Course No. 9200 711 001
Th 6:30 - 9:30 p.m.
|Professor Jay Dratler, Jr.||
Room 231D (IP Alcove)
|Copyright © 2000, 2001, 2002, 2004, 2007 Jay Dratler, Jr. For permission, see CMI.|
Copyright and Other Misuse
Near the middle of the last century, the defense of "misuse" of intellectual property arose. It appeared first in patent cases, in which a patent owner tried to tie the sale of unpatented goods to the sale or lease or patented ones. Courts disfavored tying of this sort, seeing it as an attempt to extend the economic power of the patent beyond its proper bounds. They ruled it an offense against equity, rendering the relevant patents unenforceable, at least temporarily. Courts refrained from invalidating patents on this ground. Rather, they held the patents unenforceable until the patent owner could "purge" the misuse and its effects, for example, by eliminating both the tie and its economic effects.
All this was judge-made law. Courts founded the misuse defense on broad notions of equity and public policy. They saw no need to coordinate misuse doctrine with antitrust law because misuse was a defense, while antitrust law provided causes of action. Moreover, in tying cases the defense then seemed to jibe well with antitrust law, for antitrust courts at that time viewed tying as invariably illegal per se, without analyzing whether or not the patent really provided market power in any "tying" product. Like the antitrust courts of the time, courts adjudicating patent-infringement cases applied the nascent misuse doctrine through simple categorization of behavior, without analyzing market definition, market power, or substantial economic effect.
Eventually the patent bar rebelled. It saw the broad, unprincipled approach to tying—declaring it misuse with little or no substantive analysis—as eroding the value of patents. In particular, the patent bar viewed refusal to allow contractual limitations on how patented products might be used as undermining the exclusive "use" right that patent law granted explicitly. In addition, the misuse doctrine had been applied inconsistently, and the patent bar saw it as imposing substantial uncertainty on patent-related businesses.
In the Patent Act of 1952, the patent bar proposed, and Congress adopted, provisions to preserve the broad "use" right of patentees. Those provisions were codified in Section 271(d)(1) - (3) of the patent act. The Supreme Court upheld them in its seminal decision in Dawson Chemical Co. v. Rohm & Haas Co., 448 U.S. 176, 100 S.Ct. 2601, 65 L.Ed.2d 696 (1980), which allowed a process patentee to control the use of an unpatented chemical by licensing the process of using that chemical as an herbicide.
Those 1952 provisions, however, did not specifically address the issue of tying, so the patent bar had to return to Congress again. In the Patent Misuse Amendments of 1988, Congress added Section 271(d)(4) and (5) which precluded misuse defenses based on a patentee's mere refusal to license, or based on tying absent a showing of market power in the tying product.
With these amendments, Congress coordinated the misuse defense with antitrust law and, at the same time, substantially cut back the growth of misuse in the field of patents. Yet neither the 1952 provisions nor the 1988 patent misuse amendments applied to fields of intellectual property other than patents. Less than two years after the patent misuse amendments, the federal courts of appeals began to extend the doctrine of misuse to copyright.
Lasercomb America, Inc. v. Reynolds
Widener and Sprouse, Circuit Judges, and Hoffman, Senior United States District Judge for the Eastern District of Virginia, sitting by designation. Judge Sprouse wrote the opinion, in which Judge Widener and Senior Judge Hoffman joined.
[*971] Sprouse, Circuit Judge.
Appellants Larry Holliday and Job Reynolds appeal from a district court judgment holding them liable to appellee Lasercomb America, Inc., for copyright infringement and for fraud, based on appellants' unauthorized copying and marketing of appellee's software. We affirm in part, reverse in part, and remand for recomputation of damages.
Appellants and defendants below are Larry Holliday, president and sole shareholder of Holiday Steel Rule Die Corporation (Holiday Steel), and Job Reynolds, a computer programmer for that company. Appellee is Lasercomb America, Inc. (Lasercomb), the plaintiff below. Holiday Steel and Lasercomb were competitors in the manufacture of steel rule dies that are used to cut and score paper and cardboard for folding into boxes and cartons. Lasercomb developed a software program, Interact, which is the object of the dispute between the parties. Using this program, a designer creates a template of a cardboard cutout on a computer screen and the software directs the mechanized creation of the conforming steel rule die.
