Empire Med. Review Servs., Inc. v. CompuClaim, Inc.
Docket: Case No. 13–CV–1283
Court: District Court, E.D. Wisconsin; June 26, 2018; Federal District Court
Empire Medical Review Systems, Inc. develops medical billing software, including "ClearingMagic," which allows medical providers to submit payment claims. CompuClaim assists school districts in submitting claims to state Medicaid agencies. Following the enactment of the Health Insurance Portability and Accountability Act (HIPAA) in 1996, the healthcare industry was required to comply with new electronic transaction standards by approximately 2003. This led to a demand for translation software to convert existing formats into HIPAA-compliant ANSI formats. In late 2005 and early 2006, Empire updated its software to comply with these new requirements, officially branding it as ClearingMagic in 2006.
In 2010, CompuClaim approached Empire to develop a website for submitting Medicaid claims, resulting in a Software License and Support Maintenance Agreement that included ClearingMagic, though coverage of other software (like EligibilityMagic) is disputed. Following this, a "CompuClaim Web Portal Discovery Proposal" was created to explore website development. In September 2010, the "Web Integration Agreement" (Addendum B) was signed, under which Empire agreed to provide source code for CompuClaim's website, extending the License Agreement from three to five years. However, CompuClaim stopped payments after three years.
To assist with the CMWebSite source code, Empire hired Jeff Berg as an independent contractor, and the functional website was delivered to CompuClaim in early 2011. Berg later began working for CompuClaim while still operating from Empire's offices until February 2012. When Berg left Empire's office, an Empire employee removed other software from his computer but did not remove the CMWebSite source code, allowing Berg to retain access and the ability to modify it.
MeduClaim was initially designed for the ANSI 4010 format but was required to transition to the ANSI 5010 format by 2012. Empire charged CompuClaim for updating the software to comply with this new standard as per their License Agreement, which CompuClaim contends should have been covered under "software maintenance" due to its definition relating to necessary changes from CMS implementation guides. In January 2012, CompuClaim's customers encountered issues attributed to the ANSI 5010 update. Following their separation from Empire, Berg and a CompuClaim employee developed a new version of the software, launched in August 2012, using the CMWebSite source code, which CompuClaim claims ownership of. Empire filed a lawsuit on November 13, 2013, alleging multiple breaches of the License Agreement by CompuClaim, including failure to pay license fees. CompuClaim counterclaimed, asserting that Empire had materially breached the agreements, leading to their termination. Empire received copyright registration for the CMWebSite source code on August 17, 2015, and amended its complaint to include claims for copyright infringement and violations of the DMCA. Although the five-year license term had expired, making Empire’s request for declaratory relief moot, CompuClaim continued to assert counterclaims. Both parties filed motions for summary judgment on November 30, 2017, with Empire seeking to affirm its copyright claims and the duration of the License Agreement while dismissing CompuClaim's counterclaims based on a prior release. On June 6, 2018, the parties submitted a Joint Notice of Settlement regarding CompuClaim’s counterclaims, which were dismissed on June 18, 2018, while Empire's claims remained unresolved. All parties consented to the court entering final judgment following the completion of motion briefings.
Summary judgment is granted when the movant demonstrates no genuine dispute exists regarding any material fact and is entitled to judgment as a matter of law, according to Fed. R. Civ. P. 56(a). Material facts are those that could affect the case's outcome under applicable law, while genuine disputes exist if reasonable jury evidence could favor the nonmovant. The moving party can meet its burden by showing a lack of evidence supporting the nonmoving party's claims. The primary issue is whether a reasonable factfinder could rule in favor of the nonmoving party based on the presented evidence.
The Digital Millennium Copyright Act (DMCA) prohibits the unauthorized removal or alteration of copyright management information when there's knowledge or reasonable grounds to know it will facilitate an infringement of rights under Title 17 of the U.S. Code. Copyright management information includes identifying details about the work, the author, and the copyright owner, among others. Specific exceptions apply to public performances by broadcast stations.
In a case involving MeduClaim source code, specific classes were identified, including one named "ClaimsInInventoryQuery," which was altered by Berg, an employee of CompuClaim. Empire contends that "EmpireMedical" identifies the author of the copyrighted software, qualifying as copyright management information under 17 U.S.C. 1202(c)(2). Empire claims each of the 149 instances of name changes by Berg constitutes a DMCA violation, potentially subjecting CompuClaim to statutory damages ranging from $2,500 to $25,000 per violation.
