Universal Instruments Corp. v. Micro Sys. Eng'g, Inc.

17‐2748‐cv
Universal Instruments Corp. v. Micro Sys. Engʹg, Inc.

UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT

August Term 2018

(Argued: September 21, 2018 Decided: May 8, 2019)

Docket No. 17‐2748‐cv

UNIVERSAL INSTRUMENTS CORPORATION,

Plaintiff‐Counter‐Defendant‐Appellant,

v.

MICRO SYSTEMS ENGINEERING, INC.,
MISSOURI TOOLING & AUTOMATION, INC.,

Defendants‐Counter‐Claimants‐Appellees.*

ON APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF NEW YORK

Before:
WALKER and CHIN, Circuit Judges, and KEENAN, District Judge.**

*
The Clerk of Court is respectfully directed to amend the official caption to
conform to the above.
**
Judge John F. Keenan, of the United States District Court for the Southern
District of New York, sitting by designation.
 Appeal from a judgment entered in the United States District Court

for the Northern District of New York (Sharpe, J.), dismissing plaintiffʹs claims

for breach of contract, copyright infringement, misappropriation, and unfair

competition arising from its sale of equipment and software for an automated

assembly system. On appeal, plaintiff contends that the district court erred in

granting defendantsʹ motion for judgment as a matter of law.

AFFIRMED.

AMY MASON SAHARIA (Kannon K. Shanmugam, Giselle
Barcia, Stacie M. Fahsel, on the brief), Williams &
Connolly LLP, Washington, D.C.; Anthony L.
Meola, Christopher E. Blank, Victor J.
Baranowski, Schmeiser, Olsen & Watts LLP,
Latham, New York, for Plaintiff‐Counter‐
Defendant‐Appellant Universal Instruments
Corporation.

DAVID B. TULCHIN (Thomas C. White, Adam R. Brebner,
Jacob B. Lieberman, on the brief), Sullivan &
Cromwell LLP, New York, New York, for
Defendants‐Counter‐Claimants‐Appellee Micro
Systems Engineering, Inc.

Howard J. Kaplan (Marie E. Christiansen, on the brief),
Kaplan Rice LLP, New York, New York, for
Defendants‐Counter‐Claimants‐Appellee Missouri
Tooling & Automation, Inc.
___________

2
CHIN, Circuit Judge:

Plaintiff‐counter‐defendant‐appellant Universal Instruments

Corporation (ʺUniversalʺ) developed and sold an automated assembly system to

defendant‐counter‐plaintiff‐appellee Micro Systems Engineering, Inc. (ʺMSEIʺ) in

2007 pursuant to a purchase agreement. MSEI developed a multi‐phase plan to

build a system to automate the handling of medical devices during its quality

testing process, and Universal won the bid to provide the equipment for the first

phase. MSEI awarded the second and third phases of the project not to

Universal, but to Universalʹs competitor, defendant‐counter‐plaintiff‐appellee

Missouri Tooling & Automation, Inc. (ʺMTAʺ). In implementing phases two and

three, MSEI and MTA used intellectual property, including computer source

code, that Universal had provided for phase one.

Universal brought this action below alleging, inter alia, that MSEI

and MTA had infringed Universalʹs copyright in its source code, breached the

terms of the purchase agreement, and misappropriated Universalʹs trade secrets.

Certain claims were dismissed on defendantsʹ motion for judgment on the

pleadings, and, after discovery, the parties proceeded to a jury trial on the

3
remaining claims. At the close of the evidence, however, the district court

granted defendantsʹ motion for judgment as a matter of law. Universal appeals.

For the reasons set forth below, we affirm the judgment of the

district court.

BACKGROUND

A. Factual Background

MSEI is a medical device company that designs and manufactures

electronics for implantable pacemakers and defibrillators. Before selling these

components, MSEI subjects them to a battery of tests to ensure they are working

properly. MSEI sought to automate its then manual system of moving

components from one test station to another; to that end, MSEI solicited bids for

the development of a Test Handling System (the ʺTHSʺ). MSEI sought to build

the THS in phases. The first phase would automate the handling of some

product testing stations with further automation to be added in subsequent

phases.

Beginning in 2006, MSEI obtained bids from suppliers for phase one.

One of the bidders was Universal, a developer of automated assembly platforms.

MSEI awarded phase one to Universal, and the parties memorialized their

4
agreement in an Equipment Purchase Agreement (the ʺEPAʺ), executed in June

2007.

The THS ultimately developed by Universal had two software

components: the station software and the server software. The station software

was embedded on each individual Polaris station and ʺmanage[d] the operation

of conveyors, elevators, stacks and robotic arms.ʺ J. Appʹx at 2606. This software

was stored on each stationʹs programmable logic controller and could be

downloaded on site by physically connecting a computer to the station and

downloading the source code. Id. at 1299‐1300, 1480‐81, 1532‐34. The server

software, on the other hand, was the ʺbrains of the operation,ʺ id. at 988, which

ʺsynchronize[d] the activities of the hardware and softwareʺ and was

ʺresponsible for coordinating the movement of the module trays,ʺ id. at 2606.

The source code for the server could not be downloaded in the same way as the

station software, and under the EPA, Universal was under no obligation to

provide the server source code to MSEI. Id. at 2344 (providing that ʺsource code

will not be providedʺ). The parties agreed, however, in their Final Customer

Acceptance letter (the ʺFCAʺ) that Universal would provide MSEI with a copy of

5
the server source code at the time of delivery. The THS was delivered in October

2008.

In 2009, MSEI solicited bids for the next phase (ʺTHS2ʺ). The bid

documents for THS2 indicated that MSEI had the responsibility to provide the

software for the station and server source code to be used in the project. In April

2010, MSEI awarded the project to MTA, a competitor of Universal, which

submitted a lower bid for the project. On April 8, 2010, MSEI and MTA entered

into an agreement (the ʺMTA Agreementʺ). On April 16, Universal and MTA

were notified by email that MSEI had ʺawarded the business to MTA for the THS

line two project.ʺ J. Appʹx at 2878. MTA subsequently sought to purchase

Polaris stations from Universal for use in THS2, but on August 4, 2010, Universal

declined to sell them to MTA. Thereafter, MSEI downloaded the source code

from the individual Polaris stations and the server source code that Universal

gave to MSEI on delivery of phase one; it then gave the code to MTA to use in

the production of THS2. MSEI and MTA subsequently modified the server

source code to meet the requirements of THS2.

