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DYNAMIC SOLUTIONS, INC. v. PLANNING & CONTROL

October 3, 1986

DYNAMIC SOLUTIONS, INC., Plaintiff,
v.
PLANNING & CONTROL, INC. & JOHN Z. CENSOR d/b/a CENSOR & COMPANY, Defendants



The opinion of the court was delivered by: HAIGHT

MEMORANDUM OPINION AND ORDER

CHARLES S. HAIGHT, JR., District Judge:

Plaintiff brings this action for copyright infringement, 17 U.S.C. § 3501 et seq., and conversion and unfair competition under state law. The dispute concerns certain computer software, or "programs," of which plaintiff claims ownership. Subject matter jurisdiction is predicated on 28 U.S.C. § 1338(a), (b) and principles of pendent jurisdiction. Venue is proper under 28 U.S.C. § 1400(a).

 Plaintiff moves pursuant to Rule 65, F.R.Civ.P., for a preliminary injunction barring defendants from using those programs or any computer programs based thereupon. By Memorandum Opinion and Order dated March 13, 1986, familiarity with which is assumed, a temporary restraining order was granted, which was extended on consent, see F.R.Civ.P. 65(b), until certain discovery could be completed and the preliminary injunction motion decided.

 A hearing was held April 29, 1986 and May 2, 13 and 14, 1986, and testimony was taken from plaintiff's principal and its expert witness. Plaintiff also introduced, in the form of deposition transcripts, *fn1" testimony from defendant Censor, who appears to be the principal of defendant Planning and Control, Inc. ("PCI"). Defendants indicated that their only prospective witness was a computer expert of their own. (Tr. 384). For scheduling reasons, and because defendants strongly argued that plaintiff was not entitled to the requested injunction on the existing record, no testimony from defendants' expert was taken. Instead, defendants were asked to make an offer of proof as to its expert's testimony, and the parties then briefed the question whether plaintiff was entitled to the sought-after relief based on the testimony to date and the defendants' proffer. That is the question now before me.

 I. Factual Background

 This case involves the breakdown of a once-symbiotic relationship between two companies and two principals. Defendant John Censor's occupation is providing business training programs. At one time, Censor did business as "Censor and Company." (Tr. 71-72). He now does business through PCI, and the parties have treated the two defendants as one. At least some of PCI's training programs use computer simulation games; the computer software at issue here runs two of those games. Censor, however, appears to have only limited knowledge of computers and computer programming, and relies upon others to supply the necessary hardware and software.

 Plaintiff Dynamic Solutions, Inc. ("DSI") is in the computer business and has supplied PCI with software for computer simulation games for a number of years. DSI was formed in 1971 by its present principal, Joseph Melhado, and one Anthony Paris. Initially Melhado and Paris were equal partners in the company. In or about 1973 formal ownership of Paris' share was transferred to Melhado, but Paris continued to receive 50 percent of DSI's profits as compensation as an employee and vice-president of DSI until some time in 1985. (Tr. 9, 70-71). Both Paris and Melhado did computer programming for DSI.

 The relationship between DSI and PCI began about 1972. Censor contacted Paris with an eye toward joining forces to provide a training course for one of Censor's clients with a computer simulation component. Censor was to provide the training course and DSI was to provide the computer software. No software, however, was written until 1973, when Censor and Paris "got involved with Chase Manhattan Bank." Censor created a training course for Chase, and DSI created the simulation software. Paris was apparently responsible for writing the "source code" *fn2" created especially for the simulation games; this source code referenced and incorporated certain "utility codes," or "utility routines," that Melhado had written in the past for other DSI clients and which apparently cause the computer to execute certain specific functions which are useful in various programming contexts. *fn3" The programs were written in FORTRAN and, designed to run on timesharing, mainframe computers, were stored on timesharing computer systems in accounts maintained by DSI and which could be accessed only by those who had knowledge of DSI's "password." When the simulation games were run in the course of a training seminar, each terminal would be hooked up to the mainframe computer through a telephone line. (Tr. 12-14; 74).

 On December 8, 1975, DSI by Melhado and Censor & Company by Censor executed a letter agreement (hereinafter sometimes referred to as the "1975 agreement" or "the agreement") intended "to clarify, define and regularize the relationship, the responsibilities, obligations and rights of both parties." *fn4" (P2). The agreement, drafted by Censor, first describes various aspects of the parties' then-existing relationship. DSI, it states, "currently serves Censor and will continue to serve as a time-sharing broker, i.e. arranging for time-sharing services," for which DSI was paid directly by Censor clients. (P3). The agreement noted, "DSI provides, for some Censor clients, consulting services to create the new software that produces the simulations." (P4). DSI also "provides and makes available, from time to time, certain software which is proprietary to DSI. . . ." (P5). Two examples of programs considered DSI "proprietary software" are given (PP4, 11), but the term is not further defined in the agreement. DSI had "[i]n the past . . . been paid in full for the consulting services and for the use of the proprietary software," and the agreement provides that "this practice will continue by which DSI will be paid for consulting services they render or for the use of any proprietary software, separate from time-sharing payments." (P6).