In 1983, before Lasercomb was ready to market its Interact program generally, it licensed four prerelease copies to Holiday Steel which paid $ 35,000 for the first copy, $ 17,500 each for the next two copies, and $ 2,000 for the fourth copy. Lasercomb informed Holiday Steel that it would charge $ 2,000 for each additional copy Holiday Steel cared to purchase. Apparently ambitious to create for itself an even better deal, Holiday Steel circumvented the protective devices Lasercomb had provided with the software and made three unauthorized copies of Interact which it used on its computer systems. Perhaps buoyed by its success in copying, Holiday Steel then created a software program called "PDS-1000," which was almost entirely a direct copy of Interact, and marketed it as its own CAD/CAM die-making software. These infringing activities were accomplished by Job Reynolds at the direction of Larry Holliday.
There is no question that defendants engaged in unauthorized copying, and the purposefulness of their unlawful action is manifest from their deceptive practices. For example, Lasercomb had asked Holiday Steel to use devices called "chronoguards" to prevent unauthorized access to Interact. Although defendants had deduced how to circumvent the chronoguards and had removed them from their computers, they represented to Lasercomb that the chronoguards [*972] were in use. Another example of subterfuge is Reynolds' attempt to modify the PDS-1000 program output so it would present a different appearance than the output from Interact.
When Lasercomb discovered Holiday Steel's activities, it registered its copyright in Interact and filed this action against Holiday Steel, Holliday, and Reynolds on March 7, 1986. Lasercomb claimed copyright infringement, breach of contract, misappropriation of trade secret, false designation of origin, unfair competition, and fraud. Defendants filed a number of counterclaims. On March 24, 1986, the district court entered a preliminary injunction, enjoining defendants from marketing the PDS-1000 software.
* * * [U]ltimately, all of the counterclaims were dismissed; Lasercomb's claims of misappropriation of trade secret, false designation of origin, and unfair competition were dismissed as preempted by the Copyright Act; the court found the defendants liable to Lasercomb for copyright infringement, rejecting their affirmative defenses of misuse of copyright and lack of statutory copyright notice; and the court held for Lasercomb on its claims of breach of contract and fraud.
The district court awarded Lasercomb $ 105,000 in actual damages for copyright infringement and for fraud—with Holiday Steel, Holliday, and Reynolds jointly and severally liable—plus $ 10,000 against Holliday and $ 5,000 against Reynolds as punitive damages on the fraud claim.(1) All defendants were permanently enjoined from publishing and marketing the PDS-1000 software.
Holliday and Reynolds raise several issues on appeal. They do not dispute that they copied Interact, but they contend that Lasercomb is barred from recovery for infringement by its concomitant culpability. They assert that, assuming Lasercomb had a perfected copyright, it impermissibly abused it. This assertion of the "misuse of copyright" defense is based on language in Lasercomb's standard licensing agreement, restricting licensees from creating any of their own CAD/CAM die-making software. * * *
A successful defense of misuse of copyright bars a culpable plaintiff from prevailing on an action for infringement of the misused copyright. Here, appellants claim Lasercomb has misused its copyright by including in its standard licensing agreement clauses which prevent the licensee from participating in any manner in the creation of computer-assisted die-making software.(2) The offending paragraphs read: [*973]
Defendants were not themselves bound by the standard licensing agreement. Lasercomb had sent the agreement to Holiday Steel with a request that it be signed and returned. Larry Holliday, however, decided not to sign the document, and Lasercomb apparently overlooked the fact that the document had not been returned.(3) Although defendants were not party to the restrictions of which they complain, they proved at trial that at least one Interact licensee had entered into the standard agreement, including the anticompetitive language.(4)
The district court rejected the copyright misuse defense for three reasons. First, it noted that defendants had not explicitly agreed to the contract clauses alleged to constitute copyright misuse. Second, it found "such a clause is reasonable in light of the delicate and sensitive area of computer software." And, third, it questioned whether such a defense exists. We consider the district court's reasoning in reverse order.
We agree with the district court that much uncertainty engulfs the "misuse of copyright" defense. We are persuaded, however, that a misuse of copyright defense is inherent in the law of copyright just as a misuse of patent defense is inherent in patent law.
