Altmayer-Pizzorno v. L-Soft International, Inc.

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 07-1600
JUAN ALTMAYER-PIZZORNO,
Plaintiff - Appellee,
v.
L-SOFT INTERNATIONAL, INCORPORATED,
Defendant – Appellant,
and
L-SOFT SWEDEN AB; L-SOFT INVESTMENTS, S.A.; L-SOFT UK LTD;
ERIC THOMAS,
Defendants,
and
DELOITTE & TOUCHE, LLP,
Interested Party.
No. 07-1613
JUAN ALTMAYER-PIZZORNO,
Plaintiff – Appellee,
v.
ERIC THOMAS,
Defendant – Appellant,
and
L-SOFT INTERNATIONAL, INCORPORATED; L-SOFT SWEDEN AB; L-SOFT
INVESTMENTS, S.A.; L-SOFT UK LTD,
Defendants,
and
DELOITTE & TOUCHE, LLP,
Interested Party.
Appeals from the United States District Court for the District
of Maryland, at Greenbelt. Peter J. Messitte, Senior District
Judge. (8:02-cv-01556-PJM)
Argued: September 25, 2008 Decided: December 3, 2008
Before WILLIAMS, Chief Judge, GREGORY, Circuit Judge, and James
C. CACHERIS, Senior United States District Judge for the Eastern
District of Virginia, sitting by designation.
Affirmed by unpublished opinion. Judge Gregory wrote the
opinion, in which Chief Judge Williams and Senior Judge Cacheris
joined.
ARGUED: Mark Thomas Stancil, ROBBINS, RUSSELL, ENGLERT, ORSECK,
UNTEREINER & SAUBER, L.L.P., Washington, D.C., for Appellants.
Norman L. Smith, FISHER & WINNER, Baltimore, Maryland, for
Appellee. ON BRIEF: Craig M. Palik, MCNAMEE, HOSEA, JERNIGAN &
KIM, P.A., Greenbelt, Maryland, for Appellant Eric Thomas;
Roy T. Englert, Jr., Ariel N. Lavinbuk, ROBBINS,
RUSSELL, ENGLERT, ORSECK, UNTEREINER & SAUBER, L.L.P.,
Washington, D.C., for Appellant L-Soft International,
Incorporated. Jeffrey E. Nusinov, FISHER & WINNER, L.L.P.,
Baltimore, Maryland; Francis J. Gorman, Charles L. Simmons,
GORMAN & WILLIAMS, Baltimore, Maryland, for Appellee.
Unpublished opinions are not binding precedent in this circuit.
2
GREGORY, Circuit Judge:
Juan Altmayer-Pizzorno (“Pizzorno”) brought suit against L-
Soft International, Inc. (“L-Soft”), and its CEO Eric Thomas
(“Thomas”), alleging, inter alia, that L-Soft 1 breached the
software distribution contract between the parties and engaged
in copyright infringement through its continued software sales
after the termination of the contract. A jury returned a
verdict for Pizzorno on both of these claims. On appeal, L-Soft
argues that the district court erred in denying its motion for
judgment as a matter of law on the copyright infringement claim.
For the reasons set forth below, we affirm the judgment of the
district court.
I.
L-Soft is a software company whose premier product is an e-
mail list management program known as LISTSERV. LISTSERV offers
various functions related to e-mail list management, but the
program does not actually send e-mail messages. In 1995, L-Soft
came into contact with Pizzorno, a developer who had designed
mailing software that was capable of quickly sending a large
number of e-mail messages. The two parties discussed an
1
Defendants L-Soft International, Inc., and Eric Thomas are
hereinafter collectively referred to as “L-Soft.”
3
arrangement in which L-Soft would market and sell licenses of
Pizzorno’s mailing software that were packaged along with
LISTSERV. These negotiations culminated in an October 1995
contract between the parties, known as the Intellectual Property
Distribution Agreement (“IPDA”).
