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Copyright Issues for Software Use Or Modification

December 9, 2008


Copyright Issues for Software Use Or Modification

December 9, 2008

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Law360, New York (December 09, 2008)

By Erin Hickey

A federal appellate court recently became the first to weigh in on a narrow but increasingly relevant issue of copyright law that frequently revolves around the use or modification of software: whether an accused infringer of an unregistered copyright in software may “seek a federal declaratory-judgment to clear up whether [its] actions are infringing even though the copyright holder threatens future infringement litigation.”

According to the broadly worded holding of the U.S. Court of Appeals for the Eleventh Circuit in Stuart Weitzman LLC v. Microcomputer Resources Inc., 542 F.3d 859, 867 (11th Cir. 2008), the clear answer is, “No.”

This decision is potentially important, because many large companies rely on small consultants and vendors for customized software services.

The court’s opinion contains both an apology and warning for software purchasers: if you get into a dispute with the software vendor about your rights to use or modify customized software, but the vendor has not registered its copyright in the software with the U.S. Copyright Office, you have no ability to sue for declaratory relief in federal court under the Copyright Act. In short: software buyers, beware.

Federal Jurisdiction In Copyright Cases

Generally speaking, federal courts have exclusive subject matter jurisdiction over claims “arising under” the Copyright Act of 1976.

The majority view is that the Copyright Act completely preempts state law claims which seek to vindicate rights equivalent to any of the exclusive rights granted under the Act, including an infringement suit.

A copyright owner may file an infringement suit in federal court only if it has registered (or, in some jurisdictions, applied to register) its copyright with the Copyright Office.

Failure to register (or at least apply) deprives a federal court of jurisdiction to hear the infringement claim. Congress enacted this gate-keeping measure to encourage registration of copyrights with the Copyright Office.

Because jurisdiction for copyright litigation resides solely in federal court, it is the only judicial forum in which a party may obtain a binding declaration that it is not infringing another’s copyright.

The Weitzman Case

It is clear under existing law that an accused copyright infringer may bring a federal declaratory action seeking a determination of noninfringement where the copyright in question is registered with the Copyright Office.

What is unclear – and what Weitzman decided – is whether a federal court possesses jurisdiction over a declaratory action for noninfringement involving an unregistered copyright.

Weitzman, a well-known manufacturer of ladies’ shoes, hired Microcomputer Resources Inc. (“MCR”) in the 1990s to provide support for Weitzman’s computerized worldwide order management system.

Subsequently, Weitzman engaged MCR to create new order management software, modify Weitzman’s existing order fulfillment software, and integrate the two systems into customized software.

Weitzman paid MCR millions of dollars over the years, including in excess of $1 million for building Weitzman’s custom software. MCR owned the copyright in this custom software but never applied to register it.

MCR, which was operated by two brothers, conducted its relationship with Weitzman under an oral agreement for approximately 12 years. In early December 2005, a dispute erupted and one brother brought a state court action seeking to dissolve MCR.

Two weeks later, on Dec. 20, 2005, the other brother wrote to Weitzman on behalf of MCR, asserting that:

“[Weitzman] is not entitled to the use or possession of MCR’s source code, explicitly or impliedly. [Weitzman] has the right to use the software but it cannot be modified, changed or reverse engineered by anyone. MCR must agree and consent, in writing, to any changes in this regard. MCR retains and reserves 100 percent of the intellectual property rights to all software developed by MCR.”

Two months later, the brother who first sought to dissolve MCR resigned and began performing computer work directly for Weitzman, along with two former MCR programmers.

Weitzman’s Declaratory Action Based On Section 117(a) Of The Copyright Act

Shortly thereafter, Weitzman filed a federal action seeking a declaration that it “owned” a copy of the custom software pursuant to § 117(a) of the Copyright Act, thus retaining certain rights to its use and modification.

Weitzman argued that, because it owned a copy of the customized software and notwithstanding MCR’s letter, Weitzman retained rights to “use, maintain, and/or modify” the software under § 117(a)(1) without infringing MCR’s copyright.

The Lower Court Decision And Appeal

Weitzman prevailed on summary judgment in the district court, obtaining a ruling that it owned a copy of the customized software under § 117(a), and that it possessed the right to modify or add features to meet internal business needs.

MCR appealed on the grounds that (a) the district court lacked subject matter jurisdiction to entertain Weitzman’s lawsuit, and (b) disputed issues of fact existed to make summary judgment inappropriate.

The Eleventh Circuit agreed that the lower court lacked jurisdiction over Weitzman’s action because MCR’s copyright in the software was not registered.

The court noted that the Declaratory Judgment Act does not independently provide federal jurisdiction, and followed Eleventh Circuit precedent holding that a declaratory plaintiff’s well-pleaded facts must “demonstrate that the defendant could file a coercive action arising under federal law.”

Weitzman failed to satisfy this standard, according to the court, because “the most logical reading of Weitzman’s declaratory complaint … suggests that Weitzman anticipates a copyright infringement suit by MCR.”

The court noted that, “only those copyright holders that at least apply to register their copyrights may invoke the subject matter jurisdiction of the federal courts in an infringement suit.”

The court held that, because MCR never applied for a copyright registration covering the customized software, it could not presently bring an infringement action in federal court.

The court concluded that, “such a hypothetical coercive action [MCR’s hypothetical infringement suit] cannot provide the district court with subject matter jurisdiction over Weitzman’s declaratory suit.” The court thus barred a declaratory action sourced in § 117(a) where the copyright in issue is unregistered.

The Eleventh Circuit likewise blocked any federal declaratory suit by a party, where a copyright owner sues that party in state court for preempted state law claims.