The misuse of a patent is a potential defense to suit for its infringement, and both the existence and parameters of that body of law are well established. E.g., United States Gypsum Co. v. National Gypsum Co., 352 U.S. 457, 465, 1 L. Ed. 2d 465, 77 S. Ct. 490 (1957) . . . . Although there is little case law on the subject, courts from time to time have intimated that the similarity of rationales underlying the law of patents and the law of copyrights argues for a defense to an infringement of copyright based on misuse [*974] of the copyright. E.g., United States v. Loew's, Inc., 371 U.S. 38, 44-51, 9 L. Ed. 2d 11, 83 S. Ct. 97 (1962); United States v. Paramount Pictures, Inc., 334 U.S. 131, 157-59, 92 L. Ed. 1260, 68 S. Ct. 915 (1948); Mitchell Bros. Film Group v. Cinema Adult Theater, 604 F.2d 852, 865 & n.27 (5th Cir. 1979), [**12] cert. denied, 445 U.S. 917, 63 L. Ed. 2d 601, 100 S. Ct. 1277 (1980). The origins of patent and copyright law in England, the treatment of these two aspects of intellectual property by the framers of our Constitution, and the later statutory and judicial development of patent and copyright law in this country persuade us that parallel public policies underlie the protection of both types of intellectual property rights. We think these parallel policies call for application of the misuse defense to copyright as well as patent law.
Because of the paucity of precedent in the copyright misuse area, some historical perspective of the elements underlying intellectual property law is helpful to our inquiry. . . .
During the sixteenth century, it became common for the English Crown to grant "letters patent,"(5) which gave individuals exclusive rights to produce, import and/or sell given items within the kingdom. . . . These monopolies were granted for such commonplace items as salt, vinegar, and calfskins, to name but a few. The practice of granting monopolies led to widespread abuses, such as shortages and inflated prices for items that would otherwise be easily and cheaply available. Consequently, Parliament passed the Statute of Monopolies (1623-24),(6) prohibiting the creation of such monopolies by the Crown. An exception was made, however, to permit a patent to be granted for a period of fourteen years to the creator of a new invention. 21 Jac., ch. 3, § 6.
The rationale for allowing patents for new inventions was and is to encourage their creation for the benefit of society. . . . The monopolies granted by the Crown had been odious because they restrained trade in articles that had previously been a part of the public domain. An invention, however, does not withdraw anything from public traffic; rather, it introduces something new. To encourage and reward inventors for increasing the inventory of useful objects, the government grants them, for a limited time, the right to exclude others from making and selling their inventions. . . . United States v. Dubilier Condenser Corp., 289 U.S. 178, 186, 77 L. Ed. 1114, 53 S. Ct. 554 (1933).
The development of copyright law in England likewise grew out of a differentiation by Parliament between a monopoly that restricts publication of works and a limited copyright that encourages the efforts of authors. In sixteenth-century England, the Crown granted to the Stationers' Company the exclusive right to publish and print all published works (apparently to enable censorship of Protestant materials). In the early 1700s, the Stationer's Company petitioned Parliament to recognize that these rights inured to it in perpetuity. Instead, Parliament passed the Statute of Anne (1709-10),(7) the first known copyright legislation. A. Latman, The Copyright Law: Howell's Copyright Law Revised and the 1976 Act 2-3 (5th ed. 1979) [hereinafter Howell's Copyright Law] . . . . That statute gave authors the sole right of publication for up to [*975] twenty-eight years. Thus, the English statutory treatment of copyright was similar to that of patent in that it granted the creator a monopoly for a limited time only.
