RX Data Corp. v. Department of Social Services

• Decision Date: 23 June 1982
• Docket Number: D,No. 700,700
• Citation: 684 F.2d 192
• Parties: , 1982 Copr.L.Dec. P 25,414 RX DATA CORPORATION, a New York Corporation, Plaintiff-Appellant, v. DEPARTMENT OF SOCIAL SERVICES, an agency of the State of New York, et al., Defendants-Appellees. ocket 81-7604.
• Court: U.S. Court of Appeals — Second Circuit

Page 192

684 F.2d 192

216 U.S.P.Q. 69, 1982 Copr.L.Dec. P 25,414

RX DATA CORPORATION, a New York Corporation, Plaintiff-Appellant, v. DEPARTMENT OF SOCIAL SERVICES, an agency of the State of New York, et al., Defendants-Appellees.

No. 700, Docket 81-7604.

United States Court of Appeals Second Circuit.

Argued Feb. 19, 1982.

Decided June 23, 1982.

Leonard Horn, New York City (Ira J. Schaefer and Sprung, Felfe, Horn, Lynch & Kramer, New York City, on the brief), for plaintiff-appellant.

Paul Glickman, Asst. Atty. Gen., New York City (Robert Abrams, Atty. Gen. of the State of N. Y., George D. Zuckerman, Asst. Sol. Gen., and Frederic L. Lieberman, Deputy Asst. Atty. Gen., New York City, on the brief), for defendant-appellee Dept. of Social Services.

David M. Sandgrund, New York City (John V. Marinelli, New York City, on the

brief), for defendant-appellee Bradford Administrative Services, Inc.

Before NEWMAN, CARDAMONE, and WINTER, Circuit Judges.

NEWMAN, Circuit Judge:

On this appeal from the dismissal of a copyright infringement action, we must determine the collateral estoppel and res judicata effect of two state court judgments on a federal action for copyright infringement. RX Data Corporation ("RX Data") developed a computerized system and provided computer printouts that were used by New York's Department of Social Services ("NYDSS") to determine the appropriate reimbursement to pharmacists for drugs dispensed under the Medicaid program. The New York Supreme Court invalidated a contract between RX Data and NYDSS, and the New York Court of Claims ruled that RX Data did not have a right to compensation under a theory of quantum meruit for performing work most of which was beyond the scope of the first contract. RX Data then brought this federal court action alleging that NYDSS and Bradford Administrative Services Inc. ("Bradford"), the company that processes claims under New York's Medicaid program, infringed RX Data's copyrighted computer tapes and printouts. Pendent state law claims for unfair competition and quantum meruit were included. The District Court for the Southern District of New York (Henry F. Werker, Judge) held that the first state court judgment collaterally estopped the copyright infringement action and dismissed the complaint. We conclude that the copyright infringement claim survives the collateral estoppel and res judicata effects of the two state court judgments and vacate the District Court's dismissal of that claim and remand for further proceedings. We affirm the dismissal of the pendent state law claims.

I.

In 1977, NYDSS took steps to revise its system for drug purchase reimbursement to pharmacies under the Medicaid program so that only the Estimated Acquisition Cost ("EAC") of the drugs would be reimbursed. The EAC is an average of the available wholesale prices of a drug in the state. NYDSS contracted with RX Data for assistance in the preparation of a computerized system that would provide monthly price lists of the EACs for 3,500 of the most frequently purchased drugs. The end product of this system was to be a formulary file that would contain various information about each drug and facilitate processing of claims for reimbursement by NYDSS. Under the terms of this first contract, all files and reports provided to NYDSS would become the property of NYDSS. RX Data, however, would be permitted to obtain statutory copyrights for reports and could then charge the public for copies of its lists or computer tapes at rates specified in the contract. Besides the benefits from this exclusive licensing provision, NYDSS agreed to pay RX Data $975.

On February 15, 1978, three drug wholesalers and a professional association brought suit in the Supreme Court of New York against both the Commissioner of NYDSS and RX Data seeking to have the contract declared illegal and its implementation enjoined. S-P Drug Co. v. Smith, 96 Misc.2d 305, 409 N.Y.S.2d 161 (Sup.Ct.N.Y. County 1978). The Supreme Court of New York held that the contract was illegal for three reasons. First, giving RX Data exclusive access to price lists and an exclusive right of distribution of the price lists violated New York's Freedom of Information Law, N.Y. Pub. Off. Law §§ 85-90 (McKinney Cum.Supp. 1981-1982), which requires public access to certain information on which governmental decisionmaking is based. The State could neither agree to withhold the drug price data from the public nor grant a private company a right to make a profit by selling such information since pharmacists were entitled to "unimpaired access" to the reimbursable prices allowed by the State. Secondly, the court held that the grant of exclusivity was void under New York's antimonopoly statute, N.Y.Gen.Bus.Law § 340 (McKinney 1968). Finally, the Court suggested that the contractual arrangement might violate N.Y.State Fin.Law § 174 (McKinney 1974), which at that time required competitive bidding for state purchases over $1,000. Although the specified contract payment was only $975, the exclusive rights given to RX Data were valued at up to one million dollars. The Supreme Court of New York expressed the rationale for its ruling in these terms:

