Prof'l Portable X-Ray, Inc. v. Brad Nelson, Ken Kern, & Webinterstate, Inc., 301 F. Supp. 3d 943 (2018)

March 7, 2018 · United States District Court for the District of Maine · Case No. 17–cv–2469 (WMW/KMM)

301 F. Supp. 3d 943

PROFESSIONAL PORTABLE X-RAY, INC., and Evolve, Inc., Plaintiffs,
v.
Brad NELSON, Ken Kern, and WebInterstate, Inc., Defendants.

Case No. 17-cv-2469 (WMW/KMM)

United States District Court, D. Minnesota.

Signed March 7, 2018

Matthew C. Murphy, Stanley E. Siegel, Jr., Nilan Johnson Lewis, PA, Minneapolis, MN, for Plaintiffs.

Bruce H. Little, Barnes & Thornburg LLP, Sarah Pruett, Ballard Spahr LLP, Minneapolis, MN, Clarence J. Kuhn, The Kuhn Law Firm, PLLC, Edina, MN, for Defendants.

ORDER GRANTING DEFENDANTS' PARTIAL MOTION TO DISMISS

Wilhelmina M. Wright, United States District Judge Plaintiffs Professional Portable X-Ray, Inc. (PPX), and Evolve, Inc., seek, among other things, a declaratory judgment that PPX owns the copyright in certain computer software and that Defendants' registered copyright in that software is invalid. Defendants move to dismiss this aspect of Plaintiffs' complaint. For the reasons addressed below, the Court grants Defendants' motion.

BACKGROUND

PPX provides portable digital diagnostic imaging services to correctional facilities, nursing homes, and other long-term care facilities. In September 1999, PPX requested a proposal from Defendant Brad Nelson for the development of computer software that would allow PPX customers to transmit certain information over the Internet. On September 14, 1999, Orion Services LTD and Kern Consulting Inc., which are companies respectively owned at the time by Nelson and Defendant Ken Kern, submitted a proposal to PPX to develop "Business Nursing Home Services" software. The 1999 Proposal outlined a two-step development process and provided that the developed software "shall be the property of PPX once the [$25,000] development costs are paid," and that "[a]ny proceeds of the resale of the custom developed software ... shall go to PPX after paying Orion Services LTD, and Kern Consulting a 25% royalty fee." The 1999 Proposal expired after 60 days.

Nelson and Kern founded Defendant WebInterstate in June 2000 "for the purpose of developing PPX's custom software." PPX thereafter "worked closely" with WebInterstate to "define and design ... software specifications." On April 4, 2002, PPX signed a "Web Application Proposal" submitted by WebInterstate. The 2002 Proposal details PPX's interest in the creation of a web-based application, outlines the core features of the application, includes a timeline for its development, and establishes a development cost of $35,250. The 2002 Proposal is not signed by Nelson, Kern, or WebInterstate. PPX paid WebInterstate; and the custom software, MediMatrix, was released in or about July 2002. PPX thereafter paid WebInterstate to host and manage the software.

In December 2002, PPX asked WebInterstate to "update the MediMatrix software" and subsequently "worked closely" with WebInterstate to develop the update. WebInterstate completed MediMatrixII on or about April 1, 2004, but WebInterstate returned PPX's payment for the software update without explanation. In January 2005, WebInterstate advised PPX that the monthly hosting fee had been discounted because PPX was "a good customer for [MediMatrixII]." WebInterstate stated that the discounts would continue until PPX received $25,000. PPX objected, fearing that WebInterstate was attempting to acquire ownership of MediMatrix.¹ WebInterstate subsequently requested that PPX sign a "MediMatrix Software Services Agreement" and "MediMatrix2 sales commission agreement." PPX declined.

On March 21, 2005, without PPX's knowledge or permission, Nelson and Kern registered a copyright in MediMatrixII-Registration Number TX0006175487. Nelson and Kern identified themselves as the sole authors of the copyright, registered the entire source code for MediMatrix, and did not designate MediMatrixII as either a derivative of or an adaptation of MediMatrix.