It is significant, we think, that the framers of our Constitution continued the English development of intellectual property law and considered in tandem those property rights protectable by copyrights and those protectable by patents. In giving Congress the power to create copyright and patent laws, the framers combined the two concepts in one clause, stating a unitary purpose— to promote progress. Article I, section 8, clause 8 of the United States Constitution provides:
Supreme Court comment has likewise equated the public policies of copyright and patent. For example, in Mazer v. Stein, 347 U.S. 201, 219, 98 L. Ed. 630, 74 S. Ct. 460 (1953), the Supreme Court stated:
Although a patent misuse defense was recognized by the courts as early as 1917,(9) most commentators point to Morton Salt Co. v. G. S. Suppiger, 314 U.S. 488, 86 L. Ed. 363, 62 S. Ct. 402 (1942), as the foundational patent misuse case. In that case, the plaintiff Morton Salt brought suit on the basis that the defendant had infringed Morton's patent in a salt-depositing machine. The salt tablets were not themselves a patented item, but Morton's patent license required that licensees use only salt tablets produced by Morton. Morton was thereby using its patent to restrain competition in the sale of an item which was not within the scope of the patent's privilege. The Supreme Court held that, as a court of [*976] equity, it would not aid Morton in protecting its patent when Morton was using that patent in a manner contrary to public policy. The Court stated:
Since Morton Salt, the courts have recognized patent misuse as a valid defense and have applied it in a number of cases in which patent owners have attempted to use their patents for price fixing, tie-ins, territorial restrictions, and so forth. . . . The patent misuse defense also has been acknowledged by Congress in the 1988 Patent Misuse Reform Act, Pub. L. No. 100-703, 102 Stat. 4676 (1988) (codified at 35 U.S.C. § 271(d)(4) & (5)), which limited but did not eliminate the defense.(10)
Although the patent misuse defense has been generally recognized since Morton Salt, it has been much less certain whether an analogous copyright misuse defense exists. This uncertainty persists because no United States Supreme Court decision has firmly established a copyright misuse defense in a manner analogous to the establishment of the patent misuse defense by Morton Salt. The few courts considering the issue have split on whether the defense should be recognized, and we have discovered only one case which has actually applied copyright misuse to bar an action for infringement. M. Witmark & Sons v. Jensen, 80 F. Supp. 843 (D. Minn. 1948), appeal dismissed, 177 F.2d 515 (8th Cir. 1949).
We are of the view, however, that since copyright and patent law serve parallel public interests, a "misuse" defense should apply to infringement actions brought to vindicate either right. As discussed above, the similarity of the policies underlying patent and copyright is great and historically has been consistently recognized. Both patent law and copyright law seek to increase the store of human knowledge and arts by rewarding inventors and authors with the exclusive rights to their works for a limited time. At the same time, the granted monopoly power does not extend to property not covered by the patent or copyright. Morton Salt, 314 U.S. at 492; Paramount Pictures, 334 U.S. at 156-58;(11) cf. Baker v. Selden, 101 U.S. 99, 101-04, 25 L. Ed. 841 (1880). [*977]
Thus, we are persuaded that the rationale of Morton Salt in establishing the misuse defense applies to copyrights. In the passage from Morton Salt quoted above, the phraseology adapts easily to a copyright context:
Having determined that "misuse of copyright" is a valid defense, analogous to the misuse of patent defense, our next task is to determine whether the defense should have been applied by the district court to bar Lasercomb's infringement action against the defendants in this case.
In declining to recognize a misuse of copyright defense, the district court found "reasonable" Lasercomb's attempt to protect its software copyright by using anticompetitive clauses in their licensing agreement. In briefly expressing its reasoning, the court referred to the "delicate and sensitive" nature of software. It also observed that Lasercomb's president had testified that the noncompete language was negotiable.
If, as it appears, the district court analogized from the "rule of reason" concept of antitrust law, we think its reliance on that principle was misplaced. Such reliance is, however, understandable. Both the presentation by appellants and the literature tend to intermingle antitrust and misuse defenses(12). . . . A patent or copyright is often regarded as a limited monopoly—an exception to the general public policy against restraints of trade. Since antitrust law is the statutory embodiment of that public policy, there is an understandable association of antitrust law with the misuse defense. Certainly, an entity which uses its patent as the means of violating [*978] antitrust law is subject to a misuse of patent defense. However, Morton Salt held that it is not necessary to prove an antitrust violation in order to successfully assert patent misuse:
So while it is true that the attempted use of a copyright to violate antitrust law probably would give rise to a misuse of copyright defense, the converse is not necessarily true— a misuse need not be a violation of antitrust law in order to comprise an equitable defense to an infringement action. The question is not whether the copyright is being used in a manner violative of antitrust law (such as whether the licensing agreement is "reasonable"), but whether the copyright is being used in a manner violative of the public policy embodied in the grant of a copyright.