While it is all well and good for the State to compensate the contractor for the furnishing of service, provided it is done in accordance with the law, this court cannot understand how the State can grant to a private contractor the right to copyright information which is, and should be, in the public domain. Granting such an exclusive right to a private business and permitting it to profit from the right the State confers upon it to use public information is indeed a bargaining away of public property without proper consideration.

96 Misc.2d at 312, 409 N.Y.S.2d at 165. In its order enjoining the carrying out of the contract, the Court expressly permitted NYDSS to "continue to receive and utilize information supplied by RX Data ... without paying compensation therefore except upon a competitive bid contract."

After entering into the first contract but before the ruling of the New York Supreme Court, NYDSS and RX Data entered into negotiations to produce a more sophisticated computerized system and a more comprehensive drug listing that would have permitted NYDSS to have a fully automated drug reimbursement program under Medicaid for the entire state. Under a proposed second contract, RX Data would have been paid $432,000 in the first year for creating the system generating a 20,000-item compilation and for supplying the more comprehensive monthly reports. NYDSS would get "full and exclusive right, title and ownership interest in all software, modifications thereof, and associated documentation ...." Because of time pressure, RX Data agreed to render some services to NYDSS and Bradford even though the contract still had not been given official approval by New York State. RX Data contends that it gave computer software, tapes, and printouts of formulary files to NYDSS, which NYDSS and Bradford used in the processing of Medicaid claims. When New York then informed RX Data that it would not agree to the contract, RX Data brought suit in the New York Court of Claims for recovery for its uncompensated work, alleging an informal, unexecuted agreement and entitlement under a theory of quantum meruit.

The Court of Claims ruled that N.Y. State Fin.Law § 112(2) (McKinney 1974), which then required contracts with the State for more than $1,000 to be approved by the State Comptroller prior to taking effect, precluded state liability to RX Data on the basis of an informal agreement in the absence of approval by the Comptroller. Concerning the claim for quantum meruit recovery, the Court of Claims observed, "However inequitable the conduct of the State may be," RX Data had full knowledge that a contract could not be executed without Comptroller approval. "Under such circumstances," the Court of Claims found itself "without jurisdiction to invoke equitable considerations to require the State to pay for the services rendered." And in turning down a request by RX Data to amend its complaint, the Court of Claims found it to be "clear, in any event, that the claimant cannot assert a viable cause of action against the State in law or in equity based upon the facts giving rise to this claim."

Just after filing suit in the Court of Claims, RX Data filed this copyright infringement action in the District Court for the Southern District of New York. RX Data alleges that NYDSS published and distributed to pharmacies lists that were "substantial duplicates" of computer printouts and tapes for which it had obtained copyright registrations. It alleges that Bradford engaged in unfair competition by receiving and using one or more of these lists. RX Data also sought compensation from both NYDSS and Bradford for labor and services in developing the automated drug pricing system.

II.

We agree with the District Court's rejection of defendants' challenge to subject matter jurisdiction. 28 U.S.C. § 1338 (1976) gives the district courts exclusive jurisdiction over civil actions "arising under" the copyright laws. As a suit for an infringement remedy, this action falls within a traditional category of claims "arising under" the copyright laws. See T. B. Harms Co. v. Eliscu, 339 F.2d 823, 828 (2d Cir. 1964), cert. denied, 381 U.S. 915, 85 S.Ct. 1534, 14 L.Ed.2d 435 (1965). Defendants correctly point out that even an infringement claim will not invoke federal jurisdiction when the claim is merely incidental to a primary dispute over copyright ownership under state law. See Simon & Flynn, Inc. v. Time Inc., 513 F.2d 832 (2d Cir. 1975) (per curiam); Stepdesign, Inc. v. Research Media, Inc., 442 F.Supp. 32 (S.D.N.Y.1977); Elan Associates, Ltd. v. Quackenbush Music, Ltd., 339 F.Supp. 461 (S.D.N.Y.1972); cf. Luckett v. Delpark, Inc., 270 U.S. 496, 502-03, 46 S.Ct. 397, 399, 70 L.Ed. 703 (1926) (patent laws); see generally 3 Nimmer on...