Software commercialization began to accrue significance in the early 1960s and it presented a challenge to the U.S. Copyright office when the first registrations were submitted in 1964. Since that time, until the 1976 Copyright Act, the required registrations of software were accepted under the general assimilation of software as a “how to” book. The Act made it clear that Congress intended software to be copyrightable. Yet the very nature of software requires that copies be made in the ordinary course of using the software. First, the software is generally installed on the users’ computer system by copying it from a distribution medium (such as a computer disk, compact disk, or downloaded from the internet) on to a storage system (typically a hard drive). Secondly, another copy of the software is made to the computer’s memory in order to execute the software or, when viewing a page on a web site, a copy is transmitted (downloaded) to the computer’s memory and/or storage system.
Thus, in principle, the rightful possessor of software would generally be expected to be able to make copies, and Congress considered the need to set some limits to the exclusive right of copyright owners. Specifically, section 117 was added allowing, among other rights, the making of archival copies by the owner of a copy of a computer program. However, industry practice since the sixties had been to protect software through contractual means, i.e. by licensing instead of selling software. Thus, software copyright owners generally aim to limit copying by licensees, claiming they have not acquired the rights of an owner. One concern fueling this tendency is the principle of “first sale,” which generally limits the copyright owner’s rights to that first sale, but allows the buyer to resell the work without consideration being due to the author. Finally, the law does not distinguish between data and instructions when describing software only as instructions, where the former may well represent other types of information, including images.
Generally, when we think of copyright infringement, we think of somebody duplicating a work, either all of it or at least enough of it as to appropriate much of its value. Sometimes we even remember that a copyright can be infringed by publicly performing or displaying a work without permission, or by translating the work into another language or another form. But with software it is possible to infringe a copyright without copying all, or even a major part, of a work.
(1) Whelan v. Jaslow
The first appeals court to confront what copyright protects for a computer program beyond direct copying was the Third Circuit, in the case of Whelan Associates v. Jaslow Dental Laboratory. But the Third Circuit recognized that the dichotomy between idea and expression, codified in Section 102(b) of the Copyright Act of 1976, limits what might otherwise be found infringing. Jaslow argued that “the structure of a computer program is, by definition, the idea and not the expression of the idea, and therefore that the structure cannot be protected by the program copyright.” The mere idea or concept of a computerized program for operating a dental laboratory would not in and of itself be subject to copyright. Copyright law protects the manner in which the author expresses an idea or concept, but not the idea itself. Copyrights do not protect ideas – only expressions of ideas. There are many ways that the same data may be organized, assembled, held, retrieved and utilized by a computer. Different computer systems may functionally serve similar purposes without being copies of each other. There is evidence in the record that there are other software programs for the business management of dental laboratories in competition with plaintiff’s program. There is no contention that any of them infringe although they may incorporate many of the same ideas and functions. The ‘expression of the idea’ in a software computer program is the manner in which the program operates, controls and regulates the computer in receiving, assembling, calculating, retaining, correlating, and producing information either on a screen, print-out or by audio communication. The conclusion is thus inescapable that the detailed structure of the Dentalab program is part of the expression, not the idea, of that program.
(2) Kluge v Gentra
As we have seen in other cases, and other types of intellectual property, an important component or dimension of economic damages that can be recovered by plaintiffs are lost profits measured by a “reasonable royalty.” The determination of such royalty rate is not straight forward in most cases, and an expert’s experience is crucial to the determination of a suitable rate that does not fall into the trap of speculation.
An illustration of such a situation is the litigation involving Kluge Design, Inc. (“Kluge”), in relation to their intellectual property dispute with Gentra Systems, Inc. (“Gentra”) in 2003. In that case, the software involved was a specific type of embedded software, i.e., software incorporated into the circuitry of specific devices. The biggest challenge for the assessment of damages in this approach is to analyze a hypothetical situation without leading into speculation.
The analysis of a reasonable royalty typically begins by considering the range of royalty rates derived from a series of comparable arm’s length transactions in the marketplace. Naturally, however, few licensing agreements in intellectual property in general, and software in particular are perfectly comparable. Thus the appropriate comparable range can only be derived after an expert consideration of contextual factors such as the growth prospects of the device within which the software is used, in terms of the market dynamic and the competitive advantages the software may represent, exclusivity, scope of territory or application, among others. These additional factors allow the full range of royalty rate to be narrowed down to a more likely range where a hypothetical negotiation between willing buyer and seller would have taken place. In this case, the full spectrum of rates was found to range from a low of 2.5% of sales, to a high of 15.0% of sales. The more appropriate range for the case, however, was determined by the plaintiff’s experts to be 5.0% to 8.0%.
Furthermore, even a hypothetical negotiation has additional limits. The licensor cannot be assumed to be “willing” to enter into a transaction unless profitability meets the level of their full costs plus the prevailing market-driven profit. The licensee, on the other hand, must also find the license cost still allows for a reasonable profit. Within those limits, the negotiation ensues in the context outlined in the analysis of the royalty rates. Both aspects of the analysis are important to give a sound basis to the royalty rate conclusion, thus minimizing the risk of having the damages award dismissed on grounds of being speculative.
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