Under the terms of the IPDA, Pizzorno granted L-Soft the
exclusive North American licensing rights to the mailing
software, which was to be sold under the brand name LSMTP; in
exchange, L-Soft was to pay Pizzorno twenty-five percent of the
net proceeds from its sales of LSMTP. L-Soft also agreed to
sell maintenance services for LSMTP, and Pizzorno was to provide
support under the maintenance service contracts in exchange for
eighty percent of the net proceeds from the service contracts.
The payment schedule in the IPDA obligated L-Soft to make all
royalty payments to Pizzorno on a quarterly basis.
In addition to the IPDA’s licensing and royalty provisions,
the contract included a non-competition covenant that prohibited
L-Soft from developing any software that would be in direct
competition with LSMTP and from contracting with a third party
to develop competing software. 2 The IPDA also contained two
2
Section 6.2 provides:
A software product shall be considered to qualify as
Competing Software if, subject to the other limiting
and defining provisions in this Article 6, the
(Continued)
4
provisions allowing for termination of the contract, one in the
event of default and the other for voluntary termination. Under
Section 5.2 of the IPDA, either party could terminate the
contract if, after giving written notice to the other party that
it had breached the terms of the IPDA, the breaching party
“fail[ed] to correct, or commence and diligently pursue
corrective action, within thirty days.” (J.A. 100.) Under
Section 5.4 of the IPDA, either party could voluntarily
terminate the IPDA without cause; however, L-Soft had to give
sixty days written notice, while Pizzorno was required to give
eighteen months written notice. Furthermore, if Pizzorno
elected to voluntarily terminate the IPDA, L-Soft would be
immediately released from the non-competition covenant at the
time that the notice of termination was given.
From 1993 until 1998, both parties performed in accordance
with the IPDA. However, Pizzorno did not receive his royalty
payment for the first quarter of 1999, which ended on April 30,
1999, and he sent Thomas correspondence by e-mail and registered
software product performs tasks substantially similar
to the Software, such that a typical customer and user
of the Software could be reasonably expected to switch
from the Software to the new software product with
negligible or at least acceptable loss in
functionality and performance.
(J.A. 101.)
5
mail on May 25, 1999. In this correspondence, Pizzorno notified
Thomas that L-Soft had failed to send him a royalty check for
the first quarter of 1999 as required by the IPDA. Thomas
responded to Pizzorno by e-mail, claiming that Pizzorno was
himself in breach of the IPDA and disputing that L-Soft owed
Pizzorno any royalties for the first quarter. L-Soft claimed
that it had overpaid Pizzorno in prior quarters due to
differences in accounting procedures.
On July 13, 1999, Pizzorno sent Thomas a letter (“the July
13th letter”), in which he stated:
[O]n May 25th I sent you a letter, both per e-mail and
on paper per registered mail, inquiring on the status
of the 2nd quarter royalty payment, which was due by
the end of April. You responded per e-mail saying
that you were changing your accounting system and
would pay once that had been done, but you never did.
Certainly you realize that I have the right to be paid
on time . . . I find it hard to believe that L-Soft
owed me no money at all for that quarter. I wonder if
you are still selling licenses of the program. As far
as I can tell, by not paying me, you have breached the
contract.
I now consider the contract terminated, and unless you
prove that L-Soft indeed owned [sic] me no money by
the end of July, I will act accordingly. Thank you.
(J.A. 222 (ellipsis in original).)
On August 5, 1999, L-Soft sent a letter to Pizzorno in
response to the July 13th letter. In this letter (“the August
5th letter”), L-Soft reiterated that it had not paid Pizzorno
because of changes in its accounting procedures, and L-Soft
6
assured Pizzorno that he would be paid royalties in the future
as soon as he was entitled to them. L-Soft further alleged that
Pizzorno was in breach of the IPDA because he had failed to
provide adequate technical support and failed to provide L-Soft
a copy of the source code for the mailing software.
On August 25, 1999, Pizzorno sent a letter to L-Soft in
response to the August 5th letter. In this letter (“the August
25th letter”), Pizzorno stated that he had initially sent notice
of default on May 25, 1999, and after he received no payment or
adequate explanation for nonpayment, he sent the July 13th
letter terminating the agreement. The August 25th letter
continued:
Given the history of payments from L-Soft to Mr.