As noted above, a number of courts and commentators conclude that the Copyright Act completely preempts state law claims which seek to vindicate rights equivalent to any of the exclusive rights granted under the Act, e.g., a suit for infringement.

Weitzman held that, even assuming MCR could file state law claims, those claims would “sound[] in the nature of an infringement action.”

Any such state law claim by MCR would be displaced by the Copyright Act, and the only relief available to MCR in that case would be an infringement suit in federal court. Weitzman held that any such action also would be barred in the absence of a registered copyright.

The court concluded with an “apology” of sorts, recognizing “the unfortunate position of potential defendants who are accused of infringing an unregistered copyright”:

“Although we recognize that our holding may place alleged infringers of unregistered copyrights in an awkward position – i.e., they cannot seek a federal declaratory judgment to clear up whether their actions are infringing even though the copyright holder threatens future infringement litigation – we nonetheless are bound by the law of this Circuit.”

Related Authority And Analysis

Another decision – again involving software – reached the opposite conclusion.

In Application Science and Technology LLC v. Statmon Technologies Corp., the declaratorydefendant first sued the declaratory-plaintiff in state court for “common law” copyright infringement of software.

The declaratory-plaintiff commenced a federal declaratory action for non-infringement, and the declaratory-defendant moved to dismiss for lack of jurisdiction because it had never registered its copyright.

The court held that it possessed jurisdiction nonetheless, framing the issue as one of “circumvention”:

“[C]an a party accuse another of infringement and prevent the alleged infringer from seeking redress by failing to bring a coercive lawsuit? The answer is obviously “no”; that is a reason for permitting declaratory judgment actions. We think that answer pertains when the accuser seeks to prevent the alleged infringer from seeking redress by failing to register the copyright.”

In comparison, several previous cases agree with Weitzman. One is Prospect Planet LLC v., another software litigation, where defendant moved to dismiss a declaratory judgment action of copyright non-infringement, arguing the district court lacked jurisdiction because defendant’s software copyright was unregistered. The district court agreed and dismissed the case.

It is possible to view Weitzman’s holding concerning federal jurisdiction as dictum, because Weitzman’s facts do not sharply present the “actual controversy” necessary to implicate the Declaratory Judgment Act.

In copyright disputes a declaratory plaintiff must demonstrate “an explicit threat or other action by the [copyright owner], which creates a reasonable apprehension on the part of the declaratory plaintiff that it will face an infringement suit …”

The above-quoted letter from MCR to Weitzman, while stern in tone, does not explicitly or even implicitly threaten litigation in any forum. While Weitzman characterized the letter as a litigation threat, it does not appear to be that strongly worded.

Moreover, even if not dictum, Weitzman’s result is not necessarily ordained either by precedent or recent developments in copyright law.

First, at least one federal appellate court previously held that federal courts possess jurisdiction to enjoin the infringement of an unregistered copyright, explaining in another context that, “[t]he power to grant injunctive relief is not limited to registered copyrights, or even to those copyrights which give rise to an infringement action.”

Because a declaratory judgment action for noninfringement of an unregistered copyright effectively seeks injunctive relief declaring the plaintiff’s rights, it seems difficult to distinguish from this precedent.

Second, the president recently signed legislation amending the Copyright Act to clarify that registration is not a prerequisite for criminal prosecution of an infringer of an unregistered copyright.

The change was premised on the rationale that prosecutors do not control whether a copyrighted work is registered; similarly, an accused infringer has no control over this either.

Third, the Digital Millennium Copyright Act (“DMCA”) offers a copyright owner a number of important protections for publication of works in electronic media, yet does not require that the owner register the copyright in question before commencing suit in federal court to obtain relief under that act.

An example is the procedure by which copyright owners, such as television or film producers, may give notice to Internet service providers, like YouTube, to remove material that infringes a copyright.

Finally, it seems anomalous that a party wrongfully sued in state court by another alleging infringement of an unregistered trademark may seek vindication through federal declaratory relief, while a party wrongfully sued in the same forum over allegations of infringement of an unregistered copyright lacks this remedy.

It may be sensible policymaking to encourage copyright registration by restricting infringement actions to those who register, but this policy is not furthered by prohibiting accused infringers from seeking relief where they otherwise satisfy the prerequisites of a federal declaratory judgment.

Implications Of Weitzman

The implications of Weitzman are potentially far-reaching.

Many companies today rely on small software consultants and vendors for mission-critical software services. Unlike Microsoft, which has registered the copyright in a number of its software programs, small operations may decide not to register software copyrights, or may be unaware of registration’s benefits.

Yet, the right and ability to modify customized software in light of functional advancements and debugging opportunities is imperative.

As Weitzman learned, the risk of interference with essential business operations is very real for an entity that obtains customized software from a vendor that fails to register its copyright.

It is in these instances that the opportunity for intentional circumvention (or neglect) of Copyright Act protections for software purchasers and others exists.

Under Weitzman, the software user who seeks to resolve the dispute by clarifying its rights cannot do so in federal court under the Copyright Act.

Weitzman’s narrower view of the reach of federal jurisdiction, while not without logic, thus provides this opportunity for circumvention of the Copyright Act through nonregistration.

The result is the ability of the owner of an unregistered copyright to competitively disadvantage or economically injure a competitor – or in the case of Weitzman, a former customer – by threatening infringement litigation or bringing a state court action that is a disguised copyright claim.

For purchasers of customized software, the court’s message is clear: act to protect your rights when acquiring customized software critical to your operations.

Erin Hickey is an associate with the firm in the New York office.

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