Category Archives: License v. Contract

Third Circuit provides gloss on Warner-Lambert

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Shourin Sen - 3 September 2009 – 9:00 am
Filed under License v. Contract, Licensing, Trade Secret

Nova Chemicals, Inc. v. Sekisui Plastics Co., Ltd., 2009 WL 2634762 (3d Cir. 2009)

There was an interesting decision from the Third Circuit last week (Jordan, Nygaard, Fuentes writing) that addressed what types of provisions in a trade secret licensing agreement are binding after the trade secret is no longer confidential. To briefly review, if you enter an agreement to license a copyright or patent and the term in the intellectual property right expires, you’re no longer obligated to continue to make royalty payments. The licensing agreement would terminate with the expiration of the exclusive rights in the underlying patent or copyright. See, e.g., Brulotte v. Thys Co., 379 U.S. 29 (1964) (finding that the obligation to pay  royalties in return for the use of a patented device may not extend beyond the life of the patent.)

Things aren’t as simple in the context of trade secret, which has a potentially indefinite term. The landmark case in this area is Warner-Lambert Pharm. Co. v. John J. Reynolds, Inc., 178 F.Supp. 655, 665-66 (S.D.N.Y.1959), aff’d 280 F.2d 197 (2d Cir.1960) (per curiam) (adopting District Court opinion), where a company licensed the secret formula for Listerine for seventy-five years. After the formula was disclosed to the public, the licensor refused to make additional payments for the former trade secret. The S.D.N.Y. held that the licensor was still obligated to pay for the license, finding that “one who acquires a secret formula or a trade secret through a valid and binding contract … [may not] escape from an obligation to which he bound himself simply because the secret is discovered by a third party or by the general public.”

In Nova Chemicals, inc. v. Sekisui Plastics, Inc., a company agreed to license proprietary technology to produce a Styrofoam product. The propreitary technology was protected by patent and trade secret, both of which expired during the course of the agreement; the patent via term, the trade secret via disclosure. 

The licensing agreement between the two parties stated that the licensor couldn’t market the Styrofoam products derived from the trade secret in Asia. The Licensor brought suit seeking a declaratory judgment that it could market in the region. 

The Third Circuit found that, unlike in Warner-Lambert and Aronson v. Quick Point Pencil Co, the “language of the License Agreement, and its surrounding circumstances” showed that the parties didn’t intend the Asia provision “to survive the expiration of Sekisui’s intellectual property.” The Court instead read the provision as a limitation on the scope of the license, and not as bargained for consideration for disclosure.  As such, the Court found that NOVA chemicals could market products that incorporated the disclosed trade secret in Asia.

In both Aronson and Warner-Lambert, the courts focused on aspects of the agreements that evinced an intent to create ongoing obligations after the life of the relevant intellectual property. In Aronson, the parties understood that the relevant trade secrets would be destroyed as soon as the product was manufactured. 440 U.S. at 259. Nevertheless, the parties explicitly agreed to ongoing royalty payments even if a pending patent application failed. Id. Further, the parties clearly delineated the consideration applicable to the patent-license portion of the agreement and the trade-secret license portion of the agreement. Id. In Warner-Lambert, Warner-Lambert agreed
to ongoing royalty payments as long as it continued to manufacture Listerine, instead of setting a fixed end date or otherwise limiting its obligation to continue paying. 178 F.Supp. at 660. In both cases, the Court found that the licensor agreed to disclose secret information to a manufacturer in exchange for ongoing consideration.

