Comprehensive Technologies Intern., Inc. v. Software Artisans, Inc.

• Citation: 3 F.3d 730
• Decision Date: 30 September 1993
• Docket Number: No. 92-1837,92-1837
• Parties: 1993 Copr.L.Dec. P 27,137, 28 U.S.P.Q.2d 1031 COMPREHENSIVE TECHNOLOGIES INTERNATIONAL, INCORPORATED, Plaintiff-Appellant, v. SOFTWARE ARTISANS, INCORPORATED; Marshall Dean Hawkes; Igor A. Filippides; Randall L. Sterba; Richard T. Hennig; David R. Bixler; Alvan S. Bixler, Defendants-Appellees, and Mark A. Hawkes, Defendant.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 730

3 F.3d 730

1993 Copr.L.Dec. P 27,137, 28 U.S.P.Q.2d 1031

COMPREHENSIVE TECHNOLOGIES INTERNATIONAL, INCORPORATED Plaintiff-Appellant, v. SOFTWARE ARTISANS, INCORPORATED; Marshall Dean Hawkes Igor A. Filippides; Randall L. Sterba; Richard T. Hennig; David R. Bixler; Alvan S Bixler, Defendants-Appellees and Mark A. Hawkes, Defendant.

No. 92-1837.

United States Court of Appeals, Fourth Circuit.

Argued March 30, 1993.

Decided Aug. 25, 1993.

Opinion and Judgment Vacated and Case Dismissed on Petition

for Rehearing Sept. 30, 1993.

Cynthia Lee Clark, Chantilly, VA, argued, for plaintiff-appellant.

Philip A. Gagner, Shaughnessy, Borowski & Gagner, Washington, DC, argued (Robert J. Zeknick, Szabo, Quinto, Zelnick & Erickson, P.C., Woodbridge, VA, on brief), for defendants-appellees.

Before HALL, MURNAGHAN, and WILLIAMS, Circuit Judges.

OPINION

WILLIAMS, Circuit Judge:

Comprehensive Technologies International, Inc. (CTI), brought this action for copyright infringement against former employees Dean Hawkes, Igor A. Filippides, Randall L. Sterba, Richard T. Hennig, and David R. Bixler (the Defendant employees). CTI also named as defendants Alvan S. Bixler and Software Artisans, Inc. (SA), a corporation formed by Alvan Bixler and several of the Defendant employees shortly after their departure from CTI. CTI contended that "Transend," a computer program developed by the Defendants, infringed upon the copyrights CTI held in its "Claims Express" and "EDI Link" computer programs. CTI appended numerous state law causes of action, including trade secret misappropriation, breach of confidentiality, and breach of contract. ¹ CTI also alleged that Hawkes breached his covenant not to compete with CTI by performing services for SA, soliciting CTI's customers, and hiring CTI's former employees. After a bench trial, the district court entered judgment for the Defendants on all counts.

CTI now appeals and offers four reasons for reversal. First, CTI contends that, in granting judgment for Defendants on its copyright infringement claim, the district court failed to apply the appropriate standard for determining whether Transend is substantially similar to Claims Express and EDI Link. Second, CTI contends that under the Virginia Uniform Trade Secrets Act, Va.Code Ann. Sec. 59.1-336 to -343 (Michie 1992), the district court erred in finding that Defendants did not misappropriate its trade secrets. Third, CTI challenges the district court's conclusion that Hawkes's covenant not to compete with CTI is unreasonable and hence unenforceable under Virginia law. Last, CTI charges that the district court committed reversible error by expressing "bias" against its software.

With regard to CTI's copyright infringement and trade secret misappropriation claims, we affirm the judgment for the Defendants. We agree, however, with CTI's contention that Hawkes's covenant not to compete is enforceable. We therefore vacate the judgment for Hawkes on CTI's claim for breach of contract, and remand for the district court to determine whether Hawkes has breached his covenant not to compete. We find CTI's charge of bias to be without merit.

I. Factual Background

CTI, a California corporation with its principal place of business in Chantilly, Virginia, is engaged in defense related services. CTI was founded in 1980 by Celestino Beltran, who at the time of trial served as CTI's president, chief executive officer, and chairman of the board of directors. By 1988 Beltran was hoping to diversify CTI's operations into newly emerging technologies. At that time, Beltran's next door neighbor, Alvan Bixler, worked for the Electronic Data Interchange Association (EDIA). Electronic data interchange, or EDI, is the computer-to-computer transmission of business transactions in proprietary or standard formats. After discussing EDI with Alvan Bixler and conducting his own research on the subject, Beltran concluded that EDI technology presented substantial growth potential in the small business market.

