Is Breach of a software EULA (or other terms of use for a copyrighted work) considered a breach of contract or copyright infringement?

Introduction

When dealing with software publishers and copyright holders it is important to know whether you have a license to use their copyrighted works.  Users should also know what the terms, conditions, scope of the license, and what covenants are  made in the licensing agreement.  Violating the EULA could result in triggering a software audit, or could result in a federal lawsuit alleging willful copyright infringement, or breach of the EULA.  This blog discusses these concepts.

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Federal case law

In one federal case, MDY Indus., LLC v. Blizzard Entm't, Inc., 629 F.3d 928, 939–40 (9th Cir. 2010), as amended on denial of reh'g (Feb. 17, 2011),, opinion amended and superseded on denial of reh'g, No. 09-15932, 2011 WL 538748 (9th Cir. Feb. 17, 2011), the 9th circuit discussed the difference between a copyright infringement claim and breach of contract for violating terms of the end-user license agreement.  Here is some language from the case:

B. Contractual covenants vs. license conditions

“A copyright owner who grants a nonexclusive, limited license ordinarily waives the right to sue licensees for copyright infringement, and it may sue only for breach of contract.” Sun I, 188 F.3d at 1121 (internal quotations omitted). However, if the licensee acts outside the scope of the license, the licensor may sue for copyright infringement. Id. (citing S.O.S., Inc. v. Payday, Inc., 886 F.2d 1081, 1087 (9th Cir.1989)). Enforcing a copyright license “raises issues that lie at the intersection of copyright and contract law.” This highlights that the facts of each case have to be closely examined to see which cause of action is appropriate.  The remedies may differ so the distinction could matter.  For example, copyright infringement has statutory penalties of $150,000 per infringed title if the infringement is deemed to be “ willful.”  The Court continued, and discussed the difference between EULA conditions and covenants: “We refer to contractual terms that limit a license's scope as “conditions,” the breach of which constitute copyright infringement. We refer to all other license terms as “ covenants,” the breach of which is actionable only under contract law. We distinguish between conditions and covenants according to state contract law, to the extent consistent with federal copyright law and policy. See  Foad Consulting Group v. Musil Govan Azzalino, 270 F.3d 821, 827 (9th Cir.2001). So what the Court is saying, is if there is a condition to the licensing agreement (ex. we will let you use our software on the condition that you install a copy on no more than one computer), and the condition is not satisfied or excused, you could be held liable for copyright infringement.  On the other hand, if the term at issue in the licensing agreement is interpreted to be a “covenant” (ex. a PROMISE to do or not do something), the breach of the promise could trigger a breach of contract case for failing to keep your contractual promises (ex. licensee agrees to allow the software company to request, and licensee will respond to any request that licensee conduct an internal software audit and verify its compliance to the terms of the EULA).  Failure to honor this promise (covenant) by refusing to respond to a software audit demand, could trigger a breach of contract claim, as opposed to a copyright infringement claim.  The Court further noted: “A condition precedent is an act or event that must occur before a duty to perform a promise arises. AES P.R., L.P. v. Alstom Power, Inc., 429 F.Supp.2d 713, 717 (D.Del.2006) (citing Delaware state law); see also Restatement (Second) of Contracts § 224. Conditions precedent are disfavored because they tend to work forfeitures. AES, 429 F.Supp.2d at 717 (internal citations omitted). Wherever possible, equity construes ambiguous contract provisions as covenants rather than conditions. See Wilmington Tr. Co. v. Clark, 325 A.2d 383, 386 (Del.Ch.1974).  A covenant is a contractual promise, i.e., a manifestation of intention to act or refrain from acting in a particular way, such that the promisee is justified in understanding that the promisor has made a commitment.”   See Travel Centers of Am. LLC v. Brog, No. 3751–CC, 2008 Del. Ch. LEXIS 183, *9 (Del. Ch. Dec. 5, 2008); see also Restatement (Second) of Contracts § 2 (1981).

What is the test for copyright infringement based on breach of a EULA?

