Evans Newton Inc. v. Chicago Systems Software, s. 84-2971
| Decision Date | 16 July 1986 |
| Docket Number | Nos. 84-2971,85-1359,s. 84-2971 |
| Citation | 793 F.2d 889 |
| Parties | , 230 U.S.P.Q. 166, 1986 Copr.L.Dec. P 25,951 EVANS NEWTON INCORPORATED, a New Jersey corporation, Plaintiff-Appellee, v. CHICAGO SYSTEMS SOFTWARE, and Brian Brazda, an individual, and James M. Davey, an individual, d/b/a Chicago Systems Software, Defendants-Appellants. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Charles A. Laff, Laff, Whitesel, Conte & Saret, Chicago, Ill., for defendants-appellants.
Don C. Stevens, II, Jones, Skelton & Hochuli, Phoenix, Ariz., for plaintiff-appellee.
Before CUMMINGS, Chief Judge, and WOOD and CUDAHY, Circuit Judges.
This case involves allegations that the defendants Chicago Systems Software, Brian Brazda, and James Davey engaged in copyright infringement, misappropriation of trade secrets, unfair competition, and breach of contract, based upon the defendants' alleged improper copying of the plaintiff Evans Newton Incorporated's user's manual for the microcomputer program "Project Basic." The plaintiff contracted with the defendants for the defendants to do the computer programming for Project Basic, a program used by educational institutions. The defendants, after finishing work for the plaintiff, attempted to market their own manual and computer program to compete with Project Basic.
The plaintiff consequently sued for damages and to enjoin the defendants from marketing the competing program. The defendants counterclaimed that the plaintiff had impermissibly interfered with the defendants' attempts to market their own manual and program. A bench trial before Judge McMillen resulted in a verdict for the plaintiff. Defendants appeal a number of factual findings and conclusions of law. We affirm in part but reverse the district court's award of punitive damages and the plaintiff's attorneys' fees.
The district court found the following to be the facts of this case. The plaintiff, Evans Newton Incorporated ("ENI"), is a corporation which provides recordkeeping systems to educational institutions throughout the country. During 1978, ENI decided to adapt its educational instruction program to programmable calculators. In cooperation with Victor Business Products, ENI developed calculator-managed and assisted programs for use with the Victor 4900 programmable calculator. ENI's president, Lloyd Ferguson, designed and prepared the programs to perform various functions including storage of information relating to student numbering, student progress, class information and scores. The programs could also produce reports on these topics. ENI incorporated specialized terminology and concepts into the automated recordkeeping system. 1
In May 1979, ENI decided to develop a management program compatible with the new rapid low-cost programmable microcomputers which had become increasingly available to ENI's customers. ENI envisioned that these programs would both facilitate basic accountability of school instructional curriculums and perform various collateral functions such as preparing progress reports, teacher/class reports, student report cards, school and district status reports, and so forth. To bring this vision to life, Ferguson wrote the system bid guidelines with programming specifications. This included flow diagrams and prepared numbering and coding systems. Ferguson also developed sample printouts and reports incorporating all of the concepts developed by ENI for computer-managed instruction.
In need of a computer programmer, ENI was referred to defendant Brian Brazda, the president and a partner of defendant Chicago Systems Software ("CSS"). 2 James Davey, the other defendant, is vice-president and also a partner of CSS. CSS designs and sells computer software and provides custom programming services for microcomputers. CSS possessed the necessary programming skills to provide ENI the computer coding necessary to run the ENI Computer Managed Instruction Program on a Commodore computer. On June 21, 1979, ENI and CSS agreed that CSS would provide the necessary programming, including complete documentation of how the system operated, for $5,500 (to compensate CSS for an estimated 200 to 300 hours of programming work).
