By Peter Reap, J.D., LL.M.
The federal district court in Brooklyn did not abuse its discretion in finding that two declarations submitted by the CEOs of two software companies in order to demonstrate that the companies’ software programs were copyrightable, were expert testimony subject to preclusion for noncompliance with disclosure rules, the U.S. Court of Appeals in New York City has held. Having struck the most salient evidence of copyrightability, the district court properly granted summary judgment to the defendants on the software companies’ Digital Millennium Copyright Act claims. The district court also did not abuse its discretion in finding that Tri-State Surgical Supply and Equipment, a licensee of the companies’ programs, was not entitled to attorney fees under the Lanham Act because this was not an exceptional case. However, the lower court erred in holding that the software companies abandoned their breach of contract claim, and the grant of summary judgment on this claim was vacated and the case remanded (Dynamic Concepts, Inc. v. Tri-State Surgical Supply and Equipment Ltd., November 8, 2017, Per Curiam).
The software company plaintiffs, Dynamic Concepts and Point 4 Data Corporation, developed two software programs, UniBasic and Genesys. In 1999, Tri-State purchased a license to use Genesys and UniBasic subject to certain limitations, including a limitation on the number of concurrent users. UniBasic, in turn, contained security measures designed to enforce these licensing limitations, including the Passport Licensing Security Software, designed to ensure that UniBasic would not run if the licensing conditions were not complied with. According to the plaintiffs, Tri-State, with the assistance of defendants SJ Computers, Inc., and Shmuel Judkovitz, modified these security measures (including Passport) in a way that prevented these software programs from enforcing the licensing restrictions. The plaintiffs subsequently brought suit, alleging claims arising under, the Digital Millennium Copyright Act (DMCA), 17 U.S.C. § 1201(a) (making it a violation to "circumvent a technological measure that effectively controls access to a work protected under [the Copyright Act]"), the Lanham Act, 15 U.S.C. § 1125(a), and breach of contract. After the district court granted summary judgment to the plaintiffs, Tri-State appealed.
DMCA claim. To prove their DMCA claim, the software companies were required to show that at least one of the underlying software programs was protected under the Copyright Act. To establish that the two programs were copyrightable, the software companies submitted two declarations as part of their opposition to the defendants’ motion for summary judgment: the first from the CEO of Dynamic Concepts, Douglas Chadwick, and the second from the CEO of Point 4 Data Corporation, Don Burden, The declarations included descriptions of Genesys and UniBasic as well as commentary on how the code and features of each program compared to industry standards and other, comparable software programs—to demonstrate sufficient originality to render the programs copyrightable.
The district court found that both declarations contained expert testimony, as defined under Federal Rule of Evidence 702, rather than solely lay opinion, as permitted under Federal Rule of Evidence 701, or lay testimony, under Federal Rule of Evidence 601. Because it was undisputed that the software companies had not timely complied with expert discovery disclosure rules, the district court found preclusion to be the appropriate remedy. Having before it virtually no evidence describing the underlying programs, the district court concluded that no reasonable jury could find that the plaintiffs met their burden of showing that their computer programs contained copyrighted material. On this basis, the district court awarded summary judgment to the defendants on the DMCA claim.
On appeal, the software companies argued that the district court abused its discretion in finding that the Burden and Chadwick declarations contained expert testimony. The district court did not abuse its discretion in finding that the declarants’ proffered testimony as to the uniqueness of certain elements of UniBasic and Genesys as compared with other programs in the industry drew not on their experience as CEOs of their company, but on their technical and specialized knowledge of software design and industry standards, the appellate court ruled.
The district court observed that the declarations offered opinions designed to situate elements of those programs in the industry as a whole in order to demonstrate that the programs included original—and thus potentially copyrightable—elements. It concluded that these opinions were expert and could not be admitted under Rule 701.
The district court permissibly concluded that, although both declarants had familiarity with their programs because of their experience as CEOs, the reasoning processes on which they relied to analyze these programs and situate them in the industry as a whole were not simply those of CEOs describing their products based on personal experience, but those of experts with technical knowledge of software design and specialized knowledge of industry standards, the Second Circuit reasoned. Given that the declarations did not qualify or contextualize the bases of the declarants’ opinions, that the issues were at least arguably technical in nature and not easily accessible to average persons, and that the declarations emphasized the declarants’ expertise with these technical issues, this conclusion was not an abuse of discretion.
