A Scheme to Steal Software?
by Pamela Chestek • January 3, 2023 • copyright • 0 Comments
I’ve been meaning to write about this case for a long time, and was finally inspired by the “Order Finding Defendants Entitled to Attorneys’ Fees,” entered after the case ended on a motion to dismiss, which tells you it went resoundingly badly for the plaintiff. Long-read warning.
Since the case ended on a motion to dismiss, the facts are as claimed by the plaintiff, which I’ve assembled from the decisions, the complaints and the motions. The individual defendants are people who participated in the development of the NGINX (pronounced “Engine-X”) web server software while employed by non-party Rambler Internet Holdings LLC. Rambler is Russian technology company and search engine. Plaintiff Lynwood Investments CY Limited acquired any rights Rambler had in the software in 2015.
According to Lynwood, defendant Igor Sysoev, a Russian national residing in Russia, developed NGINX in the scope of his employment, beginning in 2001. In 2004 he released a portion of the NGINX software under an open source license (to be exact, the 2-clause BSD license, aka the Simplified BSD or FreeBSD License) allegedly without authorization from Rambler. The case refers to different versions of NGINX, “Open Source NGINX” or “NGINX Software,” “NGINX Enterprise,” which was the “entire web server enterprise,” i.e., the NGINX open source software and presumably other components, and “NGINX Plus,” a proprietary version of NGINX Enterprise with extra features.
In the original complaint, Sysoev and other individuals named as defendants (the “Team”), “conspir[ed] to steal” NGINX Enterprise. They created legal entities, successfully obtained investment, and starting in December 2011 quit Rambler.
According to Lynwood, “Sysoev and Konovalov each misrepresented to Rambler that they were separating from Rambler to form a new company that would provide support services to the existing open source NGINX Software for third-parties.… Sysoev and Konovalov fraudulently concealed from Rambler that they were contemplating the prospect of potentially providing add-on services to the NGINX Software in the future. … In an attempt to avoid triggering suspicion at Rambler, Sysoev and Konovalov couched their statements as aspirational and deeply protective in nature.”
Defendant F5 acquired NGINX and it various corporate entities in March 2019 for $670 million. Lynwood claims to have learned of the defendants wrongful actions sometime after that, when a former NGINX team member blew the whistle to Rambler.
The corporate defendants in the case were F5, the NGINX companies and NGINX investors. Lynwood originally brought 26 claims against the many defendants, but the court ordered Lynwood to select ten claims to litigate through trial. Lynwood selected civil conspiracy, breaches of duty (or aiding and abetting them), tortious interference (contract and prospective business advantage), and direct copyright infringement. Motions to dismiss followed.
On a motion to dismiss filed by the corporate entities, the court dismissed all claims, with leave to amend, for three reasons:
First, these claims are untimely because they stem from the Team’s alleged theft of the NGINX Enterprise from Rambler, which occurred in 2011, nearly a decade ago. Second, the allegations of a fraudulent scheme to steal the NGINX Enterprise from Rambler, which underlie all these claims, do not satisfy the heightened pleading standard of Federal Rule of Civil Procedure 9(b). Third, each of these claims fails to state a claim.
With respect to the copyright infringement claim, the court’s full analysis was:
Lynwood has failed to plausibly allege that the F5 Entities and the Outside Investors copied the constituent elements of the work. To state a claim for copyright infringement, the plaintiff must “identify which Defendant is alleged to have infringed which particular copyright.” In the instant case, Lynwood does not identify which defendants allegedly infringed its copyright. Instead, Lynwood lumps all the defendants together without stating which entity or person copied the work.
The individuals also filed a motion to dismiss alleging lack of personal jurisdiction, which the court denied. However, the court dismissed the claims on statute of limitations grounds as it had done with the corporate defendants, with leave to amend.