With the approval of his board of directors, Beltran established a Software Products Group and designated Dean Hawkes to lead it. Hawkes was given the responsibility to design, develop, test, and market software that would enable clients to process and transmit data through EDI technology. CTI selected Igor Filippides as the Software Products Group's Acting Vice President for Sales and gave him primary responsibility for marketing the software. Other members of the Software Products Group included Sterba, Hennig, and David Bixler, who together wrote the actual software. To boost the marketability of its products, CTI obtained an agreement from EDIA to assist CTI in the development of its software. Pursuant to that agreement, Alvan Bixler collaborated with CTI as a consultant on EDI technology.

Each of the Defendant employees except Hawkes signed CTI's standard Confidentiality and Proprietary Information Agreement. Under the Agreement, each employee agreed not to disclose or use, directly or indirectly, during his employment and for three years thereafter any confidential, proprietary, or software-related information belonging to CTI. The Agreement specifically identified the Claims Express and EDI Link projects as confidential. Although Hawkes did not sign a Confidentiality and Proprietary Information Agreement, he did sign an Employment Agreement that contained similar but more restrictive provisions. In addition to promising confidentiality, Hawkes agreed that during the term of his employment he would not compete with CTI, solicit CTI's customers, or employ CTI's current or former employees.

The Software Products Group undertook to develop two software packages for personal computers. The first, Claims Express, is an electronic medical billing system. Claims Express transmits information that conforms to two specific insurance claims forms, the "HFCA 1500" and the "UB 82." The program has been successfully marketed. CTI's second software package, EDI Link, is not specific to the health care industry. It is designed to permit users to create generic forms, enter data on the forms electronically, test that data for errors, and store both the forms and the data on a computer. Although CTI expended substantial effort on EDI Link, at the time of trial the program had not been completed and had never been sold or marketed. Trial testimony indicated that between 35 and 85 percent of the program had been completed.

In February 1991, all of the Defendant employees left CTI. Hawkes executed a formal Termination Agreement with CTI. In that Agreement, Hawkes agreed to rescind his Employment Agreement in return for $50,000 and more than $20,000 worth of equipment. Hawkes also agreed that he would not disclose or use CTI's confidential information, and that, for a period of one year following his departure, he would not (1) compete with CTI, (2) solicit CTI's customers, or (3) hire CTI's employees.

In April 1991, the Defendants incorporated Software Artisans, Inc., located in Fairfax, Virginia. By July 1991, SA had developed and begun to market its own program called Transend. According to its User's Manual, Transend creates a "paperless office environment" by enabling its users to process business forms on a computer. (J.A. at 1592.) Transend is similar to Claims Express and EDI Link in that it is designed to prepare forms for transmission by EDI. Transend permits the user to input data, check the data for errors, and prepare the data for transmission by EDI.

II. Copyright Infringement

The district court concluded that Defendants did not infringe upon CTI's copyrights in Claims Express and EDI Link. See 17 U.S.C.A. Sec. 501(a) (West Supp.1993) (defining copyright infringement). The court found that Transend was not a literal copy of either Claims Express or EDI Link, see Computer Assocs. Int'l, Inc. v. Altai, Inc., 982 F.2d 693, 701 (2d Cir.1992) (literal copying can prove infringement), nor was it substantially similar to either program, see Dawson v. Hinshaw Music, Inc., 905 F.2d 731, 732 (4th Cir.1990) (access and substantial similarity can prove infringement), cert. denied, 498 U.S. 981, 111 S.Ct. 511, 112 L.Ed.2d 523 (1990); Whelan Assocs., Inc. v. Jaslow Dental Lab., Inc., 797 F.2d 1222, 1232 (3d Cir.1986), cert. denied, 479 U.S. 1031, 107 S.Ct. 877, 93 L.Ed.2d 831 (1987). The district court acknowledged that under Whelan CTI could prove infringement by showing substantial similarities between the structure, sequence, and organization of the programs, but found that CTI had not met its burden of proof on that issue. The court accepted CTI's evidence that the programs shared some characteristics but nonetheless found that the similarities were either derived from common sources available to the average programmer or were dictated by the functions of the programs. The court also found that, to the extent that CTI may have possessed proprietary algorithms, ² Defendants had not copied any of them.

CTI contends that the district court failed to apply the correct test to determine substantial similarity and therefore erred in concluding that the structure, sequence, and organization of Transend were not substantially similar to that of Claims Express and EDI Link. We review the district court's factual findings on substantial similarity for clear error, Data East USA, Inc. v. Epyx, Inc., 862 F.2d 204, 206 (9th Cir.1988); Whelan, 797 F.2d at 1233 n. 25, and we review its conclusions of law de novo, Whelan, 797 F.2d at 1233 n. 25.

CTI points out that the district court criticized the Whelan test of substantial similarity as overly simplistic, ³ but never stated which alternative test should be used to evaluate substantial similarity. CTI believes that the district court should have applied the Second Circuit's "abstraction-filtration-comparison" analysis, first announced in the Computer Associates opinion. Computer Assocs., 982 F.2d at 706-12. CTI...