6
 The EPA contains several provisions relating to the partiesʹ

intellectual property rights. Section 8 is entitled ʺIntellectual Property.ʺ Section

8.2(d) provides that

[i]f [Universal] uses any Pre‐Existing Intellectual Property in connection
with this Agreement, [Universal] hereby grants MSEI, MSEIʹs
subcontractors, or suppliers, a non‐exclusive, royalty‐free, worldwide,
perpetual license, to use, reproduce, display, of the Pre‐Existing
Intellectual Property for MSEIʹs internal use only.

J. Appʹx at 2336. ʺPre‐Existing Intellectual Propertyʺ is defined as ʺany trade

secret, invention, work of authorship, mask work or protectable design that has

already been conceived or developed by anyone other than MSEI before

[Universal] renders any services under the Agreement.ʺ Id.

Exhibit E to the EPA, entitled ʺEquipment Acceptance Form,ʺ

contained a blank form for the parties to fill in upon final delivery and

acceptance.

On October 31, 2008, Universal and MSEI signed a negotiated ʺFinal

Customer Acceptanceʺ letter, which stated, among other things, that Universal

agrees to provide the THS server code as is with the understanding that
MSEI assumes the risk of invalidating the warranty in the event a change
made by MSEI to the source code causes damage to any of the THS line
hardware.

J. Appʹx at 2361.

7
B. Procedural Background

On July 15, 2013, Universal brought this action against MSEI and

MTA in the Northern District of New York, alleging copyright infringement,

misappropriation of trade secrets, breach of contract, unfair competition, unjust

enrichment, and promissory estoppel. On February 24, 2017, the district court

granted judgment on the pleadings and dismissed Universalʹs claim for

promissory estoppel and its claims against MSEI for unjust enrichment and

unfair competition. Universal does not challenge those rulings on appeal.

In July and August of 2017, the parties proceeded to trial before a

jury on the remaining claims ‐‐ breach of contract, copyright infringement,

misappropriation of trade secrets, and as to MTA only, unjust enrichment1 and

unfair competition. After the close of Universalʹs case‐in‐chief, the district court

reserved judgment on defendantsʹ motion for judgment as a matter of law. After

six days of trial and following the close of the evidence on August 7, the district

court orally granted defendantsʹ renewed motions for judgment as a matter of

law. As the district court explained: ʺThe whole issue here is whether or not

1 Universal has abandoned on appeal its claim against MTA for unjust enrichment.
It has thus waived any challenge to the ruling below. See Norton v. Samʹs Club, 145 F.3d
114, 117 (2d Cir. 1998).
8
under the arrangements between the parties, contractual and otherwise, MSEI

had permission and/or ownership in the property that was transmitted to them.ʺ

Spec. Appʹx at 3. The district found as a matter of law that Universal (1) had a

protected intellectually property interest in the system source code, (2)

transferred copies of that property to MSEI, and (3) offered no evidence that

MSEI had exceeded the scope of its license under the EPA by giving MTA the

intellectual property. These findings were dispositive of all claims. The court

reaffirmed its ruling in a nine‐page order issued the following day. It entered

judgment August 9, 2017.

This appeal followed.

DISCUSSION

Universal argues that the district court erred in granting defendantsʹ

renewed motion for judgment as a matter of law. In short, it contends that the

district courtʹs construction of the EPA is incorrect as a matter of law and that it

demonstrated the existence of factual questions that should have been resolved

by a jury.

The district court based its grant of judgment as a matter of law on a

number of overlapping grounds: it ruled that (1) the license granted by

9
Universal to MSEI pursuant to § 8.2(d) of the EPA authorized MSEI and MTAʹs

use of the source code; (2) the Final Customer Acceptance letter granted MSEI

ownership of the source code; (3) the evidence offered by Universal as to

damages was insufficient as a matter of law; (4) Universalʹs copyright and

misappropriation of trade secrets claims were time barred; (5) Universalʹs breach

of contract claim was preempted by the Copyright Act; and (6) Universalʹs

copyright claim failed because MSEIʹs use of the source code was authorized by

17 U.S.C. § 117(a).

We review de novo both the grant of judgment as a matter of law and

the district courtʹs construction of the agreements. Phillips v. Audio Active Ltd.,

494 F.3d 378, 384 (2d Cir. 2007); Cash v. Cty. of Erie, 654 F.3d 324, 332‐33 (2d Cir.

2011). In reviewing a grant of judgment as a matter of law, we construe the

evidence in the light most favorable to Universal, drawing all reasonable

inferences in its favor, and without making credibility determinations or

weighing the evidence. Reeves v. Sanderson Plumbing Prods., Inc., 530 U.S. 133, 150

(2000).

It is undisputed that in completing phases two and three, MSEI and

MTA used source code that Universal had provided for phase one. The principal

10
issue presented is whether the EPA permitted them to do so. We hold that

defendantsʹ conduct did not breach § 8.2(d) of the EPA and was non‐infringing

because that provision permitted defendants to reproduce and use the station

and server source code; defendantsʹ adaptation of the server source code was

non‐infringing because it was authorized by 17 U.S.C. § 117(a); Universalʹs

contract claim that defendantsʹ modification of the server source code breached

the EPA is preempted by the Copyright Act; Universalʹs claim of

misappropriation of trade secrets is time‐barred; and MTA did not unfairly

compete with Universal because its conduct was not in bad faith. Accordingly,

we affirm.