 The contract then establishes the ownership of the computer programs and simulation games. The agreement provides, "[t]he new software, i.e., the computer simulations that result from the efforts of Censor plus the consulting services provided by DSI, for which DSI was and is fully paid, become products which are now the sole and exclusive property of Censor. DSI hereby expressly disclaims any and all claims of ownership, proprietorship or partnership or other interest of any nature whatsoever in these computer simulation products." (P7). DSI further "disclaimed any interest in current simulation products, already created, and/or to new products now under development or those that may be developed at any time in the future." (P8). Although the agreement as drafted by Censor would also have transferred ownership of the DSI proprietary software involved in the simulation programs, that provision was struck by Melhado. (Ex. 1 P7). The source codes at issue in this lawsuit operate two of the games which, plaintiff concedes, belong to Censor under paragraph 8 of the agreement: "Operations Management" and "Project Management" (together, the "simulation games"). *fn5" Plaintiff also concedes that the source codes that were written to operate these two games on timesharing computers belong to Censor under the 1975 agreement. (These source codes are hereinafter referred to as the "1975 programs" or the "1975 source codes").

 The agreement went on to provide:

 Before each and every client engagement in the future, whether for an outright sale, a licensing agreement for an existing product, for the design of a new, custom simulation or for the provision of any Censor service which involves DSI in any way, a brief work order will be prepared by Censor specifying (a) consulting services and (b) proprietary software required and (c) fees to be paid to DSI for the use of consulting services and proprietary software.

 (P10). These work orders were to be signed by specified officers or partners. (P12).

 In the years following the 1975 agreement, Censor continued conducting training seminars using the 1975 programs on the timesharing computers, and DSI continued acting as Censor's "timesharing broker." Paris remained DSI's contact with Censor until he left DSI in the summer of 1985. By that time, Censor and his new corporation, PCI, represented about 90 percent of DSI's business. (Tr. 56-58). Despite the transfer of ownership in the 1975 agreement, Censor never actually possessed the source codes or computer tapes for the simulation games. Rather, DSI maintained them in its time-sharing computer accounts. (Tr. 32). It appears that some of the formalities of the 1975 agreement were not respected. For example, although the agreement provided for preparation by Censor of signed work orders "[b]efore each and every client engagement," no written work orders were ever prepared. (Tr. 44; Dep. 76-77). *fn6" DSI continued to make "minor" modifications to the simulation programs, at least sometimes on Paris' own intiative. (Tr. 79-81).

 The record only provides one specific example of the way Censor and DSI worked together in providing a course involving the timesharing programs to a client. In 1981, Censor contracted to provide Mobil Research & Development Corporation with one of the training simulation programs. Censor negotiated a licensing arrangement with Mobil for one of his simulation training courses. According to Censor, this agreement was similar to those PCI had with other large corporate clients. (Dep. 162). DSI was not a party to the agreement, but it included a provision for DSI's benefit under which Mobil would pay "royalties for the use of certain proprietary computer programs, Scheduling and PERT 6, which underlie the Simulation-Training Program." (Ex. 18 P16; 175-78). *fn7" DSI's involvement in and compensation for the Mobil project was worked out in negotiations between Censor and DSI before PCI's contract with Mobil was signed. (Dep. 166-67). No written work order or memorandum was prepared to memorialize PCI's arrangement with DSI. (Dep. 167; Tr. 17). DSI was paid $41,620.18 for its role in the Mobil project; of that amount Censor "believe[d]" $28,500 was for the use of the proprietary programs and the balance was for "timesharing charges and other fees." (Dep. 169).

 In the early 1980s, smaller, more portable computers came into use. DSI created software for this new technology to run the simulation games. Programs were developed to run the game on IBM personal computers. According to Censor, Melhado was asked -- a "verbal work order" -- to procure the IBM hardware and to develop software to run the simulation games on the IBM machine. (Dep. 357).

 The microcomputers that DSI and Censor used most often, however, were "Alpha Microcomputers." *fn8" (Dep. 357). DSI first created a simulation program for an Alpha Microcomputer in connection with DSI's sale of Alpha Micro hardware to the Commercial Bank of Kuwait. The sale of hardware was arranged by Paris, and Melhado reprogrammed the Operations Management simulation to run on the Alpha Micro machine. (Tr. 82-85).

