Opinion

Dun & Bradstreet Software Services, Inc. v. Grace Consulting, Inc.

307 F.3d 197
2002 WL 31111821

Court: Court of Appeals for the Third Circuit
Filed: Sep 24, 2002
Status: Published
Author: Rosenn
On the bench: Scirica, Rosenn, Kane
Cited by: 8 cases
Authority: More cited than 65.7%

in determining whether computer program commands were copyrightable, question was whether external factors limited the expressive choices available to the author, not whether external factors limited the choices available to the alleged in-fringer

How later courts described this case

in determining whether computer program commands were copyrightable, question was whether external factors limited the expressive choices available to the author, not whether external factors limited the choices available to the alleged in-fringer

Written by the judges who cited it.

The opinion

Opinions of the United

2002 Decisions States Court of Appeals

for the Third Circuit

9-24-2002

GEAC Computer Sys v. Grace Consul Inc

Precedential or Non-Precedential: Precedential

Docket No. 00-2772

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PRECEDENTIAL

Filed September 24, 2002

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

Nos. 00-2772 and 00-2932

DUN & BRADSTREET SOFTWARE SERVICES,

INC.; GEAC COMPUTER SYSTEMS, INC.

GRACE CONSULTING, INC.; GRACE MAINTENANCE

INT.; ANTHONY ILUTZI

GEAC ENTERPRISE SOLUTIONS, INC.

f/k/a

GEAC COMPUTER SYSTEMS, INC.,

Appellant No. 00-2772

DUN & BRADSTREET SOFTWARE SERVICES,

INC.; GEAC COMPUTER SYSTEMS

GRACE CONSULTING, INC.; GRACE MAINTENANCE;

ANTHONY ILUTZI

Appellants No. 00-2932

Appeal from the United States District Court

For the District of New Jersey

D.C. No.: 94-cv-01090

District Judge: Honorable Katharine S. Hayden

Argued January 17, 2002

Before: SCIRICA, ROSENN, Circuit Judges,

and KANE,* District Judge

(Filed: September 24, 2002)

Wayne C. Matus (Argued)

LeBoeuf, Lamb, Greene & MacRae

125 West 55th Street

New York, NY 10019

Harvey C. Kaish

McCarter & English

100 Mulberry Street

Four Gateway Center

Newark, NJ 07107-0652

Peter J. Gallagher

Salans, Hertzfeld, Heilbronn,

Christy & Viener

620 Fifth Avenue

New York, NY 10020

Counsel for Appellant

Geac Computer Systems

Andrew J. Kyreakakis (Argued)

Ambrosio, Kyreakakis, DiLorenzo,

Moraff & McKenna

317 Belleville Avenue

Bloomfield, NJ 07003

Counsel for Appellees

Grace Consulting, Inc. and Grace

Maintenance

Leonard T. Nuara (Argued)

Thacher, Proffitt & Wood

1 Exchange Place, Suite 600

Jersey City, NJ 07302

Counsel for Appellee

Anthony Ilutzi

_________________________________________________________________

* Honorable Yvette Kane, United States District Court for the Middle

District of Pennsylvania, Sitting by Designation.

Ronald S. Katz

Coudert Brothers

600 Beach, 3rd Floor

San Francisco, CA 94109

Counsel for Amicus for

Appellee Service Industry

Association

OPINION OF THE COURT

ROSENN, Circuit Judge.

This appeal presents serious problems of alleged

competitive world of computer technology that challenges

the effectiveness of our well-established copyright laws.

Formerly known as Dun & Bradstreet Software Services,

Inc. (DBS), Geac Computer Systems, Inc. (collectively Geac)

is the undisputed owner of certain proprietary, copyrighted

software, including a system known as Millennium. The

system is designed to provide valuable services to the

business community at large.

Millennium contains highly confidential information and

trade secrets that were designed and developed by Geac at

great effort and expense. Geac complains that Grace

Consulting, Inc., its founder, president, and chief executive

officer Anthony Ilutzi, and a related enterprise, Grace

Maintenance, Int. (collectively Grace) deliberately have

infringed on Geac’s copyrighted software while in the

course of providing consulting and maintenance services to

companies licensed by Geac to use its software.

Geac brought suit against Grace in March 1994 in the

United States District Court for the District of New Jersey.1

Grace filed an answer together with counterclaims for

_________________________________________________________________

1. The District Court had subject matter jurisdiction pursuant to 28

U.S.C. SS 1331, 1338 and 1367 because the plaintiffs’ complaint alleges

claims under the federal Copyright Act and related state law claims. This

court has appellate jurisdiction of the timely appeals from the final

judgment of the District Court pursuant to 28 U.S.C.S 1291.

breach of contract and tortious interference. The District

Court struck Grace’s counterclaims and six of its defenses

after the close of testimony. The court, however, entered

summary judgment in favor of the defendants on Geac’s

claim for misappropriation of trade secrets. On the

remaining issues, the case was tried to a jury which

returned a verdict in favor of the defendants. The Court

denied Geac’s motions for a judgment as a matter of law

after trial and for a new trial. Geac timely appealed. The

Court also rejected Grace’s claim for attorneys’ fees. Grace

timely cross-appealed. We affirm in part and reverse in

part.

BACKGROUND

A. GEAC’S MILLENNIUM SOFTWARE

Among the United States copyrighted products owned by

Geac are twelve different software business applications,

collectively known as Millennium. These applications keep

track of a host of business information, such as accounts

payable, taxes payable, accounts receivable, fixed assets,

and others. Trade secrets and highly confidential

information are found in a wide variety of materials relating

to Millennium, including but not limited to: (a) source and

object codes for applications and operating software; (b)

software documentation; (c) software upgrades; (d) manuals

and materials for training, installation, service and

maintenance; and (e) customer lists and other information

about the specific needs of its licensees. Geac faces

substantial competition for all of its Millennium products,

and its confidential information and trade secrets allow it to

compete effectively and advantageously.

Geac authorizes its customers to use its Millennium

software under licensing agreements that contain protective

provisions for its trade secrets and copyrighted properties.

The licensing agreements provide, inter alia, that if a

customer engages a third party consultant to install or

configure the software to the customer’s needs or for

maintenance, the consultant must execute a non-disclosure

agreement acceptable to Geac. Geac also offers

maintenance service to its customers for its Millennium

software which includes, among other things, telephone

support, repairs, fixing program errors ("bugs"), and

updated versions of Millennium. Millennium runs on a

large mainframe computer that is typically licensed to large

corporations and institutions, with the customers electing

which of Millennium’s twelve copyrighted software

applications it wants to license.

At issue here is the Human Resources application known

as HR:M. This application enables licensees to perform

various payroll, benefits, and other employee-related

functions in any jurisdiction in the United States. HR:M

consists of numerous individual programs, each of which

are self-contained units of code. Each of the programs

performs one or more of the many individual tasks

comprising the application. One of such programs is Geac’s

W-2 PAYTXABR. This W-2 program enables employers to

prepare employee W-2s and related year-end reports

required by federal and state taxing authorities.

B. GRACE’S OPERATIONS

Grace Consulting, Inc. is a New Jersey corporation with

its principal place of business in Verona, New Jersey, and

is engaged in the business of computers and software

consulting. Anthony Ilutzi, a New Jersey resident, formed

the company to provide consulting services to Geac

licensees. This company also does business as Grace

Maintenance, Int., which was formed in 1993 to provide a

program of maintenance support services for Millennium.

We refer to them collectively as Grace. Grace’s activities in

implementing their services apparently triggered this suit

by Geac.

Commencing in 1993, Grace offered and performed

services for Geac’s licensees, including customizing

Millennium software for their specific needs, fixing"bugs"

in Millennium software, providing tax and regulatory

updates, and modifying Geac’s programming language code.2

_________________________________________________________________

2. Instructions for a computer program may be written in any of three

different levels of computer language.

Grace began offering Millennium licensees Grace’s"Remain

on Release" program, which provides Geac customers with

Grace’s own version of Geac’s W-2 program. Grace

represented that this software maintenance program

"allows customers to stay on their present release without

having to accept expensive upgrades from the vendor."

Under this program, Grace purported to save Geac

customers considerable money they presumably would pay

Geac under its maintenance program.

Grace’s W-2 software was initially developed by Cook &

Reynolds Services, Inc. (CNR), a company formed by two

former Geac employees, Stan Cook and Rick Reynolds. In

1996, Grace purchased the rights to CNR’s W-2 program,

revised it, and renamed the individual programs to begin

with a "GMI" prefix instead of "CNR." The CNR W-2 then

became known as "GMITXABR."