I. Copyright Infringement

A. Applicable Law

Universalʹs copyright infringement claim turns on whether

defendantsʹ conduct fell within the scope of the non‐exclusive license provided in

the EPA. This is so because a valid license ʺimmunizes the licensee from a charge

of copyright infringement, provided that the licensee uses the copyright as

agreed with the licensor.ʺ Davis v. Blige, 505 F.3d 90, 100 (2d Cir. 2007). Where a

claim turns on the scope of a license, ʺthe copyright owner bears the burden of

11
proving that the defendantʹs [use] was unauthorized.ʺ Tasini v. N.Y. Times Co.,

206 F.3d 161, 171 (2d Cir. 2000) (quoting Bourne v. Walt Disney Co., 68 F.3d 621,

631 (2d Cir. 1995)).

Whether the partiesʹ license agreement encompasses the defendantsʹ

activities is ʺessentiallyʺ a question of contract interpretation. See Bourne, 68 F.3d

at 631. ʺ[A] written agreement that is complete, clear and unambiguous on its

face must be enforced according to the plain meaning of its terms.ʺ Greenfield v.

Philles Records, Inc., 98 N.Y.2d 562, 569 (2002) (citing R/S Assocs. v. N.Y. Job Dev.

Auth., 98 N.Y.2d 29, 32 (2002)).2 Where, however, ʺthe language used is

susceptible to differing interpretations, each of which may be said to be as

reasonable as another, then the interpretation of the contract becomes a question

of fact for the jury and extrinsic evidence of the partiesʹ intent properly is

admissible.ʺ Bourne, 68 F.3d at 629 (internal quotations marks omitted). The

existence of an ambiguity, if any, is to ʺbe ascertained from the face of an

agreement without regard to extrinsic evidence.ʺ Reiss v. Fin. Perf. Corp., 97

2
The EPA does not contain a choice‐of‐law provision, but the parties agree that
New York law applies. See Federal Ins. Co. v. Am. Home Assur. Co., 639 F.3d 557, 566 (2d
Cir. 2011) (noting that where, during the course of litigation, ʺthe parties agree that New
York law controls, this is sufficient to establish choice of lawʺ).
12
N.Y.2d 195, 199 (2001); see also Duane Reade Inc. v. St. Paul Fire & Marine Ins. Co.,

411 F.3d 384, 390 (2d Cir. 2005).

B. Application

We first consider whether the EPA unambiguously permitted MSEI

to transfer the source code to MTA for reproduction and use in subsequent

phases of the THS. We next consider whether MSEI or MTAʹs modification of

Universalʹs pre‐existing intellectual property was infringing. We hold, for the

reasons discussed below, that the EPA unambiguously permitted MSEI and

MTA to reproduce and use Universalʹs pre‐existing intellectual property in

subsequent phases of the THS. Defendantsʹ conduct was, therefore, not

infringing. We further conclude that MSEI and MTAʹs adaptation of the server

source code for use in additional testing stations was authorized by 17 U.S.C.

§ 117(a) and thus non‐infringing.

1. Section 8.2(d) of the EPA Unambiguously Permitted MSEI
and MTA to Reproduce Universalʹs Pre‐Existing Source Code

Universal argues that the EPA plainly prohibited MSEI from

furnishing MTA with the server and station source code to replicate the THS. It

argues in the alternative that the relevant provisions of the EPA are ambiguous

and that therefore their interpretation could not be resolved as a matter of law.

13
We disagree and hold that the EPA unambiguously permitted MSEI and MTA to

reproduce Universalʹs source code for use in subsequent phases of the THS ‐‐

conduct that constituted internal use.

Section 8.2(d) of the EPA provides that ʺ[i]f [Universal] uses any Pre‐

Existing Intellectual Property in connection with this Agreement, [Universal]

hereby grants MSEI, MSEIʹs subcontractors, or suppliers, a non‐exclusive,

royalty‐free, worldwide, perpetual license to, use, reproduce, display, of the Pre‐

Existing Intellectual property for MSEIʹs internal use only.ʺ J. Appʹx at 2336. It

was Universalʹs burden to prove that MSEI exceeded the scope of this license.

See Tasini, 206 F.3d at 171. To do so, it was required to prove that (1) MSEI or its

ʺsubcontractorʺ or ʺsupplierʺ (2) did more than ʺuse, reproduce, displayʺ for

MSEIʹs ʺinternal use onlyʺ (3) Universalʹs ʺPre‐Existing Intellectual Property.ʺ

First, MTA is a ʺsupplierʺ of MSEI. The plain meaning of ʺsupplierʺ

unambiguously includes a component manufacturer like MTA. See Supplier,

Blackʹs Law Dictionary (10th ed. 2014) (defining ʺsupplierʺ as ʺ[a] person or

business engaged, directly or indirectly, in making a product available to

consumersʺ); Supplier, Oxford English Dictionary (2d ed. 1989) (defining

ʺsupplierʺ as ʺone who . . . furnishes something neededʺ). Indeed, in its trial brief

14
to the district court, Universal twice used the term ʺsupplierʺ in reference to

MTA. J. Appʹx at 679, 685. Universalʹs argument that MTA is not a supplier thus

fails.

Second, MSEI and MTA had license to ʺuse, reproduce, displayʺ the

intellectual property for MSEIʹs ʺinternal use only.ʺ J. Appʹx at 2336. The plain

meaning of ʺinternal useʺ clearly and unambiguously encompasses MSEIʹs

agreement to permit its supplier to use the software to produce subsequent

phases of the THS. There is no evidence that the source code was used by MSEI

and MTA for anything other than developing and implementing phases two and

three of MSEIʹs internal test handling system.

Universal contends that ʺinternal useʺ was meant to limit the license

of ʺthird parties ‐‐ subcontractors and suppliers ‐‐ whose products, components,

or services MSEI would be using internally as it tested products on Universalʹs

THS lineʺ at MSEIʹs premises. Appellantʹs Br. at 25; see also Appellantʹs Reply Br.

at 12 (ʺMSEIʹs external provision of Universalʹs software to MTA to build the lines

violated Section 8.2(d).ʺ (emphasis in original)). We are unconvinced.

