Opinion
B157511.
7-8-2003
JOHN SCOTT, Plaintiff and Appellant, v. JEFFREY LANE et al., Defendants and Respondents.
Gross & Belsky, Terry Gross, Adam C. Belsky for Plaintiff and Appellant. Hogan & Hartson, Richard L. Stone, Julie A. Shepard for Defendants and Respondents.
Appellant John Scott created software which respondent Jeffrey Lane marketed. According to Scott, the parties orally agreed that for Scotts services he would receive a percentage of the businesss gross revenues, and thereafter orally agreed that in exchange for Scotts additional services Lane would pay him 30 percent of the sales price if the software business were sold. Lane sold the business and paid Scott nothing from the proceeds of the sale.
Scott sued Lane, as well as Lanes company (respondent Brookfield Communications, Inc., hereinafter, Brookfield) and the purchasing company (respondent Creative Planet), alleging causes of action for breach of oral agreements, fraud in the inducement, unfair competition, unjust enrichment, and accounting. The trial court granted summary judgment against Scott, finding that each cause of action was barred because the oral promises and agreements were invalid under federal copyright law, which requires that the "transfer of copyright ownership," such as the grant of an exclusive license upon which the contract and related claims were based, be "in writing and signed by the owner." (17 U.S.C. § 204(a), hereinafter, section 204(a).) We affirm.
FACTUAL AND PROCEDURAL SUMMARY
In December of 1988, Lane and Scott orally agreed to work together to create and market software and data processing services for the entertainment industry featuring a data retrieval system with information on film projects. They agreed that Scott would write, maintain and update the software for the data processing projects, which ran on the PC-DOS operating system, and that Lane would run the office and would market their products. Scott and Lane further agreed that they would use for their office and marketing functions Brookfield, a corporate entity previously registered by Lane and in which Lane was the sole shareholder.
The parties also orally agreed that Scott would receive one-third of all gross revenues obtained from the sale or license of the joint ventures or Brookfields assets, Lane would receive two-thirds of such revenues, and each would pay their necessary overhead and expenses from their respective shares. Furthermore, the copyright to the software developed by Scott, ultimately known and marketed as "the Studio System," would be owned and retained by Scott.
In April of 1989, Scott and Lane orally agreed to a slight modification of their agreement. Because of increased sales and marketing expenses incurred by Lane, Scott agreed to reduce his share of the gross to 30 percent and to pay a share of the marketing expenses. In other regards, their oral agreement remained the same.
In July of 1989, Scott drafted and gave to Lane a short document that outlined their agreement, with apparently some slight modifications. The document indicated that it was intended as a guide for lawyers in structuring an "official contract" between Scott and Lane. The document specified, in part, that gross revenues from their endeavor would be distributed one-third to Scott and two-thirds to Lane, that Scott would "retain ownership of the software" written by him and that "all payments to [him] will be in the form of royalties for the use of his copyrighted work," with Lane "granted a 99 year exclusive license to market the software." Moreover, that document indicated that each party would bear all business costs incurred by that party, with the possible exception of printing costs, of which Scott would pay one-third.
According to Scott, the above document he drafted, which granted Lane an exclusive license to the market the software, contained his understanding of the parties oral agreement. Neither party signed the document, and Lane did not prepare or submit any written agreement for Scott to sign. Scott and Lane never signed any written agreement.
By the end of 1992, Scott had received a total of $ 65,000, or approximately $ 16,000 a year for four years. In 1993, Scott discussed with Lane the possibility of "writing completely new software" that could take advantage of the new features of the Windows and Macintosh operating systems. To take advantage of these new operating systems that were becoming more widely used in the entertainment industry, the DOS-based version of the Studio Systems software had to be largely rewritten and could not simply be updated.
However, Scott did not believe writing new software for Windows and Macintosh was worth his effort, in view of the small amount of income he had received thus far. He also did not deem writing new software for new operating systems as a project he was contractually obligated to perform. In June of 1993, Scott informed Lane that he was contemplating terminating his relationship with the project, since it would take a substantial effort to write new software and the money he had received was not commensurate with the effort he would have to expend. Lane encouraged Scott to write the new software for the Windows and Macintosh operating systems and offered Scott 30 percent of the sale or acquisition price of Brookfield in the event it was ever sold or acquired.
