259 F. Supp. 2d 531

POSITIVE SOFTWARE SOLUTIONS, INC., Plaintiff, v. NEW CENTURY MORTGAGE CORPORATION, et al., Defendants.

No. CIV.A.3:03-CV-0257-N.

United States District Court, N.D. Texas, Dallas Division.

April 28, 2003.

See also 259 F.Supp.2d 531, 2003 WL 1984535.

*532W. Ralph Canada, Jr., Shore Deary, Dallas, TX, for plaintiff.

Barry C. Barnett, Ophelia F. Camina, Susman Godfrey, Dallas, TX, for defendants.

MEMORANDUM OPINION AND ORDER

GODBEY, District Judge.

Before the Court are Plaintiff Positive Software Solutions, Inc.’s (“Positive Soft*533ware”) motion for preliminary injunction and impoundment under the Copyright Act and Defendants’ motions to compel arbitration. Defendant New Century Mortgage Corporation (“New Century”) has recently advised the Court of certain conduct from which it is willing to abstain in the future (although it did not agree to entry of an injunction); the Court grants Positive Software injunctive relief to that extent. The Court also compels arbitration of the balance of Positive Software’s claims.

I.Background

New Century is in the mortgage business. It generates business through telephone contacts with prospective borrowers. Positive Software developed a software product called “LoanForee,” which provides automated support for that process, in conjunction with other third-party supplied software. New Century licensed LoanForee from Positive Software (the “Software Subscription Agreement” or “SSA”).

The information collected by the users of LoanForee and generated by the operation of Loan Force is collected and saved in an aggregation of data called a database.1 LoanForee interacts with the database through third party software. Loan-Force communicates with the database software through statements written in Structured Query Language (“SQL”). In order for the LoanForee software to interact correctly with the database, a description of the arrangement of the database, 1.e., the composition of the various tables and fields and the types of data contained in each field, is included in SQL statements within the LoanForee source code (the “SQL Data Structures”).2

In late 2002 and early 2003, Positive Software became aware of a new software package that New Century was using called LoanTrack, together with what are apparently databases called LFMoon and LTKMoon (collectively, “LoanTrack-1”). Although Positive Software was not aware of the fact at the time, it presently appears that LoanTrack-1 was an interim product that New Century intended to use as it made a transition away from LoanForee to new products called Loan-Track-2 and MLAS, which were developed partly inhouse and partly by a contractor called eConduit.3 New Century currently anticipates LoanTrack-2 and MLAS will be usable by May, 2003. It appears that LoanTrack-1 will not provide all of New Century’s business needs without LoanForee and/or its associated database components. It appears that LoanTrack-2 and MLAS will provide all of New Century’s business needs without *534utilizing the LoanForee application software.

The Software Subscription Agreement required annual renewal and payment of license fees. During 2002, New Century told Positive Software that New Century might want to expand its LoanForee license to include all of New Century’s branch offices. During that same time, New Century was preparing its transition away from LoanForee with the development of LoanTrack-1 and LoanTrack-2. At the end of 2002, when renewal license fees were due, New Century asked Positive Software to defer full payment of the renewal fee and to consider alternative billing arrangements. Although Positive Software did not know it at the time, New Century did this in order to continue its use of LoanForee until New Century’s replacement product was ready, without having to incur the full annual license fee for LoanForee.

Positive Software, unbeknownst to New Century, was investigating New Century’s LoanTrack-1 project and had concluded that LoanTrack-1 was making improper use of Positive Software’s intellectual property rights in LoanForee. Positive Software thus began to prepare for litigation with New Century. On January 1, 2003, New Century went into default under the Software Subscription Agreement. On January 6, 2003, Positive Software sent New Century demand for payment. New Century never made the payments required under the Software Subscription Agreement. On February 6, 2003, Positive Software declared the Software Subscription Agreement to be terminated. This lawsuit soon followed.

Positive Software seeks injunctive and monetary relief from New Century for breach of the Software Subscription Agreement, copyright infringement, misappropriation of trade secrets, violation of the Digital Millennium Copyright Act of 1998, conversion, fraud and civil conspiracy. Positive Software moved for preliminary injunction relating to LoanTrack-1. The Defendants moved to compel arbitration pursuant to the Software Subscription Agreement. The Court will address those matters in turn.4

II. Positive Software is Entitled to a Preliminary Injunction Against Infringement of the SQL Data Structures in LoanForce

The requirements for issuance of a preliminary injunction are (1) substantial showing of likelihood of success on the merits; (2) substantial threat of irreparable injury; (3) balance of harm weighs in favor of injunction; and (4) injunction will not harm the public interest. E.g., Walgreen Co. v. Hood, 275 F.3d 475, 477 (5th Cir.2001). The Court finds that Positive Software is entitled to injunctive relief on its copyright infringement claim. Because the Court would not consider any greater relief on any of Positive Software’s other *535theories, it is unnecessary to address those theories in this Order.