_________________________________________________________________

Computers can "understand" (that is, execute) only programs in

"machine language" -- the lowest level. A machine language is a

cluster of "0" and "1" symbols called"bits," which are the only

symbols recognized by digital computers. A program consisting of a

sequence of machine language instructions is referred to as "object

code."

To make it easier for humans to read and write programs, two

"higher" levels of languages exist. The first level is "assembly

language." Assembly language instructions consist of alphanumeric

labels rather than bits. To be executed by the computer, the

alphanumeric instructions must be translated into their

corresponding clusters of bits by another computer program known

as an "assembler." At the next level are "high-level" computer

languages, such as FORTRAN or COBOL, that employ English-like

words and syntax and are therefore easier to use and understand

than assembly or machine language. Each high-level instruction is

the equivalent of several assembly or machine language

instructions. A computer program known as a "compiler" translates

high-level programs into the corresponding object code. Programs

written in assembly or high-level languages are referred to as

"source programs" or "source code."

1723, 1725 (footnotes omitted).

C. GEAC’S LICENSING AGREEMENTS

Geac has two standard Millennium licensing agreements

that are at issue here: the DBS and the McCormack and

Dodge (M&D) agreements (collectively, the License

Agreements). The DBS License Agreement prohibits anyone

from modifying Geac’s Millennium software without Geac’s

authorization. The M&D License Agreements permit a third

party consultant, in limited instances, to modify the Geac

code, provided it satisfies the Agreement’s non-disclosure

and work-for-hire prerequisites for accessing the code.

Both of Geac’s License Agreements prohibit the removal

of the Geac code from the licensee’s site. The M&D License

Agreement authorizes and limits the licensee to use the

system solely for its own internal operation on any central

processor within Customer’s data center at the location

designated on the "Customer and Product Information

Schedule" or, with the prior approval of Geac, at a

designated replacement site or service bureau. This

Agreement defines use as "copying any portion of a

Licensed Program . . . or transmitting [it] to a computer for

processing of the instructions or statements contained in

the Licensed Program." The Agreement expressly provides

that "customer[s] shall not copy the System, in whole or in

part, except as expressly provided in the [M&D] license

agreement." The DBS License Agreement also restricts the

use, including copying, of the Geac source code, solely for

"purposes on the Hardware and Operating System Software

at the Site." Both License Agreements bar the distribution

of modified versions of the code. It is undisputed that

approximately 35% of Grace customers are subject to the

DBS license agreement and 65% are subject to the M&D

license agreement.

In relevant part, the M&D License Agreement specifically

provides:

- Customer may also disclose M&D confidential

information to Customer’s consultants who have

been retained to perform work for hire in connection

with Customer’s use of the System. All Customer

consultants having access to M&D confidential

information will be required to execute a non-

disclosure agreement acceptable to M&D prior to

disclosure.

- Customer shall not copy the System, in whole or in

part, except as expressly provided in this section.

The System may be copied, in whole or in part, in

printed or machine readable form, for use by

Customer at the designated site, for archive or

emergency restart purposes, to replace a worn copy,

to understand the contents of such machine-

readable materials . . . ."

At trial, Geac’s counsel conceded that "under the M&D

license, we allowed customers and consultants that

qualified, to modify the source code for that customer only."

In relevant part, the DBS Software License Agreement

specifically provides:

- Customer may make a reasonable number of copies

of the Program exclusively for testing, disaster

recovery, inactive back-up or archival purposes.

- Each party shall hold Confidential Information of

the other in confidence . . . . All Confidential

Information shall remain the sole property of the

disclosing party.

- Upon execution of a satisfactory nondisclosure

agreement, third parties may have access to

Confidential information.

- All programs and Documentation, and any

modification or copies thereof are proprietary and

protected by copyright and/or trade secret law and

no ownership rights are transferred by this

Agreement.

- Customer shall not modify, reverse engineer, reverse

assemble or reverse compile any Program or part

thereof . . . .

In addition, all third party consultants engaged to work

on software products licensed by Geac to its customers are

required to execute a consultant’s non-disclosure

agreement.3 It provides, in relevant part, for an

_________________________________________________________________

3. The consultant non-disclosure agreement allows Consultant access to

certain proprietary and confidential information about the Program,

acknowledgment by the Consultant of the secret trade

status of the source code, program and system design

specifics and all related items or materials developed by or

licensed to the licensee. It also requires an agreement to

abide by all of the terms of these provisions, using items

only in accordance with the license agreements and making

no duplicates of any items except with the written consent

of the vendor as necessary in the course of any

employment.

_________________________________________________________________

modifications thereto and derivative works thereof, upon the following

conditions:

- Consultant may use the Confidential Information, including

adapting, modifying and crating derivative works of the Program,

solely for purposes of assisting Customer in evaluating the

Program and/or implementing or modifying the Program at

Customer’s facility to meet Customer’s particular requirements.

Consultant may not use the Confidential Information to perform

maintenance services for Customer or for any other purposes,

and may not in any event distribute the Confidential Information

to any third party including other DBS licensees.

- All adaptations and modifications to the Confidential Information,

and all derivative works thereof shall be deemed to be the sole

property of [Geac], whether prepared by [Geac], Customer,

Consultant or any other party. Consultant agrees that any such

adaptations, modifications and derivative works prepared by

Consultant for Customer shall be deemed to be work for hire as

defined under the U.S. copyright law.

- Consultant shall have no right to use, copy or disclose the

Confidential Information, in whole or in part, except as

authorized herein. Consultant may disclose the Confidential

Information only to DBS’s or Customer’s employees in the scope

of their employment who have a need to know and to obtain

access thereto for the purposes described above and who are

bound by a written agreement with Consultant to maintain the

confidentiality of such Confidential Information in a manner

consistent with this Agreement.

- All tangible Confidential Information and any copies thereof, shall

be promptly returned to DBS or destroyed at DBS’s option upon

request of DBS or upon termination of this Agreement.

D. INFRINGEMENT CLAIMS

Geac claims that one of its most important software

products is its Millennium package, including the twelve

separate programs which compose it. It alleges that it has

never authorized defendants to market or license

Millennium software or upgrades, either to the general

public or to specific business clients. The defendants,

however, it asserts, have induced one or more of Geac’s

customers to provide them with Millennium software,

upgrade programs, documentation, and customer lists, all

of which constitute confidential information of Geac. Geac

further alleges that Ilutzi and Grace have illegally and

without Geac’s permission copied these proprietary

materials and used the confidential information to solicit

directly in competition with Geac existing Geac licensees

and provide them with software and maintenance service

for Geac software. By improperly taking this confidential

information and software programs, Geac alleges that Grace

has avoided a substantial investment in time and money

that Geac found necessary to develop the Millennium

confidential package. Grace, therefore, has been able to

offer their services at prices significantly lower than those

charged by Geac. Further, Geac asserts that Grace has

improperly used Geac’s confidential information and

materials to upgrade and alter Millennium software.

In a systematic attempt to lure away Geac’s software

maintenance customers, it alleges that Grace has

disseminated advertising and marketing materials 4 to

existing Geac licensees using Geac customer lists to which

Grace had no right to access, as well as confidential and

proprietary information and materials which they had no

right to possess or use.

Geac claims of copyright infringement may be divided

into three general categories. First, Geac claims that the

_________________________________________________________________

4. An excerpt of the nature of the marketing materials states: "GMI has

its own proprietary Year End processing software for HR:M. This

software was developed by Rick Reynolds and Stan Cook, both former

developers of the M&D HR:M package and is in use at our maintenance

clients as well as clients who are continuing on DBS maintenance but

have found our W-2 process to be superior to the vendor’s process."

defendants have infringed upon the aforesaid copyrights

not only by copying and obtaining unauthorized copies of

Millennium programs and documentation but loading such

copies into computer memory and delivering unlawful

copies to Grace’s customers, and amending the Millennium

software. These acts of infringement, it asserts, were

committed for the purpose of marketing, maintaining, and

upgrading Millennium software without Geac’s authority.

Second, it claims that Grace’s W-2 program contains literal

copying of Geac’s PAYTXABR package. Third, it also asserts

that Grace’s use of the Copy and Call commands to access

Geac’s software infringes.

