Dun & Bradstreet Software v. Grace Consulting

• Citation: 307 F.3d 197
• Decision Date: 24 September 2002
• Docket Number: No. 00-2772,No. 00-2932.,00-2772,00-2932.
• Parties: DUN & BRADSTREET SOFTWARE SERVICES, INC.; Geac Computer Systems, Inc. v. GRACE CONSULTING, INC.; Grace Maintenance Int.; Anthony Ilutzi Geac Enterprise Solutions, Inc. f/k/a Geac Computer Systems, Inc., Dun & Bradstreet Software Services, Inc.; Geac Computer Systems v. Grace Consulting, Inc.; Grace Maintenance; Anthony Ilutzi
• Court: United States Courts of Appeals. United States Court of Appeals (3rd Circuit)

307 F.3d 197

DUN & BRADSTREET SOFTWARE SERVICES, INC.; Geac Computer Systems, Inc. v. GRACE CONSULTING, INC.; Grace Maintenance Int.; Anthony Ilutzi Geac Enterprise Solutions, Inc. f/k/a Geac Computer Systems, Inc., Dun & Bradstreet Software Services, Inc.; Geac Computer Systems v. Grace Consulting, Inc.; Grace Maintenance; Anthony Ilutzi

No. 00-2772

No. 00-2932.

United States Court of Appeals, Third Circuit.

Argued January 17, 2002.

Filed September 24, 2002.

COPYRIGHT MATERIAL OMITTED

Wayne C. Matus (Argued), LeBoeuf, Lamb, Greene & MacRae, New York, NY Harvey C. Kaish, McCarter & English, Newark, NJ, Peter J. Gallagher, Salans, Hertzfeld, Heilbronn, Christy & Viener, New York, NY, for Appellant Geac Computer Systems.

Andrew J. Kyreakakis (Argued), Ambrosio, Kyreakakis, DiLorenzo, Moraff & McKenna, Bloomfield, NJ, for Appellees Grace Consulting, Inc. and Grace Maintenance.

Leonard T. Nuara (Argued), Thacher, Proffitt & Wood, Jersey City, NJ, for Appellee Anthony Ilutzi.

Ronald S. Katz, Coudert Brothers, San Francisco, CA, for Amicus for Appellee Service Industry Association.

Before SCIRICA, ROSENN, Circuit Judges, and KANE,^* District Judge.

OPINION OF THE COURT

ROSENN, Circuit Judge.

This appeal presents serious problems of alleged copyright infringement in an evolving and highly competitive world of computer technology that challenges the effectiveness of our well-established copyright laws. Formerly known as Dun & Bradstreet Software Services, Inc. (DBS), Geac Computer Systems, Inc. (collectively Geac) is the undisputed owner of certain proprietary, copyrighted software, including a system known as Millennium. The system is designed to provide valuable services to the business community at large.

Millennium contains highly confidential information and trade secrets that were designed and developed by Geac at great effort and expense. Geac complains that Grace Consulting, Inc., its founder, president, and chief executive officer Anthony Ilutzi, and a related enterprise, Grace Maintenance, Int. (collectively Grace) deliberately have infringed on Geac's copyrighted software while in the course of providing consulting and maintenance services to companies licensed by Geac to use its software.

Geac brought suit against Grace in March 1994 in the United States District Court for the District of New Jersey.¹ Grace filed an answer together with counterclaims for breach of contract and tortious interference. The District Court struck Grace's counterclaims and six of its defenses after the close of testimony. The court, however, entered summary judgment in favor of the defendants on Geac's claim for misappropriation of trade secrets. On the remaining issues, the case was tried to a jury which returned a verdict in favor of the defendants. The Court denied Geac's motions for a judgment as a matter of law after trial and for a new trial. Geac timely appealed. The Court also rejected Grace's claim for attorneys' fees. Grace timely cross-appealed. We affirm in part and reverse in part.

I. BACKGROUND

A. GEAC'S MILLENNIUM SOFTWARE

Among the United States copyrighted products owned by Geac are twelve different software business applications, collectively known as Millennium. These applications keep track of a host of business information, such as accounts payable, taxes payable, accounts receivable, fixed assets, and others. Trade secrets and highly confidential information are found in a wide variety of materials relating to Millennium, including but not limited to: (a) source and object codes for applications and operating software; (b) software documentation; (c) software upgrades; (d) manuals and materials for training, installation, service and maintenance; and (e) customer lists and other information about the specific needs of its licensees. Geac faces substantial competition for all of its Millennium products, and its confidential information and trade secrets allow it to compete effectively and advantageously.

