Lasercomb America, Inc. v. Reynolds

• Citation: 15 USPQ2d 1846,911 F.2d 970
• Decision Date: 27 September 1990
• Docket Number: No. 89-3245,89-3245
• Parties: , 1990-2 Trade Cases 69,145, 1990 Copr.L.Dec. P 26,619, 18 Fed.R.Serv.3d 130, 15 U.S.P.Q.2d 1846 LASERCOMB AMERICA, INC., Plaintiff-Appellee, v. Job REYNOLDS; Larry Holliday, Defendants-Appellants, and Holiday Steel Rule Die Corporation, Defendant.
• Court: United States Courts of Appeals. United States Court of Appeals (4th Circuit)

Page 970

911 F.2d 970

59 USLW 2142, 1990-2 Trade Cases 69,145,

1990 Copr.L.Dec. P 26,619, 18 Fed.R.Serv.3d 130,

15 U.S.P.Q.2d 1846

LASERCOMB AMERICA, INC., Plaintiff-Appellee, v. Job REYNOLDS; Larry Holliday, Defendants-Appellants, and Holiday Steel Rule Die Corporation, Defendant.

No. 89-3245.

United States Court of Appeals,

Fourth Circuit.

Argued Jan. 8, 1990.

Decided Aug. 16, 1990.

Rehearing and Rehearing In Banc Denied Sept. 27, 1990.

Boris Haskell, argued Paris and Haskell, Arlington, Va., for defendants-appellants.

Lee Carl Bromberg, argued (Judith R.S. Stern, on brief), Bromberg & Sunstein, Boston, Mass., for plaintiff-appellee.

Before WIDENER and SPROUSE, Circuit Judges, and HOFFMAN, Senior United States District Judge for the Eastern District of Virginia, sitting by designation.

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.

I Facts and Proceedings Below

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. ¹ 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. ²

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 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.

The procedural history of this case is complex, with various claims and defenses experiencing both death and resurrection on various pretrial motions and at the bench trial itself. For purposes of this appeal it suffices to say that, ultimately, 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 ³--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. ⁴ 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. ⁵ Appellants also argue that the district court's finding of fraud was erroneously based on facts not alleged in the complaint. Finally, they contend that, even if they are liable, the district court erred in the calculation of damages. We consider these issues seriatim.

II Misuse of Copyright Defense

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. ⁶ The offending paragraphs read:

D. Licensee agrees during the term of this Agreement that it will not permit or suffer its directors, officers and employees, directly or indirectly, to write, develop, produce or sell computer assisted die making software.

E. Licensee agrees during the term of this Agreement and for one (1) year after the termination of this Agreement, that it will not write, develop, produce or sell or assist others in the writing, developing, producing or selling computer assisted die making software, directly or indirectly without Lasercomb's prior written consent. Any such activity undertaken without Lasercomb's written consent shall nullify any warranties or agreements of Lasercomb set forth herein.

The "term of this Agreement" referred to in these clauses is ninety-nine years.

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. ⁷ 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. ⁸

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.

A. Does a "Misuse of Copyright" Defense Exist?

We agree with the district court that much uncertainty engulfs the "misuse of copyright" defense. ⁹ 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, 77 S.Ct. 490, 494, 1 L.Ed.2d 465 (1957); see generally 8 E. Lipscomb, Lipscomb's Walker on Patents Secs. 28:32-28:36 (3d ed. 1989) [hereinafter Walker on Patents ]; Calkins, Patent Law: The Impact of the 1988 Patent Misuse Reform Act and Noerr-Pennington Doctrine on Misuse Defenses and Antitrust Counterclaims, 38 Drake L.Rev. 175 (1989) [hereinafter Calkins, Patent Law ]. 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 of the copyright. E.g., United States v. Loew's, Inc., 371 U.S. 38, 44-51, 83 S.Ct. 97, 101-05, 9 L.Ed.2d 11 (1962); United States v. Paramount Pictures, Inc., 334 U.S. 131, 157-59, 68 S.Ct. 915, 929-30, 92 L.Ed. 1260 (1948); Mitchell Bros. Film Group v. Cinema Adult Theater, 604 F.2d 852, 865 & n. 27 (5th Cir.1979), cert. denied, 445 U.S. 917, 100 S.Ct. 1277, 63 L.Ed.2d 601 (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...