This argument is premised on a physical internal‐external

dichotomy, whereby a supplierʹs ʺuse, reproduc[tion], [or] displayʺ of Universalʹs

15
intellectual property on MSEIʹs premises would be permitted, while the same use

or reproduction off site would violate the license. But this cannot be the partiesʹ

intent, because by its terms the license is ʺworldwideʺ in scope and extends to

MSEIʹs suppliers and subcontractors. See EPA § 8.2(d). A license cannot

simultaneously be worldwide and limited to the physical confines of the

licenseeʹs premises. The more natural understanding of ʺinternal useʺ in this

context is that the pre‐existing intellectual property could be used by or for

MSEIʹs existing business ‐‐ not for resale or for the use or benefit of others. See

Internal, Oxford English Dictionary (3d ed. 2015) (defining ʺinternalʺ as ʺaffairs

and activities within an institution, organization, department, etc.; relating to

such affairs or activities; applying or used within an organizationʺ); see also

Analect LLC v. Fifth Third Bancorp, 380 F. Appʹx 54, 58 (2d Cir. 2010) (summary

order) (finding that contract prohibiting resale and distribution by purchaser did

not prohibit ʺinternal useʺ); Norwest Corp. v. C.I.R., 110 T.C. 454, 458 (1998)

(ʺ[P]etitioner engaged in numerous projects involving the development of

internal use software ‐‐ that is, software developed solely for petitionerʹs internal

business and management purposes.ʺ). In the context of computer software, the

16
on‐premises, off‐premises distinction makes even less sense, given the nature of

software and source code.

This understanding is reinforced by our recent holding that ʺunder

long‐established principles of agency law, a licensee under a non‐exclusive

copyright license may use third‐party assistance in exercising its license rights

unless the license expressly provides otherwise.ʺ Great Minds v. Fedex Office &

Print Servs., Inc., 886 F.3d 91, 94 (2d Cir. 2018). Here, the license expressly

provided that the rights extended to MSEIʹs suppliers, which surely included

MTA. Hence, MSEI and MTAʹs reproduction of the source code for MSEIʹs

internal use did not, as a matter of law, exceed the scope of the license. Because

there is nothing in the record to suggest that the source code was used for

anything other than for MSEI in subsequent phases of its THS, MSEIʹs provision

of the source code to MTA and MTAʹs use of the source code for MSEIʹS benefit

did not exceed the scope of the license, and thus was non‐infringing.

2. Modification of the Source Code was Authorized by 17 U.S.C.
§ 117(a)

We turn next to the question whether MSEI and MTA did more than

ʺuse, reproduce, [or] displayʺ Universalʹs pre‐existing source code ‐‐ that is,

17
whether it modified the source code and, if so, whether the modification

infringed Universalʹs copyright.

a. MSEI and MTA Modified the Server Source Code

As Universal contends, evidence at trial showed that the server

source code that MSEI possessed differed from that delivered by Universal in

October of 2008. Universalʹs expert witness Richard Hooper was ʺasked to

compare two sets of server source code.ʺ J. Appʹx at 1719. The first set of source

code was the THS server source code that Universal had in its files. The second

set was the source code as it existed on MSEIʹs system at the time it was

produced in the course of litigation. Hooper testified that the server source code

consists of twenty or thirty individual files ʺthat hold the source code,ʺ which

have descriptive names like ʺAssemblyStationManager,ʺ ʺLogStationManagerʺ,

ʺMessageManager,ʺ ʺRF/ShakerManager,ʺ and ʺFeederShakerManager.ʺ Id. at

1720‐23. He proceeded to show the jury a demonstrative, which included

excerpted line‐by‐line comparisons of the Universal and MSEI source code. He

noted that although the codes were nearly ʺidentical,ʺ there were ʺsome changes

that were made to the MSEI source code.ʺ Id. at 1724. For instance, the

ʺLogStationManagerʺ files were ʺ99.4 percent . . . exactly the same.ʺ Id. at 1725.

Hooper concluded that ʺMSEI started with the Universal source code and then
18
made some changes to it. They added lines of code to it and they deleted lines of

code from it.ʺ Id. He also concluded that none of the source code was publicly

available.

The conclusion that the server source code was modified by MSEI or

MTA after delivery by Universal was reinforced by Christopher Demuth, who

helped Universal to develop the sever source code and was subsequently hired

by MSEI to make modifications. DeMuth testified that in October 2009, MSEI

contacted him with a ʺpunch list of some features they wanted added, some

changes they wanted made to help improve efficiency of the line.ʺ Id. at 1633.

He made various modifications over the course of several years, in particular

because MSEI was ʺworking on building another THS line and they needed

modifications to the THS server to support . . . communicating with all of the

[new] stations.ʺ Id. at 1635‐38. Thus, the server source code was modified.

Unlike the server source code, Universal does not seriously contend

that MSEI and MTA modified the station source code. Indeed, there is nothing in

the voluminous record indicating that the station software was modified.

Although the MTA Agreement indicates that MTA would be required to

ʺ[m]odify, if necessary, and install SWʺ (SW means software) for each of the

19
stations, id. at 2434‐35, it would be speculative to conclude, without something

more, that the station software was actually modified. We therefore proceed to

consider only whether MSEIʹs modification of the server source code was

authorized by 17 U.S.C. § 117(a).

b. The Server Source Code Modifications Were Authorized
by 17 U.S.C. § 117(a)

It is axiomatic that ʺ[a]n unlicensed use of the copyright is not an

infringement unless it conflicts with one of the specific exclusive rights conferred

by the copyright statute.ʺ Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S.

417, 447 (1984). The Copyright Act grants copyright holders a bundle of

exclusive rights, including the rights to ʺreproduce . . . in copies,ʺ ʺprepare

derivative works,ʺ ʺdistribute copies,ʺ ʺperform,ʺ and ʺdisplayʺ their works. 17

U.S.C. § 106. Source code, the human‐readable literal elements of software, is

copyrightable. See Oracle Am., Inc. v. Google Inc., 750 F.3d 1339, 1355‐56 (Fed. Cir.

2014). It is also well established that copyright owners may grant others license

to use their rights. John Wiley & Sons, Inc. v. DRK Photo, 882 F.3d 394, 410 (2d Cir.

