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IP/Entertainment Case Law Updates

Numbers Licensing, LLC v. bVisual USA, Inc.

Despite rejecting the defendant’s contention that the source code at issue was a work-made-for-hire such that defendant owned the copyright, the district court nonetheless denied plaintiff’s motion for a preliminary judgment based on a finding that the defendant obtained an implied license to continue using and modifying the source code, finding non-exclusive licenses need not be in writing and may be granted orally or by implication.

In this copyright infringement case, the district court denied plaintiff’s motion for a preliminary injunction that sought to prevent defendant from using and modifying source code for which plaintiff owned a copyright.

Defendant bVisual USA, Inc. (“bVisual”) develops internet-based audio and video conferencing services. In July 2005, bVisual hired software engineer Rand Renfroe (“Renfroe”) to create the source code for an internet-based video conferencing program. Renfroe worked for Numbers Consulting, Inc., a corporation he formed with his wife, which billed bVisual and collected for Renfroe’s services. Neither Renfroe nor Numbers Consulting signed any agreement detailing the ownership of the intellectual property rights being created. As the project progressed, Renfroe began adding copyright notices in the source code, which read “Numbers Consulting for bVisual, copyright”, based on instructions from bVisual.

Soon after a February 2008 beta test of the program, bVisual ran out of capital and stopped paying invoices submitted by Numbers Consulting on Renfroe’s behalf. In November 2008, Renfroe ceased all work on the program and ended his business relationship with bVisual. Around the same time, Numbers Consulting began the process of obtaining a copyright in the source code Renfroe had created. In December 2008, it transferred its interests to plaintiff Numbers Licensing LLP, an entity Renfroe created for copyright ownership purposes. In February 2009, Renfroe learned that bVisual had hired other software engineers to modify plaintiff’s copyrighted code. Plaintiff filed a preliminary injunction seeking to prevent defendant from using the code.

As a preliminary matter, the court found that plaintiff had established a probable success on the merits for its copyright infringement claim, as plaintiff owned a valid copyright and defendant did not dispute that it was using and modifying plaintiff’s code. In defense, bVisual raised four arguments: (1) defendant owns the copyright under the “work-made-for hire” doctrine; (2) defendant had the right to use and modify the code under an implied license; (3) defendant owns the work as a purchaser of computer software; and (4) plaintiff’s failure to identify the specific work at issue precludes the court from issuing a preliminary injunction as a matter of law.

The court rejected bVisual’s contention that the code was a work-made-for-hire. Applying common law agency principles, the court found that Renfroe acted as an independent contractor due to, inter alia, Numbers Consulting being responsible for Renfroe’s payroll and tax obligations, the specific purpose of Renfroe’s services, and the fact that he wrote the code primarily from Numbers’ offices on his own schedule. Thus, the code was not owned by defendant, as employer. The court also rejected bVisual’s argument that the code was a collective work, given the lack of a signed written agreement, as § 101(2) of the Copyright Act requires.

Having determined that defendant could not establish ownership under the work-made-for-hire doctrine, the court turned to the ‘implied license’ defense. The court held that non-exclusive licenses need not be in writing, and may be granted orally or by implication. An implied non-exclusive license to use copyrighted material will be found when “1) a person (the licensee) requests the creation of a work, 2) the creator (the licensor) makes that particular work and delivers it to the licensee who requested it, and 3) the licensor intends that the licensee-requestor copy and distribute his work.” The court found that only the issue of the licensor’s intent was in dispute. Accordingly, it applied the Ninth Circuit’s three factor “intent” test as set forth in Asset Mktg. Sys., Inc. v. Gagnon: (1) whether the parties were engaged in a short-term transaction or as part of an ongoing relationship; (2) whether the creator utilized written agreements limiting the use of the copyrighted work without the creator’s involvement or permission; and (3) whether the creator’s conduct indicated that the material could be used without the creator’s involvement or permission.

Examining the first Gagnon intent factor, the court noted that the Ninth Circuit has not clearly expressed whether the existence of an ongoing relationship favors an implied license finding. Plaintiff argued that because it had an ongoing relationship with bVisual, it had a long-term expectation of involvement with the company. The court, however, rejected this contention in light of Renfroe’s status as an independent contractor. It also noted that Renfroe neglected to communicate his intent to deny bVisual a license throughout their entire three-and-a-half-year business relationship.

The second Gagnon factor was found to also support a finding of an implied license. The court emphasized that plaintiff failed to obtain any written agreement retaining its licensing rights and that plaintiff did not once discuss licensing arrangements with bVisual. Additionally, plaintiff was paid a substantial sum – in both money and stock – in exchange for the code, which the court found suggested an implied license in the absence of any objective factors indicating the denial of a license.

Finally, the third Gagnon factor – the creator’s conduct – was found to show that Renfroe did not intend to deny bVisual a license to use the source code. First, Renfroe inserted the copyright notice on behalf of bVisual 112 times without claiming his own interest. Second, when Renfroe discussed inserting an end-user license agreement into the code, he confirmed with bVisual that bVisual would own the copyright without any mention of his ownership claim in the code. Third, Renfroe was aware that bVisual’s beta test of the program resulted in licensing fees to bVisual, yet Renfroe never claimed to be owed any portion of these fees.

Having found defendant would likely succeed based on an implied license defense, the court declined to consider the final two defenses. Similarly, the court found that defendant’s strong implied license argument rendered the discussion of plaintiff’s irreparable harm unnecessary. Thus, based on the probable success on the merits and irreparable harm, the court denied the plaintiff’s motion for preliminary injunction.

In considering the alternative preliminary injunction test, i.e. the balance of hardships either party would face in light of a grant or denial of a preliminary injunction, the court found that plaintiff’s hardship claims as to lost sales and customer goodwill were unpersuasive as plaintiff is not in the sales business and has only indicated one client since resigning its services from bVisual. It also rejected any concerns plaintiff had about protecting the expression of the code due to the fact that plaintiff had previously submitted parts of the code as a court exhibit. Conversely, the court held that bVisual’s entire launch of the internet-based video conference program, and any revenue derived therefrom, could be delayed if an injunction was granted. Thus, the balance of hardships tipped in defendant bVisual’s favor, and as such, the court denied plaintiff’s motion on this basis as well.

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