Vault Corp. v. Quaid Software Ltd.
| Decision Date | 20 June 1988 |
| Docket Number | No. 87-3516,87-3516 |
| Citation | 847 F.2d 255 |
| Parties | , 1988 Copr.L.Dec. P 26,293, 7 U.S.P.Q.2d 1281 VAULT CORPORATION, Plaintiff-Appellant, v. QUAID SOFTWARE LIMITED, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Jarrell E. Godfrey, Jr., Kenneth J. Servay, Chaffe, McCall, Phillips, Toler & Sarpy, New Orleans, La., for Vault Corp.
David Banowetz, Jr., William E. Wright, Jr., Baldwin & Haspel, John P. Manard, Jr., New Orleans, La., for Quaid Software Ltd.
Appeal from the United States District Court for the Eastern District of Louisiana.
Before REAVLEY, KING and SMITH, Circuit Judges.
Vault brought this copyright infringement action against Quaid seeking damages and preliminary and permanent injunctions. The district court denied Vault's motion for a preliminary injunction, holding that Vault did not have a reasonable probability of success on the merits. Vault Corp. v. Quaid Software Ltd., 655 F.Supp. 750 (E.D.La.1987). By stipulation of the parties, this ruling was made final and judgment was entered accordingly. We affirm.
Vault produces computer diskettes under the registered trademark "PROLOK" which are designed to prevent the unauthorized duplication of programs placed on them by software computer companies, Vault's customers. Floppy diskettes serve as a medium upon which computer companies place their software programs. To use a program, a purchaser loads the diskette into the disk drive of a computer, thereby allowing the computer to read the program into its memory. The purchaser can then remove the diskette from the disk drive and operate the program from the computer's memory. This process is repeated each time a program is used.
The protective device placed on a PROLOK diskette by Vault is comprised of two parts: a "fingerprint" and a software program ("Vault's program"). 1 The "fingerprint" is a small mark physically placed on the magnetic surface of each PROLOK diskette which contains certain information that cannot be altered or erased. Vault's program is a set of instructions to the computer which interact with the "fingerprint" to prevent the computer from operating the program recorded on a PROLOK diskette (by one of Vault's customers) unless the computer verifies that the original PROLOK diskette, as identified by the "fingerprint," is in the computer's disk drive. While a purchaser can copy a PROLOK protected program onto another diskette, the computer will not read the program into its memory from the copy unless the original PROLOK diskette is also in one of the computer's disk drives. The fact that a fully functional copy of a program cannot be made from a PROLOK diskette prevents purchasers from buying a single program and making unauthorized copies for distribution to others.
Vault produced PROLOK in three stages. The original commercial versions, designated as versions 1.01, 1.02, 1.03, 1.04 and 1.06 ("version 1.0") were produced in 1983. Vault then incorporated improvements into the system and produced version 1.07 in 1984. The third major revision occurred in August and September of 1985 and was designated as versions 2.0 and 2.01 ("version 2.0"). Each version of PROLOK has been copyrighted and Vault includes a license agreement with every PROLOK package that specifically prohibits the copying, modification, translation, decompilation or disassembly of Vault's program. 2 Beginning with version 2.0 in September 1985, Vault's license agreement contained a choice of law clause adopting Louisiana law. 3
Quaid's product, a diskette called "CopyWrite," contains a feature called "RAMKEY" which unlocks the PROLOK protective device and facilitates the creation of a fully functional copy of a program placed on a PROLOK diskette. The process is performed simply by copying the contents of the PROLOK diskette onto the CopyWrite diskette which can then be used to run the software program without the original PROLOK diskette in a computer disk drive. RAMKEY interacts with Vault's program to make it appear to the computer that the CopyWrite diskette contains the "fingerprint," thereby making the computer function as if the original PROLOK diskette is in its disk drive. A copy of a program placed on a CopyWrite diskette can be used without the original, and an unlimited number of fully functional copies can be made in this manner from the program originally placed on the PROLOK diskette.
