National Car Rental System, Inc. v. Computer Associates Intern., Inc., 92-1683

Citation991 F.2d 426
Decision Date06 April 1993
Docket NumberNo. 92-1683,92-1683
Parties, 1993 Copr.L.Dec. P 27,078, 26 U.S.P.Q.2d 1370 NATIONAL CAR RENTAL SYSTEM, INC., Appellee, v. COMPUTER ASSOCIATES INTERNATIONAL, INC., Appellant.
CourtUnited States Courts of Appeals. United States Court of Appeals (8th Circuit)

Allen W. Hinderaker, Minneapolis, MN, argued (Bruce H. Little and Polly A. Maier, on the brief), for appellant.

Peter J. Frazza, Short Hills, NJ, argued (Donald P. Jacobs and Vincent J. Proto, on the brief), for appellee.

Before MAGILL, Circuit Judge, HEANEY, Senior Circuit Judge, and BEAM, Circuit Judge.

MAGILL, Circuit Judge.

We here deal with the difficult question of the extent to which the Copyright Act preempts state breach of contract actions alleging that the licensee of computer software exceeded limitations on the use of computer software contained in the license agreements. Computer Associates International, Inc., appeals from the district court's order resolving a motion for judgment on the pleadings and dismissing its breach of contract claim against National Car Rental as preempted under the Copyright Act. We conclude that the district court failed to grant Computer Associates all reasonable inferences from its pleadings, and hold that as properly construed, the cause of action as pled is not preempted. We reverse.

I. BACKGROUND

Computer Associates International, Inc. (CA), creates and licenses computer software. CA licensed its programs to the appellee, National Car Rental Systems, Inc. (National), to process National's data on National's hardware in Bloomington, Minnesota. The 1990 license agreement between CA and National provided, as did earlier licenses, that National may use the licensed programs "only for the internal operations of Licensee and for the processing of its own data." A separate order form, incorporated into the license agreement similarly provided that "use of the Licensed Program[s] is restricted to the internal operations of Licensee and for the processing of its own data."

Sometime in 1990, National decided to cease its internal computer operations and contract with an independent computer services vendor for computer related information services. Ultimately, National retained Electronic Data Systems Corporation (EDS) to provide these services. In connection with this transaction, National, EDS, and CA entered into a supplement addendum, which provided that EDS could use the licensed programs to process National's data. The supplement addendum provided that EDS would use the programs for the benefit of National subject to the terms and conditions of the 1990 license agreement, and solely "to process data of Licensee and in no event for the processing of data ... of any third party other than Licensee."

CA subsequently determined that National had been using the programs to process the data of third parties, including Lend Lease Trucks, Inc. (Lend Lease), and Tilden Car Rental, Inc. (Tilden), in violation of the license agreement, and that such use had continued through EDS under the supplement addendum. CA threatened to sue National if such use did not stop. National then brought a declaratory judgment action in the district court. National admitted in its complaint that it "has used the Licensed Software in its business activities ... including the activities relating to Tilden and Trucks [Lend Lease]," but requested a declaration that its use of the programs neither breached the license agreement nor infringed CA's copyright. CA asserted two counterclaims. In the first, it claimed that National's use of the programs, either individually or through EDS, for the benefit of Lend Lease and Tilden, breached the license agreement. In the second, CA claimed that National infringed its copyright by making an unauthorized copy of the software.

National moved for judgment on the pleadings under Rule 12(c), alleging that CA's first counterclaim was preempted under § 301(a) of the Copyright Act. In resolving the motion, the district court concluded that CA alleged a lease agreement between National and the third parties: National permitted them to use the software in exchange for payment. The district court concluded that this cause of action, as pled, was "equivalent" to the exclusive copyright right of distribution of copies of the work, and held it was preempted.

II. DISCUSSION
A. Standard of Review

We review a motion for judgment on the pleadings de novo. Westcott v. City of Omaha, 901 F.2d 1486, 1488 (8th Cir.1990). The standard is strict: judgment on the pleadings is not appropriate unless the moving party has "clearly establishe[d] that no material issue of fact remains to be resolved and he is entitled to judgment as a matter of law." Iowa Beef Processors, Inc. v. Amalgamated Meat Cutters, 627 F.2d 853, 855 (8th Cir.1980). This court must accept as true all facts pled by the non-moving party, and grant all reasonable inferences from the pleadings in the non-moving party's favor. Id. Thus, we must determine whether CA's first counterclaim, as pled, may reasonably be read only as a claim preempted by the Copyright Act.