Pizzorno pursuant to the Agreement, Mr. Pizzorno finds
it difficult to believe that no payments were due for
the first quarter. If indeed no payments were due,
then this implies that L-Soft has defaulted on its
obligations to use its best efforts to sell the
Software . . . . In any event, empty statements that
no royalties are due will not suffice. Until L-Soft
provides an accounting, Mr. Pizzorno will continue to
treat the Agreement as terminated.
(J.A. 231.) The August 25th letter also addressed L-Soft’s
contention that Pizzorno had breached the IPDA by failing to
provide the source code for the mailing software, stating that
Pizzorno “has elected the escrow option” and “is prepared” to
transmit the source code directly to the licensees. (J.A. 231-
32.) Pizzorno further charged L-Soft with several additional
7
breaches of the IPDA, including: (1) failing to make second
quarter royalty payments, (2) failing to use best efforts in
marketing LSMTP, and (3) using LSMTP in a manner not permitted
by the IPDA. Pizzorno demanded that L-Soft cure these breaches
within thirty days.
Pizzorno next communicated with L-Soft via two e-mails sent
on September 10, 1999. In the first e-mail, Pizzorno contacted
Thomas regarding Pizzorno’s failure to provide support services
for the mailing software:
[A]s I and my attorney have indicated, we consider the
Agreement terminated. Accordingly, I am no longer
providing support services. If L-Soft 1) persuades me
that no royalties were due the first quarter, and 2)
cures the breaches described in my attorney’s most
recent letter, I will resume support. Until then, I
will forward all “help” messages to you . . . .
This of course ignores the problem that L-Soft
continues to use LSMTP despite the termination of the
Agreement. I will not ignore that for long.
(J.A. 237.) Pizzorno wrote the second e-mail in response to a
support request from an L-Soft employee. In that e-mail,
Pizzorno told the employee that L-Soft and he were “in the
middle of a contract dispute, and unless and until L-Soft
resolves this dispute I will not be supporting LSMTP further.”
(J.A. 253.) Pizzorno did answer the question, however, “as a
courtesy, and without waiving any of my rights regarding the
contract dispute.” (Id.)
8
On September 27, 1999, L-Soft responded to the August 25th
letter. In this letter (the “September 27th letter”), L-Soft
acknowledged that Pizzorno had made allegations that L-Soft was
in default of the contract, but it denied those allegations. In
addition, the September 27th letter followed up on Pizzorno’s
failure to provide the source code for the mailing software.
Pizzorno ultimately placed the source code into escrow in
October 1999. The parties had no communications with each other
from September 27, 1999, until the filing of this lawsuit;
however, L-Soft continued to sublicense LSMTP and made no
royalty payments to Pizzorno.
On April 29, 2002, Pizzorno brought suit against L-Soft in
the United States District Court for the District of Maryland
for breach of contract and copyright infringement. 3 L-Soft filed
a counterclaim against Pizzorno for breach of contract. The
jury returned a verdict in favor of Pizzorno, specifying in the
verdict form that L-Soft had breached the IPDA on April 30,
1999, and that Pizzorno had not breached the IPDA. The jury
also determined that Pizzorno had terminated the agreement on
3
Because L-Soft continued to sell LSMTP licenses after the
lawsuit was filed, Pizzorno sent a notice of voluntary
termination to L-Soft on December 16, 2003, which was “given in
addition to my previous notices of termination” and “without
prejudice to my termination of the Agreement in 1999 for cause.”
(J.A. 743.)
9
July 13, 1999, and that L-Soft was liable for copyright
infringement for all LSMTP sales occurring thereafter.
Following the verdict, L-Soft raised and renewed several
motions for judgment as a matter of law, two of which are
relevant to this appeal: (1) that the July 13th letter was
insufficient to terminate the IPDA, and (2) that the misuse of
copyright defense precluded Pizzorno from recovering on the
copyright infringement claim. The district court denied both
post-trial motions and entered judgment for Pizzorno. L-Soft
appeals.