The district court also concluded that Chadwick’s analysis of the defendants’ purported modification of the Passport program—which involved his review of evidence produced by the defendants in the course of the litigation, and his conclusions based on that review—was based on technical and specialized reasoning processes unfamiliar to average persons, particularly given that the Chadwick declaration emphasized Chadwick’s expertise with software design in a way seemingly designed to confer an aura of expertise on those conclusions. The district court also did not abuse its discretion in reaching this conclusion, according to the Second Circuit.
Moreover, the district court did not abuse its discretion in determining that preclusion was the appropriate remedy. To determine whether preclusion of testimony under Rule 37 is an appropriate sanction for failure to meet disclosure requirements, the court looked to the four Sofitel factors. See Softel, Inc. v. Dragon Med. & Sci. Commc’ns, Inc., 118 F.3d 955, 961 (2d Cir. 1997).
Although the testimony in question was highly important, the other Sofitel factors favored exclusion, the appellate court determined. The software companies’ proffered justification for nondisclosure—that they reasonably believed the Burden and Chadwick declarations were non-expert—was not compelling, particularly given that the defendants had repeatedly inquired (prior to the disclosure deadline) whether the declarations would be offered as expert, and the plaintiffs had repeatedly responded that they had not yet "made a determination." Further, even though the defendants were aware that Burden and Chadwick would offer declarations and that copyrightability would be at issue, the plaintiffs’ failure to disclose still prejudiced the defendants. Finally, a continuance was not appropriate under the circumstances.
Breach of contract claim. The district court erred when it determined that the plaintiffs, for purposes of their breach of contract claim, abandoned their claim for damages amounting to the value of an imputed license for an unlimited number of users of Genesys and UniBasic, the Second Circuit held. The lower court found that the companies, in opposing the defendants’ motion for summary judgment, abandoned their claim for unrestricted user fees damages as part of their breach-of-contract claim, opting instead to pursue this theory of damages solely as part of their DMCA claim. To the contrary, the software companies’ opposition brief opposed the grant of summary judgment to the defendants as to the unrestricted user fees damages claim under both theories of liability, and that the district court thus abused its discretion in finding the claim abandoned.
Lanham Act claims. After the district court granted summary judgment to Tri-State on the plaintiffs’ Lanham Act claims, Tri-State moved for attorney fees relating to those claims pursuant to 17 U.S.C. § 1117(a). The District Court cited the rule previously applied in the Second Circuit that, to qualify as an "exceptional case[ ]" under the Lanham Act, there must be evidence of "fraud or bad faith" or "willful infringement" (quoting Louis Vuitton Malletier S.A. v. LY USA, Inc., 676 F.3d 83, 111 (2d Cir. 2012)). After articulating this standard, the court held, first, that fees should not be awarded because Tri-State had failed to establish that the plaintiffs pursued their claims in bad faith, and second, that even if Tri-State could establish bad faith, for other equitable reasons, "the Court would exercise its discretion to deny a fee award in this case."
On appeal, Tri-State urged that the district court erred in requiring bad faith, in light of the Supreme Court’s decision in Octane Fitness, LLC v. Icon Health & Fitness, Inc., 134 S. Ct. 1749, 1756–57 (2014). The Second Circuit did not need to decide whether Octane (a Patent Act case) abrogated Louis Vuitton (a Lanham Act case) for two reasons, it explained. First, Tri-State forfeited this argument by failing to make it before the District Court.
Second, even assuming Octane abrogated Louis Vuitton and the district court should have applied the Octane standard, the appellate court would not vacate the lower court’s decision. The district court held that, even if it found the plaintiffs’ Lanham Act claims had been brought in bad faith, it would decline to award fees for other equitable reasons unrelated to the plaintiffs’ culpability. The district court’s decision, then, did not rest on its holding that bad faith was required for a finding that this was an "exceptional case," but instead rested on other equitable considerations. Thus, there was no abuse of discretion in this determination, and no reason why application of the Octane standard on remand would change the district court’s conclusion.
The case is Nos. 15-0563-cv and 15-3212-cv.
Attorneys: Matthew J. Press (Press Law Firm PLLC) for Dynamic Concepts, Inc. Robert J. Bernstein (Law Office of Robert J. Bernstein) for Tri-State Surgical Supply and Equipment, Ltd. Eli S. Fixler (Law Offices of Eli S. Fixler) for SJ Computers, Inc.
Companies: Dynamic Concepts, Inc.; Tri-State Surgical Supply Equipment, Ltd.; SJ Computers, Inc.
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