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Federal Circuit Reverses US Navy’s Short-Lived Avoidance of Software Piracy Claim

Edward J. Dailey

Edward J. Dailey | Of Counsel View more articles

Edward is a member of our Business Practice Group, Trademark Practice Group and Litigation Practice Group

In 2016, the German software company Bitmanagement Software GMBH brought a headline-grabbing lawsuit against the Navy for copyright infringement, claiming among other things that the Navy unlawfully copied a limited 38-seat license to over 425,000 Navy computers. Bitmanagement claimed damages of $600 million; the Navy had paid just $5,490. After trial in September 2019, the Claims Court ruled against Bitmanagement. See our colleague Erin E. Connors’s earlier commentary.

Notwithstanding the limitation to 38 licenses, the trial court determined there was an implied license between the parties permitting the Navy to make unlimited downloads of the software – based on highly informal email exchanges between the Navy and Bitmanagement’s principal. The court rejected Bitmanagement’s claim that the Navy had agreed to limit concurrent use of the licenses to 38 users under a modified “seat license” arrangement as a condition of the license. Bitmanagment claimed the Navy agreed expressly to use its FLEXERA IT management software to limit concurrent use to 38 users.

The facts of the case are complicated because the Navy’s contract for purchase of Bitmanagment licenses was with a third-party reseller while discussions about use of the 38 licenses were between the Navy and Bitmanagement. No one, it seems, managed the overall relationship.

As every litigation lawyer knows, victory at trial can be ephemeral. Here, the Federal Circuit reversed with a comprehensive decision in February.

First, the court agreed with the Navy: There is an implied, unlimited download license. The court noted the established rule that while legal conclusions are reviewed de novo on appeal, they will be reversed only if clearly erroneous. Consequently, the trial court was upheld on this key finding.

The circuit court’s ruling includes an extensive discussion of the distinction between implied-in-fact licensing terms and express contract terms. Where an express contract governs use of a copyright license, of course, implied terms are precluded. Here, the court found no express contract, a consequence of the complicated, informal dealings between the Navy and the reseller on some terms and with Bitmanagement on others. Indeed, the court notes the parties “were intentional in their decision not to enter into an express contractual relationship.” So, to this point, the Navy prevails with an implied, unlimited download license.

In the trial court, the case ended with rejection of Bitmanagement’s argument that any such license must be further conditioned on the Navy’s agreement to use its FLEXERA software management program to limit concurrent use to 38 users. Apparently, the trial court took the position that a copyright owner cannot sue a licensee for infringement but must sue for breach of contract. Bitmanagement had not pleaded contract.

On this point, the circuit court has come to Bitmanagement’s rescue on appeal. The court applies a distinction between contract conditions and mere covenants. Breach of a condition, says the court, may be pursued as a claim of infringement, whereas a breach of a covenant may be pursued only in contract. While this distinction takes us back to a first-year law school course in contracts, the court ruled that the FLEXERA agreement was a condition of the license and therefore subject to a claim for infringement.

It is far from clear that the court’s arcane discussion of conditions and covenants is even necessary to its decision. The court could have easily found an informal agreement incorporating both unlimited downloads and FLEXERA management to assure no more than 38 users. In any event, the Navy now faces further litigation on damages for infringement.

Of course, it is unlikely that the Navy used Bitmanagement’s software on over 425,000 computers, so damages are unlikely to meet Bitmanagement’s wishful claim for $600 million. Nevertheless, there are important issues here, as noted in our earlier article. Even where a software license seems to involve modest cost and a cordial relationship exists with the other party, reliance on good faith and email exchanges is imprudent at best. Furthermore, where licensing terms involve multiple parties--here the reseller and Bitmanagement and the Navy-- formal agreements and compliance oversight are essential.

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