Itofca, Inc. v. Megatrans Logistics, Inc.

• Decision Date: 07 March 2003
• Docket Number: No. 02-1069.,02-1069.
• Citation: 322 F.3d 928
• Parties: ITOFCA, INC., Plaintiff-Appellant, v. MEGATRANS LOGISTICS, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 928

322 F.3d 928

ITOFCA, INC., Plaintiff-Appellant, v. MEGATRANS LOGISTICS, INC., Defendant-Appellee.

No. 02-1069.

United States Court of Appeals, Seventh Circuit.

Argued October 15, 2002.

Decided March 7, 2003.

Eric C. Cohen (Argued), Welsh & Katz, Chicago, IL, for Plaintiff-Appellant.

Richard R. Winter (Argued), Holland & Knight, Chicago, IL, for Defendant-Appellee.

Before POSNER, RIPPLE, and KANNE, Circuit Judges.

POSNER, Circuit Judge.

The plaintiff, ITOFCA, appeals from the grant of summary judgment to the defendant, MegaTrans, in a suit for copyright infringement. ITOFCA claims to be the owner of the copyright on a computer software program. MegaTrans owns the program itself, claims to have obtained the copyright in a bankruptcy sale, and is making and selling copies of a modified version of the program. The modified program is a derivative work, and so if ITOFCA owns the copyright on the original, MegaTrans cannot sell its version without a license, 17 U.S.C. § 106(2), which it does not have, from ITOFCA.

ITOFCA was in 1986 a cooperative corporation owned by Ford, Walgreen, and other large corporations to which it provided rail and truck freight consolidation and forwarding services. It had developed a computer program called the "Comprehensive Intermodal Program" to help its member-owners with their shipping. It undoubtedly owned the copyright on the program, though it hadn't registered the copyright; registration is no longer required for a valid copyright. In 1986 it transferred most of its assets to a new entity, ITOFCA Consolidators, Inc. (ICI). The asset agreement recites that "the membership of ITOFCA desires to divest ITOFCA of all assets and operations involving freight forwarding services" and specifically "desires to transfer all of its assets, except a building at [address] and cash assets of ITOFCA to ICI." Among the "assets" transferred to ICI (which despite its name was not owned by or otherwise affiliated with ITOFCA) was the employee of ITOFCA, a man named Fowler, who had developed the Comprehensive Intermodal Program.

Five years later, ICI found itself in Chapter 11. The bankruptcy court, with no opposition from ITOFCA (which participated in the Chapter 11 proceeding), approved the sale to a company called Amerifreight of ICI's "right, title and interest in all patent, copyright and trade secret rights in and to all computer software and corresponding documentation developed or acquired by [ICI] .... Amerifreight expressly acknowledges that [ICI] may sell additional copies of the Software to other parties and that by virtue of the proposed assignment it has only a nonexclusive right to the Software." Amerifreight turned around and assigned all the rights it had acquired from ICI to MegaTrans. Fowler, now employed by MegaTrans, modified the software program, which MegaTrans then licensed to others. That was in 1991. Eight years later, ITOFCA, dormant since the transfer of its operating assets to ICI, woke up and registered copyright on what it described as a "comprehensive intermodal program" that had been developed in 1989. Later it filed a supplemental registration stating that the program had been created in 1991 and listing ICI as a co-author and hence as a copyright owner, but asserting that ITOFCA was the owner of the original program, which had been developed in 1986. ITOFCA was thus conceding that ICI was authorized to modify the original program, see 17 U.S.C. § 117(a)(1), but only, as the statute makes clear, for ICI's own use, and not to sell copies of the modified work. 17 U.S.C. § 117(b); Aymes v. Bonelli, 47 F.3d 23, 25-27 (2d Cir.1995); Foresight Resources Corp. v. Pfortmiller, 719 F.Supp. 1006, 1009-10 (D.Kan.1989). The distinction is consistent with the general principle of copyright law that a license to prepare a derivative work does not authorize the preparer to sell copies of it. Making and selling are distinct rights, 17 U.S.C. §§ 106(1), (2), and you can assign one without the other. See Gracen v. Bradford Exchange, 698 F.2d 300, 302-03 (7th Cir.1983).

