Universal Instruments Corp. v. Micro Sys. Eng'g, Inc. , 924 F.3d 32 ( 2019 )

17‐2748‐cv
Universal Instruments Corp. v. Micro Sys. Engʹg, Inc.
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
August Term 2018
(Argued: September 21, 2018 Decided: May 8, 2019)
Docket No. 17‐2748‐cv
UNIVERSAL INSTRUMENTS CORPORATION,
Plaintiff‐Counter‐Defendant‐Appellant,
v.
MICRO SYSTEMS ENGINEERING, INC.,
MISSOURI TOOLING & AUTOMATION, INC.,
Defendants‐Counter‐Claimants‐Appellees.*
ON APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF NEW YORK
Before:
WALKER and CHIN, Circuit Judges, and KEENAN, District Judge.**
*
The Clerk of Court is respectfully directed to amend the official caption to
conform to the above.
**
Judge John F. Keenan, of the United States District Court for the Southern
District of New York, sitting by designation.
Appeal from a judgment entered in the United States District Court
for the Northern District of New York (Sharpe, J.), dismissing plaintiffʹs claims
for breach of contract, copyright infringement, misappropriation, and unfair
competition arising from its sale of equipment and software for an automated
assembly system. On appeal, plaintiff contends that the district court erred in
granting defendantsʹ motion for judgment as a matter of law.
AFFIRMED.
AMY MASON SAHARIA (Kannon K. Shanmugam, Giselle
Barcia, Stacie M. Fahsel, on the brief), Williams &
Connolly LLP, Washington, D.C.; Anthony L.
Meola, Christopher E. Blank, Victor J.
Baranowski, Schmeiser, Olsen & Watts LLP,
Latham, New York, for Plaintiff‐Counter‐
Defendant‐Appellant Universal Instruments
Corporation.
DAVID B. TULCHIN (Thomas C. White, Adam R. Brebner,
Jacob B. Lieberman, on the brief), Sullivan &
Cromwell LLP, New York, New York, for
Defendants‐Counter‐Claimants‐Appellee Micro
Systems Engineering, Inc.
Howard J. Kaplan (Marie E. Christiansen, on the brief),
Kaplan Rice LLP, New York, New York, for
Defendants‐Counter‐Claimants‐Appellee Missouri
Tooling & Automation, Inc.
___________
2
CHIN, Circuit Judge:
Plaintiff‐counter‐defendant‐appellant Universal Instruments
Corporation (ʺUniversalʺ) developed and sold an automated assembly system to
defendant‐counter‐plaintiff‐appellee Micro Systems Engineering, Inc. (ʺMSEIʺ) in
2007 pursuant to a purchase agreement. MSEI developed a multi‐phase plan to
build a system to automate the handling of medical devices during its quality
testing process, and Universal won the bid to provide the equipment for the first
phase. MSEI awarded the second and third phases of the project not to
Universal, but to Universalʹs competitor, defendant‐counter‐plaintiff‐appellee
Missouri Tooling & Automation, Inc. (ʺMTAʺ). In implementing phases two and
three, MSEI and MTA used intellectual property, including computer source
code, that Universal had provided for phase one.
Universal brought this action below alleging, inter alia, that MSEI
and MTA had infringed Universalʹs copyright in its source code, breached the
terms of the purchase agreement, and misappropriated Universalʹs trade secrets.
Certain claims were dismissed on defendantsʹ motion for judgment on the
pleadings, and, after discovery, the parties proceeded to a jury trial on the
3
remaining claims. At the close of the evidence, however, the district court
granted defendantsʹ motion for judgment as a matter of law. Universal appeals.
For the reasons set forth below, we affirm the judgment of the
district court.
BACKGROUND
A. Factual Background
MSEI is a medical device company that designs and manufactures
electronics for implantable pacemakers and defibrillators. Before selling these
components, MSEI subjects them to a battery of tests to ensure they are working
properly. MSEI sought to automate its then manual system of moving
components from one test station to another; to that end, MSEI solicited bids for
the development of a Test Handling System (the ʺTHSʺ). MSEI sought to build
the THS in phases. The first phase would automate the handling of some
product testing stations with further automation to be added in subsequent
phases.
Beginning in 2006, MSEI obtained bids from suppliers for phase one.
One of the bidders was Universal, a developer of automated assembly platforms.
MSEI awarded phase one to Universal, and the parties memorialized their
4
agreement in an Equipment Purchase Agreement (the ʺEPAʺ), executed in June
2007.
The THS ultimately developed by Universal had two software
components: the station software and the server software. The station software
was embedded on each individual Polaris station and ʺmanage[d] the operation
of conveyors, elevators, stacks and robotic arms.ʺ J. Appʹx at 2606. This software
was stored on each stationʹs programmable logic controller and could be
downloaded on site by physically connecting a computer to the station and
downloading the source code. Id. at 1299‐1300, 1480‐81, 1532‐34. The server
software, on the other hand, was the ʺbrains of the operation,ʺ id. at 988, which
ʺsynchronize[d] the activities of the hardware and softwareʺ and was
ʺresponsible for coordinating the movement of the module trays,ʺ id. at 2606.
The source code for the server could not be downloaded in the same way as the
station software, and under the EPA, Universal was under no obligation to
provide the server source code to MSEI. Id. at 2344 (providing that ʺsource code
will not be providedʺ). The parties agreed, however, in their Final Customer
Acceptance letter (the ʺFCAʺ) that Universal would provide MSEI with a copy of
5
the server source code at the time of delivery. The THS was delivered in October
2008.
In 2009, MSEI solicited bids for the next phase (ʺTHS2ʺ). The bid
documents for THS2 indicated that MSEI had the responsibility to provide the
software for the station and server source code to be used in the project. In April
2010, MSEI awarded the project to MTA, a competitor of Universal, which
submitted a lower bid for the project. On April 8, 2010, MSEI and MTA entered
into an agreement (the ʺMTA Agreementʺ). On April 16, Universal and MTA
were notified by email that MSEI had ʺawarded the business to MTA for the THS
line two project.ʺ J. Appʹx at 2878. MTA subsequently sought to purchase
Polaris stations from Universal for use in THS2, but on August 4, 2010, Universal
declined to sell them to MTA. Thereafter, MSEI downloaded the source code
from the individual Polaris stations and the server source code that Universal
gave to MSEI on delivery of phase one; it then gave the code to MTA to use in
the production of THS2. MSEI and MTA subsequently modified the server
source code to meet the requirements of THS2.
