DSC Communications v. Pulse

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DSC Communications v. Pulse Communications, 170 F.3d 1354 (Fed. Cir. 1999)

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BRYSON, Circuit Judge.

DSC Communications Corporation (DSC) and Pulse Communications, Inc., (Pulsecom) make products for the telephone industry and compete for the business of the Regional Bell Operating Companies, more commonly known as the "RBOCs." Competition between the two parties led to this litigation over certain products that the two produce for use in commercial telephone systems.

DSC struck first, filing an action in the United States District Court for the Eastern District of Virginia in which it alleged that Pulsecom had committed various federal and state law violations, including (1) contributory infringement of DSC's copyright in certain software used with one of DSC's products; (2) direct infringement of DSC's copyright in that software; (3) misappropriation of DSC's trade secrets; and (4) tortious interference with DSC's business expectancy. Pulsecom then counterclaimed, charging that DSC had infringed Pulsecom's U.S. Patent No. 5,263,081 (the '081 patent).

The parties went to trial on DSC's claims, and at the close of DSC's case-in-chief, Pulsecom moved for judgment as a matter of law. The court granted the motion and dismissed all four of DSC's claims. With respect to Pulsecom's counterclaim of patent infringement, the court held a hearing to construe the claims, and the parties subsequently filed cross-motions for summary judgment. The court granted DSC's motion and entered a summary judgment of noninfringement.

I

This case involves certain components of digital loop carrier systems (DLCs), electronic devices that allow telephone companies to serve large numbers of subscribers efficiently. Before the advent of DLCs, telephone companies had to run copper wire from their central offices to the telephones of each of their subscribers. DLCs allow the individual copper lines to be run over much shorter distances, resulting in large savings for telephone companies. Typically, a DLC is placed in a location central to a number of subscribers, and copper lines are run over the relatively short distances from the DLC to the subscribers.

The DLC acts as an analog-to-digital converter and as a signal modulator-demodulator. The electrical signals that travel over the copper lines between the DLC and the subscribers are voice-frequency analog signals, but the signals that travel between the DLC and the central telephone office are digital signals that travel over a high-bandwidth (e.g., fiber optic) digital channel. The DLC converts the various analog signals it receives from individual subscribers to a digital format and modulates those digital signals into a high-bandwidth composite signal that is sent to the central office through the digital channel. The DLC performs the reverse process on signals traveling from the central office to individual subscribers.

The devices at the heart of the dispute in this case are the "Litespan 2000" DLC, which is manufactured by DSC, and the interface cards, which DSC and Pulsecom designed to work with the Litespan. The Litespan has a backplane connecting 500 interface card slots, through interface circuitry, to a microprocessor. The backplane is controlled by an application-specific integrated circuit that uses a particular signaling protocol. The purpose of the interface cards is to comport with the backplane protocol while providing a particular type of service to subscribers. For example, a single Litespan might have some interface cards providing POTS (plain old telephone service) service and other interface cards providing PBX (private branch exchange) service. The analog signals traveling between the subscribers and the two types of interface cards may be quite different, but the interface cards process the signals so that they are compatible with the Litespan's backplane protocol.

Litespans and individual interface cards each have their own microprocessors and interface circuitry, which require software to operate. Two software packages are at issue here. The first is the Litespan System software, which includes both the Litespan operating system software and various Litespan utility programs. The second is the POTS-DI (download image) software, which DSC developed to operate its POTS interface cards. Both the Litespan System software and the POTS-DI software normally reside in nonvolatile storage within Litespan systems. When a DSC POTS card is inserted into a Litespan and powered up, a copy of the POTS-DI software is downloaded into volatile memory on the POTS card. When the POTS card is powered down, its copy of the POTS-DI software ceases to exist. This design allows changes to be made to the POTS-DI software in a central location (i.e., in the Litespan system) with no need to update software in the individual POTS cards.

DSC designed the Litespan to be used in the telephone networks of the RBOCs, and it transferred the Litespan technology to the RBOCs through a series of comprehensive agreements. The seven agreements at issue here--DSC-Ameritech, DSC-NYNEX, DSC-Bell Atlantic (1993-96 and 1996-99), DSC-U.S. West, DSC-Pacific Bell, and DSC-BellSouth--have generally similar provisions. The agreements all contain provisions that license, under a variety of restrictions, the Litespan System software and POTS-DI software to the RBOCs.

Pulsecom has developed a Litespan-compatible POTS card to compete with DSC's POTS card. Pulsecom decided not to develop the software necessary to operate its POTS card, but rather to design the card so that--like DSC's POTS card--it downloads the POTS-DI software from the host Litespan into its resident memory upon power-up. Pulsecom's design has the obvious advantage of allowing Pulsecom's POTS cards to remain compatible with the Litespan system if DSC modifies its Litespan System software and POTS-DI software.

II

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DSC's principal contention on appeal is that the district court improperly granted judgment to Pulsecom on DSC's contributory copyright infringement claim at the close of DSC's case. . . .