In its answer to Geac’s complaint, Grace states that it

has entered into one or more Consultant’s Confidentiality

Agreements with Geac, but denies generally all other

allegations of infringement alleged in the complaint. It

claims that the consulting services it performed did not

infringe because: (1) no copying was performed; (2) no

derivative works were created; (3) any copying, if performed,

was inadvertent and de minimis; (4) the "call and copy"

commands used in providing services were non-infringing;

(5) Geac licensing agreements authorized its customers to

use maintenance services like Grace; and (6) the services

that Grace performed comported with "standard industry

practice" and Geac’s licensing agreements.

In addition, Grace pled counterclaims for breach of

contract and tortious interference. At the close of

testimony, the District Court struck the following defenses:

(1) copyright misuse defense; (2) de minimis defense; (3)

waiver defense; (4) estoppel defense; (5) 17 U.S.C.S 117

defense; and (6) fair use defense. One of the struck

defenses that Grace has cross-appealed only for is the

as required by Section 15 of the License Agreement, it

entered into non-disclosure agreements with each licensed

customer it served in which each consultant agreed to

protect the confidentiality of the software. It further argues

that Geac’s course of conduct demonstrated that

consultants like Grace "were expressly permitted" to provide

"maintenance to licensees." If there was some copying, it

was de minimis and, therefore, not infringing.

II.

THE MOTION FOR JUDGMENT AS A MATTER OF LAW

Geac presented two motions for judgment as a matter of

law during a complex and difficult trial and one after the

jury returned its verdict for the defendants. The trial court

denied each of them. A trial court’s denial of motions for

judgment as a matter of law during the trial and after the

verdict by the jury must be affirmed where the evidence

viewed in a light most favorable to the non-moving party

contains a "minimum quantum of evidence" reasonably to

support the jury’s verdict. Kuth v. Truck Stops of Am., 909

F.2d 743, 745 (3d Cir. 1990). Our review of a District

Court’s action in each of these instances is plenary. Id. In

denying plaintiff ’s motion for judgment as a matter of law,

the trial judge stated that she believed there was ample

evidence on which the jury could have decided that the

defendants were not liable for copyright infringement. She

offered no explanation on what evidence she relied for her

conclusion.

A motion for judgment as a matter of law should be

granted only if, viewing the evidence in the light most

favorable to the non-movant and giving it the benefit of

every favorable and reasonable inference, there is

insufficient evidence from which a jury reasonably could

find liability. In assessing whether the evidence is sufficient

to sustain liability, the court may not weigh the evidence,

determine the credibility of the witnesses, or substitute its

version of the facts for the jury’s version. Although

judgment as a matter of law should be granted sparingly, a

scintilla of evidence is insufficient to sustain a verdict of

liability. Lightning Lube, Inc. v. Metro Corp. , 4 F.3d 1153,

1166 (3d Cir. 1993). Thus, although the court draws all

reasonable and logical inferences in the non-movant’s favor,

we must reverse an order denying judgment as a matter of

law if, upon review of the record, it is apparent that the

verdict is not supported by legally sufficient evidence.

Although we do not set aside a jury verdict lightly or

without careful review of the complete record, we must

grant judgment here in this case as a matter of law because

there is plain evidence of copyright infringement. When the

record is distilled, filtered, and shaken down, 5 it becomes

apparent that there is no legal basis for such infringement.

A. COPYRIGHT LAW

We commence our analysis with the relevant provisions

of the copyright law. Beginning with the federal

Constitution, copyright protection has enjoyed a revered

place in our national legal system and in the development

of the arts, sciences, the economy, and industrialization of

our nation. Under Constitutional mandate, Congress is

specifically empowered "To promote the Progress of Science

and useful Arts, by securing for limited Time to Authors

and Inventors the exclusive Right to their respective

Writings and Discoveries." U.S. CONST. ART. I, S 8. Congress

enacted the first copyright statute as early as 1790. The

existing copyright laws are codified in the Copyright Act of

1976 (the Act). This Act contains a complete revision of

made in technology and the sciences. Congress amended

the Act in 1980 expressly to extend copyright protection to

computer programs and derivatives. 17 U.S.C. SS 101 et

seq.

The Copyright Act as amended provides, in relevant part,

that:

(a) Copyright protection subsists, in accordance with

this title, in original works of authorship fixed in any

tangible medium of expression, now known or later

developed, from which they can be perceived,

reproduced, or otherwise communicated, either directly

or with the aid of machine or device. Works of

authorship include the following categories: (1) literary

works:

_________________________________________________________________

5. Counsel for the parties were not of much assistance to the court with

respect to the contents of the record. The joint appendix consisted of

many volumes and supplemental appendices but the index to them does

not identify or refer to a single witness by name. Typical references to

the testimony are: "Excerpts of transcript trial" and date. This is

meaningless and frustrating to the court. Moreover, the transcript of

testimony also fails to identify the witness under examination.

17 U.S.C. S 102(a). Computer programs are entitled to

Jaslow Dental Lab., 797 F.2d 1222, 1234 (3d Cir. 1986).

To establish a claim of copyright infringement, a plaintiff

must establish: (1) ownership of a valid copyright; and (2)

unauthorized copying of original elements of the plaintiff ’s

work. Whelan, 797 F.2d at 1231; Gator Rubber Co. v. Bondo

Chem. Indus., 9 F.3d 823, 831 (10th Cir. 1993). Copying is

a "shorthand reference to the act of infringing any of the

S 106." Ford Motor Co. v. Summit Motor Products, Inc., 930

F.2d 277, 291 (3d Cir. 1991). Of relevance here, 17 U.S.C.

S 106 provides:

Subject to sections 107 through 121, the owner of

authorize any of the following:

(1) to reproduce the copyrighted work in copies or

phonorecords;

(2) to prepare derivative works based upon the

copyrighted work;

(3) to distribute copies or phonorecords of the

copyrighted work to the public by sale or other transfer

of ownership, or by rental, lease, or lending;

In the instant case, the ownership of the copyrighted

property is undisputed, as is its validity. The United States

for all programs contained in its Millennium software

package. What remains at issue is the copying, and much

of the evidence in support of the plaintiffs’ claim comes

from the lips of Grace’s president and its other witnesses.

As we previously noted, supra, we divide Geac’s claim into

three parts. First, Geac claims that the defendants

infringed upon their copyright by copying their software in

the course of providing consultant and maintenance

services to Geac’s licensees. Second, Geac claims that

Grace’s W-2 programs contain literal copies of PAYTXABR.

Third, Geac also asserts that Grace’s W-2 program contains

Copy and Call commands to Geac’s source and object

codes.

B. PAYTXABR AND DE MINIMIS

Initially, Grace performed maintenance work for Geac’s

licensees as to which Geac made no complaint. However,

commencing in 1993, Grace expanded its activities beyond

maintenance service to provide Geac’s customers with

software, particularly a program it called the "Remain on

Release." Geac viewed the expanded activities beyond mere

maintenance, and especially the sale of Grace software, as

a violation of its exclusive rights under the Copyright Act to

make and distribute derivative works of its Millennium

programs.

Grace offered and sold a program that it obtained by

copying and modifying Geac’s copyrighted Millennium

product known as PAYTXABR. Grace distributed and sold it

as its CNRTXABR program. It acquired this program from

Cook and Reynolds, and immediately renamed it the

GMITXABR program.

Reynolds testified categorically on direct examination that

his W-2 program was in no way similar to HR:M’s (DBS

Millennium) program. This unexplained statement,

however, lacks substance and verity because it is wholly

inconsistent with his testimony concerning the origin of his

program. He testified that when he was installing programs

presumably on behalf of Dun & Bradstreet’s licensee Super

Foods in Ohio, their local school district "wasn’t showing up

on the W-2." Reynolds, thereupon, asked for a copy of the

PAYTXABR program. Then "I made a copy and renamed it

CNRTXABR," and then made a fix for Super Foods to pick

up the local school tax. He acknowledged that CNRTXABR

"should have stayed at Super Foods and shouldn’t have

been distributed with the other code - a bad idea." This is

a plain statement of the root of his infringement.

On cross-examination, he testified:

Q: Could you have written the CNR W-2 program

without making either copies or calls to Dun &

Bradstreet copy members or source code?

A: No.

Reynolds’s denial of infringement is also inconsistent

with earlier testimony given by Ilutzi under cross-

examination wherein he admitted unequivocally that CNR

W-2 "makes copies and calls to Geac codes" and that CNR’s

W-2 contains CNRTXABR. Ilutzi also admitted that Grace

initially distributed CNRTXABR as part of its W-2 software,

later renamed and replaced it as part of its W-2 software

with GMITXABR, and distributed it as part of its W-2

software. Ilutzi testified:

Q: Do you admit that CNR W-2 makes copies and

calls to Geac codes?