CSS and ENI set up a schedule that required CSS to begin working on ENI's program by July 11, 1979. CSS was to demonstrate the final version of the program during an in-service training session in Phoenix in mid-August of 1979. CSS began work on ENI's program in late June or early July of 1979. On August 6, 1979, Brazda received a letter from Ferguson setting out the "terms of this commitment." One such term was that "[t]he ENI Copyright of this program is fully recognized by Chicago Software Systems [sic]." CSS completed the final program by mid-August, and on or about August 14, 1979, Davey and Brazda attended an ENI demonstration in Phoenix, where the new program was introduced to ENI customers. The new program was operational, but ENI's customers requested functional changes and corrections, which Davey and Brazda made. Following the demonstration in Phoenix, Brazda (on behalf of CSS) signed an "ENI Microcomputer Program Copyright Statement" prepared by Ferguson, which implemented Ferguson's letter of August 6. 3 After Brazda signed the statement, ENI paid CSS the first $1,500 of CSS's fee.
As soon as the new program became operational in April 1980, ENI began to market its computer-managed instruction program throughout the United States under the trade name "Project Basic." ENI also published a Project Basic user's manual. On June 13, 1980, ENI applied for and received copyright registration for the user's manual. The registration labelled the manual a "work made for hire," but omitted any date of publication. ENI printed a paper copyright notice on its manual.
In April 1980, CSS began to market its own program and user's manual entitled "Computerized Classroom Management." The new CSS program competed with the ENI Project Basic program. CSS demonstrated and distributed its program to various potential users and customers. CSS sold two complete copies of its program for $1,200. CSS also sold demonstration disks containing its program to three customers for less than $200.
Material portions of the CSS user's manual were substantially similar to ENI's Project Basic user's manual. Furthermore, material portions of CSS's program were similar both in form and function to material portions of ENI's Project Basic program. These similarities violated both the agreement between ENI and CSS and ENI's copyright. On or about June 13, 1980, counsel for ENI sent a letter to CSS maintaining that CSS was "attempting to sell an instructional management program that is basically the same" as the program CSS wrote for ENI. ENI demanded that CSS "immediately desist from any attempts to sell or otherwise make available to third parties any programs or material prepared for ENI or furnished [CSS] by ENI." ENI apparently also sent a copy of this letter to Richard Powers of Commodore Business Machine, a potential customer for CSS.
ENI's Project Basic program in its completed form includes both the computer software and the user's manual. The two components have little independent value. In 1980 ENI marketed Project Basic to approximately 300 Commodore computer dealers. Sixty of the Commodore dealers became Project Basic dealers. In return for exclusive Project Basic sales territories, the Commodore dealers paid ENI an amount ranging from $10,000 to $25,000, depending upon the size of the particular dealer's metropolitan area. Although ENI was unsuccessful in obtaining any Project Basic dealers in Georgia, Texas, Illinois, Wisconsin, Minnesota, Ohio, and Oklahoma, this failure was not due to confusion in the marketplace, as CSS also failed to obtain any dealers in those states. Between June of 1980 and June of 1982, no one besides CSS was marketing a program that competed with Project Basic.
Following a bench trial, the district court issued a decision on September 11, 1984, which the court subsequently amended on October 29, 1984. The district court found that CSS had infringed upon ENI's valid copyright for the Project Basic manual. 4 Alternatively, the court found that CSS engaged in acts of unfair competition and violated the parties' confidentiality agreement. The court enjoined CSS from further infringement and copying and ordered CSS "to deliver up all infringing articles for destruction." The court dismissed the counterclaims of CSS. The court found ENI's loss of profit damages (or statutory damages) to be $16,000. Because CSS acted knowingly, willfully, and intentionally, the court awarded ENI exemplary damages of $16,000. Finally, the court allowed ENI to recover its costs and attorneys' fees under copyright law. On February 27, 1985, the district court entered a final order awarding ENI $16,000 in attorneys' fees. ENI's bill of costs is evidently still pending and not an issue for this appeal.
The defendants raise numerous objections to the district court decision. CSS's principal argument is that ENI purposefully jumbled and obfuscated the facts and ENI's various legal theories in order to confuse the trial judge and conceal ENI's true motive for bringing the suit--to eliminate CSS as a competitor. More particularly, CSS alleges that (1) ENI failed to prove copyright infringement, (2) ENI failed to establish a factual or legal basis under contract, trade secret, confidentiality, or unfair competition theory for preventing CSS from marketing its program or manual, (3) ENI failed to demonstrate that it was entitled to injunctive relief, damages, costs, or attorneys' fees, and (4) the district court should not have dismissed CSS's counterclaim. We will address the defendants' four arguments in order.
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