Mon, 08 Jun 2015 15:34:06 +0000 en-US hourly 1 Case Summary: Estate of Hevia v. Portrio Corp., 602 F.3d 34, 41 (1st Cir. P.R. 2010) Tue, 20 Aug 2013 11:26:20 +0000 KEY HOLDINGS: Copyright ownership may be transferred by operation of law or in a writing signed by the owner of the copyright. Short of transferring ownership, a nonexclusive right to use a copyright may occur through a written license or by manifest intent of the owner (implied license). An implied license is limited in scope, permitting use of the copyright only under specific circumstances and within certain guidelines. A party asserting “implied license” as a defense to claims of copyright infringement bears the burden of proving the existence of the implied license. The most important factor in determining whether an implied copyright license exists is intent of the parties.

BACKGROUND: Two individuals (Hevia and Valcarce) owned equal interest in the development of three pieces of real estate. Each partner shared the burden of their enterprise and each contributed equally to the capital required to fund the acquisition of the land.

One project, a residential community known as Rio Grande Village (RGV), became the focus of the litigation. RGV was owned by one of the joint partnerships between Hevia and Valcarce, RG Development. Hevia had been in charge of the architectural plans for this project while Valcarce was in charge of the business and financial side of things.

Two days before Hevia passed away he placed all of his stock related to each of the partnerships, and the architectural plans for RGV into a Trust. Thereafter, the Trust sold Hevia’s stock to Valcarce through a Purchase-and-Sale-Agreement. The Agreement conveyed “every interest” that Hevia may have had in their partnerships to Valcarce, though did not specifically note the RGV architectural plans. Subsequently, Valcarce used the plans formed by Hevia to complete the RGV project. Hevia’s estate sued Valcarce, alleging copyright infringement.

STANDARD OF REVIEW: The grant or denial of summary judgment is reviewed de novo.

ANALYSIS: The Court found compelling evidence that Hevia had granted RG Development an implied, nonexclusive license to use the architectural plans for RVG. The Court looked to the decedent’s course of conduct prior to his expiration and found he intended the plans to be used for the RGV development. The Court found no evidence that the implied license had been revoked and further noted that copyright ownership may be transferred by operation of law or by a writing signed by the copyright owner. While implied copyright licenses are found only in “narrow circumstances… the touchstone for finding an implied license… is intent.” (citations omitted). The Court quoted Nelson-Salabes, 284 F.3d at 516 for the main three factors to be considered when determining whether an implied license has been granted:

1. Whether the parties were engaged in a short-term discrete transaction as opposed to an ongoing relationship

2. Whether the creator utilized written contracts… providing that copyrighted materials could only be used with the creator’s future involvement or express permission; and

3. Whether the creator’s conduct during the creation or delivery of the copyrighted material indicated that use of the material without the creator’s involvement or consent was permissible.

The Court found all three factors were sufficiently met by defendant. Specifically, evidence showed that Hevia and Valcarce intended the architectural plans in question to be used for the development. Hevia contributed his architectural talents while Valcarce contributed his financial and managerial expertise. Finally, Hevia’s intentions must be viewed “against this entrepreneurial backdrop.” Namely, Hevia’s ongoing relationship with Valcarce and RG Development “was founded on successful consummation of the project.” That relationship favors a finding of intent on Hevia’s part to grant a license for use of the architectural design for RGV to RG Development.

Plaintiffs also contended that when Valcarce enlisted a third party to complete the actual work, it committed copyright infringement. However, the Court noted that “when, as in this case, there is no indication that a license-granting copyright owner has restricted the licensee’s ability to use third parties in implementing the license, the license is generally construed to allow such delegation.” Moreover, in the Court’s view, enlistment of third parties does not transmogrify a non-infringing use into an infringing use.

Finally, plaintiffs asserted that Valcarce had no right to transfer its nonexclusive license to third parties. However, the Court found no evidence to support the contention that defendants transferred the nonexclusive license when they sold the land upon which the project was to be built. There was no indication that the sale of the land included a transfer of the license.

HOLDING: Judgment of the District Court was affirmed.

By: Olivia J. Fines, Esq.

