Copyright in Software vs. Antitrust

copyright in software

Dan-el Advanced Software Solutions launched a software product 15 years ago called Danel 2000 that manages securities and other financial products. The defendant, Gal Snapir developed a competing product in 2009 that plaintiff alleged was a copy of Danel 2000. Dan-el obtained a temporary injunction, and the current ruling relates to an attempt to obtain a permanent injunction and compensation for copyright infringement, theft of trade secrets and unjust enrichment. The defendant claimed that the functionality largely dictates form, and so to prevent unfair monopolies, it should be allowed to copy certain elements of a product.

The present case is interesting, since it relates to the balance between the conflicting interests of unfair and fair competition, monopolies, copyright and trade-secrets. If the source code is not copied, is it legitimate to copy the interface of an established product to facilitate market penetration by making a product familiar and easy to use by users?

Michal Agmon Gonen ruled that despite being functional, the software was a creative work and protected by Copyright Law. Since the software sold by Snapir was significantly similar to that of Dan-el and that he had access to Dan-el’s software, the onus was on him to prove that he had not copied the software. Since he was unable to do so, she found in favour of the plaintiff. The damages awarded were large but not maximum statutory for one (ongoing) case of infringement, and not for each and every installation of the software. Since there were no profits, there was no unjust enrichment, and since she found copyright infringement, she found the additional claim of using trade-secrets unnecessary, particularly as there were no grounds to award damages twice.

Whilst believing that copyright in software should generally be interpreted narrowly, and that the arrangement of material and functionality cannot be protected, Ms Agmon-Gonen noted that there were other competing systems and that the similarities between that sold be defendant and by the plaintiff were significant.

The decision cites a large number of Hebrew research papers, Shlomit Yanitzky-Ravid’s new book, and the related laws. Academics at ONO, Hebrew University, Tel Aviv and Haifa are all cited. There is also extensive reference to case-law. In all, a scholarly but laborious decision.

Background

Dan-el is a lead player in the Israel financial management market with some 40 employees. Banks, insurance companies, funds and investment companies use their software. Danel 2000 is the result of 150 man years at a cost of 12 – 13 million dollars. Gil Snapir is a systems engineer who established a software house 20 years ago that provides dedicated solutions to clients that include health funds, banks, high-tech companies and personnel companies. Until now, software products were provided to order, and Snapir did not provide off-the-shelf software packages. At the end of 2009, Snapir offered Dan-El’s clients a copycat product with same functionality and interfaces, for ease of use. Dan-el sued for compyright infringement, theft of trade secrets and unjust enrichment.

After Dan-El received a temporary injunction, Snapir responded claiming to have independently developed a program with similar functionality that was not to be considered a copy. On 5 January 2010, at a hearing before Judge Zefet, the sides agreed to appointment of an expert who would review the two programs and submit an opinion to the court. Attorney Gad Oppenheimer was appointed as the expert.

On 24 January 2010, Oppenheimer reported that:

  • The two systems are written in totally different programming languages and thus the code is not copied.
  • The interfaces are virtually identical, apart from one program titling a column Client’s Details, and the other Account Details.
  • Identical in every aspect, including number of files, names of fields (except the single example above), and names of variables
  • I found that the source code was not copied. The interface was copied. The database was copied. Snapir’s program copies large chunks of Dan-El’s program, including the interface and the database. These elements are significant parts of Dan-El’s program, and have an accumulative effect when considering whether they were copied, and so I conclude these were copied from Dan-El’s program into Sapir’s.

On the basis of the above report, Judge Zefet decided to implement a temporary injunction.

Request Under Contempt of Court Ordinance

On 11 October 2010, Dan-EL sued that during May 2010 the defendant continued to sell Snapir’s software and to offer it for sale, possibly with minor variations, in contempt of the Court injunction.  The Defendant responded that the New Financier was independent, with a different interface and was not influenced by Dan-El’s program beyond the fact that it provided a complete solution to the managing security portfolios.

On having the case transferred to her, On 21 February 2011, Judge Agmon-Gonen requested that Adv. Oppenheimer review the interface and database of the new version.

