Edgenet, Inc. v. Home Depot U.S.A.

In the
United States Court of Appeals
For the Seventh Circuit
No. 10-1335
E DGENET, INC.,
Plaintiff-Appellant,
v.
H OME D EPOT U.S.A., INC., and JAMES M USIAL,
Defendants-Appellees.
Appeal from the United States District Court
for the Eastern District of Wisconsin.
No. 09-C-747—J.P. Stadtmueller, Judge.
A RGUED S EPTEMBER 28, 2010—D ECIDED S EPTEMBER 2, 2011
Before E ASTERBROOK, Chief Judge, and SYKES and
T INDER, Circuit Judges.
E ASTERBROOK, Chief Judge. Home Depot has more
than 2,000 retail stores, each of which stocks thousands
of items. Customers can buy more than 250,000 items
on Home Depot’s web site, or by special order at a
retail outlet. It would be impossible to manage such
a complex inventory without a computer database—and
2 No. 10-1335
setting up a database requires a classification of its con-
tents into categories, such as hand tools and appliances.
Each classification comprises subclassifications (e.g.,
both hammers and screwdrivers are hand tools, and
there are many types of each). The database also needs
information about each product’s attributes, such as
the length of the screwdriver’s blade and whether its
handle is made of wood, metal, or rubber.
Manufacturers supply electronic records detailing
their products’ attributes. In 2004 Home Depot con-
tracted with Edgenet, Inc., to develop a classification
system, which the parties call a taxonomy, that would
be used to organize Home Depot’s database. This con-
tract provides that Edgenet would own the intellectual-
property rights in the taxonomy and would license
Home Depot to use it, while the products’ manufac-
turers would own intellectual-property rights in their
wares’ attributes. A supplemental agreement in 2006
provides that Home Depot has a no-cost license to use
“the product collection taxonomy” as long as Edgenet
remains Home Depot’s data-pool vendor and Home
Depot continues paying for services. The license
terminates with the contract, and Home Depot then
must “immediately” stop using the taxonomy unless it
exercises its option to purchase a perpetual license
for $100,000.
In 2008 Home Depot began to develop an in-house
database, incorporating the taxonomy that Edgenet
had created. Edgenet got wind of Home Depot’s prepara-
tions and registered a copyright on what it called the
No. 10-1335 3
“Big Hammer Master Collection Taxonomy and Attributes
2008.” On February 26, 2009, Home Depot told Edgenet
that their business relationship would end soon. A check
for $100,000 to purchase a perpetual license was en-
closed with the letter. Home Depot instructed its
suppliers to transmit their product data to its in-house
system, HomeDepotLink, rather than to Edgenet—which
did not acquiesce in the transition. It returned the
check and filed this suit. But the district judge dismissed
the complaint under Fed. R. Civ. P. 12(b)(6), concluding
that the 2006 contract, combined with Home Depot’s
tender of the $100,000 payment, meant that Home
Depot can continue to use the taxonomy. 2010 U.S.
Dist. L EXIS 2276 (E.D. Wis. Jan. 12, 2010).
Whether this case belongs in federal court depends
on how we understand Edgenet’s grievance. Is it seeking
to enforce a copyright and obtain a remedy provided
by federal law, or is it arguing that Home Depot failed
to keep its promises and obtain a remedy for breach
of contract? If the former, then the claim arises under
federal law, and 28 U.S.C. §1331 supplies jurisdiction. If
the latter, then jurisdiction would depend on diversity
of citizenship, because the fact that a copyright is a con-
tract’s subject matter does not change the status of a
claim that arises under the contract. See T.B. Harms Co. v.
Eliscu, 339 F.2d 823 (2d Cir. 1964); Gaiman v. MacFarlane,
360 F.3d 644, 652 (7th Cir. 2004); cf. International Armor &
Limousine Co. v. Moloney Coachbuilders, Inc., 272 F.3d 912(7th Cir. 2001) (collecting decisions that apply the ap-
proach of T.B. Harms to trademark disputes). Both
4 No. 10-1335
litigants are incorporated in Delaware, so the diversity
jurisdiction of 28 U.S.C. §1332 is unavailable.
Because neither side mentioned the T.B. Harms
principle, we called for supplemental briefs. The parties’
responses show that Edgenet’s claim arises under the
copyright law and that Home Depot has invoked the
2006 contract’s offer of a perpetual license as an
affirmative defense. This means that §1331 supplies
subject-matter jurisdiction. See also Nova Design Build,
Inc. v. Grace Hotels, LLC, No. 10-1738 (7th Cir. July 26,
2011). But the status of the contract as an affirmative
defense calls into question the district court’s use of
Rule 12(b)(6).
