Copyright Infringement
Copyright on Database-Script Source Code
Software
Hardware
Abstraction-Filtration Test
Permanent Injunction – Stayed – Special Master
Trade Secret
Licensing Terms
Contract Drafting
Carrier and ECIMOS once had a long-standing business relationship that has now deteriorated. Carrier is a leading manufacturer of residential Heating, Ventilation, and Air Conditioning (“HVAC”) systems and ECIMOS once produced the quality-control system that tested completed HVAC units at the end of Carrier’s assembly line. The present dispute centers on Carrier’s alleged infringement of ECIMOS’s copyright on its database-script source code—a part of ECIMOS’s software that stores test results. ECIMOS alleges that Carrier improperly used the database—indeed copied certain aspects of the code—to aid a third-party’s development of a new testing software that Carrier now employs in its Collierville, Tennessee manufacturing facility. ECIMOS sued for copyright infringement and breach of contract and won a $7.5 million jury award.
ECIMOS also filed a post-trial motion and asked the court to enjoin Carrier from using or disclosing ECIMOS’s trade secrets and from using its third-party-developed database until a new, non-infringing database could be developed from scratch. ECIMOS also moved to amend the jury award so that it could receive even more damages from Carrier. The district court: (1) enjoined Carrier from using its new database, but stayed the injunction until Carrier could develop a new, non-infringing database subject to the supervision of a special master; (2) enjoined Carrier from disclosing ECIMOS’s trade secrets, but also held that certain elements of ECIMOS’s system were not protectable as trade secrets (such as ECIMOS’s assembled hardware) and thus did not enjoin Carrier from using ECIMOS’s system; and (3) rejected ECIMOS’s motion to amend the jury award. ECIMOS now appeals those decisions.
In 2004, ECIMOS began formally incorporating licensing terms into the proposals that it sent to Carrier. These terms prohibited the “unauthorized copying, reverse engineering, decompiling, disassembling, decrypting, translating, renting, sub-licensing, leasing, distributing, and/or creating derivative works based on the software, in whole or in part.” This 2004 iteration of the Carrier-ECIMOS contract is the operative contract that underlies the contract-breach-damages argument on appeal.
(…) However, Carrier never accepted the proposal. Instead, in early 2015, Carrier accelerated its work with Amtec to develop a new, competing quality-control system. This Amtec-developed system included both a software application (the “Runtest Execution System” or “RES”) and a new storage database (the “Manufacturing Execution System” or “MES”). For simplicity’s sake, we will refer to all components of the Amtec-developed system as the “RES.” The RES went live at Carrier’s Collierville plant in October 2015.
Copyright-Infringement
To succeed on a copyright-infringement claim, a plaintiff must establish “(1) ownership of a valid copyright, and (2) copying of constituent elements of the work that are original.” Feist Publ’ns, Inc. v. Rural Tel. Serv. Co., 499 U.S. 340, 361 (1991). The first part “tests the originality and non-functionality of the work” to ensure that it is a protectable expression rather than an unprotectable idea. Registration of a valid copyright (as ECIMOS has done for its IPCS database) is prima facie evidence that the work is entitled to protection. Lexmark, 387 F.3d at 534. The second part of the analysis “tests whether any copying occurred (a factual matter) and whether the portions of the work copied were entitled to copyright protection (a legal matter).” Ibid. It is undisputed that ECIMOS holds a valid copyright in its IPCS database-script source code. However, Carrier contends that it did not infringe upon any protectable element of that copyright, and that—even if it did—any copying was de minimis and was not actionable as a matter of law.
(…) This court’s dictates for an “abstraction-filtration comparison” when evaluating whether there has been a copyright infringement in cases where evidence of direct copying—the actual sale of copyrighted material— is sparse. See Kohus v. Mariol, 328 F.3d 848, 855 & n.1 (6th Cir. 2003). Developed by the Second Circuit in its opinion in Computer Associates Int’l, Inc. v. Altai Inc., 982 F.2d 693, 706 (2d Cir. 1992), the comparison proceeds (by most accounts) in three steps. First, protectable expression is separated from abstract ideas. For example, the general function of a computer program—at the highest level—is an unprotectable idea, but the code of the program that expresses a unique way to achieve the goals of the program is generally considered a protectable form of expression. Id. at 706–07. Next, unprotectable elements of the work are “filtered” out from the protectable expressive form. These unprotectable elements include “elements dictated by efficiency,” “stock” elements that are common or expected in any type of code on that subject, and elements from the public domain. Id. at 707–10. Finally, once the unprotectable elements of the work are filtered out, the remaining elements of both programs are compared to see if they are substantially similar. Id. at 710–11.
De Minimis
See Ringgold v. Black Ent. Television, Inc., 126 F.3d 70, 74 (2d Cir. 1997) (“De minimis in the copyright context can mean what it means in most legal contexts: a technical violation of a right so trivial that the law will not impose legal consequences.”).
