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

Background

MPAY Inc. and the defendant entities formed OnePoint Solutions, LLC, to license MPAY’s Millenium payroll software. The parties entered into several agreements, including a Member Control Agreement and a Software Development and License Agreement. Those agreements allowed OnePoint to modify the software to create enhanced products and to hire independent software developers. OnePoint was to pay MPAY a royalty of two cents per paycheck processed using the software.

A 2003 letter agreement required OnePoint to notify MPAY about independent contractors hired to help develop enhanced software products and barred disclosure of MPAY’s source code unless the contractor signed a confidentiality agreement. It also clarified that OnePoint owned copyrights in additions and modifications, while MPAY retained ownership rights in the remainder of the source and object code. A 2007 settlement later extinguished most of OnePoint’s obligations under the license agreement, except for royalty and other obligations not relevant to the court’s analysis.

Erie Custom Computer Applications, Inc. and Payroll World, Inc. later formed StarrLee, and StarrLee formed or owned an interest in Taslar. Erie and Payroll World granted StarrLee a sublicense for the software, and StarrLee granted Taslar a sublicense. MPAY claimed that defendants improperly provided its source code, improperly sublicensed the software, failed to pay royalties, infringed copyrights, misappropriated trade secrets, and breached contracts. Defendants also sought judgment on MPAY’s other claims, including unjust enrichment, claims under Minnesota’s Deceptive and Unfair Trade Practices Act, tortious interference, breach of the implied covenant of good faith and fair dealing, and account stated.

Source-Code Claims

The court held that MPAY’s claims based on defendants’ provision or possession of the source code failed as a matter of law. Earlier rulings in this litigation had determined that the parties’ agreements allowed OnePoint to provide the source code to others to develop enhanced software products, and the Court of Appeals had affirmed that conclusion.

The court rejected MPAY’s argument that factual disputes about whether the recipients were truly independent contractors required a trial. It held that the agreements allowed OnePoint to hire whomever it chose and did not require a written contract with the developers or require that such a contract be shared with MPAY. The Member Control Agreement also did not specify to whom OnePoint could provide the source code. The court further rejected MPAY’s argument that the 2007 letter agreement required notice of new software developers because the provision MPAY cited contained no notice requirement.

To the extent MPAY’s copyright, trade-secret, breach-of-contract, or other claims depended on the independent-contractor or source-code-possession theories, those claims failed as a matter of law.

Sublicenses

The Member Control Agreement allowed a OnePoint member to sublicense the software to an entity in which that member owned a majority of the equity and voting control. Erie and Payroll World argued that the agreement had been amended in 2015 to allow any member to approve and provide sublicenses as long as royalties were paid. They also argued that the original agreement allowed the sublicense to StarrLee because Erie and Payroll World together owned a majority of StarrLee.

The court found material factual disputes about whether the alleged amendment was effective without MPAY’s consent and whether the agreement’s use of the singular word “Member” permitted a sublicense to an entity majority-owned collectively by multiple members. The court also found factual questions about whether an immunity provision applied to the sublicenses and whether the conduct involved the business of OnePoint or the separate businesses of Erie and Payroll World. Erie and Payroll World were therefore not entitled to summary judgment on these grounds.

Copyright Issues

The court stated that MPAY had not clearly identified the copyright or misappropriation claims arising from the allegedly improper sublicenses or identified all defendants against whom those claims were brought. It noted that Erie and Payroll World apparently did not provide MPAY’s source code to StarrLee or Taslar, so there could be no direct infringement based on those sublicenses. However, the court found that the sublicense allegations might implicate the underlying copyright.

MPAY registered copyrights in the source code in February and March 2019, more than twenty years after it had owned the code and shortly before filing the action. Because the registrations were not made within five years of first publication, the statutory presumption that the copyrights were valid did not apply. MPAY therefore had to establish that the copyrights were valid and protectable.

The court held that whether the source code contained protectable expression, and whether defendants’ products had relevant similarities, involved factual issues. The court also noted that the parties had anticipated defendants’ use of MPAY’s source code in developing Phase II products. Summary judgment was therefore inappropriate on MPAY’s copyright claim arising from the allegedly improper sublicenses.

Royalties and Other State-Law Claims

The agreements required licensees and sublicensees to pay MPAY two cents per paycheck generated using the software. Since MPAY filed the lawsuit, defendants had placed the royalties into an escrow account rather than paying them directly to MPAY. MPAY conceded that the escrow contained all royalties due.

The court held that the Member Control Agreement did not require payment within a specific time and that the royalties would be paid when the lawsuit was resolved. Because MPAY could not establish damages from the retention of the escrowed funds, the portions of its breach-of-contract and account-stated claims based on that retention failed.

The court also dismissed MPAY’s unjust-enrichment and Minnesota Deceptive and Unfair Trade Practices Act claims. It explained that Minnesota does not recognize unjust enrichment when a contract governs the parties’ relationship and that the Minnesota statute did not apply to this dispute.

Claims Against Clayton and the Proliant Defendants

Kevin Clayton and the Proliant defendants sought summary judgment on MPAY’s remaining contributory- and vicarious-infringement and misappropriation claims. MPAY argued that Clayton should have known that Erie would misuse the source code and that he knew about the alleged sublicense amendment.

The court held that contributory infringement requires more than knowledge or a relationship with the alleged direct infringer. MPAY identified no evidence that Clayton or the Proliant defendants knew of or ratified Erie and Payroll World’s conduct, induced or encouraged the alleged infringement, or had the right or ability to stop or limit it. The court granted their motion for summary judgment and dismissed them from the action.

Expert Testimony and Affirmative Defenses

MPAY moved to exclude testimony from Dr. Mats P. E. Heimdahl, who criticized MPAY’s expert’s analysis of whether the source code contained protectable expression. The court found part of the motion moot because no expert testimony was needed on the eliminated source-code claims. It denied the remaining portion because Heimdahl was qualified to identify flaws in the copyrightability analysis and MPAY had not shown that his opinions would mislead the jury. The motion to exclude was denied.

MPAY also sought summary judgment on defendants’ affirmative defenses. The court denied that request without prejudice to further argument at trial, stating that defendants must be allowed to present legitimate defenses.

Disposition

The court denied MPAY’s motion for partial summary judgment. It granted in part and denied in part Erie and Payroll World’s motion for summary judgment. It granted Kevin Clayton, PayDay USA, Inc., Proliant, Inc., and Proliant Technologies, Inc.’s motion for summary judgment and dismissed those defendants from the action. It denied MPAY’s motion to exclude the expert. The court also dismissed the source-code claims, the unjust-enrichment and Minnesota Deceptive and Unfair Trade Practices Act claims, and the portion of the breach-of-contract claim concerning escrowed royalties. The claims concerning the allegedly improper sublicenses were not resolved entirely on summary judgment.