As the Blizzard court noted: To recover for copyright infringement based on breach of a license agreement: (1) the copying must exceed the scope of the defendant's license and (2) the copyright owner's complaint must be grounded in an exclusive right of copyright (e.g., unlawful reproduction or distribution). See Storage Tech. Corp. v. Custom Hardware Eng'g & Consulting, Inc., 421 F.3d 1307, 1315–16 (Fed.Cir.2005). Contractual rights, however, can be much broader: Consider a license in which the copyright owner grants a person the right to make one and only one copy of a book with the caveat that the licensee may not read the last ten pages. Obviously, a licensee who made a hundred copies of the book would be liable for copyright infringement because the copying would violate the Copyright Act's prohibition on reproduction and would exceed the scope of the license. Alternatively, if the licensee made a single copy of the book, but read the last ten pages, the only cause of action would be for breach of contract, because reading a book does not violate any right protected by copyright law. Consistent with this approach, we have held that the potential for infringement exists only where the licensee's action: (1) exceeds the license's scope (2) in a manner that implicates one of the licensor's exclusive statutory rights. See, e.g., Sun I, 188 F.3d at 1121–22 (remanding for infringement determination where defendant allegedly violated a license term regulating the creation of derivative works).   

Linda's Lyrics v. Aronson and Dash Inc.

Here is some more language that came from another case involving the “Dash Poem” (this was pulled from the Defendants unsuccessful motion for summary judgement):

“It is well-established law that the Copyright Act (17 U.S.C. Section 501 et seq.) is intended to protect copyright holders from unconsented-to pirating by those unwilling to pay the full value of the works used. When copyright holders agree to license their products (as here), however, they have entered the realm of legally enforceable contracts, and have represented as such to their contractual counterparts. See, e.g., Harper & Row Publishers, Inc. v. Nation Enterprises, 471 U.S. 539, 546, 105 S.Ct. 2218, 85 L.Ed. 2d 588 (1988). Therefore, where the use is within that contemplated and agreed upon by the parties to the license, the mere fact that the contract is for copyrighted material does not allow copyright holders to escape the constraints of contract law. Plaintiffs election in this case to seek copyright infringement damages is “disproportionate to the damages which could have been anticipated from breach of the contract.” 5 Williston on Contracts Section 776, at 668.”

So again, you need to have a infringement attorney look closely at the allegations being made, and review any contracts that may have existed between the party being accused of infringement, (defendant)  and the Plaintiff.  In many cases, you would prefer to argue the alleged copyright infringement (with potential of $150,000 plus attorney fees) is really just a breach of contract (and the Plaintiff needs to prove their damages suffered, which would possibly be lower than the statutory damages.

Bourne v. Walt Disney Co., 68 F.3d 621, 631 (2d Cir. 1995)

In another case, the concept of “exceeding the scope of the license” was discussed with reference to a breach of contract:

We conclude that, in cases where only the scope of the license is at issue, the copyright owner bears the burden of proving that the defendant's copying was unauthorized. See S.O.S., Inc. v. Payday, Inc., 886 F.2d 1081, 1085 (9th Cir.1989) (“ To prevail on its claim of copyright infringement, [the copyright owner] must prove ‘copying' of protectible expression by [the accused infringer] beyond the scope of [the] license.”); Microsoft Corp. v. Harmony Computers & Electronics, Inc., 846 F.Supp. 208, 210 (E.D.N.Y.1994); see also NLFC, Inc. v. Devcom Mid–America, Inc., 45 F.3d 231, 235 n. 5 (7th Cir.), cert. denied, 515 U.S. 1104, 115 S.Ct. 2249, 132 L.Ed.2d 257 (1995). Copyright disputes involving only the scope of the alleged infringer's license present the court with a question that essentially is one of contract: whether the parties' license agreement encompasses the defendant's activities. Just as in an ordinary contract action, the party claiming a breach carries the burden of persuasion. See Gordon v. Leonetti, 324 F.2d 491, 492 (2d Cir.1963).

Conclusion – Software Infringement Lawyer

Again, this is a case by case factual analysis that requires a skilled copyright counsel to review the EULA and the facts of the case and determine what the legal exposure might be.  We can help you if you are involved in a software audit with the business software alliance, SIIA, Autodesk, Adobe, Siemens, Vero Software or other software publisher.  We offer free initial consultations and low flat rate fees for most non-litigation cases.  Call us at (877) 276-5084 or send an email to the address on the right sidebar on this page.  Click here to go to our software audit resource page.