Case Summary: MDY Industries, LLC. v. Blizzard, Inc., 2011 U.S. App. LEXIS 3428 (9th Cir. Ariz. Feb. 17, 2011) Mon, 05 Aug 2013 14:01:00 +0000 KEY HOLDINGS: In the absence of direct infringement, one cannot be found liable for contributory or vicarious infringement. Generally, a copyright owner who grants a nonexclusive, limited license waives his right to sue a licensee for infringement, and may sue only for breach of contract. Nevertheless, a licensee may be liable for copyright infringement where the licensee’s action exceeds the scope of the license in a manner that implicates one of the licensor’s exclusive statutory rights (i.e., copying, distributing, making derivative works, etc.).  A contractual term that limits a license’s scope is a “condition,” the violation of which constitutes copyright infringement. All other license terms are considered “covenants,” the violation of which give rise to suit for breach of contract. Conditions and covenants are distinguished by state contract law, and to the extent consistent with federal copyright law and policy.  Section 1201(a)(2) of the DMCA provides for an anti-circumvention right, distinct from infringement.

BACKGROUND: Blizzard Inc. is the creator of the popular online videogame, World of Warcraft (“WoW”) which came on the market in 2004. Each WoW player was required to accept Blizzard’s End User License Agreement (“EULA”) and Terms of Use (“ToU”) at various stages throughout the gaming process.

MDY Industries, and its sole member, Michael Donnelly (collectively “MDY”), developed and sold Glider, a “bot” that automatically played the first few levels of the 70-level-WoW game for players. Glider did not copy or alter the game client’s software, did not prohibit a player from paying its monthly subscription to WoW, and had no independent use separate from WoW.

Blizzard became aware of WoW players’ use of Glider and claimed the bot disrupted the WoW gaming experience for other non-Glider users. In September 2005, in an effort to eliminate Glider use, Blizzard launched a program named Warden to locate players using bots, including Glider users, and ban them from connecting to the WoW server.

MDY learned of Blizzard’s detection of bots and thereafter modified Glider so that its use could not be detected. Further, MDY continued to market Glider through its website, highlighting Glider’s new anti-detection features and charging a $5/month service fee for use of the new Glider. At the end of 2005 Blizzard amended its ToU to reflect that the use of Glider was prohibited by WoW gamers. MDY was aware of this prohibition and modified its website to state that using Glider violated Blizzard’s ToU. However, MDY continued to sell Glider.

Blizzard contended that from December 2004 to March 2008 it received thousands of complaints about Glider. Blizzard further claimed that it spent $940,000 annually responding to bot complaints. The parties stipulated that Glider was the primary bot used by WoW players.

MDY filed suit, seeking a declaratory judgment that its sales of Glider did not infringe Blizzard’s copyright or other rights related to WoW. Blizzard counterclaimed under the Digital Millennium Copyright Act (“DMCA”) and for tortious interference with contract under Arizona law.

The district court found MDY and Donnelly liable for secondary copyright infringement, violations of DMCA §§ 1201(a)(2) and (b)(1), and tortious interference with contract. MDY appealed.

ISSUES: Whether MDY’s marketing and sale of Glider constituted secondary copyright infringement as to Blizzard’s WoW gaming software. Whether MDY’s sale of Glider violated Blizzard’s rights under the DMCA. Whether MDY tortiously interfered with contracts between Blizzard and its gaming users by selling Glider to WoW gamers.

STANDARD OF REVIEW: The Ninth Circuit reviews de novo the district court’s (1) orders granting or denying summary judgment; (2) conclusions of law after a bench trial; and (3) interpretations of state law. The district court’s findings of fact are reviewed for clear error.



In its analysis of whether MDY committed copyright infringement, the Ninth Circuit considered whether MDY committed contributory or vicarious infringement of Blizzard’s copyright when it sold Glider to WoW players. In order to establish secondary copyright infringement (i.e., contributory or vicarious), Blizzard had to first show that WoW players directly infringed its rights. In other words, Blizzard had to establish that is owned a valid copyright for the WoW software and that a player’s use of the Glider software to play the WoW game violated of one of Blizzard’s monopoly rights.