A: Yes.

Q: Do you admit that CNR W-2 contains CNRTXABR?

A: Yes.

Q: Do you admit that GMI W-2 makes copies and

calls to Geac code?

A: Yes.

Q: Do you admit that GMI W-2 contains GMITXABR?

A: Yes.

Ilutzi further admitted that CNRTXABR was created by

copying and modifying Geac’s program PAYTXABR and that

Grace’s "CNRTXABR was used in the making of

GMITXABR," both of which supplied the same tax program.

Grace’s counsel conceded at trial that Grace was not

contesting its use of Geac’s PAYTXABR. "It is there and

that’s literal copying." Ilutzi conceded under cross-

examination that CNRTXABR should not have been in the

CNR W-2 program because it was copied from PAYTXABR.

He directed at the end of 1996 that Grace discontinue

distributing CNRTXABR. Grace’s expert, Dewar,

acknowledged that Grace’s distribution of CNRTXABR and

GMITXABR was contrary to "standard industry practice."

However, he did not consider the distribution a copyright

infringement because, in his opinion, it was de minimis.

In supporting its de minimis defense, Grace asserts that

the quantitative infringement amounted to only twenty-

seven lines out of 525,000 lines. This argument is

irrelevant as a matter of law and we therefore will not tarry

on the disputed factual element. The unrefuted trial

testimony was that if one considers Grace’s use of Copy

and Call commands to gain access to PAYTXABR and the

Geac code, the CNR W-2 program actually consists of 62%

Geac code, and the GMI W-2 program possesses

approximately 43% of Geac’s code. Much more significant,

however, than the quantity of copy is the quality of the

material purloined.

A de minimis defense does not apply where the

qualitative value of the copying is material. Kremin, Geac’s

technical expert, and Dr. Dewar, Grace’s expert, both agree

that Geac’s software would not work if PAYTXABR were

removed from it and that Grace’s infringing W-2 software

would not work without its copies of PAYTXABR. Thus, the

information Grace copied was highly critical. In Harper &

Row Publishers, Inc. v. Nation Enterprises, 471 U.S. 539,

564-66, (1985), the Supreme Court rejected a claim that

copying 300 to 400 words of a copyrighted book was

insubstantial and constituted fair use of the material. The

Court looked to the "qualitative value of the copied

material, both to the originator and to the plagiarist." Id. at

565; see also Educational Testing Serv. v. Katzman, 793

F.2d 533, 542 (3d Cir. 1986). The trial judge appropriately

struck the de minimis defense with respect to PAYTXABR

from her jury charge and Grace does not contest this

ruling. For the foregoing reasons, Grace’s de minimis

argument made on appeal also must be rejected.

C. GRACE CONSULTING AND MAINTENANCE

ACTIVITIES

We turn to Geac’s second claim of infringement arising

out of Grace’s consulting and maintenance activities. In

support of its infringement claims, Geac contends that

Grace’s witnesses admitted also copying Geac’s copyrighted

source code while fixing bugs, creating tax updates,

customizing Millennium, modifying the program language

code, and compiling, link editing and testing Millennium.

Ilutzi admitted to modifying many of Geac’s programs in all

twelve Millennium applications. This modification was

"large scale," and included compilation, link editing,6 and

_________________________________________________________________

6. Dr. Dewar, Grace’s expert, explained that"compiling" is a program

that converts source code, which can be read by humans, into object

testing of GMI W-2 software with the DBS code at customer

sites, and modifying the Geac program language code. He

further stated unequivocally that in fixing bugs and in

adding features, Grace consultants have modified DBS’s

source code. When asked whether he would admit that his

consultants would find it easier to copy and modify Geac’s

source code and cheaper for his customers rather than

create a program from scratch, Ilutzi replied "absolutely."

He also responded affirmatively when asked whether his

consultants would take Geac’s software if one of his

customers "wants software to perform a particular

function."

We address Grace’s contention that notwithstanding all

of the foregoing evidence of infringement, none occurred. It

asserts that both the terms of the License Agreements and

Geac’s course of conduct confirm that Geac expressly

permitted computer consultants to provide maintenance to

its licensees. Grace’s position in general at trial and on

appeal is that the License Agreements raise factual issues

of interpretation.

We examine the M&D License Agreement wherein Grace

claims authorization to copy Geac’s programs. Grace refers

to Paragraph 16 of the License Agreement that permits the

consultant to copy a limited number of copies to be made

or remain in existence at any one time "for use by the

customer." However, Grace omits reference to a significant

portion of Paragraph 16 which provides:

Customer shall not copy the System, in whole or in

part, except as expressly provided in this section. The

System may be copied . . . for use by Customer at the

designated site, for archive or emergency restart

purposes, to replace a worn copy, to understand the

contents of such machine-readable materials, or to

store at the off-premises location which Customer uses

for security storage purposes, provided, however, that

no more than 10 printed copies and 10 machine-

_________________________________________________________________

code, which is binary, consisting of ones and zeroes that computers can

read. Link editing further processes the object code into "executable

files," which can then be run on the computer.

readable copies will be in existence under this license

at any one time without prior written consent from

M&D.

(Emphasis added).

Grace, however, asserts that its consulting and

maintenance activities complied with the custom and

industry practice. Paragraph 15 of the License Agreement

does permit licensees to provide access to consultants they

have hired to Geac’s confidential information provided the

consultants have executed a non-disclosure agreement

acceptable to the licensor prior to disclosure. 7 Grace also

contends that as required by Section 15 of the License

Agreement, it entered into non-disclosure agreement with

each licensed customer it served in which each consultant

agreed to protect the confidentiality of the software.

The License Agreement between Geac and its licensees

was crucial in the trial of this case. The record supports

plaintiffs’ arguments that many of the defendant’s

witnesses admitted to conduct which, in the absence of

authorization from Geac, amounted to infringement of

Geac’s copyrights. These acts included copying its code,

creating and distributing derivative works, and the

extensive sale and marketing of Grace’s W-2 program.

Unless authorized by Geac, its right to create derivative

works has been usurped by Grace, whose product instructs

the computer to incorporate Geac copyrighted material with

its W-2 program. This derivative work exists in a concrete

or permanent form and substantially incorporated

protected material from the pre-existing work. See Micro

Star v. Formgen, Inc., 154 F.3d 1107, 1110 (9th Cir. 1998).8

_________________________________________________________________

7. Customer may also disclose M&D confidential information to

Customer’s consultants who have been retained to perform work for hire

in connection with Customer’s use of the System. All Customer

consultants having access to M&D confidential information will be

required to execute a non-disclosure agreement acceptable to M&D prior

to disclosure.

8. The Copyright Act defines a derivative work as:

a work based upon one or more preexisting works, such as a

translation . . . condensation, or any other form in which a work

Grace also copied Geac’s copyrighted software code in

creating bug fixes for Millennium, creating tax updates and

customizing Millennium, making Millennium "year 2000

compliant," modifying the program language code, and

compiling, link editing and testing Millennium. Ilutzi

acknowledged that he has written enhancements for his

clients for Geac’s HR:M program and readily agreed that he

used Call or Copy for their programs.

John Rasnic, a Grace computer consultant, testified

when deposed that he worked on Millennium software; that

he made a copy of a portion of the Millennium source code

disks; that clients (naming some) have sent Grace floppy

disks with Millennium downloaded to Grace at offsite

locations. Rasnic also admitted to physically downloading

pieces of Millennium’s source code from customers’

mainframes at the customers’ premises and then taking

with him the floppy disks containing downloaded

Millennium source code when he left the premises. He also

acknowledged transferring those disks loaded with

Millennium source code onto a personal computer at his

Illinois offices, which are not physically located on the

customer premises. The computer, Rasnic testified, can

then make, at his direction, copies on the hard drive of

what was on the floppy disk.

During his service with Grace, Rasnic performed this

operation at this office "once a quarter to twice a week." A

copy of the Millennium source code has remained in his

personal computer on its hard drive for four to five weeks.

At the time he was deposed, he stated that he had copies

of the Millennium source code on his hard drive for the

purpose of "doing a modification for Food Line[a customer]

of that program." He also stated that he has modified the

source code at his Illinois office for other "Grace clients

only." Generally, the kinds of work he performed for the

_________________________________________________________________

may be recast, transformed, or adapted. A work consisting of

editorial revisions, annotations, elaborations, or other modification

which, as a whole, represent an original work of authorship, is a

"derivative work."