The Copyright Act provides the exclusive source of protection for "all legal and equitable rights that are equivalent to any of the exclusive rights within the general scope of copyright as specified by section 106" of the Copyright Act. See 17 U.S.C. § 301(a). Concomitantly, all non-equivalent rights are not preempted. A state cause of action is preempted if: (1) the work at issue is within the subject matter of copyright as defined in §§ 102 and 103 of the Copyright Act, and (2) the state law created right is equivalent to any of the exclusive rights within the general scope of copyright as specified in § 106. 1 Harper & Row, Publishers, Inc. v. Nation Enters., 723 F.2d 195, 200 (2d Cir.1983).

We cannot tell from the district court's memorandum opinion whether the district court concluded the cause of action was preempted because the district court believed CA had alleged National actually distributed a copy of the program to Lend Lease and Tilden, or whether the district court concluded that the allegation of use by National for Lend Lease's and Tilden's benefit was preempted even absent an actual distribution. Therefore, we first examine CA's pleadings to determine whether the district court gave it the benefit of all reasonable inferences from the pleadings. On this standard, we determine that CA's pleadings cannot be read to allege that National actually distributed a copy of the program to Lend Lease or Tilden. Instead, CA's pleadings must be read to allege that National breached their contract by using the program itself, or through EDS, to process data for Lend Lease and Tilden. We then examine whether so construed, the cause of action is preempted.

B. Characterization of CA's Pleadings

Because the question here depends upon the proper interpretation of CA's first counterclaim, we set it out in some detail. In the first counterclaim, CA alleged, in pertinent part, that:

The authorization for use granted National [pursuant to the 1990 License Agreement] was for the internal operations of National and for the processing of its own data. (First Counterclaim, p 31)

Pursuant to the Supplement Addendum ... it was agreed that the Licensed Programs would be used solely for the benefit of National and subject to the rights, obligations and benefits in all respects of the terms and conditions of the License Agreement. (First Counterclaim, p 32)

Pursuant to the Supplement Addendum ... National and EDS further agreed, among other things, to use the Licensed Programs ... solely to process data of National and in no event for the processing of data of any third party other than National. (First Counterclaim, p 33)

... In none of the License Agreements was [National] granted any authorization to use the licensed programs for the benefit of any company other than itself. (First Counterclaim, p 35)

... National has used and permitted the use of the Licensed Programs for the processing of data for the benefit of third parties. This use of the Licensed Programs for the benefit of third parties includes the use for Lend Lease Trucks, Inc. and Tilden Car Rental, Inc. (First Counterclaim, p 36)

... National has been unjustly enriched by any fees or other compensation received from those third-parties for use of the Licensed Programs for their benefit. (First Counterclaim, p 37)

The district court noted that the computer software in question was within the subject matter of copyright, and thus focused on whether CA's breach of contract action sought to protect rights equivalent to the exclusive copyright rights. The court noted that National had not alleged which copyright right was equivalent to CA's action, but concluded that the distribution right was the only right potentially equivalent.

In resolving the preemption issue, the court concluded that "[c]onstrued as true, CA's allegations reflect the existence of a lease arrangement between National and Lend Lease and Tilden: National has permitted Lend Lease and Tilden to use the licensed software in exchange for payment. The distribution right includes specifically the right to lease or lend." Mem. op. at 9-10. The court further concluded that the presence of a contract promise did not create a right qualitatively different from copyright, and stated: "In essence, CA alleges National breached the license agreement by infringing CA's copyrights in the licensed software." Id. at 10.

We believe that in reaching this conclusion, the district court either failed to give CA the benefit of all reasonable inferences from the pleadings or misinterpreted the law of copyright preemption. We first assume that the district court concluded an actual distribution had occurred.

Given our standard of review, we do not believe that CA's complaint may be read to allege that National actually distributed the program. The...

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