Ninth Circuit Finds Creation of Custom Programs under Contract which is Silent as to Intellectual Property Grants an Unlimited License to Use and Modify the Custom Programs

In Asset Marketing Systems, Inc. v. Kevin Gagnon, d/b/a Mister Computer, D.C. 542 F3d 748; 88 USPQ2d 1343 (9thCir. 2008), Kevin Gagnon, doing business as Mister Computer (“Gagnon”) appeals from the District Court’s grant of summary judgment in favor of Asset Marketing Systems, Inc. (“AMS”). The Court of Appeals for the Ninth Circuit affirmed.

Background

From May 1999 to September 2003, AMS, a field marketing organization offering sales and marketing support to insurance marketing entities, hired Gagnon at-will as an independent contractor to assist with its information technology needs. Gagnon was asked to develop six custom software programs for AMS.  Over the course of the companies’ four year relationship, AMS paid Gagnon over $2 million for this development.  However, no agreement was agreed to governing rights in the intellectual property for the developed software programs.

When AMS terminated Gagnon’s services in June 2003, it offered Gagnon an employment position, but he declined. In back and forth written communications, Gagnon demanded payment from AMS for its right to continue to use the programs and for Gagnon’s agreement not to sell the programs to AMS’ competitors. Gagnon eventually ordered AMS to remove “all original and derivative source code” and related program files. In response, AMS refused to cooperate with any of Gagnon’s orders, demanded copies of the source code for all software developed by and on behalf of it, and asserted that Gagnon was not authorized to utilize the software that AMS believed it owned. A week prior to his termination, Gagnon registered the copyright for the six programs with the United States Copyright Office, and this action incited AMS to take legal action.

AMS filed a complaint in California Superior Court against Gagnon alleging misappropriation of trade secrets and conversion. In turn, Gagnon removed the case to federal court and then filed numerous counterclaims alleging, among other claims, copyright infringement for the six programs, trade secret misappropriation, and unfair competition. The District Court remanded AMS’ claims back to the state court, and AMS filed the remanded claims as counter-counterclaims in order to maintain all related claims in federal court.

The District Court granted AMS’ motion for summary judgment as to Gagnon’s counterclaims.  Specifically, the District Court found that Gagnon had granted AMS an implied nonexclusive license to use, modify, and retain the source code of the programs. Gagnon’s trade secret misappropriation claim was, therefore, also defeated.  Further, because no trade secret agreement existed as between Gagnon and AMS with respect to the source code, Gagnon’s unfair competition claims were deemed invalid under California law. Gagnon’s remaining state law claims also failed for these reasons. Next, Gagnon filed a motion for reconsideration, which was denied. The case was then reassigned to a new judge, and Gagnon appealed the grant of summary judgment. Upon successful limited remand, the District Court denied the motion for reconsideration and returned the case to the Ninth Circuit Court of Appeals.

Court of Appeals for the Ninth Circuit

On appeal, the Ninth Circuit first noted that although exclusive licenses must be in writing, 17 U.S.C. § 204 grants of nonexclusive license need not be in writing and may be granted orally or by implication. The Ninth Circuit has held that an implied license is granted when “(1) a person (the licensee) requests the creation of a work, (2) the creator (the licensor) makes that particular work and delivers it to the licensee who requested it, and (3) the licensor intends that the licensee-requestor copy and distribute his work.” I.A.E., Inc. v. Shaver, 74 F.3d 768, 776 (7th Cir. 1996). For example, in Effects Assocs., Inc. v. Cohen, 908 F.2d 555-56 (9th Cir. 1990), a movie producer hired Effects Associates to create certain special effects for a movie. Though the film footage containing the special effects was used without the producer’s obtaining a written license from Effects Associates, the Ninth Circuit found that an implied license had been granted because the footage was created at the producer’s request with the intent that it be used in the film with no warning that use of the footage would constitute infringement. Id. at 558-59 & n.6. The Ninth Circuit applied the same analysis used in Effects to implied licenses for computer programs.

As to the first factor, Gagnon argued that AMS never specifically requested that he create the programs, but “rather relayed its needs to Mr. Gagnon and he satisfied them by providing either computer hardware or computer software at his discretion.” The Ninth Circuit found this interpretation of “request” to be strained. Gagnon did not create the programs on his own initiative and market them to AMS; rather, he created them in response to AMS’ requests. Also, after prototype software was developed, he made changes to the programs in response to AMS’ requests.

