U.S. Court of Appeals for the Second Circuit, Universal Instruments Corp. v. Micro Sys. Engʹg, Inc., Docket No. 17‐2748‐cv

Sale of Equipment and Software for an Automated Assembly System
Contract Drafting
Breach of Contract
Preemption by the Copyright Act
Copyright Infringement
License Rights
Misappropriation
Unfair Competition
Trade Secret
Tolling
Tort: Continuing Tort Theory
Equitable Relief
Computer Source Code
Software
17 U.S.C. § 117(a)
Choice of Law


Appeal from a judgment entered in the United States District Court for the Northern District of New York (Sharpe, J.), dismissing plaintiffʹs claims for breach of contract, copyright infringement, misappropriation, and unfair competition arising from its sale of equipment and software for an automated assembly system. On appeal, plaintiff contends that the district court erred in granting defendantsʹ motion for judgment as a matter of law.
Affirmed.

Corporation (ʺUniversalʺ) developed and sold an automated assembly system to defendant‐counter‐plaintiff‐appellee Micro Systems Engineering, Inc. (ʺMSEIʺ) in 2007 pursuant to a purchase agreement. MSEI developed a multi‐phase plan to build a system to automate the handling of medical devices during its quality testing process, and Universal won the bid to provide the equipment for the first phase. MSEI awarded the second and third phases of the project not to Universal, but to Universalʹs competitor, defendant‐counter‐plaintiff‐appellee Missouri Tooling & Automation, Inc. (ʺMTAʺ). In implementing phases two and three, MSEI and MTA used intellectual property, including computer source code, that Universal had provided for phase one.
(…) Test Handling System (the ʺTHSʺ)

Universal brought this action below alleging, inter alia, that MSEI and MTA had infringed Universalʹs copyright in its source code, breached the terms of the purchase agreement, and misappropriated Universalʹs trade secrets. Certain claims were dismissed on defendantsʹ motion for judgment on the pleadings, and, after discovery, the parties proceeded to a jury trial on the remaining claims. At the close of the evidence, however, the district court granted defendantsʹ motion for judgment as a matter of law. Universal appeals.

Beginning in 2006, MSEI obtained bids from suppliers for phase one. One of the bidders was Universal, a developer of automated assembly platforms. MSEI awarded phase one to Universal, and the parties memorialized their agreement in an Equipment Purchase Agreement (the ʺEPAʺ), executed in June 2007.

The THS ultimately developed by Universal had two software components: the station software and the server software. The station software was embedded on each individual Polaris station and ʺmanaged the operation of conveyors, elevators, stacks and robotic arms.ʺ J. Appʹx at 2606. This software was stored on each stationʹs programmable logic controller and could be downloaded on site by physically connecting a computer to the station and downloading the source code. Id. at 1299‐1300, 1480‐81, 1532‐34. The server software, on the other hand, was the ʺbrains of the operation,ʺ id. at 988, which ʺsynchronized the activities of the hardware and softwareʺ and was ʺresponsible for coordinating the movement of the module trays,ʺ id. at 2606.
The source code for the server could not be downloaded in the same way as the station software, and under the EPA, Universal was under no obligation to provide the server source code to MSEI. Id. at 2344 (providing that ʺsource code will not be providedʺ). The parties agreed, however, in their Final Customer Acceptance letter (the ʺFCAʺ) that Universal would provide MSEI with a copy of the server source code at the time of delivery. The THS was delivered in October 2008.

In 2009, MSEI solicited bids for the next phase (ʺTHS2ʺ). The bid documents for THS2 indicated that MSEI had the responsibility to provide the software for the station and server source code to be used in the project. In April 2010, MSEI awarded the project to MTA, a competitor of Universal, which submitted a lower bid for the project. On April 8, 2010, MSEI and MTA entered into an agreement (the ʺMTA Agreementʺ). On April 16, Universal and MTA were notified by email that MSEI had ʺawarded the business to MTA for the THS line two project.ʺ J. Appʹx at 2878. MTA subsequently sought to purchase Polaris stations from Universal for use in THS2, but on August 4, 2010, Universal declined to sell them to MTA. Thereafter, MSEI downloaded the source code from the individual Polaris stations and the server source code that Universal gave to MSEI on delivery of phase one; it then gave the code to MTA to use in the production of THS2. MSEI and MTA subsequently modified the server source code to meet the requirements of THS2.

