Second Circuit Broadly Construes Copyright Defense for Computer Programs

In Krause v. Titleserv, Inc. (2d Cir.; March 21, 2005) The Court of Appeals held that 17 U.S.C. § 117(a) authorized the defendants to adapt their copies of software programs because, within the meaning of §117(a) of the Copyright Act, they (i) owned the copies; (ii) created the adaptations as an "an essential step in the utilization of the computer program in conjunction with a machine;" and (iii) used the adaptations "in no other manner."

Krause terminated his relationship with Titleserv after learning that Titleserv intended that he take direction from its new Director of Information Technology. Krause told Titleserv that it was free to continue using the executable code as it existed on the day Krause left, but asserted that Titleserv had no right to modify the source code. According to the court, "Inability to modify the source code would have severely limited the value of those programs to Titleserv. Many routine functions such as the addition of a new customer or a change of a customer address could be performed only by changing the source code. In addition, changes were required to fix bugs from time to time to keep the system from crashing."

The court first noted that the absence of other evidence that Titleserv’s right to possess and use a copy indefinitely without material restriction, as well as to discard or destroy it at will, gave it sufficient incidents of ownership to make it the owner of the copy for purposes of applying § 117(a):

"[F]ormal title in a program copy is not an absolute prerequisite to qualifying for § 117(a)’s affirmative defense. Instead, courts should inquire into whether the party exercises sufficient incidents of ownership over a copy of the program to be sensibly considered the owner of the copy for purposes of § 117(a). The presence or absence of formal title may of course be a factor in this inquiry, but the absence of formal title may be outweighed by evidence that the possessor of the copy enjoys sufficiently broad rights over it to be sensibly considered its owner.

"We conclude that Titleserv owned copies of the disputed programs within the meaning of § 117(a). We reach this conclusion in consideration of the following factors: Titleserv paid Krause substantial consideration to develop the programs for its sole benefit. Krause customized the software to serve Titleserv’s operations. The copies were stored on a server owned by Titleserv. Krause never reserved the right to repossess the copies used by Titleserv and agreed that Titleserv had the right to continue to possess and use the programs forever, regardless whether its relationship with Krause terminated. Titleserv was similarly free to discard or destroy the copies any time it wished. In our view, the pertinent facts in the aggregate satisfy §5 117(a)’s requirement of ownership of a copy."

With regard to whether the modifications were and"essential step," the court noted that the modifications fell into four main categories: (1) correcting programming errors or “bugs,� which interfered with the proper functioning of the programs; (2) changing the source code to add new clients, insert changed client addresses, and perform other routine tasks necessary to keep the programs up-to-date and to maintain their usefulness to Titleserv; (3) incorporating the programs into the Windows-based system Titleserv designed and implemented between 1997 and 1998; and (4) adding capabilities, such as the ability to print checks, and, to a limited degree, allowing customers direct access to their records, which made Titleserv’s copy of the programs more responsive to the needs of Titleserv’s business.

"The only category of Titleserv’s modifications requiring additional analysis is the fourth category: the addition of new features, such as check printing and providing for direct client access. Such changes were not strictly necessary to keep the programs functioning, but were
designed to improve their functionality in serving the business for which they were created. . . ."

"We can see no reason why the modest alterations to Titleserv’s copies of the programs should not qualify. We need not address whether other types of improvements might be too radical, or might fail to qualify because they somehow harm the interests of the copyright owner. The sentence of the CONTU Report after the one speaking of the right to add features states that the rights granted by § 117(a) could “only be exercised so long as they did not harm the interests of the copyright proprietor.� CONTU Report at 13. A different scenario would be presented if Titleserv’s alteration somehow interfered with Krause’s access to, or ability to exploit, the copyrighted work that he authored, or if the altered copy of Krause’s work were to be marketed by the owner of the copy. But on our facts, we see no harm whatsoever to Krause’s enjoyment of his copyright. The changes made by Titleserv were made only to its copies of Krause’s programs. Krause enjoyed no less opportunity after Titleserv’s changes, than before, to use, market, or otherwise reap the fruits of the copyrighted programs he created.