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Second Circuit: Copyright license of indeterminate term improperly read to be perpetual

November 07, 2008
Post by Blog Staff

In this appeal from the United States District Court for the Northern District of New York, the Second Circuit reversed the dismissal of a copyright claim based on ambiguity in a contract, but affirmed dismissal of the antitrust claims because the plaintiff's proposed market definition was not plausible.The district court dismissed the copyright claims based on a contract granting the defendants the right to copy the plaintiff's materials with no time limit. The district court held this was unambiguous, and granted a perpetual license to the defendants. The Second Circuit held the contract ambiguous, in part because under New York law "contracts which are vague as to their duration generally will not be construed to provide for perpetual performance." As a result, the court remanded the case for the district court to determine the duration of the license granted by determining the parties' intent.The Second Circuit agreed with the district court that the plaintiff defined the relevant market in an implausible manner, and affirmed the dismissal of the antitrust claims. The plaintiff's proposed market definition did not encompass all interchangeable substitute products, even under the facts in the light most favorable to the plaintiff, and therefore dismissal was proper.More detail of Chapman v. New York State Div. for Youth after the jump.The Plaintiffs, Bruce Chapman and Handle With Care Behavior Management Systems (collectively "HWC") sued sixteen defendants for copyright infringement and anti-trust violations. HWC markets a training program that teaches individuals a safe technique for physically restraining others. The copyright claim derived from a 1997 contract which provided that HWC would provide training to the defendants, various New York state entities, in the techniques encompassed in its Handle With Care program, and allowed the right to reproduce all training materials. The contract provided that the agreement had a four month term ending August 31, 1997. In 1998, another defendant, Cornell University, developed and marketed its own restraint method and training services, called TCI. The applicable New York regulatory agency then began to withhold approval of each facility's restraint method unless the TCI method was used. After learning of this policy change, HWC filed suit for copyright infringement based on use of its materials after the 1997 contract's termination date and antitrust violations based on the requirement for state agencies to use the TCI method. The district court dismissed both claims, holding the contract granted a perpetual license to copy HWC's materials, and that HWC did not offer a plausible definition of the relevant market for antitrust analysis. HWC appealed.The Second Circuit affirmed the dismissal of the antitrust claim, but reversed the dismissal of the copyright claim. Regarding the copyright claim, there was no dispute HWC's materials were copied; the only question is whether the defendants had a right to do so. Under New York law, whether ambiguity exists in a contract is a question of law, which is determined by looking within the four corners of the document, without reference to extrinsic evidence. Ambiguity exists where a term could suggest more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement and who is cognisant of the customs, practices, usages and terminology as generally understood in the particular trade or business.The question on appeal was whether the contract was ambiguous as to the duration of the license granted to copy HWC's materials. HWC argued the license ended when its performance of the contract ended, August 31, 1997; the defendants argued (and the district court agreed) the license was perpetual. The Second Circuit rejected HWC's position, noting there was nothing in the contract that expressly indicated that the termination clause also governed the duration of the license to copy, and the contract expressly contemplated continued copying because HWC was training trainers who would have to copy the materials in order to train others in the techniques. The court also held the license was not perpetual, because under New York law, in the absence of the clear provision courts are reluctant to declare a perpetual license as a matter of law. The 1997 contract did not explicitly grant a perpetual license. Thus, the court concluded that the 1997 contract was ambiguous as to the duration of the copying license, and remanded to the trial court to consider and weigh extrinsic evidence to determine the parties' intent.Turning to the antitrust claim, the Second Circuit agreed HWC attempted to define the relevant market in an implausible manner, and the dismissal was proper. HWC claimed the defendants conspired to create a monopoly in the market for training services to private child care providers located in New York by withholding approval of supervised facilities that did not use the competitive TCI method. For a monopoly claim to survive dismissal, an alleged product market must bear a rational relation to the methodology courts prescribe to define a market for anti-trust purposes, which includes analysis of the interchangeability of use or the cross-elasticity of demand, and it must be plausible. While defining the relevant market is a fact-intensive inquiry, where a plaintiff fails to define its relevant market with reference to the requirements of reasonable interchangeability and cross-elasticity of demand, or alleges a proposed relevant market that clearly does not encompass all interchangeable substitute products, the relevant market is legally insufficient and a motion to dismiss may be granted.The Second Circuit concluded HWC's proposed market definition, "training services to private child care providers located within the State of New York," was too narrow. There is no market difference between child care providers and the larger market for restraint training services to other businesses, agencies, and organizations. HWC even admitted it marketed its product to various organizations, institutions and agencies that are not child care providers, and therefore the appropriate market included social service agencies, law enforcement agencies, correctional facilities, educational facilities, and airlines. Therefore, the plaintiff's proposed market was legally insufficient and the anti-trust claims were properly dismissed.To read the full decision in Chapman v. New York State Div. for Youth, click here.


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