Invessys, Inc. v. McGraw-Hill Companies, Ltd.

• Decision Date: 21 May 2004
• Docket Number: No. 03-1954.,03-1954.
• Parties: INVESSYS, INC. and Peter Hodges, Plaintiffs, Appellants, v. The McGRAW-HILL COMPANIES, LTD. and The McGraw-Hill Companies, Inc., Defendants, Appellees.
• Court: U.S. Court of Appeals — First Circuit

369 F.3d 16

INVESSYS, INC. and Peter Hodges, Plaintiffs, Appellants, v. The McGRAW-HILL COMPANIES, LTD. and The McGraw-Hill Companies, Inc., Defendants, Appellees.

No. 03-1954.

United States Court of Appeals, First Circuit.

Heard March 3, 2004.

Decided May 21, 2004.

Douglas H. Wilkins with whom Anderson & Kreiger LLP was on brief for appellants.

John D. Donovan, Jr. with whom Crystal D. Talley, Levina Wong and Ropes & Gray LLP were on brief for appellees.

Before BOUDIN, Chief Judge, CYR, Senior Circuit Judge, and HOWARD, Circuit Judge.

BOUDIN, Chief Judge.

Defendants — The McGraw-Hill Companies, Ltd., and The McGraw-Hill Companies, Inc. (together "McGraw-Hill") — successfully defended themselves against a lawsuit brought by plaintiffs InvesSys, Inc. ("InvesSys"), and Peter Hodges. One of the claims in the complaint was for copyright infringement and, at the end of the case, the district court awarded attorney's fees and costs to McGraw-Hill under the Copyright Act. 17 U.S.C. § 505 (2000). Plaintiffs now appeal, contesting the award.

The background facts are as follows. During the spring of 2000, McGraw-Hill became interested in selling a subsidiary called Micropal Accounting Portfolio Services, Inc. ("MAPSI"). MAPSI's primary business was the licensing and support of a Windows-based software program called "MaPS." Hodges, who was an employee of the McGraw-Hill subsidiary that owned MAPSI Standard & Poor's Fund Services, Inc. ("S & P") — expressed interest in purchasing MAPSI.

Negotiations between Hodges and McGraw-Hill for the sale of MAPSI began in the fall of 2000. The lead negotiator for McGraw-Hill was Kevin Thornton, then the managing director of S & P. At some point in the negotiations, Hodges requested that MaPS's DOS-based predecessor programs be included in the deal. Thornton agreed, and, because the additional programs Hodges sought were considered obsolete, directed that they be added to the terms of a draft sales agreement for no additional consideration.

When McGraw-Hill's lawyer (Susan Winter) added the predecessor programs to the draft agreement, she also included a program called "AIM," which was not obsolete, was not a part of the MaPS line of programs, and in fact generated millions of dollars in revenue for McGraw-Hill.¹ Hodges had expressed interest in the AIM program to McGraw-Hill manager Adrian Manning, who had referred Hodges to Thornton. Hodges would later claim that he spoke with Thornton about AIM and obtained his agreement to include the program in the deal; Thornton would deny that Hodges ever approached him about AIM.

The draft agreement — including its reference to the AIM program — was reviewed several times by Thornton and other McGraw-Hill officials before it was executed by the parties on May 29, 2001. The final purchase price was $19,600, and no McGraw-Hill official raised any objection to the specification of the AIM program as among those being transferred. After the sale was completed, Hodges conveyed his rights to MAPSI and AIM to InvesSys. Hodges is InvesSys's sole shareholder, sole officer, sole director, and sole employee.

On August 2, 2001, Hodges called Thornton to arrange a meeting for the following day. At the meeting, Hodges asked Thornton for access to data feeds that were necessary to market the AIM software. Thornton claimed that he had not been aware that AIM had been included in the terms of the sales agreement. After examination of the document, McGraw-Hill took the position that, under New York law, inclusion of AIM was a scrivener's error and maintained that it still owned the rights to AIM.

On November 26, 2001, Hodges and InvesSys filed suit against McGraw-Hill in the federal district court for the district of Massachusetts. The suit alleged copyright infringement — a federal claim under the Copyright Act — as well as breach of contract and a medley of other state law claims (fraud, conversion, and claims under Mass. Gen. Laws ch. 93A). Because the parties agreed that the scrivener's-error issue was central, the district court directed that only the state law claims proceed to trial, the copyright claim being held in abeyance.

At trial, the principal witnesses were Hodges, Winter, Manning, and Thornton. The gist of plaintiffs' case was that there had been a knowing sale of AIM by McGraw-Hill; defendants' position was that inclusion of AIM was patently a scrivener's error by Winter and that the parties' true intentions required reform of the contract to exclude AIM under well established legal doctrine. See George Backer Mgmt. Corp. v. Acme Quilting Co., 46 N.Y.2d 211, 413 N.Y.S.2d 135, 385 N.E.2d 1062, 1066 (N.Y.1978); 7 Corbin on Contracts § 2845 (rev. ed.2002).