PPX commissioned a separate developer in 2008 to create Lattice Pro, a software replacement of MediMatrix. Lattice Pro does not use any of MediMatrix's source code. Plaintiff Evolve, Inc., was incorporated on or about March 10, 2009, for the purpose of owning and marketing Lattice Pro. In November 2009, WebInterstate threatened to stop hosting MediMatrix unless PPX signed a service agreement. PPX "acquiesced," and both PPX and WebInterstate signed the MediMatrix Software Services Agreement on November 23, 2009. This agreement classifies WebInterstate as an independent contractor, provides PPX a license to use MediMatrix, and acknowledges that MediMatrix is a "valuable trade secret[ ] of WebInterstate."

WebInterstate sent PPX a cease and desist letter on May 12, 2017, alleging that Lattice Pro infringes on WebInterstate's copyright in the MediMatrix software. On July 3, 2017, PPX and Evolve filed this action seeking, as relevant here, a declaratory judgment that PPX owns MediMatrix and that Nelson and Kern's copyright in MediMatrix is invalid. Defendants move to dismiss.

ANALYSIS

The Declaratory Judgment Act provides for a declaration of "the rights and other legal relations of any interested party . whether or not further relief is or could be sought." 28 U.S.C. § 2201(a). To survive a motion to dismiss, a complaint must allege sufficient facts such that, when accepted as true, a facially plausible claim for relief is stated. See Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). The factual allegations need not be detailed, but they must be sufficient to "raise a right to relief above the speculative level" in order to "state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly , 550 U.S. 544, 555, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). A district court may consider documents necessarily embraced by the pleadings so long as no party questions the authenticity of the documents. See Zean v. Fairview Health Servs. , 858 F.3d 520, 526 (8th Cir. 2017) ; Ashanti v. City of Golden Valley , 666 F.3d 1148, 1151 (8th Cir. 2012). When determining whether a complaint states a claim for relief that is plausible on its face, a district court accepts as true all factual allegations in the complaint and draws all reasonable inferences in the plaintiff's favor. Blankenship v. USA Truck, Inc. , 601 F.3d 852, 853 (8th Cir. 2010).

Plaintiffs seek a declaratory judgment that PPX owns MediMatrix and, for that reason, the copyright in MediMatrix held by Nelson and Kern is invalid. Because PPX commissioned the creation of MediMatrix as a work for hire, Plaintiffs allege, PPX's ownership interest in MediMatrix is established. Plaintiffs alternatively assert that the 1999 Proposal transferred Defendants' copyright ownership in MediMatrix to PPX. The Court addresses each argument in turn.

I. Work for Hire under the Copyright Act

PPX owns MediMatrix, Plaintiffs contend, because PPX commissioned Defendants to create the software as a work for hire under the Copyright Act. Defendants counter that no written instrument establishes a work-for-hire relationship and, even if such a written instrument existed, a computer program cannot be commissioned under the Copyright Act as a work for hire.

The Copyright Act of 1976 provides that copyright ownership "vests initially in the author or authors of the work."

17 U.S.C. § 201(a) ; Cmty. for Creative Non-Violence v. Reid , 490 U.S. 730, 737, 109 S.Ct. 2166, 104 L.Ed.2d 811 (1989). Ownership of a copyright "is distinct from ownership of any material object in which the work is embodied. Transfer of ownership of any material object ... does not itself convey any rights in the copyrighted work embodied in the object." 17 U.S.C. § 202. "As a general rule, the author is the party who actually creates the work, that is, the person who translates an idea into a fixed, tangible expression entitled to copyright protection." Cmty. for Creative Non-Violence , 490 U.S. at 737, 109 S.Ct. 2166 (citing 17 U.S.C. § 102 ).

An exception to this general rule of copyright ownership exists for a "work made for hire." 17 U.S.C. § 201(b). In a work made for hire, ownership vests in the party commissioning the work. See id. The Copyright Act provides in pertinent part that a "work made for hire" is:

1) a work prepared by an employee within the scope of his or her employment; or

2) a work specially ordered or commissioned for use as a contribution to a collective work, as a part of a motion picture or other audiovisual work, as a translation, as a supplementary work, as a compilation, as an instructional text, as a test, as answer material for a test, or as an atlas, if the parties expressly agree in a written instrument signed by them that the work shall be considered a work made for hire .