As to the second factor, it was undisputed that Gagnon created the programs for AMS.  However, the remaining question was whether Gagnon delivered the programs to AMS. The Ninth Circuit agreed with the District Court that Gagnon delivered them when he installed them onto the AMS computers and stored the source code on-site at AMS. Gagnon had argued that even if he had installed the programs onto the AMS computers, he never delivered the source code so that AMS could modify the code. Gagnon further argued that if, in fact, AMS did not have the right to modify the code, AMS may have infringed Gagnon’s copyright by exceeding the scope of its license.  However, the Ninth Circuit noted that “Gagnon’s conduct manifested an objective intent to give AMS an unlimited license at the time of creation; thus, when he stored the source code at AMS, the code was delivered.”  Therefore, the Ninth Circuit held that the scope of the license necessarily included the unlimited license to modify the source code as well as use the executable object code.

As to the third factor, the Ninth Circuit concluded that Gagnon’s conduct did manifest an intent to grant a license.  Specifically, the Ninth Circuit noted that the relevant intent is the licensor’s objective intent at the time of the creation and delivery of the software as manifested by the parties’ conduct. See Effects, 908 F.2d at 559 n.6; see also John G. Danielson, Inc. v. Winchester-Conant Props., Inc., 322 F.3d 26, 42 (1st Cir. 2003), I.A.E., 74 F.3d at 777. Gagnon and AMS had an ongoing service relationship in which Gagnon provided technical support for all computer-related problems at AMS, and he created certain custom software applications at AMS’ request. The parties’ relationship indicated neither an intent to grant nor deny a license without Gagnon’s future involvement.

Moreover, the Ninth Circuit held that courts have looked to contracts, even if unexecuted, as evidence of the intent of the party submitting the contract.  In the instant case, there were several documents that reflected the parties’ objective intent: a Technical Services Agreement (TSA), an Outside Vendor Agreement (OVA) submitted by Gagnon, and Gagnon’s letter objecting to AMS’ proposed changes to the OVA. The TSA that both parties signed in May 2000 stated only that Gagnon “[would] provide” AMS “specific add-on products.” Nothing in the TSA indicated Gagnon’s understanding or intent that continued use of the custom application programming undertaken by Gagnon would be prohibited after the TSA terminated, nor did the TSA mention anything about a license. Also, Gagnon was well paid for his services. It is highly unlikely that AMS would have paid Gagnon for his programming services if AMS could not have used the programs without further payment pursuant to a separate licensing arrangement that was never mentioned in the TSA and never otherwise requested at the time. Moreover, the TSA was not renewed beyond its April 30, 2001 expiration although the relationship continued.  Moreover, the Ninth Circuit noted that custom software is far less valuable without the ability to modify it, and because the TSA was set to expire in one year, one would expect some indication of the need for future licensing if the custom programs were to become unusable after the TSA expired.   Thus, the TSA, while silent as to the intellectual property rights, was evidence that the right to use and modify the software programs after termination of the TSA.

The parties additionally attempted to draft an Outside Vendor Agreement (OVA) but were unable to agree upon a version, and it was never executed. The Ninth Circuit found that the unexecuted OVA submitted to Gagnon did not evidence any intent by Gagnon to limit AMS’ use of the programs.

Lastly, the Ninth Circuit noted that Gagnon and AMS did not discuss a licensing agreement until their relationship was ending. Gagnon delivered the software without any caveats or limitations on AMS’ use of the programs. The first time that Gagnon expressed a contrary intent was in a letter to AMS, sent after AMS had decided to terminate Gagnon’s services. Gagnon had to express an intent to retain control over the programs and limit AMS’ license if he intended to do so. A belated statement that the programs could not be used after Gagnon’s departure, made after the termination decision and well after the creation and delivery of the programs, for which substantial sums were paid, was not sufficient to negate all other objective manifestations of intent to grant AMS an unlimited license. For these reasons, the Ninth Circuit held that Gagnon granted AMS an unlimited, nonexclusive license to retain, use, and modify the software, and because AMS paid consideration, this license was irrevocable. The Court of Appeals, therefore, affirmed the District Court’s grant of summary judgment in favor of AMS on the copyright infringement claim.

Significance to Software Licensors

While not an entirely unexpected result, Asset Marketing Systems confirms that where software is custom built, the entity writing the code will own the code, but the entity funding the work will be entitled to an unlimited license to the resulting work.  As such, where parties envision a more restricted license, the parties need to ensure that the contract includes provisions which explicitly provide these restrictions.

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