Dispatch Automation v. Richards, Anthony B. ( 2002 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 01-2273
Dispatch Automation, Inc.,
Plaintiff-Appellant,
v.
Anthony B. Richards and Patricia Richards,
Defendants-Appellees.
Appeal from the United States District Court
for the Western District of Wisconsin.
No. 00 C 454--John C. Shabaz, Judge.
Argued January 14, 2002--Decided February 11, 2002
Before Posner, Ripple, and Diane P. Wood,
Circuit Judges.
Posner, Circuit Judge. This is a
diversity suit for breach of contract.
(It is governed, all agree by Wisconsin
contract law, but no peculiarities of
that law have been cited to us.) The
district court granted summary judgment
for the defendants, Tony Richards and his
wife. The plaintiff, Dispatch Automation,
Inc., has appealed. The particulars of
the claims and counterclaims need not
detain us; the dispositive issue is the
ownership of a computer program called
RiMS 2000. If the judge was right that no
reasonable jury, on the basis of the
evidence gathered in pretrial discovery,
could find that the corporation rather
than Mr. Richards was the owner, we must
affirm.
Richards is a software developer who in
1982 wrote a computer program to help
police and fire departments with records
management and vehicle dispatch. He
called the program RiMS Version 1.0 and
continued to develop it, registering
copyright on it in 1989, and by 1993 he
was up to RiMS Version 5.0. That year he
and his wife formed Dispatch Automation
with Gary Hagar and his wife, each couple
taking a 50 percent interest. The idea
was that Hagar, who had experience in
marketing, would be the outside partner,
and Richards, who would continue develop
ing RiMS, the inside partner. Hagar
testified in his deposition that the
Richardses needed him because they don’t
like using the telephone--a sure sign
they needed help in marketing.
An attachment to the articles of
incorporation defined ownership rights in
the corporation’s products:
Among the principal products sold by the
corporation will be the RIMS group of
computer-aided dispatch and records
management software products. RIMS is
owned by Anthony B. Richards and will be
licensed to the corporation. A license
fee of $1.00 per year will be paid to
Anthony B. Richards. All proceeds from
sales of the product will accrue to the
corporation. The corporation may continue
to develop the product but all ownership
rights will remain with Anthony B.
Richards.
This was an unusual form of contract in
the software industry. Ordinarily an
employer insists on owning all the
software developed by its employees
(unless created wholly on the employee’s
own time and at his sole expense),
whether it is derivative of pre-
employment work or completely new,
precisely to avoid the kind of dispute
that has arisen here. For an employee to
own rights to part of the employer’s
output is bound to create difficult and
contentious issues of managing and
tracking who owns what, and there is also
a danger that the employee will quit and
take his technology with him. Then too
software development is a risky
undertaking and the employer is likely to
be the superior risk bearer, and
ownership of the software shifts the
risk, both upside and downside, from the
developer to the firm. But the situation
here was unusual. Richards was not an
ordinary employee but (with his wife) the
half owner of his employer. The company
was built around his technology and he
was expected to and did continue
developing it. The corporation was
essentially himself and a marketing team,
and he was naturally reluctant to
relinquish ownership of the technology
that he had invented and would be working
to improve. The reservation of ownership
in Richards was broadly worded, perhaps
precisely to minimize the disputes likely
to arise in cases of divided rights.
Successive versions of the RiMS software
were developed, culminating in RiMS 2000,
also known as RiMS Version 8.0, which was
put on the market in 1999. RiMS 2000 was
developed by Richards over a two-year
period with the aid of an independent
programmer for whose services Dispatch
Automation paid $46,000.
Around this time the two couples had a
falling out, however, and in February
2001 Richards cancelled Dispatch
Automation’s license to market the "RiMS
group of computer-aided dispatch and
records management software products" and
he and his wife resigned as employees of
the corporation. Until the cancellation,
Dispatch Automation had been selling RiMS
2000 for roughly eighteen months.
The parties agree that the contract gave
Richards no ownership of any new products
developed by Dispatch Automation, but
only products that were "developments" of
the products that he had licensed to the
corporation when it was formed in 1993.
Dispatch Automation argues that
"developments" are small, incremental
changes and that RiMS 2000 was so
different from the earlier versions that
it was a new product. Richards, in
contrast, defines a "new" product as one
that is not encompassed by the
contractual term "RIMS group of computer-
aided dispatch and records management
software products." Dispatch Automation
developed a program for jail management
that Richards concedes was not
encompassed by the term, presumably
because it did not involve vehicle
dispatch; another excluded product was a
program for the digital imaging of
mugshots.
