The Software IP Report

Software Licensee’s Creation of Derivative Work Results in an Injunction

By Charles Bieneman

Categories: Copyright, Software Licenses, The Software IP Report

In case you doubted it, seemingly boilerplate provisions in software license agreements that prohibit the creation of derivative works do mean something, as exemplified in EyePartner, Inc. v. Kor Media Group LLC, No. 4:13-10072 (S.D. Fla. July 15, 2013). The court in this case granted a preliminary injunction based on such an anti-modification provision, as well as on the anti-circumvention provisions of the Digital Millennium Copyright Act (DMCA), 17 U.S.C. § 1201, and Florida trade secret law.

The court’s analysis followed the standard four-prong preliminary injunction analysis, which under eBay, Inc. v. MercExchange, LLC, 547 U.S. 388 (2006) “applies equally to intellectual property cases,” and under which the court must find: (1) the plaintiff’s substantial likelihood of success on the merits, (2) irreparable harm to the plaintiff, (3) that the balance of hardships favors the movant, and (4) that an injunction would not hurt the public interest. Here, the court devoted most of its attention to the first prong, finding that the plaintiff was likely to prevail on its copyright and trade secret claims.

The plaintiff had licensed its software to the defendants. The applicable license agreement may have “given Defendants the right to copy the encrypted source code,” but the agreement further expressly prohibited conduct that would “modify, translate, reverse engineer, decompile, disassemble . . . or create derivative works.” Nonetheless, the defendants, “unhappy with the quality of the product,” decided that, instead of paying for an offered service to modify the software that might have addressed their needs, they would rather “make their own modifications to Plaintiff’s code.” To make these modifications, the defendants decrypted copyrighted, encrypted code that the plaintiff had provided, then copied “and modified it to create their own competing software, and such modifications clearly constitute the making of a derivative work.”

The defendants raised the fair use doctrine as a defense. The court first noted that the fair use defense “could only absolve liability as to willful copyright infringement but not [counts] regarding violations of the Digital Millennium Copyright Act.” Further, the fair use defense was not applicable to the plaintiff’s claim of copyright infringement because the defendants had “contractually waived their rights to modify the code.”

Turning to the DMCA, the court noted that the anti-circumvention provisions require the plaintiff to “show that it employed a technological measure to protect” its software, “and that Defendants circumvented that technology.” However, there was no requirement for the plaintiff “to prove that Defendants were contractually prohibited from decrypting; the law is sufficient.” Here, there was no dispute that one of the defendants had decrypted code provided in a encrypted format. The strength of the encryption was of no moment; what mattered was “that Defendants circumvented Plaintiff’s protective measure without consent.” In fact, the court was offended by the defendants’ suggestion that decrypting the source code was within the scope of the license.

The law also supported an injunction based on plaintiff’s allegations of trade secret misappropriation. Florida law required a showing “that Defendants misappropriated information of economic value that is not readily ascertainable by proper means and is the subject of Plaintiff’s reasonable efforts to keep secret.” Here, plaintiff’s efforts were reasonable, including using an industry-standard encryption technology, and the evidence showed defendants’ misappropriation and modification of the source code, which one of the defendants then marketed.

After finding that the plaintiff was likely to prevail on the merits, the court was able to quickly dispense with the remaining three prongs of the preliminary injunction analysis. For the circumvention and trade secret claims, irreparable harm was presumed. Irreparable harm was also demonstrated based on plaintiff’s lost licensing revenue and potential loss of customers.  The plaintiff’s likelihood of success on the merits showed that it could meet the third and fourth prongs. The balance of hardships favored the plaintiff, because the defendant should not be allowed to build a business on infringement.  And the public interest favored enforcing copyright interests.