When a bankruptcy court approves the sale of an asset of the debtor, a person who has notice of the sale cannot later void it on the ground that he is the asset's real owner. La Preferida, Inc. v. Cerveceria Modelo, S.A. de C.V., 914 F.2d 900, 908 (7th Cir.1990); In re Met-L-Wood Corp., 861 F.2d 1012, 1016 (7th Cir. 1988); Veltman v. Whetzal, 93 F.3d 517, 520-21 (8th Cir.1996); see also In re Edwards, 962 F.2d 641, 643-44 (7th Cir. 1992). That was the ground on which the district judge rejected ITOFCA's claim of copyright infringement. ITOFCA argues that all the sale did was transfer whatever copyright interest ICI had, and the only interest it had was a license to use the copyrighted program that had been transferred to it by ITOFCA when ICI was created. The terms of the bankruptcy court's order approving the sale refute this interpretation. The order states that ICI is free to sell additional copies of the software; this implies, since ICI was conveying its rights to Amerifreight, that Amerifreight too, and hence its transferee, MegaTrans, was free to sell copies. So ICI and its transferees must have had more than a license to use the software, since a copyright licensee has no right to make further copies (except a single, backup copy for his own use): the purchaser of a book does not obtain the right to make copies of the book.

In the same order, ICI conveyed its software rights to a second company as well as to Amerifreight (namely Southern Pacific), which it could not do without making a copy; to repeat, a mere copyright licensee is permitted only to make a single copy, and that for his own use only, not for sale to another. There is a further significance to this second sale; it helps explain why the grant to Amerifreight was described as a "nonexclusive" license. It was nonexclusive because another corporation (Southern Pacific) was also sold rights to the software and because ICI retained a right to sell more copies; Amerifreight was not receiving an exclusive right to the software. "Nonexclusive" does not as ITOFCA believes equate to "a copy;" the bankruptcy court would have had no occasion to mention the nonexclusivity of the grant if all that was being conveyed was a copy of the software, since everyone knows that the sale of a copy of a copyrighted work does not convey an exclusive right to the work; the owner of the copyright retains his right to make and sell additional copies to others.

Any doubt about the meaning of "nonexclusive" is dispelled by the exchange over the term between the lawyers and the bankruptcy judge, after the critical passage, elided by ITOFCA in its brief, is restored:

[ITOFCA attorney]: And the only other concern that we had is it being a private sale instead of a public sale. Now, we understand that the software will be held open to a future sale as well. I just query—

Court: What's this, a nonexclusive license that's being sold?

[ICI attorney]: That's correct, your Honor.

[ITOFCA attorney]: I just query whether there is anything unique about the hardware that should be marketed by a public sale.

The grant was nonexclusive because the software remained salable to others as well as to Amerifreight.

It is true that ICI did not list a copyright among its assets on the asset schedule that it submitted to the bankruptcy court; true, too, that ordinarily persons who might have an interest in property being sold at a bankruptcy auction have a right to rely on the fact that the debtor's schedule of assets does not list the property in which they are interested. But it was apparent on the face of the bankruptcy judge's order that it was conveying the right to sell copies of the modified program — which is precisely the right that ITOFCA claims to have retained for itself. Its failure to object to the bankruptcy court's order is compelling evidence that its claim of right is an afterthought. It knew it had no basis for objecting to the sale order.

The question whether the bankruptcy court's order gave ICI's transferee, Amerifreight, and hence Amerifreight's transferee, MegaTrans, the defendant, the right to make and sell copies of the software is distinct from the question whether what ITOFCA had conveyed to ICI in the asset transfer agreement (which of course preceded the bankruptcy) was, in fact, the copyright on the software. Probably it was, though this we need not decide, since even if the agreement did not transfer the copyright we have just determined that it transferred a right to sell a modified version, which is all that matters so far as this appeal is concerned.

The copyright on the computer program was an asset of ITOFCA. ITOFCA sold all its assets to ICI except a building and some cash. A copyright is neither a building nor cash. True, the asset transfer agreement also states that ITOFCA desires to "transfer only those assets used and necessary in the operations of the transportation services being transferred," but the copyright is one of those assets; it was used in ITOFCA's "transportation services"; that was ITOFCA's business that it exited through the sale to ICI. A possible reply is that since section 117 of the copyright statute entitled ICI to adapt the program for its own use, it didn't need the copyright itself, but just the right that the statute gave it — the right to modify the program for its own use. But the parties do not discuss the possible bearing of section 117.

ITOFCA is right of course that a copyright is not transferred automatically with the transfer of the copyrighted good. As we said, when you buy a book, you don't obtain the right to make and sell copies of it. The copyright statute is explicit that there must be a memorandum in writing for the sale of the copyright to be enforceable. 17 U.S.C. §§ 202, 204(a). But it does not follow as ITOFCA believes that the agreement must use the word "copyright." Schiller &...