The U.S. Court of Appeals for the Second Circuit has held that the owner of a copy of a copyrighted software program can lawfully exercise the rights of §117(a) copyright "owner," even without formal title to the copy. Krause v. TitleServ, Inc., No. 03-9303 (2d. Cir. Mar. 21, 2005) (Leval, J.).
Krause authored computer programs for TitleServ. When he worked for TitleServ, Krause left executable copies of the programs on its servers but "locked" the software to prevent TitleServ from modifying the source code. Without Krause’s permission, TitleServ "unlocked" the programs and modified the source code to fix bugs, to make changes to customer addresses and to keep the software functional. Krause sued for copyright infringement.
Section 117(a) of the Copyright Act allows the owner of a copy of a computer program to modify the program if doing so is "an essential step in the utilization of the computer program." The Court found that TitleServ, which did not have formal title to its copy of the software, nevertheless qualified as an "owner" under §117(a) because it had paid Krause to develop the software (which was customized for it), had stored copies of the software on its servers and because Krause had not reserved the right to repossess copies of the software.
The Court also found TitleServ’s modifications were "essential" to the continued functioning of the software within the meaning of §117(a). The Court reached the same conclusion as to the addition of a new feature added by TitleServ to improve the functionality of the software. The Court reasoned the changes were "modest alterations," affecting only TitleServ’s copies of the software and did not lessen Krause’s rights to "use, market, or otherwise reap the fruits of the copyrighted programs."
Finally, the Court found that use of the software by TitleServ’s subsidiary was a continuation of the original use and not forbidden "use in another manner."
Practice Note: Software companies have had good success using "shrinkwrap licenses" to keep "buyers" of their products from becoming §117(a) "owners." Because of the unique facts of this case (including the finding that Krause failed to take the steps necessary to make TitleServ a licensee rather than an owner), it would be premature to characterize it as the opening salvo of an attack on that practice.
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