Edgenet contends that HomeDepotLink infringes
its copyright on the “Big Hammer Master Collection
Taxonomy and Attributes 2008.” Complaints can’t be
dismissed just because they ignore potential defenses;
the time to deal with an affirmative defense is after it has
been raised. See, e.g., Gomez v. Toledo, 446 U.S. 635 (1980);
United States v. Northern Trust Co., 372 F.3d 886 (7th
Cir. 2004). What is more, if a motion to dismiss a com-
plaint raises matters outside the original pleading—the
termination letter, the $100,000 check, the details of
HomeDepotLink’s derivation and operation, and a few
more facts that we mention later—the district court is
supposed to treat the motion to dismiss as a motion for
summary judgment. Fed. R. Civ. P. 12(d). When the
complaint itself contains everything needed to show
that the defendant must prevail on an affirmative de-
fense, then the court can resolve the suit on the pleadings
No. 10-1335 5
under Rule 12(c). See Brooks v. Ross, 578 F.3d 574 (7th
Cir. 2009). Here the district court relied on matters in
addition to Edgenet’s complaint, so it should have
acted under Rule 56.
No harm was done, however. Edgenet does not dispute
any of the material allegations in, or attached to, Home
Depot’s motion to dismiss. Edgenet had plenty of time
to respond to Home Depot’s arguments. It did not file a
declaration or affidavit under Rule 56(d) specifying
matters on which it needed discovery. Neither side
has proffered any parol evidence that could assist with
potentially ambiguous terms in the 2006 contract. The
facts are essentially uncontested and present a question
of law, for judges rather than juries interpret contracts
when there is no extrinsic evidence. See Licciardi v.
Knopp Forge Division Employees’ Retirement Plan, 990
F.2d 979, 981 (7th Cir. 1993).
Home Depot concedes that it used Edgenet’s taxonomy,
which makes HomeDepotLink a derivative work. But
Edgenet promised Home Depot that for $100,000 it
could have a perpetual license of “the product collection
taxonomy”. Home Depot tendered that payment. What’s
left to dispute?
Edgenet thinks that it has three answers. First, it con-
tends, Home Depot infringed its copyright before
paying the $100,000, which invalidates its option to
license the taxonomy. Second, Edgenet maintains, it
never promised to license the “Big Hammer Master
Collection Taxonomy and Attributes 2008,” which it says
6 No. 10-1335
differs from “the product collection taxonomy” (the
phrase in the 2006 contract); according to Edgenet, “the
product collection taxonomy” means the taxonomy
developed under the 2004 contract, not the revised
version in use by 2008. Third, Edgenet observes that in
2008 Home Depot’s Canadian affiliate stopped using
Edgenet’s taxonomy, and it believes that, by not paying
$100,000 “immediately” thereafter, Home Depot forfeited
its option to acquire a perpetual license. We analyze
these contentions sequentially.
Home Depot didn’t do anything wrong by copying
the taxonomy before paying $100,000. Both the 2004
contract and the 2006 contract give Home Depot permis-
sion to employ the taxonomy as long as Edgenet re-
mained its database-service provider. During the entire
time that Home Depot developed HomeDepotLink,
Edgenet played that role, so Home Depot could use the
taxonomy as it pleased. Neither contract limits the way
in which Home Depot could use the taxonomy, and the
exclusive rights under copyright law (unlike patent law)
do not attach to the product into which a copyrighted
work may be incorporated. All Home Depot needed
were the rights to copy the taxonomy and prepare a
derivative work, see 17 U.S.C. §106(1), (2); the unre-
stricted license gave it those rights.
Any limits on what Home Depot could do with the
classification system depended on a contract, see ProCD,
Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996), and the
absence of limits is dispositive. What the contracts did
forbid was any effort to decompile or reverse engineer
No. 10-1335 7
Edgenet’s software. Although it once suspected that
Home Depot had done this, Edgenet no longer
contends that Home Depot broke its promise to refrain
from reverse engineering or decompiling. It used only
the taxonomy itself—which from the beginning has
been accessible without decompilers. (The taxonomy is
visible to the general public; both Home Depot and cus-
tomers use it to navigate the product database.)