6
The EPA contains several provisions relating to the partiesʹ
intellectual property rights. Section 8 is entitled ʺIntellectual Property.ʺ Section
8.2(d) provides that
[i]f [Universal] uses any Pre‐Existing Intellectual Property in connection
with this Agreement, [Universal] hereby grants MSEI, MSEIʹs
subcontractors, or suppliers, a non‐exclusive, royalty‐free, worldwide,
perpetual license, to use, reproduce, display, of the Pre‐Existing
Intellectual Property for MSEIʹs internal use only.
J. Appʹx at 2336. ʺPre‐Existing Intellectual Propertyʺ is defined as ʺany trade
secret, invention, work of authorship, mask work or protectable design that has
already been conceived or developed by anyone other than MSEI before
[Universal] renders any services under the Agreement.ʺ Id.
Exhibit E to the EPA, entitled ʺEquipment Acceptance Form,ʺ
contained a blank form for the parties to fill in upon final delivery and
acceptance.
On October 31, 2008, Universal and MSEI signed a negotiated ʺFinal
Customer Acceptanceʺ letter, which stated, among other things, that Universal
agrees to provide the THS server code as is with the understanding that
MSEI assumes the risk of invalidating the warranty in the event a change
made by MSEI to the source code causes damage to any of the THS line
hardware.
J. Appʹx at 2361.
7
B. Procedural Background
On July 15, 2013, Universal brought this action against MSEI and
MTA in the Northern District of New York, alleging copyright infringement,
misappropriation of trade secrets, breach of contract, unfair competition, unjust
enrichment, and promissory estoppel. On February 24, 2017, the district court
granted judgment on the pleadings and dismissed Universalʹs claim for
promissory estoppel and its claims against MSEI for unjust enrichment and
unfair competition. Universal does not challenge those rulings on appeal.
In July and August of 2017, the parties proceeded to trial before a
jury on the remaining claims ‐‐ breach of contract, copyright infringement,
misappropriation of trade secrets, and as to MTA only, unjust enrichment1 and
unfair competition. After the close of Universalʹs case‐in‐chief, the district court
reserved judgment on defendantsʹ motion for judgment as a matter of law. After
six days of trial and following the close of the evidence on August 7, the district
court orally granted defendantsʹ renewed motions for judgment as a matter of
law. As the district court explained: ʺThe whole issue here is whether or not
1 Universal has abandoned on appeal its claim against MTA for unjust enrichment.
It has thus waived any challenge to the ruling below. See Norton v. Samʹs Club, 145 F.3d
114, 117 (2d Cir. 1998).
8
under the arrangements between the parties, contractual and otherwise, MSEI
had permission and/or ownership in the property that was transmitted to them.ʺ
Spec. Appʹx at 3. The district found as a matter of law that Universal (1) had a
protected intellectually property interest in the system source code, (2)
transferred copies of that property to MSEI, and (3) offered no evidence that
MSEI had exceeded the scope of its license under the EPA by giving MTA the
intellectual property. These findings were dispositive of all claims. The court
reaffirmed its ruling in a nine‐page order issued the following day. It entered
judgment August 9, 2017.
This appeal followed.
DISCUSSION
Universal argues that the district court erred in granting defendantsʹ
renewed motion for judgment as a matter of law. In short, it contends that the
district courtʹs construction of the EPA is incorrect as a matter of law and that it
demonstrated the existence of factual questions that should have been resolved
by a jury.
The district court based its grant of judgment as a matter of law on a
number of overlapping grounds: it ruled that (1) the license granted by
9
Universal to MSEI pursuant to § 8.2(d) of the EPA authorized MSEI and MTAʹs
use of the source code; (2) the Final Customer Acceptance letter granted MSEI
ownership of the source code; (3) the evidence offered by Universal as to
damages was insufficient as a matter of law; (4) Universalʹs copyright and
misappropriation of trade secrets claims were time barred; (5) Universalʹs breach
of contract claim was preempted by the Copyright Act; and (6) Universalʹs
copyright claim failed because MSEIʹs use of the source code was authorized by
17 U.S.C. § 117(a).
We review de novo both the grant of judgment as a matter of law and
the district courtʹs construction of the agreements. Phillips v. Audio Active Ltd.,
494 F.3d 378, 384 (2d Cir. 2007); Cash v. Cty. of Erie, 654 F.3d 324, 332‐33 (2d Cir.
2011). In reviewing a grant of judgment as a matter of law, we construe the
evidence in the light most favorable to Universal, drawing all reasonable
inferences in its favor, and without making credibility determinations or
weighing the evidence. Reeves v. Sanderson Plumbing Prods., Inc., 530 U.S. 133, 150
(2000).
It is undisputed that in completing phases two and three, MSEI and
MTA used source code that Universal had provided for phase one. The principal
10
issue presented is whether the EPA permitted them to do so. We hold that
defendantsʹ conduct did not breach § 8.2(d) of the EPA and was non‐infringing
because that provision permitted defendants to reproduce and use the station
and server source code; defendantsʹ adaptation of the server source code was
non‐infringing because it was authorized by 17 U.S.C. § 117(a); Universalʹs
contract claim that defendantsʹ modification of the server source code breached
the EPA is preempted by the Copyright Act; Universalʹs claim of
misappropriation of trade secrets is time‐barred; and MTA did not unfairly
compete with Universal because its conduct was not in bad faith. Accordingly,
we affirm.
