Hill v. Xyquad, Inc.

• Citation: 939 F.2d 627
• Decision Date: 29 July 1991
• Docket Number: Nos. 91-1274,91-1842,s. 91-1274
• Parties: William E. HILL, Appellee, v. XYQUAD, INC., Terminal Software, Inc.; Gerald Claunch; Sylvan Landau; Frederick Stewart; James Tuxberry, Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)

Page 627

939 F.2d 627

19 U.S.P.Q.2d 1626

William E. HILL, Appellee, v. XYQUAD, INC., Terminal Software, Inc.; Gerald Claunch;

Sylvan Landau; Frederick Stewart; James

Tuxberry, Appellants.

Nos. 91-1274, 91-1842.

United States Court of Appeals,

Eighth Circuit.

Submitted June 12, 1991.

Decided July 29, 1991.

Rehearing Denied in No. 90-1274

Sept. 5, 1991.

Stephen L. Dreyfuss, Newark, N.J., argued (Rachel N. Davidson, Newark, N.J., and Messrs. Michael H. Wetmore and Alan E. Popkin, St. Louis, Mo., on the brief), for appellants.

Frank B. Janoski, argued (Timothy F. Noelker, on the brief), St. Louis, Mo., for appellee.

Before McMILLIAN, Circuit Judge, and FLOYD R. GIBSON and HENLEY, Senior Circuit Judges.

HENLEY, Senior Circuit Judge.

Xyquad, Inc., its predecessor entity and founders, collectively referred to as the appellant, appeals the issuance and terms of a preliminary injunction ordering it to return certain software programs to William E. Hill, appellee. Appellee sought the preliminary injunction to prevent appellant from continuing its alleged infringement of his copyright. Appellee also filed a suit for infringement. In connection with the injunction, the district court properly ordered appellee to post a reasonable pre-trial bond of $500,000.00 but later, without explanation, substantially reduced and drastically modified the bond requirement, permitting appellee to post the equity in his home instead.

We stayed the injunction and ordered appellant to post a bond of $1 million pending our further review and resolution of its appeal of the district court's order. Appellant agreed in the alternative, and we so ordered it, to return all copies of the software to the appellee with the exception of one copy deposited with the district court for safekeeping. We now lift our stay order, dissolve the preliminary injunction entirely, and remand this cause to the district court so that it can proceed toward ultimate disposition.

FACTS

We first summarize the relevant findings of the district court. Hill is a programmer The agreement provided that appellee was to receive monthly royalties and in exchange he would sublicense the programs and make himself available to handle problems with and upgrades of the programs. Appellee was to remain the owner of the programs, unless he died before termination of the agreement, in which case appellant became the owner. Appellee agreed to let appellant use the programs to develop business software applications for its clients, the end users. The end users were likewise authorized to use the programs within the context of the applications developed for it by the appellant.

who developed three software programs for use by banking entities. He entered into an indefinite term, non-exclusive licensing agreement in 1987 with Xyquad's predecessor entity after discussing with its founders the possibility of going into business together. The company was to provide certain integral computer equipment and services to financial institutions.

The agreement could be terminated at will by appellant with ninety-days notice. Appellee could only terminate the agreement if appellant failed to pay the monthly royalty. The district court found that appellant had not terminated the agreement and had made all required payments. Upon termination, appellee was responsible for servicing end users if appellant became unable to do so and appellant was required to return all codes and programs to appellee.

Each program consisted of object codes (binary, machine-readable only codes) and source codes (human readable). Appellee was required to provide the object code to appellant, and appellant was permitted to distribute program applications to end users in object code. Appellee was specifically required to deliver a copy of the source codes and any upgrades to Mercantile Trust Company for safekeeping. Appellant was specifically precluded from sharing the source codes with end users. The district court found that appellee originally kept the source codes at appellant's place of business, though under his control, but later turned copies of the source codes over to appellant. The agreement required appellant to keep the programs (object and source codes) confidential from third persons with the exception of permitted disclosures to end users.

