Richard E. Graham v. Larry D. James

144 F.3d 229


Jacobs, Circuit Judge.


Plaintiff Richard E. Graham (dba Night Owl Computer Service and then through a corporate entity, Night Owl's Publisher, Inc.) marketed CD-ROM disks containing compilations of computer programs; defendant Larry D. James created file-retrieval programs that allowed users to access particular programs on Graham's products or (presumably) other CD-ROM disks. In this case, the parties assert conflicting rights to James's work product.


Graham now appeals, and James cross-appeals, from a judgment of the United States District Court for the Western District of New York (Elfvin, J.), following a bench trial, awarding James $137,258 in damages on his copyright infringement and breach of contract counterclaims.


On appeal, Graham claims principally that the district court erred: (i) in finding that the program was not a work for hire developed while James was in Graham's employ and therefore that James owned the copyright for the CD-ROM file-retrieval program; and (ii) in finding copyright infringement even though James granted Graham a license to use the program . . .


We affirm the district court's finding that the file-retrieval program was not a work for hire and its award of breach of contract damages (as well as its denial of pre-judgment interest thereon). We . . . vacate the judgment and remand to permit the district court to determine whether Graham's license to use the file-retrieval program was rescinded, and thus whether Graham infringed James's copyright . . .




The facts, as found by the district court after a bench trial, are as follows: Graham, until recently doing business as Night Owl Computer Service, markets CD-ROM disks containing compilations of computer programs known as “Shareware,” “Freeware,” and “Public Domain software.”  “Shareware” are programs that are created and released to the public to sample, with the understanding that anyone using the software will register with the author and remit a fee. “Freeware” is software available for free use. “Public Domain software” is software unprotected by copyright. Each of Graham's CD-ROM disk releases contains 5,000 to 10,000 such programs.


Graham's first CD-ROM disk release, called PDSI-001, was unwieldy because it lacked a file-retrieval program. So before releasing his second CD-ROM product, Graham asked Jeffrey Anderson, a student, to compose a file-retrieval program. Anderson developed a program called NIGHT.EXE in the QuickBASIC programming language; that program was then incorporated into Graham's second CD-ROM disk release, PDSI-002. Anderson's program provided a table of contents for the programs on the disk, but did not allow for actual file retrieval, or for decompression of the files. Because of the number of programs on each disk, the programs had to be compressed prior to placement on the disk and thus decompression was necessary prior to using a program. Although Graham claimed to have participated in the development of NIGHT.EXE, he is not a computer programmer and the trial court found that his role in the program's development was “negligible.”


Dissatisfied with Anderson's program, Graham purchased a license for FOLIO, a file-retrieval program with retrieval and decompression capabilities, that Graham used for his next two releases.


In March 1991, he contacted James, a self-taught computer programmer, part-time taxi driver, and computer equipment salesman, and explained to him in general terms what was needed. James agreed to create a file-retrieval program in exchange for a CD-ROM disk drive and credit on the final product. He then created a different QuickBASIC version of NIGHT.EXE, which was included on PDSI-004; unlike Anderson's program, James's had retrieval and decompression capabilities. Neither party asserts any claim relating to this version of NIGHT.EXE.


Using “Borland's C//” language (said to be a superior programming language), James then developed a new version of NIGHT.EXE, which we will call the “C version.”  The C version was included in PDSI-004-1, released on August 2, 1991. This was an entirely new program, and Graham's contribution was limited to communicating the general requirements of the program and collaborating on the organization of the files that the program retrieved.


In composing the C version, James built into it a notice attributing authorship and copyright to himself. In September 1991, Graham and James argued over the copyright notice, with Graham claiming the copyright under the work-for-hire doctrine. At trial, Graham introduced a tape recording of a late-night telephone conversation between himself and James, in which they argued over copyright ownership and their compensation arrangement; the conversation ended without any resolution.


At trial, the parties presented conflicting testimony regarding their compensation and licensing arrangement. Graham claimed that he made several payments to James for developing the C version, including $200 payments in July and August 1991, and three $250 payments in September 1991; Graham claimed that the last three payments were pursuant to a newly-instituted “monthly” salary. James claimed that Graham orally agreed to a licensing arrangement under which Graham would pay James $1,000 for each CD-ROM release containing the program and $1 for each disk sold, that the five payments evidenced Graham's partial performance of the licensing agreement, and that Graham promised further payments pursuant to the agreement after he built up his cash reserve. The district court found that “the parties had orally agreed that James would provide Graham with a file retrieval program written in Borland's C//” and “that Graham would pay James $1,000 for each version provided thereof and one dollar for each disk sold.”

The district court found that James licensed Graham to use of the C version of the file retrieval program in exchange for the payment of $1,000 for each CD-ROM release and one dollar for each disk sold. 