The EPA contains several provisions relating to the partiesʹ intellectual property rights. Section 8 is entitled ʺIntellectual Property.ʺ Section 8.2(d) provides that
if [Universal] uses any Pre‐Existing Intellectual Property in connection with this Agreement, [Universal] hereby grants MSEI, MSEIʹs subcontractors, or suppliers, a non‐exclusive, royalty‐free, worldwide, perpetual license, to use, reproduce, display, of the Pre‐Existing Intellectual Property for MSEIʹs internal use only. J. Appʹx at 2336. ʺPre‐Existing Intellectual Propertyʺ is defined as ʺany trade secret, invention, work of authorship, mask work or protectable design that has already been conceived or developed by anyone other than MSEI before [Universal] renders any services under the Agreement.ʺ Id.
Exhibit E to the EPA, entitled ʺEquipment Acceptance Form,ʺ contained a blank form for the parties to fill in upon final delivery and acceptance.

On October 31, 2008, Universal and MSEI signed a negotiated ʺFinal Customer Acceptanceʺ letter, which stated, among other things, that Universal agrees to provide the THS server code as is with the understanding that MSEI assumes the risk of invalidating the warranty in the event a change made by MSEI to the source code causes damage to any of the THS line hardware. J. Appʹx at 2361.

It is undisputed that in completing phases two and three, MSEI and MTA used source code that Universal had provided for phase one. The principal issue presented is whether the EPA permitted them to do so. We hold that defendantsʹ conduct did not breach § 8.2(d) of the EPA and was non‐infringing because that provision permitted defendants to reproduce and use the station and server source code; defendantsʹ adaptation of the server source code was non‐infringing because it was authorized by 17 U.S.C. § 117(a); Universalʹs contract claim that defendantsʹ modification of the server source code breached the EPA is preempted by the Copyright Act; Universalʹs claim of misappropriation of trade secrets is time‐barred; and MTA did not unfairly compete with Universal because its conduct was not in bad faith. Accordingly, we affirm.

Copyright Infringement
Universalʹs copyright infringement claim turns on whether defendantsʹ conduct fell within the scope of the non‐exclusive license provided in the EPA. This is so because a valid license ʺimmunizes the licensee from a charge of copyright infringement, provided that the licensee uses the copyright as agreed with the licensor.ʺ Davis v. Blige, 505 F.3d 90, 100 (2d Cir. 2007). Where a claim turns on the scope of a license, ʺthe copyright owner bears the burden of proving that the defendantʹs [use] was unauthorized.ʺ Tasini v. N.Y. Times Co., 206 F.3d 161, 171 (2d Cir. 2000) (quoting Bourne v. Walt Disney Co., 68 F.3d 621, 631 (2d Cir. 1995)). Whether the partiesʹ license agreement encompasses the defendantsʹ activities is ʺessentiallyʺ a question of contract interpretation. See Bourne, 68 F.3d at 631. ʺA written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms.ʺ Greenfield v. Philles Records, Inc., 98 N.Y.2d 562, 569 (2002) (citing R/S Assocs. v. N.Y. Job Dev. Auth., 98 N.Y.2d 29, 32 (2002)). Where, however, ʺthe language used is susceptible to differing interpretations, each of which may be said to be as reasonable as another, then the interpretation of the contract becomes a question of fact for the jury and extrinsic evidence of the partiesʹ intent properly is admissible.ʺ Bourne, 68 F.3d at 629. The existence of an ambiguity, if any, is to ʺbe ascertained from the face of an agreement without regard to extrinsic evidence.ʺ Reiss v. Fin. Perf. Corp., 97 N.Y.2d 195, 199 (2001); see also Duane Reade Inc. v. St. Paul Fire & Marine Ins. Co., 411 F.3d 384, 390 (2d Cir. 2005).

We hold, for the reasons discussed below, that the EPA unambiguously permitted MSEI and MTA to reproduce and use Universalʹs pre‐existing intellectual property in subsequent phases of the THS. Defendantsʹ conduct was, therefore, not infringing. We further conclude that MSEI and MTAʹs adaptation of the server source code for use in additional testing stations was authorized by 17 U.S.C. § 117(a) and thus non-infringing.

(…) There is no evidence that the source code was used by MSEI and MTA for anything other than developing and implementing phases two and three of MSEIʹs internal test handling system.

(…) This understanding is reinforced by our recent holding that ʺunder long‐established principles of agency law, a licensee under a non‐exclusive copyright license may use third‐party assistance in exercising its license rights unless the license expressly provides otherwise.ʺ Great Minds v. Fedex Office & Print Servs., Inc., 886 F.3d 91, 94 (2d Cir. 2018). Here, the license expressly provided that the rights extended to MSEIʹs suppliers, which surely included MTA. Hence, MSEI and MTAʹs reproduction of the source code for MSEIʹs internal use did not, as a matter of law, exceed the scope of the license.