 Writing the source code for this 1981 transaction (hereinafter the "1981 source code" or the "1981 program"), Melhado had access to the 1975 Operations Management source code, some printouts from "user interactions," and the printed rules for the game. He also consulted with Paris, who had written the 1975 source code for the Operations Management simulation. Melhado concedes that without Paris' assistance, it would have taken too long for him to create the 1981 source code to make the effort practical from a business standpoint. Even with Paris' assistance, it appears to have taken several months. Melhado states, however, that he did not use the 1975 source code written by Paris in writing the 1981 program, because he found the code written by Paris incomprehensible. According to Melhado, the 1981 source code plays the same Operations Management game, with the same output, as the 1975 Operations Management source code. (Tr. 81-94).

 There is no indication in the record when Censor became aware of the 1981 project for the Commercial Bank of Kuwait. However, DSI neither asked Censor's permission before creating the new Operations Management source code nor paid him anything for its use of the game or output resulting from user interaction with the 1975 source code. (Tr. 81-94).

 In 1983 and 1984, DSI created programs for smaller Alpha Microcomputers. These programs (hereinafter the "Alpha Micro" software or programs) are the focus of the present dispute. An Operations Management program was created in 1983 (the "1983 Operations Management program"), and a Project Management program for the smaller Alpha Micro hardware followed in 1984 (the "1984 Project Management program"). It is not clear when and how Censor himself was involved in this project. It does not appear to have been undertaken for any particular client; rather, a decision was made to phase out Censor's use of timesharing computers in favor of the more convenient and economical Alpha Micro hardware. (Tr. 12-13; Dep. 355-56). No writing memorializes the arrangement by which DSI was to create, and Censor use, the new software, nor does it appear that DSI undertook the project pursuant to any specific "work order," oral or otherwise. Just how the decision to create such programs was made is not clear. *fn9" What is clear is that Censor himself did not actually write any source code for the Alpha Micro programs. They were created by DSI. And, it is clear that Censor gladly used the Alpha Micro source codes, once they were written, in his training courses.

 The Alpha Micro programs were created by Melhado and Paris together in a manner similar to the way the 1981 source code was created. The programmers had access to the 1975 source codes, printout from user interaction with the game, and the game's rules. Melhado testified that he did not refer to the 1975 source codes in writing his sections of the code. However, he did not know whether Paris, who had written the simulation portions of the 1975 source codes, used the earlier programs in writing the Alpha Micro source codes. (Tr. 15-16; 116-19; 132-33). Like the 1975 source codes, the 1984 Project Management source code was written in FORTRAN. The 1983 Operations Management program was written in Pascal, and was derived from the 1981 Operations Management source code Melhado had written. *fn10" (Tr. 94-95).

 Once the Alpha Micro source codes were created, Censor began using them in his training seminars. As with the 1975 source codes, DSI maintained possession of the Alpha Micro software, and over time made minor changes to fix "bugs" in the programs. When Censor ran a seminar using the programs DSI would provide the Alpha Microcomputers and would "load" the programs into the computers by inserting "floppy disks" containing the source codes into the machine. The disks allowed the games to be run a limited number of times. If the client wished to run additional games, DSI would have to be called to allow it to do so. DSI received compensation for the clients' use of the programs on a per-use basis. (Tr. 41-43).

 Melhado testified that DSI had customers for the Alpha Micro software other than Censor, including Chase Manhattan Bank. (Tr. 43). Censor was aware for some time before the dispute broke out with DSI that DSI was billing Chase directly for the use of the software (although it is not clear he would agree that Chase was DSI's "customer"). PCI billed Chase separately for the "training components" of the seminars. *fn11" (Dep. 395-97). There is no evidence in the record concerning Censor's knowledge of and involvement with other customers that DSI billed directly.

 The relationship between DSI and PCI began to deteriorate late in the summer of 1985. Melhado testified that he discovered at that time that Paris had been diverting company funds to himself and that PCI had been paying considerably more for the use of the Alpha Micro software than DSI actually received (the implication being that the additional funds were being paid directly to Paris). Paris was fired, and Melhado contacted Censor and demanded that PCI pay what he considered the "full price" for use of the software. (Tr. 45-46). According to Censor, this action was simply a unilateral attempt by DSI "to raise its prices to an unreasonable level." (Dep. 257).

 On February 3, 1986, Melhado wrote to Censor, "[a]s you well know, DSI is no longer prepared to accept the artificially low price for its proprietary software that PCI has been paying." Melhado asserted that PCI was using its proprietary software under an "oral license terminable at will," and "direct[ed] [PCI and Censor]. . . to stop using [by February 14, 1986] all DSI proprietary software, including, without limitation, the Project Management and Operations Management programs which run on Alpha Micro computers." (Def.'s Ex. E). On February 12, 1986, Censor wrote back and asserted that the software belonged to PCI, not DSI.

 Shortly thereafter, obviously in anticipation of litigation, DSI filed registration statements with the United States Copyright Office for the "Operations Management Simulation Source Code" (Pl's Ex. 6) and the "Project Management Simulation/Game Source Code" (Pl's Ex. 7). Both filings were ...


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