Krause v. Titleserv, Inc., Docket No. 03-9303.

• Decision Date: 21 March 2005
• Docket Number: Docket No. 03-9303.
• Citation: 402 F.3d 119
• Parties: William KRAUSE dba Special-T software, Plaintiff-Appellant, v. TITLESERV, INC., New York Settlement Corp., David Eisenberg, Kenneth Wodiska, Thomas Murphy and James J. Conway, III, Defendant-Appellees.
• Court: U.S. Court of Appeals — Second Circuit

402 F.3d 119

William KRAUSE dba Special-T software, Plaintiff-Appellant, v. TITLESERV, INC., New York Settlement Corp., David Eisenberg, Kenneth Wodiska, Thomas Murphy and James J. Conway, III, Defendant-Appellees.

Docket No. 03-9303.

United States Court of Appeals, Second Circuit.

Argued: September 30, 2004.

Decided: March 21, 2005.

Eugene D. Berman, Fine, Fine & Berman, LLP (Scott J. Fine, on the brief), Melville, NY, for Plaintiff-Appellant.

Ronald J. Rosenberg, Rosenberg Calica & Birney LLP (Kenneth E. Aneser, on the brief), Garden City, NY, for Defendant-Appellees.

Before: LEVAL and KATZMANN, Circuit Judges.^*

LEVAL, Circuit Judge.

Plaintiff William Krause appeals from a judgment of the United States District Court for the Eastern District of New York (Thomas C. Platt, J.) granting defendants' motion for summary judgment. Krause brought this suit against Titleserv, its owner and CEO, three employees, and an affiliated company (collectively "Titleserv"). The complaint alleged that Titleserv infringed the plaintiff's copyright by modifying the source code of eight computer programs he authored for Titleserv.

Titleserv moved for summary judgment on the basis of 17 U.S.C. § 117(a)(1) (as well as on other grounds). Section 117(a)(1) provides an affirmative defense against copyright infringement for anyone who (i) owns a physical copy of a computer program, (ii) makes an adaptation "as an essential step in the utilization of the computer program in conjunction with a machine," and (iii) uses it "in no other manner." The district court, following the recommendation of Magistrate Judge William D. Wall, concluded there was no genuine issue of material fact and granted summary judgment in favor of Titleserv.

On appeal, Krause challenges the district court's interpretation and application of § 117(a)(1). We affirm.

BACKGROUND

Between 1986 and 1996 plaintiff Krause performed computer and communications work for Titleserv. He wrote over thirty-five computer programs for Titleserv. The eight programs at issue in this suit were designed to enable Titleserv to track and report on the status of client requests and other aspects of its operations. The programs were installed on Titleserv's computer network and were thus accessible to Titleserv employees.

Krause wrote the programs in Clipper, a DOS-based programming language. Code written in such a programming language is called source code. Source code becomes executable only when it is run through a compiler which converts it into the binary 1s and 0s of object, or executable, code. See Universal City Studios, Inc. v. Corley, 273 F.3d 429, 438-39 (2d Cir.2001).

In 1996, Krause and Titleserv began negotiating Krause's assignment of the copyright in his programs to Titleserv in exchange for a five-year consulting agreement. On July 10, 1996, before any agreement was reached, Krause terminated his relationship with Titleserv after learning that Titleserv intended that he take direction from its new Director of Information Technology. When Krause left, he took his notebook computer, which contained the only copies of the source code for two of the programs. He left copies of the source code for the other six disputed programs on the Titleserv file servers because Titleserv had backup tapes, so that in Krause's words, "removing the source from the file servers would have been a meaningless gesture." Krause left executable versions of all eight programs at issue on Titleserv's file servers, but locked them with a command, which prevented a popular decompiler from converting the executable code back into source code.

Krause told Titleserv that it was free to continue using the executable code as it existed on the day Krause left, but asserted that Titleserv had no right to modify the source code. Inability to modify the source code would have severely limited the value of those programs to Titleserv. Many routine functions such as the addition of a new customer or a change of a customer address could be performed only by changing the source code. In addition, changes were required to fix bugs from time to time to keep the system from crashing.

