Graham v. James

• Decision Date: 18 May 1998
• Docket Number: D,Nos. 794,795 and 796,s. 794
• Citation: 1997 WL 894500,144 F.3d 229
• Parties: 1998 Copr.L.Dec. P 27,783, 46 U.S.P.Q.2d 1760 Richard E. GRAHAM, dba Night Owl Computer Service and Night Owl Publisher, Inc., Plaintiff-Appellant-Cross-Appellee, v. Larry D. JAMES, Defendant-Appellee-Cross-Appellant. ockets 96-9224, 96-9272 and 97-7706.
• Court: U.S. Court of Appeals — Second Circuit

Page 229

144 F.3d 229

1998 Copr.L.Dec. P 27,783, 46 U.S.P.Q.2d 1760

Richard E. GRAHAM, dba Night Owl Computer Service and Night Owl Publisher, Inc., Plaintiff-Appellant-Cross-Appellee, v. Larry D. JAMES, Defendant-Appellee-Cross-Appellant.

Nos. 794, 795 and 796, Dockets 96-9224, 96-9272 and 97-7706.

United States Court of Appeals Second Circuit.

Argued Jan. 9, 1998.

Decided May 18, 1998.

Denis A. Kitchen, Jr., Williamsville, NY, for Plaintiff-Appellant-Cross-Appellee.

James Ostrowski, Buffalo, NY, for Defendant-Appellee-Cross-Appellant.

Before: WALKER and JACOBS, Circuit Judges, and MISHLER ^*, Senior District Judge.

JACOBS, Circuit Judge.

Plaintiff Richard E. Graham (dba Night Owl Computer Service and then through a corporate entity, Night Owl's Publisher, Inc. ¹ ) marketed CD-ROM disks containing compilations of computer programs; defendant Larry D. James created file-retrieval programs that allowed users to access particular programs on Graham's products or (presumably) other CD-ROM disks. In this case, the parties assert conflicting rights to James's work product.

Graham now appeals, and James cross-appeals, from a judgment of the United States District Court for the Western District of New York (Elfvin, J.), following a bench trial, awarding James $137,258 in damages on his copyright infringement and breach of contract counterclaims.

On appeal, Graham claims principally that the district court erred: (i) in finding that the program was not a work for hire developed while James was in Graham's employ and therefore that James owned the copyright for the CD-ROM file-retrieval program; and (ii) in finding copyright infringement even though James granted Graham a license to use the program. James cross-appeals, claiming that the district court erred: (i) in failing to award pre-judgment interest; (ii) in dismissing James's defamation action based on the common interest privilege; (iii) in failing to enter judgment against Night Owl's Publisher, Inc., the alleged successor to Graham's sole proprietorship; and (iv) in denying James's request for a continuance to obtain expert testimony.

We affirm the district court's finding that the file-retrieval program was not a work for hire and its award of breach of contract damages (as well as its denial of pre-judgment interest thereon). We also affirm the district court's dismissal of James's defamation counterclaim. However, we vacate the judgment and remand to permit the district court to determine whether Graham's license to use the file-retrieval program was rescinded, and thus whether Graham infringed James's copyright. On remand, the district court should reconsider whether judgment should be entered against Graham's successor, Night Owl's Publisher, Inc.

BACKGROUND

The facts, as found by the district court after a bench trial, are as follows: Graham Graham's first CD-ROM disk release, called PDSI-001, was unwieldy because it lacked a file-retrieval program. So before releasing his second CD-ROM product, Graham asked Jeffrey Anderson, a student, to compose a file-retrieval program. Anderson developed a program called NIGHT.EXE in the QuickBASIC programming language; that program was then incorporated into Graham's second CD-ROM disk release, PDSI-002. Anderson's program provided a table of contents for the programs on the disk, but did not allow for actual file retrieval, or for decompression of the files. Because of the number of programs on each disk, the programs had to be compressed prior to placement on the disk and thus decompression was necessary prior to using a program. Although Graham claimed to have participated in the development of NIGHT.EXE, he is not a computer programmer and the trial court found that his role in the program's development was "negligible."

until recently doing business as Night Owl Computer Service, markets CD-ROM disks containing compilations of computer programs known as "Shareware," "Freeware," and "Public Domain software." "Shareware" are programs that are created and released to the public to sample, with the understanding that anyone using the software will register with the author and remit a fee. "Freeware" is software available for free use. "Public Domain software" is software unprotected by copyright. Each of Graham's CD-ROM disk releases contains 5,000 to 10,000 such programs.