Damages - Valuation
(…) The only copyright that was infringed was ECIMOS’s database-script source code. Even if the IPCS hardware and software applications were linked to the database, there is no evidence that the database, by itself, had a fair-market value of anywhere close to $1 million. Although ECIMOS provided Carrier with the 2014 proposal for a system upgrade, which totaled more than $1 million, there was nothing in the proposal that adverted to ECIMOS’s valuation of the database. The only reasonable basis upon which to calculate the amount is ECIMOS’s valuation of how much its IPCS software (which included the database) was worth on a license-per-station basis. This amount was $50 per month for each of the 103 runtest stations at Carrier’s Collierville plant. When this rate is factored alongside the amount of time that the infringement was ongoing at Collierville before trial (32 months—from the time that the infringing RES database went live at Collierville to the time that the trial started), the maximum supportable amount of actual copyright damages is $164,800.
(…) There is ample evidence to conclude that ECIMOS met its burden of presenting proof of Carrier’s gross revenues, and that it was reasonably related to the infringement. The jury was presented with Carrier’s financial records from October 2015 to December 2016, and the jury heard testimony that the records were “created by Carrier’s finance department” and were prepared “in accordance with Generally Accepted Accounting Principles.” The testimony discusses estimates of Carrier’s monthly revenues, costs, and liabilities for the period in question. ECIMOS also limited its revenue presentation to the Collierville plant and, notably, Carrier does not dispute that Carrier’s estimates of its gross revenue or profits were accurate. Thus, ECIMOS clearly met its burden of presenting “proof only of the infringer’s gross revenue.” 17 U.S.C. § 504(b). (…) In our case, there is no dispute as to the fact that every Carrier HVAC unit would have undergone tests on the IPCS—and thus would have necessarily utilized aspects of the database where the test results were stored—before being shipped for sale. Thus, the impact of ECIMOS’s intellectual property on Carrier’s profits likely had an even larger impact than the copyrighted photograph had on Hustler’s profits in Balsley and yet the jury concluded that only 0.4% of Carrier’s revenues were attributable to its infringing use of the IPCS database. This is not excessive.
(…) ECIMOS is already being compensated for any post-trial use of its copyright by Carrier. The district court’s post-trial injunction requires Carrier to pay the equivalent of a licensing fee ($50 per month) for a period beginning August 1, 2018 for each runtest station in its Collierville plant, and continuing until Carrier stops using its RES database. The $50 per station per month is a reasonable rate that was based on ECIMOS’s quoted figure for licensing fees in its 2014 proposal to Carrier. In short, the district court concluded that requiring Carrier to pay licensing fees for continued use of the RES database would put ECIMOS in no worse a position than if Carrier had actually obtained a valid license for use of the database at each runtest station. This is not unreasonable.
(…) The licensing fee of $50/month for the use of 103 stations for the 87 months from April 2011 through June 2018 adds up to $448,050, not $474,150. The $474,150 number is likely calculated from the $50/month licensing fee for 109 stations for 87 months. However, on appeal it appears that Carrier’s use of the ECIMOS system at only 103 stations is undisputed.
(…) It may be helpful to re-summarize the facts. In 2004, ECIMOS began incorporating terms into its IPCS licensing contract that prohibited the “unauthorized copying, reverse engineering, decompiling, disassembling, decrypting, translating, renting, sub-licensing, leasing, distributing, and/or creating derivative works based on the software, in whole or in part.” The terms also stated that “the Software may not be duplicated or copied” except for specific purposes, and that “no part of the software . . . may be reproduced or transmitted in any form or by any means.” It is undisputed that, in 2011, Carrier installed the VB6 software directly onto Windows 7, which the jury found to be a breach of the parties’ licensing contract. In 2014, ECIMOS proposed to sell Carrier an upgrade to the entire IPCS, which it quoted as costing a total of $1,021,000. The $1,021,000 figure included a $118,000 fee for “Software migration from VB6 to VB.net” for all runtest stations, as well as assorted other fees for: (1) software licensing (quoted at $600/year per station, which is $50/month); (2) specialized licensing fees (for special programs associated with VB.Net); and (3) hardware-repair fees to the runtest stations.
Permanent Injunction
(…) After trial, the district court granted a permanent injunction enjoining Carrier from using its RES database. However, it stayed the injunction until Carrier could implement a new, non-infringing database, meaning that Carrier was permitted to continue using the RES—subject to its payment of licensing fees—until then. The district court appointed a special master to oversee the process.
Trade Secret
(…) Here, ECIMOS voluntarily disclosed its assembled hardware to third parties, including Carrier, by selling it as a product. Indeed, ECIMOS claimed throughout trial that it had customers other than Carrier, and so it is safe to presume that other third parties also received the hardware. Put simply, ECIMOS’s hardware was a marketed product that was sold and freely shared, and it is not a trade secret.
(U.S. Court of Appeals for the Sixth Circuit, August 21, 2020, Ecimos, LLC v. Carrier Corp., Docket No. 19-5436/5519, Recommended for Publication)
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