By James Kachmar
On September 9, 2008, the Ninth Circuit issued its opinion in the case Asset Marketing Systems, Inc. v. Kevin Gagnon and clarified the law concerning implied licenses to use and modify computer software programs. In doing so, the Ninth Circuit adopted an approach previously utilized by the First and Fourth Circuits’ Court of Appeals.
AMS is a field marketing company that provides marketing and sales support to insurance – related companies. AMS hired Gagnon as an independent contractor to assist AMS with its IT needs. Gagnon was asked by AMS, his largest client, to develop custom software and was paid over $2 million during the course of their contract. Gagnon developed six computer programs for AMS.
In May 2007, AMS and Gagnon signed a one-year Technical Services Agreement (“TSA”). The TSA did not mention anything about a license and although it was not renewed, the relationship between AMS and Gagnon continued for several years. In June 2003, Gagnon proposed that AMS execute an Outside Vendor Agreement (“OVA”) that included a proprietary rights clause in which Gagnon would give AMS a non-exclusive, unlimited license in the software he developed for AMS. (AMS claimed that Gagnon had previously signed a vendor non-disclosure agreement that gave it ownership of all intellectual property developed for AMS by Gagnon. However, Gagnon disputed the validity of this document.) AMS declined to sign the OVA and proposed a revised OVA that stated that AMS would retain all ownership of the intellectual property. At about that time, AMS decided to terminate Gagnon’s services and offered to make him an AMS employee, which he declined. After the relationship was terminated, several of Gagnon’s employees left his company and joined AMS, which continued to use the six computer software programs developed by Gagnon.
Gagnon began to market his computer software to other companies and AMS claimed that doing so amounted to trade secret misappropriation since its trade secrets had been incorporated into the computer programs. After an exchange of cease and desist letters, AMS filed suit against Gagnon in state court claiming trade secret misappropriation and conversion. Gagnon removed the case to federal court and filed several counterclaims against AMS, including a claim for copyright infringement. The district court subsequently granted AMS’ summary judgment motion as to Gagnon’s counterclaims finding that Gagnon had granted AMS an implied non-exclusive license to use, modify and retain the source code of the computer programs developed for AMS by Gagnon.
In reviewing the district court’s grant of summary judgment as to the infringement claim, the Ninth Circuit began by recognizing that although “exclusive licenses must be in writing (17 U.S.C. §204), grants of non-exclusive licenses need not be in writing and may be granted orally or by implication.” The Ninth Circuit had previously recognized such implied licenses in the context of movie footage and architectural drawings. For instance, in Effects Associates, Inc. v. Cohen, 908 F.2d 555 (9th Cir. 1990), the Court held that a movie producer who had been hired to create certain special effects for a movie had granted an implied license for the use of such footage. The Ninth Circuit had adopted a three prong test for determining when an implied license is granted: (1) the licensee requests a creation of the work; (2) the licensor makes and delivers the particular work to the licensee who requested it; and (3) the licensor intends that the licensee copy and distribute his work. The Ninth Circuit held that this same analysis was applicable to implied licenses for computer programs. However, the Ninth Circuit did not limit the third prong to “copying and distribution,” but rather, whether Gagnon intended that AMS “use, retain and modify the programs.”
The Ninth Circuit quickly dealt with the first two prongs and found that Gagnon did not create the programs on his own initiative, but rather, in response to AMS’ request. The Court also found that Gagnon had “delivered” the programs to AMS when he installed them on AMS’ computers and stored the source code onsite at AMS. The Court expressly found that the storing of the source code at AMS constituted a delivery of that source code to AMS.
Finally, the Ninth Circuit considered Gagnon’s claim that he never intended that AMS would retain and modify the programs after their relationship ended. The Ninth Circuit rejected his claim and concluded that his conduct manifested an intent to grant a license. The Ninth Circuit ruled “the relevant intent is the licensor’s objective intent at the time of the creation and delivery of the software as manifested by the parties conduct.” It was in connection with this third prong that the Ninth Circuit adopted the approach by the First and Fourth Circuits and ruled that the following factors must be considered to determine intent: “(1) Whether the parties were engaged in a short term discrete transaction as opposed to an ongoing relations; (2) whether the creator utilized written contracts … providing that copyrighted materials could only be used with the creator’s future involvement or express permission; and (3) whether the creator’s conduct during the creation or delivery of the copyrighted material indicated that use of the material without the creator’s involvement or consent was permissible.”
Applying these factors, the Ninth Circuit concluded that Gagnon and AMS had an ongoing service relationship in which Gagnon serviced IT issues at AMS and created certain customer computer software at AMS’ request. The Court held that this relationship alone did not establish the intent as to whether a license was to be granted. However, the Court recognized that it could look to contracts, even if unexecuted, as evidence of the parties’ intent. The Ninth Circuit recognized that the 2000 TSA signed by both parties contained no language indicating Gagnon’s intent that AMS would be prohibited from using the computer software after their relationship terminated. Furthermore, the OVA proposed by Gagnon (but never executed) did not evidence any intent by Gagnon to limit AMS’ use of the programs after the termination of the relationship. Finally, Gagnon and AMS did not discuss any licensing agreement until the relationship was in its final stages.
The Court concluded that Gagnon delivered the software to AMS without any caveats or limitations and had installed the source code onsite at AMS to which AMS had access. The Ninth Circuit found this conduct did not demonstrate an intent for Gagnon to retain sole control. Rather, the Ninth Circuit found that Gagnon had granted an unlimited, non-exclusive license to AMS to retain, use and modify the computer software and that because AMS had paid Gagnon, this license was irrevocable. The Ninth Circuit therefore affirmed the district court’s granting of summary judgment against Gagnon on the ground that he had given an implied license to AMS to use and modify the computer software he had created after the termination of their relationship.