Id. S 101.

customers were telephone support, problem resolution,

upgrades and modifications, and interfaces.

The License Agreements provide that third parties,

including customer consultants, may have access to

confidential information, including the Millennium program,

upon execution of a non-disclosure agreement acceptable to

[Geac] prior to disclosure. Although Grace asserts that

every one of its consultants signed a non-disclosure

agreement when they worked on DBS software, we can find

none of record except the Hutto document. Grace fails to

point to any evidence of non-disclosure agreements signed

by it or its employees with any of its customers; it claims

a blanket authorization under the "Hutto-VA" agreement

permitting access to Millennium.

Hutto, a vice-president of Dun and Bradstreet, executed

a non-disclosure document in 1993. The document fails to

state the name of any customer for whom the services were

to be performed. It is silent as to the duration of the period

of service. Geac claims that this "Hutto" agreement applied

only to the University of Virginia for whom Grace proposed

to do maintenance work and was not a general

authorization. Grace argues that "Hutto testified that the

agreement was not limited to any one licensee and was

satisfactory for any licensee." This argument, however, is a

distortion of what Hutto stated. He testified that the

agreement was satisfactory "as it related to the[University

of Virginia]." The trial court ruled against Grace’s claim of

blanket authorization stating that "there is not a sufficient

quantum of proof to establish that we have a contract . . .

understood by both sides, and the same way." The court,

therefore, would not permit this document to go to the jury.

Grace has appealed this ruling.

Hutto testified the agreement was only intended"for the

particular customer" with whom they were dealing at the

time, the University of Virginia. He never intended it to be

a blank non-disclosure agreement with third-party

consultants. Moreover, there was no discussion by him

with Grace’s representative that the agreement include

others than the University of Virginia. In addition, it is

unrefuted that he had "no authority" to enter into a blanket

non-disclosure agreement. Although he further testified

that an agreement containing similar language would have

been satisfactory with respect to other customers, he did

not testify, as Grace would have this Court believe, that

"the agreement was not limited to any one licensee." The

other evidence, particularly the use of the plural in the

word "licensees" and the letter of Grace’s counsel to Hutto,

is of very little probative value. Reference to the plural in

"licensees" in the agreement is indeed a slender reed on

which to cling. We see no error in the District Court’s

conclusion that "there’s not a requisite quantum of

evidence that the contract entered into between the parties

had a meeting of the mind."

The defendants offer an additional pellet in defense of

their consulting and maintenance operation. They claim

that their offsite activities in copying the source code and

other elements of the program were justified by industry

custom and practice.

Grace emphasizes that it was industry practice to allow

programs off-site and that customers required such off-site

work, especially in emergency situations. Furthermore, it

asserts that Section 16 of the License Agreement allows off-

site activities, and that the provisions of the License

Agreement "demonstrate that it does not preclude off site

work." It maintains that its off-site activities are limited to

reviewing the program to understand it so that necessary

fixes can be made to the software in the customer’s

mainframe computer. It contends that this section"makes

clear that such activities are allowed." A defense of industry

custom and practice in the face of the protective provisions

of the Copyright Act could undermine the purposes and

objectives of the statute and reduce it to rubble.

Grace may not stultify itself by seeking shelter within

selected terms of the License Agreements at one time and

then, when it serves its convenience, disregard the

conditions and other pertinent terms of the Agreements.

Custom and practice in the computer industry, and the

evidence of it in this record is vague and conclusory, is no

authority to disregard or trump the specific terms of a valid

license agreement or the provisions of the Copyright Act.

"Custom and usage may not be invoked to relieve defendant

of the clear cut obligations imposed by the application of

the statute." Famous Music Corp. v. Seeco Records, Inc., 201

F. Supp. 560, 566 (S. D. N.Y. 1961) Extrinsic evidence may

not be used to nullify or modify the terms of a valid,

unambiguous license agreement. See Atlantic Northern

Airlines v. Schwimmer, 96 A.2d 652, 656 (N.J. 1953).

"Extrinsic evidence . . . may not be used to create an

ambiguity where none exists." International Union v. Skinner

Engine Co., 188 F.3d 130, 145 (3d Cir. 1999).

As previously noted, the Copyright Act gives the copyright

owner the exclusive right to prepare derivative works based

on the copyrighted work. 17 U.S. S 106. The District Court

correctly defined a derivative work to the jury as"a new

created work based on the original copyright work."9

Grace’s W-2 program using Copy and Call commands

copies Geac’s computer copyrighted code. Thus, it is a

derivative work; the inclusion of the Copy and Call

commands makes Grace’s W-2 programs infringing,

derivative works of Geac’s copyrighted software.

Grace attempts to brace its argument of industry practice

to use these commands to retrieve data for maintenance

work by arguing that the copy command does not modify

the code. It also argues that the Copy and Call commands

are used to access customer’s data, which belongs to the

customer and is not protected.

Section 2 of the M&D License Agreement provides in

relevant part that the customer is authorized to use"the

system solely for its own internal operation . . . within

Customer’s data center at the location designated on the

Customer and Product Information Schedule, at any other

site which may replace it as provided in this section, or

through a service bureau upon written prior approval of

M&D." Paragraph 3 of that section permits use of the

system in a remote job entry mode for the benefit of the

customer and its subsidiaries provided that all processing

involving use of any Licensed Program takes place only at

the designated site or its temporary replacement."

_________________________________________________________________

9. Under the Copyright Code, 17 U.S.C. S 101, a derivative work is work

"based upon one or more preexisting works" and includes any recasting,

transforming or adopting of the original work. Whelan, 797 F.2d at 1239.

The limitation of the license authorization to the

customer’s site and for its own internal operation is plain;

use elsewhere may be permissible but with written prior

approval of the licensor. Neither License Agreement

permitted customer off-site use of the Geac code except

with its prior approval. The License Agreement also forbade

the distribution of modified versions of the Geac code.

Section 16 of the agreement relied on by Grace is not

inconsistent. It allows system copying, in whole or in part

"for use by Customer at the designated site" and then

under specific conditions and purposes set forth in that

section. Such copying as is permitted at the site is only for

purposes of "understand[ing] the contents of such machine

readable materials." The interpretation of a written

unambiguous agreement traditionally is a matter of law,

not a question of fact for a jury. Church v. General Motors

Corp., 74 F.3d 795, 799 (7th Cir. 1996); see also Winter v.

Minnesota Mut. Life Ins. Co., 199 F.3d 399, 406 (7th Cir.

1999). We therefore hold that the terms and conditions of

the License Agreements may not be altered or modified by

extrinsic incidence of purported industry custom and

usage.

D. GRACE’S W-2 PROGRAM

We turn now to Geac’s third claim -- Grace’s use of Copy

and Call commands to Geac’s W-2 program. Grace

contends that the Call and Copy commands are used to

access customer’s data, that such data belongs to the

customer, and is not protectable. It asserts the Copy

command does not modify the code and that industry

practice uses the commands "to interoperate two systems;"10

the Copy command does not insert text from one program

into another; their program remains separate in memory.

Grace admitted that the installation, testing, compiling and

link editing of its W-2 programs required copying Geac’s

software and link editing the Geac code. Geac therefore

_________________________________________________________________

10. Defendant Grace asserts in Geac’s brief filed at trial dated April 19,

2000, it conceded "that whether the call and copy" commands infringe is

an issue to be decided by the jury. We can find no such concession in

the record to which it refers.

argues that these trial admissions compel the conclusion

that, "as a matter of Law," Grace’s W-2 programs are

infringing because they contain copies of Geac’s copyright

code and are derivative works of Millennium. We agree.

Citing to Walker v. University Books, 602 F.2d 589, 564

(9th Cir. 1979), Geac further asserts that the Copyright Act

does not allow an infringer to avoid liability by distributing

instructions which result in copying. The Act gives a

works based upon the copyrighted work." 17 U.S.C.S 106.

The Act also defines a "derivative work" as"a work based

upon one or more pre-existing works [including] any other

form in which a work may be recast, transformed or

adapted." 17 U.S.C. S 101. Furthermore, the DBS License

Agreement prohibits anyone from modifying the Millennium

software code without Geac’s authorization. The M&D

License Agreement permits a third party consultant, in

certain instances, to modify the Geac code, but only if it

satisfies the agreement’s non-disclosure and work-for-hire

requirements for accessing the Geac code. Grace did not

meet the License Agreements and non-disclosure

requirements. Thus, Geac posits that this results in literal

copy and modification of Geac’s W-2 program that

constitutes a derivative work of the copied and called

programs and code.

