1MAGE Software, Inc. v. Reynolds and Reynolds Co.

• Decision Date: 23 July 2003
• Docket Number: No. CIV.A. 02-K-1688.,CIV.A. 02-K-1688.
• Citation: 273 F.Supp.2d 1168
• Parties: 1MAGE SOFTWARE, INC., a Colorado corporation, Plaintiff, v. THE REYNOLDS AND REYNOLDS COMPANY, an Ohio corporation, et al. Defendants.
• Court: U.S. District Court — District of Colorado

273 F.Supp.2d 1168

1MAGE SOFTWARE, INC., a Colorado corporation, Plaintiff, v. THE REYNOLDS AND REYNOLDS COMPANY, an Ohio corporation, et al. Defendants.

No. CIV.A. 02-K-1688.

United States District Court, D. Colorado.

July 23, 2003.

James A. Jablonski, Gorsuch, Kirgis, LLP, Denver, CO, for 1mage Software, Inc.

JoAnne M. Zboyan, Denver, CO, for Reynolds and Reynolds Co.

Peter H. Walsh, Hogan & Hartson, Denver, CO, for Auto Dealer, defendants.

ORDER GRANTING MOTION TO COMPEL ARBITRATION AND FOR STAY

KANE, District Judge.

This computer software copyright and trade secrets action is before me on Defendant Reynolds' Motion to Compel Compliance with Alternative Dispute Resolution Provision ("Motion to Compel Arbitration") and the Motions of both Reynolds and the remaining Auto Dealer Defendants for Stay pending arbitration. Reynolds asserts Plaintiff's claims "arise under" the parties' 1994 Software Licensing Agreement and that they are therefore subject to arbitration under that Agreement's arbitration clause. I agree, and grant the Motion to Compel Arbitration and related Motions for Stay.

I. BACKGROUND.

Plaintiff 1mage Software, Inc. ("1mage"), is a developer of computer imaging software used to capture and archive business reports and paper documents as electronic images. The software eliminates the need to handle original paper documents such as sales tax returns, payroll reports, and repair orders. Defendant Reynolds & Reynolds Co., ("Reynolds") is an Ohio corporation in the business of supplying business forms to the automotive industry since 1927. Pursuant to a 1994 Software Licensing Agreement executed with 1mage's parent company, ISI, (the "1994 Licensing Agreement"), Reynolds purchased perpetual exclusive and non-exclusive licenses to Plaintiff's "1MAGE" software (defined in the Agreement as the "ISI Software") and certain related third-party applications ("Third-Party Software") in exchange for a one-time fee of $1.75 million. The Agreement provided that "[s]ubsequent updates, up-grades, enhancements and new products provided by ISI will be made available to Reynolds and become a part of the ISI Software and Documentation, provided the fees ... are agreed upon by the parties at that time." 1994 Licensing Agreement § 5.2. The remaining Defendants are Denver area automobile dealerships (the "Auto Dealer Defendants") who are using a disputed version of 1MAGE pursuant to sublicensing agreements with Reynolds.

Section 18 of the parties' 1994 Licensing Agreement includes an alternative dispute resolution provision calling for the arbitration of "any dispute ... arising out of or related to this Agreement ... whether in contract, tort or otherwise." The dispute in this case is 1mage's claim that the perpetual license provided under the 1994 Agreement was limited to 1MAGE Release 3.3 and related software, so that when the parties in 1996 entered into a subscription and maintenance agreement for 1MAGE Release 5.5 (the "1MAGE^TM Document Management System Maintenance Agreement" or "1996 Agreement"), a new and separate license related solely to 1MAGE Release 5.5 arose.¹ This separate license, according to 1mage, was completely independent of the perpetual license granted in 1994 and conditioned the initial transfer and authorization to use Release 5.5 on payment of the AMC. When Reynolds terminated the 1996 Agreement in April 2002 and ceased paying the annual fee, 1mage contends Reynolds' license to use Release 5.5 ended with it. Reynolds' continued use and distribution of Release 5.5 to the Auto Dealer Defendants thereafter, 1mage concludes, constitutes a misappropriation of trade secrets and infringes 1mage's copyrights in the 1MAGE software. On the assertion that Reynolds' use of the 1996 Software is governed exclusively by the 1996 Agreement, which includes no alternative dispute resolution provision, 1mage maintains the dispute is properly before this Court and is not subject to arbitration.

Reynolds denies the 1996 Agreement included any license grant or affected in any way its right to use the disputed 1996 Software, which it claims was a "subsequent update, upgrade, [or] enhancement" of the ISI Software under § 5.2 of the 1994 Licensing Agreement and therefore within the scope of the perpetual license. Reynolds maintains the 1996 Agreement was nothing more than a subscription-based agreement for the servicing and upkeep of 1MAGE and related software, which it could renew or terminate without any impact on the underlying license.

