In Numbers Licensing LLC v. bVisual USA Inc. [91 U.S.P.Q.2d 1946 (E.D. Wash. July 15, 2009)], the United States District Court for the Western District of Washington addressed the implied license defense in the software licensing context. The court denied plaintiff's motion for a preliminary injunction based on alleged copyright infringement of plaintiff's copyrighted source code, holding that defendant had obtained an implied license to continue using and modifying the source code and the balance of hardships favored defendant.

Defendant bVisual USA Inc. (bVisual) developed and sold Internet-based audio and video conferencing services. In April 2005, bVisual's owner constructed the conceptual framework for a video conferencing platform and began hiring outside software engineers to turn his vision into a reality. Rand Renfroe was hired to develop the source code for the system over a three-year period. Mr. Renfroe owned Numbers Consulting, Inc. (Numbers) and later incorporated Numbers Licensing LLC as a holding company for the copyright in the source code.

During the development, bVisual did not pay Mr. Renfroe directly. Instead, Numbers billed and collected for his services. Numbers was also responsible for Mr. Renfroe's tax obligations and employee benefits, as well as nearly all of Mr. Renfroe's equipment and computers. Mr. Renfroe developed the system's source code on his own schedule from his own office, provided daily progress reports to bVisual, and delivered updated versions of the source code approximately every two weeks. As the source-code development progressed, Mr. Renfroe began inserting copyright notices, which read: "Numbers Consulting for bVisual, copyright."

In February 2008, bVisual exhausted its startup capital and stopped paying the invoices submitted by Numbers on Mr. Renfroe's behalf. Around the same time, Numbers began the process of obtaining an expedited copyright registration for the system's video source code. Shortly thereafter, Numbers Licensing LLC was formed, and a Copyright Certificate of Registration for the source code was granted. In February 2009, Mr. Renfroe learned that bVisual had hired other software engineers to modify the source code. Mr. Renfroe filed a lawsuit alleging copyright infringement and requesting a preliminary injunction.

After making a preliminary evidentiary ruling, the U.S. District Court for the Western District of Washington analyzed two separate tests for granting a preliminary injunction. In that district, preliminary injunctive relief is available to a party who demonstrates either: (1) a combination of probable success on the merits and the likelihood of irreparable harm; or (2) that serious questions as to success on the merits are raised and the balance of hardships tips in its favor.

Under the first test, the court held that Numbers established probable success on the merits by demonstrating a prima facie case of copyright infringement, which requires a showing of: (1) ownership of the copyright, and (2) copying of expression protected by the copyright. Because it was undisputed that Numbers owned a valid federal copyright registration in the source code, and that bVisual had a copy of the source code for use and modification, Numbers had successfully demonstrated its prima facie case of copyright infringement. bVisual, however, raised four infringement defenses:

1. bVisual owned the copyright under the "work-made-for-hire" doctrine;
2. bVisual had rights to use and modify the work under an implied license;
3. bVisual owned the work as a purchaser of computer software; and
4. Numbers' failure to identify the specific work at issue precluded the court from issuing a preliminary injunction as a matter of law.

Under the work-made-for-hire defense, copyright ownership will vest with an author's employer or in a third-party in two scenarios: (1) when a work is prepared by an employee within the scope of his or her employment; or (2) when a work is specially ordered or commissioned for use as a contribution to a collective work and the parties expressly agree in a written statement signed by them that the work shall be considered a work-made-for-hire. Not all types of works qualify as works made for hire, if made by independent contractors. Only the types of works listed in the definition of works made for hire set forth in 17 U.S.C. § 101 can be works made for hire by independent contractors.

Under the first exception, the court held that Mr. Renfroe was an independent contractor rather than an employee of bVisual. The court based this holding on several facts, including Mr. Renfroe's ownership of and employment by Numbers, Numbers' responsibility to bill and collect for Mr. Renfroe's services, as well as its tax and employee benefits obligations, bVisual's lack of control over Mr. Renfroe's work schedule and style, and several instances where Mr. Renfroe explicitly denied being a bVisual employee.

