MPAY Inc. v. Erie Custom Computer Applications, Inc.

• Decision Date: 14 August 2020
• Docket Number: No. 19-2206,19-2206
• Citation: 970 F.3d 1010
• Parties: MPAY INC. Plaintiff - Appellant v. ERIE CUSTOM COMPUTER APPLICATIONS, INC. ; PayDay USA, Inc.; Payroll World, Inc. ; Proliant, Inc.; Proliant Technologies, Inc.; Kevin Clayton Defendants - Appellees
• Court: U.S. Court of Appeals — Eighth Circuit

970 F.3d 1010

MPAY INC. Plaintiff - Appellant

v.ERIE CUSTOM COMPUTER APPLICATIONS, INC. ; PayDay USA, Inc.; Payroll World, Inc. ; Proliant, Inc.; Proliant Technologies, Inc.; Kevin Clayton Defendants - Appellees

No. 19-2206

United States Court of Appeals, Eighth Circuit.

Submitted: June 17, 2020

Filed: August 14, 2020

Amanda R. Phillips, Morse & Barnes-brown, Waltham, MA, Andrew J. Pieper, Stoel & Rives, Minneapolis, MN, for Plaintiff - Appellant

Scott Alan Johnson, Jon B. Miller, Miller Johnson Law, San Diego, CA, Alyssa N. Lawson, Robins & Kaplan, Minneapolis, MN, Kevin C. Young, Law Offices of Kevin C. Young, San Diego, CA, for Defendants - Appellees

Before GRUENDER, WOLLMAN, and KOBES, Circuit Judges.

GRUENDER, Circuit Judge.

MPAY Inc. appeals the district court's denial of its motion for a preliminary injunction against Erie Custom Computer Applications, Inc.; PayDay USA, Inc.; Payroll World, Inc.; Proliant, Inc.; Proliant Technologies, Inc.; and Kevin Clayton (collectively, "Appellees"). We affirm in part, vacate in part, and remand.

I.

MPAY (formerly known as MATTPAY, Inc.) is a Massachusetts corporation that develops and owns payroll-processing software that it licenses to its customers. In 1999, MPAY entered into a Member Control Agreement with three other entities to form a new entity, OnePoint Solutions LLC. Under the Member Control Agreement, each separate entity became a member of OnePoint. Since that time, other entities joined OnePoint as members, including the entity Appellees.

Around the same time, MPAY entered into a Software Development and License Agreement with OnePoint. This agreement envisioned two phases in the relationship between MPAY and OnePoint. During "Phase One," MPAY would work with OnePoint to develop "Enhanced Software Products," meaning "modifications, enhancements, or improvements" of MPAY's payroll-processing software. In "Phase Two," OnePoint would "take over responsibility for support and development functions," and it would be free to "hire its own independent software developers to develop Enhanced Software Products" at that time. OnePoint would then own these "Phase Two Enhanced Software Products."

To allow OnePoint to develop its own Enhanced Software Products in Phase Two, the Software Development and License Agreement provided that MPAY would supply OnePoint with "complete copies of the source code" for MPAY's payroll-processing software. The source code is, as MPAY tells it, the "secret recipe" to the software—it is the computer text that gets "translated," so to speak, into the functional software products. Given the sensitive and proprietary nature of the source code, the agreement required each party to safeguard it.

In the Software Development and License Agreement, MPAY also granted OnePoint "a perpetual, non-exclusive, ... and unrestricted right to use" MPAY's payroll-processing software "for its business, the business of any of the Members" of OnePoint, "or the business of any third party." In the Member Control Agreement, OnePoint, in turn, granted to each member of OnePoint a license to use both MPAY's software and whatever software OnePoint developed. The Member Control Agreement also permitted certain members to sublicense the software "to any entity in which such Member owns (a) a majority of the value of the equity and (b) voting control." The Member Control Agreement otherwise prohibited members from sublicensing the software.

In 2003, MPAY and OnePoint executed a Letter Agreement to "clarif[y] the terms under which [MPAY] w[ould] provide Source Code" to OnePoint pursuant to the Software Development and License Agreement. In this Letter Agreement, MPAY and OnePoint reaffirmed that OnePoint could hire third parties to assist it with developing Phase Two Enhanced Software Products and, in doing so, could grant these third parties "access to the Source Code." OnePoint had to comply with certain "restrictions," however, before it granted third parties such access.

It appears that by 2007, MPAY had failed to fulfill its obligations to furnish OnePoint with the source code, so OnePoint sued MPAY. That litigation resulted in a Mediated Settlement Agreement. Among other things, the Mediated Settlement Agreement provided that Phase Two would begin in February 2008 and that most of OnePoint's obligations "arising out of" the Software Development and License Agreement would be extinguished at that time, with the caveat that MPAY retained its rights in its software products.

