Lasercomb America v. Reynolds

Citation: Lasercomb America, Inc. v. Reynolds, 911 F.2d 970, 15 U.S.P.Q.2D (BNA) 1846 (4th Cir. 1990).

Factual Background
Lasercomb America developed a CAD/CAM software program, Interact, that it licensed to Holiday Steel ($35,000 for the first copy, $17,500 each for the second and third copies, and $2,000 for the fourth copy with an agreement to charge $2,000 for any additional copies required by Holiday. The terms of the license contained a provision that for the ninety-nine (99) year term of the agreement, and for one (1) year afterwards, Holiday would not "write, develop, produce or sell or assist others in writing, developing, producing or selling computer assisted die making software, directly or indirectly without Lasercomb's prior written consent" but the license agreement was never signed by Holiday.

After receiving copies of Interact Holiday circumvented the protective measures in place to prevent copying and made three (3) unauthorized copies of the program and created their own software called "PDS-1000" which was essentially a copy of Interact that they marketed as their own die-making software.

Procedural History
Lasercomb brought an action against Holiday for copyright infringement, breach of contract, misappropriation of trade secrets, false designation of origin, unfair competition, and fraud. The District Court granted a permanent injunction against Holiday for publishing or marketing the PDS-1000 software and granted an award of damages of $105,000 for actual damages and $15,000 as punitive damages] on the [[fraud claim.

The defendants argued a defense of misuse of copyright which was rejected by the District Court because (1) the defendants were not actually a party to the license agreement, (2) because the court held a clause to be reasonable for the computer software industry, and (3) because they rejected the existence of a misuse of copyright defense. Holiday brought this appeal on the issue of their misuse of copyright defense as well as their arguments that the District Court erroneously based their finding of fraud on facts not alleged in the complaint, and that the District Court erroneously calculated the damages awarded.

Appellate Decision
The Appellate Court recognized the defense of misuse of copyright drawing an analogy to a similar defense in patent law, reversed the holding that the anticompetitive language in the license agreement was reasonable, and remanded for a determination of proper damages.

Because the Supreme Court had endorsed the defense of misuse of patent in the Morton Salt v. G.S. Suppiger case and equated the public policies of copyright and patent in Mazer v. Stein, the Appellate Court held that a "'misuse' defense should apply to infringement actions brought to vindicate either right."

The Court also held that the District Court had misplaced their reliance on the antitrust law concept of the "rule of reason" and determined that a "misuse' need not be a violation of antitrust law in order to comprise an equitable defense to an in infringement action." The determinative issue to the court was whether a copyright was being used to violate the public policy of copyright rather the laws of antitrust.

With respect to the fact that Holiday had never actually signed the license agreement the court determined that the proper focus in the case was not whether Holiday was a party to the agreement but whether Lasercomb was improperly using their copyright and since it had determined that they were Holiday was free to avail themselves of the defense.

Because the appellants had made no objections to the introduction of evidence which proved fraud after Interact had been licensed the court held that under Rule 15(b), which states that "[w]hen issues not raised by the pleadings are tried by express or implied consent of the parties, they shall be treated in all respects as if they had been raised in the pleadings" and that the District Court had properly made a finding of fraud.

Since the agreement was governed by North Carolina law, the purpose of damages is to restore the victim to their original condition and the Appellate Court held that the District Court's determination of damages was improper and remanded for recalculation. The District Court had calculated damages based on the $35,000 retail price of Interact rather than the respective prices of the original four (4) licenses and the agreed upon $2,000 price of additional licenses based on the concept of lost sales. This court rejected this calculation stating that "[d]ue to the nature of software, however, Lasercomb could have sold copies to any other interested buyer not withstanding defendants' copying" and remanded for a determination of the exact price of three (3) additional licenses acknowledging that the $2,000 price may have been wrongfully acquired by Holiday's fraudulent promise to preserve the copyright protection on the software.