United States District Court, N.D. Illinois
March 24, 2004.
HOTSAMBA, INC., Plaintiff
CATERPILLAR INC., Defendant
The opinion of the court was delivered by: JOAN GOTTSCHALL, District Judge
MEMORANDUM OPINION AND ORDER
Plaintiff HotSamba, Inc. ("HotSamba") has filed a three-count lawsuit
against Defendant Caterpillar, Inc. ("Caterpillar") arising from
Caterpillar's use of HotSamba's alleged proprietary inventory management
software. The Complaint alleges that Caterpillar infringed on HotSamba's
copyright for the software (Count I), misappropriated HotSamba's trade
secrets (Count II), and breached a Licensing Agreement which HotSamba
alleges governed Caterpillar's use of the software (Count III),
Caterpillar has moved for summary judgment on Counts n and III, arguing
that (a) HotSamba's disclosure of the software source code bars its claim
for misappropriation of trade secrets,*fn1 and (b) HotSamba's breach of
contract claim is preempted under Federal copyright law. For the reasons
stated below, Caterpillar's motion for summary judgment on Counts n and
III is denied.
This case arises from a dispute between HotSamba and Caterpillar over
ownership and use of inventory management software developed by HotSamba
known as "net-Source" and a customized version of this software called
Build 46. The parties have had a business relationship since at least
1995 when they entered into a Consultant Agreement by which HotSamba
agreed to provide services to design and develop certain software for
Caterpillar. The parties agreed that Caterpillar would own the software
developed under the Consultant Agreement.
The primary dispute in this case is over the origin of the net-Source
software and the Build 46 customization. HotSamba claims that it
independently developed the net-Source software in 1997-98, and that it
created a customized version of net-Source called Build 46 that it
subsequently delivered to Caterpillar. HotSamba claims that, pursuant to
the parties' subsequent Licensing Agreement, Caterpillar agreed to keep
the Build 46 software confidential, but that Caterpillar later breached
that agreement by selling Build 46 to another software development firm,
i2 Technologies, Inc. ("i2"). Caterpillar, on the other hand, contends
that HotSamba did not develop net-Source independently, but rather
derived it from software that HotSamba developed for Caterpillar under
the 1995 Consultant Agreement. Caterpillar argues that, consequently, it
owned Build 46 before it ever signed the License Agreement.
On September 8, 1998, HotSamba delivered the source code for Build 46
to Caterpillar. The delivery of source code included the human
understandable computer language version of the software, including
programmer notes, and other supporting documentation necessary to use and
support the software. HotSamba stated that this delivery was tantamount
to a written disclosure to Caterpillar, providing comprehensive
information regarding the design, architecture, and functionality of
net-Source. This transfer occurred eight months before the
parties entered into any license agreement. HotSamba alleges that, during
those eight months, Caterpillar examined the code and functionality and
could thereby determine the code's origins.
During the period of disclosure before the parties entered into the
License Agreement, HotSamba informed Caterpillar that net-Source was
HotSamba's proprietary, confidential product. HotSamba made such
statements in several pieces of correspondence to Caterpillar detailing
the contract negotiations and progress for the net-Source software,*fn2
and Caterpillar did not express any disagreement with treating the
net-Source software as confidential.*fn3 HotSamba alleges that it made
all of its employees that worked on the net-Source software sign
confidentiality agreements. Further, at least some of the software
delivered to Caterpillar contained a copyright and confidentiality
After the disclosure period, on April 30, 1999, HotSamba and
Caterpillar entered into the "Software License Agreement," Under the
License Agreement, Caterpillar agreed, among other things, to refrain
from unauthorized disclosure of confidential information. Further, the
agreement allowed Caterpillar to create derivative works of the software
and stated that Caterpillar owned these derivative works provided that
Caterpillar did not transfer such works to others.
On or about September 25, 2000, Caterpillar entered into an agreement
with i2 called the "Software Purchase and Alliance Agreement." Under this
agreement, Caterpillar sold i2 software called "WECAP," which Caterpillar
developed from the Build 46 software. HotSamba claims that Caterpillar's
transfer of WECAP to i2 infringed on HotSamba's copyright to Build
46, breached the License Agreement and constituted a misappropriation of
Hot Samba's trade secrets.
Subsequent to Caterpillar's sale of WECAP to i2, HotSamba registered
its copyright to Build 46. On February 9, 2001, the U.S. Copyright Office
issued a Certificate of Copyright Registration to HotSamba for the
net-Source software. However, during the course of this litigation,
HotSamba discovered that the code deposited with its registration
application did not reflect the code for the Build 46 version of
net-Source. HotSamba has twice attempted to remedy the error by
submitting a new registration application. On September 15, 2003,
HotSamba submitted its third and most recent registration application
for Build 46. Simultaneously, it requested that the Copyright Office
cancel the two prior registrations for Build 46. Because the copyrighted
material allegedly contained trade secrets, the deposit only included the
first and last ten pages of the Build 46 source code. The Copyright
Office issued HotSamba's registration for Build 46 effective September
19, 2003.*fn4 This registration identified Build 46 as an unpublished
Summary judgment is appropriate if "the pleadings, depositions, answers
to interrogatories, and admissions on file, together with the
affidavits, if any, show that there is no genuine issue as to any
material fact and that the moving party is entitled to a judgment as a
matter of law." Fed.R.Civ.P. 56(c). The moving party has the initial
burden of proving that no genuine issue of material fact exists.