I. Copyright Infringement
A. Applicable Law
Universalʹs copyright infringement claim turns on whether
defendantsʹ conduct fell within the scope of the non‐exclusive license provided in
the EPA. This is so because a valid license ʺimmunizes the licensee from a charge
of copyright infringement, provided that the licensee uses the copyright as
agreed with the licensor.ʺ Davis v. Blige, 505 F.3d 90, 100 (2d Cir. 2007). Where a
claim turns on the scope of a license, ʺthe copyright owner bears the burden of
11
proving that the defendantʹs [use] was unauthorized.ʺ Tasini v. N.Y. Times Co.,
206 F.3d 161, 171 (2d Cir. 2000) (quoting Bourne v. Walt Disney Co., 68 F.3d 621,
631 (2d Cir. 1995)).
Whether the partiesʹ license agreement encompasses the defendantsʹ
activities is ʺessentiallyʺ a question of contract interpretation. See Bourne, 68 F.3d
at 631. ʺ[A] written agreement that is complete, clear and unambiguous on its
face must be enforced according to the plain meaning of its terms.ʺ Greenfield v.
Philles Records, Inc., 98 N.Y.2d 562, 569 (2002) (citing R/S Assocs. v. N.Y. Job Dev.
Auth., 98 N.Y.2d 29, 32 (2002)).2 Where, however, ʺthe language used is
susceptible to differing interpretations, each of which may be said to be as
reasonable as another, then the interpretation of the contract becomes a question
of fact for the jury and extrinsic evidence of the partiesʹ intent properly is
admissible.ʺ Bourne, 68 F.3d at 629 (internal quotations marks omitted). The
existence of an ambiguity, if any, is to ʺbe ascertained from the face of an
agreement without regard to extrinsic evidence.ʺ Reiss v. Fin. Perf. Corp., 97
2
The EPA does not contain a choice‐of‐law provision, but the parties agree that
New York law applies. See Federal Ins. Co. v. Am. Home Assur. Co., 639 F.3d 557, 566 (2d
Cir. 2011) (noting that where, during the course of litigation, ʺthe parties agree that New
York law controls, this is sufficient to establish choice of lawʺ).
12
N.Y.2d 195, 199 (2001); see also Duane Reade Inc. v. St. Paul Fire & Marine Ins. Co.,
411 F.3d 384, 390 (2d Cir. 2005).
B. Application
We first consider whether the EPA unambiguously permitted MSEI
to transfer the source code to MTA for reproduction and use in subsequent
phases of the THS. We next consider whether MSEI or MTAʹs modification of
Universalʹs pre‐existing intellectual property was infringing. We hold, for the
reasons discussed below, that the EPA unambiguously permitted MSEI and
MTA to reproduce and use Universalʹs pre‐existing intellectual property in
subsequent phases of the THS. Defendantsʹ conduct was, therefore, not
infringing. We further conclude that MSEI and MTAʹs adaptation of the server
source code for use in additional testing stations was authorized by 17 U.S.C.
§ 117(a) and thus non‐infringing.
1. Section 8.2(d) of the EPA Unambiguously Permitted MSEI
and MTA to Reproduce Universalʹs Pre‐Existing Source Code
Universal argues that the EPA plainly prohibited MSEI from
furnishing MTA with the server and station source code to replicate the THS. It
argues in the alternative that the relevant provisions of the EPA are ambiguous
and that therefore their interpretation could not be resolved as a matter of law.
13
We disagree and hold that the EPA unambiguously permitted MSEI and MTA to
reproduce Universalʹs source code for use in subsequent phases of the THS ‐‐
conduct that constituted internal use.
Section 8.2(d) of the EPA provides that ʺ[i]f [Universal] uses any Pre‐
Existing Intellectual Property in connection with this Agreement, [Universal]
hereby grants MSEI, MSEIʹs subcontractors, or suppliers, a non‐exclusive,
royalty‐free, worldwide, perpetual license to, use, reproduce, display, of the Pre‐
Existing Intellectual property for MSEIʹs internal use only.ʺ J. Appʹx at 2336. It
was Universalʹs burden to prove that MSEI exceeded the scope of this license.
See Tasini, 206 F.3d at 171. To do so, it was required to prove that (1) MSEI or its
ʺsubcontractorʺ or ʺsupplierʺ (2) did more than ʺuse, reproduce, displayʺ for
MSEIʹs ʺinternal use onlyʺ (3) Universalʹs ʺPre‐Existing Intellectual Property.ʺ
First, MTA is a ʺsupplierʺ of MSEI. The plain meaning of ʺsupplierʺ
unambiguously includes a component manufacturer like MTA. See Supplier,
Blackʹs Law Dictionary (10th ed. 2014) (defining ʺsupplierʺ as ʺ[a] person or
business engaged, directly or indirectly, in making a product available to
consumersʺ); Supplier, Oxford English Dictionary (2d ed. 1989) (defining
ʺsupplierʺ as ʺone who . . . furnishes something neededʺ). Indeed, in its trial brief
14
to the district court, Universal twice used the term ʺsupplierʺ in reference to
MTA. J. Appʹx at 679, 685. Universalʹs argument that MTA is not a supplier thus
fails.
Second, MSEI and MTA had license to ʺuse, reproduce, displayʺ the
intellectual property for MSEIʹs ʺinternal use only.ʺ J. Appʹx at 2336. The plain
meaning of ʺinternal useʺ clearly and unambiguously encompasses MSEIʹs
agreement to permit its supplier to use the software to produce subsequent
phases of the THS. There is no evidence that the source code was used by MSEI
and MTA for anything other than developing and implementing phases two and
three of MSEIʹs internal test handling system.
Universal contends that ʺinternal useʺ was meant to limit the license
of ʺthird parties ‐‐ subcontractors and suppliers ‐‐ whose products, components,
or services MSEI would be using internally as it tested products on Universalʹs
THS lineʺ at MSEIʹs premises. Appellantʹs Br. at 25; see also Appellantʹs Reply Br.
at 12 (ʺMSEIʹs external provision of Universalʹs software to MTA to build the lines
violated Section 8.2(d).ʺ (emphasis in original)). We are unconvinced.
