Potential Y2K Intellectual Property Litigation

The process of working around the Year 2000 problem is huge and labor-intensive. The process of changing date fields from two to four digits involves hundreds of worker-years and millions of dollars. Finding a responsive prior vendor willing to undertake the task may be problematic. On the other hand, if a company plunges ahead promptly to fix the problems, it might find itself unwittingly tripping into some big copyright infringement traps. Changes must be made to the object code itself, which is a low-level, computer-readable code, composed of the 0s and 1s of binary language. To access the object code, programmers often have to "reverse engineer" the software; they have to "disassemble" or "decompile" the high-level human operating languages (like Pascal or COBOL) down to the source and object code. In this section, we discuss exposure from "reverse engineering," "essential" use modifications, the availability of a "fair use" defense, and the interplay with warranty issues.

1. Reverse Engineering May be Unlawful

2. Software used to be sold outright and directly to users. Owners of software have more rights than licensees. Today, software producers license most of their products to users, so that the producer can maintain more control over how the product is used, modified, or updated in the future. The process of "reverse engineering" described above is likely to infringe most licensing and purchasing agreements. Although it may seem that such low-level code languages are more like strings of unprotectable alphabet letters, courts have consistently held them protected by copyright law. It has been held, however, that reverse engineering can sometimes constitute a fair use of the copyrighted material.

3. Modifying Programs as an "Essential Step" To Use

4. Furthermore, if the process involves "reverse engineering," licensees might be held to have breached their licensing agreements. Owners arguably have a defense under section 117 of the Copyright Act, since such reverse engineering might constitute an "essential step" towards the use of the purchased product.¹ However, as will be discussed below, licensees have no such right and must appeal to the equitable "fair use defense" if they wish to alter or modify the program through such reverse engineering.

5. The Fair Use Defense Should Protect Some Users

   The Ninth Circuit has held, upon the policies underlying the Copyright Act, "that disassembly of copyrighted object code is, as a matter of law, a fair use of the copyrighted work if such disassembly provides the only means of access to those elements of the code that are not protected by copyright and the copier has a legitimate reason for seeking such access."² However, in Triad Systems Corp.v. Southeastern Express Co.,³ the Ninth Circuit declined to apply the fair use defense to a case of reverse engineering where no appreciable public benefit was derived from the infringing acts.⁴

   Section 107 of the Copyright Act lists the factors to be considered in determining whether a particular use is a fair one. Those factors include:

   1. the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes;
   2. the nature of the copyrighted work;
   3. the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and
   4. the effect of the use upon the potential market or value of the copyrighted work.⁵

   The statutory factors listed are not exclusive; rather, the doctrine of fair use is in essence "an equitable rule of reason."

   In Sega, the defendant, Accolade, reverse engineered and copied sections of the object code from Sega's software products to make its own software products compatible with Sega's operating system. Accolade disassembled the object code into human-readable source code, and generated printouts of the resulting source code.⁶ Disassembly is accomplished through the use of commercially available devices which are widely used within the software industry.⁷ The engineers then compared the printouts to find which functional elements were necessary to make its product compatible with the Sega operating system and generated a manual for development of its own line of software.⁸

   The court held that the presumption of unfair use raised by the defendant's commercial purpose could be rebutted by the degree and characteristics of the particular commercial use. The court found that the defendant's commercial purpose was "essentially non-exploitative" and "minimal," primarily because the defendant was reverse engineering the object code merely to study the functional elements of the plaintiff's software as an intermediate step towards developing its own distinct product.

   Moreover, the court held that "notwithstanding the fact that the alleged infringer may gain commercially," the public benefit derived from the infringing act can overcome any Copyright Act violation. Further, such "[p]ublic benefit need not be direct or tangible, but may arise because the challenged use serves a public interest." The use of unprotected elements of one software program to generate more works and further "creative expression" was found to benefit the public and therefore constitute a fair use. However, the court limited its holding to cases where reverse engineering of object code is the only way to gain access to the functional aspects of a computer program.

   Sega arguably applies to any modifications a licensee or owner makes to software as part of its Year 2000 compliance program. Changing the date fields from two to four digits involves re-coding millions of lines of code. Since, in the same way as Sega suggests, such reverse engineering is necessary to gain access to the functional elements, it constitutes a "fair use" of the software. Great public benefit (or, actually, protection from public harm) is obtained from Year 2000 modifications. Indeed, the problem is a high priority for government institutions like the Social Security Administration, the Internal Revenue Service, Medicare, etc. Moreover, even where the public benefit is not immediate, preventing the corruption of important files ultimately affects the public, since it affects the economy.