In determining whether MDY’s actions amounted to vicarious or contributory copyright infringement, the Court analyzed the terms of the agreement between WoW and its players to ascertain whether the players were owners or licensees of their copies of WoW. Specifically, the Court considered “whether WoW players, including Glider users, are owners or licensees of copies for purposes of the essential step defense,” which “provides that the player does not infringe by making a copy of the computer program where the copy is created and used ‘solely as an essential step in the utilization of the computer program in conjunction with a machine.’” 17 USC Sect. 117(a)(1).

A. Licensee or Owner: Both parties agreed that when playing WoW, a copy of the game’s software is created and loaded in the random access memory (RAM) of the player’s computer. This copy would infringe Blizzard’s copyright unless the player was (1) a licensee, using the software within the scope of the license or (2) owned his copy of the software.

In determining whether WoW users are licensees or owners, the Court looked to the case of Vernor v. Autodesk, Inc., 621 F.3d 1102 (9th Cir. 2010). In Vernor, the Ninth Circuit held “that a software user is a licensee rather than an owner of a copy where the copyright owner (1) specifies that the user is granted a license; (2) significantly restricts the usder’s ability to transfer the software; and (3) imposes notable use” restrictions . Vernor, 621 F.3d at 1108-09 (9th Cir. 2010). Applying the Vernor factors, the Court first noted that the license agreement reserved title in the software to Blizzard and granted players only a non-exclusive limited license. Second, the Court found that the license imposed significant transfer restrictions in that it required a transferring player to: (i) transfer all original packaging; (ii) permanently delete all of the copies and installation of the game client; and (iii) transfer only to a recipient who accepts the EULA. A player could not transfer his account.

Finally, the Court noted that the license agreement imposed a variety of use restrictions such as limiting its use to non-commercial entertainment purposes, prohibiting its use in cyber cafes and computer gaming centers, and prohibiting the concurrent use of bots and unauthorized third party programs. Blizzard also reserved the right to alter the game client remotely without a player’s knowledge or consent, and to terminate the license if the player violates its terms. Upon termination, the player was required to uninstall the game and destroy all copies.

Based upon the Vernor factors, the Ninth Circuit found that WoW players were licensees rather than owners of the copies they possessed. Thus, the next issue to address was whether a player’s use of Glider to play WoW in violation of the license agreement’s terms exceeded the scope of the license or was merely a breach of the agreement.

B. Covenant or Limitation of Scope: The Ninth Circuit posited that whether the appropriate cause of action sounded in contract or copyright infringement hinged upon whether the bot and third party software restrictions in Section 4(B)(ii) and (iii) were license conditions or contractual covenants.

C. Contractual Covenant or License Condition: The Court referenced its decision in Sun Microsystems, Inc. v. Microsoft Corporation for the proposition that where a copyright owner grants a nonexclusive, limited license, he generally waives the right to sue the licensee for copyright infringement but instead may sue only for breach of contract. 188 F.3rd 1115, 1121 (9th Cir. 1999). However, when the licensee acts outside the scope of the license, the copyright owner may sue for infringement. The Court further cited Sun Microsystems in summarily stating:

[w]e refer to contractual terms that limit a license’s scope as ‘conditions,’ the breach of which constitute copyright infringement… We refer to all other license terms as ‘covenants,’ the breach of which is actionable only under contract law.” The Ninth Circuit then nodded in the direction of Delaware state law by stating that it distinguishes “between conditions and covenants according to state contract law, to the extent consistent with federal copyright law and policy.

Food Contulting Group v. Musil Govan Azzalino, 270 F.3d 821, 827 (9th Cir. 2001).

Looking to Delaware contract law, the Court stated that “a covenant is a contractual promise, … such that the promisee is justified in understanding that the promisor has made a commitment,” whereas “[a] condition precedent is an act or event that must occur before a duty to perform a promise arises.” Applying the Delaware definitions, the Court found that nothing in Sections 4(B)(ii) or (iii) conditioned the grant of the license on the player’s compliance with their terms.