Scott accepted Lanes offer and wrote new software that was customized for the Windows and Macintosh operating systems. Scott also continued to modify and update the original DOS-based software. Virtually all of the software currently marketed by Brookfield or Creative Planet was written after June of 1993. The bulk of the copyright license royalties Scott received were paid after he made the software designed to run on the Windows and Macintosh operating systems. Scott ultimately received approximately $ 1.3 million from Brookfield exclusively in the form of copyright royalties for the use of his software.
Meanwhile, in 1995, Lane suggested to Scott the possibility of a written agreement that would document that Scott was acting as an independent contractor. Lane suggested a renegotiated agreement in the form of a license agreement that would be somewhat different than their oral agreement. Scott then retained an attorney to work out and memorialize the terms of a new agreement. In response to an inquiry from Scotts attorney, in February of 1996 Lane detailed the terms of Scotts 1989 royalty agreement, which included: 30 percent of gross sales in Los Angeles County, payable at the end of each month, less $ 1,000 advance, less 50 percent advertising and marketing costs, 30 percent of net profits outside of Los Angeles County, with Brookfield retaining the exclusive marketing rights to the product that was exclusive to Brookfield in the entertainment industry.
In March of 1996, Scott sent a letter to Lane in which he explained the efforts of his attorney to negotiate a new arrangement. Scott was dissatisfied with the unpredictably huge ups and downs in the royalty revenue stream. Scott also pointed out in his letter that he had little incentive to make the software program easy to use for the data entry people, as that would not affect his royalty income. Scott speculated that software sales might dwindle as more studios were added to the client list, and also that an internet based version might become popular and result in reduced software sales. Scott suggested restructuring their agreement so that it did not focus on software sales and thus provided him with incentive to update the data entry process. Specifically, Scott suggested modifying the agreement with a "new percentage . . . set up" so that "Brookfields bottom line affected [his] income."
During the next several years, further futile discussions ensued between Scott and Lane regarding the possibility of a written agreement. In 1999, Lane sold his company, Brookfield, to Creative Planet, though Scott did not learn of the sale until April of 2000. Scott continued to receive checks, first from Brookfield and then from Creative Planet.
In February of 2001, Scott sued Lane, Brookfield and Creative Planet. The causes of action alleged in Scotts first amended complaint were: (1) breach of contract against Lane and Brookfield for breach of the 1993 oral sales agreement; (2) breach of contract against all defendants for breach of the modified 1988 oral agreement because of the failure to pay Scott the required 30 percent of the gross revenues of the joint venture; (3) accounting against all defendants; (4) fraud by intentional misrepresentation against Lane and Brookfield; (5) fraud by making a promise without intention to perform (Civ. Code, § 1710, subd. 4) against Lane and Brookfield; (6) violation of the Unfair Competition Law (Bus. & Prof. Code, § 17200 et seq.) against all defendants; and (7) unjust enrichment against Lane and Brookfield. The first amended complaint sought injunctive relief, accounting, disgorgement and damages.
Scotts claims were based on the alleged failure to compensate him in accordance with the 1993 sales agreement in that Scott purportedly was not paid the agreed-upon percentage of the sales price of Brookfield, and was not compensated in accordance with the 1988 oral agreement (i.e., Lane purportedly failed to pay Scott the agreed-upon percentage of the joint ventures gross revenues). Scott also alleged misrepresentations regarding the intentions of others involved in the oral contracts and unjust enrichment in that Lane benefited from Scotts contributions to the joint venture without properly compensating him.
Scotts complaint and his supporting declaration characterized the relationship with Lane as "a joint venture" partnership whereby Scott would write, maintain and update software in return for a percentage of the sales revenue. However, during discovery Scott repeatedly acknowledged that the purported joint venture was based on "a 99-year license to market the software" he wrote in return for which he was paid exclusive copyright royalties as he had requested.
The motion for summary judgment urged, in pertinent part, that all of Scotts claims were barred because the agreements were invalid and unenforceable under section 204(a) of the federal Copyright Act. Respondents argued the parties oral agreements involved the granting of an exclusive license, for which section 204(a) requires an agreement in writing, and that the oral exclusive license agreement was unenforceable.