Turning to the second work-made-for-hire exception, the court held that bVisual did not own the copyright in the source code as part of a collective work because the parties did not execute a signed, written agreement expressing that intent. According to the court, a signed writing is a prerequisite to establishing a collective work. The court noted that the copyright notices inserted in the source code did not serve as a signed writing expressing the intent to make the source code a work made for hire. In sum, the court held that neither work-made-for-hire exception applied. It is also questionable whether a computer program can legitimately fall into the category of a collective work, for purposes of shoe-horning a computer program made by an independent contractor into the work-made-for-hire category.

The court next analyzed whether bVisual had obtained an implied license to use and modify the source code. Although exclusive licenses must be in writing, grants of nonexclusive licenses need not be in writing, and may be granted orally or by implication. An implied license will be found when:

1. a person (the ostensible licensee) requests the creation of the work,
2. the creator (the ostensible 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 relevant intent is the licensor's objective intent at the time of the creation and delivery of the software, as manifested by the parties' conduct.

Because Numbers conceded the first two requirements for an implied license, the court discussed only the third requirement.

In determining the licensor's intent to convey a license, the court discussed three factors from Asset Mktg. Sys., Inc. v. Gagnon [542 F.3d 748 (9th Cir. 2008)]: (1) whether the parties were engaged in a short-term discrete transaction as opposed to an ongoing relationship; (2) whether the creator utilized written contracts providing that 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 or delivery of the copyrighted material indicated that use of the material without the creator's involvement or consent was permissible.

Upon weighing the Gagnon factors, the court concluded that bVisual obtained an implied license to continue using and modifying the source code. First, the three-and-a-half year ongoing relationship between Mr. Renfroe and bVisual weighed in favor of finding an implied license because Mr. Renfroe never made known his intent to retain his rights during that period, despite numerous opportunities to do so. Second, Numbers' failure to obtain a written agreement retaining licensing rights supported a finding of an implied license. According to the court, when a license has not been denied and substantial sums of money are paid for the copyrighted work, the absence of a licensing agreement supports the finding of an implied license. Third, Mr. Renfroe's conduct during the development of the source code demonstrated that he did not intend to deny bVisual use of the system's source code. Specifically, Mr. Renfroe inserted the copyright notice "Numbers Consulting for bVisual, copyright" 112 times in the source code and confirmed that bVisual would be the owner of the copyrights in the program when discussing the insertion of the End User License Agreement into the code. Further, he was aware of the licensing and subscription management process used by bVisual in its beta test to obtain license agreements and fees from end-users of the bVisual system, but did not make any copyright ownership claims with respect to the subscriber license fees collected by bVisual.

Given the strength of bVisual's implied license defense, the court did not consider the two remaining defenses or analyze irreparable harm. The court held that bVisual's implied license defense raised serious questions on the merits of Numbers' copyright claim, and therefore Numbers could not demonstrate probable success on the merits.

Accordingly, the court turned to the second test for the grant of a preliminary injunction. Having already found that serious questions were raised on the merits of Numbers' claim, the court next weighed the balance of hardships. In evaluating the balance of hardships, a court must consider the impact that granting or denying a motion for a preliminary injunction will have on the respective parties.

Numbers argued that the balance of hardships tipped in its favor because a failure to grant an injunction would cause irreparable harm in terms of lost sales and customer goodwill, and in terms of bVisual's ability to view and modify the "genius" of the source code. The court rejected these arguments. First, because Numbers was not in the sales business, the court rejected Numbers' claims of lost sales and customer goodwill. The court noted that bVisual was Numbers' sole client for three-and-a-half years. Second, Numbers lost credibility with the court by filing exhibits relating to "Mr. Renfroe's genius" in the public record, and subsequently arguing that disclosing the same "genius" would cause irreparable harm. The court further held that the balance of hardships actually tipped in bVisual's favor because any continued delays caused by a preliminary injunction would prevent bVisual from launching the system and getting the company off the ground. Because Numbers' claims failed under both tests for granting preliminary injunctive relief, the court denied Numbers' motion for a preliminary injunction.

This case highlights the danger of licenses by implication to the rights of independent contractor-authors. Such authors would be well-served to (1) rely upon a signed, written agreement indicating that copyrighted materials can only be used with the author's future involvement or express permission, and (2) conduct themselves in accordance with that agreement throughout the development process. Otherwise, an implied license could weaken or dissolve the author's rights in the copyrighted work.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.