On 2 June 2011, Adv. Oppenheimer concluded that the interface of the revised version of the New Financier program had several differences and could not be considered as copied from that of Dan-el but was functionally equivalent. He went on to conclude that the similarities in the “how” were significant, in that the New Financier could not be considered an independent creation, but was significantly influenced by Dan-el’s program and tries to emulate Dan-el’s program, perhaps to enable ease of transfer of users from one system to another, maybe for some other reason.

As far as the database was concerned, Snapir had changed column order and column length and names of fields in the individual tables, but the functions of each table remained the same. He felt that the database could no longer be considered “copied”, but the similarities were too many for it to be considered an independent piece of work. On a scale of 1-10, the similarities, were, he felt 6-7.

Following the report, On 4 January 2012, Ms Agmon-Gonen rejected the Contempt of Court allegations, considering the changes significant enough that there was no prima facie basis to conclude that the temporary injunction was ignored. She noted however, that although her ruling would relate to the original earlier version of Financier, it would have ramifications and relevance to the new version which could be considered a sibling program.

Plaintiff:

The plaintiff alleged that since the interface, database, program structure, system analysis and documents generated by Financier were copied from Dan’el’s program, he was entitled to statutory damages of 100,000 Shekels for every installation of the program at every third-partycomputer.

The plaintiff went on to charge that cracking their source code was achieved with illegitimate means and was to be considered a breach of their trade secret. They requested 100,000 Shekels for this infringement. Furthermore, all profit from this was to be considered unjust enrichment and should be surrendered to the plaintiff.

Defendant:

The defendant argued that the desire to prevent monopolies must allow competing programs to emulate the functionality of market leading software and to have a similar general look and feel so that users could be wooed away.

The defender acknowledged using the plaintiff’s concept, but claimed to have separately and differently implemented it. He claimed to have invested over a million dollars and 13,000 hours in programming in a different language. The interface was graphically similar to that of the plaintiff at the customers’ request and due to functional considerations. The similar purpose of the two programs requires functionality which causes similarities in layout.

Furthermore, if the court finds that there was infringement, it should be considered as a single continuous infringement and not as separate instances for each installation. Snapir denied making any profits, and claimed that the program had been installed on beta sites for testing purposes for a brief period and had no sales.

Snapir claimed that the database was open to users and thus it should be considered “open” and public domain. Judge Agmon-Gonen accepted that this could not be considered a trade-secret, but any assumed license was for clients and not competitors, and Snapir never purchased a single license.

Legal Issues

In here analysis, Judge Agmon-Gonen ruled that one has to first establish copyright and determine its infringement or not, and then address the limits of copyright protection in cases of monopolies and for public interest and the like.

Agmon-Gonen went on to rule that since the alleged copying took place in 2009, the relevant Law was the Copyright Law 2007 and not the older copyright ordinance.

Both sides accept that software is protected by copyright, and both sides accept that underlying concepts are not protected by copyright law. The question is therefore one of acceptable influence of an earlier product to enable market penetration or one of copying of significant elements.

The second issue is one of public interest and in the event of copyright infringement, whether the defendant can claim that fair competition allows a certain degree of copying.

Theoretical background – General

Although copyright covers creative works, it includes software, See Yanitzky-Ravid page 30, 2013. Citing Yanitzky-Ravid page 39, Agmon-Gonen goes into a little aside about utilitarianism and personal development and Economics of the Law. She quotes Yanitzky-Ravid’s conclusion that copyright provides an incentive and a temporary monopoly is acceptable since it results in an increase in the number and range of creative works and enriches mankind.

Agmon-Gonen also cited Guy Pesach as showing that the Supreme Court considers copyright as being utilitarian and as an incentive to create, but notes that creative works are easy to copy and must also be considered as personal to the creator and must be protected.

She noted Orit Fishman Afori’s allegations that copyright was passé in the modern digital era but noted that neither the Israel Courts nor other systems implement this view by cancelling the relevant laws, but that it should be taken into account when applying the law.

Whilst accepting that copyright solved a market failure (that it was easy to copy someone else’s labour) it must be realized that copyright creates other market failures and that it should be interpreted narrowly.