II.
We review de novo the district court’s denial of a motion
for judgment as a matter of law. Int’l Ground Transp., Inc. v.
Mayor of Ocean City, 475 F.3d 214, 218 (4th Cir. 2007). A
district court should grant a motion for judgment as a matter of
law after the jury verdict “only if, viewing the evidence in a
light most favorable to the non-moving party . . . and drawing
every legitimate inference in that party’s favor, the only
conclusion a reasonable jury could have reached is one in favor
of the moving party.” Id. at 218-19.
In deciding upon the applicability of an equitable defense
such as misuse of copyright, a district court must accept the
factual findings of the jury if they are supported by
10
substantial evidence. See Wang Labs., Inc. v. Mitsubishi Elecs.
Am., Inc., 103 F.3d 1571, 1579 (Fed. Cir. 1997). If the
district court makes its own factual findings in determining the
applicability of an equitable defense, we must uphold such
findings unless they are clearly erroneous. See id. at 1579
n.3; Newell Cos., Inc. v. Kenney Mfg. Co., 864 F.2d 757, 762
(Fed. Cir. 1988).
A.
In order to terminate a contract, one party must give the
other party a notice of termination that is “definite, specific,
positive, and unconditional.” C.W. Blomquist & Co., Inc. v.
Capital Area Realty Investors Corp., 311 A.2d 787, 791 (Md.
1973); accord City of Fairfax v. Washington Metro. Area Transit
Auth., 582 F.2d 1321, 1327 (4th Cir. 1978). Written notice of
termination is not required; rather, a contract may be
terminated through conduct that is clearly inconsistent with the
continued existence of the contract. Buchholtz v. Bert Goodman
Signs, Inc., 199 A.2d 915, 917 (Md. 1964). Nevertheless, even
where a contract is terminated or abandoned through the conduct
of both parties, such termination must be shown by “positive and
unequivocal conduct inconsistent with an intent to be bound.”
Graham v. James, 144 F.3d 229, 238 (2d Cir. 1998); see also
11
Buchholtz, 199 A.2d at 917-18 (applying the “unequivocal”
standard where the conduct of both parties was at issue). 4
First, L-Soft argues that the district court misconceived
the legal standard for determining whether a contract has been
terminated. According to L-Soft, the district court should have
determined for itself whether the July 13th letter was ambiguous
on its face, rather than merely “conclude[] that the jury could
well conclude that the letter was not ambiguous.” (J.A. 1660.)
L-Soft bases this argument on the familiar proposition that “the
determination of ambiguity is one of law, not fact.” Calomiris
v. Woods, 727 A.2d 358, 362 (Md. 1999). However, Calomiris is a
case regarding the interpretation of the terms of a written
contract, not a case about whether a written notice constituted
an effective termination of a contract. See id. In deciding
whether a contract was terminated, it is unnecessary for the
court to initially determine whether a written notice of
termination was “ambiguous” as is done for cases involving
contract interpretation. The legal standard for contract
termination permits the trier of fact to consider any written
4
The district court suggested that there may be a lower
standard for determining whether there has been an effective
contract termination when both parties act as if the contract is
terminated. (J.A. 1661.) While the district court was
incorrect as a matter of law, it did not actually apply a lower
standard in making its decision, and thus this error does not
merit reversal.
12
documents, the conduct of the parties, and surrounding
circumstances to determine whether the notice of termination was
positive and unconditional. See Buchholtz, 199 A.2d at 917. A
fair reading of the district court’s opinion reveals that the
district court acknowledged that the notice of termination had
to meet the positive and unconditional standard, and it held
that a reasonable jury could have concluded that the July 13th
letter and the prior conduct of the parties satisfied that
standard.
Nevertheless, L-Soft argues that even if the district court
applied the correct legal standard for contract termination, the
July 13th letter was legally insufficient to satisfy this
standard. Under some circumstances, courts have determined that
particular written documents did not satisfy the standard for
termination as a matter of law. See, e.g., Stovall v.