CompuClaim's motion for summary judgment asserts that Empire has failed to identify any witnesses who can testify about the removal of alleged copyright management information, specifically claiming that "EmpireMedical" is not Empire's proper name and that a separate Oregon corporation exists with that name. However, evidence from Berg indicates he removed the "EmpireMedical" reference from the source code, and employee Jereme Mills confirms its removal from 148 files, contradicting CompuClaim's assertion regarding the lack of witness testimony. Additionally, CompuClaim contends that Empire cannot prove the removed information qualifies as copyright management information, arguing that such information must include the author's name plus "other identifying information." The court disagrees, stating that this interpretation is unsupported and inconsistent with the intent of the DMCA, which aims to provide broad protection for copyrighted works. The court clarifies that the definition of copyright management information does not require the author’s name to be supplemented by additional identifying details for it to receive protection. Thus, the court finds that CompuClaim's interpretation unnecessarily limits the statute's protective scope, affirming that the provision serves a crucial role in safeguarding authors' intellectual property rights.
An author identified as "John Smith of Milwaukee, Wisconsin" cannot have their identifying information altered by another John Smith who knows such changes would enable him to falsely claim authorship, as per DMCA Section 1202(c)(2). Congress intended to provide broad protection under the DMCA, extending beyond just the author's name to encompass additional identifying information. In the case of Bounce Exch. Inc. v. Zeus Enter. Ltd., the court permitted Bounce to amend its complaint to include a DMCA claim after finding that Zeus altered Bounce's software code by changing identifying terms, which constituted copyright management information (CMI). The court equated this information to an artist's signature or an author's name on a book cover, affirming that CMI can be embedded within source code. Zeus's argument for a distinction between CMI and the work's body was rejected, as it contradicted the statute's wording. The court underscored the appropriateness of including an author's name in source code due to its limited visibility and recognized that abbreviations or variants of a name could still qualify as CMI. In a similar case, Iconics, Inc. v. Massaro, the court found that "ico" referenced the author and constituted CMI. The court expressed reluctance to rule that the references to "EmpireMedical" in the source code could not be considered CMI, and acknowledged that determining whether the removal of this name involved knowledge of potential infringement under Title 17 presents a complex issue.
Berg did not conceal the removal of "EmpireMedical" references from the MeduClaimWeb 2.0 project; he documented the removal in the project log, indicating transparency to those with source code access. Empire has not claimed that the altered code was publicly distributed without "EmpireMedical" references, nor was it shared outside the litigation context. The removal aimed to enhance efficiency and ease of future modifications, though CompuClaim's assertions lack citations to factual findings. Empire challenges this rationale as pretextual, asserting no tangible improvements resulted from the changes. Additionally, an expert noted that Berg explicitly commented on the removal in July 2013. Empire's responses to CompuClaim's proposed findings are deemed improperly presented, limiting CompuClaim's ability to contest them effectively. Therefore, the court finds insufficient evidence to determine whether CompuClaim acted without the necessary knowledge regarding potential copyright infringement implications of the changes. Consequently, the court denies CompuClaim's motion for summary judgment on Empire's DMCA claim, noting a genuine dispute over whether the class name removal constitutes copyright management information and if it was done with requisite knowledge. In a related copyright infringement matter, both parties seek summary judgment based on a prior settlement agreement from April 2012, where CompuClaim released Empire from all claims arising before the agreement but retained the right to pursue claims for breaches of that agreement or related obligations.
Empire released CompuClaim from all current and future claims arising from events before the execution of their settlement agreement but maintained the right to pursue claims for breaches of that agreement. Courts favor written compromises of disputes, which are enforceable when the parties' intent is clear. The legal standards for evaluating settlement agreements fall under local contract law, specifically Wisconsin law in this case.
CompuClaim contends that Empire's copyright claim is barred by the release, arguing that the relevant "event" is Berg's departure from Empire in February 2012, which allowed him to retain custom programming related to the MeduClaim website. CompuClaim points out that Empire's alleged damages began on April 17, 2012, after the release, asserting that no new events occurred post-release to support Empire's claim.
