By Robert B. Barnett Jr., J.D.
Universal Instruments’ claim that Micro Systems Engineering and Missouri Tooling infringed its copyright in software code used for pacemaker testing failed because Micro Systems had a license to use the code for internal purposes.
In a case in which Universal Instruments alleged that Micro System Engineering (MSE) and Missouri Tooling & Automation (MTA) infringed its copyright in software code used in a system that tests pacemakers, the U.S. Court of Appeals in New York City has affirmed a district court’s decision to grant judgment to the defendants after the evidence was presented but before the case went to the jury. According to the appellate court, the lower court correctly determined that as a matter of law MSE had a license to use the software code pursuant to an agreement between MSE and Universal and that the Copyright Act protected MSE’s and MTA’s minor alterations to the code. The Second Circuit also affirmed the lower court’s decision to grant judgment on the pleadings in MSE’s and MTA’s favor on all remaining claims, which were for misappropriation of trade secrets, breach of contract, and unfair competition (Universal Instruments Corp. v. Micro Systems Engineering, Inc., May 8, 2019, Chin, D.).
MSE sought to develop a multi-phase plan to build a system that would automate the testing process for pacemakers and defibrillators. Universal won the bid to provide the equipment for phase one. The two parties signed an Equipment Purchase Agreement in June 2007, which contained an intellectual property provision that granted MSE and its suppliers a license to use Universal’s code for “internal use only.” The equipment that Universal designed included station source and server source code, with the server source code being far more valuable because it was, in effect, the brains of the operation. In a Final Customer Acceptance letter in 2008, Universal agreed to give MSE the server source code, which it did.
MSE, however, awarded the bid for the remainder of the project, phases 2 and 3, to MTA rather than to Universal. When MSE and MTA used Universal’s code to develop phases 2 and 3, Universal cried foul, and in 2013 it sued both parties in New York federal court for copyright infringement, misappropriation of trade secrets, breach of contract, and unfair competition. The case went to trial in 2017, and, after the close of evidence but before the case was sent to the jury, the trial judge granted MSE’s and MTA’s motion for judgment on the pleadings. Universal appealed the decision to the Second Circuit.
Copyright infringement. The question the Second Circuit addressed was whether MSE’s and MTA’s conduct fell within the scope of the license that Universal granted to MSE. The Second Circuit first determined that the agreement unambiguously permitted MSE to transfer the source to MTA for use in phases 2 and 3. MTA was clearly a “supplier” of MSE, as mentioned in the intellectual property provision. MSE clearly had the right to transfer the code to a supplier for internal use. Was this “internal use”? Yes, the Second Circuit said, because “internal use” meant for use in MSE’s existing business, as opposed to resale to or for the benefit of others. In the software context, “internal use” does not mean only on MSE’s premises, as Universal argued. It meant only for MSE’s business purposes, regardless of where the code actually resided. As a result, as a matter of law, MSE’s and MTA’s conduct fell within the scope of the license that Universal granted to MSE, and MSE’s giving of the code to MTA did not exceed the scope of the license.
Modifications. MSE and MTA modified the original code to accommodate their needs for phases 2 and 3. The Second Circuit then looked at whether this modification violated the license that Universal granted to MSE. The server code was slightly modified to add some features and to help improve efficiency. The Copyright Act, however, includes an affirmative defense to allow the owner of the copyright to modify a computer program for limited purposes (17 U.S.C. §117(a)). The Second Circuit then examined whether MSE was an “owner” of the software, concluding that it was as a matter of law because (1) Universal gave a copy of the server code to MSE and (2) the agreement granted MSE a perpetual, worldwide license to use it. The Second Circuit then concluded that the modifications were “an essential step in the utilization of the computer program,” as the Copyright Act requires. The modifications were made to improve functionality in serving MSE’s business needs. The result would have been different had MSE made changes that inhibited Universal’s ability to market its software to others or if MSE had enriched itself at Universal’s expense. And the final conclusion was that the adaptation was “used in no other manner,” as §117(a) requires, than to adapt it for use in the testing system. Universal was aware when it gave the code to MSE that two more phases were to come, which meant that the adaptations were contemplated at the beginning. The Second Circuit, therefore, concluded that MSI did not as a matter of law infringe Universal’s copyright.
Trade secrets misappropriation. Whatever the merits of the trade secrets claim, the Second Circuit affirmed the lower court’s decision on the ground that it was time-barred. The claim was not filed within the three-year statute of limitations, given that Universal should have known of the alleged misappropriation of trade secrets when it lost the bid on the final two stages. The suit filed was filed three years and three months after that date. The claim, therefore, failed as a matter of law.
Breach of contract. Once again, the Second Circuit did not need to address the merits, this time because the Copyright Act preempted the breach of contract claim. Preemption cannot be avoided simply by labelling a claim breach of contract. The breach was predicated on the modification of the source code, which fell squarely within the Copyright Act’s purview. The claim, therefore, failed as a matter of law.
Unfair competition. The remaining unfair competition claim was against MTA only. The claim requires an element of bad faith. Under the facts of this case, no evidence of any such bad faith existed. As a result, the Second Circuit affirmed the lower court’s decision to dismiss this claim.
The Second Circuit, therefore, affirmed the lower court’s ruling in its entirety.
This case is No. 17-2748-cv.
Attorneys: Amy Mason Saharia (Williams & Connolly LLP) for Universal Instruments Corp. David B. Tulchin (Sullivan & Cromwell LLP) for Micro Systems Engineering, Inc. Howard J. Kaplan (Kaplan Rice LLP) for Missouri Tooling & Automation, Inc.
Companies: Universal Instruments Corp.; Micro Systems Engineering, Inc.; Missouri Tooling & Automation, Inc.
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