2018). But because copyright licenses prohibit any use not authorized, a licensee

infringes the ownerʹs copyright if its use exceeds the scope of its license. Gilliam

v. Am. Broad. Cos., 538 F.2d 14, 20 (2d Cir. 1976) (noting that ʺ[o]ne who obtains

20
permission to use a copyrightedʺ work ʺmay not exceed the specific purpose for

which permission was grantedʺ and concluding that ʺunauthorized editing of the

underlying work, if proven, would constitute an infringement of the copyright in

that work similar to any other use of a work that exceeded the license granted by

the proprietor of the copyrightʺ); see also S.O.S., Inc. v. Payday, Inc., 886 F.2d 1081,

1088 (9th Cir. 1989). Thus, § 8.2(d) of the EPA arguably prohibits, at least

impliedly, MSEI and its suppliers from modifying Universalʹs pre‐existing

intellectual property.

The Copyright Act, however, provides an affirmative defense that

allows the owner of a copy of a computer program to copy or modify the

program for limited purposes without incurring liability for infringement. See 17

U.S.C. § 117(a). Section 117(a) provides, in relevant part:

Notwithstanding the provisions of section 106 [which lists the exclusive
rights of a copyright holder], it is not an infringement for the owner of a
copy of a computer program to make or authorize the making of another
copy or adaptation of that computer program provided:

(1) that such a new copy or adaptation is created as an essential
step in the utilization of the computer program in conjunction with
a machine and that it is used in no other manner . . . .

Thus, a defendant seeking protection under § 117(a) must demonstrate that the

new adaptation (1) was made by the ʺowner of a copy of [the] computer

21
program,ʺ (2) was ʺcreated as an essential step in the utilization of the computer

program in conjunction with a machine,ʺ and (3) was ʺused in no other manner.ʺ

17 U.S.C. § 117(a); see Krause v. Titleserv, Inc., 402 F.3d 119, 122 (2d Cir. 2005). We

consider each requirement in turn.

1. MSEI Is the ʺowner of a copy of a computer
programʺ

We have held that ʺownerʺ as used in § 117(a) does not require

formal title in a program copy. Titleserv, 402 F.3d at 123. Instead, ʺcourts should

inquire into whether the party exercised sufficient incidents of ownership over a

copy of the program to be sensibly considered the owner of the copy for

purposes of § 117(a).ʺ Id. at 124.

In Titleserv, we found the following facts sufficient to consider

defendant an owner under § 117(a): defendant paid plaintiff ʺsubstantial

consideration to develop the programs for its sole benefitʺ; plaintiff ʺcustomized

the software to serve [defendantʹs] operationsʺ; plaintiff stored copies ʺon a

server owned by [defendant]ʺ; plaintiff ʺnever reserved the right to repossess the

copies used by [defendant] and agreed that [defendant] had the right to continue

to possess and use the programs forever, regardless whether its relationship with

22
[defendant] terminatedʺ; and ʺ[defendant] was similarly free to discard or

destroy the copies any time it wished.ʺ Id.

For similar reasons, we conclude as a matter of law that MSEI

owned copies of the server software within the meaning of § 117(a). MSEI paid

Universal over $1 million for the combined hardware and software solution.

Universal customized the software to serve MSEIʹs precise needs.3 Universal

expressly ʺprovidedʺ a copy of the server software to MSEI with the sole

condition that ʺMSEI assume[d] the risk of invalidating the warranty in the event

a change made by MSEI to the source code cause[d] damage to any of the THS

line hardware.ʺ J. Appʹx at 2361. Universal granted MSEI and its suppliers

broad rights to the server source code ‐‐ a perpetual, worldwide license to use,

reproduce, and display the software for MSEIʹs internal use. J. Appʹx at 2336.

Although the terms of the EPA expired on December 31, 2012, MSEIʹs rights to

3 Frank Caudrillier, Universalʹs project manager for the THS, testified that ʺthe
THS server was developed based on . . . some common tools that we had . . . developed
previously, and then customized . . . to respond to the requirements of [MSEI].ʺ J.
Appʹx at 1511. Kevin Ford, Universalʹs lead software engineer, testified that the server
source code was ʺcreated specifically for the THS lineʺ to ʺimplement[] MSEIʹs
requirements.ʺ Id. at 1668‐69. A change order in evidence shows that modifications
were made to ʺTHS interface, module information table, reseat and correlate,ʺ which
Ford testified were modifications to the server source code. Id. at 1670‐71.

23
the software ʺcontinue perpetually and do not terminate upon completion of the

services.ʺ Id. at 2337. Nothing in the arrangement between MSEI and Universal

indicates that MSEI was in any way restricted from discarding or disposing of

the software as it wished. For all of these reasons, MSEI was an owner of the

station and server source code under § 117(a).

Universal contends that MSEI was not an owner because § 8.2(d)

ʺseverely limitedʺ MSEIʹs rights to the software. For support, it cites DSC

Communications Corp. v. Pulse Communications, Inc., 170 F.3d 1354 (Fed. Cir. 1999).

But as we noted in Titleserv, the defendant in DSC Communications was expressly

prohibited from using the software on hardware other than that provided by

plaintiff. 402 F.3d at 123. MSEI faced no such prohibition. In fact, under the

EPA, MSEI was authorized to use and reproduce the software at will so long as

its uses were ʺinternal.ʺ

Universalʹs argument does find some additional support from the

Ninth Circuit, which has held ʺthat a software user is a licensee rather than an

owner of a copy where the copyright owner (1) specified that the user is granted

a license; (2) significantly restricts the userʹs ability to transfer the software; and

(3) imposes notable use restrictions.ʺ Vernor v. Autodesk, Inc., 621 F.3d 1102, 1111

24
(9th Cir. 2010) (footnote omitted). Although the EPA granted MSEI a license that

was limited to MSEIʹs internal use, it subsequently transferred a copy of the

server source code to MSEI with the sole condition that MSEI would be liable for

any damage caused by modifications. J. Appʹx at 2361. Several Universal

employees, including its executives, as well as MSEI employees, testified that this

provision resolved the issue of ʺsource code ownership.ʺ Id. at 1048, 1270‐71,

1453‐54, 1545, 2126‐27. In an email to MSEI on October 31, 2008 ‐‐ the date of

final delivery ‐‐ Universal stated internally, ʺAs you can see, we are trying to get

away from the Source Code.ʺ Id. at 2632. It then told MSEI, ʺwe are ready to let

you assume ownership of the line.ʺ Id. at 3009. Thereafter, Universal instructed

its team to ʺget the source code to them todayʺ and to ʺbe sure it is packaged and

ready to [sic] (or email it to them or give them the key or whatever).ʺ Id. at 2632.