The Court then outlined a separate test for distinguishing between copyright infringement and breach of contract, holding that “[t]o recover for copyright infringement based on breach of a license agreement, (1) the copying must exceed the scope of the defendant’s license and (2) the copyright owner’s complaint must be grounded in an exclusive right of copyright.” Reviewing the license agreement through the lens of the newly stated test, the Court noted that Section 4 of the TOU contained restrictions which were grounded in Blizzard’s copyrights, and yet simultaneously other restrictions which were not. As an example the Court pointed to Section 4(D) of the TOU, which forbade

creation of derivative works based on WoW without Blizzard’s consent, A [sic] player who violates this prohibition would exceed the scope of her license and violate one of Blizzard’s exclusive rights under the Copyright Act. In contrast, TOU Section 4(C)(ii) prohibits a player’s disruption of another player’s game experience… Although this conduct may violate the contractual covenants with Blizzard, it would not violate any of Blizzard’s exclusive rights of copyright. The anti-bot provisions at issue in this case… are similarly covenants rather than conditions. A Glider user violates the covenants with Blizzard but does not thereby commit copyright infringement because Glider does not infringe any of Blizzard’s exclusive rights. For instance, the use does not alter or copy WoW software.

The Court concluded its analysis by holding that “for a licensee’s violation of a contract to constitute copyright infringement, there must be a nexus between the condition and the licensor’s exclusive rights of copyright.” Given that the bot restriction was merely a covenant according to the Court, WoW players did not commit direct copyright infringement by using Glider in violation of the ToU. Therefore, MDY could not liable for secondary copyright infringement, which requires the existence of direct copyright infringement.


The purpose of the Digital Millennium Copyright Act (DMCA) is to mitigate issues of copyright enforcement in the digital age. There are three provisions within the DMCA which speak to the “circumvention of copyright owners’ technological measures.” The Court noted that the U.S. Supreme Court has yet to address these provisions and that they were issues of first impression in the Ninth Circuit.

The Court addressed whether Glider violated DMCA Sections 1201(a)(2) and (b)(1) – namely, “by allowing users to circumvent Warden to access WoW’s various elements.” The Court provided a detailed analysis of these sections of the DMCA and ultimately concluded that MDY violated DCMA Section 1201(a)(2).

Specifically, the Court looked to the legislative history of the DMCA, finding (in a departure from the Federal Circuit) that:

there is significant textual evidence showing Congress’s intent to create a new anti-circumvention right in Section 1201(a) distinct from infringement…. Legislative history supports the conclusion that Congress intended to prohibit even non-infringing circumvention and trafficking in circumventing devices.” Glider was not authorized to circumvent Warden, thus MDY violated Section 1201(a)(2). Specifically, the Court found a violation of Section 1201(a)(2) because MDY (1) traffics in (2) a technology or part thereof (3) that is primarily designed, produced, or marketed for, or has limited commercially significant use other than (4) circumventing a technological measure (5) that effectively controls access (6) to a copyrighted work. See 17 USC Section 1201(a)(2).

The Court found that MDY did not violate DCMA Section 1201(b)(1) because (1) Blizzard’s EULA and ToU authorize all licensed WoW players to copy the software code into their RAM when playing the game and (2) while theoretically a WoW player can record a game by taking screen shots, there was no evidence that Warden was designed to detect or prevent infringing copying. In short, MDY did not violate Section 1201(b)(1), because Warden did not effectively protect any of Blizzard’s rights under the Copyright Act.

III. TORTIOUS INTERFERENCE WITH CONTRACT: Applying Arizona law, the Court concluded that there were triable issues of material fact with regard to this count, and that Blizzard satisfied only four of five of the elements of this cause of action based upon undisputed facts. The Court noted Blizzard was entitled to summary judgment in relation to this count only if it showed that MDY’s actions were improper. However, analyzing the facts under the test for determining whether MDY’s actions were improper, the Ninth Circuit concluded that a number of the factors did not clearly weigh in favor of either side. Thus, summary judgment was inappropriate and the issue should have been tried.

IV. COPYRIGHT MISUSE DEFENSE: The Court noted the copyright misuse
defense originates from the unclean hands doctrine. Though the Ninth Circuit did not apply the doctrine in this case (as MDY was not guilty of copyright infringement), it briefly discussed the defense, stating that while its contours are still being defined, the remedy for copyright misuse is to decline enforcement of the copyright for the period of misuse. In the course of its DMCA analysis, the Court discussed the doctrine of copyright misuse in the context of antitrust violations, noting, however there was no clear showing of anticompetitive behavior in this case. The Court did point out concerns related to Section 1201(a), which might permit “companies to leverage their sales into aftermarket monopolies, in tension with antitrust law and the doctrine of copyright misuse.”

