HyperQuest v. N’Site Solutions

Citation
HyperQuest, Inc. v. N’Site Solutions, Inc., 2011 WL 148803 (7th Cir. Jan. 19, 2011).

Factual Background
In 2001, Quivox Systems granted N’Site Solutions, Inc. a non-exclusive license to copyrighted software called “eDoc.” The eDoc software suite was designed to facilitate the processing of insurance claims. Quivox later sold its assets, including the copyright for eDoc, to Safelite Group, Inc, which in turn granted rights to HyperQuest.

Following a sale by N’Site of a modified version of eDoc source code to Unitrin Direct Insurance Company in 2006, HyperQuest filed suit against both N’Site and Unitrin for copyright infringement.

Trial Court Proceedings
The district court dismissed HyperQuest’s suit with prejudice on the basis that it lacked standing as the holder of a non-exclusive license and awarded attorney’s fees and costs to the defendants in the amount of $134,958.42.

Appellate Court Proceeedings
HyperQuest appealed, challenging both the determination that it lacked standing and the calculation of the award of fees. After dissecting the various license and sale agreements at issue, the appellate court affirmed the district court’s decision on both issues after finding that HyperQuest indeed lacked proper standing to bring a claim for copyright infringement.

The Copyright Act restricts the set of potential plaintiffs able to bring a civil action for infringement to those who qualify as “[t]he legal or beneficial owner of an exclusive right under a copyright. . .” 17 U.S.C. § 501(b). While HyperQuest was required to show that it was the legal owner of an exclusive right, it was not required to show that it was the owner of all exclusive rights. The holder of a non-exclusive license, however, is not entitled to bring an action for infringement. The three rights at issue in this case were (1) the right to reproduce the copyrighted work, (2) the right to prepare derivative works, and (3) the right to distribute copies of the work to the public. The first step in the chain of title is easy, Safelite is the successor in interest to Quivox, owning all rights once held by Quivox and assuming the role of Licensor to N’Site. Quivox is essentially removed from the analysis for the purpose of this case. The other parties’ rights are as follows:

N’Site’s Interests Under its original agreement with Quivox, assumed by Safelite, N’Site was entitled to use the software only within its own facilities. The license between the parties granted no rights to modify the software or to sell it to others despite those very actions taken by N’Site in 2006. N’Site later argued during these proceedings that it was required to modify the software because eDoc failed to perform properly without fixes and modifications. Clearly, N’Site was the mere owner of a non-exclusive, rather limited license to use eDoc for its own purposes without change.

HyperQuest’s Interests Safelite granted HyperQuest a perpetual, worldwide, exclusive license “(i) to use the eDoc Software in source code form, to support the development and commercialization of HQ Services, and (ii) to develop, modify and enhance the eDoc Software as HQ in its sole discretion determines, provided, that such modifications and enhancements are solely related to the development and commercialization of HQ Services. . . Notwithstanding the forgoing, HQ may not, without the prior written consent of Safelite, which consent shall not be unreasonably withheld, rent, sell, lease, transfer, or sublicense the eDoc Software to any person or entity that competes with Safelite in the manufacture, distribution, or sale of automotive glass or related services, including but not limited to, those competitors set forth on Schedule 2(a).” While the license agreement itself indicated that the license was exclusive, the court noted that the use of “exclusive license” alone is not dispositive. “It is the substance of the agreement, not the labels that it uses, that controls our analysis.” In addition, a number of restrictions were imposed on the license granted to HyperQuest, notably that Safelite would have the right “to use the eDoc Software and may license the eDoc Software to third parties solely for purposes of testing or development,” and that the parties acknowledged that N’Site had an existing license that would continue to be negotiated by Safelite; in the event of a material change to that license, Safelite agreed to notify HyperQuest of the changes.

HyperQuest’s Standing While the license granted to HyperQuest labeled itself as an exclusive license, the substance of the agreement clearly noted that HyperQuest was not the owner of any whole exclusive right under the Copyright Act. HyperQuest argued, however, that exclusive rights can be further subdivided into smaller bundles of rights and that it was the owner of some small bundle of exclusive rights giving it standing to bring suit. The court agreed that further subdivision of rights is possible, citing the example of an author who grants an exclusive license to one party for the exploitation of a book and to another party for the exploitation of a movie version of the same story. While such divisions are possible, and even common, they are generally based on geographic boundaries, or based on forms of production. Ultimately, the court concluded that any rights that HyperQuest held were rendered non-exclusive based on the rights retained by Safelite, namely the right to further license for development purposes, and the right to renegotiate the terms of its license with N’Site. It was entirely possible that at some point Safelite would grant a more expansive license to N’Site to cover all the activities challenged by HyperQuest as a violation of its current license. If Safelite were to take this approach, or grant an expansive license to any other party based on its retained rights, HyperQuest would have no exclusive rights. The Seventh Circuit declined to adopt the rule promulgated by N’Site and Unitrin that a copyright owner’s retention of ownership rights renders all subsequent licenses non-exclusive, however, based on the agreements at issue, HyperQuest simply lacked standing for a copyright infringement suit.