We turn to Grace’s defense that its CNR W-2 program

and the DBS Millennium W-2 programs are not similar and

Grace, therefore, does not infringe on Geac’s copyright.

Grace makes much of the government form that both

generate for their customers and that this is a government

form unprotected under copyright law. Of course, it is

unprotected, and is not an issue. However, there is no

claim that the other material in the PAYTXABR package is

not copyrighted property.

Grace also leans on Dr. Dewar’s testimony to support its

argument that the two programs are dissimilar. Dr. Dewar

found similarities in the two programs at the upper level

but found them different at the lower levels.11 No further

explanation is offered by Dr. Dewar as to what are the

_________________________________________________________________

11. For descriptions of "upper" and "lower" levels, see p.6, n.2, supra.

differences, except for a vague reference to Grace’s

"extraction program."

The source code which speaks in human language, and

is critical, is at the upper level. This infringement may not

be justified on the ground that not all elements of the

system were copied or that there were some dissimilarities.

Grace may have rearranged some of the words in the

plagiarizing program or altered or replaced one or more

components in its program, but these efforts to distinguish

its program from Geac’s system does not erase the literal

copying of Geac’s source code; it does not surmount

Reynolds’ acknowledgment that "I could not have written

the W-2 program without making either copies or calls to

Dun & Bradstreet copy members or source code."

We had occasion in one of our early cases dealing with

substantial similarity wherein the defendant’s premise was

that one cannot prove substantial similarity without

comparing the entirety or a greater part of the work. We

concluded that not in every area of copyright infringement

is there a general requirement "that most of each of two

works be compared before a court can conclude that they

are substantially similar." Whelan, 797 F.2d at 1245. The

source code and the object code are the literal elements of

a computer program and are protected by copyright law.

Apple Computer, Inc. v. Franklin Computer Corp., 714 F.2d

1240, 1249 (3d Cir. 1993); Cognotec Services v. Morgan

Guar. of New York, 862 F. Supp. 45, (S.D. N.Y. 1994).

Dr. Dewar conceded that Grace made copies of Geac’s

code by its Call commands to Geac’s software when Grace

compiled it W-2 program. He testified that so long as Geac’s

licenses used Grace’s program, the coping through the

Copy and Call commands is non-infringing because the

licensee had authority to access. This is sophistry with

which we do not agree. Authority to the licensee to access

both programs does not give Grace the right to copy and

call Geac’s copyrighted property for its own commercial and

competitive purposes. As we have already explained, this

infringement cannot be excused by purported industry

practice. Having copied the critical source code, it is no

defense to infringement that more of the system was not

copied or that the plagiarist’s system may have some

dissimilarities from the original system.

Turning to its last defense, Grace relies on Computer

Associates International, Inc. v. Altai, Inc., 982 F.2d 693 (2d

Cir. 1992) and Mitel, Inc. v. Iqtel, Inc., 124 F.3d 1366 (10th

Cir. 1997). This defense to the use of the Copy and Call

command in Grace’s W-2 program is predicated on the

doctrine of externalities, often referred to in a non-

computer literary setting as scenes a faire.

The Court of Appeals explained in Gates Rubber Co. that

under this doctrine, copyright protection is denied"to those

expressions that are standard, stock, or common to a

particular topic or that necessarily follow from a common

theme or setting." Bando Chemical Industries, Ltd., 9 F.3d

at 838. As related to computer programs, the Court of

Appeals for the Second Circuit in Altai recognized that "in

many instances it is virtually impossible to write a program

to perform particular functions in a specific computing

environment without employing standard techniques." 982

F.2d at 709 (quoting 3 Nimmer S 13.03[F][3], at 13-65).

That is because "a programer’s freedom of design choice is

often circumscribed by extrinsic considerations such as (1)

the mechanical specifications of the computer on which a

particular program is intended to run; (2) compatibility

requirements of other programs with which a program is

designed to operate in conjunction; (3) computer

manufacturers’ design standards; (4) demands of the

industry being serviced; and (5) widely accepted

programming practices within the computer industry." Id.

at 709-10; see also Mitel, 124 F.3d at 1375. Thus, for these

reasons certain content of the allegedly infringed program

that might have been dictated by external factors may not

be subject to copyright protection. Altai, 982 F.2d at 710;

Gates Rubber, 9 F.3d at 838.

The Court in Mitel agreed, stating that the"traditional

exclude from protection against infringement those

elements of a work that necessarily results from external

factors inherent in the subject matter of the work." Mitel,

124 F.3d at 1375. The rationale is rather straightforward:

Because those external factors dictated the creation of the

allegedly infringed work, "it is lacking the originality that is

the sine qua non for copyright protection. Gates Rubber, 9

F.3d at 838 (citing Publ’n, Inc. v. Rural Tel. Serv. Co., 499

U.S. 340, 348 (1991).

Both Altai and Mitel clearly held that in determining

aspects of the program not entitled to protection because of

external factors, we examine the program from the

viewpoint of the creator. Altai, 982 F.2d at 714; Mitel, 124

F.3d at 1375. The Mitel court pointedly noted that the focus

is on the factual circumstances and the external factors

surrounding the author of the infringed program. Mitel, 124

F.3d at 1375; see also Control Data Sys., Inc. v. Infoware,

Inc., 903 F. Supp. 1316, 1323 (D. Minn. 1995) ("The

question to be examined is whether external factors limited

the choices available to the [allegedly infringed]

programmers, not whether external factors may somehow

limit the choices of [the alleged infringing work’s]

programmers.").

Dr. Dewar made it clear that he was advancing his own

theory, explaining: "So my understanding of the process of

determining for myself whether I consider something

infringement, is that if something is dictated by the

requirement of intraoperability, then that is an external

factor that is not protectable." Explaining further, he

testified:

[I]n modern computing, the notion of intraoperability is

fundamental. And the idea of writing programs which

are designed to work with licensed copies of other

programs, a fundamental part of computing, one of

which everyone has a PC, . . . taking advantage of.

And consequently it is exactly expected to, according to

industry standard and practice relating to

intraoperability, you will find two programs to design,

to work and to interoperate, and in the same manner

will have the same calls.

Dewar’s testimony regarding external factors, including

interoperability, is wholly misplaced. As Dewar admitted on

cross-examination, he focused on externality from the

viewpoint of Grace’s W-2 program, not Geac’s. He looked at

externalities from the eyes of the plagiarist, not the eyes of

the program’s creator. As explained, in determining whether

certain aspects of an allegedly infringed software are not

protected by copyright law, the focus is on external factors

that influenced the choice of the creator of the infringed

product. Altai, 982 F.2d at 714; Mitel , 124 F.3d at 1375.

What is telling is that Grace makes no effort to explain this

fundamental error on the part of Dewar except to urge that

"external factors" and "interoperability" "are important

concepts in proving that no infringement occurred."

Furthermore, Dewar here simply offered no testimony

regarding what parts of Geac’s program were dictated by

external factors and therefore not protected.

He therefore concluded: "My opinion, there’s no

infringement." His explanation ignores completely that

Geac’s Millennium program was designed and developed

not for the purpose of working with personal computers but

solely for business customers’ specific human resource

problems. Under his theory, the Copyright Act is

superfluous and the License Agreements become a bundle

of straw.

Dewar’s explanation of the need to interoperate two

programs, and industry practice and custom, do not justify

unauthorized accessing and copying Geac’s copyrighted

code. The Court in Mitel specifically rejected the analysis of

the district court in that case which focused on whether

external factors such as market forces and efficiency

considerations justified the copying. Mitel, 124 F.3d at

1375; see also Apple Computer, Inc. v. Franklin Computer

Corp., 714 F.2d 1240, 1253 (3d Cir. 1983) (stating that

achieving total computability with independently developed

application program . . . is a commercial and competitive

objective which does not enter into the somewhat

metaphysical issue of whether particular ideas and

expressions have merged). We also reject the doctrine of

externalities, including interoperability, as justification for

using the Copy and Call commands to access Geac’s

copyrighted software in violation of the License Agreements

and the Copyright Code.

