Supreme Court Denies Certiorari in Software Copyright Case

November 7, 2005. The Supreme Court denied certiorari in Krause v. Titleserv, a software copyright case involving interpretation of 17 U.S.C. § 117(a)(1), which provides a defense to copyright infringement where the owner of a copy of a program modifies that program as an "essential step in the utilization of the computer program". The denial of certiorari lets stands the 2nd Circuit's tortured construction of the statute to permit modifications that "improve" the program. See, Order List [9 pages in PDF] at page 3.

Introduction. William Krause authorized eight software programs for Titleserv, Inc., which Titleserv possessed and used. Titleserv compensated Krause for this. Titleserv also modified the source code of these programs, without authorization from Krause. There was not written agreement between Krause and Titleserv.

That is, Krause wrote the programs, and owns the copyrights. But, he wrote them for Titleserv, and was paid by Titleserv, which obtained copies. Titleserv modified the programs not only to make sure that they could continue to be utilized, but also to improve them. Titleserv made these new and improved versions for its own use, rather for sale or distribution to others. Krause sued for infringement in violation of 17 U.S.C. § 106. Titleserv raised the affirmative defense of § 117(a)(1).

The Court of Appeals characterized Titleserv's changes as falling into four categories: "(1) correcting programming errors ...; (2) changing the source code to add new clients, insert changed client addresses ...; (3) incorporating the programs into the Windows-based system Titleserv designed and implemented between 1997 and 1998; and (4) adding capabilities, such as the ability to print checks, and, to a limited degree, allowing customers direct access to their records ..."

The Court of Appeals opinion has several notable components. First, it addresses the "owner of a copy" element of § 117(a)(1). The Court found for Titleserv.

Second, the opinion addresses the "essential step in the utilization" element of § 117(a)(1). The Court found for Titleserv, after a long contortion of the phrase "essential step in the utilization" into "improve". To the extent that few purchasers of commercial software modify it for the purpose of making it worse, the Court's interpretation, in effect, tends to remove the "essential step in the utilization" element from the affirmative defense provided by § 117(a)(1).

Both of these parts of the opinion may favor software purchasers, users and licensees over software developers and vendors. Although, developers of mass market software may adjust by using and revising shrinkwrap and other consumer end-user license and terms of usage agreements. The U.S. Court of Appeals (8thCir) upheld such an agreement, in a non § 117 case, in Davidson v. Combs, which is also known as the Blizzard case. See, September 1, 2005 opinion [20 pages in PDF]. See also, amicus curiae brief [51 pages in PDF] of the Consumers Union and the Public Knowledge.

Another significant part of the Court's opinion is its reliance upon a "no harm" principle. That is, the Court of Appeals relied upon its conclusion that "we see no harm whatsoever to Krause’s enjoyment of his copyright" as a basis for finding that Titleserv's modifications are protected by the affirmative defense provided by § 117(a)(1).

Technology companies often assert a no harm principle in public policy debates. For example, Google has argued recently that its scanning of library books will cause no harm to publishers and authors. But, in intellectual property law, as in other areas of property law, the holder of a property right need not prove harm in order to enforce its property rights. Harm is at issue in the remedies phase, if the rights holder seeks actual damages. And, in the context of copyright, harm may be at issue in resolving an affirmative defense of fair use. But, this is a § 117 case, not a § 107 case. There is not a "no harm" element codified in § 117. The Court of Appeals has created a "no harm" consideration for § 117, and perhaps, the implication that "no harm" may be a consideration in a wider array of copyright cases.

Proceedings Below. Krause filed a complaint in U.S. District Court (EDNY) against Titleserv, its owner, CEO, three additional employees, and an affiliated company, alleging copyright infringement. Defendants moved for summary judgment on the argument that their use was permitted by 17 U.S.C. § 117(a)(1). The District Court granted summary judgment to the defendants. The District Court opinion is also reported at 289 F. Supp. 2d 316.

Krause appealed. The Court of Appeals (2ndCir) issued its opinion [PDF] on March 21, 2005, and an errata on March 23, affirming the judgment of the District Court.

Statutes. 17 U.S.C. § 106 provides the exclusive rights of copyright holders, including the exclusive rights "to reproduce the copyrighted work in copies" and "to prepare derivative works based upon the copyrighted work".

Then, 17 U.S.C. § 117 provides limitations on the exclusive rights of copyright holders in the case of software programs. In particular, subsection 117(a)(1) provides, in part, that "(a) ... Notwithstanding the provisions of section 106, it is not an infringement for the owner of a copy of a computer program to make or authorize the making of another copy or adaptation of that computer program provided: (1) that such a new copy or adaptation is created as an essential step in the utilization of the computer program in conjunction with a machine and that it is used in no other manner ..."

Court of Appeals Analysis of "owner of a copy". First, the Court of Appeals addressed whether Titleserv is an "owner of a copy" of the programs within the meaning of 117(a). Krause is the owner of the copyright, and Titleserv possessed copies, but the parties disputed whether Titleserv owned a copy.

