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A licensee of insurance software did not hold any of the exclusive rights enumerated under the Copyright Act and thus did not have standing to bring an infringement claim against another licensee that had allegedly exceeded the scope of its license, the U.S. Court of Appeals for the Seventh Circuit ruled Jan. 19 (Hyperquest Inc. v. N’Site Solutions Inc., 7th Cir., No. 08-2257, 1/19/11).
Affirming a federal district court's dismissal of a copyright infringement claim, the court looked to the Supreme Court's Muchnick to determine that standing in this case was an issue of failure to state a claim under Fed. R. Civ. P. 12(b)(6), rather than an Article III standing issue.
Quivox Systems is a software developer whose markets include a program called eDoc, which is used to help health care providers process insurance claims. In 2001, N'Site Solutions Inc. entered into an agreement with Quivox and acquired a non-exclusive license for eDoc granting it rights to use and develop the software. The agreement provided for N'Site to use the software in-house, and granted no rights to modify eDoc or to sell it.
Safelite Group Inc. purchased Quivox's assets, including its copyright interest in eDoc. In 2004, HyperQuest Inc. acquired rights in eDoc from Safelite through a license that granted it exclusive rights to use the software in source code form and to modify it to serve its provision of its services. The license did not allow HyperQuest to sell the software. The contract included a provision acknowledging N'Site's license and that Safelite and N'Site would negotiate a revised license; however, such negotiations were unsuccessful.
In 2006, N'Site made certain modifications to the software and then sold the source code to Unitrin Direct Insurance Co. Safelite registered its copyright interest in 2006, and in 2008, HyperQuest sued N'Site and Unitrin, alleging copyright infringement based on allegations that N'Site had exceeded the scope of its license in several ways, including installing the software outside its own facility, modifying and creating derivative works (N'Solutions and ClaimHub), and selling the software to a third party.
Judge Milton I. Shadur of the U.S. District Court for the Northern District of Illinois found that HyperQuest, as holder of a non-exclusive license in eDoc, did not have standing to bring a copyright infringement claim, and dismissed the lawsuit. The district court awarded attorneys' fees and costs of $135,000 to N'Site and Unitrin, an amount less than that requested.
HyperQuest appealed the dismissal of its claims. Unitrin cross appealed, objecting to the lowered award.
Judge Diane P. Wood began by noting that under 17 U.S.C. §501(b), an infringement action may be brought by a party that holds an exclusive right under the Copyright Act. The court then noted a subtle semantic distinction between considering the question as a constitutional standing issue or whether it is a question of who is the real party in interest. The court said:
Some courts … have seen this as a limitation derived from Article III's standing requirement …, but we believe that it is preferable to be more precise in our language. Many parties who have not crossed the “T's” and dotted the “i's” in their copyright licenses would have no trouble demonstrating injury in fact, causation, and redressability--the three indispensable requirements for constitutional standing, … but their efforts to sue will nonetheless be thwarted by the statutory requirement. Another possibility, closer to the mark, is that the Copyright Act establishes criteria for the real party in interest, …. Or one could keep it simple and say that the Copyright Act spells out who has enforceable rights under the statute; someone who does may sue, and someone who does not has failed to state a claim upon which relief may be granted.
According to the court, the Supreme Court's ruling in Reed Elsevier Inc. v. Muchnick, 130 S. Ct. 1237, 93 USPQ2d 1719 (2010) (79 PTCJ 497, 3/5/10), suggests that “the last of these approaches is the correct one.” Indeed, this is the analysis that was applied at the trial level, the court said.
Furthermore, the court said, if the dismissal had been based on a question of Article III standing, then the dismissal would have been without prejudice. However, in this case the dismissal was with prejudice, as consistent with a dismissal for failure to state a claim under Fed. R. Civ. P. 12(b)(6).
Therefore, according to the court, the question upon appeal was whether the district court had erred in its conclusion that HyperQuest held no exclusive right among the rights enumerated in 17 U.S.C. §106.
HyperQuest held some rights with respect to eDoc, specifically those related to the right to prepare derivative works, the right to distribute copies to the public, and the right to make copies. Looking to the language of the licensing contract between Safelite and HyperQuest, the court first rejected the argument that the mere inclusion of the phrase “exclusive license” could support a conclusion that HyperQuest actually held any exclusive rights.
“At first blush, it seems apparent that HyperQuest has never been the sole holder of any of the three exclusive rights that it has identified--reproduction, derivative works, or distribution,” the court said. The court noted that it was possible for an exclusive right to be subdivided into smaller exclusive rights, such as hardcover and softcover publishing rights for a book, or geographic distribution rights. However, “it appears that these subdivisions must be done cleanly, so that the limits of each holder's rights can be defined.”
Specifically, the court noted that the agreement reserved significant rights to Safelite, including certain use rights and licensing rights to further develop the software.
And the court found a “gaping hole” in HyperQuest's rights created by the provision acknowledging N'Site's current license and Safelite's right to renegotiate the license, which the court referred to as an “open-ended new license.”
“HyperQuest retained to right to veto any terms that might have appeared in that license,” the court noted. “All it got, essentially, was the right to a seat at the table if the eventual planned license deviated materially from the version that HyperQuest had already seen.”
Furthermore, there was another provision that specified that Safelite retained all intellectual property rights with respect to the software and that it would hold rights in any modification to be created.
“[W]hen all is said and done, we cannot find in this license the kind of clearly delineated exclusivity over at least one strand of the bundle of rights that would permit HyperQuest to sue for infringement,” the court found.
However, the court emphasized that it did not endorse the argument “that a copyright owner's retention of ownership rights renders all subsequent licenses non-exclusive.” Such a principle would not allow for divisibility of exclusive rights, the court noted.
The court thus found no error in the district court's ruling on the issue of standing.
Finally, turning to the issue of the award of attorneys' fees, the court found no abuse of discretion in the district court's ruling.
The court's opinion was joined by Judges Joel M. Flaum and Terence T. Evans.
HyperQuest was represented by Deborah R. Hogan of Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Chicago. N'Site and Unitrin were represented by Paul R. Kitch of Nixon Peabody, Chicago.
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