The district court found that appellee was the owner of the programs as evidenced by virtue of his copyright registrations in effect at February 9, 1990. The court also found that applications of these programs were operational at several locations throughout the United States. The parties had a "falling out" in early 1989 and appellee departed from appellant's business for a few weeks, leaving the programs behind. The district court found that appellee later returned to appellant's business after discussions regarding amendments to the licensing agreement, and gave appellant copies of the source codes. Shortly thereafter, however, appellee again departed, this time for good.

The district court found that appellant had only disclosed the source code to officers and employees of Xyquad, and to certain computer programmers it hired to correct and modify the source codes after appellee's departure. Also, sometime after departure, appellant removed appellee's name from the copyright disclosure notice on the programs. The court further found that the programs continued to have, as expected, certain "bugs" and "glitches" that needed correction and necessitated using the source codes. Appellee had not offered to perform these corrections after his last departure.

Appellee moved for preliminary injunction on May 23, 1990, and unsuccessful efforts were made towards settlement. The court held hearings on the injunction in October, November and December. On January 2, 1991, the court issued its decision granting the injunction and ordered briefs regarding an appropriate bond. Applying the Eighth Circuit test adopted in Dataphase, the district court found appellee would likely succeed on the merits of its underlying infringement action, that appellee would be irreparably harmed if the injunction was not granted, that the balance The court stated that, although it was granting plaintiff relief, it would "not grant plaintiff immediate relief, and it [would] require the posting of a significant security bond to protect defendants' interests during the pendency of the litigation." The court then curiously ordered appellant to immediately cease all use of the source codes and to return all programs and codes to appellee within fifty days. As for bond, the appellant introduced evidence suggesting possible damages amounting to over $3 million. The court ordered bond of $500,000.00. Upon motion for reconsideration, the court modified its order permitting appellee to post the unascertained equity in his home to secure the bond. We stayed the injunction, and appellant appeals both the district court's injunction and its bond order.

of harms favored appellee, and that an injunction would benefit the public interest. Dataphase Systems, Inc. v. C L Sys., Inc., 640 F.2d 109 (8th Cir.1981) (en banc).

APPLICABLE STANDARDS

We review an order granting preliminary injunction for an abuse of discretion, clear legal error, and clearly erroneous fact findings. Id. at 114; accord West Pub. Co. v. Mead Data Cent. Inc., 799 F.2d 1219, 1223 (8th Cir.1986), cert. denied, 479 U.S. 1070, 107 S.Ct. 962, 93 L.Ed.2d 1010 (1987). In considering the district court's application of the aforementioned four factor test, a reviewing court must be mindful of the fact that no single factor is determinative. Dataphase, 640 F.2d at 113. The central question, however, in any preliminary injunction case is "whether the balance of equities so favors the movant that justice requires the court to intervene to preserve the status quo until the merits are determined." Id. Each case is necessarily considered on its unique facts and circumstances.

DISCUSSION

In its memorandum opinion, the district court first evaluated the probability of appellee's success on the merits. The district court concluded that the evidence showed appellee owned the programs, appellant's use of source code infringed upon appellee's copyright, and that no meritorious defenses existed. Next, the district court found irreparable harm based on the presumption of irreparable harm in copyright cases that was articulated in West. In addition, the court found that appellant's actions created a threat of improper distribution of the source codes, potential for damage to appellee's reputation, and potential exposure of appellee to legal liability. The court also cursorily concluded that the public interest most certainly was served by granting an injunction in this case.

For purposes of our analysis it is assumed, without deciding, that the district court's findings of fact and conclusions of law regarding factors one, two and four were not erroneous. However, we reverse because it does not appear that the court adequately balanced the harms and the evidence does not suggest that such balancing would favor appellee.

The district court found that appellee had left appellant's business and stopped servicing end users. This appears to be a clear breach of the agreement. Without appellee, appellant had no way within the terms of the agreement to service end user needs. The court concluded the programs had "bugs" and "glitches" that necessitated use of the source codes. The court stated that appellant had made all payments up to the present day that were required by the agreement despite ap...