Diggan v. Cycle Sat, Inc., No. 96-1318

• Court: United States State Supreme Court of Iowa
• Writing for the Court: Considered by McGIVERIN; NEUMAN
• Citation: 576 N.W.2d 99
• Decision Date: 25 March 1998
• Docket Number: No. 96-1318
• Parties: Michael DIGGAN d/b/a Jemi Software, Appellant, v. CYCLE SAT, INC., Appellee.

Page 99

576 N.W.2d 99 46 U.S.P.Q.2d 1372 Michael DIGGAN d/b/a Jemi Software, Appellant,
v.
CYCLE SAT, INC., Appellee. No. 96-1318. Supreme Court of Iowa. March 25, 1998.

Page 100

Peter C. Riley of Tom Riley Law Firm, P.C., Cedar Rapids, and Matthew F. Berry, Clear Lake, for appellant.

Robert R. Rush and Elizabeth D. Jacobi of Lynch, Dallas, Smith & Harman, P.C., Cedar Rapids, for appellee.

Considered by McGIVERIN, C.J., and HARRIS, LAVORATO, NEUMAN, and TERNUS, JJ.

NEUMAN, Justice.

Plaintiff Michael Diggan, a computer programmer, sued his former employer, defendant Cycle Sat, Inc., claiming it breached an implied contract to pay him for developing software, and breached an implied license for use of the software in its "cycle cypher," a downlink system for capturing television commercials sent over satellite. The district court granted Cycle Sat summary judgment, finding the claims barred by the five-year limitation period of Iowa Code section 614.1(4) (1995). On Diggan's appeal, we affirm in part, reverse in part, and remand for further proceedings.

I. Background Facts and Proceedings.

Cycle Sat operated a satellite communication network used for transmitting commercials nationwide to television stations. To automate the network, it contracted with North Iowa Electronics, Inc. (NIE) to produce the necessary computers. Michael Diggan, an independent computer programmer acquainted with NIE, developed software in May 1987 to command the cycle cypher's receipt of satellite signals. Thereafter Cycle Sat hired him to work for the company. As Cycle Sat's employee, Diggan made modifications and enhancements to the downlink software.

Prior to becoming an employee, Diggan had received from Cycle Sat's parent company a $1500 advance on commissions and royalties for the software he had developed. No express agreement was ever concluded between Diggan and Cycle Sat, however, regarding full payment and royalties for development and use of the software. Thus,

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throughout his term as an employee, Diggan refused to give Cycle Sat the crucial source code for the program.

In late 1989, Cycle Sat offered Diggan a lump sum payment of $10,000 for his development interest in the software. Diggan refused the offer. Cycle Sat then pressed the issue by threatening to fire Diggan unless he turned over the software, including the source code. On January 18, 1990, Diggan resigned rather than turn over the code.

By a letter from legal counsel dated January 30, 1990, Cycle Sat notified Diggan of its claimed ownership of the software. It demanded return of all computer data, information, software, and programs in Diggan's possession. Diggan, through counsel, responded on February 5, 1990, demanding that Cycle Sat cease using the software.

A. Federal copyright litigation. Based on the facts sketched above, Diggan commenced a suit for copyright infringement in federal court. A jury found, by special verdict, that Diggan owned the copyright to the disputed program. It awarded no damages for copyright infringement, however, because Cycle Sat prevailed on its affirmative defense of implied license. Whether Diggan was entitled to compensation for Cycle Sat's use of the license--a state law claim--remained unanswered. ¹

The parties differ somewhat over the impact of the federal jury's verdict. Cycle Sat--in its unsuccessful motion to dismiss Diggan's subsequent suit in state court--claimed the jury's verdict precluded any further action by Diggan to collect compensation from Cycle Sat. We believe, however, the posture of the case at this point closely resembles Effects Associates, Inc. v. Cohen, 908 F.2d 555 (9th Cir.1990), a copyright infringement case decided by the United States Court of Appeals for the Ninth Circuit. Because the court's opinion so nicely illuminates the path from complex federal copyright litigation to garden-variety state contract claims, we pause to consider it here.

Effects involved a dispute over the copyright to special effects footage incorporated into a horror movie. The movie maker's refusal to pay any more than half the promised amount for the footage sparked the legal controversy. Effects, 908 F.2d at 556. As in the case before us, the court concluded that Effects held a copyright to the footage but had nevertheless given the movie maker implied license to use the special effect sequence in the film. Id. at 558-59. Citing the leading treatise on copyright law, the court found that "[a] nonexclusive license may be granted orally, or may even be implied from conduct." Id. at 558 (citing 3 M. Nimmer & D. Nimmer, Nimmer on Copyright § 10.03[A], at 10-36 (1989)). Pertinent to the case before us, the circuit court affirmed a finding of no copyright infringement but noted the controversy was not yet over:

[P]laintiff doesn't leave this court empty-handed. Copyright ownership is comprised of a bundle of rights; in granting a nonexclusive license to Cohen, Effects has given up only one stick from that bundle--the right to sue Cohen for copyright...