HOLDING: The Ninth Circuit reversed the district court except as to MDY’s liability for violation of DMCA § 1201(a)(2) and remanded for trial Blizzard’s claim for tortious interference with contract.

Case Summary: I.A.E., Inc. v. Shaver, 74 F.3d 768 (C.A.7 (Ind.), 1996) Mon, 10 Nov 2008 04:30:24 +0000 Key Holdings: Affirming the U.S. District Court for the Northern District of Indiana, the Seventh Circuit holds that, as stated under 17 U.S.C. §204(a) of the Copyright Act, an exclusive license may be granted only through a written agreement. Conversely, under 17 U.S.C. §101 a non-exclusive license is explicitly exempted from the writing requirement imposed by §204(a). Thus, it is possible for a licensee to obtain an implied, non-exclusive license through either oral statements or the conduct of the copyright holder. Conditions precedent are not favored and will not be read into a license absent plain and unambiguous language.

Background: Shaver, an architect, entered into a letter agreement with I.A.E./BEMI Joint Venture (“Joint Venture”) for Shaver to prepare a series of schematic design drawings for various airport buildings at a total cost of $10,000 plus out-of-pocket expenses. While Shaver’s contract with Joint Venture only concerned the preparation of the building schematics, Shaver expected, as was industry standard, that he and Joint Venture would execute further written contracts for the remaining phases of the architectural work. Thereafter, Shaver prepared and delivered the schematic drawings to the airport, Joint Venture and several other parties involved in the project. When the airport approved one of the schematic drawings, Joint Venture paid Shaver $5,000 of his $10,000 fee. Joint Venture then entered into a contract with a third party to perform the remaining architectural work.

Upon discovering that he would not be retained for future work on the project, Shaver sent a letter to Joint Venture acknowledging that Shaver’s role in the project had ended and stating that “We [Shaver] trust that our ideas and knowledge exhibited in our work will assist the Airport in realizing a credible and flexible use Cargo/Hanger facility.” One week later, Shaver demanded that Joint Venture pay the remaining $5,000 of the agreed fee along with $887.29 in out of pocket expenses and an additional $7,000 for the assignment of Shaver’s copyrighted schematics to Joint Venture. Joint Venture paid Shaver the $5,887.29 owned to him under contract but refused to pay the $7,000 copyright assignment fee.

Joint Venture filed suit against Shaver seeking declaratory judgment that its use of the schematics did not infringe any copyrights owned by Shaver. Shaver counter claimed against Joint Venture and cross claimed against the new architect, the Airport and others alleging copyright infringement. The District Court dismissed Shaver’s infringement claim on summary judgment on the basis that Shaver granted Joint Venture an implied non-exclusive license in the letter agreement to make use of Shaver’s schematics. In so finding, the Court rejected Shaver’s argument that he revoked any implied license he may have granted on the basis that once “consideration is paid for a [nonexclusive] license, it is irrevocable.” (citing N. Nimmer and D. Nimmer, 3 Nimmer Sec. 10.01[C] and at 10.01[B] (1995)). Shaver appealed.

Issues: Did the District commit reversible error by finding that Shaver implicitly granted a nonexclusive license to Joint Venture, that Joint Venture’s use of the schematics was within the scope of the implied license and that payment in full was not a condition precedent to license?

Standard of Review: The Circuit Court conducts plenary / de novo review of a District Court’s summary judgment award. Summary judgment is appropriate if “there is no genuine issue as to any material fact and … the moving party is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(c).

Analysis: The Circuit Court began its analysis by noting that there are two elements for a copyright infringement claim: i) the claimant owns a valid copyright; and ii) the “’constituent elements of the work that are original’ were copied.” (citing Feist Publications, Inc. v. Rural Tel. Serv. Co., 499 U.S. 340, 361 (1991)). The first element was satisfied as none of the parties challenged Shaver’s ownership of the copyrights in the schematics. Shaver satisfied the second element for the purposes of summary judgment by asserting that the schematics were copied. Nevertheless, the Circuit Court found that Joint Ventures “use of the works was permissible because … Shaver had granted an implied nonexclusive license.”

