S.O.S., Inc. v. Payday, Inc. is a 1989 decision of the United States Court of Appeals for the Ninth Circuit in a dispute between a supplier of payroll software and its customer. Payday had acquired “the right of use” of programs written by S.O.S., and later had former S.O.S. programmers copy the programs onto its own computer and convert them to another programming language. The district court held that Payday’s licence protected it from the copyright claim. The Ninth Circuit reversed, holding that “[a] licensee infringes the owner’s copyright if its use exceeds the scope of its license”, that copyright licences “are assumed to prohibit any use not authorized”, and that Payday had exceeded its licence by copying and modifying the programs.[1]
Background
S.O.S. supplied computer hardware and software to companies processing payroll, ledgers and receivables. Payday provided payroll and financial services to the entertainment industry. S.O.S. wrote a payroll package for Payday, made up of 236 programs, about 89 of which were derived from “Brown Tank” software that S.O.S. had licensed from a third party, Hagen Systems.[1]
The contract set a purchase price of USD 5,325 and stated: “This series of programs is the property of SOS, and PAYDAY is acquiring the right of use, SOS retains all rights of ownership.” Further changes would be charged at USD 50 an hour. The contract did not mention copyright or trade secrets, and the parties did not discuss what “ownership” and “use” meant. The programs originally ran on a computer that Payday leased, and later on S.O.S.’s own computer.[1]
The dispute
In 1985 two programmers who had written most of the software left S.O.S. but continued to work for it as contractors. They proposed that Payday buy its own computer and told Payday’s controller that changing the programs by 20% would make them new programs that S.O.S. no longer owned. S.O.S. refused to give Payday an unprotected copy unless Payday paid its account. One of the programmers then copied the payroll software at S.O.S.’s office and gave it to Payday, and the programmers loaded it on Payday’s new computer and translated it into another language, BITS BASIC. S.O.S. had offered to install a protected copy that Payday could use but not enter, copy or change; Payday declined.[1]
S.O.S. sued for copyright infringement, breach of contract, misappropriation of trade secrets and an unpaid account. The district court granted Payday summary judgment on the copyright, contract and trade secret claims. It held that a licensee cannot infringe and, applying the California rule that a contract is construed against its drafter, that S.O.S. had to restrict modification expressly.[1]
Decision or outcome
The Ninth Circuit reversed on copyright, contract and trade secrets, affirmed judgment for S.O.S. on the account stated claim and on Payday’s counterclaims, and remanded.[1]
- Scope, not existence, of the licence. “The critical question is not the existence but the scope of the license.” A licensee whose use exceeds the scope infringes.[1]
- No reading against the licensor. State rules of construction apply only where they do not conflict with federal copyright policy. Treating S.O.S. as granting every right it did not expressly keep was “contrary to federal copyright policy: copyright licenses are assumed to prohibit any use not authorized.”[1]
- “Right of use”. The contract language was unambiguous. Payday acquired the right to use the software to produce output for its customers, not a copyright “use”. Payday “exceeded the scope of its license when it copied and prepared a modified version of the programs without S.O.S.’s permission.” Whether the modified programs infringed, as derivative works rather than new works, was left for the district court.[1]
- Ownership of the copy. “All rights of ownership” covered both the copyright and the copies, so Payday possessed but did not own a copy. The court noted that an owner of a copy has rights under 17 U.S.C. § 117 (essential-step and archival copies) and § 109(a) (resale) that a mere possessor does not.[1]
- Authorship. Payday’s controller, who described what the programs should do but wrote no code, was not a joint author.[1]
- Trade secrets. The question was how Payday obtained the unprotected source code, and there were factual disputes about whether the contract entitled Payday only to a protected copy.[1]
The court expressly left open whether Payday might have a defence if S.O.S. had breached the contract by withholding a usable copy.[1] No later decision in the case was found in the sources reviewed.
Significance for software licensing and SAM practice
Later courts applied the “scope of the license” rule together with the Ninth Circuit’s distinction in MDY v. Blizzard between licence conditions, whose breach is infringement, and covenants, whose breach is only a contract claim. In Quest Software v. DirecTV a federal court cited this case for the rule that a licensor can sue its licensee for infringement only when the licensee acts outside the licence’s scope, and then held that exceeding a CPU count was a covenant breach.[2] See also MDY v. Blizzard. The ownership point anticipates the later licensed-or-sold cases such as Vernor v. Autodesk and Wall Data v. Los Angeles County Sheriff’s Department.
For licensees, the decision means that silence in a licence does not favour the customer on copyright questions in the Ninth Circuit: copying, modifying, porting or moving software to a new platform needs a grant, not just the absence of a prohibition.[1]
Lessons learned
- A licence is not a defence to copyright infringement if the use goes beyond the scope of the licence. The court reversed a judgment that rested on the existence of a licence alone.[1]
- Courts in the Ninth Circuit read software licences as permitting only the uses they authorise, not everything they fail to forbid. The court refused to construe the contract against the licensor on this point.[1]
- A bare “right of use” does not include the right to copy, modify or port the software. Payday exceeded its licence by copying the programs and converting them to another language.[1] Negotiate explicit rights for migration, modification and backups.
- If the vendor keeps “all rights of ownership”, the licensee does not own its copy and may not have the copy-owner rights in 17 U.S.C. 117. The court contrasted an owner of a copy with a mere possessor.[1]
- Getting a copy of software through former vendor staff, instead of from the vendor, can add trade secret claims. The court revived the trade secret claim because of how Payday obtained the source code.[1]