Dissatisfied with Anderson's program, Graham purchased a license for FOLIO, a file-retrieval program with retrieval and decompression capabilities, that Graham used for his next two releases.

In March 1991, he contacted James, a self-taught computer programmer, part-time taxi driver, and computer equipment salesman, and explained to him in general terms what was needed. James agreed to create a file-retrieval program in exchange for a CD-ROM disk drive and credit on the final product. He then created a different QuickBASIC version of NIGHT.EXE, which was included on PDSI-004; unlike Anderson's program, James's had retrieval and decompression capabilities. Neither party asserts any claim relating to this version of NIGHT.EXE.

Using "Borland's C++" language (said to be a superior programming language), James then developed a new version of NIGHT.EXE, which we will call the "C version." The C version was included in PDSI-004-1, released on August 2, 1991. This was an entirely new program, and Graham's contribution was limited to communicating the general requirements of the program and collaborating on the organization of the files that the program retrieved.

In composing the C version, James built into it a notice attributing authorship and copyright to himself. In September 1991, Graham and James argued over the copyright notice, with Graham claiming the copyright under the work-for-hire doctrine. At trial, Graham introduced a tape recording of a late-night telephone conversation between himself and James, in which they argued over copyright ownership and their compensation arrangement; the conversation ended without any resolution.

At trial, the parties presented conflicting testimony regarding their compensation and licensing arrangement. Graham claimed that he made several payments to James for developing the C version, including $200 payments in July and August 1991, and three $250 payments in September 1991; Graham claimed that the last three payments were pursuant to a newly-instituted "monthly" salary. James claimed that Graham orally agreed to a licensing arrangement under which Graham would pay James $1,000 for each CD-ROM release containing the program and $1 for each disk sold, that the five payments evidenced Graham's partial performance of the licensing agreement, and that Graham promised further payments pursuant to the agreement after he built up his cash reserve. The district court found that "the parties had orally agreed that James would provide Graham with a file retrieval program written in Borland's C++" and "that Graham would pay James $1,000 for each version provided thereof and one dollar for each disk sold."

After the late-night telephone conversation, Graham removed James's copyright notice, repaired a "bug" in the program, and proceeded to release a new version of PDSI-004-1. In October 1991, Graham released PDSI-005. PDSI-006, PDSI-006-1 and PDSI006-2 followed in early- to mid-1992, and NOPV-6 in the summer of 1992. All of these releases contained the C version of NIGHT.EXE (or a slight modification of it).

Variants of the C version were used in NOPV 7,8 and 9; but Graham alleged that these variants were created by other programmers, and the district court concluded that these later programs were not substantially similar to James's C version.

In September or October 1991, James sold the C version of NIGHT.EXE to another CD-ROM publisher. Graham sued and moved for a preliminary injunction, claiming ownership of the copyright in the C version under the work-for-hire doctrine and asserting that James had infringed Graham's copyright by selling the program. James counterclaimed, alleging that he owned the copyright and that Graham had infringed his copyright by installing the C version on his CD-ROM releases and removing James's copyright notice. James also asserted counterclaims for breach of the licensing agreement, unfair competition, defamation, and tortious interference with contractual relations. The district court granted a preliminary injunction enjoining James from "publishing, copying, selling, marketing or otherwise disposing" of programs substantially similar to the C version.

After a bench trial, however, the district court found for James on his breach of contract and copyright infringement counterclaims. It concluded that James owned the C version copyright because he was an independent contractor when he developed the program, and that Graham's CD-ROM releases from PDSI-004-1 through NOPV-6 contained file-retrieval programs substantially similar to the C version, thereby infringing James's copyright. The court also rejected Graham's copyright infringement claim, permanently enjoined Graham from using the program, and dismissed James's common law counterclaims. On James's contract counterclaim, the court found that Graham had breached the agreement by failing to pay James $1,000 for each release containing the C version and one dollar for each disk sold.

Damages were awarded as follows: (i) actual damages for breach of contract of $17,716, representing six CD-ROM releases at $1000 per release, and 12,866 disks at $1 per disk, for a total of $18,866, minus the $1,150 already paid to James; and (ii) actual damages and profits for copyright infringement of $119,542, representing: (a) $25,000 for Graham's failure to credit James with authorship; and (b) $112,258 of profits and actual damages on the six relevant CD-ROM releases, reduced by $17,716 (the amount awarded for breach of contract to avoid double counting).

Later, the court denied James's motion pursuant to Fed.R.Civ.P. 59...