17 U.S.C. § 101 (emphasis added). This statutory definition represents a "carefully worked out compromise aimed at balancing legitimate interests." Cmty. for Creative Non-Violence , 490 U.S. at 748, 109 S.Ct. 2166 (internal quotation marks omitted). PPX concedes that its claim does not rely on the existence of an employee-employer relationship, and the parties do not dispute that MediMatrix was "specially ordered or commissioned." In light of these circumstances, to state a plausible claim of ownership, PPX must allege both the existence of a written instrument signed by the parties and that MediMatrix qualifies as one of the enumerated categories that would make MediMatrix eligible to be commissioned under the Copyright Act as a work for hire.

One purpose of requiring parties to "expressly agree" to a work-for-hire relationship "in a written instrument signed by them," 17 U.S.C. § 101, is "to make the ownership of property rights in intellectual property clear and definite," Schiller & Schmidt, Inc. v. Nordisco Corp. , 969 F.2d 410, 412 (7th Cir. 1992). Unless, as relevant here, "the parties have agreed in a writing signed by both that the person who commissioned the creation of the property is the owner," the creator is the owner. Id. at 413 ; see also Playboy Enter., Inc. v. Dumas , 53 F.3d 549, 558 (2d Cir. 1995). In the absence of the requisite written instrument, a claim of copyright ownership based on an alleged work-for-hire relationship ordinarily will not succeed. Schiller , 969 F.2d at 412.

Plaintiffs contend that the written-instrument requirement is satisfied by a combination of the 1999 Proposal and the 2002 Proposal. Because the 1999 Proposal states that the developed software "shall be the property of PPX" and the 2002 Proposal details the creation of the software, Plaintiffs argue, the parties clearly intended a work-for-hire relationship. But neither the 1999 Proposal nor the 2002 Proposal is a written instrument signed by both parties. The 1999 Proposal is not signed by either party. And only PPX signed the 2002 Proposal. Plaintiffs do not cite, nor has the Court identified, any legal authority for Plaintiffs' theory that multiple documents when read together can satisfy the written-instrument requirement of the Copyright Act. Moreover, stitching together multiple documents to ascertain implied intent is at odds with both the language and purpose of the Copyright Act's work-for-hire provision. See id. (explaining the importance of the written-instrument requirement to effectuate the purpose of the Copyright Act).

Plaintiffs nevertheless contend that general principles of contract interpretation cure their apparent failure to allege facts that satisfy the written-instrument requirement. Plaintiffs cite Nimmer on Copyright for the proposition that "the vast bulk of copyright contractual issues must be resolved under state law, given the silence of the Copyright Act in addressing such issues." 1 Melville B. Nimmer & David Nimmer, Nimmer on Copyright § 1.01(B)(3)(a) (2013) (emphasis added). But the Copyright Act is not silent in addressing this issue. The Copyright Act expressly requires both parties to sign a written instrument to create a work-for-hire relationship.² See 17 U.S.C. § 101.

Assuming without deciding that general principles of contract interpretation apply to these circumstances, such principles do not cure Plaintiffs' failure to satisfy the statutory written-instrument requirement. Under Minnesota law,³ when "contracts relating to the same transaction are put into several instruments they will be read together and each will be construed with reference to the other." Anchor Cas. Co. v. Bird Island Produce, Inc. , 249 Minn. 137, 82 N.W.2d 48, 54 (1957). But whether the contracts are effectual and whether they satisfy the written-instrument requirement of the Copyright Act are different questions. Neither Defendant signed either the 1999 Proposal⁴ or the 2002 Proposal. Moreover, the proposals are successive rather than contemporaneous, contain materially different terms as to pricing and ownership, involve different parties, and make no reference to one another. See, e.g., Alpha Real Estate Co. of Rochester v. Delta Dental Plan of Minn. , 664 N.W.2d 303, 312-13 (Minn. 2003) (declining to read 1995 and 1997 agreements together as one contract); see also Loftness Specialized Farm Equip., Inc. v. Twiestmeyer , 742 F.3d 845, 852 (8th Cir. 2014) (applying Minnesota law and declining to combine separate contracts executed by different parties and signed more than one year apart).

