Computer Associates International, Inc. v. Altai, Inc.
Docket: 1090
Court: Court of Appeals for the Second Circuit; April 7, 1994; Federal Appellate Court
The case involves Computer Associates International, Inc. (CA) appealing against Altai, Inc. regarding alleged copyright infringement and trade secret misappropriation. Claude F. Arney, III, a former employee of CA, left to work for Altai in January 1984 and unlawfully took source code for CA’s ADAPTER program, violating his employment agreement. He subsequently copied approximately 30% of this code to create OSCAR 3.4, a competing program for Altai. Although Arney copied the code, no other employees at Altai were aware of this action. CA became aware of the potential infringement in July 1988, confirmed the allegations, and subsequently secured copyrights for certain versions of CA-SCHEDULER before filing a lawsuit in federal district court in August 1988. The appeal, heard by the Second Circuit, led to a decision to certify questions of state law to the Supreme Court of Texas, as there was no controlling precedent in Texas law for the issues raised. The court ordered that fees and costs related to the certification be shared equally between the parties.
Williams, after consulting legal counsel, initiated a project to rewrite the OSCAR program, using a different Altai program as a base. He outlined service descriptions for the new OSCAR, designated OSCAR 3.5, and directed programmers—who had no previous experience with OSCAR 3.4—not to contact the original program's creator, Arney, or reference OSCAR 3.4 during development. Following a bench trial, the district court determined that OSCAR 3.4 infringed on CA's copyrighted ADAPTER component, resulting in damages of $364,444 for CA. However, it found that OSCAR 3.5 was not substantially similar to nor copied from ADAPTER, denying CA relief for that version. The court ruled that CA's trade secret misappropriation claim was preempted by federal copyright law, concluding that both claims related to unauthorized reproduction of a copyrightable work. Altai did not appeal the damages related to OSCAR 3.4, but CA appealed the ruling on OSCAR 3.5. The appellate court affirmed the lower court's decision regarding OSCAR 3.5 and agreed that Texas law would apply to CA's trade secret claims, provided they were not preempted. It noted that if CA's misappropriation claims contained an "extra element" beyond mere copying, they could potentially avoid preemption. The court remanded for further consideration of CA's misappropriation claims, which included trade secret issues under Texas law. Altai raised a defense based on the Texas statute of limitations, asserting that CA's claims were barred due to the two-year limit for filing suit related to property injury.
The Texas Court of Civil Appeals has historically applied article 5526, the precursor to Sec. 16.003, to trade secret misappropriation claims. Under Texas law, the statute of limitations for tort claims typically begins when the wrongful act causes injury, independent of when the plaintiff becomes aware of the injury. This rule can be altered by the "discovery rule," which allows the limitations period to start from the date the plaintiff discovers or should have discovered the injury's nature. In the case at hand, the district court dismissed CA's misappropriation claims as barred under Sec. 16.003(a), despite having previously indicated that these claims might be subject to the discovery rule. Upon remand, the court determined that no Texas court had definitively applied the discovery rule to trade secret misappropriation claims and declined to extend the rule to this case, referencing the limited circumstances under which the Supreme Court of Texas had applied it. The court expressed its inability to certify the issue to the Supreme Court of Texas due to Texas R.App. P. 114(a) but suggested that the second circuit might consider certifying the question for authoritative guidance. CA admitted at trial that it was unaware of Altai's alleged misappropriation until 1988, meaning that if the discovery rule applied, its claims would be timely. However, the district court found that the discovery rule did not apply, ruling that the statute of limitations had expired since the wrongful act occurred in 1984, four years prior to CA's lawsuit.
CA argues on appeal that the district court incorrectly declined to apply the discovery rule to its misappropriation of trade secrets claim. CA supports its position by citing the Texas Court of Civil Appeals' application of the discovery rule in Reynolds-Southwestern Corp. and the Supreme Court of Texas's precedent that allows for the discovery rule in cases where it's challenging for plaintiffs to uncover the negligent acts. CA asserts that the Supreme Court of Texas would likely adopt the discovery rule for trade secrets, contrasting it with Texas cases that did not apply the rule due to differing contexts. CA also contends that interpreting Sec. 16.003(a) to bar claims before they are discoverable would violate the "open courts" provision of the Texas Constitution, referencing the case of Nelson v. Krusen.
In response, Altai argues that Reynolds-Southwestern is not directly applicable as it involved a fraudulent claim and that the discovery rule is mainly used in cases of fiduciary breaches. Altai further claims that CA's failure to discover the alleged misappropriation was due to its own negligence and that the "open courts" provision has been limited in application. Altai emphasizes the need for careful consideration of policy implications before extending the discovery rule to new claims.
The court concludes that resolving these significant and unsettled questions of Texas law is best left to the Supreme Court of Texas. Consequently, it certifies two questions: whether the discovery rule applies to misappropriation of trade secrets claims, and if not, whether applying the two-year limitations period would violate the "open courts" provision of the Texas Constitution.
Certification to the Supreme Court of Texas is made under Tex.R.App. P. 114(a) by the United States Court of Appeals for the Second Circuit, dated April 7, 1994, by Clerk George Lange, III, and Chief Deputy Clerk Carolyn Clark Campbell. The document defines "source code" as the literal text of computer program instructions, with examples including COBOL, FORTRAN, BASIC, and EDL, and explains that source code is compiled into "object code," which is the binary format understood by computers.
The legal entities involved are CA, a Delaware corporation based in Garden City, New York, and Altai, a Texas corporation located in Arlington, Texas. A federal court in diversity cases applies the choice of law rules of the forum state, as established in Klaxon Co. v. Stentor Electric Mfg. Co. CA initiated the action in the District of New Jersey, later transferred to the Eastern District of New York under 28 U.S.C. § 1404(a). The transferee court must adhere to the choice of law rules from the transferor court, meaning New Jersey's rules will dictate the applicable statute of limitations.
New Jersey's approach has shifted from treating statutes of limitations as procedural matters to applying an interest-based test for determining the applicable substantive law. Given that the relevant events occurred in Texas involving both CA's Texas operations and Altai, New Jersey is deemed to have no significant interest in its own statute of limitations, leading to the application of Texas' statute instead.