Exclusive v. Nonexclusive Licenses. The Seventh Circuit recognized that Section 204(a) of the Copyright Act requires that any transfer of a copyright must be in writing. 17 U.S.C. § 204(a). Section 101 of the Copyright Act defines “transfers” to include exclusive licenses, but expressly excludes nonexclusive licenses. Thus, nonexclusive licenses are exempt from Section 204(a)’s writing requirement and may be “granted orally, or may even be implied from conduct.” (citing N. Nimmer and D. Nimmer, 3 Nimmer Sec. 10.03[A] at 10-40.1 (1995); Effects Associates, Inc. v. Cohen, 908 F.2d 555, 558 (9th Cir. 1990).

The Circuit Court explained the difference between exclusive and nonexclusive licenses. With an exclusive license, the copyright holder permits “the licensee to use the protected material for a specific use and further promises that the same permission will not be given to others.” On the other hand, with a nonexclusive license the copyright holder “simply permits the use of a copyrighted work in a particular manner .… In fact, consent given in the form of a mere permission or lack of objection is also equivalent to a nonexclusive license and is not required to be in writing.” In any event, “the existence of a license, exclusive or nonexclusive, creates an affirmative defense to a claim of copyright infringement. (citing Effects, 908 F2d at 559).

Implied Nonexclusive Licenses. The Seventh Circuit adopted the Ninth Circuit’s analysis in the Effects case in determining whether Shaver granted an implied license.

[A]n implied nonexclusive license has been granted when (1) a person (the licensee) requests the creation of a work, (2) the creator (the licensor) makes that particular work and delivers it to the licensee who requested it, and (3) the licensor intends that the licensee-requestor copy and distribute his work. (citing Effects, 908 F.2d at 558-59).

Shaver argued that there could be no implied license because he did not intend to grant one. Citing Indiana law, the Seventh Circuit noted that while contractual terms can be “implied from the intent and action of the parties, the ‘intent relevant in contract matters is not the parties’ subjective intent but their outward manifestation of it.’” (quoting Real Estate Support Servs., Inc. v. Nauman, 644 N.E.2d 907, 910 (Ind. Ct. App. 1994).

Effects suggests several objective factors to guide the judicial inquiry as to whether an implied license exists: the language of the copyright registration certificate, the letter agreement and deposition testimony; and the delivery of the copyrighted material without warning that its further use would constitute copyright infringement.” (citing Effects, 908 F.2d at 559).

In the case at hand, the Seventh Circuit noted that the copyright certificates of registration state that they are to be used for the “Airport Facility.” The letter agreement also evidenced that Shaver understood he was being retained to produce preliminary schematic drawings that would be used “to describe the scope of the project and also for general reference.” The letter agreement even set forth the consideration for Shaver’s preliminary design services. The letter agreement did not state that Shaver would perform any additional services or suggest how he would be compensated for any such services. Finally, Shaver delivered the schematics to Joint Venture, the airport and others without any indication that their further use would constitute copyright infringement. Instead, after learning that he would not be retained for further work, he wrote “[w]e trust that our ideas and knowledge exhibited in our work will assist the Airport in realizing a credible and flexible use Cargo/Hangar facility.” The Seventh Circuit found that “[t]his statement, accompanied by the delivery of copies of his drawings, certainly constitutes a release of those documents to the Airport for it Project” and further validated a finding that the objective factors support the existence of an implied license.

Condition Precedent. Shaver argued that even if his language and conduct could be interpreted to create an implied license, the license never came into existence because Joint Venture paid only half of the specified consideration. In effect, Shaver argued that full payment was a condition precedent to the license. The Seventh Circuit disagreed, stating that “conditions precedent are disfavored and will not be read into a contract unless required by pain, unambiguous language.” (citing Effects, 908 F.2d at 557-58 (9th Cir. 1990). As in Effects, there was no indication in the letter agreement that full payment was a condition precedent. Moreover, Shaver “distributed his drawings before any payment was made, and next handed them over to the Airport, with no mention of payment…”.

Holding: Shaver “created an implied nonexclusive license to use his schematic design drawings in the Airport Project. Accordingly, there was no infringement of [Shaver]’s copyrighted works.” The Seventh Circuit was compelled to affirm the District Court’s award of summary judgment given Shaver’s failure to raise any genuine issues of material fact.