Lasercomb undoubtedly has the right to protect against copying of the Interact code. Its standard licensing agreement, however, goes much further and essentially attempts to suppress any attempt by the licensee to independently implement the idea which Interact expresses.(13) The agreement forbids the licensee to develop or assist in developing any kind of computer-assisted die-making software. If the licensee is a business, it is to prevent all its directors, officers and employees from assisting in any manner to develop computer-assisted die-making software. Although one or another licensee might succeed in negotiating out the noncompete provisions, this does not negate the fact that Lasercomb is attempting to use its copyright in a manner adverse to the public policy embodied in copyright law, and that it has succeeded in doing so with at least one licensee. . . .
The language employed in the Lasercomb agreement is extremely broad. Each time Lasercomb sells its Interact program to a company and obtains that company's agreement to the noncompete language, the company is required to forego utilization of the creative abilities of all its officers, directors and employees in the area of CAD/CAM die-making software. Of yet greater concern, these creative abilities are withdrawn from the public. The period for which this anticompetitive restraint exists is ninety-nine years, which could be longer than the life of the copyright itself.(14)
We previously have considered the effect of anticompetitive language in a licensing agreement in the context of patent misuse. Compton v. Metal Products, Inc., 453 F.2d 38 (4th Cir. 1971), cert. denied, 406 U.S. 968, 32 L. Ed. 2d 667, 92 S. Ct. 2414 (1972). [*979] Compton had invented and patented coal auguring equipment. He granted an exclusive license in the patents to Joy Manufacturing, and the license agreement included a provision that Compton would not "engage in any business or activity relating to the manufacture or sale of equipment of the type licensed hereunder" for as long as he was due royalties under the patents. Suit for infringement of the Compton patents was brought against Metal Products, and the district court granted injunctive relief and damages. On appeal we held that relief for the infringement was barred by the misuse defense, stating:
We think the anticompetitive language in Lasercomb's licensing agreement is at least as egregious as that which led us to bar the infringement action in Compton, and therefore amounts to misuse of its copyright. Again, the analysis necessary to a finding of misuse is similar to but separate from the analysis necessary to a finding of antitrust violation. The misuse arises from Lasercomb's attempt to use its copyright in a particular expression, the Interact software, to control competition in an area outside the copyright, i.e., the idea of computer-assisted die manufacture, regardless of whether such conduct amounts to an antitrust violation.
In its rejection of the copyright misuse defense, the district court emphasized that Holiday Steel was not explicitly party to a licensing agreement containing the offending language. However, again analogizing to patent misuse, the defense of copyright misuse is available even if the defendants themselves have not been injured by the misuse. In Morton Salt, the defendant was not a party to the license requirement that only Morton-produced salt tablets be used with Morton's salt-depositing machine. Nevertheless, suit against defendant for infringement of Morton's patent was barred on public policy grounds. Similarly, in Compton, even though the defendant Metal Products was not a party to the license agreement that restrained competition by Compton, suit against Metal Products was barred because of the public interest in free competition. See also Hensley Equip. Co., 383 F.2d at 261; cf. Berlenbach, 329 F.2d at 784-85.
Therefore, the fact that appellants here were not parties to one of Lasercomb's standard license agreements is inapposite to their copyright misuse defense. The question is whether Lasercomb is using its copyright in a manner contrary to public policy, which question we have answered in the affirmative.
In sum, we find that misuse of copyright is a valid defense, that Lasercomb's anticompetitive clauses in its standard licensing agreement constitute misuse of copyright, and that the defense is available to appellants even though they were not parties to the standard licensing agreement. Holding that Lasercomb should have been barred by the defense of copyright misuse from suing for infringement of its copyright in the Interact program, we reverse the injunction and the award of damages for copyright infringement.(15)
Because of this holding, we do not reach the other defenses to copyright infringement advanced by appellants.
