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Krause v. Titleserv, Inc., 402 F.3d 119 (2d Cir. 2005) (full-text).

Factual Background[]

Plaintiff, Krause, is the provider of computer and communication services as well as software development. Between 1986 and 1996, Krause did extensive business with consulting firm, Titleserv. During this period of time, Krause wrote over thirty-five computer programs for Titleserv, all of which were in DOS-based programming language. All source code programs developed by Krause were executable only when the code was run through a compiler that coverts the source code into 1s and 0s, or executable code.

Of the thirty-five programs provided to Titleserv between 1986 and 1996, eight were designed to report on the status of client requests and other aspects of Titleserv’s operations. In addition, all eight of the programs were installed on Titleserv’s computer network that could be accessed by Titleserv employees at any time.

In July 1996, Krause and Titleserv began negotiations regarding the possibility of Krause assigning the copyrights in his programs to Titleserv in exchange for a five-year consulting agreement. Shortly after negotiations began, Krause learned that Titleserv intended to have Krause take direction from new Director of Information Technology. Krause refused to agree to such a setup and, as a result, terminated all contact with Titlserv.

Upon cutting ties with Titleserv, Krause left copies of the source code on Titleserv's file server for six of the eight programs designed to aid in reporting on the status of Titleserv clients. Krause informed Titlserv that it was free to continue to use the executable code as it existed the day Krause ended his relationship with Titlserv, however, the company was forbidden from manipulating the source code in any way.

Despite Krause’s limitation on the software’s use, Titlserv accessed the program's source code and made various changes, including the fixing of computer bugs, the addition of new customers and the addition of a Windows-based system.

Trial Court Proceedings[]

Upon learning of Titlserv’s actions, Krause brought suit on the grounds that Titleserv infringed his copyrights on the eight programs.

After discovery, Titlserv filed a motion for summary judgment on the basis of an affirmative defense found in 17 U.S.C. §117(a).

The district court granted Titleserv’s motion for summary judgment. The court determined that Titlserv used and edited the software in accordance with 17 U.S.C. §117(a). Since §117(a) provided an affirmative defense against an allegation of copyright infringement, the claim against Titlserv could not stand.

Appellate Court Proceedings[]

On appeal, the court was faced with the question of whether or not Titlserv was entitled to summary judgment on the basis of the affirmative defense provided in 17 U.S.C. §117(a). In answering this question in the affirmative, the appellate court conducted an independent analysis for each of the three elements found in §117(a).

First, the court determined that Titlserv was the valid “[o]wner of a copy of a computer program.” In arriving at this decision, the appellate court noted that Titleserv paid Krause substantial consideration to develop the programs for the company’s sole benefit. Furthermore, Krause was aware that the software he sold to Titlserv was being stored on company servers the entire length of the relationship. These facts coupled with the absence of a “right to repossess the copies used by Titlserv” led the court to believe that Titleserv had “ownership” as defined by §117(a)(1).

Next, the court analyzed whether Titlserv’s conduct amounted to an “essential step in the utilization of the computer program in conjunction with the machine.” In making a determination on this question, the court focused on the four major “violations” alleged by Krause (correcting computer bugs, changing source code], incorporating a Windows-based OS and adding capabilities to the software). When analyzing the alleged wrongdoings, it was determined that the changes made by Titleserv in no way affected Krause’s copyright of the programs. Titlserv made changes only to copies in its rightful possession and made changes only to the extent necessary to facilitate the day-to-day functions of the company. Since Titleserv’s “tweaks” to Krause’s programs did not affect Krause’s ability to use, market, or otherwise reap the fruits of the copyrighted programs he created, the court found that Titleserv’s conduct fell squarely within §117(a)(2).

Finally, the court of appeals looked to see if Titlserv’s use fulfilled the third element, which required that the software to be “used in no other manner.” The court was quick to note that “in another manner” was to be decided on a case-by-case basis and was directly dependent on what the creator’s intentions were at the time of the programs inception. In the case at bar, the court found that Krause’s intentions were to allow Titlserv to share the program with its customers and subsidiaries. Therefore, Krause’s argument that the copyright was infringed by third-party use was without merit since he was well-aware that the program was meant to be shared between Titlserv and its clients. As a result, the third element of §117(a) was satisfied and the lower court's grant of summary judgment was affirmed.