The instant action arose when MPAY evidently learned that OnePoint, at the direction of its manager Kevin Clayton, allegedly "copied and distributed" the source code to certain OnePoint members and that some members had sublicensed MPAY's software to third parties in whom no member held a majority equity stake. Believing these actions to be a violation of its intellectual-property rights, MPAY sued Clayton along with a number of entities who are current or former members of OnePoint. MPAY asserted a variety of claims against Appellees, including a copyright-infringement claim under federal law and trade-secrets-misappropriation claims under state and federal law. MPAY also sought a preliminary injunction, asserting it was entitled to such relief based on its copyright-infringement and trade-secrets-misappropriation claims.

The district court denied this motion. It reasoned that the Software Development and License Agreement permitted OnePoint to provide the source code to its independent software developers in Phase Two, and it found that OnePoint's copying and distribution of the source code was simply the result of OnePoint exercising this right under the Software Development and License Agreement. It thus concluded that MPAY's claims of copyright infringement and trade secrets misappropriation premised on the unauthorized copying and distribution of the source code were unlikely to succeed. The district court did not address MPAY's claim that certain members of OnePoint were sublicensing MPAY's software in violation of the Member Control Agreement.

MPAY appeals this denial of its motion for a preliminary injunction. We have jurisdiction. See 28 U.S.C. § 1292(a)(1).

II.

A "preliminary injunction is an extraordinary remedy," and the "party seeking injunctive relief bears the burden of proving" that the relevant factors "weigh in its favor." Mgmt. Registry, Inc. v. A.W. Cos. , 920 F.3d 1181, 1183 (8th Cir. 2019). "A plaintiff seeking a preliminary injunction must establish" four factors showing such relief is warranted: (1) "he is likely to succeed on the merits"; (2) "he is likely to suffer irreparable harm in the absence of preliminary relief"; (3) "the balance of equities tips in his favor"; and (4) "an injunction is in the public interest." Wise v. Dep't of Transp. , 943 F.3d 1161, 1165 (8th Cir. 2019). "While ‘no single factor is determinative,’ the probability of success factor is the most significant." Home Instead, Inc. v. Florance , 721 F.3d 494, 497 (8th Cir. 2013) (citation omitted) (quoting Dataphase Sys., Inc. v. C L Sys., Inc. , 640 F.2d 109, 113 (8th Cir. 1981) (en banc)).

"We review a district court's ultimate ruling on a preliminary injunction for abuse of discretion, though we review its underlying legal conclusions de novo." Home Instead, Inc. , 721 F.3d at 497. "A district court abuses its discretion in denying a preliminary injunction if it rests its conclusion on clearly erroneous factual findings or erroneous legal conclusions." Id. (internal quotation marks omitted). Here, the district court's decision rested almost entirely on its interpretation of the agreements governing the parties’ relationship, a question of law we review de novo . See Lawn Managers, Inc. v. Progressive Lawn Managers, Inc. , 959 F.3d 903, 912 (8th Cir. 2020). Our analysis of this issue is governed by Minnesota law given the Minnesota choice-of-law provisions in the relevant agreements, the application of which no party disputes. See Progressive N. Ins. v. McDonough , 608 F.3d 388, 390 (8th Cir. 2010) (applying Minnesota law because Minnesota was the forum state "and neither party has raised a choice-of-law claim").

MPAY advances two legal theories—copyright infringement and trade secrets misappropriation—under which it argues it is likely to succeed. It also advances two factual predicates giving rise to its claims: the allegedly wrongful copying and distribution of the source code and the allegedly improper sublicensing of MPAY's software. We first address the source-code issue; then, we turn to the improper-sublicensing issue.

A.

1.

Concerning the source-code issue, we start with the first and "most significant" factor, which is whether MPAY has shown a likelihood of success on the merits. See Home Instead, Inc. , 721 F.3d at 497. Appellees acknowledge that Erie Custom Computer Applications at least, and possibly also Proliant Technologies, possesses the source code. Declarants for Appellees have stated that these entities possess the source code only because OnePoint retained them as "independent software developers" to assist it in developing Phase Two Enhanced Software Products. MPAY argues that these entities are not authorized to possess the source code. MPAY thus contends the copying and disclosure of the source code to these entities constitutes copyright infringement and that Clayton, Erie Custom Computer Applications, and Proliant Technologies have misappropriated MPAY's trade secrets through this arrangement. Although the legal theories MPAY has advanced differ in details, what MPAY must show to demonstrate a likelihood of success under either theory is ultimately the same: OnePoint did not have authorization to copy and disclose the source code to Erie Custom Computer Applications and Proliant Technologies, who in turn were not permitted to possess it.

To demonstrate copyright infringement, MPAY must show that it owned a valid copyright and that Appellees violated MPAY's copyright "by, for...