Haddley v. Next Chapter Technology, Inc.

Background

Neil Leonard Haddley created and held the copyright to Scanning Enabler, software that lets users scan paper documents into electronic form. Next Chapter Technology, Inc. (NCT) licensed an electronic document-management system called CaseWorks to Minnesota counties. In 2009, NCT entered into a reseller arrangement for Scanning Enabler with Haddley’s company, Dark Blue Duck Solutions, LLC. Haddley later worked for NCT as a consultant and then as its chief technical officer.

Scanning Enabler was installed on servers in Clay and Steele Counties. Other counties shared those server environments. The defendants contended that the licenses were unrestricted single-server licenses that allowed the other counties to download the software. Haddley disputed that position and asserted that only Clay and Steele Counties were licensed.

NCT later replaced Scanning Enabler with its own scanning module, NCT SCAN. Haddley brought three claims: copyright infringement based on allegedly unauthorized use of Scanning Enabler; copyright infringement based on creation of an allegedly infringing derivative work; and a claim under the Digital Millennium Copyright Act alleging circumvention of the software’s license-key system. NCT asserted counterclaims against Haddley for breach of his employment agreement, breach of the duty of loyalty, and unfair competition.

Haddley’s motion

Haddley sought summary judgment on his unauthorized-use copyright claim, his Digital Millennium Copyright Act claim, and NCT’s counterclaims.

For the unauthorized-use copyright claim, Haddley argued that the licenses were limited by customer and server, so downloads by counties other than Clay and Steele were unlicensed. The defendants argued that NCT was the licensee, that the licenses were unrestricted, and that Haddley had granted implied permission or was prevented from denying that permission. The court concluded that factual disputes remained about who held the licenses, which agreements governed, whether the licenses allowed the counties to share the software, and whether Haddley granted implied licenses or was prevented from disputing them. The court denied summary judgment on Count I.

For the Digital Millennium Copyright Act claim, Haddley alleged that NCT and Mulcrone worked with the county defendants to bypass the license-key system. Because the claim required circumvention without the copyright owner’s authority, and factual disputes remained about the scope of the licenses and any implied permission, the court denied summary judgment on Count III.

The court also denied summary judgment on each of NCT’s counterclaims. It found a factual dispute about whether Haddley’s employment agreement required him to evaluate licensing for NCT’s customers. It found factual disputes about whether Haddley breached a duty of loyalty by failing to advise NCT that additional licenses might be required. It also found that a jury could regard Haddley’s effort to collect additional license fees as unfair competition if the counties were properly licensed. NCT’s claimed damages survived summary judgment, and the court found it premature to decide whether the duty-of-loyalty claim was improperly duplicative of the contract claim.

Defendants’ motion on the derivative-work claim

The defendants sought summary judgment on Count II, in which Haddley alleged that NCT SCAN was a derivative work based on Scanning Enabler. Haddley had registered the copyright in the original 2007 version of Scanning Enabler but had deposited only selected portions of its source code as identifying material. The record also showed that Haddley changed the source code after 2007.

The court explained that proving infringement required Haddley to establish ownership of a valid copyright and copying of original elements. Because the claim depended on the 2007 source code, the court concluded that a complete copy of that registered source code was necessary for a meaningful comparison with the alleged infringing work. Haddley had not produced a complete copy and instead argued that later changes were minor. The court rejected that argument, reasoning that without the complete 2007 code it could not determine whether the alleged infringement concerned the registered work or later-added expression, or whether the changes were actually inconsequential.

The court therefore granted the defendants’ motion for partial summary judgment and dismissed Count II with prejudice. The court did not reach the defendants’ alternative arguments. It noted that this ruling did not appear to affect Count I, which concerned alleged unauthorized use of licensed software rather than substantial similarity between software programs.

Disposition

The defendants’ motion for partial summary judgment was granted, and Count II was dismissed with prejudice. Haddley’s motion for partial summary judgment was denied. Judge Donovan W. Frank signed the order on February 28, 2019.