Case Summary: Effects Associates, Inc. v. Cohen, 908 F.2d 555 (C.A.9 (Cal.), 1990) Fri, 07 Nov 2008 15:31:06 +0000 Key Holdings: Ninth Circuit holds that: i) 17 U.S.C. § 204(a) requires that an assignment of a copyright must be in writing to be effective; ii) a non-exclusive license may be granted orally, or may even be implied from conduct; iii) conditions precedent are disfavored and will not be read into a contract unless required by plain, unambiguous language.

Background: Defendant Larry Cohen wrote, directed and produced a “B” horror movie called “The Stuff”. Cohen orally requested that Effects Associates (“Effects”), a small special effects company, create footage for certain sequences in the film. Effects created and delivered the requested footage to Cohen. Cohen paid Effects approximately $56,000 of the original contract price of $62,335. However, Cohen was dissatisfied with one of the scenes and unilaterally decided to pay only half the promised amount for that scene. Despite Effects protests and demands that payment be made in full, Cohen went on to use the unsatisfactory scene in the movie as planned. Effects brought suit against Cohen claiming copyright infringement for Cohen’s use of the scene without full payment. The district court granted summary judgment to Cohen on the infringement claim, holding that Effects had granted Cohen an implied license to use the scenes.

Issues: Did the district court correctly grant summary judgment to Cohen on the basis that Effects granted Cohen an implied copyright license?

Standard of Review: The district court’s grant of summary judgment is subject to de novo review.

Analysis: Cohen argued that ownership of the copyrights in the scenes vested in him. Rejecting this argument, the Ninth Circuit held that “where a non-employee contributes to a book or movie, as Effects did here, the exclusive rights of copyright ownership vest in the creator of the contribution, unless there is a written agreement to the contrary.” (citing Community for Creative Non-Violence v. Reid, 490 U.S. 730 ( 1989)). The Circuit Court further rejected Cohen’s argument that Effects should be deemed to have transferred ownership of the copyrights. “While the copyright owner can sell or license his rights to someone else, section 204 of the Copyright Act invalidates a purported transfer of ownership unless it is in writing.” (emphasis added). The Circuit Court found Cohen’s argument that the movie industry should be exempt from Section 204 to be utterly unpersuasive regardless of the customs in the industry. The Court explained that

Section 204’s writing requirement is not unduly burdensome …. If the copyright holder agrees to transfer ownership to another party, that party must get the copyright holder to sign a piece of paper saying so. It doesn’t have to be the Magna Charta; a one-line pro forma statement will do.

Relying on Oddo v. Ries, 743 F.2d 630 (9th Cir. 1984), Cohen next argued that even if Effects retained ownership of the copyrights in its work, Cohen obtained a non-exclusive license to use the scenes. Citing Nimmer on Copyright, the Court agreed that “[a] nonexclusive license may be granted orally, or may even be implied from conduct.” M. Nimmer and D. Nimmer, Nimmer on Copyright, Sec. 10.03[A], at 10-36 (1989). Section 204’s writing requirement does not apply to non-exclusive licenses because the definition of “transfer” in Section 101 expressly excludes non-exclusive licenses. Given the fact that Effects’ created the scenes at Cohen’s request and handed them over intending that Cohen copy and distribute them, the Court was compelled to find that Effects concurrently conveyed a license to Cohen use the scenes. The Court rejected Effects’ argument that Cohen’s payment of the full contract price was a condition precedent to the implied license because the oral agreement failed to unambiguously specify that pre-payment in full was a condition. “Conditions precedent are disfavored and will not be read into a contract unless required by plain unambiguous language.” (citing In re Bubble Up Delaware, Inc., 684 F.2d 1259, 1264 (9th Cir. 1982).

While the Court agreed that Effects was barred from bringing a copyright infringement claim for Cohen’s use of the scenes within the scope of the implied license, the Court noted that Effects could bring a breach of contract action under the implied license to require Cohen to make full payment.