Whatever the merits, Reynolds contends the dispute over ownership rights to the 1996 Software is one "arising under" the 1994 Licensing Agreement and therefore subject to arbitration. I agree. Resolution of 1mage's copyright infringement claim is only a necessary consequence of determining the private contractual rights of the parties, i.e., whether the 1996 Agreement gave rise to a new license for Reynolds' use of 1MAGE Release 5.5 independent of the perpetual license conferred in 1994 or merely established new terms for the maintenance and upkeep of a later version of 1MAGE that, by operation of § 5.2 of the original Agreement, had become part of the "ISI Software" for which Reynolds already had a license.² That interpretation must be discerned by the application of common law principles of contract construction. No construction of the federal Copyright Act or consideration of federal public policy principles is necessary to its resolution.

Both parties' positions on the merits of their claims and defenses appear viable. In deciding whether the parties have agreed to submit the dispute to arbitration, however, the actual merits of those claims and defenses are irrelevant. See AT & T Technologies, Inc. v. Communications Workers of America, 475 U.S. 643, 649, 651, 106 S.Ct. 1415, 89 L.Ed.2d 648 (1986)("in deciding whether the parties have agreed to submit a particular grievance to arbitration, a court is not to rule on the potential merits of the underlying claims"). The question is not whether the 1994 Licensing Agreement was limited to 1MAGE Release 3.3 and the 1996 Agreement evinced an intent to create a different and limited license to use Release 5.5 that ended upon termination of that Agreement, but whether the facts underlying 1mage's copyright infringement and misappropriation of trade secret claims arise under or relate to the 1994 Licensing Agreement. Because the parties' licensing relationship over Plaintiff's 1MAGE software began in 1994 with a formal and individually negotiated Licensing Agreement and continued, in some form at least, notwithstanding the 1996 Agreement's origin or termination,³ I find that they do.

II. DISCUSSION.

A. Jurisdiction.

Federal jurisdiction over the instant dispute is premised both on diversity of citizenship under 28 U.S.C. § 1331 and the fact the first of Plaintiff's two claims "arises under" the federal Copyright Act of 1976 for purposes of 28 U.S.C. § 1338(a). The standard for federal jurisdiction under § 1338(a) is minimal, requiring only that plaintiff seek a remedy expressly provided under the Act. See Bassett v. Mashantucket Pequot Tribe, 204 F.3d 343, 348-49 (2d Cir.2000)(citing T.B. Harms Co. v. Eliscu, 339 F.2d 823 (2d Cir.1964)(Friendly, J.)). It is not necessary that plaintiff's copyright claim require any construction of the Act or federal law generally. Id. Because the remedy sought by 1mage includes Reynolds' profits or statutory damages as provided under the Act, jurisdiction under § 1338(a) is established.

B. Legal Standards.

The Federal Arbitration Act (FAA), 9 U.S.C. § 1-16, "evinces a strong federal policy in favor of arbitration." ARW Exploration Corp. v. Aguirre, 45 F.3d 1455, 1462 (10th Cir.1995)(citing Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 226, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987)), cert. denied, 525 U.S. 822, 119 S.Ct. 65, 142 L.Ed.2d 51 (1998). The purpose of the FAA "was to reverse the longstanding judicial hostility to arbitration agreements ... and to place arbitration agreements upon the same footing as other contracts." Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24, 111 S.Ct. 1647, 114 L.Ed.2d 26 (1991). "If a contract contains an arbitration clause, a presumption of arbitrability arises." ARW at 1462. This presumption may be overcome only if "it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute." Id. All doubts should be resolved in favor of coverage. Id. As the Supreme Court stated in Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983):

The Arbitration Act establishes that, as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability.

(Emphasis added.)

Here, the arbitration clause at issue is found in the parties' original 1994 Licensing Agreement. The presumption, then, is that 1mage's claim that Reynolds is using 1mage software for which it no longer owns a license is subject to arbitration under that Agreement. 1mage's defense to arbitrability is that Reynolds right to use the particular version of 1mage software at issue is governed by the 1996 Maintenance Agreement, which does not have an arbitration clause. Because the underlying source of Reynolds' rights to use 1mage software generally originated in the 1994 Agreement and because the 1996 Agreement expressly acknowledged the 1994 Agreement's continuing viability after its execution, the presumption, again, is that 1mage's claim that Reynolds is using 1mage software without authorization is subject to arbitration. Under Moses H. Cone, moreover, any doubt that the dispute is not subject to arbitration should be resolved in favor of arbitration.

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