We think that Richards must be right in
his understanding of the difference
between a new product and the further
development of old product. It would have
been cockeyed--it would have been
contrary to Dispatch Automation’s own
interests as they then appeared--for the
parties to have agreed that Richards
would own successive versions provided
they made only incremental improvements
over their predecessors but that he would
have no rights to a successive version
that made a real breakthrough. That would
have given him an incentive to pull his
punches, or to quit the company if he
thought he was on the brink of a
breakthrough; neither the articles of
incorporation nor, so far as we are
aware, any other contractual provision
binds Richards to Dispatch Automation.
Since the corporation received the entire
income (minus $1 a year) from the sale of
programs licensed to it by Richards, it
had every reason to encourage him to make
breakthroughs. Granted, the bigger the
breakthrough, the more irksome the 50/50
division of income might seem to
Richards. Maybe this was a factor in the
falling out of the two couples; but it is
hardly to be imagined that Hagar wanted
to negotiate a form of contract that
would discourage Richards from making his
best efforts lest he do so well that he
would want the corporate charter revised
to give him a bigger slice of the pie.
(And it is presumably the absolute rather
than relative size of their own slice
that would matter to the Hagars.) It is
acknowledged that Richards developed RiMS
2000. The assistance of the independent
programmer was apparently quite minor;
one doesn’t buy much time of a first-rate
programmer for $46,000, and if he wasn’t
first rate he probably didn’t add much
value to the product.
When a contractual interpretation makes
no economic sense, that’s an admissible
and, in the limit, a compelling reason
for rejecting it, as we just noted in
Hartford Fire Ins. Co. v. St. Paul
Surplus Lines Ins. Co., No. 01-1946, slip
op. at 5-6 (7th Cir. Feb. 6, 2002). "The
presumption in commercial contracts is
that the parties were trying to
accomplish something rational. Common
sense is as much a part of contract
interpretation as is the dictionary or
the arsenal of canons." Fishman v.
LaSalle National Bank, 247 F.3d 300, 302
(1st Cir. 2001) (citations omitted). And
when the senseless interpretation would
require indeterminate litigation to
implement it, that is another compelling
reason for rejecting it. Clark Equipment
Co. v. Dial Corp., 25 F.3d 1384, 1387
(7th Cir. 1994). "Parties to contracts
may prefer simple-minded textualism to
costly disputes later on." Hemenway v.
Peabody Coal Co., 159 F.3d 255, 258 (7th
Cir. 1998). They "may prefer, ex ante
(that is, when negotiating the contract,
and therefore before an interpretive
dispute has arisen), to avoid the expense
and uncertainty of having a jury resolve
a dispute between them, even at the cost
of some inflexibility in interpretation."
FDIC v. W.R. Grace & Co., 877 F.2d 614,
621 (7th Cir. 1989).
To decide, as Dispatch Automation says
we (or a jury) must, whether a successive
version of a computer software product is
a merely incremental improvement or a
breakthrough would be like determining
the exact moment at which day becomes
night. The indeterminacy of that moment
is the reason the Weather Service defines
"sunset" as the moment when the top of
the sun’s disk sinks below the horizon
from the standpoint of a person standing
at ground level. The definition is
perfectly arbitrary, but without an
arbitrary definition the matter would be
indeterminate. And so here. It is
doubtful that contracting parties would
want to saddle courts with a standard as
nebulous as "when the sun sets" to guide
decision in the event the parties had a
falling out, especially when application
of the standard might require a
familiarity with computer programming
that few judges and jurors have. How for
example to decide whether to compare the
latest version of a product with the
immediately preceding version or with the
original version? Compared to the former,
it might seem incremental, while compared
to the original version it might seem
discontinuous, a radical or fundamental
change. The first approach would invite
the proliferation of meaningless
intermediate steps designed to disguise
novelty; but the second would ignore the
obvious fact that a process of
unmistakable, indeed quite gradual,
development can have an end point
radically different from its beginning,
as in the case of the oak and the acorn
it grew from. The position for which
Dispatch Automation contends is,
paradoxically, the minefield that in the
usual case leads employers to insist on
owning all software developed by their
employees.
The primary evidence on which Dispatch
Automation relies to show that RiMS 2000
was a new product is a statement that
Richards made when the program went on
the market that it is "a completely
different product underneath, a 100%
rewrite of RiMS in a new language with a
new database. . . . RiMS 2000 is four
times the size of its predecessor. It
does more things, does old things in
better, cleaner ways. It takes a bigger
PC to run it" (emphasis in original).
Even if we ignore the element of sales
puffery, we can see that the statement
provides an unsatisfactory basis for
distinguishing between a new development
of an existing product and a new product,
though we think it actually leans toward
the former, contrary to Dispatch
Automation’s submission. The reference to
the program’s being completely new
"underneath" and four times larger than
its predecessor suggests that the
principal changes are in the code rather
than the interface with the user, so that
unless told that it’s completely
rewritten and much bigger the user
wouldn’t know that it had changed.