Thus, for the purposes of applying § 117(a), a reasonably jury could

only find that MSEI owned a copy of the THS software.

2. The Adaptation was ʺcreated as an essential step
in the utilization of the computer program in
conjunction with a machineʺ

To receive the protection of § 117(a), MSEI must also demonstrate

that its modification of the software was ʺan essential step in the utilization of the

computer program[s] in conjunction with a machine.ʺ In Aymes v. Bonelli, the
25
defendant retail store used programs to track inventory and sales, and generally

organize its records. 47 F.3d 23, 24 (2d Cir. 1995). The defendants modified the

programs to keep them up‐to‐date and to ensure their compatibility with

successive generations of computer systems. Id. at 26. We held that the

modifications were essential to the defendantsʹ utilization of the programs within

the meaning of § 117(a)(1) because the ʺadaptations were essential to allow use of

the program[s] for the very purpose for which [they were] purchased.ʺ Id. at 27.

In Titleserv, the defendant used the programs at issue ʺto track and

report on the status of client requests and other aspects of its operations.ʺ 402

F.3d at 120. The defendant modified the programs by correcting bugs,

ʺperforming routine tasks necessary to keep the programs up‐to‐date and to

maintain their usefulness to [defendant],ʺ incorporating the programs into a new

system implemented by defendant, and adding new capabilities to help ʺmake

the programs more responsive to the needs of [defendantʹs] business.ʺ Id. at 125.

We reiterated, as we originally held in Aymes, that ʺadaptation of the copy of

the[] software so that it would continue to function on the defendantsʹ new

computer systemʺ constituted an ʺessential stepʺ within the meaning of § 117(a).

Id. at 126. We further held that the ʺaddition of new features,ʺ which ʺwere not

26
strictly necessary to keep the programs functioning, but were designed to

improve their functionality in serving the business for which they were created,ʺ

were also ʺessential.ʺ Id.; see also Final Report of the National Commission on New

Technological Uses of Copyrighted Works 13 (1978) [hereinafter ʺCONTU Reportʺ]

(ʺ[A] right to make those changes necessary to enable the use for which it was

both sold and purchased should be provided. The conversion of a program from

one higher‐level language to another to facilitate use would fall within this right,

as would the right to add features to the program that were not present at the

time of rightful acquisition.ʺ). In doing so, however, we noted an important

limitation: an ʺessentialʺ improvement ought not to ʺharm the interests of the

copyright proprietor.ʺ Id. at 129 (citing CONTU Report at 13).

As Universalʹs witnesses testified, the copy of the server software

given to MSEI was ʺpretty much identicalʺ to the copy owned by MSEI. J. Appʹx

at 1724. The modifications that were made were undertaken ʺto help improve

efficiency of the line,ʺ id. at 1633, and to enable the server software to ʺsupport

. . . communicating with all of the [new] stations.ʺ Id. at 1635‐38. The

modifications were, therefore, ʺdesigned to improve [the server source codeʹs]

27
functionality in serving the business for which [it was] created.ʺ Titleserv, 402

F.3d at 126.

Universal claims that MSEIʹs provision of the source code to MTA ‐‐

ʺa competitorʺ of MSEI ‐‐ is exactly the sort of harm we indicated in Titleserv

might present ʺ[a] different scenario.ʺ Id. We disagree that this is the sort of

harm envisioned by § 117(a). By its terms, § 117(a) permits the owner of a copy

ʺto make or authorize the making . . . of another adaptation.ʺ 17 U.S.C. § 117(a)

(emphasis added). And, as we held above, Universal expressly authorized MSEI

and its suppliers and subcontractors to use and reproduce the software at issue.

True, alterations that ʺsomehow interfere[] with [a copyright ownerʹs] access to,

or ability to exploit, the copyrighted workʺ might render modifications non‐

essential under § 117(a), but where the copyright owner ʺenjoy[s] no less

opportunity after . . . changes, than before, to use, market, or otherwise reap the

fruits of the copyrighted programs that he created,ʺ the changes may properly be

considered essential under § 117(a). Titleserv, 402 F.3d at 129.

MSEIʹs use did not inhibit Universalʹs ability to market or sell its

server software to others, nor did it divulge sensitive Universal information or

enrich MSEI or MTA at the expense of Universal. MSEI made and authorized the

28
making of minor modifications, narrowly tailored to adapting the server

software for the use for which it was designed ‐‐ orchestration of the test handing

stations to ensure the quality of MSEIʹs implantable medical devices.

Accordingly, we hold that a reasonable jury could only find that the

modifications made by MSEI were essential as they allowed the existing server

software to interact with additional systems in the manner intended when the

source code was developed for MSEI.

3. The Adaptation was ʺused in no other mannerʺ

Finally, to warrant the protection of § 117(a), MSEI must show that

the server software was ʺused in no other manner,ʺ that is, it was used only to

make an adaptation as an essential step in utilizing the software in conjunction

with the test handling system. Universal argues that MSEIʹs modification of the

server software to operate with new machines, rather than the existing machines

created by Universal, defeats MSEIʹs claim to protection from § 117(a).

ʺWhether a questioned use is a use in another manner . . . depend[s]

on the type of use envisioned in the creation of the program.ʺ Titleserv, 402 F.3d

at 129. The server software was designed to be the ʺbrains of the operation,ʺ J.

