Cadence Design Systems, Inc. v. Avant! Corp. was a dispute between two competitors in “place and route” software, which is used to design integrated circuits by placing and connecting the transistors on a chip.[1] Cadence sued on 6 December 1995 for copyright infringement and misappropriation of trade secrets, alleging that Avant! had incorporated wholesale portions of Cadence’s copyrighted source code in its ArcCell and ArcCell XO products.[1] Two Ninth Circuit rulings record the litigation. The 1997 opinion decided what remedy follows a likely copyright infringement, and the 2001 order asked the California Supreme Court when a trade secret claim arises. The case is relevant to software licensing because it concerns the copyright in the software itself, and the protection a vendor can obtain against a competitor’s copying.
Background
Cadence and Avant! competed in place-and-route software. Cadence alleged that the copied code reached Avant! through several employees who left Cadence to work for Avant!, and that Avant! paid Cadence employees for valuable information about Cadence’s software products.[1] The 2001 order adds that Cadence was formed in 1988 by the merger of several companies, that four senior employees left in 1991 to found Avant!, then called Arcsys, and that a Cadence vice president resigned in March 1994 to join Avant!.[2] In June 1994 the parties settled earlier claims in a confidential agreement with a mutual general release and a California Civil Code section 1542 waiver, although they “apparently did not discuss” Avant!‘s alleged use of Cadence’s Framework II (DFII) source code.[2]
In summer 1995 a Cadence engineer found a bug in Avant!‘s ArcCell program that resembled one he had inadvertently created years earlier in Cadence’s DFII source code. In December 1995 the Santa Clara County District Attorney searched Avant!‘s headquarters and seized a log showing line-by-line copying of Cadence source code in 1991 by a former Cadence employee and Avant! founder.[2]
The dispute and the 1997 decision
After the suit was filed, Avant! undertook a clean room process to remove the allegedly infringing code. An independent expert examined the code Cadence identified and wrote specifications from which Avant!‘s engineers, allegedly without access to the Cadence code, wrote replacement code. The modified software was called Aquarius.[1] After an expert-assisted review the district court granted in part and denied in part Cadence’s motion for a preliminary injunction. It found that Cadence’s source code was protected by copyright and trade secret law, that Avant! used some of it in ArcCell and thereby infringed, and that Cadence would likely prevail on its claim that the clean room procedures were inadequate. It declined to enjoin the sale of ArcCell and Aquarius because it found the balance of harm tilted toward Avant! and money damages were adequate.[1]
The Ninth Circuit reversed. It held that a copyright infringement defendant cannot rebut the presumption of irreparable harm by showing that money damages are adequate, because the argument “that could be made in most cases of copyright infringement that involve a copyrighted commercial work” would otherwise deprive the presumption of meaning.[1] It also held that the district court gave improper weight to the harm an injunction would cause Avant!. In the court’s words a defendant who knowingly infringes “cannot complain of the harm that will befall it when properly forced to desist from its infringing activities”, and Avant! had deliberately copied Cadence’s code and was not an innocent infringer.[1] The district court had found that the infringing software accounted for 60 percent of Avant!‘s income, and Avant! asserted that at most 5 percent of its software used Cadence code; the court held that neither point changed the analysis where the plaintiff had shown a strong likelihood of success.[1] On the replacement code, the court held that if Aquarius infringed Cadence’s copyright, the district court should have enjoined its sale, and it remanded for the district court to decide whether Aquarius infringed.[1]
The 2001 order
By 2001 the case was on a further appeal and cross-appeal. The district court had ruled on 13 October 1999 that Cadence’s trade secret claims for post-release misuse of its DFII trade secrets, taken before the 1994 release, were barred by the release. The Ninth Circuit certified to the California Supreme Court the question of whether, under the California Uniform Trade Secrets Act, a claim for trade secret infringement arises only once, at the initial misappropriation, or with each subsequent misuse.[2] It stayed all further proceedings and withdrew the appeal from submission pending the answer.[2] The order mentions a related criminal trial. The court records read for this article do not include the later resolution of the case.
Significance for software licensing and SAM practice
The case shows how vendors protect the software that licences grant access to. Licence terms such as restrictions on reverse engineering and on use to build competing products rest on copyright and trade secret rights, and this litigation is an example of a vendor enforcing those rights against a competitor rather than against a customer. Three points are relevant to practitioners.
First, the presumption of irreparable harm in copyright infringement favours the owner of commercial software at the injunction stage, and the 1997 opinion is a statement that adequacy of damages does not defeat it. Second, a clean room is evaluated on its own facts: the district court’s concern was that Avant! could use its knowledge of the functions and basic structure of the Cadence code, and that using Cadence code to write specifications “rais[ed] serious questions.”[1] Third, the 2001 order shows that a general release in an earlier settlement can become the central issue in a later source code dispute.[2]
Lessons learned
- Source code copying supports an injunction against the competing product. The Ninth Circuit reversed a refusal to enjoin because money damages do not rebut the presumption of irreparable harm in a copyright case.[1]
- A clean room is not a defence by itself. The court held that if the replacement software infringed, it should have been enjoined, and the process had to be assessed on whether copied code or structure carried over.[1]
- Releases need precise scope. A broad release with a section 1542 waiver led to a question of when a trade secret claim arises, which the court sent to the state’s highest court.[2]
- Movement of staff is a risk path for source code. Cadence alleged that departing employees brought code to the competitor, and a search found a log of copying by a former employee.[2]