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Ninth Circuit: Absent evidence of intent to the contrary, custom software purchaser retains license
September 25, 2008
In a recent decision, the Ninth Circuit affirmed a district court's decision that a software developer's delivery of customized software includes a grant of an unlimited, non-exclusive, implied license to use, modify, and retain the source code of the programs in the absence of written agreements to the contrary. The Ninth Circuit also affirmed the district court’s determination that the license granted by the transfer defeated the developer’s trade secret claim based on the source code of the software as the license to modify the source code implicitly allowed access to the trade secrets in the source code.

More on Asset Mktg. Sys., Inc. v. Gagnon after the jump.

The case involved a dispute over rights in software developed by Gagnon (doing business as "Mister Computer") for Asset Marketing Systems (AMS). Gagnon worked for multiple years as an at-will, independent contractor developing custom software for AMS. AMS is a field marketing organization offering sales and marketing support to insurance marketing entities. Over the course of their business relationship, the parties only managed to conclusively execute one document, a Technical Services Agreement with a term of one year, which did not discuss any license associated with the software developed under the contract. Eventually, the parties decided to part ways, and a dispute over software ownership ensued. Gagnon filed suit claiming copyright infringement. Additionally, sometime at the end of the relationship, AMS hired a significant number of Gagnon’s employees despite a non-compete agreement between Gagnon and the employees. As a result, Gagnon also filed claims for misappropriation of trade secrets in the source code and tortious interference with contract.

The district court granted summary judgment in favor of AMS finding that Gagnon had granted AMS an implied, nonexclusive license to use, modify and retain the source code of the programs. The court held that there were no trade secrets between the parties, and that the non-competition agreements were invalid under California law. Gagnon appealed.

The Ninth Circuit first considered the copyright infringement claim. AMS had asserted three defenses, implied license, a transfer of copyright ownership under a non-disclosure agreement (with contested details concerning the execution of the agreement), and under 17 U.S.C. § 117. The Ninth Circuit only considered the implied license argument, as it was dispositive.

Concerning the implied license, the Ninth Circuit based its decision largely on the Effects Associates, Inc. v. Cohen decision. In Effects, the court considered a case where a firm had created visual effects for a movie studio with no written agreement concerning ownership of the special effects. In that case, the court had concluded that “an implied license is granted 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 the work.” In this case, the third element was modified to consider whether Gagnon intended that AMS use, retain, and modify the programs.

Regarding the first two elements the court found the evidence was clearly in AMS’s favor. The court determined that AMS had requested the creation of the work because "Gagnon did not create the programs on his own initiative and market them to AMS" and that Gagnon "made changes to the programs in response to . . . AMS employees' requests." The court also determined that Gagnon delivered the program when "he installed them onto the AMS computers and stored the source code on-site at AMS."

The court then turned to the final factor, Gagnon's intent as manifested by his conduct. The court noted that the relevant intent was the licensor’s objective intent at the time of the creation and delivery of the software. The court applied the three part test from John G. Danielson v. Winchester-Conant Props. to determine the parties' intent: 1) whether the relationship was short term or an ongoing relationship, 2) whether the creator used written contracts providing that the 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/delivery of the material indicated that use of the material without the creator’s involvement or consent was permissible.

The court found the ongoing nature of the relationship to be non-determinative, as the relationship included both technical support for all problems and custom software creation. The contracts, while unexecuted, supported a license for the plaintiff, as the court concluded that it "defies logic that AMS would have paid Gagnon for his programming services if AMS could not have used the programs without further payment pursuant to a separate licensing arrangement that was never mentioned in [the agreement]." This was particularly the case given "custom software is far less valuable without the ability to modify it and because the [agreement] was set to expire in one year." The court also noted that "Gagnon delivered the software without any caveats or limitations on AMS's use of the programs." Based on this pattern of conduct and the other analysis, the court concluded that Gagnon granted AMS an unlimited, nonexclusive license to retain, use, and modify the software. Because AMS paid for the programs, the license was irrevocable.

The court then turned to the misappropriation of trade secrets claim. The court noted AMS was legally entitled to use and modify the source code, hence, "the license included access to any trade secret embodied therein." Regarding the tortious interference with contracts claim, the court noted that "[u]nder California law, non-competition agreements are unenforceable unless necessary to protect an employer's trade secret. Thus, "[b]ecause the non-competition agreements were no longer necessary to protect Gagnon’s trade secrets against AMS, they were no longer enforceable in this case."

This case underscores the need for parties to enter into written agreements that specifically spell out who will retain what rights upon termination of the relationship. Had the parties in this case executed a carefully-worded agreement at the outset, the entire litigation may have been avoidable.

To read the full opinion in Asset Mktg. Sys., Inc. v. Gagnon, click here.

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