Publishers Paper Co., 584 P.2d 1375, 1381 (Or. 1978); Rosenbloom
v. Feiler, 431 A.2d 102, 111 (Md. 1981); Accu-Weather, Inc. v.
Prospect Commc’ns, Inc., 644 A.2d 1251, 1255 (Pa. Super. Ct.
1994). L-Soft argues that the July 13th letter is similar to
the purported written notice of termination at issue in Stovall,
which the Supreme Court of Oregon determined was legally
insufficient to constitute an effective notice of termination.
In Stovall, the plaintiff’s counsel sent a letter to the
defendant’s counsel as part of an ongoing dispute about the
13
construction of a road that was part of a timber contract. See
584 P.2d at 1377. In the first two paragraphs of the letter,
the plaintiff’s counsel ostensibly terminated the contract,
stating that:
We are giving you notice herewith that pursuant to
Paragraph 11 of the contract we are exercising Mr.
Stovall’s option to terminate the Timber Cutting
Agreement and all rights thereunder of your client and
of their predecessor in interest. The cutting of any
timber will be considered willful trespass and treble
damages will be sought under ORS 105.810.
Id. at 1378.
In the third paragraph of the letter, the plaintiff’s
counsel first stated that he “was prepared to file [an] action
several days ago,” and he even included a copy of the complaint
with the letter. Id. However, the plaintiff’s counsel
indicated that he and the plaintiff had “reexamined” a prior
letter of the defendant and that “it would appear that in the
interest of compromise [the defendant] is offering to do
substantially more than it has previously acknowledged to be its
obligation . . . .” Id. The letter then suggested a compromise
to the ongoing dispute between the parties and indicated that if
the compromise was not accepted by written notice within a week,
the plaintiff would file a complaint thereafter. Id. at 1378-
79. The plaintiff’s counsel concluded the letter with a related
proposal, which the defendant should consider “if [the
14
defendant] accepts the compromise offer and will be logging in
the area.” Id.
Ultimately, the Stovall court found that the letter was an
ineffective notice of termination as a matter of law. See id.
at 1379-80. According to the court, when a letter “mix[es]
words of termination with words of compromise, negotiations, and
present obligation,” such a letter fails to satisfy the
requirements for an effective termination. Id. at 1380. Even
though the first two paragraphs of the letter seemed to contain
clear, unequivocal language of termination, the remainder of the
letter contained an extensive “offer of compromise,” raising
doubts as to whether the plaintiff had terminated the contract.
Id. at 1379-80. Throughout the second half of the letter, the
plaintiff’s counsel referred to present contractual obligations,
which would presumably continue if the defendant were to accept
the plaintiff’s compromise offer within a week. See id.
Although L-Soft contends that the July 13th letter is
similar to the letter at issue in Stovall, the two letters are
in fact quite distinct with regard to the termination of the
respective contracts. In the first paragraph of the July 13th
letter, Pizzorno stated that he had sent a letter to Thomas on
May 25, 1999, inquiring about the royalty payment, but that he
had not received any payment nor been provided with a sufficient
explanation for non-payment. Pizzorno concluded the paragraph
15
by stating, “As far as I can tell, by not paying me, you have
breached the contract.” (J.A. 222.) According to L-Soft, the
last sentence of the first paragraph was equivocal because
Pizzorno admitted that he lacked complete information about
whether L-Soft had breached the IPDA.
The last sentence of the first paragraph should not be read
in isolation, as L-Soft suggests, but rather it must be
considered in the context of the circumstances of the parties.
Pizzorno had no way of knowing the precise amount of royalty
payments that were due since he was not involved in the sales of
the LSMTP software; all such information was held exclusively by
L-Soft. The use of the phrase “[a]s far as I can tell” did not
imply any equivocation in Pizzorno’s termination of the IPDA,
but merely reflected the fact that Pizzorno had no way of
verifying the amount of royalty payments he was owed.