Here, in contrast, nothing in the License Agreement suggests that the parties intended any ongoing obligations with respect to trade secrets after the 1995 termination of NOVA’s obligation to maintain the secrecy of Sekisui’s technical information. While Sekisui argues that it only agreed to disclose its trade secrets and to train NOVA personnel in exchange for NOVA’s ongoing promise to stay out of Asia (in addition to lump sum and royalty payments), the terms of the License Agreement belie this argument. The Asia exception appears as a limitation on the scope of NOVA’s rights under Sekisui’s intellectual property, rather than as an independent restriction or as consideration for trade secret disclosures.FN13

Further, Sekisui disclosed its trade secrets during the option period. If NOVA had chosen not to exercise its option to acquire a ten-year license to manufacture Piocelan products, Sekisui’s trade secrets would have been protected for only five years after NOVA rejected the license. In this circumstance, the Asia exception never would have come into force at all; NOVA would have been undisputably free to make use of Sekisui’s trade secrets after five years and to market Piocelan products anywhere in the world as soon as Sekisui’s patents expired. Thus, if it was intended as consideration at all, the Asia exception could only have been consideration for a license under Sekisui’s patent rights and to use Sekisui’s trade secrets during the period they remained protected, rather than for the initial disclosure of those trade secrets.

*10 Finally, none of the extrinsic evidence supplied by the parties suggests that they intended the Asia exception to be a stand-alone provision, or any terms of the License Agreement to survive the expiration of Sekisui’s patent rights and NOVA’s secrecy obligations with respect to the trade secrets.

RealNetworks preliminarily enjoined from distributing RealDVD software

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Shourin Sen - 13 August 2009 – 10:00 pm
Filed under DMCA, License v. Contract, Preliminary Injunction

RealNetworks, Inc. v. DVD Copy Control Association, Inc., 08-04548 MHP (N.D. Cal. 2009)

The story

RealNetworks distributed the software RealDVD which, among other things, would play a DVD and store a copy of it to a hard drive to be played at a later time. RealNetworks obtained a license to use CSS, the industry standard DRM encryption technology, at the not inconsequential price of $30k. When RealDVD saved a DVD to a users hard drive, it saved the content along with CSS and its own proprietary DRM. The protection measures were set to limit the playback of ripped DVDs to five hard drives. RealNetworks also required an end-user agreement that made users verify  that they would only rip copies of DVDs that they owned, not rented, and that they would limit their use of the saved copies to personal use.

Breach of the licensing agreement

The CSS licensing agreement required that “video content or keys initially encrypted using CSS not be carried on a user accessible bus.”  RealNetworks argued that it was not in breach of the provision because its own DRM limited access to CSS and content saved on a user hard drive. The Court disagreed, noting that Real’s own layer of protection was “inconsequential” for interpreting the licensing agreement. The Court also found that RealNetworks had breached its covenant of good faith and fair dealing.

DMCA Violation under 17 U.S.C. 1201(a)

Section 1201(a) provides that “[n]o person shall . . . offer to the public . . . any technology . . . that (A) is primarily designed or produced for the purpose of circumventing a technological measure that effectively controls access” to a work protected under copyright. RealNetworks argued that since CSS has been cracked, it did not “effectively” control access for purposes of the Section. The Court rejected the argument, citing 321 Studios v. Metro Goldwyn Mayer Studios, Inc., 307 F. Supp.2d 1085, 1095 (N.D. Cal. 2004) (Illston, J.) for the proposition that that CSS technology still effectively controls access to DVD content for the “ordinary customer.”

Fair Use

RealNetworks argued that it could not be held liable for a DMCA violation because the user copying made possible by its technology was shielded from liability as a non-infringing fair use. In making this argument, RealNetworks relied on 17 U.S.C. 1201(c) which states, in part, that nothing in the DMCA should be read to “limit defenses to copyright infringement, including fair-use.” The Court rejected this argument finding that “[f]air use is not a defense to trafficking in products used to circumvent effective technological measures that prevent unauthorized access to, or unauthorized copying of, a copyrighted work under sections 1201(a) or (b).” The Court noted that fair use only “enters into the picture in the context of the act of circumvention itself.”