Because Plaintiffs fail to allege facts that satisfy the written-instrument requirement of the Copyright Act, the Court need not address whether a computer program can be commissioned under the Copyright Act as a work for hire.

II. Transfer of Rights

Plaintiffs alternatively contend that the 1999 Proposal transferred Defendants' copyright ownership in MediMatrix to PPX. Defendants counter that the 1999 Proposal is not a binding agreement and, even if it were, the 1999 Proposal cannot satisfy the strict statutory requirements for transferring copyright ownership.

"A transfer of copyright ownership ... is not valid unless an instrument of conveyance, or a note or memorandum of the transfer, is in writing and signed by the owner of the rights conveyed ...." 17 U.S.C. § 204(a). Copyright ownership initially vests in the author of the work and conveying copyright ownership is distinct from conveying ownership of a material object. 17 U.S.C. §§ 201(a), 202. For this reason, the terms of any writing purporting to transfer underlying copyright interests must be clear. Papa's-June Music, Inc. v. McLean , 921 F.Supp. 1154, 1158-59 (S.D.N.Y. 1996). This requirement ensures that the creator of a work does not inadvertently transfer copyright ownership. Effects Assocs., Inc. v. Cohen , 908 F.2d 555, 557 (9th Cir. 1990). A writing cannot transfer copyright ownership unless it is clear and unequivocal. Weinstein Co. v. Smokewood Entm't Grp., LLC , 664 F.Supp.2d 332, 340 (S.D.N.Y. 2009).

Plaintiffs contend that Defendants transferred their copyright ownership in MediMatrix by operation of the 1999 Proposal. But, akin to Plaintiffs' work-for-hire contention, this argument fails because Defendants did not sign the 1999 Proposal. Instead, the 1999 Proposal was submitted on behalf of distinct, non-party entities. Plaintiffs allege that WebInterstate was created for the express purpose of developing MediMatrix in June 2000-a date that is after the 1999 Proposal was submitted. Although Plaintiffs allege that WebInterstate assumed the obligations of the 1999 Proposal when it agreed in the 2002 Proposal to develop MediMatrix, the 2002 Proposal neither incorporates nor references the 1999 Proposal. Moreover, as addressed in Part I, supra , the 1999 Proposal and 2002 Proposal are inconsistent and cannot be read together. Finally, the statement in the 1999 Proposal that the developed software "shall be the property of PPX" is not a clear and unequivocal transfer of copyright ownership. See 17 U.S.C. § 202 (providing that ownership of a material object is distinct from copyright ownership); Saxon v. Blann , 968 F.2d 676, 680 (8th Cir. 1992) (affirming conclusion that transfer of "ownership rights" was not a written statement transferring copyright ownership).

For these reasons, Plaintiffs fail to state a plausible claim that Defendants transferred their copyright ownership in MediMatrix to PPX.

ORDER

1 The parties do not often distinguish between MediMatrix and MediMatrixII. Unless otherwise indicated, the Court's reference to MediMatrix refers to the software collectively.

2 Plaintiffs' reliance on Gary Friedrich Enterprises, LLC v. Marvel Characters, Inc. , 716 F.3d 302 (2d Cir. 2013), is misplaced because the existence of a work-for-hire relationship was not in dispute. The Court in Gary Friedrich Enterprises instead applied state contract law to ascertain the underlying contractual intent of the parties as to the assignment of renewal rights.

3 The parties do not dispute that Minnesota law governs their contractual relationship.

4 Although Defendants argue that the 1999 Proposal expired and was not a binding contract, the Court accepts, as it must on a motion to dismiss, Plaintiffs' factual allegation that PPX accepted the 1999 Proposal. See, e.g., Morrisette v. Harrison Int'l Corp. , 486 N.W.2d 424, 427 (Minn. 1992) (explaining existence and terms of contract are questions of fact).

Based on the foregoing analysis and all the files, records and proceedings herein, IT IS HEREBY ORDERED that Defendants' motion to dismiss the first cause of action, (Dkt. 9), is GRANTED .