Geac authorizes its customers to use its Millennium software under licensing agreements that contain protective provisions for its trade secrets and copyrighted properties. The licensing agreements provide, inter alia, that if a customer engages a third party consultant to install or configure the software to the customer's needs or for maintenance, the consultant must execute a non-disclosure agreement acceptable to Geac. Geac also offers maintenance service to its customers for its Millennium software which includes, among other things, telephone support, repairs, fixing program errors ("bugs"), and updated versions of Millennium. Millennium runs on a large mainframe computer that is typically licensed to large corporations and institutions, with the customers electing which of Millennium's twelve copyrighted software applications it wants to license.

At issue here is the Human Resources application known as HR:M. This application enables licensees to perform various payroll, benefits, and other employee-related functions in any jurisdiction in the United States. HR:M consists of numerous individual programs, each of which are self-contained units of code. Each of the programs performs one or more of the many individual tasks comprising the application. One of such programs is Geac's W-2 PAYTXABR. This W-2 program enables employers to prepare employee W-2s and related year-end reports required by federal and state taxing authorities.

B. GRACE'S OPERATIONS

Grace Consulting, Inc. is a New Jersey corporation with its principal place of business in Verona, New Jersey, and is engaged in the business of computers and software consulting. Anthony Ilutzi, a New Jersey resident, formed the company to provide consulting services to Geac licensees. This company also does business as Grace Maintenance, Int., which was formed in 1993 to provide a program of maintenance support services for Millennium. We refer to them collectively as Grace. Grace's activities in implementing their services apparently triggered this suit by Geac.

Commencing in 1993, Grace offered and performed services for Geac's licensees, including customizing Millennium software for their specific needs, fixing "bugs" in Millennium software, providing tax and regulatory updates, and modifying Geac's programming language code.² Grace began offering Millennium licensees Grace's "Remain on Release" program, which provides Geac customers with Grace's own version of Geac's W-2 program. Grace represented that this software maintenance program "allows customers to stay on their present release without having to accept expensive upgrades from the vendor." Under this program, Grace purported to save Geac customers considerable money they presumably would pay Geac under its maintenance program.

Grace's W-2 software was initially developed by Cook & Reynolds Services, Inc. (CNR), a company formed by two former Geac employees, Stan Cook and Rick Reynolds. In 1996, Grace purchased the rights to CNR's W-2 program, revised it, and renamed the individual programs to begin with a "GMI" prefix instead of "CNR." The CNR W-2 then became known as "GMITXABR."

C. GEAC'S LICENSING AGREEMENTS

Geac has two standard Millennium licensing agreements that are at issue here: the DBS and the McCormack and Dodge (M & D) agreements (collectively, the License Agreements). The DBS License Agreement prohibits anyone from modifying Geac's Millennium software without Geac's authorization. The M & D License Agreements permit a third party consultant, in limited instances, to modify the Geac code, provided it satisfies the Agreement's non-disclosure and work-for-hire prerequisites for accessing the code.

Both of Geac's License Agreements prohibit the removal of the Geac code from the licensee's site. The M & D License Agreement authorizes and limits the licensee to use the system solely for its own internal operation on any central processor within Customer's data center at the location designated on the "Customer and Product Information Schedule" or, with the prior approval of Geac, at a designated replacement site or service bureau. This Agreement defines use as "copying any portion of a Licensed Program ... or transmitting [it] to a computer for processing of the instructions or statements contained in the Licensed Program." The Agreement expressly provides that "customer[s] shall not copy the System, in whole or in part, except as expressly provided in the [M & D] license agreement." The DBS License Agreement also restricts the use, including copying, of the Geac source code, solely for "purposes on the Hardware and Operating System Software at the Site." Both License Agreements bar the distribution of modified versions of the code. It is undisputed that approximately 35% of Grace customers are subject to the DBS license agreement and 65% are subject to the M & D license agreement.

In relevant part, the M & D License Agreement specifically provides:

• Customer may also disclose M & D confidential information to Customer's consultants who have been retained to perform work for hire in connection with Customer's use of the System. All Customer consultants having access to M & D confidential information will be required to execute a non-disclosure agreement acceptable to M & D prior to disclosure.

• Customer shall not copy the System, in whole or in part, except as expressly provided in this section. The System may be copied, in whole or in part, in printed or machine readable form, for use by Customer at the designated site, for archive or emergency restart purposes, to replace a worn copy, to understand the contents of such machine-readable materials.....

At trial, Geac's counsel conceded that "under the M & D license, we allowed customers and consultants that qualified, to modify the source code for that customer only."

In relevant part, the DBS Software License Agreement specifically provides:

• Customer may make a reasonable number of copies of the...