E. CONCLUSION

In conclusion, the interpretation of the License

Agreements was a question of law and not of fact. The

defenses raised by the defendants were unacceptable as a

matter of law. Drawing all reasonable and logical inferences

in the non-movant’s favor, we nevertheless must reverse

the Order of the District Court denying Geac judgment as

a matter of law on its copyright infringement claims. Upon

our review of the record, it is evident that the verdict is not

supported by legally sufficient evidence. In light of our

decision on the motion for judgment as a matter of law, we

do not reach the alternative issues relating to the motion

for a new trial.

III.

MISAPPROPRIATION OF TRADE SECRETS

Geac also pled a state claim for misappropriation of trade

secrets claim with respect to Grace’s use of Millennium

software. Geac argued that Grace breached multiple duties

of confidentiality in creating and distributing its W-2

program and other derivative works. The District Court

granted Grace’s motion for summary judgment because it

held that Geac’s claim was preempted by S 301 of the

Our review of the District Court’s grant of summary

judgment is plenary; we apply the same test as the District

Court should have applied initially. Olson v. General Elec.

Astrospace, 101 F.3d 947, 951 (3d Cir. 1996). Our review is

de novo as to the question of law whether S 301 preempts

a state cause of action for misappropriation of trade

secrets. Trandes Corp. v. Guy F. Atkinson Co. , 996 F.2d

655, 658 (4th Cir. 1993).

Section 301(a) of the Copyright Act provides that:

all legal or equitable rights that are equivalent to any

of the exclusive rights within the general scope of

authorship that are fixed in a tangible medium of

expression and come within the subject matter of

governed exclusively by this title. Thereafter, no person

is entitled to any such right or equivalent right in any

such work under the common law or statutes of any

State.

17 U.S.C. S 301(a). However, subsection b(1) makes explicit

what is implicit in subsection (a) that the preemption

provision does not apply if the "subject matter[ ] does not

come within the subject matter of copyright as specified by

sections 102 and 103." 17 U.S.C. S 301(b)(1).

Subsection 301(b)(3) imposes another limitation that is

principally at issue here. It provides that "[n]othing in this

title annuls or limits any rights or remedies under the

common law or statutes of any State with respect to

activities violating legal or equitable rights that are not

equivalent to any of the exclusive rights within the general

scope of copyright as specified by section 106." 17 U.S.C.

S 301(b)(3). As already noted previously, section 106 gives,

subject to certain limitations, the owner of a copyright the

exclusive rights to do and to authorize among other things

the reproduction of the copyrighted material, the

preparation of derivative works, and the distribution of

copies. 17 U.S.C. S 106.

As the District Court acknowledged, this Circuit has not

yet addressed the effect of S 301 on the preemption of state

misappropriation of trade secrets claims. Although we have

not addressed the issue, we are not without guidance or a

framework. The Congressional House Judiciary Committee

Note accompanying S 301 clearly states that the intent of

S 301 "is to preempt and abolish any rights under the

common law or statutes of a State that are equivalent to

however, that certain common law rights "would remain

unaffected as long as the causes of action contain elements,

such as invasion of personal rights or a breach of trust or

confidentiality, that are different in kind from copyright

infringement." Id. More specifically and most relevant to our

issue, the Committee noted that misappropriation type

claims are not necessarily synonymous with copyright

infringements. Id. Therefore, misappropriation causes of

action are not preempted if they are based on claims not

equivalent to the exclusive rights within the general scope

of the Copyright Act. Id.

Less clear is what types of misappropriation claims are

not preempted and are not within the general scope of the

Act. The House version of S 301, which Congress adopted,

deleted the Senate version of S 301(b)(3) that had

enumerated certain types of misappropriation claims that

would not be preempted. Conference Comm. Notes , House

Conference Report No. 94-1733. However, as the District

Court acknowledged, because any direct reference was

deleted to acts of misappropriation, federal courts have

grappled with whether a particular cause of action and,

more specifically, a particular type of misappropriation is

preempted under "any of the exclusive rights within the

general scope of copyright as specified by S 106."

Courts, as the Court of Appeals for the First Circuit

acknowledged, have developed a "functional test" to

determine the question of equivalence. Data General Corp.

v. Grumman Systems Support Corp., 36 F.3d 1147, 1164

(1st Cir. 1994). There, the court held that "if a state cause

of action requires an extra element, beyond mere copying,

preparation of derivative works, performance, distribution

or display, then the state cause of action is qualitatively

different from, and not subsumed within, a copyright

infringement claim and federal law will not preempt the

state action." Data Gen. Corp., 36 F.3d at 1164 (quoting

Gates Rubber, 9 F.3d at 846-47); see also Trandes Corp.,

996 F.2d at 659 ("To avoid preemption, a cause of action

defined by state law must incorporate elements beyond

those necessary to prove copyright infringement, and must

regulate conduct qualitatively different from the conduct

governed by copyright law."); Altai, 982 F.2d at 716 ("[i]f an

‘extra element’ is ‘required instead of or in addition to the

acts of reproduction, performance, distribution or display,

in order to constitute a state-created cause of action, then

the right does not lie ‘within the general scope of copyright,’

and there is no preemption.") (citation omitted). This test

has been labeled the "extra element" test. Trandes Corp.,

996 F.2d at 659.

Not every extra element is sufficient to establish a

qualitative variance between rights protected by federal

F.3d at 1164-65; Altai, 982 F.2d at 717. A state law

misappropriation of trade secrets claim that requires a

proof of breach of duty of trust or confidence to the plaintiff

through the improper disclosure of confidential materials is

qualitatively different because it is not an element of

represents unfair competitive conduct "qualitatively

different from mere unauthorized copying." Data Gen. Corp.,

36 F.3d at 1165. Thus, it has been held that trade secrets

claim based upon a breach of duty provides the extra

element avoiding preemption. Altai, 982 F.2d at 717 ("[t]he

defendant’s breach of duty is the graveman of such trade

secret claims, and supplies the ‘extra element’ that

qualitatively distinguishes such trade secret causes of

action from claims for copyright infringement that are

based solely upon copying."); Trandes Corp. , 996 F.2d at

660 (agreeing "that the breach of a duty of trust or

confidentiality comprises the core of action for trade secret

misappropriation" qualitatively distinguishing it from

847-48 (same).

Geac argues that "the district court erroneously

concluded that Geac’s software . . . claims were based

simply on the use and copying of the software, rather than

Grace’s breach of its duties to keep Geac’s software and

client list confidential." The extra element, it argues,

precludes preemption. We agree with Geac that if their

misappropriation of trade secrets claim was based on such

breach of duty of trust and confidentiality, it would survive

preemption in this case. Thus, if an employee of Geac who,

by virtue of a confidential position, had access to the

source code, misappropriated it, and used it to promote his

own interests, such breach of confidentiality would be the

extra element to a copyright infringement claim. The claim,

therefore, would not be preempted by the Act. See Gates

Rubber Co. v. Bando Chem. Indus., 9 F.3d. 823, 847-48

computer program does not preempt trade secret claim for

misappropriation where defendant gained access to the

program through plaintiff ’s employee who breached his

duty to maintain secrecy).

Geac also argues that the District Court did not address

Geac’s misappropriation of trade secrets claim with respect

to its customer lists. Because customer lists are not subject

to copyright, it argues, it cannot pursuant to S 301(b)(1) be

preempted. Grace does not dispute that the customer lists

are not subject to copyright and presumably escape

preemption for that reason pursuant to S 301(b)(1). Further,

it does not contest that customer lists could constitute

valid trade secrets. See Lamorte Burns & Co. v. Walters,

770 A.2d 1158, 1166 (N.J. 2001) ("In New Jersey, customer

lists of service business have been afforded protection as

trade secrets.").

Under Rule 56(c) of the Federal Rules of Civil Procedure,

summary judgment on an issue is appropriate only if the

affidavits, depositions, and other evidence submitted in

connection with the motion for summary judgment

demonstrate that "there is no genuine issue as to any

material fact and that the moving party is entitled to a

judgment as a matter of law." See Seibert v. Nusbaum,

Stein, Goldstein, Bronstein & Compeau, P.A., 167 F.3d 166,

170 (3d Cir. 1999). The court must "construe the facts in

the light most favorable to the non-moving party."

Seitzinger v. Reading Hosp. and Med. Ctr., 165 F.3d 236,

238 (3d Cir. 1999).

In entering summary judgment, the District Court failed

to consider evidence that Geac’s customer lists were not

copyrightable material and, therefore, that claims alleging a

violation of state laws were not preempted. See First

Publications, Inc. v. Rural Tel. Service Co., 499 U.S. 340,

347 (1991) (data or facts "do not trigger copyright" because

they are not original in the constitutional sense). Therefore,

the claims that Grace misappropriated Geac’s client lists

were not preempted and the District Court as a matter of

law should not have dismissed them.

