MPAY Inc. v. Erie Custom Computer Applications, Inc.

Background

MPAY Inc. sued Erie Custom Computer Applications, Inc., PayDay USA, Inc., Payroll World, Inc., Proliant, Inc., Proliant Technologies, Inc., and Kevin Clayton over payroll-system software source code. About twenty years earlier, MPAY and many of the defendant entities formed OnePoint Solutions, LLC, a limited liability company, to license MPAY’s Millenium payroll software. The parties entered into a Member Control Agreement for OnePoint and a Software Development and License Agreement between MPAY and OnePoint.

Those agreements gave OnePoint and its members rights to use MPAY’s software. The license agreement also contemplated a later development phase in which OnePoint could modify the software to create enhanced software products. MPAY agreed to convey copyrights in those enhanced products to OnePoint. The agreements included provisions concerning Minnesota law, venue, and jurisdiction.

MPAY alleged that the defendants breached the Member Control Agreement by providing the software source code to other entities. The defendants responded that MPAY had repeatedly breached the license agreement by failing to provide OnePoint with the complete source code needed to develop enhanced products. MPAY’s claims involved copyright and trade-secret law, and the copyrights on which it relied were issued in March 2019, shortly before the lawsuit was filed.

Personal Jurisdiction

The defendants challenged the court’s personal jurisdiction, arguing that they lacked sufficient contacts with Minnesota. Erie Custom Inc. no longer contested jurisdiction. The court explained that Minnesota’s long-arm statute extends as far as due process permits, so it focused on whether the defendants had sufficient minimum contacts with Minnesota.

The court found that Kevin Clayton had sufficient contacts because he was the manager of OnePoint, a Minnesota limited liability company, and the chief executive officer of Proliant, Inc., which had a registered office in Minnesota. As to the remaining defendants, MPAY argued that the Member Control Agreement incorporated the license agreement’s mandatory Minnesota forum-selection clause. Because each defendant had signed the Member Control Agreement and agreed that software licenses provided by MPAY would be subject to the “Primary License,” the court found it plausible, when viewing the agreements in MPAY’s favor, that the forum-selection clause was incorporated. For purposes of the preliminary-injunction motion, the court concluded that MPAY met its minimal burden to establish personal jurisdiction.

Preliminary Injunction

A preliminary injunction is temporary relief issued before a final decision. The court considered four factors: the likelihood that MPAY would succeed on its claims, the threat of irreparable harm, the balance of harms, and the public interest.

Likelihood of Success

MPAY argued that the defendants had provided copyrighted source code to unauthorized third parties. It made a similar argument under trade-secret law, claiming that the source code was a trade secret and that the defendants misappropriated it by giving it to third parties.

The court found that the license agreement undermined MPAY’s position. The agreement allowed OnePoint to use MPAY’s software for OnePoint’s business, the businesses of its members, or the businesses of third parties in the United States, Canada, and Mexico. Although MPAY argued that “use” did not include providing the underlying source code to others, the court reasoned that developing enhanced software products would necessarily involve providing source code to others. The parties disputed whether separate agreements were required for the transfers at issue, but that was an evidentiary dispute.

The court concluded that MPAY had not established that it would succeed on the merits of its copyright and trade-secret claims. Because MPAY had not shown a likelihood of success, and because the other preliminary-injunction factors depended on MPAY’s ability to prove those claims, the court denied preliminary injunctive relief.

Irreparable Harm, Balance of Equities, and Public Interest

MPAY argued that copyright and trade-secret claims presumed irreparable harm. The court noted that decisions after the Supreme Court’s decision in Winter v. Natural Resources Defense Council had cast doubt on such presumptions. In any event, because MPAY had not shown a likelihood of success, the court stated that it could not presume irreparable harm even if such a presumption were appropriate. The court also found that much of the alleged harm consisted of lost customers, which could be compensated with money damages, and therefore MPAY had not established irreparable harm.

The court recognized that the public interest generally supports preventing copyright infringement and trade-secret misappropriation. But because MPAY had not shown a likelihood of success, the public interest did not require an injunction. The court also credited the defendants’ assertion that they would suffer significant harm if barred from using the software underlying their businesses. The balance of equities therefore did not favor an injunction.

Consolidation

The defendants asked the court to consolidate this case with OnePoint, LLC v. MPAY, Inc., No. 19cv465. The court stated that the two cases were already pending before the same court and Magistrate Judge Thorson, making formal consolidation potentially unnecessary. It said the parties could seek formal consolidation from Magistrate Judge Thorson if they believed it was necessary or appropriate.

Disposition

The court ordered that MPAY’s Motion for Preliminary Injunction and Expedited Discovery was denied. The order did not finally decide the parties’ copyright or trade-secret claims.