Keane Dealer Services v. Harts

Citation: Keane Dealer Servs., Inc. v. Harts, 968 F. Supp. 944 (S.D.N.Y. 1997)(full-text).

Factual Background
Keane and defendant Harts worked at Lehman Brothers (“Lehman’) and developed a software program together called SLBX that was later sold to Smith Barney as part of the OMS system that processed Lehman’s order flow; the retail order flow was transferred to Smith Barney as of September 3, 1993. When Keane left after the transfer, it was made clear that he had no proprietary rights in the program, but that he could market the underlying concepts he had brought with him to Lehman. He later formed KDSI. Following the sale, people from Smith Barney called Lehman’s counsel to ask how SLBX complied with security regulations and that Lehman readily answered any questions concerning SLBX. Lehman’s counsel, Richard Chase, testified at his deposition that "shortly after" Smith Barney began using SLBX in Septmeber 1993, he became aware of Smith Barney’s use of the program when one of Smith Barney’s attorneys called him with questions about the system. He testified that there were other issues pending between Smith Barney and Lehman and that their not objecting to the use of the SLBX system would be helpful in other aspects of the relationship between the two firms. On July 12, 1995, Keane entered into an agreement with Lehman granting Keane all rights in the program in exchange for royalties of 10% of any gross revenue from Keane’s use of the program. KDSI registered a copyright in the program, and instituted this action against Smith Barney and Harts for copyright infringement.

Defendants couterclaimed against the Plaintiff Kevin Keane and filed a third party complaint; they moved for summary judgment and sought a declaration that they did not infringe plaintiff and/or third party defendant’s copyright.

Trial Court Proceedings
Defendants argued that they are entitled to summary judgment because they were given an implied, nonexclusive license to use the software by Lehman, and that Lehman’s grant of its rights to KDSI could not negate this license. A nonexclusive license may be granted orally or implied from conduct. The court cited I.A.E., Inc. v. Shaver, for the proposition that consent given in the form of mere permission or lack of objection is also equivalent to a nonexclusive license and is not required to be in writing. Defendants argue that Lehman’s knowledge of, and acquiescence in, their use of the software constituted an implied license to its use. The court agreed and found that summary judgment was appropriate with regard to use of the program up until the time of the institution of this action. The court cited Avtec Sys., Inc. v. Peiffer and Johnson v. Jones, for the proposition that an implied license is revocable where no consideration was given for the license. Here, there was no evidence that Lehman even mentioned having given tacit permission for the use of the software during their negotiations with Smith Barney. This raised a question of fact as to whether consideration was given by Smith Barney. If no consideration was given, the license is revocable and the institution of this action would constitute a revocation. The court found that summary judgment on the basis of an implied license was therefore inappropriate with respect to the use of the software after the institution of this lawsuit. Defendants also argue that Plaintiffs are equitably estopped from bringing any infringement action. A holder’s rights may be destroyed if the defendant shows that the party to be estopped had knowledge of the infringing conduct, and either intended that his own conduct be relied upon or acted so that the party asserting estoppel had a right to believe it was so intended and the defendant was ignorant of the true facts and must rely on plaintiff’s conduct to its detriment. Following this logic, the court determined that Lehman’s silence in regards to their knowledge of defendant’s use of the software and their willingness to assist Smith Barney when the latter had questions regarding the software constituted conduct on which Smith Barney was entitled to rely on. Defendants introduced evidence that had they known that they were violating a copyright they could have easily negotiated a license agreement. The court rejected plaintiff’s argument that defendants’ assertion was speculation because plaintiff did not offer evidence to dispute defendant’s claim. The court explained that in light of Lehman’s virtual gifting of the rights to Keane and their acquiescence in Smith Barney’s use of the program and desire to resolve any open items between the two entities, the sworn affidavit that asserts a license could easily have been negotiated is not speculative and constitutes sufficient factual basis for granting summary judgment. The plaintiffs relied on Peer International for the proposition that any claim of detrimental reliance ended when this lawsuit was filed. The court distinguished this case from Peer International because in that case the defendants were on notice that their license to use the copyrighted material may be terminated. The court explained that a successful application of estoppel as a remedy requires that the party asserting estoppel to use due care and not fail to inquire as to its rights where that would be the prudent course of conduct, but in this case there was nothing to indicate to the defendants that they were unauthorized to use the software. The court concluded that summary judgment was proper, the case was dismissed and defendants’ use of the SLBX program was declared to be non-infringing.