Matsushita Elec. Indust. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574,
(1986). Once the moving party shows that there is no genuine issue of
material fact, the burden shifts to the non-moving party to designate
specific facts showing that there is a genuine issue for trial. Celotex
Corp. v. Catrett, 477 U.S. 317, 324 (1986). The court must examine the
admissible evidence in the light most favorable to the non-moving party
and draw all reasonable inferences in favor of that party. Anderson v.
Liberty Lobby. Inc., 477 U.S. 242, 255 (1986).
I. Misappropriation of Trade Secrets.
Caterpillar claims that the court should grant summary judgment on
Count II, arguing that HotSamba's disclosure of Build 46 to Caterpillar
prior to execution of the License Agreement vitiated any trade secret
protection for that software under Illinois law. However, because there
are disputed issues of material fact as to whether HotSamba made
sufficient efforts to maintain secrecy of its software to retain trade
secret protection, summary judgment on Count n is inappropriate.
Under Illinois law, a trade secret is defined as
information, including but not limited to, technical
or non-technical data, a formula, pattern,
compilation, program, device, method, technique,
drawing, process, financial data, or list of actual or
potential customers or suppliers, that:
(1) is sufficiently secret to derive economic value,
actual or potential, from not being generally known to
other persons who can obtain economic value from its
disclosure or use; and
(2) is the subject of efforts that are reasonable
under the circumstances to maintain its secrecy or
765 I.L.C.S. § 1065/2(d) (2001). Absolute secrecy is not required to
maintain a trade secret Indeed, "[t]he mere fact that [a trade secret
owner] disclosed its trade secrets to `a limited number of outsiders for
a particular purpose'-[does] not forfeit trade secret protection."
Rockwell Graphic Sys., Inc. v. DEV Indus., Inc., 925 F.2d 174
, 177 (7th
Cir. 1991) (quoting A.H. Emery Co. v. Marcan Prods. Corp., 389 F.2d 11
16 (2d Cir. 1968)). In other words, a party seeking trade secret
protection need not establish that it took every available precaution to
maintain secrecy as long as it made reasonable efforts to maintain its
software as secret. "[O]nly in an extreme case can what is a `reasonable'
precaution be determined on a motion for summary judgment, because the
answer depends on a balancing of costs and benefits that will vary from
case to case and so require estimation and measurement by persons
knowledgeable in the particular field of endeavor involved." Rockwell,
925 F.2d at 178-79. Therefore, "[w]hether the measures taken by a trade
secret owner are sufficient to satisfy the [Illinois Trade Secrets] Act's
reasonableness standard ordinarily is a question of fact for the jury."
Learning Curve Toys, Inc. v. Playwood Toys, Inc., 342 F.3d 714
, 725 (7th
Here, HotSamba has shown that between the time that it disclosed the
software and the time that the parties signed the License Agreement it
sent Caterpillar a number of documents including draft license agreements
that stated that net-Source was a confidential and proprietary product.
HotSamba's disclosure to a single customer with whom it had an
established relationship and to whom HotSamba communicated that the
software was confidential is not sufficient to show on summary judgment
that HotSamba ceased to enjoy any trade secret protection for its
software. See Warrington Assocs., Inc. v. Real-Time Eng'g Sys., 522 F.
Supp., 367, 369 (N.D. Ill. 1981) (court refuses to grant summary judgment
where claimant disclosed a confidential manual to its customers after
receiving assurances of confidentiality).
In support of its motion for summary judgment on Count II, Caterpillar
relies heavily on Nat'l Presto Indus., Inc. v. Hamilton Beach, Inc., No.
88-C-10567, 1990 U.S. Dist. LEXIS 16758 (N.D. Ill. Dec. 10, 1990) and Web
Communications Group, Inc. v. Gateway 2000, Inc., 889 F. Supp. 316 (N.D.
Ill. 1995). These cases are distinguishable from the instant case because
claimant in Presto disclosed its product to one hundred customers and
placed its product on public sale, Nat'l Presto, 1990 U.S. Dist. LEXIS
16758, at *2-3, while the claimant in Web disclosed its product to
competitors without restriction, Web Communications, 889 F. Supp. at
320. Here, HotSamba disclosed its software to a single customer,
Caterpillar, with whom HotSamba had an established relationship going
back at least to 1995. Dealings between parties often require the parties
to exchange information, even confidential trade secret information,
during the negotiation of final agreements. Such disclosure does not
automatically destroy any trade secret protection. Determination of this
issue will require a fact intensive inquiry into when information was
disclosed and what understandings the parties had about confidentiality.
Learning Curve, 342 F.3d at 723 ("[T]he question of whether certain
information constitutes a trade secret ordinarily is best resolved by a
fact finder after full presentation of evidence from each side.")
