US Infringement for Failure to Monitor Seat License Fees

Bitmanagement Software GmbH v. US, 20-1139 (Fed. Cir. 2021)

Bitmanagement distributes graphics-rendering software that the US Navy makes available to computers connected to the Navy Marine Corps Intranet.  The Navy purchased these copies, but did not pay the full seat license fees for system-wide use.  As part of the discussion between the parties, the Navy was supposed to (but did not) use licensing-tracking software (“Flexera”) to monitor and limit the number of simultaneous users of its system. After learning of that failure, Bitmanagement registered its copyright and then sued for copyright infringement.

Since the U.S. Gov’t is a defendant, the lawsuit was filed in the Court of Federal Claims (CFC) under 28 U.S.C. § 1498(b).

(b) [W]henever the [US] copyright in any work protected … shall be infringed by the United States … the exclusive action which may be brought for such infringement shall be an action by the copyright owner against the United States in the Court of Federal Claims [CFC] for the recovery of his reasonable and entire compensation as damages for such infringement.

Section 1498(b).  The CFC agreed with Bitmanagement that it “had established a prima facie case of copyright infringement.”  But, the lower court went on to excuse the Navy’s actions–finding an implied license to make/distribute copies. Bitmanagement Software GmbH v. United States, 144 Fed. Cl. 646 (2019).

Suing on Copyright vs. Contract: The Navy admitted that it did not fully live up to the implied agreement — it did not track/limit usage. On that point, the Navy suggested that potential breach should be pursued via a breach-of-contract claim, not a copyright claim. This is a convenient argument for the Navy because Bitmanagment did not allege breach of contract.

On appeal, the Federal Circuit sided with the copyright holder and found that the Navy’s failure to track/limit usage created an infringement claim.  The line on this is fairly thin — the Federal Circuit makes a distinction between breaches of (a) “a condition that limits the scope” or instead is (b) “merely a covenant.” Slip Op.  There is no infringement claim if the licensee breaches a mere covenant, but there will be a copyright claim that arises from breach of a condition.  The court went on to explain that terms of a license “are presumed to be covenants, rather than conditions, unless it is clear that a condition precedent was intended.”   Thus, “[n]ormally, a copyright owner who grants a license to his copyrighted material has waived his right to sue the licensee for copyright infringement and must instead pursue a claim for breach of contract.”

On appeal here, the court found that the use of Flexera to limit/monitor usage was a condition that induced Bitmanagment to enter the contract.  The CFC did not reach the condition/covenant question, but did expressly conclude that Bitmanagment entered the contract “because Flexera would limit the number of simultaneous users  … regardless of how many copies were installed on Navy computers.”  On appeal, the Federal Circuit found this implied clause “critical to the basic functioning of the deal.”

Thus, the Flexera term was clearly a condition rather than merely a covenant. Unlike payment, which is typically considered a covenant, the use of Flexera at the time of copying was critical to the basic functioning of the deal. The timing of Flexera was key because the Navy’s tracking of BS Contact Geo users was intended to establish how many additional licenses the Navy would purchase. Without tracking, the Navy would have no basis to purchase more licenses and, consequently, Bitmanagement would have had no reason to enter into the implied-in-fact license. Unlike payment, which can feasibly come at any time after contract performance, Flexera was only useful if it could track, from the beginning, the number of Navy users.

Slip Op.

Bottom line here: this provision is a condition and thus its breach opens the door to a copyright infringement claim.  Because the CFC already found infringement but-for the license all that remains on remand is to determine the damages owed.

Regarding damages, the court also provided some guidance to the lower court:

Because Bitmanagement’s action is against the government, it is entitled only to “reasonable and entire compensation as damages . . ., including the minimum statutory damages as set forth in section 504(c).”  28 U.S.C. § 1498(b). This amount may not include non-compensatory or punitive damages. Contrary to Bitmanagement’s argument, it is not entitled to recover the cost of a seat license for each installation. If Bitmanagement chooses not to pursue statutory damages, the proper measure of damages shall be determined by the Navy’s actual usage of BS Contact Geo in excess of the limited usage contemplated by the parties’ implied license. That analysis should take the form of a hypothetical negotiation. As the party who breached the Flexera requirement in the implied license, the Navy bears the burden of proving its actual usage of the BS Contact Geo software and the extent to which any of it fell within the bounds of any existing license. See Restatement (Second) of Contracts § 352 cmt. a (Am. L. Inst. 1981) (“Doubts [about the extent of damages] are generally resolved against the party in breach.”).

Slip op. Note 5.   I’ll pause here to note the oddity with regard to proving damages.  Normally, the burden is on the IP holder to prove its damages.

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I guess I don’t fully understand the law of implied contract.  One reason justifying the finding of an implied contract was the fact that the parties were careful to avoid entering in an express contract. “Application of the preclusion rule was not warranted in this case for three primary reasons. First, Bitmanagement and the Navy were intentional in their decision not to enter into an express contractual relationship. As to the express agreements, the parties stipulated that “[t]here is no privity of contract between the United States and Bitmanagement.” J.A. 10057 ¶ 34. Instead, Bitmanagement and the Navy chose to use intermediary Planet 9 to conduct business.”  Seems to me that both parties being careful to avoiding entering into an express contract suggests that there is also no implied contract.

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The appellate panel’s reasoning for upholding the implied contract finding was that it gave substantial deference to the lower court’s factual finding.   The opinion notes that Bitmanagement’s alternative position “is certainly supported by the record.”  Although Plausible, the court affirmed because the CFC’s factual findings were “plausible … and thus is not clearly erroneous.”  The deference here is huge — the court also noted “grave doubts” and that it was “dubious” as to whether there was any meeting of the minds. Still, did not disturb the CFC’s ruling on that point .

The majority opinion was written by Judge O’MALLEY and joined by Judge DYK.

Judge NEWMAN wrote a concurring opinion and would have found no implied contract.

I discern no license, implied or otherwise, for the Navy to make hundreds of thousands of copies of Bitmanagement’s commercial software product “BS Contact Geo.” The Navy made the copies using Bitmanagement’s keys and installation file, and admitted that it distributed the copies throughout the Navy, although without authorization, without license, and without payment. The Navy has not justified this improper copying; it violates the terms of its purchases of Bitmanagement’s product, and violates Bitmanagement’s copyright.

Slip Op. (Concurring Op.)