Choice-of-Law
The EPA does not contain a choice‐of‐law provision, but the parties agree that New York law applies. See Federal Ins. Co. v. Am. Home Assur. Co., 639 F.3d 557, 566 (2d Cir. 2011) (noting that where, during the course of litigation, ʺthe parties agree that New York law controls, this is sufficient to establish choice of lawʺ).

Modification of the Source Code was Authorized by 17 U.S.C. § 117(a)
It is axiomatic that ʺan unlicensed use of the copyright is not an infringement unless it conflicts with one of the specific exclusive rights conferred by the copyright statute.ʺ Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S. 417, 447 (1984). The Copyright Act grants copyright holders a bundle of exclusive rights, including the rights to ʺreproduce . . . in copies,ʺ ʺprepare derivative works,ʺ ʺdistribute copies,ʺ ʺperform,ʺ and ʺdisplayʺ their works. 17 U.S.C. § 106. Source code, the human‐readable literal elements of software, is copyrightable. See Oracle Am., Inc. v. Google Inc., 750 F.3d 1339, 1355‐56 (Fed. Cir. 2014). It is also well established that copyright owners may grant others license to use their rights. John Wiley & Sons, Inc. v. DRK Photo, 882 F.3d 394, 410 (2d Cir. 2018). But because copyright licenses prohibit any use not authorized, a licensee infringes the ownerʹs copyright if its use exceeds the scope of its license. Gilliam v. Am. Broad. Cos., 538 F.2d 14, 20 (2d Cir. 1976) (noting that ʺone who obtains permission to use a copyrightedʺ work ʺmay not exceed the specific purpose for which permission was grantedʺ and concluding that ʺunauthorized editing of the underlying work, if proven, would constitute an infringement of the copyright in that work similar to any other use of a work that exceeded the license granted by the proprietor of the copyrightʺ); see also S.O.S., Inc. v. Payday, Inc., 886 F.2d 1081, 1088 (9th Cir. 1989). Thus, § 8.2(d) of the EPA arguably prohibits, at least impliedly, MSEI and its suppliers from modifying Universalʹs pre‐existing intellectual property.

The Copyright Act, however, provides an affirmative defense that allows the owner of a copy of a computer program to copy or modify the program for limited purposes without incurring liability for infringement. See 17 U.S.C. § 117(a). Section 117(a) provides, in relevant part:
Notwithstanding the provisions of section 106 [which lists the exclusive rights of a copyright holder], 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 . . . .

Thus, a defendant seeking protection under § 117(a) must demonstrate that the new adaptation (1) was made by the ʺowner of a copy of the computer program,ʺ (2) was ʺcreated as an essential step in the utilization of the computer program in conjunction with a machine,ʺ and (3) was ʺused in no other manner.ʺ 17 U.S.C. § 117(a); see Krause v. Titleserv, Inc., 402 F.3d 119, 122 (2d Cir. 2005).

MSEI Is the ʺowner of a copy of a computer programʺ
We have held that ʺownerʺ as used in § 117(a) does not require formal title in a program copy. Titleserv, 402 F.3d at 123. Instead, ʺcourts should inquire into whether the party exercised sufficient incidents of ownership over a copy of the program to be sensibly considered the owner of the copy for purposes of § 117(a).ʺ Id. at 124.
In Titleserv, we found the following facts sufficient to consider defendant an owner under § 117(a): defendant paid plaintiff ʺsubstantial consideration to develop the programs for its sole benefitʺ; plaintiff ʺcustomized the software to serve defendantʹs operationsʺ; plaintiff stored copies ʺon a server owned by [defendant]ʺ; plaintiff ʺnever reserved the right to repossess the copies used by [defendant] and agreed that [defendant] had the right to continue to possess and use the programs forever, regardless whether its relationship with [defendant] terminatedʺ; and ʺ[defendant] was similarly free to discard or destroy the copies any time it wished.ʺ Id.

(…) We further held that the ʺaddition of new features,ʺ which ʺwere not strictly necessary to keep the programs functioning, but were designed to improve their functionality in serving the business for which they were created,ʺ were also ʺessential.ʺ Id.; see also Final Report of the National Commission on New Technological Uses of Copyrighted Works 13 (1978) [hereinafter ʺCONTU Reportʺ] (ʺA right to make those changes necessary to enable the use for which it was both sold and purchased should be provided. The conversion of a program from one higher‐level language to another to facilitate use would fall within this right, as would the right to add features to the program that were not present at the time of rightful acquisition.ʺ). In doing so, however, we noted an important limitation: an ʺessentialʺ improvement ought not to ʺharm the interests of the copyright proprietor.ʺ Id. at 129 (citing CONTU Report at 13).

