Ninth Circuit Rejects License and Copyright Misuse Defenses in Oracle USA, Inc., et al. v. Rimini Street, Inc., et al., __ F.3d __ (9th Cir. Jan. 8, 2018)
A new case from the Ninth Circuit illustrates that policy arguments cannot overcome the express language of a copyright license, as well as the difficulties inherent in asserting a copyright misuse defense. In Oracle USA, Inc., et al. v. Rimini Street, Inc., et al., 2018 WL 315568, __ F.3d __ (9th Cir. Jan. 8, 2018), the Ninth Circuit panel affirmed in part, reversed in part, and vacated in part the district court’s judgment after a jury trial in favor of Oracle USA, Inc., on its copyright infringement and state law claims against Rimini Street, Inc. and its CEO, Seth Ravin. Id. at *3. The opinion addressed issues of copyright infringement, violations, state law claims (California’s Computer Fraud and Abuse Act; the Nevada counter-part, the Nevada Computer Crimes Law; and California’s Unfair Competition Law), damages, interest, fees and costs, and injunctive relief.
With respect to the copyright claims, the opinion focused on two arguments made by the defendants/appellants on appeal: (1) their attempt to broadly read Oracle’s license agreements to provide for a license to copy Oracle software for their future clients; and (2) their argument that Oracle was misusing its copyrights by using its licensing restrictions to restrict competition in the third-party software maintenance market. The Ninth Circuit rejected both arguments.
Factual and Procedural Background
After the trial court denied Rimini’s summary judgment motion, the jury found for Oracle on its copyright claim. Rimini asserted two arguments on appeal: (1) Rimini’s copying was permitted under the terms of the licenses Oracle granted to its customers; and (2) holding Rimini accountable for its alleged conduct would condone copyright misuse by Oracle. Id. at *3.
The Ninth Circuit had little trouble rejecting Rimini’s license defense. The existence of a license creates an affirmative defense to a claim of copyright infringement. Worldwide Church of God v. Phila. Church of God, Inc., 227 F.3d 1110, 1114 (9th Cir. 2000). However, “[w]hen a licensee exceeds the scope of the license granted by the copyright holder, the licensee is liable for infringement.” LGS Architects, Inc. v. Concordia Homes of Nev., 434 F.3d 1150, 1156 (9th Cir. 2006). The district court instructed the jury Rimini was permitted, as a third party, to make copies of the Oracle software to support its customers by performing archiving, backup, and related testing. However, the district court instructed the jury that the licenses “do not mean that a third party like Rimini Street is authorized to make copies of the … software application … to use the customer’s software … to support other customers.” Id. at *4.
With respect to one of the licenses at issue, Rimini argued on appeal that the district court’s jury instruction regarding direct use was improper. The Ninth Circuit held that Rimini waived this argument by failing to request a different jury instruction. Id. at *5–6. The Ninth Circuit also upheld a finding of infringement under a separate, more restrictive license. Id. at *8.
Rimini also argued that it was entitled to engage in “cross use” under the Oracle licenses. “Cross use” refers to the creation of a development environments (also known as a “sandbox”; i.e., an offline version of a company’s software that it uses to test and modify software before the software goes live) for use with other customers who were not yet licensed by Oracle. Rimini claimed that “cross use” is not infringement because any organization that might hire Rimini to service its software would itself have to create a sandbox. Accordingly, Rimini argued, cross use allows it to reduce expenses by reusing the work it had done for one customer when it provided services for another customer. Id. at *4–5.
According to Rimini, the Oracle licenses permitted cross use because (1) each of Rimini’s customers had its own license; (2) each license permits copies to be made for archival and support purposes; (3) the licenses authorize customers to outsource the archival and support work to third parties; and (4) such archival and support work includes the creation of development environments. Id. at *6.
The Ninth Circuit rejected this argument and instead agreed with Oracle that the licenses did not permit Rimini to develop products (i.e., sandboxes) that it could sell for Rimini’s financial gain. The Ninth Circuit held that “[a]ny work that Rimini performs under color of a license held by a customer for other existing customers cannot be considered work in support of that particular customer. The same logic applies to work Rimini performs for unknown, future customers. The licensees may hire a third party such as Rimini to maintain their software for them, but nothing in the licenses permits them to grant a non-party to the license a general right to copy proprietary software.” Id.
