Evolution, a Kansas software development firm, created software (PF32) for STSC, a predecessor in interest to SunTrust, a Georgia bank, and PAC, a wholly-owned subsidiary of SunTrust that provides financial services. The parties executed a Software License Agreement, a Source License Agreement, and a Data Door License Agreement.STSC and PAC encountered various problems with PF32 and after nearly two years of negotiations, decided to change their vendor. In preparation for the move, STSC and PAC extracted PAC’s data stored in the PF32 software and converted the data for use in the new vendor’s software. Three new programs (ABCNotes, LNSNotes and QTR.exe) were written to extract the buyers’ data from PF32 and another one (MIDAS) to create data reports by utilizing elements of developer’s PF32 source code. Furthermore, STSC and PAC stopped payments of the annual maintenance fees billed by Evolution because they were using an old version of PF32 that Evolution has ceased to update.
Evolution sued SunTrust and PAC, asserting claims for copyright infringement, breach of contract, and misappropriation of trade secrets. SunTrust and PAC countersued, asserting breach of contract, negligent misrepresentation, and fraud.
SunTrust and PAC moved for summary judgment. The district court of Kansas granted the motion in part.
a) Copyright claim
Evolution alleged that SunTrust and PAC exceeded the scope of their copyright licenses by using the PF32 source code and related documentation to create software programs and modify data files.
Defendants argue that their use was permitted under the licenses because the use of the source code was for their “own administrative, accounting and management purposes” and that furthermore it cannot be considered copyright infringement because it was “fair use” of plaintiff’s work, as provided by 17 U.S.C. § 107.
Citing Sega Enterprises Ltd. v. Accolade, Inc., 977 F.2d 1510, 1520-28 (9th Cir. 1992) and Assessment Technologies, of Wisconsin, LLC v. WIREdata, Inc., 350 F.3d 640, 645 (7th Circ. 2003), the district court concluded that SunTrust and PAC’s use of source code to extract data and enhance the functionality of plaintiff’s software fell well within the scope of fair use.
b) Breach of contract claim
Evolution alleged that SunTrust and PAC violated the License Agreement by exceeding the number of approved users accessing plaintiff’s software, by failing to pay annual fees, by installing the software in multiple servers, and by using the source code and related documentation to create programs to extract PAC’s data.
SunTrust and PAC replied that the License Agreement does not limit the number of users, oblige them to pay annual fees, nor limit the number of servers on which they could install the Evolution software.
The Court refused to grant summary judgment on the breach of contract claim, holding that the interpretation of the license raised issues of fact that a jury must decide. With respect to Evolution’s argument that the license prevented use of the source code, the court found that claim not qualitatively different from Evolution’s copyright infringement claim and held, as a consequence, that the Copyright Act preempted it.
c) Trade secret claim
The court rejected Evolution’s claim of misappropriation of trade secret, finding that reverse engineering is not an improper means to discover trade secrets in computer source code. Furthermore, the court held that Evolution’s trade secret claim does not allege an extra element and is therefore preempted by the Copyright Act.