The standard for a preliminary injunction

The Court applied the Ninth Circuit’s pre-Ebay v. MercExchange, pre-Winter v. Nat’l Res. Def. Concil, pre-American Trucking Ass’ns Inc. v. City of Los. Angeles test for obtaining injunction relief, stating that a preliminary injunction is available to “a party who demonstrates either (1) a combination of probable success on the merits and the possibility of irreparable harm, or (2) that serious questions are raised and the balance of hardships tips in its favor.”  On page 40 of the 58 page decision, however, outside of the section in which the Court outlined the standard it applied for determining whether to grant a preliminary injunction, the Court stated the following:

The court is nonetheless mindful that it “must consider the public interest as a factor in balancing the hardships when the public interest may be affected.” Caribbean Marine Servs. Co., Inc. v. Baldrige, 844 F.2d 668, 674 (9th Cir. 1988). Whether the public interest would best be served by continuing to enjoin Real from making its products available to consumers, and protect the Studios’ rights at the expense of the consumers’ rights, to engage in legal downstream use of the Studios’ copyrighted material is an excellent question. It is also one the court does not and will not reach, because the statutory structure of the DMCA leaves no room for ambiguity. By making it a DMCA violation to distribute products that enable consumers to override copyright owner preferences against unauthorized copying, Congress determined that the public interest is best served by outlawing such products. “Policy considerations cannot override our interpretation of the text and structure of [a statute], except to the extent that they may help to show that adherence to the text and structure would lead to a result so bizarre that Congress could not have intended it.” Central Bank, N.A. v. First Interstate Bank, N.A., 511 U.S. 164, 188 (1994).

This interesting passage would seem to place the Court’s decision almost directly in opposition with  eBay v. MercExchange and Winter v. Nat’l Res. Def. Council. The remedies provision of the DMCA, similarly to the remedies provision of the Patent Act and the Copyright Act’s infringement section, state that a court “may” grant temporary and permanent injunctions to prevent a transgression of the statute. See 17 U.S.C. 1203(b)(1); 17 U.S.C. 502(a); 35 U.S.C. 283. The Supreme Court in eBay v. MercExchange noted that courts can not automatically award injunctive relief under this operative language in the Copyright Act’s infringement section and the Patent Act.  (“Like the Patent Act, the Copyright Act provides that courts “may” grant injunctive relief “on such terms as it may deem reasonable to prevent or restrain infringement of a copyright.” 17 U. S. C. §502(a). And as in our decision today, this Court has consistently rejected invitations to replace traditional equitable considerations with a rule that an injunction automatically follows a determination that a copyright has been infringed.”)

The Court in RealNetworks further presumed irreperable harm upon finding that DVD Copy Control was likely to succeed upon the merits of the case. This would seem to be at odds with the Supreme Court’s pronouncement in Winter v. Nat’l Res. Def. Council that a plaintiff is required to “demonstrate that irreparable injury is likely in the absence of an injunction.”

Jacobsen v. Katzer: Order on motions to dismiss, denies preliminary injunction citing Winter v. National Resources Defense Council

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Shourin Sen - 11 January 2009 – 9:35 pm
Filed under License v. Contract, Preliminary Injunction

image The saga of Jaconsen v. Katzner continued this past week, as Judge Jeffrey S. White of the Northern District Court of California ruled on a series of motions to dismiss and denied a motion for preliminary injunction.  To review the facts in this dispute, the plaintiff, Robert Jacobsen was a professor of physics at Berkley.  Jacobsen was a model train enthusiast and a member of the Java Model Railroad Project, an online  community that developed opensource model train software.   The defendant, Matthew Katzer, was the chief executive officer and chairman of the board of directors of Matthew Katzer and Kamind Associates, Inc. (“KAM”), a company that developed software for model railroad hobbyists.   In this suit, Jacobsen sought “declaratory judgment of the unenforceability and invalidity of KAM’s patent, non-infringement of Jacobsen’s work, violation of copyright laws, violation of the Digital Millenium Copyright Act (“DMCA”), breach of contract under California law, and cybersquatting in violation of 15 U.S.C. § 1125(d).”