Appʹx at 988, which ʺsynchronize[d] the activities of the hardware and softwareʺ

and was ʺresponsible for coordinating the movement of the module trays,ʺ id. at
29
2606. These are precisely the purposes for which MSEI and MTA made

modifications, as indicated in the Statement of Work. See id. at 2366 (ʺUpdate

THS Server software to add functionality for the new stations.ʺ); see also id. at

2367 (ʺScope of the project . . . is first to replicate the existing system . . . , and

then expand this configuration to add the capability to add three . . . electrical

testers . . . , one RF testing stations and one Shaker test station.ʺ). There is

nothing in the record to suggest that the server source code was used for any

purpose other than to adapt the system to handle new testing stations for MSEIʹs

internal use. See Titleserv, 402 F.3d at 130 (ʺWhat is important is that the

transaction for which the programs are used is the type of transaction for which

the programs were developed.ʺ). Thus, MSEI ʺsimply increased the versatility of

the programs by allowing themʺ to interoperate with new test handling stations,

which ʺconstitutes use in the same manner, with the benefit of an adaptation

increasing versatility.ʺ Id.

Moreover, the server software customized by Universal for MSEI

was part of the first phase of MSEIʹs multi‐phased test handling system project.

Universal was aware that the project had additional phases when it signed the

EPA, and at that time it had no guarantees that it would be chosen to supply the

30
later phases. The addition of new systems was, therefore, a use contemplated at

the outset.4

For the foregoing reasons, we conclude as a matter of law that it was

not an infringement for MSEI as the ʺowner of a copy of a computer program,ʺ or

MTA as MSEIʹs supplier, to ʺmake or have made [an] adaptation,ʺ where ʺsuch

adaptation was created as an essential step in the utilization of the computer

program in conjunction with a machine and . . . in no other manner.ʺ 17 U.S.C.

§ 117(a).

II. Breach of Contract

MSEI and MTAʹs use and reproduction of Universalʹs pre‐existing

intellectual property for use in subsequent phases of the THS was non‐infringing

because defendants were expressly licensed to do so under § 8.2(d) of the EPA.

See supra Part I.B.1. It necessarily follows that MSEIʹs use and reproduction of the

source code was not in breach of the EPA. See Davis, 505 F.3d at 100; Bourne, 68

F.3d at 631. Universalʹs breach of contract claim is thus reduced to its assertion

that MSEI breached the EPA by modifying the server source code. We do not

4 We note also that Universal was aware that the project to ʺreplicate the existing
systemʺ was awarded to MTA in April 2010, J. Appʹx at 1014, 2878, and yet it did not
object to MTAʹs provision of subsequent phases of the system, including modifying the
server source code, until July 2013 when this action was filed.
31
reach the merits of this question, however, because what remains of Universalʹs

breach of contract claim is preempted by the Copyright Act.

The Copyright Act exclusively governs a claim when (1) the

particular work to which the claim is being applied falls within the type of works

protected by the Copyright Act under 17 U.S.C. §§ 102 and 103, and (2) the claim

seeks to vindicate legal or equitable rights that are equivalent to one of the

bundle of exclusive rights already protected by copyright law under 17 U.S.C.

§ 106. Briarpatch L.P. v. Phoenix Pictures, Inc., 373 F.3d 296, 305 (2d Cir. 2004). ʺA

state law right is equivalent to one of the exclusive rights of copyright if it may

be abridged by an act which, in and of itself, would infringe one of the exclusive

rights.ʺ Forest Park Pictures v. Universal Television Network, Inc., 683 F.3d 424, 430

(2d Cir. 2012) (internal quotation marks omitted). ʺʹBut if an extra element is

required instead of or in addition to the acts of reproduction, performance,

distribution or display, in order to constitute a state‐created cause of action,ʹ

there is no preemption.ʺ Id. (quoting Comput. Assocs. Intʹl, Inc. v. Altai, Inc., 982

F.2d 693, 716 (2d Cir. 1992)). Preemption, therefore, turns on ʺwhat [the] plaintiff

seeks to protect, the theories in which the matter is thought to be protected and

32
the rights sought to be enforced.ʺ Comput. Assocs., 982 F.2d at 716 (internal

quotation marks omitted).

As we have recognized, ʺpreemption cannot be avoided simply by

labeling a claim ʹbreach of contract.ʹʺ Forest Park, 683 F.3d at 432; see also 5

Nimmer on Copyright § 19D.03[C][2][b] (suggesting that a contract that ʺdoes

not purport to give [the plaintiff] any protection beyond that provided . . . by

copyright law itselfʺ would be preempted). In Forest Park, we held the contract at

issue not to be preempted because it included an ʺextra elementʺ of a promise to

pay, and plaintiff sought contract damages when defendant used plaintiffʹs

copyrighted work without paying for the privilege. Forest Park, 683 F.3d at 428.

Here, by contrast, there is no dispute over payment. Universal does not argue

that defendants violated the EPA by failing to pay for use of the intellectual

property.

What remains of Universal breach of contract claim is that MSEIʹs

modification of the source code exceeded the scope of the license contained in the

EPA. This claim does not include an ʺextra elementʺ that is different from those

of its copyright infringement claim. The prohibition against modification is not

explicit in the EPA; it is, instead, arguably implied because copyright licenses are

33
assumed to permit those uses not expressly authorized. Gilliam, 538 F.2d at 20.

Universal therefore necessarily seeks to vindicate its exclusive rights under 17

U.S.C. § 106. That Universal and MSEI are in contractual privity does nothing to

change the fact that vindication of an exclusive right under the Copyright Act,

read into a license by negative implication, is preempted by the Copyright Act.

See 3 Nimmer § 10.15[A] (noting that ʺuse by the grantee without authority from

the grantorʺ leads to the legal consequence ʺthat the granteeʹs conduct may

constitute copyright infringementʺ). In Kamakazi Music Corp. v. Robbins Music

Corp., we held that a licensorʹs suit against a licensee whose license had expired

was for copyright infringement, not breach of contract. 684 F.2d 228, 230 (2d Cir.

1982). This rationale extends equally to a licensor whose use arguably exceeds

the scope, rather than the duration, of a license. See Marshall v. New Kids On The

Block Pʹship, 780 F. Supp. 1005, 1008‐09 (S.D.N.Y. 1991). Because this portion of

Universalʹs breach of contract claim seeks solely to vindicate an exclusive right

under the Copyright Act, it is preempted. It thus fails as a matter of law because,

as discussed supra Part I.B.2, the affirmative defense of § 117(a) bars recovery to

Universal on the theory that MSEI or MTAʹs modifications to the server source

code infringed Universalʹs copyright.

