Actuate Corp. v. International Business Machines Corp. was a lawsuit in the United States District Court for the Northern District of California, filed in December 2009, between the reporting software publisher Actuate and IBM, which had acquired Actuate’s OEM licensee MRO Software. Actuate claimed breach of contract, copyright infringement, violation of the Digital Millennium Copyright Act (DMCA) and fraudulent concealment. It alleged that IBM used Actuate software in its Tivoli products without paying the fees due after an acquisition, and that IBM posted Actuate software and licence keys on the internet.[1][3] In April 2010 Magistrate Judge Joseph C. Spero refused to dismiss the contract and DMCA claims, holding that the unauthorised distribution of passwords and licence keys can be circumvention under the DMCA’s anti-trafficking provisions.[1] In September 2010 IBM agreed to pay Actuate USD 11 million and the case was dismissed with prejudice.[4][2]
OpenText completed its acquisition of Actuate on 16 January 2015.[5]
Background
The facts below are Actuate’s allegations, which the court assumed to be true for the motion to dismiss.[1]
In December 2000 Actuate and MRO signed an “E.Business Application Partner Software License Agreement”. It allowed MRO to use Actuate software and to market, distribute and sub-license it “for use with Partner Products”, defined as the software listed in an exhibit, which included MRO’s Maximo products. MRO could distribute an unlimited number of copies for a flat fee if it complied with the licence terms. The agreement was amended five times; Amendment 4, effective 30 June 2006, gave MRO an option to extend the term to 31 December 2011.[1]
The agreement had an acquisition clause:[1]
Should Partner acquire, merge with or be acquired by a third party during the Term, this Agreement shall remain in full force and effect in accordance with its terms. However, Partner’s use of the Software shall continue to be Limited to Partner’s Products and their Natural Successors as stated in this Exhibit A. Partner may elect to extend its rights under this Agreement to use the Actuate Software in connection with the products of such third party by agreeing to pay the incremental License Fees as defined below.
IBM announced its acquisition of MRO on 2 August 2006. Actuate alleged that MRO had not told it about the acquisition talks while Amendment 4 was negotiated. After the acquisition IBM incorporated Maximo into its Tivoli products without paying additional licence fees, and posted on the internet Actuate software, development tools, documentation and licence keys that “enable Actuate’s software to be installed on an unlimited basis”.[1]
The dispute
IBM and MRO moved to dismiss the contract and DMCA claims, and later withdrew their motion against the fraudulent concealment claim.[1]
- Contract. IBM relied on the agreement’s definition of “Limited Use”: use “solely in conjunction with the contemporaneous use of Partner Products”, excluding use “in a standalone fashion or with software or data not incorporated into or integrated with Partner products”. It argued that because the Actuate software was still used through Maximo, which was a Partner Product, the Tivoli use needed no extra fees. Actuate argued that “Limited” in the acquisition clause was not the defined term “Limited Use”, and that IBM’s reading ignored the “Natural Successors” limit and the formula for incremental fees.[1]
- DMCA. IBM argued that using a password issued by the copyright owner is not “circumvention”, citing I.M.S. Inquiry Management Systems v. Berkshire Information Systems and later cases. Actuate replied that its claim was under the anti-trafficking provisions, 17 U.S.C. § 1201(a)(2) and (b)(1), and relied on 321 Studios v. MGM Studios and Microsoft v. EEE Business, in which distribution of a Microsoft volume licence key was held to be circumvention.[1]
Decision or outcome
Order of 5 April 2010
The court denied the motion to dismiss.[1]
On the contract claim, it held that even if the “Limited Use” definition were read into the acquisition clause, factual questions about how the Actuate software was incorporated into the Tivoli products prevented dismissal, because the definition excluded standalone use and use with software not integrated with Partner Products. It did not decide whether the agreement was ambiguous.[1]
On the DMCA claim, the court found that the two lines of cases could not be reconciled, and that the same definition of “circumvent” applies to § 1201(a)(1) and (a)(2). It followed 321 Studios and EEE Business and held that “unauthorized distribution of passwords and usernames avoids and bypasses a technological measure in violation of sections 1201(a)(2) and (b)(1)”. It reasoned that a combination to a lock “appears to be essentially the same as a password”, and that the statute did not support treating passwords differently from other code used for decryption.[1]
Settlement
On 16 September 2010 Actuate and IBM signed a binding memorandum of understanding to settle the case. IBM agreed to pay Actuate USD 11 million within five business days of a definitive settlement agreement, the parties agreed to release certain claims, and Actuate agreed to dismiss the case with prejudice within three business days of receiving payment. They also agreed to meet within thirty days to discuss possible future business.[4] The court entered a stipulated order dismissing the entire case with prejudice on 30 September 2010.[2][3]
Significance for software licensing and SAM practice
The order is a ruling on a motion to dismiss, made on assumed facts, and is not binding precedent. Its points for licensees are:
- Licence keys as protection measures. The court treated an unauthorised distribution of licence keys like a decryption tool, so it could support a DMCA claim, separate from contract and copyright claims.[1] Other courts had reached the opposite view on the use of issued passwords, which the order acknowledges.
- Acquisitions and embedded software. The acquisition clause kept use limited to the partner’s own products and their “Natural Successors”, with incremental fees to extend it to the acquirer’s products.[1] Third-party components embedded in an acquired product can carry such limits into the acquirer’s product line.
- Defined terms. Whether “Limited” carried the meaning of the defined term “Limited Use” was enough to keep the contract claim alive.[1]
The terms discussed are those of the 2000 Actuate and MRO agreement as described in the order. Current OpenText terms are covered in OpenText licensing.
Lessons learned
- Check what happens to embedded or OEM licences when the licensee is acquired; acquisition clauses can limit use to the original products. The MRO agreement limited use after an acquisition to Partner Products and their Natural Successors unless incremental fees were paid.[1]
- A definition used in one clause may not decide how the same word is read elsewhere in the agreement. The dispute over “Limited” and “Limited Use” could not be resolved on the pleadings.[1]
- Licence keys can be treated as technological protection measures, so distributing them without authority can bring DMCA claims as well as contract claims. The court held that unauthorised distribution of passwords and keys can be circumvention under § 1201(a)(2) and (b)(1).[1]
- Keep licence keys out of public download sites, documentation and support portals. The posting of keys that allowed unlimited installation was a central allegation in a case that ended with a USD 11 million payment.[1][4]