In opposition to the motion for summary judgment, Scott supplied a supporting declaration that apparently attempted to avoid the application of federal copyright law by trying to explain away his discovery admissions, and to claim that he was "mistaken" in characterizing the agreement as a 99— year exclusive license to market software in return for which he would receive royalties. The trial court found there was undisputed evidence that the transfer of an exclusive license was part of the parties original oral agreement. The trial court granted summary judgment against Scott based, in large part, on the fact that the oral promises and agreements were invalid under federal copyright law, which requires that the "transfer of copyright ownership," such as the grant of an exclusive license upon which the contract and related claims were based, be "in writing and signed by the owner." ( § 204(a).)
On appeal, Scott does not dispute the trial courts finding that the parties oral agreement entailed the transfer of an exclusive license. Scott urges in essence, however, that the failure of an exclusive copyright license results by operation of law in a nonexclusive license, and that he is entitled to pursue his causes of action premised on the alleged failure to compensate him for his software and services. We review the matter in accordance with the customary rules of appellate review following a grant of summary judgment (Merrill v. Navegar, Inc. (2001) 26 Cal.4th 465, 476-477; PMC, Inc. v. Saban Entertainment, Inc. (PMC) (1996) 45 Cal.App.4th 579, 590), and for the reasons discussed below find Scotts various arguments are unavailing.
DISCUSSION
Section 204(a) of the federal Copyright Act bars Scotts causes of action.
Section 204(a) provides as follows: "A transfer of copyright ownership, other than by operation of law, is not valid unless an instrument of conveyance, or a note or memorandum of the transfer, is in writing and signed by the owner of the rights conveyed or such owners duly authorized agent." (Italics added.) The grant of an exclusive license, even for a limited period of time, is a "transfer of copyright ownership" requiring a writing within the meaning of the Copyright Act. (PMC, supra, 45 Cal.App.4th at pp. 591, 593; 17 U.S.C. § 101.)
"Unlike common law statutes of frauds (e.g., Civ. Code, § 1624), section 204 of the Copyright Act serves more than an evidentiary function. Without a writing, a transfer of copyright is not valid and the transfer is not effective." (PMC, supra, 45 Cal.App.4th at p. 591.) The purpose of section 204(a) is not simply, as Scott urges, to protect copyright owners only by ensuring that a party cannot claim an exclusive license without a writing. Rather, section 204(a) is unlike "state statutes of frauds [that] serve a purely evidentiary function — to prevent enforcement through fraud or perjury of fictitious agreements. [Citation.] Thus, agreements subject to [state] statutes of frauds may be perfectly valid, yet unenforceable without evidence of a writing. [P] By contrast, a transfer of copyright is simply not valid without a writing. [Citation.] Section 204s writing requirement not only protects authors from fraudulent claims, but also enhances predictability and certainty of ownership — "Congresss paramount goal" when it revised the Act in 1976." (Konigsberg Intern. Inc. v. Rice (Konigsberg) (9th Cir. 1994) 16 F.3d 355, 357, italics added.)
I. Contract causes of action.
In view of the purpose of the section 204(a), the statute "cannot be circumvented by parties arguing that the exclusive license was granted in a contract satisfying state common law." (Radio Television Espanola v. New World Entert. (Radio Television) (9th Cir. 1999) 183 F.3d 922, 929, fn. 7.) Therefore, section 204(a) bars not only copyright infringement actions but also bars breach of contract claims based on oral agreements. (Ibid.; Valente-Kritzer Video v. Pinckney (9th Cir. 1989) 881 F.2d 772, 774.)
Here, both of Scotts contract claims were based on an oral exclusive copyright license. Scott does not dispute the trial courts finding that the 1988 oral "joint venture" under which he would "write, maintain and update software" in return for payment of copyright royalties was in fact an oral agreement for the transfer of an exclusive copyright license. Section 204(a) thus precludes enforcement of the 1988 oral agreement.
