite.  Below is the text of the license:

    [2(a).] Safelite grants to HQ [HyperQuest] a perpetual (subject to termination only as provided in Section 4), worldwide, exclusive (except as set forth in Section 2(b)) license (i) to use the eDoc Software, in source code form, to support the development and commercialization of HQ Services, and (ii) to develop, modify and enhance the eDoc Software as HQ in its sole discretion determines; provided, that such modifications and enhancements are solely related to the development and commercialization of HQ Services. . . .

    [2(b).] Except as otherwise provided in this Section 2(b), HQ’s license to the eDoc Software is exclusive in the Territory. . . . Safelite shall have the right to use the eDoc Software and may license the eDoc Software to third parties solely for purposes of testing or development. . . .

    Notwithstanding the foregoing, HQ acknowledges the eDoc Software is licensed (“License”) to N’SITE Solutions, Inc. (“N’SITE”). HQ further acknowledges Safelite and N’SITE are presently negotiating the terms of a revised license (“Revised License”) regarding N’SITE’s use of the eDoc Software. . . . [I]n the event the Revised License is modified to include terms substantially different than the Revised License provided to HQ, Safelite will advise and include HQ in the determination of the final terms of the Revised License.

    While the license to N’Site itself didn’t destroy exclusivity, Safelite’s right to renegotiate it was. HyperQuest had no say in the rights that N’Site might ultimately end up with, but only the right to be “advise[d] and include[d].” “The fact that hindsight reveals that Safelite did not exercise its right to confer greater rights on N’Site does not matter. We must determine the scope of HyperQuest’s rights as of the time it received them. The agreement demonstrates that HyperQuest did not receive the degree of exclusivity in the realms of reproduction and distribution that it may have wanted.”

    An argument that one licensee has a claim against another simply if there is no overlap of rights licensed (like in patent law) didn’t fly:

    HyperQuest argues that as long as it has the right to exclude a third-party defendant from using the copyrighted software, then it holds the right to sue for infringement. But the right to exclude, standing alone, is not enough. Suppose that Amy, a copyright owner, licenses her copyright to Bill and promises Bill that she will not also give a license to Charlie. Under HyperQuest’s theory, if Charlie now uses the copyright without authorization, Bill would be entitled to sue for infringement. But this seems contrary to the intent of the Copyright Act; Amy’s promise of exclusivity extended only to Charlie–she gave Bill no right of exclusivity vis-à-vis Dave, Ellie, or Francesca. It therefore seems that Bill might have a contract action against Amy, but no more, if Amy is content to tolerate Charlie’s infringement. HyperQuest resists this conclusion with a number of citations to patent cases, but they are not helpful in this regard, because patent licensees who do not have sole authority over the patent are permitted to sue only if they join the patent owner.
    The district court’s decision that HyperQuest did not have standing was affirmed.
    HyperQuest, Inc. v. N’Site Solutions, Inc., Nos. 08-2257, 08-3979, 08-4176 (7th Cir. Jan. 19, 2011).

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