A. Likelihood of Success on the Merits

The Court finds that Positive Software owns the rights to LoanForce and holds valid copyright registrations for Lo-anForce and its component parts. The Court must first consider whether the SQL Data Structures are copyrightable subject matter, then whether that copyright is infringed.

Under the copyright laws, a “computer program” is “a set of statements or instructions to be used directly or indirectly in a computer in order to bring about a certain result.” 17 U.S.C. § 101. The Court finds that the SQL Data Structures here are a set of statements to be used indirectly in a computer in order to bring about a certain result. Accordingly, the SQL Data Structures are proper subject matter for copyright protection.5 This is consistent with the overall policy behind copyright law of protecting creative expression.6 Although some discussions in the legal literature give short shrift to the importance of and creative expression in data structures,7 the Court finds that the SQL Data Structures here have the requisite degree of creative expression to be copyrightable. This result is consistent with the Fifth Circuit’s holding that user interface input/output formats are copyrightable. See Eng’g Dynamics, Inc. v. Structural Software, Inc., 26 F.3d 1335 (5th Cir.1994).8

The Court now considers whether there was actionable copying of the SQL Data Structures. Factual copying is usually shown by access and “probative similarity.” Id. at 1340. Once factual copying is shown, the court must determine whether that was legally actionable by determining substantial similarity. Id. at 1341. The Court’s analysis of this issue is substantially simplified by the fact that LoanTrack-1 contains substantial verbatim or near-verbatim copying of the SQL Data Structures. The Court finds that New Century had access to the SQL Data *536Structures and that there is enough probative similarity to find that New Century factually copied the SQL Data Structures.

Substantial similarity is usually determined in the computer software context by the abstraction-filtration-comparison methodology. Id. at 1343. Due to the verbatim or near-verbatim copying at issue here, the Court need not undertake the abstraction step of the analysis. In connection with filtering out unprotectable elements from protectable expression, New Century argues that the SQL Data Structures are generic. This is the computer software version of the scenes a faire doctrine. See Mitchell Zimmerman, Baystate: Technical Interfaces Not Copyrightable— On to the First Circuit, The Computer Lawyer, April 1997, at 9, 16-17. Certain elements of the SQL Data Structures might be dictated by external market factors. See Plains Cotton Coop. Ass’n v. Goodpasture Computer Serv., Inc., 807 F.2d 1256, 1262 (5th Cir.), cert denied, 484 U.S. 821, 108 S.Ct. 80, 98 L.Ed.2d 42 (1987); Eng’g Dynamics, 26 F.3d at 1346-47. However, there is no evidence in this record that the detailed structure of the SQL Data Structures — the organization of data into tables, the selection of column elements for the tables, the names, data types, and sizes of the column elements— is dictated by external market factors, and the Court finds that structure is not dictated by external factors. Accordingly, the Court need not “filter out” any of the SQL Data Structures as unprotectable’ expression dictated by market factors.9

Finally, the Court turns to comparison. The Court’s task here is made somewhat more difficult in that neither party provid*537ed complete copies of both works.10 The record before the Court shows near-verbatim copying of significant portions of the SQL Data Structures. Even given a sliding scale with relatively narrower protection for functional and nonfiction works, Eng’g Dynamics, 26 F.3d at 1348, the Court finds that the amount and near verbatim nature of the copying show substantial similarity between LoanTrack-1 and the SQL Data Structures. That copying is therefore legally actionable. Accordingly, the Court holds that Positive Software has shown a substantial likelihood of success on the merits of its claim that LoanTrack-1 (including the associated LFMoon and LTKMoon components) infringe Positive Software’s copyrights in LoanForce.

B. Other Factors Support Injunctive Relief

Although a finding of copyright infringement does not give rise to a presumption of irreparable harm, Plains Cotton, 807 F.2d at 1261, a finding of irreparable harm often naturally, if not inevitably, follows from a finding of infringement.11 Positive Software’s copyright is a right of statutory and even constitutional magnitude. Continuing infringement of that right cannot be adequately addressed by damages after the fact. Accordingly, Positive Software has shown a threat of irreparable harm.12 The balance of harm analysis is made easier by New Century’s recent offer to refrain voluntarily from the conduct covered by the preliminary injunction entered here. The fact that New Century is willing to make that undertaking voluntarily indicates to the Court that any harm to New Century from such an undertaking is minimal and outweighed by the possible harm to Positive Software flowing from continued infringement. Finally, the public interest does not appear implicated here, other than the public interest inherent in enforcing the copyright laws. On balance, and considering all four factors, the Court finds that Positive Software has shown it is entitled to injunctive relief.13

III. Positive Software Must Arbitrate Its Remaining Claims

The Defendants move the Court to compel arbitration of Positive Software’s claims. New Century14 argues the basis for this compulsion is an arbitration clause found in the Software Subscription Agreement entered into by New Century and Positive Software stating:

If any of the Parties disagree with respect to whether any of the other Parties have breached any of the terms or conditions of this Agreement, or if the Parties have a controversy, claim or dis*538pute arising out of or related to the terms and conditions of this Agreement, the disagreement shall be settled by-binding arbitration in accordance with the Federal Arbitration Act (“FAA”).