With respect to Geac’s software claims and the evidence

in their support, the District Court concluded that they

were based only on the use and copying of software and the

codes. The court failed to consider evidence of the alleged

breach of Grace’s duties to maintain the confidentiality of

Geac’s software and customer lists. These trade secret

claims were qualitatively different from the rights protected

by the Copyright Act because Grace’s evidence of breach of

confidentiality constituted the extra element necessary to

avoid preemption.

Geac introduced evidence to the District Court that Grace

was bound by express promises of confidentiality with

respect to the software and customer list because, as a

third party consultant, it had assumed an obligation of

confidentiality under its own standard agreement with its

customers. Furthermore, there is evidence that Grace

employed former employees, and contracted with Reynolds,

who owed obligations of confidentiality to Geac, to develop

W-2 programs and provide maintenance service in behalf of

Grace. Geac also produced evidence that Grace used

improper means to acquire Geac’s trade secrets by inducing

Geac’s licensees to divulge trade secrets under the false

representation to them that the Hutto-VA agreement

authorized Grace to act generally as a third party

consultant; that on the basis of this false representation,

Geac’s licensees allowed Grace to service their copies of the

Millennium program without Geac’s knowledge or consent.

Grace disputes that Geac produces any evidence to

support "a true trade secret claim." Grace argues that Geac

did not make reasonable efforts to retain the trade secrecy

of their customer lists and that there was no evidence of

misappropriation. Geac admits that its customer lists were

distributed to participants at its user conferences but

contends that parties had to sign a confidentiality

agreement. Because of the error of law and disputed issues

of material facts, the entry of partial summary judgment

was improper and will be vacated. The issue of

misappropriation of trade secrets, therefore, will be

remanded to the District Court for further proceedings

consistent with this opinion.

IV.

GRACE’S CROSS-APPEAL

Grace and Ilutzi have cross-appealed raising numerous

issues. We conclude that each issue has no merit and

therefore we discuss each item only briefly.

First, Grace claims that the District Court erred in

dismissing the breach of contract counterclaim "without

articulating any factual basis for its decision." We could not

disagree more with Grace’s characterization of the District

Court’s decision. The court was quite clear when it stated

that there is not "sufficient quantum of proof to establish

that we have a contract." The contract claim was based on

the "Hutto-VA" Agreement. As we have discussed above, the

District Court found this agreement invalid and that it

contained no blanket authority for Grace to serve all of

Geac’s customers without appropriate, individual, non-

disclosure agreement. We see no error.

Even if there was a meeting of the minds, we conclude

that the "Hutto-VA" Agreement is still not an enforceable

contract because of lack of adequate consideration.

Although Grace agreed not to disclose "proprietary or

confidential information," there is no indication of what

Geac promised in return or what Grace bargained for in

return of its promise. Without any reference to the record

for evidentiary support, Grace argues that Geac promised

"that it would have no infringement claim against Grace if

it complied with this agreement." However, the plain

language of the agreement is silent as to any such promise.

For similar reasons, we reject Grace’s promissory

estoppel claim because it has failed to identify any clear or

definite promise to which it reasonably relied upon. We do

not reach the merits, however, because we conclude that

Grace waived it by not asserting it before the District Court.

United Parcel Serv., Inc. v. International Bhd. of Teamsters,

Chauffeurs, Warehousemen and Helpers of Am., Local Union

No. 430, 55 F.3d 138, 140 n.5 (3d Cir. 1995) ("It is the

general rule that issues raised for the first time at the

appellate level will not be reviewed.").

Second, Grace had pled a tortious interference

counterclaim alleging that Geac’s conduct damaged it

economically with third parties. More specifically, as the

Magistrate Judge also noted, the essence of the claim here

is the alleged tortious conduct of Geac’s General Counsel

James Alberg and certain letters he sent to the licensees.

Grace assigned two errors to the District Court in

dismissing this claim. The District Court dismissed the

claim because Grace failed to produce sufficient evidence to

prove that any third parties acted on a letter sent by

Alberg. This was not erroneous. FDIC v. Bathgate , 27 F.3d

850, 871-72 (3d Cir. 1994) ("Under New Jersey law[one of]

the five elements of a claim of tortious interference with a

prospective or existing economic relationship [is] the

reasonable probability that plaintiff would have received the

anticipated economic benefit in the absence of

interference.") (citations omitted). The basis of the District

Court’s dismissal was therefore the failure by Grace to

produce sufficient evidence as to causation. Thus, Grace’s

complaint on not having been provided an opportunity to

prove damages because the case was bifurcated is

irrelevant. There is no need to address whether the tortious

interference claim fails to satisfy the other elements of the

cause of action.

Grace’s other claim of error on the tortious interference

claim is equally unconvincing. It complains that the

Magistrate Judge erroneously limited discovery, prejudicing

its ability to present this claim. Were we to reach the

merits, we would not agree. Grace was provided access to

Geac’s documents of seventy of its licensees to whom Grace

provided maintenance services. If Grace needed to contact

other licensees to determine what effect letters sent by

Alberg had on their decision making process, they could

have turned to their own customer list. We see no error or

prejudice warranting reversal. Moreover, we conclude that

Grace waived the right to complain of the Magistrate

Judge’s alleged limited discovery order by failing to appeal

it to the District Court. United Steelworkers of Am., AFL-CIO

v. New Jersey Zinc Co., 828 F.2d 1001, 1006 (3d Cir. 1987)

("Congress intended that review of a magistrate’s decision

on a nondispositive pretrial matter must, initially, be had in

the district court.") (quoting Siers v. Morrash, 700 F.2d 113,

114-15 (3d Cir. 1983); id. at 1008 ("[T]his court has

consistently held that it will not, absent extraordinary

circumstances, address on appeal issues not originally

presented to the district court.").

Third, Ilutzi argues that the District Court’s refusal to

allow the jury to consider evidence of copyright misuse as

a defense to any possible infringing activity was erroneous.

Ilutzi contends that Geac "sought to use its copyright to

take and retain control over an entirely different market

than that covered by copyright (in seeking) to control

services and maintenance with respect to its software."

Because the District Court found that this defense suffered

from the same infirmity as the contract and tortious

interference counterclaim, it struck the defense. This Court

has not yet addressed the legal viability of the copyright

misuse as a defense. We reserve consideration of this issue

for another case. Even if we were to adopt copyright misuse

as a defense as laid out in Lasercomb America, Inc. v.

Reynolds, 911 F.2d 970, 972-77 (4th Cir. 1990), we agree

with the District Court that the record is simply devoid of

any evidence of misuse by Geac. As we have discussed at

length in our discussion of the motion denying judgment as

a matter of law, Geac’s Licensing Agreements with its

clients specifically allow for third party maintenance

provided the third party signs non-disclosure agreements

acceptable to Geac and complies with other conditions

contained therein.

Finally, both Grace and Ilutzi vehemently contend that

the District Court abused its discretion in denying them, as

the prevailing party in the copyright infringement action,

attorney’s fees pursuant to 17 U.S.C. S 505. In light of our

disposition of this appeal and cross-appeal, we conclude

that the issue is moot and do not address it.

Lastly, Ilutzi submits that Geac has abandoned claims

against him because he is not named or listed in Geac’s

opening brief. We find this argument to border on the

frivolous. In no uncertain terms, Geac noted in its opening

brief that references to Grace include all the defendants,

appellees, and cross-appellants. Furthermore, Geac’s notice

of appeal was from the June 6, 2000, judgment of no action

entered in favor of both Grace and Ilutzi. Thus, both parties

are properly before this Court as appellees.

CONCLUSION

In summary, we hold that the District Court erred in

denying Geac’s motion for judgment as a matter of law. The

District Court’s judgment rejecting Geac’s claim for

misappropriation of trade secrets will be vacated. The

District Court’s order dismissing defendant’s counterclaims

will be affirmed. In light of our decision on the motion for

judgment as a matter of law, there is no need to reach

Geac’s motion for new trial and the alleged evidentiary and

jury instruction errors. Grace’s motion for attorney’s fees

will be denied as moot. The case will be remanded to the

District Court with direction to enter an order vacating the

judgments entered in favor of the defendants and for such

further proceedings as are consistent with this opinion.

Costs taxed against the defendants-appellees.

A True Copy:

Teste:

Clerk of the United States Court of Appeals

for the Third Circuit

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.