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ARCHITECTRONICS, INC. v. CONTROL SYS.

August 1, 1996

ARCHITECTRONICS, INC., a New York corporation, Plaintiff, against CONTROL SYSTEMS, INC., a Minnesota corporation, ARTIST GRAPHICS CORPORATION, a Minnesota corporation, CAD SOURCE, INC., a Delaware corporation, and ACCESS GRAPHICS, INC., a Delaware corporation, Defendants.


The opinion of the court was delivered by: MUKASEY

 MICHAEL B. MUKASEY, U.S.D.J.

 Architectronics, Inc., a software development firm, has sued two former joint venturers and two related corporations for trade secret misappropriation, breach of contract, tortious interference with contract rights, and copyright infringement. Defendants move for summary judgment on all claims pursuant to Fed. R. Civ. P. 56. For the reasons set forth below, the motion is granted in part and denied in part.

 I.

 Plaintiff Architectronics is a New York corporation that maintains its principal place of business in Poughkeepsie, New York. (Am. Compl. P 1) Defendants Control Systems, Inc. ("CSI") and Artist Graphics Corporation are commonly-owned Minnesota corporations operating principally in Roseville, Minnesota. (Id. PP 2-3) Defendants CADSource, Inc. and Access Graphics, Inc. are commonly-owned Delaware corporations operating principally in Boulder, Colorado. (Id. PP 4-5)

 In 1986 and 1987, plaintiff developed prototypes for a new computer software product designed to enhance the capabilities of then-existing computer-aided design ("CAD") software. The product based on those prototypes would "retrofit" a standard CAD program to enable that program to reproduce on the main computer screen a "virtual" but fully-operational version of a hardware input device known as a "digitizer" or graphics tablet. (Lewis Aff. P 9)

 Early versions of CAD software required a separate external digitizer to send commands to a personal computer ("PC") running the software. A digitizer was a small rectangular tablet with plastic or paper templates displaying available design elements. The CAD user would make "picks" by touching a special probe to the desired design element, and the digitizer would transmit to the computer the coordinates of the pick. From those coordinates, the computer could determine and generate on the screen the appropriate design element. Plaintiff's programmers sought to replace the external digitizer with a less expensive and less cumbersome software equivalent. Plaintiff's new software would perform the same functions as an external tablet, but would use only those physical components common to virtually all PCs running CAD software: a hard drive, a monitor, a video graphics board, a keyboard, and a "mouse" input device. (Id. PP 10-11) The ultimate goal was to generate a simulated tablet in a "window" on the main computer screen. CAD users would select locations on the simulated tablet with the mouse, and the software would communicate the appropriate data to the CAD program. Plaintiff's software thus would "move the graphics tablet onto the screen" and eliminate the need for a separate external digitizer. (Id. P 12)

 Plaintiff's prototypes were engineered to work with AutoCAD, the leading PC CAD software of the 1980's. AutoCAD demanded high resolution video display capabilities, which were achieved by the video graphics board, a separately installed item of hardware. To make the graphics board work with AutoCAD, an auxiliary piece of software known as a display driver was necessary. A graphics board designed for AutoCAD typically would be shipped from the manufacturer with a floppy disk containing the corresponding AutoCAD display driver. (Id. PP 13-15)

 In March 1987, Architectronics developed a part-software, part-hardware prototype product. That prototype projected a simulated graphics tablet on a custom-built liquid crystal display ("LCD") screen. In June 1987, at a Washington, D.C. trade show, Architectronics President Stephen Lewis demonstrated the LCD prototype in a private hotel suite for Eric Korb, President of CADSource, and approximately 20 other people. (Id. P 18, 21) All in attendance signed confidentiality agreements prior to the demonstration. (Id. P 21; Abramson Aff. Ex. 1)

