DSC Communications Corp. v. Pulse Communications, Inc. was a dispute between two makers of telephone network equipment. DSC sold the Litespan 2000 digital loop carrier to the regional Bell operating companies (RBOCs). Pulse Communications (“Pulsecom”) made interface cards that plug into the Litespan and compete with DSC’s own cards. DSC sued in the Eastern District of Virginia for contributory and direct copyright infringement, trade-secret misappropriation and tortious interference. Pulsecom counterclaimed for patent infringement.[1]
Background
The Litespan and its interface cards each have microprocessors that need software. Two packages mattered. The Litespan System software includes the operating system and utilities. The POTS-DI software is the download image for DSC’s plain-old-telephone-service cards. Both normally sit in nonvolatile storage in the Litespan. When a POTS card is inserted and powered up, a copy of POTS-DI is downloaded into the card’s volatile memory.[1]
DSC transferred the Litespan technology to the RBOCs through seven comprehensive agreements, each licensing the software under restrictions. Pulsecom decided not to write its own card software. Its POTS card downloads POTS-DI from the host Litespan on power-up, as DSC’s card does.[1]
The dispute
DSC’s contributory-infringement theory was that each time an RBOC powered up a Pulsecom card in a Litespan, the RBOC copied POTS-DI into the card’s memory. The district court dismissed the claim at the close of DSC’s case. It held that the copy was an essential step in using the software and that the RBOCs were “owners” of their copies under 17 U.S.C. section 117, because they had paid once and held the software for an unlimited period.[1] The case went to the Federal Circuit because Pulsecom’s patent counterclaim gave that court appellate jurisdiction, and it applied Fourth Circuit law to the copyright and state-law issues.[1]
Decision or outcome
The Federal Circuit reversed on ownership. It declined to treat every licensee as a non-owner, because a buyer can hold a copyright licence and still own a copy. But it held that a single payment and an unlimited term are not dispositive when other restrictions are inconsistent with ownership.[1] In these agreements:
- the software remained the seller’s property, subject to a licence to use it only with the Litespan equipment during its useful life;
- the RBOCs could not disclose or make the software available to anyone except need-to-know employees without DSC’s written consent, which the court said was at odds with the first-sale right to transfer owned copies;
- the RBOCs could not use the software on hardware other than DSC’s, whereas an owner under section 117 could use it on any hardware.[1]
It also held that a clause giving the RBOCs the right to buy competing products from others did not give them the right to copy DSC’s software to use those products.[1]
On direct infringement, the result was split. The claim over Pulsecom’s copying of POTS-DI on the RBOCs’ own Litespans was remanded. But Pulsecom had bought two Litespan systems on the open market through a third party. The court held it was an owner of those systems and their software, not bound by any licence, and so entitled under section 117 to make the copies needed to operate them.[1] On the evidence at the close of DSC’s case, the copying done to show that Pulsecom cards were interchangeable did not qualify as fair use under the reverse-engineering analysis in Sega v. Accolade, although Pulsecom could still try to prove fair use on remand.[1]
The court reversed the dismissal of the trade-secret claim and held it was not preempted by the Copyright Act, because misappropriation requires an element that copyright infringement does not. It affirmed dismissal of the tortious-interference claim for lack of proof of a reasonably certain business expectancy. It vacated the summary judgment of non-infringement on Pulsecom’s patent counterclaim and left Pulsecom’s copyright-misuse defence unresolved as not yet ripe.[1]
Significance for software licensing and SAM practice
- Licence versus ownership of embedded software. Whether the holder of equipment with embedded software can rely on section 117 depends on the licence terms, not only on payment structure. A software asset manager reading a network-equipment licence should note any restriction on transfer, disclosure and use with other vendors’ hardware.[1]
- Acquisition route. The court treated the same Litespan software differently according to whether it was held under a carrier’s licence or by a buyer on the open market without restriction.[1]
Lessons learned
- A one-off payment and an unlimited term do not by themselves make a buyer the owner of its software copy. Restrictions on transfer, disclosure and use on other hardware pointed to licensee status.[1]
- A licence that ties embedded software to the vendor’s own hardware is what makes compatible third-party hardware an infringement risk. The market-rights clause did not allow copying the software for use with competitors’ products.[1]
- How equipment was acquired matters. Pulsecom’s open-market purchase, with no licence restriction, made it an owner for section 117 purposes.[1]
Out of scope
This article does not cover the Eastern District of Virginia proceedings on remand, the detail of the patent claim construction, or the later history of the parties.