In the second paragraph of the letter, Pizzorno wrote, “I
now consider the contract terminated, and unless you prove that
L-Soft indeed owned [sic] me no money by the end of July, I will
act accordingly.” (J.A. 222 (emphasis added).) L-Soft contends
that this language is similar to that of the letter in Stovall
because it ostensibly terminated the IPDA but also provided a
condition that L-Soft could satisfy to prevent the termination
of the contract. In response, Pizzorno claims that this
paragraph clearly terminates the IPDA, and that a reasonable
16
jury could conclude that the second clause merely gave L-Soft a
deadline to provide proof that no money was owed or else a
lawsuit would be filed to collect monies owed.
While the second paragraph of the July 13th letter might
not have been written using precise legal terminology, the
language is unlike the attempt to negotiate a compromise in the
Stovall letter. Although L-Soft contends that the phrase “act
accordingly” could have a variety of meanings, a reasonable jury
could have found that Pizzorno used the phrase “act accordingly”
to indicate that he would seek damages for breach of contract
through the filing of a lawsuit. Even if the import of the “act
accordingly” language could not be precisely deduced, a
reasonable jury could have concluded that “act accordingly”
clearly did not refer to the termination of the contract,
particularly since Pizzorno had already stated that the contract
was terminated in the first clause of the sentence and used the
conjunction “and” to connect the two clauses.
Finally, L-Soft urges this court to consider Pizzorno’s
conduct following the receipt of the July 13th letter, which it
claims is inconsistent with the termination of the IPDA on July
13, 1999, including: (1) the August 25th letter, in which
Pizzorno provided a list of L-Soft’s breaches of the IPDA; (2)
the September 10th e-mail to Thomas, in which Pizzorno stated
that he would resume support if Thomas cured the breaches of the
17
IPDA; (3) the placement of the LSMTP source code into escrow on
October 1999; and (4) the termination of the IPDA on December
16, 2003, pursuant to the voluntary termination provision.
Even assuming that Pizzorno’s conduct following July 13,
1999, was inconsistent with the termination of the contract,
such conduct cannot “revive” a contract that has been
terminated. Courts have noted that the “conduct between the
giving of notice and the actual date of termination[] may be
considered in determining whether there has been a clear and
unequivocal termination.” Morris Silverman Mgmt. Corp. v. W.
Union Fin. Servs., 284 F. Supp. 2d 964, 974 (N.D. Ill. 2003);
accord Maloney v. Madrid Motor Corp., 122 A.2d 694, 696 (Pa.
1956); Accu-Weather, Inc., 644 A.2d at 1254-55. However, in
those cases in which courts have considered a party’s conduct
subsequent to a purported notice of termination, the contract
had not been immediately terminated in the written notice;
rather, notice had been given for the contract to be terminated
on some future date. See, e.g., Accu-Weather, Inc., 644 A.2d at
1254-55; Morris Silverman Mgmt. Corp., 284 F. Supp. 2d at 975.
Here, the conduct at issue followed a notice of immediate
termination, and thus it is of no moment for purposes of
determining whether Pizzorno terminated the IPDA on July 13,
1999.
18
Since a reasonable juror could have concluded that the IPDA
was terminated on July 13, 1999, based on the July 13th letter,
the prior conduct of the parties, and the surrounding
circumstances, the district court did not err in denying L-
Soft’s motion for judgment as a matter of law as to this issue.
B.
L-Soft further contends that Pizzorno should not recover on
his copyright infringement claim because the inclusion of the
non-competition covenant in the IPDA constituted a misuse of
copyright. The Fourth Circuit expressly recognizes misuse of
copyright as an equitable defense to a suit for copyright
infringement, first applying the defense in Lasercomb America,
Inc. v. Reynolds, 911 F.2d 970 (4th Cir. 1990). The misuse of
copyright defense is analogous to the misuse of patent defense,
as both forbid the holder from using the copyright or patent
“‘to secure an exclusive right or limited monopoly not granted
by the [Copyright or Patent] Office and which it is contrary to
public policy to grant.’” Id. at 977 (quoting Morton Salt Co.
v. G.S. Suppiger Co., 314 U.S. 488, 492 (1942)). Specifically,
the misuse of copyright defense precludes a copyright holder
from recovering for copyright infringement where the holder has
“attempt[ed] to suppress any attempt by the licensee to
independently implement the idea which [the copyrighted
material] expresses.” Id. at 978.