After the late-night telephone conversation, Graham removed James's copyright notice, repaired a “bug” in the program, and proceeded to release a new version of PDSI-004-1. In October 1991, Graham released PDSI-005. PDSI-006, PDSI-006-1 and PDSI006-2 followed in early- to mid-1992, and NOPV-6 in the summer of 1992. All of these releases contained the C version of NIGHT.EXE (or a slight modification of it).


Variants of the C version were used in NOPV 7,8 and 9; but Graham alleged that these variants were created by other programmers, and the district court concluded that these later programs were not substantially similar to James's C version.


In September or October 1991, James sold the C version of NIGHT.EXE to another CD-ROM publisher. Graham sued and moved for a preliminary injunction, claiming ownership of the copyright in the C version under the work-for-hire doctrine and asserting that James had infringed Graham's copyright by selling the program. James counterclaimed, alleging that he owned the copyright and that Graham had infringed his copyright by installing the C version on his CD-ROM releases and removing James's copyright notice. James also asserted counterclaims for breach of the licensing agreement, unfair competition, defamation, and tortious interference with contractual relations. The district court granted a preliminary injunction enjoining James from “publishing, copying, selling, marketing or otherwise disposing” of programs substantially similar to the C version.


After a bench trial, however, the district court found for James on his breach of contract and copyright infringement counterclaims. It concluded that James owned the C version copyright because he was an independent contractor when he developed the program, and that Graham's CD-ROM releases from PDSI-004-1 through NOPV-6 contained file-retrieval programs substantially similar to the C version, thereby infringing James's copyright. The court also rejected Graham's copyright infringement claim, permanently enjoined Graham from using the program . . . On James's contract counterclaim, the court found that Graham had breached the agreement by failing to pay James $1,000 for each release containing the C version and one dollar for each disk sold.


Damages were awarded as follows: (i) actual damages for breach of contract of $17,716, representing six CD-ROM releases at $1000 per release, and 12,866 disks at $1 per disk, for a total of $18,866, minus the $1,150 already paid to James; and (ii) actual damages and profits for copyright infringement of $119,542, representing: (a) $25,000 for Graham's failure to credit James with authorship; and (b) $112,258 of profits and actual damages on the six relevant CD-ROM releases, reduced by $17,716 (the amount awarded for breach of contract to avoid double counting).


. . .





Graham challenges the finding on which rests the conclusion that the C version was not a work for hire-that James developed the C version as an independent contractor rather than as an employee. We agree with the district court's analysis and conclusion.

Copyright comes into existence when an original work of authorship is fixed in a tangible medium.  The copyright is held by the author.  When a work is “made for hire,” the employer, and not the employee, is regarded as the "author" for purposes of copyright law; hence, the employer holds the copyright. 


. . . We affirm the district court's determination that the C version was not a work for hire, and that consequently James owns the copyright.




Graham claims that even if James owns the copyright in the C version, Graham was licensed to use the copyright under a licensing agreement, and that the district court therefore erred in finding that Graham was an infringer. According to Graham, James was entitled at most to recover for Graham's breach of the licensing agreement.


Under federal law, “nonexclusive licenses may ... be granted orally, or may even be implied from conduct.”  3 Melville B. Nimmer & David Nimmer, Nimmer on Copyright  § 10.03[A][7], at 10-43; see also I.A.E., Inc. v. Shaver, 74 F.3d 768, 775-76 (7th Cir.1996). The district court found that Graham and James had entered into a licensing agreement under which Graham promised to pay James $1,000 for each CD-ROM release containing the C version and one dollar for each disk sold. Graham does not contest on appeal that he breached this agreement by failing to make the required payments, and therefore we affirm the district court's award of breach of contract damages.


. . .

However, the award of copyright damages in this case is problematic. A copyright owner who grants a nonexclusive license to use his copyrighted material waives his right to sue the licensee for copyright infringement. . . . Moreover, Graham's failure to credit James with the copyright on the C version did not itself amount to copyright infringement. According to Nimmer, “The generally prevailing view in this country under copyright law has been that an author who sells or licenses her work does not have an inherent right to be credited as author of the work. In line with that general rule, it has been held not to infringe an author's copyright for one who is licensed to reproduce the work to omit the author's name.”  3 Nimmer on Copyright, supra, § 8D.03[A][1], at 8D-32 (citations omitted). Thus, as James concedes, the district court could not have found that Graham infringed James's copyright unless the licensing agreement already had been rescinded; the problem is that the district court made no such finding. James endeavors to overcome that problem in four ways, but without success.


First, James argues that Graham failed to plead the license as an affirmative defense to infringement, and thereby waived it.   [The court rejects this claim.]


Second, James argues that Graham's license permitted use of the C version only on the PDSI-004-1 CD-ROM, and not on any subsequent release. [The court rejects this claim.]