Windows Professional 2000, which many of
us judges now use, is the successor to
Windows 98, but its code, based on
Windows NT, is radically different from
that of Windows 98; and yet to many,
maybe most, users the only differences
between Windows Professional 2000 and
Windows 98 is that the new operating
system crashes less frequently and is a
bit faster. RiMS 2000, with its rewritten
and longer code, is said to be both
faster and more stable than its
predecessors and apparently it’s also
more user-friendly (fewer steps are
required to activate subroutines) and has
some new bells and whistles. But from the
user’s standpoint it is not all that new
or different and it continues to fit
snugly within the key contractual term:
the RiMS group of computer-aided dispatch
and records-management software programs.
One might wonder why, if the code for
RiMS 2000 is as different from the code
for its predecessors as Dispatch
Automation claims, neither Dispatch
Automation nor Richards has registered it
with the Copyright Office. Asked this
question at his deposition, Richards
answered that "if you tried to submit a
copyright application every time there
was a new version of the program you
would spend all your time trying to
continually recopyright the program since
. . . the program changed literally
hundreds of times that day."
Registration, of course, is not a
condition for copyright protection,
though it confers some advantages. See,
e.g., Greenberg v. National Geographic
Society, 244 F.3d 1267, 1270 n. 3 (11th
Cir. 2001); Data General Corp. v. Grumman
Systems Support Corp., 36 F.3d 1147, 1160
(1st Cir. 1994). And contractual
alternatives to copyright may give
anowner of computer software more
protection than copyright would. See,
e.g., ProCD, Inc. v. Zeidenberg, 86 F.3d
1447, 1453-55 (7th Cir. 1996); Mark A.
Lemley, "Beyond Preemption: The Law and
Policy of Intellectual Property
Licensing," 87 Calif. L. Rev. 111, 124-33
(1999); cf. Oz Shy, "The Economics of
Copy Protection in Software and Other
Media," in Internet Publishing and
Beyond: The Economics of Digital
Information and Intellectual Property 97
(Brian Kahin & Hal R. Varian eds. 2000).
But all this is by the by, because
Richards’s avowal of the newness of RiMS
2000 would be relevant only if we adopted
Dispatch Automation’s interpretation of
the contract as requiring that
incremental improvements be distinguished
from breakthroughs, and we have said that
it would not be a proper reading.
Dispatch Automation argues that the
statement is the kind of objective
evidence of "extrinsic ambiguity" that
can make a contract which looks clear
(that is, contains no "intrinsic
ambiguity") unclear. E.g., Rossetto v.
Pabst Brewing Co., Inc., 217 F.3d 539,
542-43 (7th Cir. 2000); PMC, Inc. v.
Sherwin-Williams Co., 151 F.3d 610, 614
(7th Cir. 1998); Pierce v. Atchison,
Topeka & Santa Fe Ry., 65 F.3d 562, 568
(7th Cir. 1995); Bohler-Uddeholm America,
Inc. v. Ellwood Group, Inc., 247 F.3d 79,
93, 94 n. 3 (3d Cir. 2001); Kerin v. U.S.
Postal Service, 116 F.3d 988, 992 n. 2
(2d Cir. 1997). We may assume that a
written admission by the opposing party
is indeed sufficiently objective to
create an "extrinsic" ambiguity, cf. FDIC
v. W.R. Grace & Co., supra, 877 F.2d at
622, since the requirement of objectivity
is intended to prevent the overturning of
a straightforward-seeming contractual
interpretation on the basis of self-
serving testimony by the party
challenging that interpretation. Bock v.
Computer Associates International, Inc.,
257 F.3d 700, 707 (7th Cir. 2001);
Rossetto v. Pabst Brewing Co., Inc.,
supra, 217 F.3d at 546; PMC, Inc. v.
Sherwin-Williams Co., supra, 151 F.3d at
615; AM International, Inc. v. Graphic
Management Associates, Inc., 44 F.3d 572,
575 (7th Cir. 1995). (That self-serving
testimony might be testimony, admissible
at a trial only by virtue of an exception
to the hearsay rule, see Fed. R. Evid.
801(d)(2), to an admission by the
opposing party; that is why we said that
the admission must be written to count as
objective evidence of extrinsic
ambiguity.) But Richards’s statement is
not that. He was not making any admission
about the meaning of the contract. The
statement would become relevant if it
were decided that the contract requires
that incremental and fundamental
improvements be distinguished; but that
is a step we decline to take.
Affirmed.