Krause v. Titleserv is a 2005 decision of the Second Circuit about what a customer may do with software it paid to have written, when the developer keeps the copyright. The court held that Titleserv, the customer, was the “owner of a copy” of the programs even without formal title, and that its bug fixes, updates and adaptations to the source code fell within the statutory defence for owners of copies of programs.[1] Developer and customer here had no written licence, so the case is about the default rights of a customer rather than a negotiated licence.
Background
Between 1986 and 1996 William Krause did computer and communications work for Titleserv and wrote more than 35 programs for it, eight of which were at issue. They tracked client requests and other operations and were installed on Titleserv’s network. They were written in the Clipper language, and the executable code had to be compiled from source code.[1]
In 1996 the parties negotiated an assignment of the copyright to Titleserv in exchange for a five-year consulting agreement, but no agreement was reached and Krause left on 10 July 1996. He took the only copies of the source code for two of the programs, left the other source code on Titleserv’s servers, and locked the executables to stop a decompiler from reproducing the source. He told Titleserv it could keep using the executable code as it was on the day he left but could not modify the source code, which would have severely limited the value of the programs to Titleserv. Titleserv’s employees circumvented the lock, decompiled the code, cleaned it up and made further changes, including bug fixes and updates for new customers and addresses, while it built a replacement Windows-based system between 1997 and 1998.[1]
The dispute
Krause sued in the Eastern District of New York for copyright infringement based on copying and production of derivative works. A magistrate judge recommended summary judgment for Titleserv on the ground that its use and modification of the programs was protected by 17 U.S.C. section 117(a)(1), which lets the owner of a copy of a computer program make or authorize another copy or adaptation created as an essential step in using the program with a machine. The district court granted summary judgment on 30 October 2003 and Krause appealed.[1]
Krause argued that Titleserv held the copies only as a licensee under an oral agreement and that Congress’s choice of “owner” over “rightful possessor” limited the defence to holders of formal title. The Second Circuit rejected a title-only reading, reasoning that title can turn on state law, which would undermine the uniformity of the Copyright Act, and that it would be anomalous for a user with a complete right to use and keep a copy to be unable to fix it. It held that courts should ask whether the party exercises sufficient incidents of ownership over the copy to be sensibly considered its owner.[1]
It found Titleserv an owner on these facts: it paid Krause substantial consideration to develop the programs for its sole benefit, the software was customized to its operations, the copies were on its own server, Krause never reserved the right to repossess the copies and agreed that Titleserv could use them forever, and Titleserv was free to discard or destroy them. The court also compared the Federal Circuit’s DSC Communications decision, where licences that severely limited the customer’s rights, for example by barring use on other hardware, meant the customers were not owners.[1]
On the second requirement, the court held that fixing bugs, adding customers and addresses and adapting the programs to a new Windows system were essential steps in using the programs, following its earlier decision in Aymes v. Bonelli. It rejected Krause’s argument that “essential” meant only what was needed for the program to function, and held that adding features such as check printing could also qualify.[1]
Decision or outcome
The Second Circuit affirmed summary judgment for Titleserv.[1] The part of the opinion read for this article covers ownership of a copy and the essential-step requirement; the third requirement, that the adaptation be used in no other manner, is not summarised here.
Significance for software licensing and SAM practice
The decision is a counterpoint to cases in which customers were held to be mere licensees. Whether a customer owns or licenses its copies decides whether section 117 protects its copying and modification, and, in other cases, whether it may resell. The factors the court listed are the ones to check in any software agreement: whether the customer paid for development, whether it can keep and use the copy permanently, whether the vendor can recall it and whether use, transfer or location restrictions apply.[1] Compare Vernor v. Autodesk, where a Ninth Circuit court reached the opposite result on a mass-market licence, and MAI Systems v. Peak Computer on copying in memory.
The case concerns United States copyright law and bespoke software with no written licence. It does not decide what rights a customer has under a standard commercial licence that disclaims ownership.
Lessons learned
- Copy ownership is not copyright ownership. Titleserv owned its copies though Krause owned the copyright.[1]
- The incidents of ownership decide. Payment, customization, indefinite use and freedom to destroy the copy supported ownership.[1]
- Write the terms down. The dispute arose where there was no signed agreement on source code or the copyright, and the oral arrangement became a fact question both sides argued.[1]
- Restrictive licences change the result. The court contrasted a case where licence restrictions on use and transfer showed the customer was not an owner.[1]