34
III. Misappropriation of Trade Secrets

A plaintiff claiming misappropriation of a trade secret must prove

that (1) ʺit possessed a trade secret,ʺ and (2) the trade secret was used by

defendant ʺin breach of an agreement, confidence, or duty, or as a result of

discovery by improper means.ʺ Integrated Cash Mgmt. Servs., Inc. v. Digital

Transactions, Inc., 920 F.2d 171, 173 (2d Cir. 1990). We do not reach the merits of

this claim, however, because it is time‐barred by the applicable statute of

limitations.

In New York, a cause of action for the misappropriation of trade

secrets is governed by a three‐year statute of limitations, while claims for

equitable relief are subject to a six‐year statute of limitations. Compare N.Y.

C.P.L.R. § 214(4) (providing three‐year‐statute of limitations for claims of

misappropriation of trade secrets), with id. § 213(1) (providing six‐year statute of

limitations for claims seeking equitable relief). Universal argues that its claim for

injunctive relief is governed by the more generous six‐year limitations period.

ʺ[C]ourts determine the applicable limitations period . . . by

analyzing the substantive remedy that the plaintiff seeks.ʺ ABS Entmʹt, Inc. v.

CBS Corp., 163 F. Supp. 3d 103, 108 (S.D.N.Y. 2016) (applying New York law).

35
ʺWhere the remedy sought is purely monetary in nature, courts construe the suit

as alleging ʹinjury to propertyʹ within the meaning of CPLR 214(4), which has a

three‐year limitations period.ʺ IDT Corp. v. Morgan Stanley Dean Witter & Co., 12

N.Y.3d 132, 139 (2009). In IDT, the equitable relief was incidental to the damages

sought, so ʺlooking to the reality, rather than the form, of [the] action,ʺ the New

York State Court of Appeals concluded that IDT principally sought a monetary

remedy and, thus, held that the three‐year statute of limitations applied. Id. at

139‐40. Similarly, in this case, the main remedy that Universal seeks is monetary

damages. Universalʹs Third Amended Complaint requested that it be awarded

profits and a royalty, not just an injunction, in connection with its

misappropriation of trade secrets claim, as well as double damages, punitive

damages, and attorneysʹ fees. Therefore, because the reality of the cause of action

is that it is one for damages, not injunctive relief, the three‐year statute of

limitations applies.

Universal argues that this statute of limitations should be tolled or

extended on a continuing tort theory. ʺA continuing tort theory may apply . . .

where the plaintiff alleges that a defendant has kept a secret confidential but

continued to use it for commercial advantage.ʺ Andrew Greenberg, Inc. v. Svane,

36
Inc., 830 N.Y.S.2d 358, 362 (App. Div. 2007). ʺWhere, however, the ʹplaintiff had

knowledge of the defendantʹs misappropriation and use of its trade secret, the

continuing tort doctrine does not apply.ʹʺ PaySys Intʹl, Inc. v. Atos Se, No. 14‐

10105, 2016 WL 7116132, at * 9 (S.D.N.Y. Dec. 5, 2016) (quoting VoiceOne

Commcʹns, LLC v. Google Inc., No. 12‐9433, 2014 WL 10936546, at *10 (S.D.N.Y.

Mar. 31, 2014)) (citing cases). Here, Universal had knowledge of MSEI and

MTAʹs alleged misappropriation and use of its trade secret and, accordingly, the

continuing tort theory does not apply.

The evidence shows that Universal was put on notice of its

misappropriation of trade secrets claim more than three years prior to filing its

complaint on July 15, 2013. Accrual of the statute of limitations begins when ʺa

reasonably diligent person in plaintiffʹs position would have been put on inquiry

as to theʺ claim. Stone v. Williams, 970 F.2d 1043, 1048 (2d Cir. 1992). Universalʹs

executive chairman, Jean‐Luc Pelissier, testified that in 2009 he understood that

there were other companies besides Universal bidding on THS2. He also

testified that he understood that when MSEI said it wanted to replicate the THS

line, that included the software. On April 16, 2010, MSEI sent an email to

Universal informing Universal that MSEI awarded the business for the THS

37
replication project to MTA. Based on this evidence, a reasonably diligent person

would have been put on notice of the misappropriation of trade secrets claim ‐‐

that is, that MSEI gave Universalʹs software and source code to MTA so MTA

could replicate and modify it to build the second THS line. Yet Universal did not

assert the claim until more than three years later, in July of 2013. Thus,

Universalʹs claim is time‐barred.

IV. Unfair Competition

Universalʹs remaining claim against MTA for unfair competition

was also properly dismissed. ʺThe essence of an unfair competition claim under

New York law is that the defendant has misappropriated the labors and

expenditures of anotherʺ with ʺsome element of bad faith.ʺ Saratoga Vichy Spring

Co. v. Lehman, 625 F.2d 1037, 1044 (2d Cir. 1980). MTA was informed prior to

executing the MTA Agreement that MSEI and its suppliers were licensed to use

and reproduce Universalʹs source code. Moreover, Bob Archer, MTAʹs CEO and

co‐owner, testified at trial that MTA relied on the language of the EPA in

agreeing to supply MSEI with subsequent phases of the THS.

As we have held, the EPA in fact authorized MTA as MSEIʹs

supplier to use and reproduce Universalʹs pre‐existing intellectual property for

38
the THS replication project. See supra Part I.B.1. And to the extent MTA adapted

the server source code, such adaptions were authorized under federal law. See

supra Part I.B.2. In these circumstances, no reasonable juror could have found

that MTA acted in bad faith in agreeing to replicate the THS line for MSEIʹs

internal use and for no other purpose. See Jeffrey Milstein, Inc. v. Gregor, Lawlor,

Roth, Inc., 58 F.3d 27, 35 (2d Cir. 1995). Accordingly, we affirm the district courtʹs

dismissal of this claim.

CONCLUSION

Accordingly, for the reasons set forth above, the judgment of the

district court is AFFIRMED.

39