Home Depot had an option to acquire a perpetual
license to “the product collection taxonomy.” Edgenet’s
argument that this means only the 2004 or 2006 version
of the taxonomy amounts to a contention that it
mousetrapped its customer. We are surprised that a
firm seeking good relations with other customers
would advance such an ignoble position. The taxonomy
was a work in progress. As Home Depot added or
dropped products, the taxonomy changed. If, as Edgenet
now says, its 2006 promise meant only that for $100,000
Home Depot could use an old version of the taxonomy,
then it was offering nothing that Home Depot would
want to buy. This would imply, too, that Home Depot
violated the copyright laws continually even while the
contract was in force, for Home Depot always used the
taxonomy’s current version rather than the outdated
one Edgenet now says it licensed.
Yet the 2006 contract speaks of “the product collection
taxonomy” (emphasis added)—and this use of the
definite article is appropriate only if there is just one
taxonomy. That singular taxonomy must be the
current version. Whatever Home Depot was entitled to
8 No. 10-1335
use while the contract was in force, it was entitled to
license for the future by exercising its option.
That the registered copyright covers a taxonomy “and
Attributes” does not affect the analysis. Edgenet was not
responsible for the “attributes”; these came from the
products’ vendors, and Edgenet could not claim any
intellectual-property interest in them just by sorting
them into bins using a classification system. Cf. Feist
Publications, Inc. v. Rural Telephone Service Co., 499 U.S.
340 (1991). Edgenet’s interest is in the classification
system that it created. See American Dental Association v.
Delta Dental Plans Association, 126 F.3d 977 (7th Cir.
1997) (holding that taxonomies are copyrightable). And
the 2006 contract gave Home Depot an option to acquire
a perpetual license to that classification system.
Perhaps by “attributes” all Edgenet means is the
detailed subclassifications. Thus a particular screwdriver
part might be classified under tools / manual / screwdriver
/ Phillips / bits / metal. Edgenet contends that it created
“nodes” (subcategories) and told products’ vendors
which details their submissions of raw data had to
include in order to ensure that products could be
classified properly in the database. Because this
hierarchy of categories and nodes—rather than the char-
acteristics of a given product such as a Lisle #3
Phillips screwdriver bit #29550—is what Edgenet means
by “attributes,” however, the attributes are part of the
taxonomy under the contract. The 2006 contract does
not distinguish between the top-level categories (such
as “tools”) and the more specific ones (such as “bits”).
No. 10-1335 9
Home Depot’s option covers the taxonomy from top
to bottom.
Finally comes the fact that in 2008 Home Depot’s
Canadian affiliate dropped Edgenet. Why this should
entitle Edgenet to any relief against Home Depot U.S.A.,
Inc., the principal defendant, is a puzzle. The Home Depot,
Inc., the top level of the corporate structure, has op-
erating subsidiaries in the United States, Canada, and
other nations. Edgenet does not contend that any of the
firms has ignored corporate formalities or that there is
any other reason to hold Home Depot U.S.A. responsible
for a decision made by Home Depot Canada.
When Home Depot Canada stopped using Edgenet’s
services, The Home Depot, Inc. (the parent) lost the right
to a no-cost license and thus could not pass that right
to Home Depot U.S.A. The contract called for The
Home Depot, Inc., to use Edgenet’s services in both the
US and Canada, and the no-extra-cost license granted
by §5 of the 2006 contract was contingent on both sub-
sidiaries using Edgenet’s services. Yet Edgenet never
asked The Home Depot, Inc., for additional payment
after the Canadian subsidiary switched providers.
Perhaps Edgenet could have treated the Canadian sub-
sidiary’s defection as breach of contract and revoked
the license. Had it done that (which it didn’t), then the
$100,000 payment would have become due “immediately”
if Home Depot wanted a perpetual license. For the
option to take a perpetual license is in §2B of the 2006
contract, not §5, and what the contract requires be
done “immediately” is to cease using the taxonomy if
the license ends.
10 No. 10-1335
The only reason why payment would need to be “im-
mediate” is if Home Depot wanted to use the taxonomy
after Edgenet declared the license over. Edgenet never
did that; Edgenet went on providing data services to
Home Depot until it sent its letter in February 2009. A
check for $100,000 accompanied the letter. Termina-
tion of the contract lay a few months in the future; it
required advance notice, which Home Depot gave.
When Home Depot exercised its option, the copyright
license for the taxonomy was in force. Thus Home
Depot has not been in violation of the copyright laws
for even one day.
A FFIRMED
9-2-11