Hyperquest Inc. v. N'site Solutions Inc.

• Decision Date: 23 February 2011
• Docket Number: 08–3979,Nos. 08–2257,08–4176.,s. 08–2257
• Citation: 632 F.3d 377
• Parties: HYPERQUEST, INC., Plaintiff–Appellant, Cross–Appellee,v.N'SITE SOLUTIONS, INC., Defendant–Appellee,andUnitrin Direct Insurance Company, Defendant–Appellee, Cross–Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

632 F.3d 377

2011 Copr.L.Dec. P 30,037

97 U.S.P.Q.2d 1492

HYPERQUEST, INC., Plaintiff–Appellant, Cross–Appellee,

v.N'SITE SOLUTIONS, INC., Defendant–Appellee,andUnitrin Direct Insurance Company, Defendant–Appellee, Cross–Appellant.

Nos. 08–2257

08–3979

08–4176.

United States Court of Appeals, Seventh Circuit.

Argued April 20, 2010.Decided Jan. 19, 2011.Rehearing and Rehearing En Banc Denied Feb. 23, 2011.

Frederic R. Klein (argued), Goldberg Kohn Ltd., Chicago, IL, for Plaintiff–Appellant.Steven L. Tiedemann, JPB Enterprises, Incorporated, Columbia, MD, Jodi Rosen Wine (argued), Paul R. Kitch, Nixon Peabody LLP, Chicago, IL, for Defendants–Appellees.Before FLAUM, WOOD, and EVANS, Circuit Judges.WOOD, Circuit Judge.

In 2001, Quivox Systems granted N'Site Solutions, Inc. a non-exclusive license to certain copyrighted software, called eDoc, that is used to process insurance claims. Quivox later fell on hard times and sold its assets to Safelite Group, Inc., which continues to own the copyright for the eDoc software. Eventually, Safelite granted rights in the eDoc program to HyperQuest; when it did so, the parties acknowledged the continued existence of the N'Site license and they agreed that Safelite itself would retain certain rights to use and develop the software.

This case had its origins in a dispute between N'Site and HyperQuest over the terms of these licenses. To make matters worse, at least from HyperQuest's vantage point, N'Site sold the source code to its modified software to Unitrin Direct Insurance Company in 2006. HyperQuest filed suit on January 22, 2008, against both N'Site and Unitrin, asserting that each had infringed the copyrighted software. The district court concluded that HyperQuest held only a non-exclusive license and thus lacked statutory standing to sue; it therefore dismissed HyperQuest's case with prejudice. Later, the court awarded attorneys' fees and costs to N'Site and Unitrin in the amount of $134,958.42. HyperQuest has appealed, challenging both the conclusion that it was not an exclusive licensee (and thus not entitled to assert a claim for copyright infringement) and the attorneys' fee award. Unitrin cross-appealed from the district court's decision to reduce the amount of the fees it had requested. We conclude that the district court made no error either in interpreting the license or in its fee decisions, and we thus affirm its judgment.

I

We begin by taking a closer look at HyperQuest's interest in the copyright for eDoc. Initially, as we have already noted, Quivox, Safelite's predecessor in interest, granted a non-exclusive license for eDoc to N'Site. Under that agreement N'Site was entitled to use the software only within its own facilities; the license conferred no rights to modify the software or to sell it to others. Apparently after Safelite purchased Quivox's assets, it saw further opportunities for profit in eDoc. In the summer of 2004, Safelite entered into a licensing agreement with HyperQuest (then called HQ, but essentially the same company) for eDoc. The operative language appears in paragraph 2 of the agreement, which spells out the grant of the license and its scope. Subpart (a) says:

Subject to all limitations and obligations set forth in this License Agreement, Safelite grants to HQ a perpetual (subject to termination only as provided in Section 4 ), worldwide, exclusive (except as set forth in Section 2(b) ) license (i) to use the eDoc Software, in source code form, to support the development and commercialization of HQ Services, and (ii) to develop, modify and enhance the eDoc Software as HQ in its sole discretion determines; provided, that such modifications and enhancements are solely related to the development and commercialization of HQ Services. [The agreement then defines the term “use” and addresses sublicensing rights. This section then concludes:] Notwithstanding the foregoing, HQ may not, without the prior written consent of Safelite, which consent shall not be unreasonably withheld, rent, sell, lease, transfer or sublicense the eDoc Software to any person or entity that competes with Safelite in the manufacture, distribution, or sale of automotive glass or related services, including but not limited to, those competitors set forth on Schedule 2(a).