After the close of evidence, the court presented the jury with a single initial question:

Have the defendants proven by clear and convincing evidence, that the inclusion of `AIM' in ... the Share Purchase Agreement was a scrivener's error that did not reflect the actual agreement of the parties?

The jury answered "yes," and the district court entered judgment for McGraw-Hill on all claims, including the claim of copyright infringement. Thereafter, the court awarded McGraw-Hill $200,000 in attorney's fees and $28,583.78 in costs under section 505, finding that plaintiffs' claim of copyright infringement was objectively unreasonable and improperly motivated.

In its award, the district court declined to make any reduction despite plaintiffs' claim (and defendants' admission) that much, if not all, of the legal work performed in the case had application to the state law claims as well as the copyright claim. The district court included in its award payments by defense counsel for computer-assisted legal research. The court also made the award run against Hodges personally as well as InvesSys. Plaintiffs now appeal, challenging the award itself and each of the ancillary rulings.

Section 505 provides:

In any civil action under this title, the court in its discretion may allow the recovery of full costs by or against any party other than the United States or an officer thereof. Except as otherwise provided by this title, the court may also award a reasonable attorney's fee to the prevailing party as part of the costs.

Unlike most fee-shifting statutes, section 505 allows attorney's fees to be awarded to defendants on an "even-handed" basis with plaintiffs. Fogerty v. Fantasy, Inc., 510 U.S. 517, 534, 114 S.Ct. 1023, 127 L.Ed.2d 455 (1994); Lotus Dev. Corp. v. Borland Int'l, Inc., 140 F.3d 70, 72-73 (1st Cir.1998). Fogerty said that the award rested in "the [trial] court's discretion" and that there was no formula, but that factors that could be taken into consideration included inter alia the objective unreasonableness of the losing side's position. 510 U.S. at 534 & n. 19, 114 S.Ct. 1023.

Although fee awards are nominally reviewed on appeal for "abuse of discretion," Matthews v. Freedman, 157 F.3d 25, 29 (1st Cir.1998), an award can also depend on legal issues that are reviewed de novo. See United States v. Padilla-Galarza, 351 F.3d 594, 597 & n. 3 (1st Cir.2003). Plaintiffs' broadest position, which falls in the latter category, is that no award was permitted because the trial was directed only to state law claims and turned on a state law issue; at the very least, say plaintiffs, the costs had to be allocated and that most concerned the ownership issue rather than anything peculiar to copyright.

The statute, drafted with claims under the Copyright Act in mind, does not expressly address the problem of a case with a mix of claims. However, here a federal copyright claim was asserted in the complaint, so this is literally a "civil action under this title [the Copyright Act]," 17 U.S.C. § 505; and the case law has used common sense to carry out Congress' underlying intent to provide for attorney's fees in copyright enforcement or like matters but not for other civil claims that do not involve copyright. See Entm't Research Group, Inc. v. Genesis Creative Group, Inc., 122 F.3d 1211, 1230-31 (9th Cir.1997), cert. denied, 523 U.S. 1021, 118 S.Ct. 1302, 140 L.Ed.2d 468 (1998).

Implementing that intent presents the recurring problem of form versus substance. The only claims posed for trial were state law claims (most importantly, a contract claim) and the only issue decided was ownership of AIM, turning on state law rules as to contract and reformation. Ownership of a copyright is a predicate to a federal copyright claim, see 17 U.S.C. § 501(b); Feist Publ'ns, Inc. v. Rural Tel. Serv. Co., 499 U.S. 340, 361, 111 S.Ct. 1282, 113 L.Ed.2d 358 (1991), but the rules governing contractual transfer of ownership have been left (for the most part) to state law.²

Yet the question of ownership of AIM was common to both the plaintiffs' claim under the Copyright Act and their claims under state law. If plaintiffs lost as to ownership, all claims failed. The fact that the district court chose to extract this common issue and try it first, nominally deferring the copyright claim, does not alter the fact that the copyright claim was in the case and depended on the ownership issue being tried. Had plaintiffs' complaint set forth only the copyright claim, exactly the same contractual issue would have had to be tried.

Had plaintiffs never asserted a copyright claim but only claims under state law, it would be hard to describe this as a "civil action under" that statute. But here a copyright claim was made, thereby permitting Copyright Act remedies, and the issue actually litigated was necessary to the assertion of that claim. So it serves Congress' purpose to compensate the winning side for attorney's fees and costs. Cf. Maljack Prods., Inc. v. GoodTimes Home Video Corp., 81 F.3d 881, 884-86, 889 (9th Cir.1996).

Plaintiffs argue that because the ownership issue is governed by state law, it cannot carry out "the purposes" of the Copyright Act to award attorney's fees and costs. We think this...