   However, in a recent case that dealt specifically with the servicing of licensed operating system (OS) software by an independent service organization (ISO), the Ninth Circuit declined to apply the fair use defense and upheld the granting of a preliminary injunction to prevent the defendant from servicing the plaintiff's OS software.⁹ In Triad, the plaintiff, Triad, manufactured computers for use by automotive parts stores. Triad's copyrighted products included OS, applications, and service software. Under Triad's licensing agreements, customers could not duplicate the software or allow it to be used by third parties.

   The defendant, Southeastern, was in the business of servicing and maintaining Triad computer systems. In order to service a Triad computer, Southeastern had to use the licensed OS and service software. Previously, the Ninth Circuit had decided that, by loading a plaintiff's OS software into RAM when servicing the plaintiff's licensees, the defendant, an ISO, had made a "copy" and therefore violated the Copyright Act.¹⁰ Therefore, by loading the OS and service software into RAM when servicing its customers, Triad argued, Southeastern was infringing its copyright.

   The court upheld the preliminary injunction, rejecting application of Sega's "public benefit" theory, and finding that the infringement was "neither creative nor transformative and [did] not provide the marketplace with new creative works." Further, the court observed, allowing Southeastern to service Triad's computer systems would undoubtedly cause an adverse impact on Triad's licensing and servicing revenues and lower returns on its copyrighted software investment. The court then found that "no appreciable public benefit" arose, justifying application of the "fair use" doctrine.

   One may argue that, by focusing on the negative impact to Triad's copyright values and investments, the Triad court wrongly engrafted elements of the preliminary injunction test onto the Sega test. But Sega did not suggest that the diminished value of the plaintiff's investment was part of the "fair use" inquiry. Moreover, the Triad court did not look at less immediate "public benefits," such as lower rates or improved service from increased competition. If licensees hire one of the many ISOs that contract themselves to perform the necessary modifications to a company's systems, they may find themselves situated similarly to the licensee in Triad and faced with claims that they breached their licensing agreements and infringed copyrights. Further, because of the manifestly commercial purpose of such organizations, these ISOs may have difficulty overcoming Triad's near-presumption against such use.

   Licensees might fare better if they employ in-house service providers to make the modifications, rather than contracting with third party ISOs. In that case, the manifestly commercial purpose of the service provider drops out of the picture, and the licensees can more persuasively argue that they had to modify the program themselves in order to prevent damages to their company. There is at least an indirect public benefit to preventing such losses.

6. Direct Interplay Between Breach of Licensing/Warranty
   Agreements and Copyright Violations
   
   

The above issue illustrates how licensees might face the Scylla and Charybdis of either violating copyright laws or exposing themselves to the risk of data-corruption or system-wide failure. In short, there will be close proximity and interplay between Year 2000 breach of contract and copyright infringement claims. Indeed, courts are likely to consider such claims together because they all involve interpretation of the licensing agreement. Moreover, courts are unlikely to look kindly upon a software producer who argues for a preliminary injunction, preventing licensees from having software serviced by an ISO, and then later argues that those plaintiffs who failed to take action failed to mitigate damages. Licensees must also be aware of this interplay. If they expect to recover for compliance costs under the warranty, they have to be careful not to breach licensing provisions in the same agreement. Unless the provisions are severable, such breaches risk releasing the manufacturer from its warranties and ongoing service obligations. The licensee would therefore be barred from bringing an action for recovery of costs because of its own attempts to fix the problem. It is unclear whether violation of the copyright use provisions would constitute a total or partial breach.¹¹

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Endnotes

1..See 17 U.S.C. § 117. RETURN

2..Sega Enterprises Ltd. v. Accolade, Inc., 977 F.2d 1510, 1518 (9th Cir. 1992). RETURN

3..64 F.3d 1330 (9th Cir. 1995). RETURN

4..Id. RETURN

5..17 U.S.C. § 107. RETURN

6..977 F.2d at 1514-15. RETURN

7..See id. at 1515 n.2. RETURN

8..Id. at 1515. RETURN

9..Triad Systems Corp. v. Southeastern Brokerage Co., 64 F.3d 1330 (9th Cir.1995). RETURN

10..See MAI Sys. Corp. v. Peak Computer, Inc., 991 F.2d 511, 518 (9th Cir. 1993). RETURN

11..See Restatement (Second) of Contracts § 238 (1981). RETURN