The plaintiff refiled an amended complaint and all defendants filed a consolidated motion to dismiss for failure to state a claim. Lynwood now alleged that:
Rambler “made a business decision to permit Sysoev to continue releasing Open Source NGINX … because such releases highlighted the technical achievements of Rambler and its employee Sysoev, which inured to Rambler’s benefit for attracting top software programmers.” Lynwood further alleges Rambler’s Chief Technology Officer (“CTO”), Konovalov [a co-defendant], “repeatedly misrepresented to Rambler that Open Source NGINX had no independent commercial value or prospects for monetization” and “that its only use for Rambler was to solve Rambler’s internal technical issues … and to burnish Rambler’s reputation as a worldwide leader in technology innovation.” As a result, Lynwood alleges, “Rambler never undertook efforts to monetize or commercialize Open Source NGINX” and “did not object to Konovalov and Sysoev earning an income off of Open Source NGINX” when they later separated from Rambler in 2011.
Lynwood dropped the civil conspiracy claim, so nine claims remained. Lynwood still could not state facts that survived the statute of limitations for most of the claims, but did succeed with two—a claim for tortious inference with contract, based on NGINX’s continuing sale of the NGINX software, and the copyright infringement claim.
The reasoning on the copyright infringement claim is a little disjointed. When considering whether the plaintiff had a timeliness problem, the court considered the gravamen an ownership question:
The statute of limitations for copyright infringement is three years, see 17 U.S.C. § 507(b), and where, as here, “creation rather than infringement is the gravamen of an authorship claim, the claim accrues on account of creation, not subsequent infringement, and is barred three years from ‘plain and express repudiation’ of authorship” …
The defendants alleged repudiation when Sysoev released Open Source NGINX without authorization from Rambler and with a copyright notice saying “Copyright (C) 2002-2004 Victor Syseov.” He also gave an interview to Free Software Magazine in 2012 allegedly claiming ownership of NGINX.
Under US law the copyright notice might be considered an express repudiation, but we have a twist. Syseov is a citizen of Russia and wrote the software while in Russia. Under choice of law, the law of the country with the most significant relationship to a work controls the question of ownership. The court held that Russia had the most significant relationship to the property and therefore Russian law governed. So while in the US the copyright notice states the name of the owner of the copyright, under Russian law the notice states the name of the owner or the author. The copyright notice therefore was not an express repudiation by Syseov. His claim in the magazine article also wasn’t express repudiation; repudiation must be communicated to the claimant and Lynwood did not allege that Rambler or Lynwood ever saw the article.
As a result, “it is not apparent on the face of the AC [Amended Complaint] that the Fourteenth Claim for Relief is barred by the statute of limitations.”
Instead, the court dismissed it under Rule 12(b)(6) for failure to state a claim. In the 12(b)(6) analysis, the court’s attention is no longer on ownership, but on who is, or who is not, doing the infringing. The first decision informed Lynwood that, on refiling of the complaint, the plaintiff
“must identify which defendant is alleged to have infringed which particular copyright,” found Lynwood “lumped all the defendants together without stating which entity or person copied the work.” Moreover, Judge Koh found Lynwood’s allegations that Runa Capital and E. Ventures “bought into the plan and funded it,” rather than “copied the work,” to “belie the notion that all defendants copied the work.”
In dismissing the claim a second time,
The Court first notes that Lynwood fails to adequately identify in the AC which particular work or works were copied. Lynwood now identifies the copyrighted work as “Pre-2012 NGINX Software,” which it defines as “NGINX Plus and Open Source NGINX, in both source code and executable form, conceived and/or developed before the end of 2011, when Sysoev left the employ of Rambler.” Although Lynwood argues “the term ‘Pre-2012 NGINX Software’ is precise because it identifies the specific iterations of Open Source NGINX and NGINX Plus that Sysoev wrote as works for hire under Russian law while he was employed by Rambler,” no such specific iterations can be identified from the paragraphs Lynwood cites in support of such allegation. Moreover, Lynwood’s definition fails for the additional reason that it includes software “conceived” but not developed at Rambler. See L[aws] v. Sony Music Ent., Inc., 448 F.3d 1134, 1140 (9th Cir. 2006) (noting “copyright protects original works of authorship fixed in any tangible medium of expression”).
We’ll stop here. Typically, the copyright registration would define the scope of the claim. The court didn’t mention it, but here there was no copyright registration. Lynwood alleged in the complaint that the first publication was in Russia, and therefore no registration was required.
