CONSULTANTS’ LIABILITIES

IVAN HOFFMAN, B.A., J.D.


        If you are a consultant, especially but not limited to a consultant dealing with computer information and processes but also anyone else dealing with third party material, you should become keenly aware of the potential legal liabilities to which you may be exposed as a result of your work.  A recent case deals with just such issues.

       In Dun and Bradstreet Software Systems, Inc. and GEAC Computer Systems, Inc. vs. Grace Consulting, Inc. et. al., the Third Circuit was faced with an appeal of a judgment of copyright infringement against the defendants.  GEAC (formerly known as Dun and Bradstreet Software Systems, Inc.) was the owner of all rights including rights of copyright in and to certain business software known as “Millennium.”  The software, which was composed of 12 separate applications, contained many trade secrets and other confidential information such as source and object codes, customer lists and other such information, as well as copyrighted materials.  GEAC licensed its software to its customers and within such licenses there were provisions dealing with the protection of trade secrets and specifically for the purposes of this article, a provision requiring that if any such customers engaged the services of any third party consultants to install, configure or maintain the software, such consultants must execute a non-disclosure and confidentiality agreement acceptable to GEAC (more on this below).   GEAC also provided maintenance services to its customers.

        Grace was a consulting firm that provided consulting services to some of GEAC’s customers.  As part of Grace’s services, it maintained and customized the software but also provided its own version of one of the GEAC applications (the GEAC application was called “W-2 PAYTXABR”), which was part of what Grace called the “Remain On Release Program” which, according to Grace, would “allow customers to stay on their present release [of the GEAC software] without having to accept expensive upgrades from the vendor.”  In an interesting twist, the Grace program was developed in part by 2 former employees of GEAC, a fact that would later be cited by the Court as significant.

The GEAC Licenses

        As part of its software licensing, customers had to agree to a number of different licenses from GEAC which included, among other provisions, provisions prohibiting the copying of the software and prohibiting anyone from modifying the Millennium software without authorization.  In one exception, the licenses provided that if a customer engaged the services of a consultant, it had to be on a work made for hire basis and that before that consultant could modify any GEAC code, the consultant was required to execute an agreement acceptable to GEAC providing for non-disclosure of confidential information belonging to GEAC and that all such modifications were the property of GEAC and that such modifications would only be for that particular customer.  These licenses further provided that none of the GEAC code could be removed from the licensee’s site.

        As part of those license agreements, the consultant had to agree to abide by all the terms of the underlying GEAC licenses with the customers.

        GEAC sued Grace and its president claiming that the activities of the defendants violated GEAC’s copyright rights, its rights against disclosure of trade secrets and for other claims including that the defendant’s used the customer lists of GEAC to sell them the above Remain on Release Program and otherwise.  Grace claimed that any copying, if it were done at all, was either “de minimis” (i.e. not substantial) or was permitted because it was “standard industry practice.”  This last phrase, vague and amorphous as it is, is particularly important since it may be that many consultants make certain assumptions under the umbrella of that phrase that somehow make them feel protected against liability.

        This case puts that comfort zone to a dutiful end.

The Copyright Infringement Claims

        The Court spent a great deal of effort dealing with this aspect of the case and the issues are complex but let me try to simply the discussion in regard to the same.  The essence of GEAC’s claims of infringement were:

1. that in the course of performing its “consulting” work, Grace copied the protected materials in the software by loading it into computer memory as well as by making copies for the customers;
2. that Grace’s version of W-2 PAYTXABR was a derivative work and a copy of the protected materials contained in GEAC’s program; and
3. that that program of Grace contained “copy and call” commands to GEAC’s source and object codes.
        The Court reviewed the numerous rights contained within the rights of copyright as set forth in 17 USC section 106, which provides in part:
Subject to sections 107 through 121, the owner of copyright under this title has the exclusive rights to do and to authorize any of the following:

(1) to reproduce the copyrighted work in copies or phonorecords;

(2) to prepare derivative works based upon the copyrighted work;

(3) to distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending;

        As to the “de minimis” argument advanced by Grace (Grace claimed that the copying amount to only 27 lines out of 525, 000 lines), the Court stated:
Much more significant, however, than the quantity of copy is the quality of the material purloined.
        The Court found that even though the quantity of the material copied might be small, the copied program would not work without the copied material.  Thus, the quality of the portion copied was substantial and essential.  [In this regard, the reader should read the several articles on my site dealing with “fair use” since part of the defense of fair use is that the amount taken was not substantial, a defense that is not quantifiable.  Click on “Articles for Writers and Publishers.”]

