Injunction denied to software company alleging copyright infringement, misappropriation of trade secrets
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Wednesday, August 2, 2017

Injunction denied to software company alleging copyright infringement, misappropriation of trade secrets

By Mark Engstrom, J.D.

CSS Inc. was not entitled to a preliminary injunction against a former employee that allegedly infringed three of the company’s software copyrights and misappropriated its trade secrets, the federal district court in Charleston, West Virginia, has ruled. Because CSS was unable to show that success on the merits of its copyright or trade secrets claims was likely, that irreparable harm would occur absent an injunction, that the balancing of the parties’ hardships weighed in its favor, or that an injunction was in the public interest, preliminary injunctive relief was not warranted (CSS, Inc. v. Herrington, August 1, 2017, Goodwin, J.).

Parties. Plaintiff CSS provided software and related support services to local government entities. Defendant Compiled Technologies LLC developed and licensed custom software applications and competed with CSS. Defendants Gene Yoho and Christopher Herrington—a programmer and former CSS employee—operated Compiled Technologies.

Lawsuit. CSS sued Compiled Technologies, Christopher Herrington, and Gene Yoho (collectively, "CT") for breach of contract, copyright infringement, misappropriation of trade secrets under the West Virginia Uniform Trade Secrets Act (WVUSTA), and other causes of action. CSS asked the court to preliminarily enjoin the defendants from: (1) advertising, licensing, or selling their land-indexing and estate-management software; (2) offering or providing support services for CSS’s software; and (3) using CSS’s trade secrets or confidential information.

To secure a preliminary injunction, CSS had to show that: (1) success on the merits was likely; (2) irreparable harm was likely absent a preliminary injunction; (3) the balancing of the parties’ hardships favored CSS; and (4) an injunction was in the public interest.

Merits of copyright claim. CSS alleged non-literal copyright infringement, which covered the structure, sequence, organization, user interface, screen displays, and menu structures of the company’s software. Because the Fourth Circuit had not yet endorsed a test for non-literal copyright infringement for computer source code, the court applied the Second Circuit’s abstraction-filtration-comparison (AFC) test.

In ascertaining whether a "substantial similarity" existed between two or more software programs under the AFC test, courts: (1) divided the allegedly infringed program into its constituent structural parts; (2) examined each of those parts for incorporated ideas, incidental expressions, elements from the public domain, elements dictated by efficiency, etc., and ignored the non-protectable material; and (3) compared the resulting material with the structure of the allegedly infringing program. The result of that comparison determined whether the protectable elements of the programs at issue were "substantially similar" such that a finding of infringement would be warranted.

In this case, the court found that: (1) CT’s choice of COBOL as a programming language was not evidence of substantial similarity; (2) CSS was not likely to succeed on the merits of its copyright claim with respect to the structure, design, architecture, or design of the parties’ software; and (3) the choice and arrangement of third-party components and the similar "transaction flow" of the parties’ software did not provide evidence of substantial similarity.

In the court’s view, most of CSS’s allegations were merely about the most efficient way to implement a task. Because the merger doctrine required evidence of "similarly efficient" structures to be disregarded in the second step of the AFC test, the asserted expressions were not protectable, even though the parties’ had made "similar or even identical choices" in their software.

For those and other reasons, the court concluded that success on the merits of the copyright infringement claim was unlikely.

Merits of trade secrets claim. CSS alleged that CT had misappropriated its source code, client list, method of pricing, geographic expansion, customer preferences, and other trade secrets. However, the court found that none of those items were protectable trade secrets.

CSS’s source code did not meet the definition of a trade secret, the court explained, because the company did not, until recently, make reasonable efforts to protect its confidential material. The company’s client list was not a trade secret because the names of its clients were publically available and the West Virginia Supreme Court of Appeals had found that customer lists did not constitute a protectable employer interest.

CSS’s pricing methodology did not meet the definition of a trade secret because the company’s approach to pricing was not unique, the company did not invest a significant amount resources to develop its pricing techniques, the company had not taken sufficient measures to ensure the confidentiality of its pricing information, and the company’s prices were publicly available under the state’s Freedom of Information Act. In any event, the company failed to meet its burden of persuasion as to CT’s alleged misappropriation.

Similarly, the company’s planned expansion into Ohio was not a trade secret. First, the court doubted that trade secret protection could be acquired for the idea that a software provider to county governments might one day choose to expand to a neighboring state—after the company had already established business in that state. Second, CSS failed to take any measures to keep that information confidential. Most importantly, however, CSS failed to show that CT had misappropriated that information.

Finally, knowledge that CSS had gained through interactions with its customers did not constitute a protectable trade secret. According to the court, CSS had not taken any steps to keep that information confidential. And even if it had, CSS failed to proffer any evidence of the defendants’ misappropriation.

Irreparable harm. CSS failed to show that it would be irreparably harmed, prior to trial, absent preliminary relief. The company argued that CT would use the company’s intellectual property to become a permanent competitor. That argument was unconvincing, however, because CSS was not likely to succeed on the merits of its copyright or trade secrets claims. In addition, CSS was concerned that it would lose its viability as an ongoing company. The court noted, however, that going out of business as a consequence of litigation was an inherent danger that was "present in any case." In any event, even if CSS received a final judgment in its favor, there was no guarantee that it could recover any monetary damages.

CSS alleged damaged in the form of lost profits, future lost profits, and future potential earnings from "bundled sales," and those harms all related to monetary losses, the court explained, but CSS failed to provide tangible monetary damages or estimates about potential future earnings or losses, even though it possessed sufficient financial information to calculate damages for the loss of any customers to CT, according to the court. Finally, CSS did not present any evidence to show that its reputation and goodwill had been damaged as a result of the litigation.

Balance of hardships. CSS argued that it would be harmed by the continued infringement of its intellectual property. It further argued that nothing in its Confidentiality Agreement would have prohibited Christopher Herrington from working on programs in an unrelated interest. In the court’s view, however, CSS failed to provide sufficient evidence to show that it would likely succeed on the hardship-balancing factor.

Public interest. CSS asked the court to prohibit CT from providing support services to its current customers: twenty clerks’ offices in the State of West Virginia. CSS’s corporate representative stated that CSS would be able to provide support services for CT’s clients before switching them back to CSS’s software. According to the court, an injunction would negatively disrupt the operation of the county clerks’ offices during that transition. It thus concluded that CSS had not shown that an injunction was in the public interest.

The case is No. 2:16-cv-01762.

Attorneys: Christopher L. Bauer (Steptoe & Johnson LLP) for CSS, Inc. Kent J. George (Robinson & McElwee, PLLC) for Christopher Herrington.

Companies: CSS, Inc.

MainStory: TopStory Copyright TechnologyInternet TradeSecrets WestVirginiaNews

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