KnowledgeAZ, Inc. v. Jim Walters Resources, Inc., et al.

Plaintiff is a software company that filed suit against two of its former employees, their new businesses, a former customer and two of its employees, alleging, among other things, copyright infringement of an original software program and a subsequent version of the program. Defendants argued, among many other things, that plaintiff could not maintain a suit for infringement of a derivative work since plaintiff did not have a registered copyright for the derivative work.

Noting that the U.S. Supreme Court has not directly ruled on this issue, the district court held that a plaintiff must register a derivative work separately as a derivative product to be able to bring suit for copyright infringement of that specific work, siding with the Second, Sixth and Eleventh Circuits. However, the court also said that the copyright for an original work can be infringed by the copying of an unregistered derivative work if the evidence shows that a majority of the source code from the registered version is incorporated into the unregistered derivative and operation of the unregistered derivative is dependent upon that source code from the registered version of the software. Because of contradictory evidence about whether the original and derivative versions of the software were nearly identical, the court denied plaintiff’s motion for summary judgment.

Regarding defendants’ claim that plaintiff’s copyright infringement claim was barred by the statute of limitations, the court rejected plaintiff’s argument that defendants’ infringement was ongoing and that the statute of limitations does not begin to run until a continuing wrong is completed. The court noted that defendants’ continued use of the software after plaintiff revoked the license would have constituted a wrong that could have been the subject of a lawsuit immediately. In addition, the license agreement stated that no lawsuit may be brought unless it is brought within two years "after the cause of action occurs." The court noted that the agreement uses the word “occurs” instead of “accrues,” so the intent of the parties was that the limitations period begins when the damaging act occurs, regardless of when plaintiff learned of the act or its consequences.

The court also rejected plaintiff’s argument that each time defendant causes the software to operate, that execution amounts to another infringing act. “[Plaintiff] cites to no precedent in making its assertion that each execution of the software is a distinct violation and the court finds no support for that assertion. The bottom line here is that [plaintiff] knew [defendant] had to constantly use the software to do its business. If that use violated [plaintiff’s] copyright protections or the contract between the two companies, [plaintiff] needed to bring suit within the two year limitations period it placed in the Agreement.”