Home Depot operates over 2,000 retail stores with a vast inventory, necessitating a computer database organized into classifications and subclassifications of items. In 2004, Home Depot contracted with Edgenet, Inc. to create a taxonomy for this database, stipulating that Edgenet would retain intellectual-property rights to the taxonomy while Home Depot would be licensed to use it, along with the manufacturers retaining rights to their products' attributes. A 2006 supplemental agreement allowed Home Depot to use the taxonomy at no cost as long as Edgenet remained its data-pool vendor and services were paid for. The license would terminate upon contract conclusion unless Home Depot purchased a perpetual license for $100,000.
In 2008, Home Depot began developing its own database and started using the taxonomy created by Edgenet. Edgenet subsequently registered a copyright for its taxonomy in 2008. Following a notice from Home Depot in February 2009 that their business relationship would end, Edgenet refused the $100,000 check for the perpetual license and filed a lawsuit after Home Depot instructed suppliers to send product data directly to its new system.
The district court dismissed Edgenet's complaint, concluding that the 2006 contract and Home Depot's payment tender allowed continued use of the taxonomy. The appellate court examined whether Edgenet's claim was based on enforcing a copyright, which would invoke federal jurisdiction, or on breach of contract, which would depend on diversity jurisdiction. Both parties are incorporated in Delaware, eliminating the possibility of diversity jurisdiction under 28 U.S.C. 1332.
Supplemental briefs were requested due to the omission of the T.B. Harms principle by both parties. The responses indicated that Edgenet's claim is based on copyright law, while Home Depot presents the 2006 contract’s offer of a perpetual license as an affirmative defense, establishing subject-matter jurisdiction under §1331. The district court's reliance on Rule 12(b)(6) is challenged because an affirmative defense should be addressed after it is raised. Edgenet alleges copyright infringement concerning its “Big Hammer Master Collection Taxonomy and Attributes 2008.” Dismissals cannot occur solely for disregarding potential defenses; this is addressed later in the proceedings. If a motion to dismiss includes outside matters, it should be treated as a motion for summary judgment per Fed. R. Civ. P. 12(d). If the complaint shows that the defendant must prevail on an affirmative defense, a ruling can occur under Rule 12(c). Here, the district court improperly used additional materials, necessitating action under Rule 56, but no harm resulted since Edgenet did not contest material allegations or seek discovery under Rule 56(d). Both parties failed to provide extrinsic evidence regarding ambiguous terms in the 2006 contract. As the facts are largely uncontested and involve a legal interpretation of the contract, judges handle this without a jury. Home Depot acknowledged usage of Edgenet's taxonomy, classifying HomeDepotLink as a derivative work. Edgenet asserts three defenses: (1) infringement occurred before payment, negating the licensing option; (2) the promise did not include the 2008 taxonomy, which differs from the “product collection taxonomy” referenced in the contract; and (3) Home Depot forfeited its license option by failing to pay immediately after its Canadian affiliate ceased using Edgenet's taxonomy. The analysis concludes that Home Depot’s use prior to payment was permissible under both the 2004 and 2006 contracts, as Edgenet remained its database-service provider during the development of HomeDepotLink.
Home Depot's use of the taxonomy is not restricted by contract limitations, as copyright law exclusive rights do not apply to incorporated products. Home Depot required rights to copy the taxonomy and create derivative works, which the unrestricted license granted. Any operational limits on the classification system were contractually determined, and the absence of such limits is conclusive. The contracts prohibited reverse engineering Edgenet's software, but Edgenet no longer claims Home Depot violated this. Home Depot utilized the taxonomy, which is publicly accessible, to manage its product database.
Edgenet's assertion that Home Depot's perpetual license applies solely to earlier versions of the taxonomy is deemed unreasonable, as it implies a "mousetrap" strategy against the customer. The taxonomy evolved as Home Depot updated its product offerings, and suggesting that the 2006 contract only licensed an outdated version would mean Home Depot was continuously in violation of copyright laws for using the latest taxonomy. The 2006 contract refers to "the product collection taxonomy," indicating the current version is included.
Edgenet lacks intellectual property rights over product attributes, which originate from vendors and are not its creation. The 2006 contract provided Home Depot the option for a perpetual license covering the complete taxonomy, including detailed subclassifications. Edgenet’s argument regarding its creation of nodes and subcategories does not differentiate these from the taxonomy as defined in the contract. Lastly, the termination of Edgenet's relationship with Home Depot's Canadian affiliate does not justify any claims against Home Depot U.S.A. Inc.
The Home Depot, Inc. operates through subsidiaries in the U.S., Canada, and other countries. Edgenet does not argue that any subsidiary failed to adhere to corporate formalities, nor does it seek to hold Home Depot U.S.A. accountable for decisions by Home Depot Canada. When Home Depot Canada discontinued using Edgenet’s services, The Home Depot, Inc. lost its no-cost license, which could not be transferred to Home Depot U.S.A. The contract stipulated that The Home Depot, Inc. must utilize Edgenet’s services in both countries, and the no-cost license was contingent upon both subsidiaries using those services. Edgenet did not request additional payment after the Canadian subsidiary switched providers. Although Edgenet could have considered this a breach of contract and revoked the license—triggering an immediate $100,000 payment for a perpetual license—it did not do so. The requirement for immediate payment pertained to continuing use of the taxonomy after the license ended, which Edgenet did not declare until it sent a letter in February 2009, accompanied by a $100,000 check. The contract termination required advance notice, which Home Depot provided. At the time Home Depot exercised its option, the copyright license for the taxonomy remained valid, meaning Home Depot had not violated copyright laws at any point. The ruling was affirmed on February 9, 2011.