In the order, the Court reached the following holdings:

Jacobsen’s Contract claim preempted

The Court dismissed Jacobsen’s breach of contract claim as preempted by federal copyright law.   17 U.S.C. § 301 establishes a two-part test for courts to use when deciding whether a competing claim is preempted: (1) the claims must come within the subject matter of copyright; and (2) the rights granted under state law must be equivalent to any of the exclusive rights within the general scope of copyright as set forth in the Act.

Addressing the first prong, “subject matter,” Judge White found that the claim for breach of contract was “within the subject matter of the Copyright Act” as the “claim deals exclusively with the misappropriation of the JMRI Project decoder definition files.”   As per the second prong, “equivalent rights,” the Court found that Jacobsen’s contract claim alleged “violations of the exact same exclusive federal rights protected by Section 106 of the Copyright Act, the exclusive right to reproduce, distribute and make derivative copies.”

Patent Declaratory Claims Are Mooted

Judge White dismissed Jacobsen’s claim for declaratory judgment of the unenforceability and invalidity of KAM’s patent in the software.  The Court found that the claim was moot because Katzner had filed a Disclaimer in Patent, under 37 C.F.R. § 1.321(a), that disclaimed all claims in the patent.

Motion to strike prayer for attorneys’ fees

Katzner argued that the prayer for attorneys’ fees should be stricken from the complaint under F.R.C.P. 12(f).  12(f) provides that a court may “order stricken from any pleading any insufficient defense or any redundant, immaterial, impertinent, or scandalous matter.”  Katzner argued that Jacobsen wasn’t able to seek attorneys’ fees damages because he registered the copyright after the alleged infringement occurred. The Court denied the motion on the grounds that Jacobsen may find additional instances of infringement during discovery.

Motion to dismiss DMCA

The Court denied Katzner’s motion to dismiss Jacobsen’s claim for violation of the DMCA.   The Court stated that Jacobsen’s complaint alleged “some technolgical process engaged to protect the author’s name, a title, and reference to the license and where to find the license, a copyright notce, and the copyright owner of Jacobsen’s work.”   The Court found that it would be inappropriate to dismiss the claim without further discovery.

Motion on preliminary injunction

Most interestingly, the Court denied a motion for a preliminary injunction citing the recent Supreme Court case Winters v. National Resources Defense Council.  To review, a court grants a preliminary injunction if it finds: “(1) a combination of probable success on the merits and the possibility of irreparable injury, or (2) the existence of serious questions going to the merits, where the balance of hardships tips sharply in plaintiff’s favor.”  The Court stated that the legal standard for preliminary injunction had changed from when the action was filed.   According to the Court, until recently “federal copyright law provided that a plaintiff who demonstrates a likelihood of success on the merits of a copyright claim was automatically entitled to a presumption of irreparable harm.”  But, after Winters,

“a plaintiff is not granted the presumption of irreparable harm upon a showing of likelihood of success on the merits. Instead, a plaintiff seeking a preliminary injunction must establish that he is likely to succeed on the merits, that he is likely to suffer irreparable harm in the absence of preliminary relief, that the balance of equities tips in his favor, and that an injunction is in the public interest.”

The court denied the motion for preliminary injunction stating that “Jacobsen ha[d] failed to proffer any evidence of any specific and actual harm suffered as a result of the alleged copyright infringement and . . .  failed to demonstrate that there is any continuing or ongoing conduct that indicates future harm is imminent.”

This part of the unpublished order will certainly be appealed.   I’d be curious to hear Professor Comulkiewicz’s view of the order, given how he cautioned that courts need to play a critical role when evaluating whether to grant an injunction for breach of a license condition.

