Property, intangible

a blog about ownership of intellectual property rights and its licensing

A Rare Section 117 Win

We have a rare win under Copyright Act § 117(a), a section of the Copyright Act that allows someone to copy or adapt a computer program under very narrow circumstances. Invocation of the section has been largely unsuccessful because it only applies where one is the owner of a copy of the program. However, most transactions involving software are characterized as a license, so the defense generally fails this threshold requirement. See, e.g., Vernor v. Autodesk, Inc., 621 F.3d 1102, 1111 (9th Cir. 2010); MDY Indus., LLC v. Blizzard Entm’t, Inc., 629 F.3d 928, 939 (9th Cir. 2010); DSC Commc’ns Corp. v. Pulse Commc’ns, Inc., 170 F.3d 1354, 1362 (Fed. Cir. 1999).

Defendant Micro Systems Engineering, Inc. (MSEI) manufactures medical devices and wanted to automate parts of its production. It solicited bids for a Test Handling System (THS). The project was going to be in two phases, where the first phase was to automate some product testing stations. It solicited bids for the first phase and plaintiff Universal Instruments Corp. won the bid. The project involved hardware and two software components, the software on the test station and server software with which the station software communicated.

Two years later Micro Systems solicited bids for the next phase, which was awarded to co-defendant Missouri Tooling & Automation (MTA). Micro Systems gave the station and server source code to MTA, as it was obliged to do under the phase 2 contract. MTA made minor changes to the server code during its work on phase 2, with testimony that it was nevertheless “pretty much identical” to the Universal version of the code.

Universal sued Micro Systems and MTA for copyright infringement and, after a trial, the district court granted Micro Systems’ motion for judgment as a matter of law. The decision was appealed to the Second Circuit.

The Equipment Purchase Agreement between Universal and Micro Systems said this:

[i]f [Universal] uses any Pre-Existing Intellectual Property in connection with this Agreement, [Universal] hereby grants MSEI, MSEI’s subcontractors, or suppliers, a non-exclusive, royalty-free, worldwide, perpetual license, to use, reproduce, display, of the Pre-Existing Intellectual Property for MSEI’s internal use only.

(The court didn’t explain why this code was “Pre-Existing Intellectual Property,” but apparently it was.) In a Final Acceptance Letter, Universal agreed

to provide the THS server code as is with the understanding that MSEI assumes the risk of invalidating the warranty in the event a change made by MSEI to the source code causes damage to any of the THS line hardware.

The court first held that the license grant in the Equipment Purchase Agreement made Micro Systems’ use of the code non-infringing; MTA was a “supplier” and the use was “internal.” Universal took a stab at a theory that “internal” meant “on premises.” For all of you writing software licenses for “internal use,” take note:

[Micro System’s] argument is premised on a physical internal-external dichotomy, whereby a supplier’s “use, reproduc[tion], [or] display” of Universal’s intellectual property on MSEI’s premises would be permitted, while the same use or reproduction off site would violate the license. But this cannot be the parties’ intent, because by its terms the license is “worldwide” in scope and extends to MSEI’s suppliers and subcontractors. A license cannot simultaneously be worldwide and limited to the physical confines of the licensee’s premises. The more natural understanding of “internal use” in this context is that the pre-existing intellectual property could be used by or for MSEI’s existing business — not for resale or for the use or benefit of others. In the context of computer software, the on-premises, off-premises distinction makes even less sense, given the nature of software and source code.

The court next considered the argument that the use of the software was a non-infringing use under Section 117 of the Copyright Act. That section says:

(a) Making of Additional Copy or Adaptation by Owner of Copy. Notwithstanding the provisions of section 106, it is not an infringement for the owner of a copy of a computer program to make or authorize the making of another copy or adaptation of that computer program provided:

(1) that such a new copy or adaptation is created as an essential step in the utilization of the computer program in conjunction with a machine and that it is used in no other manner ….

The first question was whether Micro Systems was “the owner of a copy of a computer program,” which is where the defense fails most of the time. In the Second Circuit, formal title is not required and instead “the courts should inquire into whether the party exercised sufficient incidents of ownership over a copy of the program to be sensibly considered the owner of the copy for purposes of § 117(a).” Krause v. Titleserv, Inc., 402 F.3d 119, 123 (2d Cir. 2005). Here,

MSEI paid Universal over $1 million for the combined hardware and software solution. Universal customized the software to serve MSEI’s precise needs. Universal expressly “provided” a copy of the server software to MSEI with the sole condition that “MSEI assume[d] the risk of invalidating the warranty in the event a change made by MSEI to the source code cause[d] damage to any of the THS line hardware.” Universal granted MSEI and its suppliers broad rights to the server source code — a perpetual, worldwide license to use, reproduce, and display the software for MSEI’s internal use. Although the terms of the EPA expired on December 31, 2012, MSEI’s rights to the software “continue perpetually and do not terminate upon completion of the services.” Nothing in the arrangement between MSEI and Universal indicates that MSEI was in any way restricted from discarding or disposing of the software as it wished. For all of these reasons, MSEI was an owner of the station and server source code under § 117(a).

The modifications made to the server code satisfied the second requirement, “created as an essential step in the utilization of the computer program in conjunction with a machine.” Controlling precedent in the Second Circuit allows modification where they are for “correcting bugs, performing routine tasks necessary to keep the programs up-to-date and to maintain their usefulness to [defendant], incorporating the programs into a new system implemented by defendant, and adding new capabilities to help make the programs more responsive to the needs of [defendant’s] business … adaptation of the copy of the[ ] software so that it would continue to function on the defendants’ new computer system [and] … the addition of new features, which were not strictly necessary to keep the programs functioning, but were designed to improve their functionality in serving the business for which they were created,” were all essential steps as long as they do not “harm the interests of the copyright proprietor.” That was the case here:

The modifications that were made were undertaken “to help improve efficiency of the line,” and to enable the server software to “support … communicating with all of the [new] stations.” The modifications were, therefore, “designed to improve [the server source code’s] functionality in serving the business for which [it was] created.”

Universal claims that MSEI’s provision of the source code to MTA — “a competitor” of MSEI — is exactly the sort of harm we indicated in Titleserv might present “[a] different scenario.” We disagree that this is the sort of harm envisioned by § 117(a). By its terms, § 117(a) permits the owner of a copy “to make or authorize the making … of another adaptation.” And, as we held above, Universal expressly authorized MSEI and its suppliers and subcontractors to use and reproduce the software at issue. True, alterations that “somehow interfere[ ] with [a copyright owner’s] access to, or ability to exploit, the copyrighted work” might render modifications non-essential under § 117(a), but where the copyright owner “enjoy[s] no less opportunity after … changes, than before, to use, market, or otherwise reap the fruits of the copyrighted programs that he created,” the changes may properly be considered essential under § 117(a).

MSEI’s use did not inhibit Universal’s ability to market or sell its server software to others, nor did it divulge sensitive Universal information or enrich MSEI or MTA at the expense of Universal. MSEI made and authorized the making of minor modifications, narrowly tailored to adapting the server software for the use for which it was designed — orchestration of the test handing stations to ensure the quality of MSEI’s implantable medical devices.

Accordingly, we hold that a reasonable jury could only find that the modifications made by MSEI were essential as they allowed the existing server software to interact with additional systems in the manner intended when the source code was developed for MSEI.

Universal Inst. Corp. v. Micro Sys. Eng., Inc., No. 3:13-cv-831 (GLS/DEP) (N.D.N.Y. Aug. 8, 2017).
Universal Inst. Corp. v. Micro Sys. Eng., Inc., No. 17-2748-cv (2d. Cir. May 8, 2019).

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