In contrast, Empire argues that its copyright claim stems from actions taken after the settlement, namely CompuClaim's alleged infringement by copying and creating derivative works from Empire's software. Empire contends that Berg's access to the source code does not constitute the basis for its claim, disputing that it was the event that triggered the copyright claim. The court agrees with Empire, stating that the timing of damages estimated by an expert does not preclude Empire from proving at trial that damages accrued from infringement occurring after April 17, 2012. Therefore, the court concludes that CompuClaim has not established that Empire's copyright claim was released by the mutual release executed on April 16, 2012.
Copyright initially vests in the author or authors of a work but can be transferred. A valid transfer requires a written instrument signed by the rights owner or their authorized agent, per 17 U.S.C. 204(a). Empire seeks summary judgment in its copyright claim, asserting that no written assignment of copyright ownership to CompuClaim exists, and that the License Agreement only granted CompuClaim a limited license. Empire contends that CompuClaim copied elements of the CMWebSite source code without authorization.
In contrast, CompuClaim argues that the License Agreement constitutes a written transfer of copyright ownership, asserting it grants rights to all custom programming added to the licensed software, defined as "ClearingMagic." While the License Agreement specifies that Empire retains all copyrights to the software, CompuClaim emphasizes the separate treatment of custom programming and the software within the agreement. Under the License Agreement, any custom features created by CompuClaim are for its use and not for resale, with ownership remaining with CompuClaim.
Empire disputes that the License Agreement applies to the CMWebSite source code, noting that Empire, not CompuClaim, created the source code and that it does not qualify as an "add-on." CompuClaim counters that payment for the custom programming work indicates ownership of the add-ons, regardless of who performed the coding. The excerpt also highlights that while specificity in a written transfer may vary, copyright agreements are contracts subject to general contract construction principles.
The court determined that the License Agreement provision stating "Add-ons created by Licensee shall be the property of Licensee" does not assign the copyright of the CMWebSite source code to CompuClaim. It recognized the website source code as an "add-on" but clarified that the provision specifically refers to add-ons created by CompuClaim itself. The court rejected CompuClaim's argument that "created by" included works commissioned from third parties, emphasizing that the provision's silence on third-party contributions fails to meet the clarity required for copyright transfer under 204(a). CompuClaim's reference to a provision in the License Agreement to support its claim was deemed insufficient to establish a copyright transfer from Empire to CompuClaim. However, the court noted that this conclusion does not automatically dismiss Empire's copyright infringement claim, as CompuClaim may have operated under a lawful nonexclusive license.
Regarding the issue of implied license, the court found that CompuClaim had waived its right to assert this defense by not including it as an affirmative defense in its answer. CompuClaim argued that the implied license is a "negative" defense, referencing a case where such a defense was struck from a defendant's answer. Nonetheless, the court ruled that an implied license is indeed an affirmative defense that needed to be raised. It stated that the existence of any license, whether express or implied, must be asserted in response to a copyright infringement claim, reinforcing this by citing relevant case law from the Seventh Circuit. CompuClaim acknowledged this principle in its arguments, indicating awareness of the requirement to affirmatively state any defenses related to licensing in its pleadings.
CompuClaim has submitted three answers in this litigation but has not claimed the affirmative defense of implied license, which was absent from its operative answer filed on June 12, 2017, where it presented 17 affirmative defenses. Empire contends that CompuClaim's omission of this defense prejudiced its discovery opportunities; however, Empire fails to specify what discovery it would have pursued. The court finds that the mere assertion of being deprived of response opportunities does not demonstrate prejudice. Generally, forfeiture of an affirmative defense occurs only if the plaintiff suffers harm due to the delay in raising it. The court will evaluate CompuClaim's license argument on its merits despite the lack of clarity regarding whether it claims an express or implied license. CompuClaim asserts it has both licenses for custom programming related to the ClearingMagic Software, citing a Licensing Agreement. However, it does not adequately explain the basis for its belief in possessing an express license, particularly regarding the custom programming. The court notes that any express license would likely be found in a related agreement concerning CMWebSite source code, referenced in a document called "Addendum B." CompuClaim has suggested in a footnote, which the court deems insufficiently developed, that Addendum B is not part of the License Agreement.
The court determines that if Addendum B, which addresses custom website programming, is not included in the License Agreement, CompuClaim cannot claim an express license for that programming. CompuClaim's argument that the copyright was assigned through the License Agreement is insufficient. Consequently, CompuClaim has not proven entitlement to summary judgment based on an express license for the custom programming.
