Protecting Software Copyright Ownership

A federal appeals court’s recent ruling in a software copyright case broadens the rights of some software users to copy and modify software, even though they don’t own the copyright and even though they are designated as mere licensees. At the same time, the decision restricts the rights of the owners of the copyrights of software in some situations, unless the software owners take appropriate steps in their contracts.

The decision by the U.S. Court of Appeals for the Second Circuit was in a case titled William Krause vs. Titleserv, Inc. that came out of a federal trial court in New York state. It’s a decision that software creators should be aware of, particularly creators of custom software and those domiciled or doing business in the states covered by the Second Circuit.

Krause wrote computer programs for Titleserv. For purposes of its decision, the court considered him to be an independent contractor so the work-made-for-hire doctrine did not apply to the software he developed, leaving him as owner of the copyrights. Krause ended his relationship with Titleserv after learning the company wanted him to take directions from its new IT manager.

Eight programs were at issue in the case. When Krause left, he took with him the only copies of source code for two of the programs. He left the source code for the other six because he knew Titleserv had backup copies that he could not access. He also left executable versions of all eight programs but locked them in an effort to prevent them from being decompiled back into source code.

When he left, Krause told Titleserv it could continue using the executable code as it existed but asserted Titleserv had no right to modify the source code. That would have left the software increasingly less useful over time, because the source code had to be modified to add new customers, change customer addresses and to perform other routine maintenance functions.

Titleserv was able to circumvent the lock and decompile the code. It then fixed some bugs and performed routine maintenance functions. It also added some new functionality, including printing checks and permitting some customers to access the system directly.

The federal court case was for a single count of copyright infringement for copying and making derivative works, rights normally reserved to Krause as the copyright owner.

Titleserv responded that section 117(a) of the Copyright Act allows the owner of a copy of a program (even if they are not the owner of the copyright) to copy or modify the program under certain circumstances without being liable for infringement. In addition to being the owner of a copy, the new copy or adaptation can only be created if it is an essential step in the utilization of the computer program in conjunction with a machine and only if it is used in no other manner.

The court’s opinion finds that even though Titleserv was a licensee rather than the owner of a copy, the intent of Congress in passing section 117(a) was not that a party had to possess formal title as owner of the copy but that instead courts should consider whether the party exercises enough indicators of ownership over a copy of the program to be reasonably considered to be the owner, even in the absence of formal title. Calling someone a licensee doesn’t mean they are one if the licensee has sufficiently broad rights over their copy of the software.

The court found Titleserv was the owner of a copy, for purposes of section 117(a) because of the broad rights Krause had bestowed upon Titleserv. The court considered these factors:

· Titleserv paid substantial money to Krause to develop the programs for the sole benefit of Titleserv

· Krause customized the software for Titleserv’s operations.

· The copy was stored on a server owned by Titleserv.

· Krause did not reserve the right to repossess the copies used by Titleserv

· Krause agreed Titleserv had the right to continue to possess and use the programs forever, regardless of termination of the relationship between the two parties

· Titleserv had the right to discard or destroy the copy it had anytime it wished.

The court then embarked on an analysis of whether Titleserv’s modification of the programs was “an essential step in the utilization of the computer program(s) in conjunction with a machine and that it is used in no other manner.” The court had the greatest difficulty with the new functionalities added to the software by Titleserv, allowing for check printing and direct client access. Even those changes, however, were acceptable under the court’s broad interpretation of the phrase “essential step in the utilization of the computer program.”

The point for software creators who could be affected by this decision or future decisions in other jurisdictions that may adopt this view is that they should try to construct their contracts to avoid, to the extent possible, conveying indicators of ownership to their licensees, particularly the ones cited by the court.

Of course, savvy licensees will be taking the opposite position in negotiations.