 At the time Architectronics was developing DynaMenu, CSI was a leading manufacturer of graphics boards used in PCs to run AutoCAD, and CADSource was a distributor for CSI. Plaintiff believed that CSI's graphics boards would provide the best hardware platform from which to launch DynaMenu. Plaintiff hoped to secure CSI's cooperation in the development of a new DynaMenu display driver that would work with CSI graphics boards and could be sold to CSI's customers as an add-on product. (Id. P 23-24)

 Lewis proposed such a joint venture to CSI Vice President Horace Beale at a meeting held at CSI's Minnesota headquarters on August 13, 1987. (Id. PP 24-25) Prior to a presentation of technical specifications and a demonstration of the LCD and dual monitor prototypes, Beale signed a memorandum stating that CSI would keep all disclosures confidential and would not "use or disclose to others any parts of these developments which are not already published, patented or recorded in [CSI's] files, except with [Lewis'] advance written permission." (Abramson Aff. Ex. 2) The meeting was attended by Lewis, Korb, Beale, and several other representatives of CSI, including two engineers, Shailendra Jain and Jim Hooker. (Lewis Aff. PP 25-28)

 CSI's Beale and CADSource's Korb both expressed interest in the idea, and on September 1, 1987, representatives of Architectronics, CSI, and CADSource signed a Software Development and License Agreement ("SDLA") that had been drafted by CSI. (Abramson Aff. Ex. 4) The SDLA provided that Architectronics would license the source code for its prototypes to CSI to permit CSI to develop a "Derivative Work," a new AutoCAD display driver configured for CSI graphics boards. (Id. P 2.1) The new display driver was to perform the following functions:

 
1. Display upon command from within an application program such as AutoCAD a rasterized *fn1" image from a binary file stored on disk or extended memory or expanded RAM. *fn2" [Architectronics] will provide the means for creating these rasterized image files and will provide the file structure and simple files.
 
2. Provide a cursor to indicate the location of pointing device within the logical pointing space corresponding to the menu displays. Mouse will be the primary input pointing device.
 
3. Provide for menu commands to be sent back to application program preferably using AutoCAD's own menu command interpreter. Menuing must be designed primarily for mouse input devices. [Architectronics] will provide a mouse driver which uses the ADI *fn3" AutoCAD interface to define separate logical areas within the pointing space which can be used to refer to tablet and screen definitions for AutoCAD's menu interpreter.

 (Id. Ex. C)

 Shortly after the signing of the SDLA, Autodesk, Inc., the manufacturer of AutoCAD, introduced Release 9 of the AutoCAD program, which offered, inter alia, an improved graphical user interface. CSI and CADSource believed that Release 9 rendered plaintiff's DynaMenu technology less extraordinary, and sought to abandon the joint venture. (Id. P 36) In November 1987, CSI drafted and circulated to CADSource and Architectronics an agreement purporting to terminate the SDLA. (Abramson Aff. Ex. 9) Architectronics refused to sign that document. CSI subsequently drafted an agreement dated April 28, 1988 terminating the SDLA as between CSI and CADSource. That agreement was signed by Beale and Korb. (Id. Ex. 10) CSI retained but never cashed the $ 2,000 development fee check from Architectronics. (Lewis Aff. P 37)

 In June 1990, CSI released a product called "GT FLEXICON" that plaintiff describes as "a full-blown tablet replacement [program] that implemented a number of advanced features drawn directly from Architectronics' original 1987 prototypes and specifications." (Id. P 49) Plaintiff alleges that GT FLEXICON is a "Derivative Work" based on the Architectronics prototypes, and that CSI has breached the exclusive licensing provision of the SDLA by selling the product. CADSource and Access Graphics, it is alleged, have participated in the distribution and marketing of GT FLEXICON.

 Plaintiff filed this lawsuit on December 18, 1992. Plaintiff has since amended its complaint and now alleges that "GT ICON," a display driver for AutoCAD that CSI released on January 15, 1989, also incorporates Architectronics trade secrets. (Id. P 39) Plaintiff charges all defendants with misappropriation of trade secrets and copyright infringement. A breach of contract claim based on the August 13, 1987 confidentiality agreement is asserted against CSI, and a second contract claim based on the SDLA is asserted against both CSI and CADSource. Artist Graphics and Access Graphics are alleged to be liable on the contract claims as alter egos of CSI and CADSource, respectively. Separately, plaintiff charges that Artist Graphics and Access Graphics tortiously interfered with Architectronics' contractual relationships. Defendants move jointly for summary judgment on all claims.