The Court of Appeals concluded that "formal title in a program copy is not an absolute prerequisite to qualifying for § 117(a)’s affirmative defense. Instead, courts should inquire into whether the party exercises sufficient incidents of ownership over a copy of the program to be sensibly considered the owner of the copy for purposes of § 117(a). The presence or absence of formal title may of course be a factor in this inquiry, but the absence of formal title may be outweighed by evidence that the possessor of the copy enjoys sufficiently broad rights over it to be sensibly considered its owner."

The Court elaborated that "We conclude that Titleserv owned copies of the disputed programs within the meaning of § 117(a). We reach this conclusion in consideration of the following factors: Titleserv paid Krause substantial consideration to develop the programs for its sole benefit. Krause customized the software to serve Titleserv’s operations. The copies were stored on a server owned by Titleserv. Krause never reserved the right to repossess the copies used by Titleserv and agreed that Titleserv had the right to continue to possess and use the programs forever, regardless whether its relationship with Krause terminated. Titleserv was similarly free to discard or destroy the copies any time it wished. In our view, the pertinent facts in the aggregate satisfy § 117(a)’s requirement of ownership of a copy."

Court of Appeals Analysis of "essential step in the utilization". Second, the Court of Appeals addressed whether Titleserv's actions were "an essential step in the utilization of the computer program in conjunction with a machine" within the meaning of § 117(a)(1).

This is the longest section of the Court of Appeals' opinion. The Court went to great length to deconstruct and redefine the terms "essential" and "utilization", individually, and together with the term "computer program".

The Court also relied heavily on a single case from the 2nd Circuit, Aymes v. Bonelli, which is reported at 47 F.3d 23 (1995).

In the present case, the Court held that "an essential step in the utilization of the computer program" includes "changes" that "were not strictly necessary to keep the programs functioning, but were designed to improve their functionality in serving the business for which they were created."

The Court then reviewed each of the categories of software modifications made by Titleserv, and found that each falls within its modified construction of the term "an essential step in the utilization".

The Court did not have to resort to any definitional acrobatics to conclude that correcting the programming errors was an "essential step in the utilization of the computer program".

However, it was only with resort to its construction of the statute that the Court found that "adding capabilities, such as the ability to print checks, and, to a limited degree, allowing customers direct access to their records, which made Titleserv’s copy of the programs more responsive to the needs of Titleserv’s business" falls within the meaning of an "adaptation" that is "an essential step in the utilization of the computer program".

No Harm Principle. Neither the words "harm",  "injury" or "damage" appear in § 117. Nevertheless, the Court of Appeals based its conclusion that Titleserv's modifications fall within the scope of § 117(a)(1) in part upon its finding of "no harm" to Krause.

The Court wrote that "A different scenario would be presented if Titleserv’s alteration somehow interfered with Krause's access to, or ability to exploit, the copyrighted work that he authored, or if the altered copy of Krause's work were to be marketed by the owner of the copy. But on our facts, we see no harm whatsoever to Krause's enjoyment of his copyright. The changes made by Titleserv were made only to its copies of Krause's programs. Krause enjoyed no less opportunity after Titleserv's changes, than before, to use, market, or otherwise reap the fruits of the copyrighted programs he created."

Perhaps in this case, no harm resulted to Krause. The Court's recitation of the facts is not thorough. However, to the extent that the Court suggests that no harm results to the copyright holder when the user makes modifications to improve the software, but does not sell it to third parties, this could, if followed by other courts, have far reaching consequences. For example, in some commercial contexts software is written for only one, or just a few, corporate users. The incentive to write the software is to obtain revenues from an original transaction, and from transactions involving improvements to the software. In this situation, the market for the improved version is just the one company, or just a few. The Court, by disregarding the loss of revenue from authoring and licensing improvements for this one company, is ignoring all or much of the economic loss to the software developer.

Legislative Intent. One final noteworthy aspect of this case is the Court's resort to legislative intent. The Court relied upon a one sentence statement in support of its construction of the phrase "essential step in the utilization".

However, the statement was not made by any Senator or Representative during consideration of the bill. Rather, it came from a group outside of the Congress that asked the Congress to change the law. The Court of Appeals reasoned that the group made a recommendation, and the Congress approved a statute containing language similar to that sought by the group, so therefore, a line in a written submission by that group is also the intent of the Congress.

In the least, it would have been entertaining to read an opinion by Justice Scalia on this method of finding legislative intent. However, the Supreme Court denied certiorari.

For another discussion of § 117, see the U.S. Court of Appeals (FedCir) opinion in DSC Communications Corp v. Pulse Communications, Inc.

Krause was represented by Eugene Berman of the law firm of Fine Fine & Berman. Titleserv was represented by Kenneth Aneser of the law firm of Rosenberg Calica & Birney.

This is William Krause v. Titleserv, Inc., et al., a petition for writ of certiorari to the U.S. Court of Appeals for the 2nd Circuit, Sup. Ct. No. 05-166. The Court of Appeals No. is 03-9303. Judge Leval wrote the opinion of the Court of Appeals, in which Judge Katzman joined. The third member of the panel, former Judge Ellsworth Van Graafeiland, died between oral argument and decision. See also, Supreme Court docket.