Nevertheless, this description sounds pretty specific to me. Surely the pre-2011 version of at least the open source portion of the the software code exists—that’s kind of how open source works. This seems specific enough that the exact scope of the copyrighted work should be fleshed out in discovery, not be the basis for dismissal.
Continuing, Lynwood also maintained in the amended complaint the sin of claiming copyright over software that was “conceived,” but I guess not written, by Sysoev, another reason the court gave that the description of the infringed work wasn’t specific enough.
Lynwood also still failed to describe more clearly who was doing the infringing. It lumped together all the individuals, all the NGINX entities, and F5 (but not the investors), claiming that they collectively introduced 20 or more releases of NGINX Plus. But “such collective allegations do not suffice to plead a viable infringement claim.” The court therefore dismissed the copyright infringement count, and the tortious interference with contract claim was also dismissed under Rule 12(b)(6).
Because Lynwood had been warned of the possibility in the earlier dismissal, this time the repleaded, but insufficient, claims were dismissed with prejudice. The parties voluntarily dismissed the remaining claims with prejudice. Lynwood has appealed the court’s dismissal.1
But I’m still confused by the copyright infringement claim. The works allegedly infringed were “NGINX Plus and Open Source NGINX.” Taking NGINX Plus first, in all the tellings of the story the software was proprietary. I could get on board with the theory that Rambler owned it as a work made for hire, Lynwood acquired it from Rambler (although they didn’t know they did until the whistleblower told them about the secret development) and that NGINX’s exploitation is a copyright infringement of the Rambler copyright.
But what I can’t get onboard with is that NGINX was infringing the copyright by using the Open Source NGINX. In the Amended Complaint, Lynwood states Rambler “made a business decision to permit Sysoev to continue releasing Open Source NGINX … because such releases highlighted the technical achievements of Rambler and its employee Sysoev, which inured to Rambler’s benefit for attracting top software programmers.” This seems simple enough—even if Rambler didn’t make the initial decision to license the software under an open source license, it ratified the decision by continuing to allow the license to be used. An open source license is perpetual, so thereafter NGINX couldn’t infringe the copyright in it, assuming that they met the very trivial license compliance requirements of the FreeBSD license.
In the amended complaint Lynwood alleges that Rambler was bamboozled into releasing NGINX as open source software by defendant Konovalov, who was the chief technology officer. Lynwood’s narrative arc is that Lynwood purchased Rambler in 2019 and shortly thereafter, through a whistleblower, learned of a scheme operating from 2004 through 2011 thus: Sysoev developed the NGINX web server software; he and a whole crew of schemers recognized that it had commercial value; they hoodwinked Rambler into making it available under an open source license; they developed proprietary additions surreptitiously while still employed by Rambler; they departed Rambler and, although they disclosed that they were starting up a business to support the open source NGINX software, they didn’t disclose enough of what they were up to for Rambler to see that it was no good; and payday! NGINX therefore was wrongfully licensed under an open source license and Lynwood is entitled to $750 million AND the defendants have to destroy all copies of the software, including Open Source NGINX. Take note that all of this is a windfall for Lynwood, which presumably acquired Rambler (or the software, it’s not entirely clear) knowing that the NGINX software, even though owned by Rambler, was under a permissive open source license and therefore of little book value. But now they think that they can wind it all back to 2004 before the first release of NGINX.
Maybe it is all true, but I have a hard time believing Rambler was so naive, and could be so fooled by one person, that the open source licensing, upon which the whole case largely rests, was the result of some unlawful act. Instead, it’s more plausible that Rambler was a search engine provider and didn’t care so much about the NGINX software because that’s not how they directly generated revenue. Rambler recognized that releasing the software under an open source license had the indirect benefit of attracting developers. That’s a very solid, knowing rationale for licensing the software under the FreeBSD license. Lynwood would have to get past that before it could unwind the open source license.
And the final decision in the canon is an award of attorneys’ fees to the defendants on the copyright infringement claim. Where the defendant is the prevailing party, no registration is required. Latin Am. Music Co. v. Am. Soc. of Composers, Authors and Pubs. (ASCAP), 642 F.3d 87, 90 (1st Cir. 2011).