This argument is premised on a physical internal‐external
dichotomy, whereby a supplierʹs ʺuse, reproduc[tion], [or] displayʺ of Universalʹs
15
intellectual property on MSEIʹs premises would be permitted, while the same use
or reproduction off site would violate the license. But this cannot be the partiesʹ
intent, because by its terms the license is ʺworldwideʺ in scope and extends to
MSEIʹs suppliers and subcontractors. See EPA § 8.2(d). A license cannot
simultaneously be worldwide and limited to the physical confines of the
licenseeʹs premises. The more natural understanding of ʺinternal useʺ in this
context is that the pre‐existing intellectual property could be used by or for
MSEIʹs existing business ‐‐ not for resale or for the use or benefit of others. See
Internal, Oxford English Dictionary (3d ed. 2015) (defining ʺinternalʺ as ʺaffairs
and activities within an institution, organization, department, etc.; relating to
such affairs or activities; applying or used within an organizationʺ); see also
Analect LLC v. Fifth Third Bancorp, 380 F. Appʹx 54, 58 (2d Cir. 2010) (summary
order) (finding that contract prohibiting resale and distribution by purchaser did
not prohibit ʺinternal useʺ); Norwest Corp. v. C.I.R., 110 T.C. 454, 458 (1998)
(ʺ[P]etitioner engaged in numerous projects involving the development of
internal use software ‐‐ that is, software developed solely for petitionerʹs internal
business and management purposes.ʺ). In the context of computer software, the
16
on‐premises, off‐premises distinction makes even less sense, given the nature of
software and source code.
This understanding is reinforced by our recent holding that ʺunder
long‐established principles of agency law, a licensee under a non‐exclusive
copyright license may use third‐party assistance in exercising its license rights
unless the license expressly provides otherwise.ʺ Great Minds v. Fedex Office &
Print Servs., Inc., 886 F.3d 91, 94 (2d Cir. 2018). Here, the license expressly
provided that the rights extended to MSEIʹs suppliers, which surely included
MTA. Hence, MSEI and MTAʹs reproduction of the source code for MSEIʹs
internal use did not, as a matter of law, exceed the scope of the license. Because
there is nothing in the record to suggest that the source code was used for
anything other than for MSEI in subsequent phases of its THS, MSEIʹs provision
of the source code to MTA and MTAʹs use of the source code for MSEIʹS benefit
did not exceed the scope of the license, and thus was non‐infringing.
2. Modification of the Source Code was Authorized by 17 U.S.C.
§ 117(a)
We turn next to the question whether MSEI and MTA did more than
ʺuse, reproduce, [or] displayʺ Universalʹs pre‐existing source code ‐‐ that is,
17
whether it modified the source code and, if so, whether the modification
infringed Universalʹs copyright.
a. MSEI and MTA Modified the Server Source Code
As Universal contends, evidence at trial showed that the server
source code that MSEI possessed differed from that delivered by Universal in
October of 2008. Universalʹs expert witness Richard Hooper was ʺasked to
compare two sets of server source code.ʺ J. Appʹx at 1719. The first set of source
code was the THS server source code that Universal had in its files. The second
set was the source code as it existed on MSEIʹs system at the time it was
produced in the course of litigation. Hooper testified that the server source code
consists of twenty or thirty individual files ʺthat hold the source code,ʺ which
have descriptive names like ʺAssemblyStationManager,ʺ ʺLogStationManagerʺ,
ʺMessageManager,ʺ ʺRF/ShakerManager,ʺ and ʺFeederShakerManager.ʺ Id. at
1720‐23. He proceeded to show the jury a demonstrative, which included
excerpted line‐by‐line comparisons of the Universal and MSEI source code. He
noted that although the codes were nearly ʺidentical,ʺ there were ʺsome changes
that were made to the MSEI source code.ʺ Id. at 1724. For instance, the
ʺLogStationManagerʺ files were ʺ99.4 percent . . . exactly the same.ʺ Id. at 1725.
Hooper concluded that ʺMSEI started with the Universal source code and then
18
made some changes to it. They added lines of code to it and they deleted lines of
code from it.ʺ Id. He also concluded that none of the source code was publicly
available.
The conclusion that the server source code was modified by MSEI or
MTA after delivery by Universal was reinforced by Christopher Demuth, who
helped Universal to develop the sever source code and was subsequently hired
by MSEI to make modifications. DeMuth testified that in October 2009, MSEI
contacted him with a ʺpunch list of some features they wanted added, some
changes they wanted made to help improve efficiency of the line.ʺ Id. at 1633.
He made various modifications over the course of several years, in particular
because MSEI was ʺworking on building another THS line and they needed
modifications to the THS server to support . . . communicating with all of the
[new] stations.ʺ Id. at 1635‐38. Thus, the server source code was modified.
Unlike the server source code, Universal does not seriously contend
that MSEI and MTA modified the station source code. Indeed, there is nothing in
the voluminous record indicating that the station software was modified.
Although the MTA Agreement indicates that MTA would be required to
ʺ[m]odify, if necessary, and install SWʺ (SW means software) for each of the
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stations, id. at 2434‐35, it would be speculative to conclude, without something
more, that the station software was actually modified. We therefore proceed to
consider only whether MSEIʹs modification of the server source code was
authorized by 17 U.S.C. § 117(a).
b. The Server Source Code Modifications Were Authorized
by 17 U.S.C. § 117(a)
It is axiomatic that ʺ[a]n unlicensed use of the copyright is not an
infringement unless it conflicts with one of the specific exclusive rights conferred
by the copyright statute.ʺ Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S.
417, 447 (1984). The Copyright Act grants copyright holders a bundle of
exclusive rights, including the rights to ʺreproduce . . . in copies,ʺ ʺprepare
derivative works,ʺ ʺdistribute copies,ʺ ʺperform,ʺ and ʺdisplayʺ their works. 17
U.S.C. § 106. Source code, the human‐readable literal elements of software, is
copyrightable. See Oracle Am., Inc. v. Google Inc., 750 F.3d 1339, 1355‐56 (Fed. Cir.
2014). It is also well established that copyright owners may grant others license
to use their rights. John Wiley & Sons, Inc. v. DRK Photo, 882 F.3d 394, 410 (2d Cir.