Although we find misuse of copyright, we reject the contention of appellants—that they should recover attorney fees from Lasercomb under 17 U.S.C. § 505 because Lasercomb brought this action in bad faith. Given the conduct of defendants and the obscurity of their defenses, we find such a position completely untenable. [*980]
The complaint alleged that defendants committed fraud "at the time they sought to purchase a license to use the software at the Holiday plant" by representing to Lasercomb that they would preserve Lasercomb's copyright and proprietary rights in Interact. The district court found Lasercomb had established fraud by showing that defendants made various false representations on which Lasercomb reasonably relied in continuing its relationship with Holiday Steel, thereby giving defendants the opportunity to make the unlawful copies. * * * [W]e affirm the district court's finding of fraud. * * *
AFFIRMED IN PART, REVERSED IN PART, AND REMANDED
1. [court's footnote 4] Additional
actual and punitive damages were awarded against the corporation severally.
Because damages for the breach of contract were awarded against
the corporation only, issues relating to that cause of action are not
raised in this appeal.
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2. [court's footnote 6] Appellants
also claim Lasercomb has created an illegal tie-in by discounting the
price of Interact to licensees who purchase steel rule dies and other
goods from Lasercomb. This simply is not a tie-in. No customer
is required to buy steel rule dies in order to be able to purchase the
Interact software, nor must any customer buy the Interact software in
order to purchase steel rule dies, nor does Lasercomb require customers
to agree to not purchase any other vendor's wares in order to be able
to purchase Lasercomb's software and dies. See Northern Pac.
Ry. Co. v. United States, 356 U.S. 1, 5-6, 2 L. Ed. 2d 545, 78 S.
Ct. 514 & n. 4 (1958).
3. [court's footnote 7] The district
court's finding of breach of contract (not before us on appeal) was based
on a letter in which Holliday admitted an oral agreement between Holiday
Steel and Lasercomb was binding.
4. [court's footnote 8] At the time
of trial, Lasercomb had sold approximately 40 licenses in Interact. Lasercomb's
president testified that the terms of the licensing agreement, including
the noncompete language, were negotiable. He stated the noncompete
language had been negotiated out or modified in "several" instances, but
could not specifically state the degree to which the language had been
removed or altered.
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7. [court's footnote 12] An Act for
the Encouragement of Learning, by vesting the Copies of printed Books
in the Authors or Purchasers of such Copies, during the Times therein
mentioned, 8 Anne, ch. 19.
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12. [court's footnote 17] In the context
of copyright, this confusion probably arises at least in part from Broadcast
Music, Inc. v. CBS, 441 U.S. 1, 60 L. Ed. 2d 1, 99 S. Ct. 1551 (1979).
In that case, CBS brought an antitrust suit and also asked for a
declaratory judgment that defendant's action constituted misuse of copyright.
The Second Circuit first addressed whether there was an antitrust
violation, and finding there was, "the Court of Appeals held that the
challenged conduct constituted misuse of copyrights solely on the basis
of its finding of unlawful price fixing." The Supreme Court
reversed the finding of a Sherman Act violation—on the basis that the
court of appeals had used the wrong standard to evaluate the price fixing—
stating: "We reverse that judgment, and the copyright misuse judgment
dependent upon it. . . ." Id. at 24. Standing alone,
this latter sentence seems to imply that copyright misuse depends on a
finding of an antitrust violation. In context, however, it is apparent
that misuse was linked to antitrust in that case simply as a matter of
litigation strategy. Copyright misuse was not asserted as a defense
to an infringement suit, and the primary claim was an antitrust claim.
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13. [court's footnote 19] A copyright,
of course, protects only the expression of an idea (the Interact code),
and not the idea itself (using CAD/CAM software to make steel rule dies).
17 U.S.C. § 102(b); Mazer v. Stein, 347 U.S. at 217; M.
Kramer Mfg. Co. v. Andrews, 783 F.2d 421, 434-37 (4th Cir. 1986).
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15. [court's footnote 22] This holding,
of course, is not an invalidation of Lasercomb's copyright. Lasercomb
is free to bring a suit for infringement once it has purged itself of
the misuse. Cf. United States Gypsum Co. v. National Gypsum
Co., 352 U.S. 457, 465, 1 L. Ed. 2d 465, 77 S. Ct. 490 (1957); Hensley
Equipment Co., 383 F.2d at 261, 386 F.2d at 443.
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