Subpart (b) expressly addresses exclusivity. It says:

Except as otherwise provided in this Section 2(b), HQ's license to the eDoc Software is exclusive in the Territory. Such exclusivity shall terminate if a Sale of of [ sic ] HQ (as defined in the Master Agreement) occurs prior to July 5, 2009. Safelite shall have the right to use the eDoc Software and may license the eDoc Software to third parties solely for purposes of testing or development.

Further down, this subpart addresses the N'Site license:

Notwithstanding the foregoing, HQ acknowledges the eDoc Software is licensed (“License”) to N'SITE Solutions, Inc. (“N'SITE”). HQ further acknowledges Safelite and N'SITE are presently negotiating the terms of a revised license (“Revised License”) regarding N'SITE's use of the eDoc Software.

From there, the paragraph includes promises by Safelite to keep HQ apprised of the status of its negotiations with N'Site. It ends with the following promise: “... in the event the Revised License is modified to include terms substantially different than the Revised License provided to HQ, Safelite will advise and include HQ in the determination of the final terms of the Revised License.” Finally, paragraph 3(a) of the agreement provides that “all right, title and interest in and to the eDoc Software (including, but not limited to, all Intellectual Property Rights) will remain the exclusive property of Safelite, and all right, title and interest in and to the HQ Modifications shall vest in Safelite upon creation.”

In the end, Safelite and N'Site did not succeed in their efforts to renegotiate their agreement. Another part of the contract between Safelite and HQ required Safelite to notify N'Site by April 1, 2006, that Safelite was terminating the License or Revised License with N'Site. Before that date, however, N'Site had undertaken a number of steps that HyperQuest believed were unauthorized.

On June 9, 2003, Safelite notified N'Site that it had acquired the Quivox assets, including Quivox's interest in the eDoc copyright and the licensing agreement. In October 2003, Safelite notified N'Site that the latter had breached the licensing agreement because N'Site had failed to pay certain licensing fees to Safelite. That notification led to the negotiations in the spring of 2004 that are mentioned in the HyperQuest agreement. Shortly before those talks broke down, N'Site told Safelite that it was not using the eDoc software for any purpose, because the software was obsolete and inadequate.

HyperQuest also points to numerous other acts that N'Site took that (it says) were inconsistent either with the terms of N'Site's own license or with HyperQuest's understanding of its own license. Its list of grievances includes at least the following four: (1) N'Site installed the eDoc software at locations other than its own facility; (2) N'Site did not restrict its use of the eDoc software to its immediate organization, its own use, or for the purpose of electronic collection, storage, and transfer of claims; (3) N'Site modified and created derivative works from the eDoc software; and (4) N'Site marketed and sold either the eDoc software itself or the derivative works to third parties. For example, Hyper–Quest says, N'Site sold the source code of its N'Solutions software to Unitrin in the summer of 2006 for more than $700,000. In 2007, N'Site released a new version of N'Solutions called ClaimHub, which it continues to market and sell. HyperQuest asserts that all of these products were derivative works based upon eDoc.

In November 2006, Safelite filed an application in the U.S. Copyright Office for registration of eDoc; it was promptly registered, and on January 7, 2008, HyperQuest recorded the Safelite/HQ License with the Copyright Office. As we noted, this lawsuit followed less than a month later.

II

The Copyright Act restricts the set of people who are entitled to bring a civil action for infringement to those who qualify as “[t]he legal or beneficial owner of an exclusive right under a copyright....” 17 U.S.C. § 501(b). Some courts (including this one in years past, see, e.g., Moran v. London Records, Ltd., 827 F.2d 180 (7th Cir.1987)) have seen this as a limitation derived from Article III's standing requirement (which is discussed in Lujan v. Defenders of Wildlife, 504 U.S. 555, 559–60, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992), among other cases), but we believe that it is preferable to be more precise in our language. Many parties who have not crossed the “T's” and dotted the “i's” in their copyright licenses would have no trouble demonstrating injury in fact, causation, and redressability—the three indispensable requirements for constitutional standing, id. at 560–61, 112 S.Ct. 2130, but their efforts to sue will nonetheless be thwarted by the statutory requirement. Another possibility, closer to the mark, is that the Copyright Act establishes criteria for the real party in interest, as that term is used by Federal Rule of Civil Procedure 17(a). See generally 6 William F. Patry, Patry on Copyright § 21:2 (2009). Or one could keep it simple and say that the Copyright Act spells out who has enforceable rights under the statute; someone who does may sue, and someone who does not has failed to state a claim upon which relief may be granted. Our understanding of the law as it now stands, particularly in light of the Supreme Court's decision in Reed Elsevier, Inc. v. Muchnick, ––– U.S. ––––, 130 S.Ct. 1237, 1243–44, 176 L.Ed.2d 17 (2010), is that the last of these approaches is the correct one. In essence, it reflects the way that the district court approached this case. Had its dismissal of HyperQuest's suit...