(internal quotations and citation omitted). Since this issue is
inappropriate for resolution on summary judgment, the motion for summary
judgment on Count II is denied.
II. Preemption of Breach of Contract Claim (Count III).
Caterpillar argues that HotSamba's breach of contract claim is
preempted by its copyright infringement claim under 17 U.S.C. § 301(a).
However, because the contract between the parties created rights and
obligations beyond those protected under federal copyright law,
HotSamba's contract-based claim is not preempted. Summary judgment on
Count III is, therefore, denied.
17 U.S.C. § 301(a) creates a two prong test for preemption of a right
under state law: (1) the work must be fixed in a tangible medium of
expression and be copyrightable subject matter under Section 102 of the
Copyright Code; and (2) the right asserted must be equivalent to any of
the rights specified in Section 106. Baltimore Orioles, Inc. v. Major
League Baseball Players Assoc., 805 F.2d 663, 674 (7th Cir. 1986).
Section 106, in turn, provides that a copyright owner has the exclusive
rights to "(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." 17 U.S.C. § 106. Here, the first prong of the
Section 301 preemption test is satisfied because Build 46 is fixed in a
tangible medium and copyrightable subject-matter. See ProCD, Inc. v.
Zeidenberg, 86 F.3d 1447, 1453 (7th Cir. 1996). The question, therefore,
is whether HotSamba's breach of contract claim involves rights that are
not equivalent to the exclusive rights under Section 106.
The Seventh Circuit has taken a narrow view of preemption, concluding
that breach of contract claims are almost never preempted by copyright
law. Id. at 1454 ("[C]ourts usually read preemption clauses to leave
private contracts unaffected"). While declining to adopt a rule that any
action with the label "breach of contract" is outside the preemption
clause, the Seventh Circuit has found that private contracts are
generally of a different scope than copyright protection because "[a]
copyright is a right against the world. Contracts, by contrast, generally
affect only their parties; strangers may do as they please, so contracts
do not create `exclusive rights."' Id. Speaking specifically of software
licenses, the ProCD court held that "[w]hether a particular license is
generous or restrictive, a simple two-party contract is not `equivalent
to any of the exclusive rights within the general scope of copyright' and
therefore may be enforced." Id. Specifically, the ProCD court held that a
shrinkwrap license which limited uses of software to non-commercial
purposes was not preempted by copyright law. Id.
This view of copyright preemption is not unique to the Seventh
Circuit, and the majority of courts addressing preemption of breach of
contract claims by copyright have found that such claims are not
preempted. See, e.g., Bowers v. Baystate Techs., Inc., 320 F.3d 1317, 1325
(Fed. Cir. 2003) (applying ProCD and holding that copyright law did not
preempt breach of contract claims for violation of a provision that
prohibited reverse engineering); Wrench LLC v. Toco Bell Corp., 256 F.3d 446,
456 (6th Cir. 2001) (holding that the extra element of a promise to pay
rendered the action for breach of an implied contract qualitatively
different than a copyright
infringement claim and this difference includes "the requirement of proof
of an enforceable promise and a breach thereof); National Car Rental
Sys., Inc. v. Computer Assoc. Int'l, Inc., 991 F.2d 426, 431-33 (8th
Cir. 1993) (holding that the contractual restriction on use of the
software made the breach of contract action qualitatively different than
an action for copyright); Taquino v. Teledyne Monarch Rubber, 893 F.2d 1488,
1501 (5th Cir. 1990) (holding that breach of contract for using drawings
in sales materials, as prohibited by the contract, was not preempted by
copyright law because it involved the extra element of a promise); Acorn
Structures, Inc. v. Swantz, 846 F.2d 923, 926 (4th Cir. 1988) (holding
that breach of contract claim was not preempted because breach of
contract was a distinct cause of action).
Applying the ProCD holding to the facts of this case, the court finds
that Count III for breach of contract is not preempted by federal
copyright law. Here, the License Agreement created rights and obligations
that were different from those protected under copyright law. Under the
License Agreement, Caterpillar agreed to refrain from unauthorized
disclosure of HotSamba's confidential information. Further, the agreement
allowed Caterpillar to create derivative works of the software, provided
that Caterpillar did not transfer such works to others. Those provisions
on which HotSamba bases its breach of contract claim are not
equivalent to the rights specified in Section 106 as they are both more
expansive, allowing Caterpillar to perform acts that would otherwise be
copyright infringement, and more restrictive, requiring confidentiality
of the source code. Therefore, Count III for breach of contract is not
preempted under 17 U.S.C. § 301(a).
Additionally, for the reasons stated above in its discussion of Count
II, the court finds that the issue of whether the software was
confidential at the time the parties entered the License Agreement, such
that Caterpillar could have breached the confidentiality provision of the
contract, is not appropriate for resolution on summary judgment. Because
Count III is not
preempted by copyright law and because the confidentiality issue is
not appropriate for resolution on summary judgment, the motion for
summary judgment on Count III is denied.
Caterpillar's motion for summary judgment on Counts n and III is