(…) MSEIʹs use did not inhibit Universalʹs ability to market or sell its server software to others, nor did it divulge sensitive Universal information or enrich MSEI or MTA at the expense of Universal. MSEI made and authorized the making of minor modifications, narrowly tailored to adapting the server software for the use for which it was designed ‐‐ orchestration of the test handing stations to ensure the quality of MSEIʹs implantable medical devices.

The Adaptation was ʺused in no other mannerʺ
Finally, to warrant the protection of § 117(a), MSEI must show that the server software was ʺused in no other manner,ʺ that is, it was used only to make an adaptation as an essential step in utilizing the software in conjunction with the test handling system. Universal argues that MSEIʹs modification of the server software to operate with new machines, rather than the existing machines created by Universal, defeats MSEIʹs claim to protection from § 117(a).

ʺWhether a questioned use is a use in another manner . . . depends on the type of use envisioned in the creation of the program.ʺ Titleserv, 402 F.3d at 129. The server software was designed to be the ʺbrains of the operation,ʺ J. Appʹx at 988, which ʺsynchronized the activities of the hardware and softwareʺ and was ʺresponsible for coordinating the movement of the module trays,ʺ id. at 29 2606. These are precisely the purposes for which MSEI and MTA made modifications, as indicated in the Statement of Work. See id. at 2366 (ʺUpdate THS Server software to add functionality for the new stations.ʺ); see also id. at 2367 (ʺScope of the project . . . is first to replicate the existing system . . . , and then expand this configuration to add the capability to add three . . . electrical testers . . . , one RF testing stations and one Shaker test station.ʺ). There is nothing in the record to suggest that the server source code was used for any purpose other than to adapt the system to handle new testing stations for MSEIʹs internal use. See Titleserv, 402 F.3d at 130 (ʺWhat is important is that the transaction for which the programs are used is the type of transaction for which the programs were developed.ʺ). Thus, MSEI ʺsimply increased the versatility of the programs by allowing themʺ to interoperate with new test handling stations, which ʺconstitutes use in the same manner, with the benefit of an adaptation increasing versatility.ʺ Id.

Breach of Contract & Preemption by the Copyright Act
MSEI and MTAʹs use and reproduction of Universalʹs pre‐existing intellectual property for use in subsequent phases of the THS was non‐infringing because defendants were expressly licensed to do so under § 8.2(d) of the EPA. See supra Part I.B.1. It necessarily follows that MSEIʹs use and reproduction of the source code was not in breach of the EPA. See Davis, 505 F.3d at 100; Bourne, 68 F.3d at 631. Universalʹs breach of contract claim is thus reduced to its assertion that MSEI breached the EPA by modifying the server source code. We do not reach the merits of this question, however, because what remains of Universalʹs breach of contract claim is preempted by the Copyright Act.

The Copyright Act exclusively governs a claim when (1) the particular work to which the claim is being applied falls within the type of works protected by the Copyright Act under 17 U.S.C. §§ 102 and 103, and (2) the claim seeks to vindicate legal or equitable rights that are equivalent to one of the bundle of exclusive rights already protected by copyright law under 17 U.S.C. § 106. Briarpatch L.P. v. Phoenix Pictures, Inc., 373 F.3d 296, 305 (2d Cir. 2004). ʺA state law right is equivalent to one of the exclusive rights of copyright if it may be abridged by an act which, in and of itself, would infringe one of the exclusive rights.ʺ Forest Park Pictures v. Universal Television Network, Inc., 683 F.3d 424, 430 (2d Cir. 2012). ʺʹBut if an extra element is required instead of or in addition to the acts of reproduction, performance, distribution or display, in order to constitute a state‐created cause of action,ʹ there is no preemption.ʺ Id. (quoting Comput. Assocs. Intʹl, Inc. v. Altai, Inc., 982 F.2d 693, 716 (2d Cir. 1992)). Preemption, therefore, turns on ʺwhat the plaintiff seeks to protect, the theories in which the matter is thought to be protected and the rights sought to be enforced.ʺ Comput. Assocs., 982 F.2d at 716.

As we have recognized, ʺpreemption cannot be avoided simply by labeling a claim ʹbreach of contract.ʹʺ Forest Park, 683 F.3d at 432; see also 5 Nimmer on Copyright § 19D.03[C][2][b] (suggesting that a contract that ʺdoes not purport to give [the plaintiff] any protection beyond that provided . . . by copyright law itselfʺ would be preempted). In Forest Park, we held the contract at issue not to be preempted because it included an ʺextra elementʺ of a promise to pay, and plaintiff sought contract damages when defendant used plaintiffʹs copyrighted work without paying for the privilege. Forest Park, 683 F.3d at 428. Here, by contrast, there is no dispute over payment. Universal does not argue that defendants violated the EPA by failing to pay for use of the intellectual property.

