Contract – Software – License Agreement – Reverse Engineering – Civil Practice – Res Judicata – Injunctive Relief

Listen to this article

SAS Institute, Inc. v. World Programming Ltd. (Lawyers Weekly No. 001-189-17, 34 pp.) (J. Harvie Wilkinson III, J.) No. 16-1808; Oct. 24, 2017; USDC at Raleigh, N.C. (Louise Flanagan, J.) 4th Cir.

Holding: A software developer can pursue its claim that defendant breached its license agreement despite a U.K. court’s ruling that E.U. law barred the claim.

We affirm the district court’s rulings, except as to plaintiff’s copyright claim. The ruling on that claim is vacated as moot and remanded for dismissal.

Facts

Plaintiff SAS sells an integrated system of business software collectively known as the “SAS System.” Users operate the SAS System by writing SAS programs.

SAS offers the SAS Learning Edition, a lower-cost version of the SAS system as an educational tool to enable students to learn the SAS language. To complete installation of the Learning Edition, a user must click “Yes” to indicate agreement with the terms of the license. Those terms include a prohibition on “reverse engineering” as well as a restriction requiring use only for “non-production purposes.”

Defendant decided to create software, now marketed as the World Programming System (WPS), capable of running SAS language programs. Defendant acquired several copies of the SAS Learning Edition and then ran SAS programs through both the Learning Edition and WPS and then modified WPS’s code to make the two achieve more similar outputs.

Several former SAS customers have replaced their SAS System software with WPS.

In a lawsuit in the United Kingdom, the court applied the European Union Software Directive to rule that, to the extent WPS reproduced the SAS System, it reproduced only aspects of the program that are not protected by U.K. copyright law. The U.K. court held that parties to a contract may not contravene the E.U. Software Directive by agreement. Because defendant’s behavior was explicitly protected by the Directive, SAS could not enforce any contractual provisions that prohibited it.

In the instant U.S. litigation, the district court granted summary judgment to SAS as to liability for breach of the license agreement and summary judgment to defendant on SAS’s claims for copyright infringement, tortious interference with contract, and tortious interference with prospective economic advantage. A jury found for SAS on its claims of breach of contract, fraudulent inducement, and unfair trade practices. The jury awarded SAS $26,376,635 for the breach of contract. Although the jury awarded $3,000,000 in punitive damages based on the fraudulent inducement claim, SAS elected treble damages under the North Carolina Unfair and Deceptive Trade Practices Act for a total damages award of $79,129,905.

Res Judicata

While the U.K. litigation was between the same parties and produced a final judgment, it did not involve identical causes of action. The many legal and factual differences between the U.K. litigation and the present suit mean that applying res judicata would have the practical effect of preventing SAS from having its claims heard in any adequate forum. Applying res judicata in such a mechanical manner based on facial similarities between the two suits would also undermine U.S. and North Carolina policies in favor of the policies of the U.K. and European Union, a result res judicata has not been held to require.

In the license agreement, the parties agreed to be governed by North Carolina law. Nonetheless, the U.K. courts were bound to, and did, declare portions of the contract unenforceable based on E.U. law. SAS’s claims for fraudulent inducement and UDTPA violations, which were brought only in the U.S. action, could not have been adequately addressed in the U.K. due to the same aspects of E.U. law.

International comity does not require that the U.K. judgment be granted preclusive effect, thereby barring a North Carolina company from vindicating its rights under North Carolina law on the basis of the E.U.’s contrary policies.

Breach of Contract

The district court found that defendant had breached the license agreement’s prohibition on reverse engineering and its term restricting use to “non-production purposes.”

Defendant analyzed the Learning Edition to learn how it worked in order to better recreate its functionality in its own products. That defendant did not access the Learning Edition’s source code is insufficient to overcome the ample evidence that defendant analyzed the broader “design” of the Learning Edition. Defendant thus used the Learning Edition in precisely the way the reverse engineering clause prohibited.

We agree with the district court’s interpretation of the “non-production purposes only” prohibition to forbid the creation or manufacture of commercial goods. The purpose of defendant’s activity was the creation of a commercial product. Therefore, the non-production purposes limitation provides an independent basis to find defendant liable for breach of the license agreement.

Injunction

SAS has failed to show an irreparable injury. The jury’s $26,376,635 award was based in part on testimony that SAS had suffered only $13,500,245 in lost profits by the time of trial. The balance of the award was therefore based on SAS’s expected damages after trial. The fact that SAS already asked for and received these future damages undermines its claim of irreparable injury moving forward.

To the extent SAS seeks an injunction because of potential difficulties in collecting the monetary damages awarded, an injunction would only frustrate, rather than facilitate, defendant’s ability to pay damages.

Furthermore, the public interest does not favor an injunction. Defendant’s existing U.S. customers would have to expend significant time and money to replace their WPS systems.

SAS has also failed to show it is entitled to an injunction on its copyright claim. It is far from certain that the district court erred by granting summary judgment to defendant on SAS’s copyright claim.

Even if there were infringement here, it would not follow as a matter of course that SAS should receive an injunction. The Supreme Court has consistently rejected invitations to replace traditional equitable considerations with a rule that an injunction automatically follows a determination that a copyright has been infringed. Given how strongly the traditional equitable factors weigh against the issuance of injunctive relief in this case, it is hard to conceive how the outcome of what is a close copyright claim would lead to SAS receiving such relief.

Copyright

SAS has made clear that the only relief it seeks from the copyright claim that it has not already received from its other claims is an injunction. As detailed above, however, SAS would not receive the injunction it seeks even were it to prevail on its copyright claim. Thus, the legal resolution of the copyright question would have no effect on the relief afforded the parties, making the question moot.

We therefore vacate the district court’s ruling on the now-moot copyright issue, with the result that the claim should be dismissed on remand.

Affirmed in part, vacated and remanded in part.