DSC's theory of contributory infringement is that each time an RBOC powers up a Pulsecom POTS card in one of its Litespan systems, it directly infringes DSC's POTS-DI software copyright by copying the POTS-DI software from the Litespan into the resident memory of a Pulsecom POTS card. An act of direct infringement is a necessary predicate for any derivative liability on the part of Pulsecom; absent direct infringement, there can be no contributory infringement. See, e.g., Subafilms Ltd. v. MGM-Pathe Communications Co., 24 F.3d 1088, 1092, 30 USPQ2d 1746, 1749 (9th Cir. 1994). The district court disposed of DSC's claim on the ground that DSC had not made a prima facie showing of direct infringement.

Pivotal to the proper resolution of DSC's copyright infringement claim is the interpretation and application of section 117 of the Copyright Act. Because the Fourth Circuit has not had occasion to construe section 117, we have no direct guidance as to how that court would approach the problem in this case. We therefore look to general principles of copyright law in addressing the copyright infringement issue.

Section 117 provides a limitation on the exclusive rights of the owner of the copyright in a piece of software. It provides, in pertinent part:

[I]t 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 . . . .

The district court concluded that making copies of the POTS-DI software (in the resident memory of POTS cards) was an "essential step in the utilization" of the POTS-DI software and that there was no evidence that the RBOCs used the software in any other manner that would constitute infringement. Accordingly, under the district court's theory of the case there was no direct infringement (and thus no contributory infringement) if the RBOCs were section 117 "owners" of copies of the POTS-DI software.

The district court then held that the RBOCs were "owners" of copies of the POTS-DI software because they obtained the software by making a single payment and obtaining a right to possession of the software for an unlimited period. Those attributes of the transaction, the court concluded, made the transaction a "sale."

DSC challenges the district court's conclusion that, based on the terms of the purchase transactions between DSC and the RBOCs, the RBOCs were "owners" of copies of the POTS-DI software. In order to resolve that issue, we must determine what attributes are necessary to constitute ownership of copies of software in this context.

Unfortunately, ownership is an imprecise concept, and the Copyright Act does not define the term. Nor is there much useful guidance to be obtained from either the legislative history of the statute or the cases that have construed it. The National Commission on New Technological Uses of Copyrighted Works ("CONTU") was created by Congress to recommend changes in the Copyright Act to accommodate advances in computer technology. In its final report, CONTU proposed a version of section 117 that is identical to the one that was ultimately enacted, except for a single change. The proposed CONTU version provided that "it is not an infringement for the rightful possessor of a copy of a computer program to make or authorize the making of another copy or adaptation of that program . . . ." Congress, however, substituted the words "owner of a copy" in place of the words "rightful possessor of a copy." See Pub. L. No. 96-517, 96th Cong., 2d Sess. (1980). The legislative history does not explain the reason for the change, but it is clear from the fact of the substitution of the term "owner" for "rightful possessor" that Congress must have meant to require more than "rightful possession" to trigger the section 117 defense.

In the leading case on section 117 ownership, the Ninth Circuit considered an agreement in which MAI, the owner of a software copyright, transferred copies of the copyrighted software to Peak under an agreement that imposed severe restrictions on Peak's rights with respect to those copies. The court held that Peak was not an "owner" of the copies of the software for purposes of section 117 and thus did not enjoy the right to copy conferred on owners by that statute. The Ninth Circuit stated that it reached the conclusion that Peak was not an owner because Peak had licensed the software from MAI. See id. at 518 n.5. That explanation of the court's decision has been criticized for failing to recognize the distinction between ownership of a copyright, which can be licensed, and ownership of copies of the copyrighted software. Plainly, a party who purchases copies of software from the copyright owner can hold a license under a copyright while still being an "owner" of a copy of the copyrighted software for purposes of section 117. We therefore do not adopt the Ninth Circuit's characterization of all licensees as non-owners. Nonetheless, the MAI case is instructive, because the agreement between MAI and Peak, like the agreements at issue in this case, imposed more severe restrictions on Peak's rights with respect to the software than would be imposed on a party who owned copies of software subject only to the rights of the copyright holder under the Copyright Act. And for that reason, it was proper to hold that Peak was not an "owner" of copies of the copyrighted software for purposes of section 117. We therefore turn to the agreements between DSC and the RBOCs to determine whether those agreements establish that the RBOCs are section 117 "owners" of copies of the copyrighted POTS-DI software.

Each of the DSC-RBOC agreements contains a provision that is similar in effect to the following, taken from the DSC-BellSouth agreement: "All rights, title and interest in the Software are and shall remain with seller, subject, however, to a license to Buyer to use the Software solely in conjunction with the Material [i.e., the Litespan-2000 and related equipment] during the useful life of the Material." Two of the agreements also contain clauses that provide for the passage of title to all the material transferred from DSC to the RBOCs, except for the software. The language and the context of those clauses makes it clear that the clauses refer to DSC's rights to the copies of the software in the RBOCs' possession, not DSC's copyright interest in the software. There was no need for a contract clause making clear that DSC was not selling its copyrights in its software to its customers, as it was obvious that DSC did not intend to convey any ownership rights in its copyright as part of the licensing agreements with the RBOCs. The question of ownership of the copies of the software, by contrast, was a matter that needed to be addressed in the contracts.