 II.

 Subject matter jurisdiction for the copyright claims is premised on 28 U.S.C. § 1338(a) (1994). Subject matter jurisdiction for the trade secret misappropriation, breach of contract, and tortious interference claims is premised on diversity of citizenship, 28 U.S.C. § 1332(a)(1) (1994), and principles of supplemental jurisdiction. 28 U.S.C. § 1367(a) (1994). On this motion, the court construes the facts in the light most favorable to the nonmovant. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986). Summary judgment may be granted only "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c).

 III.

 A. Statute of Limitations -- Choice of Law

 Defendants argue that plaintiff's claims all are barred by the relevant statutes of limitations. All parties have relied on Minnesota statutes of limitations in framing their arguments, presumably because the SDLA specifies that its terms shall be construed according to the law of Minnesota. ( Abramson Aff. Ex. 4 P 14)

 In fact, New York statutes of limitations apply to all the claims in the complaint. Federal courts sitting in diversity apply the choice of law rules of the forum state. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496, 85 L. Ed. 1477, 61 S. Ct. 1020 (1941). On matters of substantive law, New York courts apply the law of "the jurisdiction which, because of its relationship or contact with the occurrence or the parties, has the greatest concern with the specific issue raised in the litigation." Schultz v. Boy Scouts of America, Inc., 65 N.Y.2d 189, 196, 491 N.Y.S.2d 90, 94, 480 N.E.2d 679 (1985) (quoting Babcock v. Jackson, 12 N.Y.2d 473, 481, 240 N.Y.S.2d 743, 749, 191 N.E.2d 279 (1963)). When the parties have selected the law of a particular jurisdiction by contract, New York courts give "great deference" to that choice and will apply the chosen substantive law unless "the jurisdiction whose law is to be applied has no reasonable relation to the agreement or where enforcement of the provision would violate a fundamental public policy." American Special Risk Ins. Co. v. Delta America Re Ins. Co., 836 F. Supp. 183, 188 (S.D.N.Y. 1993) (citations and quotation marks omitted). However, New York courts treat statutes of limitations as part of the forum's procedure, and therefore apply New York statutes of limitations even if the underlying claim ultimately will be governed by the substantive law of another jurisdiction. See generally Sun Oil Co. v. Wortman, 486 U.S. 717, 722-729, 100 L. Ed. 2d 743, 108 S. Ct. 2117 (1988) (application of forum state's statute of limitations to a claim governed by the substantive law of a different state does not violate the Full Faith and Credit Clause). New York courts apply New York statutes of limitations to claims filed in New York even when, as here, the claims arise out of a contract providing that its terms shall be construed in accordance with the law of another state. Woodling v. Garrett Corp., 813 F.2d 543, 551 (2d Cir. 1987); Insurance Co. of North America v. ABB Power Generation, Inc., 925 F. Supp. 1053, 1059 (S.D.N.Y. 1996); Sears, Roebuck & Co. v. Enco Associates, Inc., 43 N.Y.2d 389, 397-98, 401 N.Y.S.2d 767, 772, 372 N.E.2d 555 (1977).

 B. Statute of Limitations -- Breach of Contract

 The general statute of limitations for contract claims in New York is six years. N.Y. Civ. Prac. L. & R. § 213(2) (McKinney 1990). However, if the contract giving rise to the claim involves a "transaction in goods," the four-year limitations period of Article Two of the Uniform Commercial Code ("UCC") applies instead. N.Y. U.C.C. Law § 2-725(1) (McKinney 1993). *fn4" The difference could be material because defendants allege that the contracts were breached, if at all, approximately five years before the filing of the complaint in this action.

