Data General Corp. v. Grumman Systems Support Corp. was a copyright and trade-secret dispute between a computer maker and the largest independent maintainer of its machines. Data General (DG) sued Grumman in the District of Massachusetts in 1988, alleging that Grumman infringed DG’s copyrights and misappropriated trade secrets in ADEX, a diagnostic program for DG’s MV computers. A jury awarded DG US$27,417,000 in damages, excluding interest and fees. Grumman appealed, raising antitrust defences and counterclaims among other issues.[1]
Background
DG had about 5 percent of the primary market for minicomputers but about 90 percent of the aftermarket for servicing DG computers. Third-party maintainers (TPMs) earned roughly 7 percent of that service revenue, and Grumman, the leading TPM, about 3 percent.[1]
DG’s policy toward TPMs changed over time. From 1976 until the mid-1980s it licensed diagnostics to TPMs and allowed TPMs to use diagnostics licensed to equipment owners. In the mid-1980s it restricted access and severely limited the licensing of ADEX. DG used ADEX itself to service equipment and licensed it only for the exclusive use of the in-house technicians of equipment owners that did most of their own service. It would not license ADEX to its own service customers or to customers of TPMs.[1]
The dispute
The court described how Grumman nevertheless obtained ADEX. Some former DG employees brought copies with them when they joined Grumman, in violation of their employment agreements. DG field engineers often stored copies at customer sites, where customers were bound to keep them confidential and to return them if they switched to a TPM, which few did. Grumman technicians used and duplicated those left-behind copies, and Grumman kept libraries of ADEX so that technicians could copy and use any copy to service any customer’s MV computers.[1]
Grumman argued, among other things, that a 1976 settlement between DG and an earlier TPM licensed it to use DG information, that DG’s copyright registrations had defective deposits, that the state trade-secret claim was preempted, and that DG monopolised the service aftermarket by refusing to license ADEX. The district court rejected these defences and counterclaims before trial.[1] DG’s expert put its damages at about US$28.0 million, made up of US$26.4 million in lost profits and US$1.6 million in nonduplicative Grumman profits. The jury awarded US$27.4 million.[1]
Decision or outcome
The First Circuit affirmed on all but one relatively minor issue concerning the calculation of damages.[1] The court held that minor, inadvertent errors in the deposit material did not defeat the copyright registrations, and that the Copyright Act did not preempt the trade-secret claim, because DG’s theory was that Grumman acquired ADEX by participating in breaches of confidentiality agreements binding former employees and service customers.[1]
On the antitrust defence, the court held that the desire of an author to be the exclusive user of its original work is a presumptively legitimate business justification for refusing to license competitors. It held that Grumman had not presented enough proof to rebut that presumption, noting that DG developed ADEX internally and that its earlier liberal policies were not evidence of how a competitive market would behave.[1] The court added that it was not holding that an antitrust plaintiff can never rebut the presumption.[1]
On damages, the court found an error in the jury instruction on how to apportion Grumman’s nonduplicative profits and, instead of ordering a new trial, treated remittitur as the most equitable remedy.[1]
Significance for software licensing and SAM practice
- Service tools are licensed software. Diagnostic and support software that a vendor licenses to equipment owners can be protected against use by the owners’ outside maintainers. Whether a customer may let a contractor use it depends on the licence and confidentiality terms.[1]
- Residual copies matter. Copies left on customer sites and a maintainer’s copy library were central facts. A customer that switches maintainers should check what vendor software it holds and what it agreed to do with it.[1]
Lessons learned
- Diagnostic software licensed to equipment owners stays protected against third-party maintainers who obtained copies through customers or former employees. The court upheld both the copyright and the trade-secret liability.[1]
- A vendor’s refusal to license its software to competing maintainers was presumptively a legitimate business justification. Grumman could not rebut it on this record.[1]
- Duplicated copies and library practices drive exposure. The award of about US$27 million rested on lost service profits tied to Grumman’s use of ADEX.[1]
Out of scope
This article does not cover the remittitur amount, the proceedings on remand, DG’s separate suit against Service & Training, Inc., or DG’s later history.