Counsel:

  • Robert Jacobsen: Law Office of Victoria K. Hall (Bethesda, MD)
  • Matthew Katzer: Gorman & Miller (San Jose, CA); Field & Jerger LLP (Portland, OR)

Documents:

Robert W. Gomulkiewicz: Conditions and Covenants in License Contracts: Tales from a Test of the Artistic License

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Shourin Sen - 4 January 2009 – 7:01 pm
Filed under Academia, License v. Contract

Robert Gomulkiewicz, Professor of Law and Co-Director of the Intellectual Property Law & Policy Graduate Program at the University of Washington School of Law, recently posted a new paper on open source licensing and Jacobsen v. Katzer.

Professor Comulkiewicz began his paper by outlining four lessons that were reinforced in Jacobsen:

  1. “[I]f a licensee fails to abide by a condition placed on a license grant, then he or she infringes the licensor’s copyright.  In other words, ignoring the condition not only breaches a contract, it infringes a copyright.”;
  2. “[C]ourts can grant injunctive relief for breaches of open source licenses. As the Federal Circuit highlighted in Jacobsen, injunctive relief is particularly critical in open source licensing because the standard remedy for breach of contract, monetary damages, normally is beside the point.”
  3. “[L]icense provisions fall into two categories: a pure contractual
    covenant or a license condition. . .[A] breach of a license condition covenant can trigger copyright infringement, not merely breach of contract. Pure contractual covenants . . . only can trigger breach of contract. Thus, the distinction is vital because of the teaching of lesson two about the importance of injunctive relief in open source licensing.”
  4. “[C]ontract law applies to open source licenses.”

Professor Comulkiewicz then addressed two issues, or complexities, that wasn’t addressed in the opinion.  First Comulkiewicz touched on whether and how much the intent of the drafters should matter when interpreting a contract/license.  This remains an issue because, oftentimes, a party that uses a form in open source software is unaware of the original drafters intent.  Comulkiewicz argued that “[t]o the extent it is relevant, the form drafter’s intent should not be dispositive. The licensor or licensee may not be well schooled in the form drafter’s interpretation of the finer points of the license form and, even if they are, may not agree with it.”image

Secondly, in the main push of the article, Professor Comulkiewicz examined “to what extent can” and should license drafters be able to “choose whether a particular license provision is a pure covenant or a license condition.”  Comulkiewicz analyzed two competing views on whether courts should consider deeper copyright policy issues when evaluating whether to allow parties to “manipulat[e] the distinction” between contracts and licenses.

View 1: Conditions Must Touch on Copyrights:  Under the first view on the issue, “only a condition touching on the exclusive rights under copyright qualifies as a license condition;” e.g. “Copying onto what? Using what to make copies? How many copies? What type of copies? Who can make copies?” For a condition on the right to distribute, the condition should relate to issues such as: Where (and where not)? When? To whom? By whom? For how long? For a condition on the right to make derivative works, the condition should relate to: What type of works? Who can make derivatives?”

Although Professor Comulkiewicz acknowledged that this view “checks the power of copyright licensors,” he concluded that this method of interpretation would inhibit the “useful business model innovation” “characterized by open source licensing.”

View 2: Parties can “freely choose” whether a provision is a license condition or a pure covenant.

Professor Comulkiewicz advocated the second view, that parties should be able to “freely choose” whether a provision is a license condition (license) or pure covenant (contract).  Comulkiewicz noted that “[a]s open source licensing so nicely illustrate[], licensing fosters flexibility and choice in both the creation and distribution of works. If someone can right-size a license, then that person is more likely to grant permission than to hold it back.”

However, Professor Comulkiewicz also cautioned that courts need to play a critical role when evaluating whether to grant an injunction for breach of a license condition.

Exercising prudence will safeguard against the effects of a licensor’s attempt to improperly expand copyright power via proliferation of license conditions.  For example, the farther a license condition strays from touching on an exclusive copyright and the less it contributes positively to the underlying purposes of copyright law, the less compelling the case may be for emergency.