2018). But because copyright licenses prohibit any use not authorized, a licensee
infringes the ownerʹs copyright if its use exceeds the scope of its license. Gilliam
v. Am. Broad. Cos., 538 F.2d 14, 20 (2d Cir. 1976) (noting that ʺ[o]ne who obtains
20
permission to use a copyrightedʺ work ʺmay not exceed the specific purpose for
which permission was grantedʺ and concluding that ʺunauthorized editing of the
underlying work, if proven, would constitute an infringement of the copyright in
that work similar to any other use of a work that exceeded the license granted by
the proprietor of the copyrightʺ); see also S.O.S., Inc. v. Payday, Inc., 886 F.2d 1081,
1088 (9th Cir. 1989). Thus, § 8.2(d) of the EPA arguably prohibits, at least
impliedly, MSEI and its suppliers from modifying Universalʹs pre‐existing
intellectual property.
The Copyright Act, however, provides an affirmative defense that
allows the owner of a copy of a computer program to copy or modify the
program for limited purposes without incurring liability for infringement. See 17
U.S.C. § 117(a). Section 117(a) provides, in relevant part:
Notwithstanding the provisions of section 106 [which lists the exclusive
rights of a copyright holder], it is not an infringement for the owner of a
copy of a computer program to make or authorize the making of another
copy or adaptation of that computer program provided:
(1) that such a new copy or adaptation is created as an essential
step in the utilization of the computer program in conjunction with
a machine and that it is used in no other manner . . . .
Thus, a defendant seeking protection under § 117(a) must demonstrate that the
new adaptation (1) was made by the ʺowner of a copy of [the] computer
21
program,ʺ (2) was ʺcreated as an essential step in the utilization of the computer
program in conjunction with a machine,ʺ and (3) was ʺused in no other manner.ʺ
17 U.S.C. § 117(a); see Krause v. Titleserv, Inc., 402 F.3d 119, 122 (2d Cir. 2005). We
consider each requirement in turn.
1. MSEI Is the ʺowner of a copy of a computer
programʺ
We have held that ʺownerʺ as used in § 117(a) does not require
formal title in a program copy. Titleserv, 402 F.3d at 123. Instead, ʺcourts should
inquire into whether the party exercised sufficient incidents of ownership over a
copy of the program to be sensibly considered the owner of the copy for
purposes of § 117(a).ʺ Id. at 124.
In Titleserv, we found the following facts sufficient to consider
defendant an owner under § 117(a): defendant paid plaintiff ʺsubstantial
consideration to develop the programs for its sole benefitʺ; plaintiff ʺcustomized
the software to serve [defendantʹs] operationsʺ; plaintiff stored copies ʺon a
server owned by [defendant]ʺ; plaintiff ʺnever reserved the right to repossess the
copies used by [defendant] and agreed that [defendant] had the right to continue
to possess and use the programs forever, regardless whether its relationship with
22
[defendant] terminatedʺ; and ʺ[defendant] was similarly free to discard or
destroy the copies any time it wished.ʺ Id.
For similar reasons, we conclude as a matter of law that MSEI
owned copies of the server software within the meaning of § 117(a). MSEI paid
Universal over $1 million for the combined hardware and software solution.
Universal customized the software to serve MSEIʹs precise needs.3 Universal
expressly ʺprovidedʺ a copy of the server software to MSEI with the sole
condition that ʺMSEI assume[d] the risk of invalidating the warranty in the event
a change made by MSEI to the source code cause[d] damage to any of the THS
line hardware.ʺ J. Appʹx at 2361. Universal granted MSEI and its suppliers
broad rights to the server source code ‐‐ a perpetual, worldwide license to use,
reproduce, and display the software for MSEIʹs internal use. J. Appʹx at 2336.
Although the terms of the EPA expired on December 31, 2012, MSEIʹs rights to
3 Frank Caudrillier, Universalʹs project manager for the THS, testified that ʺthe
THS server was developed based on . . . some common tools that we had . . . developed
previously, and then customized . . . to respond to the requirements of [MSEI].ʺ J.
Appʹx at 1511. Kevin Ford, Universalʹs lead software engineer, testified that the server
source code was ʺcreated specifically for the THS lineʺ to ʺimplement[] MSEIʹs
requirements.ʺ Id. at 1668‐69. A change order in evidence shows that modifications
were made to ʺTHS interface, module information table, reseat and correlate,ʺ which
Ford testified were modifications to the server source code. Id. at 1670‐71.
23
the software ʺcontinue perpetually and do not terminate upon completion of the
services.ʺ Id. at 2337. Nothing in the arrangement between MSEI and Universal
indicates that MSEI was in any way restricted from discarding or disposing of
the software as it wished. For all of these reasons, MSEI was an owner of the
station and server source code under § 117(a).
Universal contends that MSEI was not an owner because § 8.2(d)
ʺseverely limitedʺ MSEIʹs rights to the software. For support, it cites DSC
Communications Corp. v. Pulse Communications, Inc., 170 F.3d 1354 (Fed. Cir. 1999).
But as we noted in Titleserv, the defendant in DSC Communications was expressly
prohibited from using the software on hardware other than that provided by
plaintiff. 402 F.3d at 123. MSEI faced no such prohibition. In fact, under the
EPA, MSEI was authorized to use and reproduce the software at will so long as
its uses were ʺinternal.ʺ
Universalʹs argument does find some additional support from the
Ninth Circuit, which has held ʺthat a software user is a licensee rather than an
owner of a copy where the copyright owner (1) specified that the user is granted
a license; (2) significantly restricts the userʹs ability to transfer the software; and
(3) imposes notable use restrictions.ʺ Vernor v. Autodesk, Inc., 621 F.3d 1102, 1111
24
(9th Cir. 2010) (footnote omitted). Although the EPA granted MSEI a license that
was limited to MSEIʹs internal use, it subsequently transferred a copy of the
server source code to MSEI with the sole condition that MSEI would be liable for
any damage caused by modifications. J. Appʹx at 2361. Several Universal
employees, including its executives, as well as MSEI employees, testified that this
provision resolved the issue of ʺsource code ownership.ʺ Id. at 1048, 1270‐71,
1453‐54, 1545, 2126‐27. In an email to MSEI on October 31, 2008 ‐‐ the date of
final delivery ‐‐ Universal stated internally, ʺAs you can see, we are trying to get
away from the Source Code.ʺ Id. at 2632. It then told MSEI, ʺwe are ready to let
you assume ownership of the line.ʺ Id. at 3009. Thereafter, Universal instructed
its team to ʺget the source code to them todayʺ and to ʺbe sure it is packaged and
ready to [sic] (or email it to them or give them the key or whatever).ʺ Id. at 2632.