Regarding the implied license argument, Empire contends that an express license in the License Agreement prevents the existence of an implied license. However, the court disagrees, noting that an implied nonexclusive license can exist even when an express license is present. Such a license does not transfer copyright ownership but allows specific use of the work. An implied nonexclusive license is established when the licensee requests the work, the creator delivers it, and the creator intends for the licensee to copy and distribute it.
Factors considered in determining the existence of an implied license include the copyright registration language, deposition testimony, and whether the copyrighted material was delivered without warnings against further use. The court has already established that Empire did not transfer copyright of the CMWebSite source code to CompuClaim. Despite the absence of an explicit license or copyright transfer, CompuClaim does have an implied license to use the CMWebSite source code, although this does not permit unrestricted use of the software.
The scope of the implied license remains a question for the jury, not the court on summary judgment. Thus, while an implied license exists, the court must also assess its limits and whether CompuClaim exceeded them.
A genuine issue of material fact exists regarding the extent of an implied license to create a derivative work, which prevents summary judgment in favor of CompuClaim concerning Empire's copyright infringement claim. Implied licenses can be limited, and exceeding their scope may result in copyright infringement. In terms of breach of contract, CompuClaim contends that Empire's claim is barred by a settlement agreement's release clause, which supersedes prior agreements, including the License Agreement, due to an integration clause. CompuClaim argues that while it reserved a breach of the License Agreement, Empire did not, thus releasing CompuClaim from claims arising before the settlement date of April 26, 2012. Empire counters that ongoing breaches of the License Agreement after the settlement give rise to new claims, asserting CompuClaim's continuing obligation to perform, such as paying royalties. The ambiguity exists regarding whether the License Agreement survives the release's integration clause or if only Empire maintains obligations under it. Despite limited argumentation from both sides, the conduct post-release suggests mutual obligations remained, as CompuClaim continued to pay licensing fees. Consequently, the court denies CompuClaim's request for summary judgment on Empire's breach of contract claim. Additionally, Empire successfully demonstrates that Addendum B extended the License Agreement's term from three to five years, with no dispute from CompuClaim on this point, leading to the court granting summary judgment in favor of Empire regarding the agreement's duration.
In copyright infringement cases involving software, courts often utilize the abstraction-filtration-comparison (AFC) test to differentiate between protected and unprotected elements of software, a method established in *Computer Associates International, Inc. v. Altai, Inc.* The AFC test eliminates non-protectable aspects, isolating the core copyrightable material. Empire alleges that CompuClaim infringed its copyright concerning the "SendMail" function and table headings. CompuClaim seeks summary judgment, arguing that Empire's expert did not apply the AFC test, which is crucial for assessing non-literal elements of software, such as architecture and user interface, rather than literal elements like source code.
Citing *Macro Niche Software, Inc. v. 4 Imaging Sols. L.L.C.*, CompuClaim asserts that failure to perform the AFC analysis justifies summary judgment. However, Empire contends that the AFC test is not necessary for claims involving literal elements. The court agrees with the First Circuit's position that the AFC test is less applicable to claims of literal element infringement, as seen in *Lotus Development Corp. v. Borland International*. Consequently, Empire was not required to present expert evidence for its claim concerning literal elements, and thus CompuClaim is not entitled to summary judgment on this aspect of the case.
The court concludes that despite Empire's claim that Addendum B extended the license agreement from three to five years—an assertion CompuClaim concedes—both parties' motions for summary judgment are denied due to existing factual disputes. Specifically, there are unresolved issues regarding whether "EmpireMedical" in the CMWebsite source code constituted copyright management information and whether Berg knowingly removed it with the intent to facilitate copyright infringement under Title 17 U.S.C. § 1202(b). CompuClaim has not demonstrated that Empire waived its copyright or breach of contract claims through the April 16, 2012 settlement. The court acknowledges that while the License Agreement did not transfer copyright ownership of the CMWebsite source code to CompuClaim, Empire's request for summary judgment on its copyright claim is denied due to a dispute over the authorization of the alleged infringement under an implied license. Additionally, CompuClaim's motion for summary judgment cannot be granted simply because Empire's expert did not apply the required abstraction-filtration-comparison test. The court orders the dismissal of CompuClaim's counterclaims and grants Empire's motion for summary judgment in part, confirming the five-year extension of the License Agreement, but denying it in relation to other claims. CompuClaim's motion for summary judgment is also denied.
