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Case Summary: Graham v. James, 144 F.3d 229 (C.A.2 (N.Y.), 1998)

Category : Case Summaries, Contract, Copyright Infringement

Key Holdings: Second Circuit holds that: i) a requirement to pay royalties and include an attribution notice (crediting authorship to author) are to be considered covenants rather than conditions precedent; ii) when the contested issue is the scope of the license rather than its existence, the copyright owner bears the burden of proving that the copying or distribution was unauthorized under the license and the license need not be pleaded as an affirmative defense; iii) even if licensee’s breach entitles licensor to rescind the license, rescission does not occur automatically but requires affirmative steps by licensor.

Background: Graham bundled and marketed various packages of freeware, shareware and public domain software. To further this business Graham orally contracted with James, a software programmer, for the creation of a file-retrieval program. After the completion of the program Graham claimed copyright ownership, alleging that the program was a work made for hire. James also claimed copyright ownership of the program, alleging that he was an independent contractor. After a series of telephone disputes, Graham removed James’s copyright notice from the file retrieval program, repaired a bug in the program, released a new version of the program and ceased payment of royalties. James subsequently brought suit against Graham, alleging contractual breach and copyright infringement, while Graham countersued, alleging copyright infringement. The District Court found James to be the rightful owner of the file-retrieval program and awarded James damages for both breach of contract and copyright infringement (including $25,000 specifically for Graham’s removal of James’ copyright notice). The District Court also dismissed Graham’s copyright infringement claim and permanently enjoined Graham from using the program. Graham appealed.

Issues: Did the District Court correctly determine that: i) the copyrights in the program vested in James because the program was not a work made for hire; and ii) Graham infringed James’ copyrights in the program even though Graham had a license to use the program.

Standard of Review: The District Court’s factual findings as to the presence or absence of the factors determinative of whether the program is a work made for hire cannot be disturbed unless clearly erroneous but the ultimate determination of whether the program is a work made for hire is reviewed de novo.

Analysis: The Circuit Court noted that “a work prepared by an employee within the scope of his or her employment” is a work made for hire (17 U.S.C. § 101) and that the employer is considered the author and owner of any such work (17 U.S.C. § 201(b). The Circuit noted that the term “employee” must be understood in light of the general common law of agency as stated by the Supreme Court in Community for Creative Non-Violence v. Reid. Following its previous ruling in Aymes v. Bonelli, the Circuit paid particular consideration to the following Reid factors: i) the hiring party’s right to control the manner and means of creation; ii) the skill required; iii) the provision of employee benefits; iv) the tax treatment of the hired party; and v) whether the hiring party had the right to assign additional projects to the hired party. Given the District Court’s factual findings that James was a skilled computer programmer, Graham did not pay James benefits or withhold taxes, and James was retained on a project-by-project basis, the Circuit Court agreed that James was not an employee. Thus, the program was not a work made for hire. (Given that Graham orally retained James, the program could not be deemed a work made for hire by an independent contractor under 17 U.S.C. § 101).

Turning to the infringement issue, the Second Circuit stated that a copyright owner who contractually grants a license to another to use his copyrighted material waives his right to bring suit for infringement. United States Navel Inst. v. Charter Communications, Inc., 936 F.2d 692, 695 (2nd Cir. 1991). Moreover, a licensee’s omission of the author’s name from a licensed work does not infringe the author’s copyright.

When the contested issue is that of license scope, rather than the existence of a license, the copyright owner bears the burden of proving that a licensee’s copying was either outside the scope of the license agreement or the license has been previously rescinded. Bourne v. Walt Disney Co., 68 F.3d 621, 632 (2nd Cir. 1995), cert. denied, 116 S. Ct. 1890 (1996). Rano v. Sipa Press, Inc., 987 F.2d 580, 586 (9th Cir. 1993). Thus, the Circuit Court found that James, rather than Graham, bore the burden of establishing that Graham’s use of the program was outside the scope of the license before Graham could be liable for infringement damages.

James argued that the license was voided when Graham breached its condition by nonpayment of royalties and removal of James’ copyright notice. The Circuit drew a distinction between a ‘covenant’ and a ‘condition precedent.’ If the nature of licensee’s breach is the failure to abide by a covenant of the license, then a licensor’s cause of action lies in breach of contract in seeking the enforcement of the license agreement. Conversely, if the nature of the licensee’s breach is the failure to satisfy a condition precedent upon the use of the license, then the licensee acts without license and the licensor’s cause of action lies in copyright infringement. In the absence of compelling evidence that the parties intended to create a condition, a provision must be construed as a covenant. Grand Union Co. v. Cord Meyer Dev. Co., 761 F.2d 141 147 (2d Cir. 1985). Contract obligations that are to be performed after partial performance by the other party are not treated as conditions. Jacob v. Maxwell, Inc., 110 F.3d at 754.

The Circuit Court noted that Graham and James orally agreed to the licensing agreement and did not clearly delineate its conditions and covenants. Moreover James turned over the program for use before any royalties were paid. Thus, the royalty and attribution provisions were covenants rather than conditions.

The Second Circuit further rejected James’ argument that Graham was not licensed because his material breach of the royalty and attribution provisions terminated the license. A material breach of a covenant will allow the licensor to rescind the license and hold the licensee liable for infringement for subsequent acts. Such a breach must be “material and willful, or if not willful, so substantial and fundamental as to strongly tend to defeat the object of the parties in making the contract.” Septembertide Publ’g , B.V. v. Stein and Day, Inc., 884 F.2d 675, 678 (2nd Cir. 1989). Nevertheless, rescission is not automatic – rescission can be accomplished only by some affirmative action of the part of the licensor. The Second Circuit noted that the record failed to reflect any indication that James had terminated the license or that Graham had abandoned it.

Of final note, the Circuit Court agreed that if the District Court found on remand that the license had been rescinded or abandoned, then James could recover monetary damages equal to the loss of the value of being credited as the author of the program.

Holdings: The Second Circuit upheld the District Court’s finding that the program was not a work made for hire and its award of breach of contract damages. However, given the existence of the oral license, James bore the burden of proving that Graham distributed the program outside the scope of the license before Graham could be liable for infringement. The Second Circuit found that the royalty and attribution provisions were covenants rather than conditions precedent such that Graham could not be liable for infringement unless the license was rescinded or abandoned. Thus the Circuit reversed the award of infringement damages and remanded the case for determinations as to whether a material breach had occurred, James had validly rescinded the license, or the Graham had abandoned the license (i.e., whether it had been rescinded or abandoned).

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