Thus, for the purposes of applying § 117(a), a reasonably jury could
only find that MSEI owned a copy of the THS software.
2. The Adaptation was ʺcreated as an essential step
in the utilization of the computer program in
conjunction with a machineʺ
To receive the protection of § 117(a), MSEI must also demonstrate
that its modification of the software was ʺan essential step in the utilization of the
computer program[s] in conjunction with a machine.ʺ In Aymes v. Bonelli, the
25
defendant retail store used programs to track inventory and sales, and generally
organize its records. 47 F.3d 23, 24 (2d Cir. 1995). The defendants modified the
programs to keep them up‐to‐date and to ensure their compatibility with
successive generations of computer systems. Id. at 26. We held that the
modifications were essential to the defendantsʹ utilization of the programs within
the meaning of § 117(a)(1) because the ʺadaptations were essential to allow use of
the program[s] for the very purpose for which [they were] purchased.ʺ Id. at 27.
In Titleserv, the defendant used the programs at issue ʺto track and
report on the status of client requests and other aspects of its operations.ʺ 402
F.3d at 120. The defendant modified the programs by correcting bugs,
ʺperforming routine tasks necessary to keep the programs up‐to‐date and to
maintain their usefulness to [defendant],ʺ incorporating the programs into a new
system implemented by defendant, and adding new capabilities to help ʺmake
the programs more responsive to the needs of [defendantʹs] business.ʺ Id. at 125.
We reiterated, as we originally held in Aymes, that ʺadaptation of the copy of
the[] software so that it would continue to function on the defendantsʹ new
computer systemʺ constituted an ʺessential stepʺ within the meaning of § 117(a).
Id. at 126. We further held that the ʺaddition of new features,ʺ which ʺwere not
26
strictly necessary to keep the programs functioning, but were designed to
improve their functionality in serving the business for which they were created,ʺ
were also ʺessential.ʺ Id.; see also Final Report of the National Commission on New
Technological Uses of Copyrighted Works 13 (1978) [hereinafter ʺCONTU Reportʺ]
(ʺ[A] right to make those changes necessary to enable the use for which it was
both sold and purchased should be provided. The conversion of a program from
one higher‐level language to another to facilitate use would fall within this right,
as would the right to add features to the program that were not present at the
time of rightful acquisition.ʺ). In doing so, however, we noted an important
limitation: an ʺessentialʺ improvement ought not to ʺharm the interests of the
copyright proprietor.ʺ Id. at 129 (citing CONTU Report at 13).
As Universalʹs witnesses testified, the copy of the server software
given to MSEI was ʺpretty much identicalʺ to the copy owned by MSEI. J. Appʹx
at 1724. The modifications that were made were undertaken ʺto help improve
efficiency of the line,ʺ id. at 1633, and to enable the server software to ʺsupport
. . . communicating with all of the [new] stations.ʺ Id. at 1635‐38. The
modifications were, therefore, ʺdesigned to improve [the server source codeʹs]
27
functionality in serving the business for which [it was] created.ʺ Titleserv, 402
F.3d at 126.
Universal claims that MSEIʹs provision of the source code to MTA ‐‐
ʺa competitorʺ of MSEI ‐‐ is exactly the sort of harm we indicated in Titleserv
might present ʺ[a] different scenario.ʺ Id. We disagree that this is the sort of
harm envisioned by § 117(a). By its terms, § 117(a) permits the owner of a copy
ʺto make or authorize the making . . . of another adaptation.ʺ 17 U.S.C. § 117(a)
(emphasis added). And, as we held above, Universal expressly authorized MSEI
and its suppliers and subcontractors to use and reproduce the software at issue.
True, alterations that ʺsomehow interfere[] with [a copyright ownerʹs] access to,
or ability to exploit, the copyrighted workʺ might render modifications non‐
essential under § 117(a), but where the copyright owner ʺenjoy[s] no less
opportunity after . . . changes, than before, to use, market, or otherwise reap the
fruits of the copyrighted programs that he created,ʺ the changes may properly be
considered essential under § 117(a). Titleserv, 402 F.3d at 129.
MSEIʹs use did not inhibit Universalʹs ability to market or sell its
server software to others, nor did it divulge sensitive Universal information or
enrich MSEI or MTA at the expense of Universal. MSEI made and authorized the
28
making of minor modifications, narrowly tailored to adapting the server
software for the use for which it was designed ‐‐ orchestration of the test handing
stations to ensure the quality of MSEIʹs implantable medical devices.
Accordingly, we hold that a reasonable jury could only find that the
modifications made by MSEI were essential as they allowed the existing server
software to interact with additional systems in the manner intended when the
source code was developed for MSEI.
3. The Adaptation was ʺused in no other mannerʺ
Finally, to warrant the protection of § 117(a), MSEI must show that
the server software was ʺused in no other manner,ʺ that is, it was used only to
make an adaptation as an essential step in utilizing the software in conjunction
with the test handling system. Universal argues that MSEIʹs modification of the
server software to operate with new machines, rather than the existing machines
created by Universal, defeats MSEIʹs claim to protection from § 117(a).
ʺWhether a questioned use is a use in another manner . . . depend[s]
on the type of use envisioned in the creation of the program.ʺ Titleserv, 402 F.3d
at 129. The server software was designed to be the ʺbrains of the operation,ʺ J.