The Ninth Circuit also rejected Rimini’s copyright misuse defense. The copyright misuse doctrine prevents holders of copyrights “from leveraging their limited monopoly to allow them control of areas outside the monopoly.” Apple Inc. v. Psystar Corp., 658 F.3d 1150, 1157 (9th Cir. 2011). (quoting A&M Records v. Napster, Inc., 239 F.3d 1004, 1026 (9th Cir. 2001)) (internal quotation marks omitted). To that end, while it “does prevent copyright holders from using the conditions to stifle competition,” “[t]he copyright misuse doctrine does not prohibit using conditions to control use of copyrighted material.” Id. at 1159. Accordingly, the doctrine is to be “applied … sparingly”; specifically, it operates when copyright holders attempt to impose license agreements that would “prevent … licensee[s] from using any other competing product.” Id. at 1157 (emphasis added). Oracle USA, Inc., et al. v. Rimini Street Inc., et al., 2018 WL 315568, at *7.
Rimini argued that holding it liable for copyright infringement would condone misuse of Oracle’s copyright because it would foreclose competition in the aftermarket for third-party maintenance by limiting the copies made by third parties to those made only for archival and emergency backup purposes, and because the software could not be serviced simply by making exact copies. Id.
The Ninth Circuit agreed with Oracle that its licenses do not preclude third parties from developing competing software of providing competing services; they merely “require third parties to do so in ways that do not disregard Oracle’s exclusive rights under copyright law.” Id. The Ninth Circuit observed that the trial court instructed the jury that Rimini was permitted to make copies of Oracle’s software for “testing purposes,” which would include copying Oracle’s software to a sandbox. Id.
The remaining issue for the Ninth Circuit was whether it would be copyright misuse to forbid Rimini from creating a sandbox for licensees before they have customers. In other words, Rimini was asking for a “head start” in making copies. Relying on the right of first publication doctrine, as expressed in Harper & Row Publishers, Inc. v. Nation Enters., 471 U.S. 539, 549 (1985), the Ninth Circuit explained that “[j]ust as a copyright holder has the right of first publication,” it also must enjoy the right of ‘first copy.’ Giving a head start to Oracle in creating development environments is entirely consistent with the Supreme Court’s teaching in Harper.” Id.
The Ninth Circuit’s ruling that Rimini is not permitted to exploit licensed copies of Oracle’s software to create sandboxes for future licensees upholds the express language of the Oracle licenses. There may be some pragmatic appeal to Rimini’s argument that if future licensees contract with Rimini for maintenance, Rimini would eventually need to copy Oracle’s software to service the new licensee. In this respect, Rimini’s practice of reusing sandboxes created from one licensee’s copy of the software is expedient and efficient. However, nothing in the licenses contemplated such “cross use.” In this sense, the Ninth Circuit’s ruling on the license issue vindicates the expressly-manifested intent of the parties to the license agreements over Rimini’s efficiency argument.
With respect to the Ninth Circuit’s ruling on the copyright misuse issue, Rimini’s position is difficult to square with the rarely successfully-invovoked copyright misuse doctrine. It is, of course, far more efficient for Rimini to reuse the sandboxes it created for one customer for use with other eventual licensees, especially given that the software it was copying, as the word “copy” suggests, is identical. Oracle’s licensing regime forces Rimini to go through the laborious process of recreating new copies of the sandbox for each new client. But however inefficient a process this is for Rimini, it hardly constitutes an extension by Oracle of control outside of the limited monopoly of a copyright, given that Oracle’s copyright grants it the power to dictate who may make copies of its software and for what purposes. As the Ninth Circuit has previously observed, “[w]hile copyright owners may choose to simply exclude others from their work, i.e. not to transfer their rights, see Stewart v. Abend, 495 U.S. 207, 228–29, 110 S.Ct. 1750, 109 L.Ed.2d 184 (1990); Fox Film Corp. v. Doyal, 286 U.S. 123, 127, 52 S.Ct. 546, 76 L.Ed. 1010 (1932), courts have long held that copyright holders may also use their limited monopoly to leverage the right to use their work on the acceptance of specific conditions, see, e.g., Metro–Goldwyn–Mayer Distrib. Corp. v. Bijou Theatre Co., 59 F.2d 70, 77 (1st Cir.1932) (holding that if a motion picture license is subject to the condition that its exhibition must occur at specified times and places, the licensee’s exhibitions at other times and places is without authority from the licensor and therefore constitutes copyright infringement).” Apple Inc. v. Psystar Corp., 658 F.3d 1150, 1159 (9th Cir. 2011).