19
In Lasercomb America, the plaintiff developed computer die-
making software for which it obtained a copyright, and it
licensed the software to the defendant and others. Id. at 971-
72. The plaintiff included anti-competitive terms in its
standard licensing agreement, which forbade the licensees’
“directors, officers and employees, directly or indirectly, to
write, develop, produce or sell computer assisted die making
software.” Id. at 973. Because of an oversight, the defendant
did not sign the licensing agreement and thus was not bound by
the anti-competitive terms. Id. Despite the fact that the
defendant was not subject to the terms of the licensing
agreement, this Court found that the defendant could avail
itself of the misuse of copyright defense. See id. at 979.
Although Lasercomb America recognized the existence of the
misuse of copyright defense, the decision also acknowledged that
a copyright holder who had misused a copyright was not forever
barred from bringing a suit for infringement. Instead, the
copyright holder “is free to bring a suit for infringement once
it has purged itself of the misuse.” Id. at 979 n.22 (citing
U.S. Gypsum Co. v. Nat’l Gypsum Co., 352 U.S. 457, 465 (1957)).
Although the Lasercomb America decision did not elaborate on
what standards should be used to determine whether copyright
misuse has been purged, the misuse of patent defense has a well-
established body of law upon which to draw. See id. at 973-74
20
(drawing upon the misuse of patent defense in recognizing the
misuse of copyright defense). Therefore, we hold that in order
for a court to find that there has been a purge of copyright
misuse, the copyright holder must show that “the improper
practice has been abandoned and that the consequences of the
misuse of the [copyright] have been dissipated.” Morton Salt
Co., 314 U.S. at 493; accord U.S. Gypsum Co., 352 U.S. at 474.
Even though the burden is on the copyright holder to
demonstrate that the misuse has been purged, cf. B.B. Chem. Co.
v. Ellis, 314 U.S. 495, 498 (1942), the copyright holder is not
required to prove that the consequences of the misuse have
dissipated unless the defendant first shows that the misuse had
anti-competitive consequences. Cf. U.S. Gypsum Co., 352 U.S. at
465 (finding that the district court erred in holding that the
patent misuse had not been purged because the record contained
no facts about the consequences of the misuse); White Cap Co. v.
Owens-Ill. Glass Co., 203 F.2d 694, 698 (6th Cir. 1953) (stating
in a patent misuse case that “it was unnecessary for the
plaintiff to prove that the consequences of the misuse had been
dissipated because it was not shown that the misuse had illegal
consequences”). If the defendant fails to show that the misuse
had anti-competitive consequences, the termination of the
contract containing the anti-competitive clause may be
sufficient to purge the misuse. Cf. White Cap Co., 203 F.2d at
21
698; Ansul Co. v. Uniroyal, Inc., 306 F. Supp. 541, 560
(S.D.N.Y. 1969), aff'd & modified, 448 F.2d 872 (2d Cir. 1971),
cert. denied, 404 U.S. 1018 (1972) (“What conduct constitutes a
‘purge’ depends upon the nature and extent of the misuse. Where
the misuse consists of the insertion of an objectionable
provision in a contract, the patentee’s cancellation and
abandonment of the clause may be sufficient.”).
On appeal, L-Soft argues that the district court erred in
refusing to apply the misuse of copyright defense. In
particular, L-Soft contends that the non-competition covenant of
the IPDA prohibited L-Soft from developing or contracting for
the development of mailing software having functions similar to
those of LSMTP and that these restrictions constituted a misuse
of copyright. On the other hand, Pizzorno argues that the non-
competition covenant was different from the standard licensing
agreement at issue in Lasercomb America in that: (1) the non-
competition covenant was part of a single contract between the
parties instead of a standard restriction imposed on multiple
licensees; and (2) the non-competition covenant bound only L-
Soft and not its officers, directors, or affiliate companies,
and thus the non-competition covenant did not have any actual
anti-competitive effects on L-Soft. Alternatively, Pizzorno
argues that even if the inclusion of the non-competition
22
covenant was a misuse of copyright, any misuse was purged by the
termination of the IPDA. 5
The district court found that L-Soft could not avail itself
of the misuse of copyright defense, both because the facts of
the present case did not “quite have the same flavor” as those
in Lasercomb America and because any misuse was purged by
Pizzorno’s termination of the IPDA. (J.A. 1700.) We do not
need to decide whether the inclusion of the non-competition
covenant was a misuse of copyright, for even assuming that it
was a misuse of copyright, the misuse was purged at the time
that Pizzorno terminated the IPDA.