Third, James argues that the license was voided when Graham breached its conditions by nonpayment of royalties and removal of James's copyright notice. This argument turns-and fails-on the distinction in contract between a condition and a covenant.

Suppose Jones promises Smith that Jones will provide him with a mortgage on an apartment building on the condition that seventy percent of the apartments are rented.  If seventy percent of the apartments are not rented, Jones is


(a) obligated to provide the mortgage.


(b) not obligated to provide the mortgage.


Generally, “[i]f the [licensee's] improper conduct constitutes a breach of a covenant undertaken by the [licensee] ... and if such covenant constitutes an enforceable contractual obligation, then the [licensor] will have a cause of action for breach of contract,” not copyright infringement. 3 Nimmer on Copyright, supra, § 10.15[A], at 10-120. However, “[i]f the nature of a licensee's violation consists of a failure to satisfy a condition to the license ..., it follows that the rights dependant upon satisfaction of such condition have not been effectively licensed, and therefore, any use by the licensee is without authority from the licensor and may therefore, constitute an infringement of copyright.”  Id. at 10-121 (citations omitted) . . .

Thus, if promise to use the copyrighted file retrieval system is conditional on the payment of royalties and notice about James's authorship, then the failure to pay royalties and to attribute authorship would mean that the promise was not binding.


(a) Yes


(b) No


We think that the payment of royalties and the inclusion of a notice crediting James's authorship are to be considered covenants, not conditions. The construction of the licensing agreement is governed by New York law. . . Generally speaking, New York respects a presumption that terms of a contract are covenants rather than conditions . . . Graham and James orally agreed to the licensing agreement and did not clearly delineate its conditions and covenants. Further, it is important that James turned over the C version for use before any royalties were paid, and that the first version of PDSI-004-1 was published with the proper notice of authorship, because contract obligations that are to be performed after partial performance by the other party are not treated as conditions. 22 N.Y. Jur.2d Contracts § 265 (1996); see also Jacob Maxwell, Inc., 110 F.3d at 754 (holding that payment of royalties and crediting of author were covenants because “[the composer] expressly granted [the licensee] permission to play the song before payment was tendered or recognition received”); I.A.E., Inc., 74 F.3d at 778 (holding that full payment was not a condition precedent when the licensee received the copyrighted drawings after tendering only half the required payment).


Guided by that analysis, together with New York's presumption favoring covenants over conditions and the district court's clear finding that a licensing agreement came into existence, we conclude that the notice and royalty obligations would likely be considered covenants, and cannot be relied upon by James as conditions.


Finally, James argues that even if the nonpayment of royalties and the removal of James's authorship credit amount to no more than breaches of covenants, these breaches terminated the license. A material breach of a covenant will allow the licensor to rescind the license and hold the licensee liable for infringement for uses of the work thereafter . . . Under New York law, rescission is permitted if the breach is “material and willful, or, if not willful, so substantial and fundamental as to strongly tend to defeat the object of the parties in making the contract.”  Septembertide Publ'g, B.V. v. Stein and Day, Inc., 884 F.2d 675, 678 (2d Cir.1989) (internal quotation marks and citation omitted).


Even assuming Graham materially breached the licensing agreement and that James was entitled to rescission, such rescission did not occur automatically without some affirmative steps on James's part. 22A N.Y. Jur.2d Contracts  § 497 (1996) (“The failure of a party to perform his part of a contract does not per se rescind it. The other party must manifest his intention to rescind within a reasonable time.”) . . . Similarly, although James sometimes characterizes the licensing agreement as abandoned, abandonment of a contract can be accomplished only through mutual assent of the parties, as demonstrated by positive and unequivocal conduct inconsistent with an intent to be bound . . . New York law does not presume the rescission or abandonment of a contract and the party asserting rescission or abandonment has the burden of proving it.  


We vacate the copyright infringement award because: (i) the record does not show that James was permitted to and did rescind the license or that Graham and James agreed to abandon the licensing agreement; (ii) the district court made no finding on this issue; and (iii) it does not appear that the district court recognized this defect in its decision. We remand for determinations as to whether Graham materially breached the licensing agreement and whether the agreement was actually rescinded or abandoned prior to the allegedly infringing acts, and for any further proceedings needed to make those determinations.


. . .




We affirm the district court's finding that the file-retrieval program was not a work for hire and its award of breach of contract damages (as well as its denial of pre-judgment interest thereon). We also affirm the district court's dismissal of James's defamation counterclaim. However, we vacate the judgment and remand to permit the district court to determine whether Graham's license to use the file-retrieval program was rescinded, and the related question of whether Graham infringed James's copyright. On remand, the district court should reconsider whether judgment should be entered against Graham's successor, Night Owl's Publisher, Inc.