Appʹx at 988, which ʺsynchronize[d] the activities of the hardware and softwareʺ
and was ʺresponsible for coordinating the movement of the module trays,ʺ id. at
29
2606. These are precisely the purposes for which MSEI and MTA made
modifications, as indicated in the Statement of Work. See id. at 2366 (ʺUpdate
THS Server software to add functionality for the new stations.ʺ); see also id. at
2367 (ʺScope of the project . . . is first to replicate the existing system . . . , and
then expand this configuration to add the capability to add three . . . electrical
testers . . . , one RF testing stations and one Shaker test station.ʺ). There is
nothing in the record to suggest that the server source code was used for any
purpose other than to adapt the system to handle new testing stations for MSEIʹs
internal use. See Titleserv, 402 F.3d at 130 (ʺWhat is important is that the
transaction for which the programs are used is the type of transaction for which
the programs were developed.ʺ). Thus, MSEI ʺsimply increased the versatility of
the programs by allowing themʺ to interoperate with new test handling stations,
which ʺconstitutes use in the same manner, with the benefit of an adaptation
increasing versatility.ʺ Id.
Moreover, the server software customized by Universal for MSEI
was part of the first phase of MSEIʹs multi‐phased test handling system project.
Universal was aware that the project had additional phases when it signed the
EPA, and at that time it had no guarantees that it would be chosen to supply the
30
later phases. The addition of new systems was, therefore, a use contemplated at
the outset.4
For the foregoing reasons, we conclude as a matter of law that it was
not an infringement for MSEI as the ʺowner of a copy of a computer program,ʺ or
MTA as MSEIʹs supplier, to ʺmake or have made [an] adaptation,ʺ where ʺsuch
adaptation was created as an essential step in the utilization of the computer
program in conjunction with a machine and . . . in no other manner.ʺ 17 U.S.C.
§ 117(a).
II. Breach of Contract
MSEI and MTAʹs use and reproduction of Universalʹs pre‐existing
intellectual property for use in subsequent phases of the THS was non‐infringing
because defendants were expressly licensed to do so under § 8.2(d) of the EPA.
See supra Part I.B.1. It necessarily follows that MSEIʹs use and reproduction of the
source code was not in breach of the EPA. See Davis, 505 F.3d at 100; Bourne, 68
F.3d at 631. Universalʹs breach of contract claim is thus reduced to its assertion
that MSEI breached the EPA by modifying the server source code. We do not
4 We note also that Universal was aware that the project to ʺreplicate the existing
systemʺ was awarded to MTA in April 2010, J. Appʹx at 1014, 2878, and yet it did not
object to MTAʹs provision of subsequent phases of the system, including modifying the
server source code, until July 2013 when this action was filed.
31
reach the merits of this question, however, because what remains of Universalʹs
breach of contract claim is preempted by the Copyright Act.
The Copyright Act exclusively governs a claim when (1) the
particular work to which the claim is being applied falls within the type of works
protected by the Copyright Act under 17 U.S.C. §§ 102 and 103, and (2) the claim
seeks to vindicate legal or equitable rights that are equivalent to one of the
bundle of exclusive rights already protected by copyright law under 17 U.S.C.
§ 106. Briarpatch L.P. v. Phoenix Pictures, Inc., 373 F.3d 296, 305 (2d Cir. 2004). ʺA
state law right is equivalent to one of the exclusive rights of copyright if it may
be abridged by an act which, in and of itself, would infringe one of the exclusive
rights.ʺ Forest Park Pictures v. Universal Television Network, Inc., 683 F.3d 424, 430
(2d Cir. 2012) (internal quotation marks omitted). ʺʹBut if an extra element is
required instead of or in addition to the acts of reproduction, performance,
distribution or display, in order to constitute a state‐created cause of action,ʹ
there is no preemption.ʺ Id. (quoting Comput. Assocs. Intʹl, Inc. v. Altai, Inc., 982
F.2d 693, 716 (2d Cir. 1992)). Preemption, therefore, turns on ʺwhat [the] plaintiff
seeks to protect, the theories in which the matter is thought to be protected and
32
the rights sought to be enforced.ʺ Comput. Assocs., 982 F.2d at 716 (internal
quotation marks omitted).
As we have recognized, ʺpreemption cannot be avoided simply by
labeling a claim ʹbreach of contract.ʹʺ Forest Park, 683 F.3d at 432; see also 5
Nimmer on Copyright § 19D.03[C][2][b] (suggesting that a contract that ʺdoes
not purport to give [the plaintiff] any protection beyond that provided . . . by
copyright law itselfʺ would be preempted). In Forest Park, we held the contract at
issue not to be preempted because it included an ʺextra elementʺ of a promise to
pay, and plaintiff sought contract damages when defendant used plaintiffʹs
copyrighted work without paying for the privilege. Forest Park, 683 F.3d at 428.
Here, by contrast, there is no dispute over payment. Universal does not argue
that defendants violated the EPA by failing to pay for use of the intellectual
property.
What remains of Universal breach of contract claim is that MSEIʹs
modification of the source code exceeded the scope of the license contained in the
EPA. This claim does not include an ʺextra elementʺ that is different from those
of its copyright infringement claim. The prohibition against modification is not
explicit in the EPA; it is, instead, arguably implied because copyright licenses are
33
assumed to permit those uses not expressly authorized. Gilliam, 538 F.2d at 20.
Universal therefore necessarily seeks to vindicate its exclusive rights under 17
U.S.C. § 106. That Universal and MSEI are in contractual privity does nothing to
change the fact that vindication of an exclusive right under the Copyright Act,
read into a license by negative implication, is preempted by the Copyright Act.
See 3 Nimmer § 10.15[A] (noting that ʺuse by the grantee without authority from
the grantorʺ leads to the legal consequence ʺthat the granteeʹs conduct may
constitute copyright infringementʺ). In Kamakazi Music Corp. v. Robbins Music
Corp., we held that a licensorʹs suit against a licensee whose license had expired
was for copyright infringement, not breach of contract. 684 F.2d 228, 230 (2d Cir.
1982). This rationale extends equally to a licensor whose use arguably exceeds
the scope, rather than the duration, of a license. See Marshall v. New Kids On The
Block Pʹship, 780 F. Supp. 1005, 1008‐09 (S.D.N.Y. 1991). Because this portion of
Universalʹs breach of contract claim seeks solely to vindicate an exclusive right
under the Copyright Act, it is preempted. It thus fails as a matter of law because,
as discussed supra Part I.B.2, the affirmative defense of § 117(a) bars recovery to
Universal on the theory that MSEI or MTAʹs modifications to the server source
code infringed Universalʹs copyright.
