Risks of an Unrestricted License

The recent case of Edgenet, Inc. v. Home Depot U.S.A., Inc. (7th Cir., No. 10-1335, 9/2/11) illustrates the principle that a copyright license without restrictions will be broadly construed to encompass all rights. The facts of the case were that Home Depot had contracted in 2004 with Edgenet for Edgenet to develop a classification system (called a “taxonomy”) that was to be used to organize Home Depot’s product database. For example, as the Seventh Circuit Court of Appeals suggested, a particular screwdriver part might be classified under “tools/manual/screwdriver/Phillips/bits/metal”, and that classification would form part of the taxonomy. Under the contract, Edgenet retained ownership of the taxonomy but granted Home Depot a license to use it for so long as Edgenet remained Home Depot’s data-pool vendor. On termination of the contract, the license terminated, and Home Depot was required at that time immediately to stop using the taxonomy unless it exercised an option to purchase a perpetual license for $100,000.

Home Depot ultimately decided to build its own in-house database, instead of having the database hosted by Edgenet, and so in 2009 Home Depot gave notice that its contract with Edgenet would end shortly and exercised its option to acquire the perpetual license by sending Edgenet a check for $100,000. Edgenet disputed Home Depot’s right to acquire the perpetual license, and so returned the check and filed suit against Home Depot, alleging that Home Depot was infringing Edgenet’s copyrights in the taxonomy. The District Court dismissed Edgenet’s copyright infringement claim, and the Seventh Circuit affirmed that decision.

Edgenet had alleged that Home Depot had infringed Edgenet’s copyrights in the taxonomy because Home Depot had started developing its own database based on the taxonomy before exercising the option, and that the infringement invalidated the option. However, the court ruled that Home Depot had obtained a license to use the taxonomy in any way it pleased. The license that allowed Home Depot to use the taxonomy during the term of the Edgenet contract was broad and did not include any restrictions other than reverse engineering restrictions (which were not violated). It may have been Edgenet’s intention that Home Depot only use the taxonomy in order to receive the benefit of Edgenet’s provision to Home Depot of a database based on the taxonomy, but the license was not drafted to express that limitation. As such, there was nothing to prevent Home Depot exercising its license rights to incorporate the taxonomy into a new database. Edgenet also argued that Home Depot had lost the right to acquire a perpetual license because Home Depot’s Canadian affiliate had dropped Edgenet as a supplier. However, as the court pointed out, the option continued until the contract between the parties was terminated. Because the contract had remained in place and the license continued, Home Depot’s option survived and Home Depot’s exercise of the option was valid.

This decision is not surprising, but it is a useful reminder that, if acting for a copyright licensor, any license should be narrowly tailored to the licensor’s purposes, with the licensee receiving only the rights it needs for the purpose of the Agreement.

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