Here, the Court finds Lynwood’s copyright claim, although not frivolous, was objectively unreasonable. First, Lynwood, from the outset, should have been aware of the grounds on which its copyright claim was dismissed, namely, that asserting a copyright infringement claim without properly identifying the copyrighted work at issue, or which defendant infringed which particular copyright, rendered its chances of success slim to none. … In particular, Lynwood, despite having such deficiencies pointed out and being afforded leave to amend, continued to include in its definition of the copyrighted work software “conceived” but not developed, see 17 U.S.C. § 102(b) (stating “[i]n no case does copyright protection for an original work of authorship extend to any idea, procedure, process, system, method of operation, concept, principle, or discovery”), failed to “identify which defendants allegedly infringed its copyright” (see March 25, 2021, Order, 30:26-31:1), and, most importantly, was unable to “identify with specificity which work or works were copied.”
Deterrence was necessary:
Even in the absence of frivolous or unreasonable claims, a successful defense can further the interests of the copyright act by defeating an over-aggressive copyright prosecution exemplified by pursuit of grossly overbroad monetary and injunctive relief. … Here, defendants argue, Lynwood pursued exactly that, specifically, by seeking $750 million and destruction of all copies of NGINX software. In support thereof, defendants have submitted evidence, to which Lynwood makes no objection, that any loss Rambler arguably incurred was no more than around $810,000, a sum constituting less than one percent of the $750 million in damages Lynwood claimed, and, as defendants also point out, Lynwood filed this lawsuit only after F5–a publicly traded U.S. company–acquired NGINX for $670 million in 2019.”
Additionally, defendants contend, Lynwood … pursued this lawsuit with the stated aim of effectuating the destruction of the NGINX software, which destruction, defendants assert, would have significantly impeded creative works and potentially disrupted a significant portion of web serving across the worldwide web, given that NGINX, which NGINX Inc. has operated … for the last decade, is the worlds’ most widely used web server, on which millions of people and businesses rely.
Lynwood does not dispute the above contentions.
(Quotation marks omitted.) The court therefore awarded attorneys’ fees in an amount to be determined. While I disagree that the copyright claim was objectively unreasonable for the reasons the court gave, I agree it was pursued with the aim of destroying the NGINX software. I’m not sure that copyright damages was the right hook for damages, but probably the easiest.
So who’s the one stealing?
Lynwood Investments CY Limited v. Konovalov, Civ. No. 5:20-cv-03778-LHK, Order Granting Motions to Dismiss With Leave to Amend (N.D. Cal. Mar. 25, 2021)
Lynwood Investments CY Limited v. Konovalov, Civ. No. 5:20-cv-03778-LHK, Order Granting Motion to Dismiss With Leave to Amend (N.D. Cal. Mar. 30, 2021)
Lynwood Investments CY Limited v. Konovalov, Civ. No. 3:20-cv-03778-MMC, Order Granting Motion to Dismiss (N.D. Cal. Aug. 16, 2022)
Lynwood Investments CY Limited v. Konovalov, Civ. No. 3:20-cv-03778-MMC, Amended Order Finding Defendants Entitled to Attorneys’ Fees; Affording Defendants Leave to Supplement Motions as to Amount; Setting Briefing Schedule (N.D. Cal. Dec. 20, 2022)
Lynwood Investments CY Limited v. Konovalov, App. No. Civ. No. 3:20-cv-03778-MMC , Notice of Appeal (N.D. Cal. Sept. 14, 2022)
This work is licensed under a Creative Commons Attribution-NoDerivatives 4.0 International License.
- The trademark infringement claim seems like the most viable to me, but it’s been conceded. Lynwood alleged trademark infringement in its complaints but didn’t assert those claims when the court limited their claims. Lynwood also filed petitions to cancel the NGINX trademark registrations after the original complaint was filed, but withdrew the petitions after the federal complaint was dismissed. Maybe Lynwood believes that there wasn’t business value it depriving NGINX of the ability to call the software NGINX. ↩