As to the 1993 oral sales agreement, Scott contends that it did not involve any purported transfer of a copyright license, but rather only involved whether he would continue to work on the 1988 joint venture. However, the 1988 agreement was, as discussed above, an oral agreement for the transfer of an exclusive copyright license — and that 1988 agreement was continued with the 1993 agreement. As the trial court properly remarked in its ruling, "at least part of the [two oral] agreements terms were based on what is an exclusive license."
Scott acknowledged in his declaration that under the 1993 sales agreement he merely "continued" to work for the 1988 "joint venture" and "remained" a participant in the enterprise by writing and developing "several computer programs." Scott now also does not dispute that after writing and maintaining the software, he licensed it to respondents who under that license marketed and sold the software. And it was undisputed that most of the $ 1.3 million in copyright royalties were paid to Scott for use of the software after 1993. Thus, the trial court properly concluded, based on Scotts own admissions, that the 1993 oral sales agreement was dependent upon an oral exclusive license and invalid under section 204(a).
II. No implied, nonexclusive license by operation of law here.
Nor is there any merit to Scotts contention that the failure of an exclusive license under section 204(a) resulted, by operation of law, in an implied nonexclusive license to his copyrighted work. In contrast to an exclusive license that transfers ownership, even for a limited period of time, a nonexclusive license is not a "transfer of copyright ownership." (17 U.S.C. §§ 101, 204(a).)
With a nonexclusive license, the owner of a copyright permits another merely to use the copyrighted material without transferring ownership in the copyright. (Kennedy v. National Juvenile Detention Assn. (7th Cir. 1999) 187 F.3d 690, 694.) Scott urges that where that "sort of lesser, nonexclusive license . . . results from a purely oral agreement" (Jacob Maxwell, Inc. v. Veeck (Jacob Maxwell) (11th Cir. 1997) 110 F.3d 749, 753) or the objective facts concerning the transaction support a finding that an implied license existed (Effects Associates, Inc. v. Cohen (Effects Associates) (9th Cir. 1990) 908 F.2d 555, 558), the licensee has lost the right to sue for copyright infringement, but "retains the right to sue [ ] in state court on a variety of other grounds, including breach of contract." (Id. at p. 559.)
According to Scott, in situations where the intended licensee reaches an agreement for the copyright owner to create copyrighted works and for the intended licensee to market them, and the copyright owner in fact renders performance under an oral agreement invalid under section 204(a), an implied nonexclusive license to the copyrighted work is created based on the conduct of the parties. Although under federal law nonexclusive licenses may be granted orally or implied from conduct (see, e.g., Graham v. James (2d Cir. 1998) 144 F.3d 229, 235; Effects Associates, supra, 908 F.2d at p. 558), such a lesser nonexclusive license has not been universally approved of as a fall-back position to rescue an invalid exclusive license.
The leading treatise on federal copyright law has aptly noted the problem with an invalid oral exclusive license as follows: "May a court accord partial significance to the attempted grant [of an exclusive license] by construing it as an effective, albeit nonexclusive, license? To do so would raise serious questions under contract law, as the enterprise would plainly contravene the mutual intent of the parties. Yet the Eleventh Circuit [in Jacob Maxwell, supra, 110 F.3d at p. 752] has answered that question in the affirmative, without paying much heed to those aspects of contract law. The Fifth Circuit [in Lulirama Ltd. v. Axcess Broadcast Services (Lulirama) (1997) 128 F.3d 872, 880] has agreed, citing the proposition that courts should sever the illegal portion of the agreement and enforce the remainder if the parties would have entered the agreement absent the illegal portion of the original bargain." (3 Nimmer & Nimmer, Nimmer on Copyright (2002) § 10.03[A][7], pp. 10-49 to 10-50, fns. omitted.)
We find the federal cases relied upon by Scott inapposite. All of the relevant cases involve nonexclusive licenses implied by law as an affirmative defense to copyright infringement actions. (See, e.g., Lulirama, supra, 128 F.3d at pp. 875-876, 880; Jacob Maxwell, supra, 110 F.3d at pp. 752-753; I.A.E., Inc. v. Shaver (7th Cir. 1996) 74 F.3d 768, 775; Effects Associates, supra, 908 F.2d at p. 559.) The present case, however, does not involve an affirmative defense to copyright infringement.