34
III. Misappropriation of Trade Secrets
A plaintiff claiming misappropriation of a trade secret must prove
that (1) ʺit possessed a trade secret,ʺ and (2) the trade secret was used by
defendant ʺin breach of an agreement, confidence, or duty, or as a result of
discovery by improper means.ʺ Integrated Cash Mgmt. Servs., Inc. v. Digital
Transactions, Inc., 920 F.2d 171, 173 (2d Cir. 1990). We do not reach the merits of
this claim, however, because it is time‐barred by the applicable statute of
limitations.
In New York, a cause of action for the misappropriation of trade
secrets is governed by a three‐year statute of limitations, while claims for
equitable relief are subject to a six‐year statute of limitations. Compare N.Y.
C.P.L.R. § 214(4) (providing three‐year‐statute of limitations for claims of
misappropriation of trade secrets), with id. § 213(1) (providing six‐year statute of
limitations for claims seeking equitable relief). Universal argues that its claim for
injunctive relief is governed by the more generous six‐year limitations period.
ʺ[C]ourts determine the applicable limitations period . . . by
analyzing the substantive remedy that the plaintiff seeks.ʺ ABS Entmʹt, Inc. v.
CBS Corp., 163 F. Supp. 3d 103, 108 (S.D.N.Y. 2016) (applying New York law).
35
ʺWhere the remedy sought is purely monetary in nature, courts construe the suit
as alleging ʹinjury to propertyʹ within the meaning of CPLR 214(4), which has a
three‐year limitations period.ʺ IDT Corp. v. Morgan Stanley Dean Witter & Co., 12
N.Y.3d 132, 139 (2009). In IDT, the equitable relief was incidental to the damages
sought, so ʺlooking to the reality, rather than the form, of [the] action,ʺ the New
York State Court of Appeals concluded that IDT principally sought a monetary
remedy and, thus, held that the three‐year statute of limitations applied. Id. at
139‐40. Similarly, in this case, the main remedy that Universal seeks is monetary
damages. Universalʹs Third Amended Complaint requested that it be awarded
profits and a royalty, not just an injunction, in connection with its
misappropriation of trade secrets claim, as well as double damages, punitive
damages, and attorneysʹ fees. Therefore, because the reality of the cause of action
is that it is one for damages, not injunctive relief, the three‐year statute of
limitations applies.
Universal argues that this statute of limitations should be tolled or
extended on a continuing tort theory. ʺA continuing tort theory may apply . . .
where the plaintiff alleges that a defendant has kept a secret confidential but
continued to use it for commercial advantage.ʺ Andrew Greenberg, Inc. v. Svane,
36
Inc., 830 N.Y.S.2d 358, 362 (App. Div. 2007). ʺWhere, however, the ʹplaintiff had
knowledge of the defendantʹs misappropriation and use of its trade secret, the
continuing tort doctrine does not apply.ʹʺ PaySys Intʹl, Inc. v. Atos Se, No. 14‐
10105, 2016 WL 7116132, at * 9 (S.D.N.Y. Dec. 5, 2016) (quoting VoiceOne
Commcʹns, LLC v. Google Inc., No. 12‐9433, 2014 WL 10936546, at *10 (S.D.N.Y.
Mar. 31, 2014)) (citing cases). Here, Universal had knowledge of MSEI and
MTAʹs alleged misappropriation and use of its trade secret and, accordingly, the
continuing tort theory does not apply.
The evidence shows that Universal was put on notice of its
misappropriation of trade secrets claim more than three years prior to filing its
complaint on July 15, 2013. Accrual of the statute of limitations begins when ʺa
reasonably diligent person in plaintiffʹs position would have been put on inquiry
as to theʺ claim. Stone v. Williams, 970 F.2d 1043, 1048 (2d Cir. 1992). Universalʹs
executive chairman, Jean‐Luc Pelissier, testified that in 2009 he understood that
there were other companies besides Universal bidding on THS2. He also
testified that he understood that when MSEI said it wanted to replicate the THS
line, that included the software. On April 16, 2010, MSEI sent an email to
Universal informing Universal that MSEI awarded the business for the THS
37
replication project to MTA. Based on this evidence, a reasonably diligent person
would have been put on notice of the misappropriation of trade secrets claim ‐‐
that is, that MSEI gave Universalʹs software and source code to MTA so MTA
could replicate and modify it to build the second THS line. Yet Universal did not
assert the claim until more than three years later, in July of 2013. Thus,
Universalʹs claim is time‐barred.
IV. Unfair Competition
Universalʹs remaining claim against MTA for unfair competition
was also properly dismissed. ʺThe essence of an unfair competition claim under
New York law is that the defendant has misappropriated the labors and
expenditures of anotherʺ with ʺsome element of bad faith.ʺ Saratoga Vichy Spring
Co. v. Lehman, 625 F.2d 1037, 1044 (2d Cir. 1980). MTA was informed prior to
executing the MTA Agreement that MSEI and its suppliers were licensed to use
and reproduce Universalʹs source code. Moreover, Bob Archer, MTAʹs CEO and
co‐owner, testified at trial that MTA relied on the language of the EPA in
agreeing to supply MSEI with subsequent phases of the THS.
As we have held, the EPA in fact authorized MTA as MSEIʹs
supplier to use and reproduce Universalʹs pre‐existing intellectual property for
38
the THS replication project. See supra Part I.B.1. And to the extent MTA adapted
the server source code, such adaptions were authorized under federal law. See
supra Part I.B.2. In these circumstances, no reasonable juror could have found
that MTA acted in bad faith in agreeing to replicate the THS line for MSEIʹs
internal use and for no other purpose. See Jeffrey Milstein, Inc. v. Gregor, Lawlor,
Roth, Inc., 58 F.3d 27, 35 (2d Cir. 1995). Accordingly, we affirm the district courtʹs
dismissal of this claim.
CONCLUSION
Accordingly, for the reasons set forth above, the judgment of the
district court is AFFIRMED.
39