        As to the argument that any off site copying was permitted both expressly and by implication as “industry custom and practice” as part of the consultant’s maintenance work, the Court found that although the licenses entered into by Grace permitted a limited number of copies to be made for a limited purpose, that general statement was superceded by the more specific prohibitions against copying.  The Court further found that the kinds of activities engaged in by Grace were not justified   by any evidence of “industry custom and practice.”  In this regard, the Court stated:

Grace may not stultify itself by seeking shelter within selected terms of the License Agreements at one time and then, when it serves its convenience, disregard the conditions and other pertinent terms of the Agreements.  Custom and practice in the computer industry, and the evidence of it in this record is vague and conclusory, is no authority to disregard or trump the specific terms of a valid license agreement or the provisions of the Copyright Act.
        The Court cited another case that said:
Extrinsic evidence [i.e. of industry customs]…may not be used to create an ambiguity where none exists.
        The Court found as well that the activities of the consultant in making additional copies of the protected materials including copying both source code and program code infringed upon the copyright rights of GEAC and violated the express provisions of the license agreements including provisions against making copies for off site purposes.  The Court found specifically that making the Grace version of the software was a prohibited “derivative work.”  The Court also found that Grace had failed to produce any evidence of any acceptable non-disclosure agreement and the one non-disclosure agreement produced by Grace to support that aspect of its defense was insufficient to protect Grace.

     I would also commend that consultants including web designers read “Taking Over A Web Design Project.” Many of the same issues presented in this case are discussed in another context in that article.

The Misappropriation of Trade Secrets Claims

        The Court discussed the very complex set of issues as to whether or not these type claims were or were not preempted by the federal copyright claims since under federal copyright law, state claims that are essentially copyright claims are not allowed.  However, the Court concluded that these claims could be pursued since there were issues related to the breach of the non-disclosure and confidentiality provisions by Grace.  Remember that the Grace software was previously developed by former employees of GEAC and those employees may have owed a duty of confidentiality to their former employer.  Thus, GEAC is entitled to pursue this line of evidence in a trial of the matter.  Further, the Court said that because there can be no claims for copyright infringement of customer lists since customer lists are not copyrightable, that such claims for misappropriation would be able to be pursued against Grace, in addition to the copyright infringement claims.

The Lessons For Consultants

        Consultants should pay careful attention to this case.  The temptation is to say “well, I don’t do the things that the consultant in this case did so I’m okay” but that temptation, like many temptations, can lead you astray.  The breadth of the language of the decision opens up the consultant to potential liabilities even without the extent of the facts as in this instance.  Any time a consultant (or web designer or any other party) makes changes to or even works on the protected elements of another’s work, these claims can arise.  Additionally, the obligations imposed on the consultant by reason of the language in the licenses to which the consultant was not a party can create these liability potentials.

        Consultants should review their procedures for working with clients which should include, among other procedures, that the consultant have a valid, written and thorough agreement with their clients in which, among many other provisions, the client makes appropriate representations and warranties that the client has the right to have the consultant perform the work and that the work by the consultant will not violate the rights of any other party as well as appropriate indemnities in that regard.

        But it is not enough to have the above representations and warranties and indemnities since all the consultant really has is a lawsuit against the client if any claims by third parties are made.  Instead, the consultant should have all agreements, licenses etc. regarding any software etc. reviewed by the consultant’s attorney, one experienced in these areas.  As indicated in this case, since a Court is likely to review with great care any such agreements, licenses etc., the consultant should do so as well.  Indeed, perhaps the consultant’s review may preclude a litigation.

        Once those agreements, licenses, etc. are reviewed, the consultant should comply with any obligations imposed on the consultant as a result.  One of the problems the consultant in this case faced was because it simply ignored those obligations and, as you can see, the Court came down hard on such flaunting of the express will of the software owner.

        Consultants should be aware that claims of “everyone does it this way,” also known as “standard industry practice,” will be subject to substantial and concrete evidentiary proof and under any circumstances, will probably not be sufficient to overcome contractual and statutory protections provided to the owner of rights.  Thus, reliance on these “defenses” seems particularly misplaced.  This sort of loose manner of doing business seems no longer justifiable, if indeed it ever was.

        There are of course many other aspects to the consulting relationship that should be reviewed by the consultant and the consultant’s attorney.
 

© 2002 Ivan Hoffman.  All Rights Reserved.

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This article is not intended as legal advice.  The specific facts that apply to your matter may make the outcome different than would be anticipated by you.  This article is based on United States law.  You should consult with an attorney familiar with the issues and the laws of your country.  This article does not create any attorney client relationship.

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