On July 16, 1996, Titleserv filed suit against Krause in state court alleging, inter alia, misappropriation of its property.¹ Employees of Titleserv subsequently circumvented the "lock" he had placed on the executable code and decompiled it back into source code. An employee then set about "cleaning up" the source code by formatting it, assigning proper variable names, and adding comments. Titleserv made further modifications, including the fixing of bugs, the addition of new customers, and changes in customer addresses, to keep the old programs functional while Titleserv developed a new, Windows-based system. Krause's system was then phased out at some point between late 1997 and early 1998.

Krause brought this suit in the Eastern District of New York. The complaint, as amended, states a single cause of action for copyright infringement based on Titleserv's alleged copying of his programs and its production of derivative works.

After discovery, Titleserv moved for summary judgment. The district court referred the matter to Magistrate Judge Wall, who recommended granting summary judgment in favor of Titleserv on the ground that Titleserv's use and modification of Krause's programs was protected by 17 U.S.C. § 117(a)(1).

On October 30, 2003, the district court adopted the magistrate judge's report and granted summary judgment for Titleserv. Krause v. Titleserv, Inc., 289 F.Supp.2d 316 (E.D.N.Y.2003). Krause then brought this appeal.

DISCUSSION

This appeal turns on whether Titleserv was entitled to summary judgment on the basis of the affirmative defense provided in 17 U.S.C. § 117(a)(1), as the district court found.² Section 117(a) allows the owner of a copy of a computer program to copy or modify the program for limited purposes without incurring liability for infringement. It states:

Notwithstanding the provisions of section 106 [which generally provides, inter alia, that copying of a protected work is an infringement], 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, or

(2) that such new copy or adaptation is for archival purposes only and that all archival copies are destroyed in the event that continued possession of the computer program should cease to be rightful.

We are concerned only with subparagraph (1), as Titleserv has not alleged that it copied Krause's programs solely for archival purposes.

To come within the protection of § 117(a)(1) on these facts, Titleserv must demonstrate that the new adaptation of Krause's program (i) was made by the "owner of a copy of [the] computer program"; (ii) was "created as an essential step in the utilization of the computer program in conjunction with a machine"; and (iii) was "used in no other manner."

I. "[O]wner of a copy of a computer program"

Because § 117(a) protects only "the owner of a copy of a computer program," we must first determine whether Titleserv owned the copies of the computer programs at issue. Ownership of a copy is something distinct from copyright ownership. See 17 U.S.C. § 202 ("Ownership of a copyright, or of any of the exclusive rights under a copyright, is distinct from ownership of any material object in which the work is embodied."). For example, the author of a book, or her assignee, ordinarily owns the copyright in the book and thus the sole right to authorize copying; each purchaser of a copy of the book owns that copy, but is generally not entitled to make copies from it.

It is undisputed that Titleserv possessed executable copies of all the programs. The parties disagree whether Titleserv owned those copies within the meaning of § 117(a). Krause claims that Titleserv never owned the program copies saved on its file server, but rather possessed the copies as a licensee pursuant to an oral agreement. Titleserv asserts that it owns copies of the programs because it paid Krause a substantial sum to develop them and has an undisputed right to possess and use them permanently.

Interpreting the word "owner" is more complex than might first appear. Ownership of property is often described as a bundle of rights. See, e.g., Flagg Bros., Inc. v. Brooks, 436 U.S. 149, 160 n. 10, 98 S.Ct. 1729, 56 L.Ed.2d 185 (1978) (observing that for purposes of interpreting the Fourteenth Amendment, a "property interest is not a monolithic, abstract concept hovering in the legal stratosphere. It is a bundle of rights...."). It is not clear from the text of § 117(a) how many and what kind of sticks may be removed from the bundle before the possessor of a copy of a computer program is no longer considered its owner for purposes of § 117(a).

The legislative history of § 117(a) is sparse and provides limited guidance on this point. Section 117(a) was based on the recommendations of the National Commission on New Technological Uses of Copyrighted Works ("CONTU" or the "Commission"). Congress largely enacted the language proposed by the Commission, with one notable exception. The report originally proposed making the affirmative defense of § 117(a) available to the "rightful possessor of a copy of a computer program." Final Report of the National Commission on New Technological Uses of Copyrighted Works 12 (1978) (emphasis added) [hereinafter "CONTU Report"]. Congress changed the term "rightful possessor" to "owner" but did not explain its reason. See H.R.Rep. No. 96-1307(I), at 23 (1980), reprinted in 1980 U.S.C.C.A.N. 6460, 6482.

Krause contends that Congress's substitution of the word "owner" for the Commission's term, which would have accorded adaptation...