Not only do the agreements characterize the RBOCs as non-owners of copies of the software, but the restrictions imposed on the RBOCs' rights with respect to the software are consistent with that characterization. In particular, the licensing agreements severely limit the rights of the RBOCs with respect to the POTS-DI software in ways that are inconsistent with the rights normally enjoyed by owners of copies of software.

Section 106 of the Copyright Act reserves for a copyright owner the following exclusive rights in the copyrighted work: the right to reproduce the work; the right to prepare derivative works; the right to distribute copies of the work; the right to perform the work publicly; and the right to display the work publicly. Those rights are expressly limited, however, by sections 107 through 120 of the Act. Of particular importance are the limitations of sections 109 and 117. As we have seen, section 117 limits the copyright owner's exclusive rights by allowing an owner of a copy of a computer program to reproduce or adapt the program if reproduction or adaptation is necessary for the program to be used in conjunction with a machine. Section 109, which embodies the "first sale" doctrine, limits the copyright owner's otherwise exclusive right of distribution by providing, in relevant part, that

the owner of a particular copy . . . is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy . . . . Notwithstanding [the above], unless authorized by . . . the owner of copyright in a computer program . . . [no] person in possession of a particular copy of a computer program . . . may, for the purposes of direct or indirect commercial advantage, dispose of, or authorize the disposal of, the possession of that . . . computer program . . . by rental, lease, or lending . . . .

Each of the DSC-RBOC agreements limits the contracting RBOC's right to transfer copies of the POTS-DI software or to disclose the details of the software to third parties. For example, the DSC-Ameritech agreement provides that Ameritech shall "not provide, disclose or make the Software or any portions or aspects thereof available to any person except its employees on a 'need to know' basis without the prior written consent of [DSC] . . . ." Such a restriction is plainly at odds with the section 109 right to transfer owned copies of software to third parties. The agreements also prohibit the RBOCs from using the software on hardware other than that provided by DSC. If the RBOCs were "owners of copies" of the software, section 117 would allow them to use the software on any hardware, regardless of origin. Because the DSC-RBOC agreements substantially limit the rights of the RBOCs compared to the rights they would enjoy as "owners of copies" of the POTS-DI software under the Copyright Act, the contents of the agreements support the characterization of the RBOCs as non-owners of the copies of the POTS-DI software.

In finding that the RBOCs were owners of copies of the POTS-DI software, the district court relied heavily on its finding that the RBOCs obtained their interests in the copies of the software through a single payment and for an unlimited period of time. It is true that the transfer of rights to the POTS-DI software in each of the agreements did not take the form of a lease, and that the transfer in each case was in exchange for a single payment and was for a term that was either unlimited or nearly so. One commentator has argued that when a copy of a software program is transferred for a single payment and for an unlimited term, the transferee should be considered an "owner" of the copy of the software program regardless of other restrictions on his use of the software. That view has not been accepted by other courts, however, and we think it overly simplistic. The concept of ownership of a copy entails a variety of rights and interests. The fact that the right of possession is perpetual, or that the possessor's rights were obtained through a single payment, is certainly relevant to whether the possessor is an owner, but those factors are not necessarily dispositive if the possessor's right to use the software is heavily encumbered by other restrictions that are inconsistent with the status of owner.

In passing, the district court found added support for its ruling on the contributory infringement issue in the "non-exclusive market rights" clause in DSC's contracts with the RBOCs. The court concluded that the market rights clause supported its view that the RBOCs were entitled to use the POTS-DI software in connection with Pulsecom's POTS cards, because otherwise there would be no point in permitting the RBOCs to buy equipment such as POTS cards from another source.

We conclude that the district court read the market rights clause too broadly. The market rights clause gave the RBOCs the right to obtain competing products and software from other sources, but it did not give the RBOCs the right to copy DSC's copyrighted software in the course of using other companies' products. In fact, the contracts specifically prohibited the RBOCs from copying DSC's software except for use with DSC equipment.

In light of the restrictions on the RBOCs' rights in the copies of the POTS-DI software, we hold that it was improper for the court to conclude, as a matter of law, that the RBOCs were "owners" under section 117 of the copies of DSC's software that were in their possession. The court was therefore incorrect to rule, at the close of DSC's case, that section 117 of the Copyright Act gave the RBOCs the right to copy the POTS-DI software when using Pulsecom's POTS cards without violating DSC's copyright in the software. Accordingly, we reverse the district court's order granting judgment for Pulsecom on DSC's contributory infringement claim.

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