Quaid first developed RAMKEY in September 1983 in response to PROLOK version 1.0. In order to develop this version of RAMKEY, Quaid copied Vault's program into the memory of its computer and analyzed the manner in which the program operated. When Vault developed version 1.07, Quaid adapted RAMKEY in 1984 to defeat this new version. The adapted version of RAMKEY contained a sequence of approximately 30 characters found in Vault's program and was discontinued in July 1984. Quaid then developed the current version of RAMKEY which also operates to defeat PROLOK version 1.07, but does not contain the sequence of characters used in the discontinued version. Quaid has not yet modified RAMKEY to defeat PROLOK version 2.0, and has agreed not to modify RAMKEY pending the outcome of this suit. Robert McQuaid, the sole owner of Quaid, testified in his deposition that while a CopyWrite diskette can be used to duplicate programs placed on all diskettes, whether copy-protected or not, the only purpose served by RAMKEY is to facilitate the duplication of programs placed on copy-protected diskettes. He also stated that without the RAMKEY feature, CopyWrite would have no commercial value.
Vault brought this action against Quaid seeking preliminary and permanent injunctions to prevent Quaid from advertising and selling RAMKEY, an order impounding all of Quaid's copies of CopyWrite which contain the RAMKEY feature, and monetary damages in the amount of $100,000,000. Vault asserted three copyright infringement claims cognizable under federal law, 17 U.S.C. Sec. 101 et seq. (1977 & Supp.1988) (the "Copyright Act"), which included: (1) that Quaid violated 17 U.S.C. Secs. 501(a) & 106(1) by copying Vault's program into its computer's memory for the purpose of developing a program (RAMKEY) designed to defeat the function of Vault's program; (2) that Quaid, through RAMKEY, contributes to the infringement of Vault's copyright and the copyrights of its customers in violation of the Copyright Act as interpreted by the Supreme Court in Sony Corp. of Am. v. Universal City Studios, 464 U.S. 417, 104 S.Ct. 774, 78 L.Ed.2d 574 (1984); and (3) that the second version of RAMKEY, which contained approximately thirty characters from PROLOK version 1.07, and the latest version of RAMKEY, constitute "derivative works" of Vault's program in violation of 17 U.S.C. Secs. 501(a) & 106(2). Vault also asserted two claims based on Louisiana law, contending that Quaid breached its license agreement by decompiling or disassembling Vault's program in violation of the Louisiana Software License Enforcement Act, La.Rev.Stat.Ann. Sec. 51:1961 et seq. (West 1987), and that Quaid misappropriated Vault's program in violation of the Louisiana Uniform Trade Secrets Act, La.Rev.Stat.Ann. Sec. 51:1431 et seq. (West 1987).
The district court originally dismissed Vault's complaint for lack of in personam jurisdiction. This court reversed the district court's order of dismissal and remanded the case for further proceedings. Vault Corp. v. Quaid Software Ltd., 775 F.2d 638 (5th Cir.1985). On remand, the district court, after a three-day bench trial, denied Vault's motion for a preliminary injunction holding that Vault had not established a reasonable probability of success on the merits. Vault, 655 F.Supp. at 763. Subsequently, the parties agreed to submit the case for final decision based on the evidence adduced at the preliminary injunction trial. On July 31, 1987 the district court entered final judgment in accordance with its decision on the preliminary injunction.
Vault now contends that the district court improperly disposed of each of its claims.
An owner of a copyrighted work has the exclusive right to reproduce the work in copies, to prepare derivative works based on the copyrighted work, to distribute copies of the work to the public, and, in the case of certain types of works, to perform and display the work publicly. 17 U.S.C. Sec. 106. Sections 107 through 118 of the Copyright Act limit an owner's exclusive rights, and section 501(a) provides that "[a]nyone who violates any of the exclusive rights of the copyright owner as provided by sections 106 through 118 ... is an infringer of the copyright."
It is not disputed that Vault owns the copyright to the program it places on PROLOK diskettes and is thus an "owner of copyright" under Sec. 106. Therefore, Vault has, subject to the exceptions contained in sections 107 through 118, the exclusive right to reproduce its program in copies and to prepare derivative works based on its program. Vault claims that Quaid infringed its copyright under Sec. 501(a) by: (1) directly copying Vault's program into the memory of Quaid's computer; (2) contributing to the unauthorized copying of Vault's program and the programs Vault's customers place on PROLOK diskettes; and (3) preparing derivative works of Vault's program.
Section 117 of the Copyright Act limits a copyright owner's exclusive rights under Sec. 106 by permitting an owner of a computer program to make certain copies of that program without obtaining permission from the program's copyright owner. With respect to Vault's first two claims of copyright infringement, Quaid contends that its activities fall within the Sec. 117 exceptions and that it has, therefore, not infringed Vault's exclusive rights under Sec. 501(a). To appreciate the arguments of the parties, we examine the legislative history of Sec. 117.
In 1974 Congress established the National...
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