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

This appeal presents serious problems of alleged

copyright infringement in an evolving and highly

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
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.

I. 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.

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."

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
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.

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
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

copyright misuse defense. On appeal, Grace contends that

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.

* * *

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

copyright law in response to far reaching new developments

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:

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

copyright owner's five exclusive rights set forth at 17 U.S.C.

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

copyright . . . has the exclusive rights to do and to

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

Copyright Office issued to Geac certificates of registration
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.

* * *

Click the case caption above for the full text of the Court's opinion.

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.

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