SSA at ¶ 15. Positive Software counters that its claims do not fall within the scope of the arbitration clause because paragraph 7F of the Software Subscription Agreement carves out disputes pertaining to the disclosure of confidential information:

Customer understands and acknowledges that any disclosure or misappropriation of any Confidential Information in violation of this Agreement may cause Positive irreparable harm, the amount of which may be difficult to ascertain, and therefore agrees that Positive shall have the right to apply to a court of competent jurisdiction for specific performance and/or an order restraining and enjoining any such further disclosure or breach and for such other relief as Company shall deem appropriate. Such right of Positive is to be in addition to the remedies otherwise available to Positive at law or in equity. Customer expressly waives the defense that a remedy in damages will be adequate and any requirement for posting bond by Positive in an action for specific performance or injunction.

SSA at ¶ 7F. The Court finds that Positive Software’s claims against New Century fall within the scope of the arbitration clause of the Software Subscription Agreement, because the claims arise out of and relate to the terms and conditions of the Software Subscription Agreement. Paragraph 7F of the Software Subscription Agreement contemplates preliminary relief by a court of competent jurisdiction for claims pertaining to the disclosure or misappropriation of confidential information.

The FAA creates “a body of federal substantive law of arbitrability, applicable to any arbitration agreement within the coverage of the Act.” Moses H. Cone Memorial Hosp. v. Mercury Const. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983). Section 2 of the FAA states that a written arbitration agreement in any contract involving interstate commerce is valid, irrevocable, and enforceable except on grounds that would permit the revocation of a contract in law or equity. 9 U.S.C. § 2.

In deciding whether parties have agreed to arbitrate a particular claim, a court must determine “(1) whether there is a valid agreement to arbitrate between the parties; and (2) whether the dispute in question falls within the scope of that arbitration agreement.” Personal Security & Safety Sys., Inc. v. Motorola Inc., 297 F.3d 388, 392 (5th Cir.2002) (quoting OPE Int’l LP v. Chet Morrison Contractors, Inc., 258 F.3d 443, 445 (5th Cir.2001)). Doubts concerning the scope of coverage of an arbitration clause ordinarily are resolved in favor of arbitration. Personal Security & Safety Sys., 297 F.3d at 392. (internal quotations and citations omitted). A valid agreement to arbitrate, therefore, applies unless it can be said with positive assurance that the arbitration clause is not susceptible of an interpretation which would cover the dispute at issue. Id. Here, the parties do not dispute the validity of the Software Subscription Agreement, rather Positive Software argues that its claims pertain to the disclosure and misappropriation of confidential information and, thus, are carved out of the general arbitration clause and addressed specifically in paragraph 7F of the Software Subscription Agreement. The Court does not agree.

The relevant part of paragraph 7F is one very long sentence stating that New Century acknowledges that any disclosure or misappropriation of confidential information in violation of the Software Sub*539scription Agreement may cause Positive Software irreparable harm, therefore Positive Software has the right to apply to a court for specific performance of the Software Subscription Agreement or for an order restraining and enjoining any further disclosure of confidential information or breach of the Software Subscription Agreement and for such other relief as Positive Software shall deem appropriate. The Court interprets paragraph 7F to grant Positive Software the right to apply to a court for preliminary relief, as evidenced by the predicate acknowledgment of irreparable harm and subsequent waiver of bond and defense that a remedy in damages is adequate, to stop the disclosure or misappropriation of its confidential information. Though Positive Software argues that the last part of the sentence “and for such other relief as Positive Software shall deem appropriate” gives it the right to bring this suit for damages, the Court does not construe the “other relief’ language so broadly. To allow Positive Software to choose between a trial and an arbitration in disputes pertaining to the disclosure or misappropriation of confidential information eviscerates the broad scope of the arbitration clause and is contrary to the context of paragraph 7F and the overall structure of the Software Subscription Agreement. Thus, the court interprets “other relief’ to mean other preliminary relief in addition to specific performance and injunction, for example, as Positive Software requests in its motion pending before the Court, impoundment under the Copyright Act. This interpretation of paragraph 7F allows it to be read in harmony with the arbitration clause of the Software Subscription Agreement. Positive Software’s claims against New Century, therefore, fall within the scope of the Software Subscription Agreement’s arbitration clause, because Positive Software’s claims arise out of and relate to the Software Subscription Agreement. Therefore, the Court grants New Century’s motion to compel arbitration and to stay proceedings, and Positive Software must arbitrate its claims against New Century in the arbitration currently pending.

