The Software IP Report

Use of Software After Expiration of License Is Copyright Infringement

By Charles Bieneman

Categories: Copyright, Software Licenses, The Software IP Report

A software owner was granted summary judgment of copyright infringement where its licensee had breached the applicable software license agreement, and continued to use the software after the agreement expired. Clinical Insight v. Louisville Cardiology Med. Group, No. 11-CV-6019T (W.D.N.Y. July 12, 2013). The licensee could not be saved by its allegation that it had stopped paying license fees because the software did not function properly.

The plaintiff provided medical records software for cardiologists. In the midst of the plaintiff’s alleged inability to provide a working billing module, the licensee had, pursuant to the license agreement’s notice provision, stated that it would terminate the license agreement. However, the license agreement specified that return of the software and its documentation was a prerequisite to the termination becoming effective. The licensee continued using the software. Moreover, in an attempt to avoid breaching the license agreement by permitting third party use, after the licensee had been sold, the defendant had retained certain of the licensee’s employees solely for the purpose of using the software.

The court first considered whether the plaintiff had breached the license agreement, and found that it had not. The license agreement was a valid contract, and the disputed billing module had in fact operated “substantially in accordance with the Documentation,” as required by the license agreement. Further, even if the plaintiff had breached the contract, the defendant could not “rely on the alleged failure of performance or breach as a defense to its decision to not continue to pay for the . . . software.”

Indeed, the plaintiff established that the defendant had breached the license agreement by continuing to use it, but failing to pay for it. Further, the defendant’s defenses – that the plaintiff had abandoned or repudiated the agreement – were to no avail. Abandonment could not be presumed, and there was no unequivocal manifestation of intent to abandon the contract. Further, an offer to reduce license fees was not a repudiation.

The defendant had breached the license agreement in several ways. First, the software license had a very broad anti-assignment provision, stating that the licensee “may not assign this Agreement without the prior written consent of [the licenseor]. For all purposes under this Agreement, any merger, consolidation, spin-off, acquisition of or change-in-control involving Licensee will be deemed an assignment. Any attempted assignment by Licensee will be invalid.” An assignment of the license agreement had nonetheless been attempted. Further, the license agreement provided that the software could be used only for the licensee’s “own internal use.”

With that backdrop, the court concluded that the plaintiff had established a valid claim for software copyright infringement. The plaintiff’s ownership of a valid copyright registration was undisputed. It was also undisputed that the licensee had continued to use the software “without a license or other legal authorization to do so since 2008, when it breached the Licensing Agreement by failing to pay the annual Maintenance and Telephone Support fee.”

This case was not like “Graham v. James, [144 F.3d 229 (2nd Cir. 1998)], where the Second Circuit Court of Appeals held that non-payment of royalties pursuant to an oral licensing agreement did not terminate the license agreement, and merely allowed the licensor to assert a breach of contract claim against the licensee.” Rather, this case was like several others in the Second Circuit where “use of copyrighted material after a license to use the material has expired gives rise to claim for copyright infringement.”

The court also rejected the defendant’s argument the plaintiff had created an estoppel by “inducing” it to infringe the plaintiff’s copyright. There was no merit to the defendant’s argument that the plaintiff had either abandoned its copyright or failed to diligently protect it. At a minimum, there was no evidence of the plaintiff’s acquiescence to the defendant’s infringing content, as would be necessary to prevail on an estoppel defense to copyright infringement.

Accordingly, the court granted the plaintiff’s motion for summary judgment of copyright infringement. The court further ordered the parties to show cause why injunctive relief should not be granted, addressing only “the equitable concern of patient safety, and not the legal issue of whether or not Clinical Insight is entitled to an injunction as a matter of law;” the court found that the legal requirements for an injunction were satisfied.