Most significantly, the federal cases relied upon by Scott are distinguishable because, unlike here, they do not involve a mutually inconsistent express exclusive license. We opt to analyze the matter under traditional state contract law (Civ. Code, § 1636 et seq.) and focus on the mutual intent of the parties (see PMC, supra, 45 Cal.App.4th at p. 593), who unequivocally contemplated the grant of a 99-year exclusive license to market the software in exchange for the payment of copyright royalties. (Ibid.)
Scott relies on the notion of the severability of a contract and urges that we sever the illegal portion of the oral agreement, i.e. the exclusive license, and uphold the validity of the remaining lesser-included, smaller bundle of rights associated with a nonexclusive license to use the software. As the court in Lulirama, supra, 128 F.3d 872, explained, where no express contract existed covering the subject matter: "Because [one party] intended to convey to [the other] all of the rights associated with ownership of the copyrights to the [product], it of necessity intended to convey the lesser-included set of rights associated with a nonexclusive license to use the [product.]" (Id. at pp. 880-881.)
However, we reject the severability of contract approach for two reasons. First, it flies in the face of the express intent of the parties here to create an exclusive copyright, and such "intention of the parties as expressed in the agreement is controlling." (Tanner v. Title Ins. & Trust Co. (1942) 20 Cal.2d 814, 824, 129 P.2d 383.) Second, it frustrates the primary goal of Congress in enacting section 204(a), which was to require a writing to enhance the predictability and certainty of ownership. (See Konigsberg, supra, 16 F.3d at p. 357.)
Accordingly, the claims of an implied nonexclusive license cannot be used to circumvent the failure of an express exclusive copyright license that violates section 204(a).
III. Remaining causes of action.
Section 204(a) also bars any claims to enforce an oral license based on other related causes of action, including equitable claims such as estoppel and estoppel by fraud. (PMC, supra, 45 Cal.App.4th at p. 592; Pamfiloff v. Giant Records, Inc. (N.D.Cal 1992) 794 F. Supp. 933, 936-937.) "While [laches, estoppel and waiver] may be properly asserted in an infringement action, they are not properly asserted in [an] action to determine the ownership of the copyright." (Neva, Inc. v. Christian Duplications Intern., Inc. (M.D.Fla. 1990) 743 F. Supp. 1533, 1548.)
Courts have rejected attempts to circumvent section 204(a) when parties seek to enforce an invalid oral contract through the back door by asserting claims of unjust enrichment, unfair competition or other equitable claims. (See, e.g., Radio Television, supra, 183 F.3d at pp. 925-926 [affirming summary judgment on claims for breach of contract, unjust enrichment, and unfair competition because of failure to comply with section 204(a)]; Papas-June Music, Inc. v. McLean (Papas-June Music) (S.D.N.Y. 1996) 921 F. Supp. 1154, 1160 [dismissing claims for breach of contract, quasi-contract, restitution, declaratory judgment and tortious interference with contract because of failure to satisfy section 204(a)].) Otherwise, the paramount goal underlying section 204(a) of predictability and certainty of copyright ownership would be undermined. (Konigsberg, supra, 16 F.3d at p. 358.) Thus, the writing requirements of the Copyright Act defeat other causes of action that arise "out of the same facts that serve as the basis for the breach of contract claim." (Papas-June Music, supra, 921 F. Supp. at p. 1162.)
In the present case, Scott concedes that the fraud causes of action are based on the promises in the oral agreements found by the trial court to be invalid under section 204(a). Similarly, Scott admits that his cause of action for unfair competition is based on the same allegations that support the invalid breach of contract claims and does not allege any additional conduct by respondents. And Scott acknowledges that his unjust enrichment cause of action is a restatement of the oral agreements under which Scott would write, maintain and update software and provide technical services to the purported "joint venture" in return for a percentage of Brookfields sales or acquisition. Since all the above causes of action are based on the promises in the oral agreements that are invalid under section 204(a), such claims are as invalid as the contract causes of action. The remaining causes of action, remedial claims for a constructive or resulting trust and for an accounting, are derivative of the invalid substantive claims, and thus properly dismissed as well.
Therefore, the trial court properly granted summary judgment against Scott.
DISPOSITION
The judgment is affirmed.
We concur: NOTT, J., and DOI TODD, J.