The remaining Defendants, New Century Corporation, eConduit Corporation, the AnyLoan Company, JeffLemiex and Frank Nese (collectively “Nonsignatory Defendants”), also move for an order compelling Positive Software to arbitrate its claims against them. Though the Non-signatory Defendants are not parties to the Software Subscription Agreement, which contains the contractual waiver of Positive Software’s right to a trial, these Defendants argue that Positive Software is required to arbitrate its claims against them in accordance with the doctrine of equitable estoppel. The Court agrees.

Though parties who have not expressly agreed to arbitration generally will not be compelled to arbitrate claims, federal policy allows a nonsignatory to a contract to compel arbitration under an equitable es-toppel theory. See Grigson v. Creative Artists Agency, L.L.C., 210 F.3d 524 (5th Cir.2000). Whether to utilize equitable es-toppel is within a court’s discretion. Id. at 528. The Fifth Circuit, in Grigson, adopted the Eleventh Circuit’s “intertwined-claims test” formulated in MS Dealer Serv. Corp. v. Franklin, 177 F.3d 942, 947 (11th Cir.1999), in which the court held that equitable estoppel allows a non-signatory to compel arbitration in two different circumstances:

First, equitable estoppel applies when the signatory to a written agreement containing an arbitration clause must rely on the terms of the written agreement in asserting its claims against the nonsignatory. When each of a signatory’s claims against a nonsignatory *540makes reference to or presumes the existence of the written agreement, the signatory’s claims arise out of and relate directly to the written agreement, and arbitration is appropriate. Second, application of equitable estoppel is warranted when the signatory to the contract containing an arbitration clause raises allegations of substantially interdependent and concerted misconduct by both the nonsignatory and one or more of the signatories to the contract. Otherwise the arbitration proceedings between the two signatories would be rendered meaningless and the federal policy in favor of arbitration effectively thwarted.

Id. at 527. Though Positive Software argues, without authority, that both elements of the intertwined-claims test must be present to compel the claims of a nonsig-natory, the Court reads Grigson to require only one. The language of the opinion itself states that arbitration may be compelled in “two different circumstances” and that equitable estoppel is “much more readily applicable when the case presents both independent bases.” Id. The Court therefore interprets the intertwined-claims test under Grigson to require only one of the two independent bases to be present when compelling arbitration.15

Positive Software’s claims against the Nonsignatory Defendants stem from the relationship between New Century and Positive Software that was governed by the Software Subscription Agreement. However, not all of Positive Software’s claims are dependent upon the Software Subscription Agreement. Positive Software asserts a myriad of claims against the Nonsignatory Defendants including copyright infringement, misappropriation of trade secrets and intellectual property, conversion, fraud, violation of the Digital Millennium Copyright Act, and civil conspiracy. While some of these claims, such as misappropriation of trade secrets and intellectual property, may presume the existence of the Software Subscription Agreement, each claim does not rely upon the terms of the Software Subscription Agreement. Therefore, the first independent basis for equitable estoppel is not met.

The second basis, however, is fully applicable to the facts of this case. Positive Software’s allegations against the Nonsig-natory Defendants all concern their intertwined conduct with New Century. Positive Software generally alleges throughout the First Amended Complaint that the “Defendants” pirated its software, derived source code, and created new software incorporating LoanForce. Moreover, Positive Software claims a civil conspiracy among the Defendants to violate its intellectual property rights. Since all of Positive Software’s allegations against the Nonsignatory Defendants concern their interdependent and concerted misconduct with New Century, the second independent basis for equitable estoppel is met. *541The Court, therefore, grants the Nonsig-natory Defendants’ motion to compel arbitration.

Conclusion

It is, therefore ORDERED that Defendant New Century Mortgage Corp. and any person acting in active concert with it, upon Positive Software posting security in the amount of $1000, is forthwith enjoined from any use of the LoanForce software, the LoanForce database, LoanTrack-1, LF_Moon, and LTKUMoon. It is further ORDERED that New Century delete or return all LoanForce software, including application software and the LoanForce database, that New Century has the ability to access (excepting materials produced in discovery for use in this litigation and/or arbitration). It is further ORDERED that all parties proceed to arbitrate all remaining claims in this action immediately. It is further ORDERED that all matters in this action are STAYED pending arbitration, except for that discovery provided by separate Order this day.

Positive Software Solutions, Inc. v. New Century Mortgage Corp.
259 F. Supp. 2d 531

Case Details

Name
Positive Software Solutions, Inc. v. New Century Mortgage Corp.
Decision Date
Apr 28, 2003
Citations

259 F. Supp. 2d 531

Jurisdiction
United States

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