Property, intangible

a blog about ownership of intellectual property rights and its licensing

Breach of a Copyright License in State Court

It’s unusual to see what looks like a copyright case in state court, particularly one that reaches the highest court. It is Associated Management Services, Inc. v. Ruff, a license case in the Supreme Court of Montana.

Plaintiff Associated Management Services provides payroll and business services to its parent company Associated Employer, a non-profit association of regional employers. Diane Ruff was an executive at AMS and her son, Daniel Ruff, was a Support Services Specialist for AMS. In 2006 AMS offered to develop an internet-based payroll time-tracking program for a potential customer, but the customer decided against it. Daniel proposed to his mother than AMS develop the software anyway, but she declined due to cost. Daniel then offered to develop the software at his own expense if he would own it, and his mother verbally agreed. Diane had AMS’s counsel set up Ruff Software Inc. for Daniel’s business. In advance of offering the software, called TimeTracker, to AMS’s customers, AMS and Ruff Software entered into a written license agreement where AMS would pay Ruff Software 90% of fees collected for use of the software and in exchange AMS had a perpetual, limited license to the software.

From June 30, 2007 through December 15, 2015, AMS paid the royalties. In 2013 Diane left the company and its new executive director expressed concerns about the arrangement and tried to buy the software. This ended in Daniel leaving AMS, but they continued to use the software and pay royalties. About a year later AMS asked to buy the software again. Daniel asked for $120,000 and AMS counteroffered $60,000, saying that it was going to transition away to a newer technology needed to work with new HR software. Daniel counteroffered that AMS could either buy the software for $120,000, buy it for $60,000 a month and $3,000 a month after that until AMS developed its own software, or else pay nothing, terminate the license agreement, and Daniel would sell directly to AMS customers. AMS and Daniel couldn’t reach an agreement and Daniel left the company. AMS brought a declaratory judgment action, claiming that Daniel’s offer was an anticipatory breach of the agreement.

So we have what looks a lot like a copyright case in state court, but is instead a breach of contract case where the contract happens to be a copyright license. It turns out, and you can read the opinion for the details, that AMS’s ongoing use of the TimeTracker software and its development of replacement software was within the scope of the license. As you might expect, AMS challenged Diane’s authority to enter into the agreement with Ruff Software, but AMS lost.

Even the ownership claim, that the TimeTracker program was a work made for hire, didn’t turn on copyright law. Rather, Ruff’s employment contract language closedly tracked the definition of work made for hire in the Copyright Act and thus the ownership was decided as a matter of contract, with the software development easily outside the scope of Daniel’s employment. It is nevertheless a lesson on boots-and-suspenders, where reiterating a legal standard as a term of a contract gave the employer flexibility in its choice of court.

Associated Management Services, Inc. v. Ruff, DA 17-0102 (Mont. July 24, 2018).

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