 The first contract claim, alleged in paragraphs 18-21 of the amended complaint, arises from the August 13, 1987 confidentiality agreement signed by CSI. That agreement provided that Architectronics would disclose its prototypes to CSI for demonstration purposes, and that CSI would keep the disclosures confidential. The agreement involved no transfer of software or software rights; CSI bargained only for a demonstration, and Architectronics received only a promise of confidentiality. Because the agreement involved no transaction in goods, the six-year statute of limitations applies.

 It is not clear when the alleged breach of the August 13, 1987 agreement occurred. Nevertheless, it is clear that the first contract claim in the complaint is timely because plaintiff filed this lawsuit within six years of contract formation.

 Plaintiff's second breach of contract claim, alleged in paragraphs 22-30 of the complaint, is based on the SDLA. If the SDLA memorialized a "transaction in goods," the four-year limitations period applies; if not, the six-year period applies as above.

 Under the UCC, "'goods' means all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale other than the money in which the price is to be paid, investment securities . . . and things in action." Id. § 2-105. Generally, software is considered a "good," even though a finished software product may reflect a substantial investment of programming services. Communications Groups, 527 N.Y.S.2d at 344; Schroders, Inc. v. Hogan Sys., Inc., 137 Misc. 2d 738, 522 N.Y.S.2d 404, 406 (Sup. Ct. New York County 1987); see generally Bonna Lynn Horovitz, Note, Computer Software as a Good Under the Uniform Commercial Code: Taking a Byte Out of the Intangibility Myth, 65 B.U. L. Rev. 129 (1985). However, copyrights, patents, and trademarks are classified as "general intangibles" under the UCC and are distinguished from goods. N.Y. U.C.C. Law § 9-106 & New York Annotations (McKinney 1990); see Grappo v. Alitalia Linee Aeree Italiane, S.p.A., 56 F.3d 427, 431 (2d Cir. 1995).

 The SDLA provided for two licenses. Under the first license, Architectronics granted CSI the right to use its DynaMenu software prototypes for joint venture-related purposes only. That license gave CSI a tool necessary for the development of the "Derivative Work," a new display driver. Under the second license, CSI granted Architectronics and CADSource the right to use, copy, and distribute the "Derivative Work." That license was the centerpiece of the transaction, because it provided Architectronics and CADSource with the valuable right to manufacture the new display driver and sell it to the public. Architectronics and CADSource bargained primarily for the right to mass-market the product, not for the right to install single copies of the display driver onto their own PCs. See generally Andrew Rodau, Computer Software: Does Article 2 of the Uniform Commercial Code Apply?, 35 Emory L.J. 853, 874-883 (1986) (distinguishing tangible software use rights from intangible intellectual property rights). CSI's upside in the deal also was linked to the rights to reproduce and distribute: the parties anticipated thousands of sales of the new product (Lewis Aff. P 32), and Architectronics and CADSource promised to pay CSI a $ 20-per-copy royalty on those sales. CSI stood to gain in royalties a sum that would dwarf the $ 2,000 development fee. Because the predominant feature of the SDLA was a transfer of intellectual property rights, the agreement is not subject to Article Two of the UCC. *fn5" Plaintiff's second contract claim therefore is timely because plaintiff filed suit within six years of CSI's first attempt to repudiate the SDLA.

 C. Statute of Limitations -- Trade Secret Misappropriation

 New York trade secret misappropriation claims are governed by the three-year statute of limitations for suits based on injury to property. N.Y. Civ. Prac. L. & R. § 214(4) (McKinney 1990); see Galet v. Carolace Embroidery Prods. Co., 1994 U.S. Dist. LEXIS 14060, No. 91 Civ. 7991, 1994 WL 542275, *4 (S.D.N.Y. Oct. 5, 1994); Construction Technology, Inc. v. Lockformer Co., 704 F. Supp. 1212, 1224 (S.D.N.Y. 1989); Lemelson v. Carolina Enterprises, ...


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