With respect to the district court’s determination that any
misuse of copyright had been purged, the district court first
found that Pizzorno had abandoned the improper practice
constituting misuse when he terminated the IPDA on July 13,
1999. In making this determination, the district court accepted
the jury’s finding that Pizzorno had terminated the IPDA on that
date. The district court was bound to accept the jury’s finding
provided that the finding was supported by substantial evidence,
5
Pizzorno also argues that L-Soft should be precluded from
raising the misuse of copyright defense on the grounds of waiver
and unclean hands. Because we affirm the decision of the
district court on other grounds, it is unnecessary to address
these alternate grounds.
23
and the substance of the July 13th letter and the prior conduct
of the parties supported such a finding.
L-Soft next contends that the district court erred in
finding that any anti-competitive consequences of the misuse had
dissipated at the time that Pizzorno terminated the IPDA.
Specifically, L-Soft argues that it met its initial burden of
providing evidence that the copyright misuse had anti-
competitive effects and that Pizzorno failed to produce any
evidence that those consequences had dissipated. L-Soft
primarily relies on Section 5.4 of the IPDA, the voluntary
termination provision, as evidence that the non-competition
covenant had anti-competitive consequences outlasting the
existence of the IPDA. According to L-Soft, since Section 5.4
required that Pizzorno give eighteen months notice if he wished
to voluntarily terminate the agreement and released L-Soft from
the non-competition covenant if such notice was given, the
provision demonstrates that L-Soft would need at least eighteen
months after the expiration of the non-competition covenant to
develop competing software.
L-Soft’s reliance on the voluntary termination provision as
evidence of the anti-competitive effects of the non-competition
covenant is misplaced. The jury found that Pizzorno did not
terminate the IPDA pursuant to the voluntary termination
provision, but rather pursuant to the provision allowing for
24
termination in the event of default, and the latter provision
provided no comparable eighteen-month window for L-Soft to begin
development of competing software. More importantly, this type
of contractual provision represents nothing more than a bargain
reached between the parties, and it is certainly not the type of
concrete evidence of anti-competitive effects that must be
produced by L-Soft. The Supreme Court’s decision in United
States Gypsum Co. is instructive in this regard, as it found
that the district court erred in holding that an unpurged misuse
had been shown where “the record is barren of any facts with
respect to the situation existing in the gypsum industry since
1941.” 352 U.S. at 465. Similarly, L-Soft did not provide any
evidence regarding the market for mailing software around the
time of the termination of the IPDA, so it did not meet its
initial burden of showing the existence of anti-competitive
effects resulting from the inclusion of the non-competition
covenant.
Assuming arguendo that L-Soft provided evidence of anti-
competitive consequences stemming from the copyright misuse, the
district court did not clearly err in finding that those
consequences dissipated upon the termination of the IPDA. Given
the circumstances of this case, the district court could have
found that at the time of the termination of the IPDA, L-Soft
was free to immediately begin development of a competing
25
product. Furthermore, the non-competition covenant of the IPDA
did not prohibit L-Soft from purchasing a competing software
product from another company, only from contracting for its
development. Thus, L-Soft would have been able to immediately
license competing software from another company upon the
termination of the IPDA.
Because L-Soft failed to meet its burden of providing
evidence that the inclusion of the non-competition covenant had
anti-competitive effects, the district court did not err in
refusing to apply the misuse of copyright defense.
III.
For the foregoing reasons, we affirm the judgment of the
district court.
AFFIRMED
26