Misappropriation of Trade Secrets
A plaintiff claiming misappropriation of a trade secret must prove that (1) ʺit possessed a trade secret,ʺ and (2) the trade secret was used by defendant ʺin breach of an agreement, confidence, or duty, or as a result of discovery by improper means.ʺ Integrated Cash Mgmt. Servs., Inc. v. Digital Transactions, Inc., 920 F.2d 171, 173 (2d Cir. 1990). We do not reach the merits of this claim, however, because it is time‐barred by the applicable statute of limitations.

In New York, a cause of action for the misappropriation of trade secrets is governed by a three‐year statute of limitations, while claims for equitable relief are subject to a six‐year statute of limitations. Compare N.Y. C.P.L.R. § 214(4) (providing three‐year‐statute of limitations for claims of misappropriation of trade secrets), with id. § 213(1) (providing six‐year statute of limitations for claims seeking equitable relief). Universal argues that its claim for injunctive relief is governed by the more generous six‐year limitations period.

ʺCourts determine the applicable limitations period . . . by analyzing the substantive remedy that the plaintiff seeks.ʺ ABS Entmʹt, Inc. v. CBS Corp., 163 F. Supp. 3d 103, 108 (S.D.N.Y. 2016) (applying New York law). ʺWhere the remedy sought is purely monetary in nature, courts construe the suit as alleging ʹinjury to propertyʹ within the meaning of CPLR 214(4), which has a three‐year limitations period.ʺ IDT Corp. v. Morgan Stanley Dean Witter & Co., 12 N.Y.3d 132, 139 (2009). In IDT, the equitable relief was incidental to the damages sought, so ʺlooking to the reality, rather than the form, of the action,ʺ the New York State Court of Appeals concluded that IDT principally sought a monetary remedy and, thus, held that the three‐year statute of limitations applied. Id. at 139‐40. Similarly, in this case, the main remedy that Universal seeks is monetary damages. Universalʹs Third Amended Complaint requested that it be awarded profits and a royalty, not just an injunction, in connection with its misappropriation of trade secrets claim, as well as double damages, punitive damages, and attorneysʹ fees. Therefore, because the reality of the cause of action is that it is one for damages, not injunctive relief, the three‐year statute of limitations applies.

Universal argues that this statute of limitations should be tolled or extended on a continuing tort theory. ʺA continuing tort theory may apply . . . where the plaintiff alleges that a defendant has kept a secret confidential but continued to use it for commercial advantage.ʺ Andrew Greenberg, Inc. v. Svane, Inc., 830 N.Y.S.2d 358, 362 (App. Div. 2007). ʺWhere, however, the ʹplaintiff had knowledge of the defendantʹs misappropriation and use of its trade secret, the continuing tort doctrine does not apply.ʹʺ PaySys Intʹl, Inc. v. Atos Se, No. 14‐ 10105, 2016 WL 7116132, at * 9 (S.D.N.Y. Dec. 5, 2016) (quoting VoiceOne Commcʹns, LLC v. Google Inc., No. 12‐9433, 2014 WL 10936546, at *10 (S.D.N.Y. Mar. 31, 2014)) (citing cases). Here, Universal had knowledge of MSEI and MTAʹs alleged misappropriation and use of its trade secret and, accordingly, the continuing tort theory does not apply.

Unfair Competition
Universalʹs remaining claim against MTA for unfair competition was also properly dismissed. ʺThe essence of an unfair competition claim under New York law is that the defendant has misappropriated the labors and expenditures of anotherʺ with ʺsome element of bad faith.ʺ Saratoga Vichy Spring Co. v. Lehman, 625 F.2d 1037, 1044 (2d Cir. 1980). MTA was informed prior to executing the MTA Agreement that MSEI and its suppliers were licensed to use and reproduce Universalʹs source code. Moreover, Bob Archer, MTAʹs CEO and co‐owner, testified at trial that MTA relied on the language of the EPA in agreeing to supply MSEI with subsequent phases of the THS.

As we have held, the EPA in fact authorized MTA as MSEIʹs supplier to use and reproduce Universalʹs pre‐existing intellectual property for the THS replication project. See supra Part I.B.1. And to the extent MTA adapted the server source code, such adaptions were authorized under federal law.


(U.S. Court of Appeals for the Second Circuit, May 8, 2019, Universal Instruments Corp. v. Micro Sys. Engʹg, Inc., Docket No. 17‐2748‐cv)