Holdings: The Ninth Circuit upheld the district court’s award of summary judgment to Cohen and dismissal of Effects’ copyright infringement claim on the rationale that Effects had granted an implied copyright license to Cohen to incorporate the works into his film and as such Effects was limited to suing Cohen for a breach of contract action under the license.

Case Summary: Graham v. James, 144 F.3d 229 (C.A.2 (N.Y.), 1998) Wed, 05 Nov 2008 15:21:26 +0000 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).

Case Summary: In re Bubble Up Delaware, Inc., 684 F.2d 1259 (C.A.9 (Cal.) 1982) Tue, 28 Oct 2008 04:53:36 +0000 Key Holding: Affirming the US District Court for the Central District of California, the Ninth Circuit holds that Courts will not construe contractual stipulations as conditions precedent unless required to do so by the plain, unambiguous language of the contract. ]]> Key Holding: Ninth Circuit held that Courts will not construe contractual stipulations as conditions precedent unless required to do so by the plain, unambiguous language of the contract.

Background: Bubble Up Delaware, Inc. (‘Bubble Up’) filed for bankruptcy in 1970. The US Dept. of Labor (“DOL”) filed a proof of claim for damages arising from breach of contract in the amount of $700,000. The contract in question required DOL to provide Bubble Up with $1,000,000 in exchange for Bubble Up’s employment of 300 unemployed residents of Los Angeles, CA for a period of nine months.

A liquidated damages term was included in the contract which stated:

“[T]he Contractor (Bubble Up) shall refund to the government (US Dept. of Labor) for each employment opportunity short of 300, the sum of Twenty Five Hundred Dollars ($2,500); PROVIDED, HOWEVER, that no such refund shall be required by the Contractor unless the number of persons certified by CEP…is at least three (3) for each of the 300 employment opportunities the Contractor has agreed to provide hereunder as its aforesaid facility.”

Bubble Up claimed that the DOL was not entitled to liquidated damages because the DOL failed to satisfy a condition precedent to Bubble Up’s performance; namely, the DOL did not certify three persons for each of the employment opportunities that Bubble Up was required to supply. The DOL, however, argued that the provision was a valid liquidated damages clause and that the certification requirement was not a condition precedent to Bubble Up’s performance.

The bankruptcy court disallowed DOL’s claim, finding that the certification requirement was a condition precedent and further holding that the liquidated damages provision was an unenforceable penalty because it did not reasonably forecast the harm DOL suffered as a result of Bubble Up’s breach. The District Court reversed the Bankruptcy Court on both points and Bubble Up appealed.

Issues: Was the damage provision a valid liquidated damages clause or an unenforceable penalty? Was the DOL precluded from recovering liquidated damages because the certification requirement was a condition precedent to recovery?

Standard of Review: Whether a contract contains a condition precedent is a matter of contract interpretation that constitutes a matter of law and is subject to de novo review. In re Beverly Hills Bancorp, 649 F.2d 1329, 1334 (9th Cir. 1981).

Analysis: The Ninth Circuit found that the liquidated damages were reasonable because they were proportionate to the number of employees not hired for the requisite period. The Court held that a more precise measurement of damages was not required where “the parties have bargained for a period of employment and where the value of less than full performance is questionable and difficult to calculate.”

The Ninth Circuit further held that the Bankruptcy Court committed reversible error in holding that DOL’s certification of three individuals for each job was a condition precedent to Bubble Up’s performance. The Court reasoned that the clause would be “senseless” as it would require DOL to certify three persons regardless of whether Bubble Up had any job opportunities. “[W]here one interpretation makes a contract unreasonable or such that a prudent person would not normally contract under such circumstances, but another interpretation equally consistent with the language would make it reasonable, fair, and just, the latter interpretation would apply.” (quoting Elte, Inc. v. S. S. Mullen, Inc., 469 F.2d 1127, 1131 (9th Cir. 1972)). Moreover, the Court reasoned that “[c]onditions precedent are not favored and the courts will not construe stipulations as conditions unless required to do so by plain, unambiguous language. Lockwood v. Wold Corp., 629 F.2d 603, 610 (9th Cir. 1980).

Holding: The Ninth Circuit affirmed the District Court’s award of liquidated damages to the DOL against Bubble Up, finding that the liquidated damages provision was valid and that the certification requirement was not a condition precedent to Bubble Up’s performance.