Agmon-Gonen considers that the requirement of originality is a limitation on copyright. She goes on to cite Interlego (copyright in shape of lego bricks – rejected by Israel Court), Geva (copyright in Donald Duck), Tele-event (copyright in sports broadcasting), and Professors Birnhack and Tony Greenman.

Theoretical background – Software in computer programs

According to Judge Agmon-Gonen, software was first recognized as copyright protected in 84/3021 Apple Computers vs. New Cube technologies P.P. 397, 1984. In 1988 the old Copyright Ordinance 1924 was amended to reflect that computer code have all the economic protection of creative works.

Following TRIPS, copyright law was revised to clarify that not only the source code but also the object code in binary format were copyright protected.

Copying does not have to consist of copying code, but may consist of copying the schematics and plans (Melz in Harpaz, with concurrence of Judges Barak and Levin). It may subsist in the program structure and in artwork user inputs, organization and sequence. In Harpaz, the Israeli Court largely followed the US ruling in Whelan Associates vs. Jaslow Dental (1986).

Whelan essentially rueld that everything beyond the purpose of the program was copyright protected. However, in later years, the US courts reduced the application of copyright to elements beyond the code with an understanding that it could limit technology development. In Ashraz and Har-Oz, the Israel courts made similar limitations.

According to Agmon-Gonen, nowadays there are different schools of thought regarding the appropriate scope of copyright protection for structure and the like.

The narrow approach would tend to allow substantial influence of a main program on competing products, particularly if there is a monopolistic situation. This may include the general structure, the arrangement and the look & feel to facilitate market penetration.

Judge Agmon-Gonen acknowledges that for a particular application, the expression of the program is heavily influenced by its functionality and purpose.

Copyright and competition

Judge Agmon-Gonen introduces this section by acknowledging that a creator is entitled to control and rights to his/her creation and that this is supposed to be an incentive to create. On the other hand, Competition Law is designed to enable free market competition and to prevent monopolistic market abuses.

Defendant maintains that both original and improved versions of Financier have similar interfaces to enable market penetration in a market dominated by a market leader. The argument implies that in addition to functional similarities required to achieve the purpose of a program, the consumer requires a similar look and feel to the existing product in order to consider a substitute, and substitute products are a good thing.

The idea is to interpret copyright in a minimalist manner to allow competition. She referred to Herbert Hovenkamp, Mark D. Janis, Mark A. Lamely & Christopher R. Leslie, IP and Antitrust: An Analysis of Antitrust Principles Applied to Intellectual Property Law, ch. 3 (2ed. Ed., 2009, last updated 2013), and Elkin-Coren and Shor-Afori.

Agmon-Gonen noted that the smart phone wars and the Microsoft case in the US show the dangers of unbridled IP protection. She considers the clauses preventing patent abuse and the court’s discretion in awarding copyright damages are there to counteract IP rights and she suggests that US vs. Microsoft Corp. and the Israel case concerning Teva show that limiting business monopolies are required to protect the consumer and to enable free competition.

Judge Agmon-Gonen posits that both IP laws and Anti-trust legislation are complimentary approaches to create competition to spur innovation and progress.

Quoting Ward Bowman Jr., Patent and Antitrust Law: A Legal and Economic Apprisal (1973):

“Both Antitrust Law and Patent Law have a common central economic goal: to maximize wealth by producing what consumers want at the lowest cost…The goal of both antitrust law and patent law is to maximize allocative efficiency (making what consumers want) and productive efficiency (making these goods with the fewest scarce resources).”

And

“The two laws (IP and Antitrust) are not in conflict at all. Rather, they are complementary efforts to promote an efficient marketplace and long-run, dynamic competition through innovation”

Quoting Michal S. Gal, Competition Policy for Small Market Economy 11 (Harvard U. Press, 2003) and with a nod towards Niva Elkin-Coren, Judge Agmon-Gonen realizes that IP rights provide limited monopolies and disrupt free market forces but she does not consider that all IP rights undermine free market economics.

Quoting Ward Bowman Jr., Patent and Antitrust Law: A Legal and Economic Apprisal (1973) again:

“Intellectual property rights do not ‘ipso facto’ confer monopoly power. While they do permit product differentiation, and sometimes give the owner power over price, there is a vast difference between an exclusive right and the sort of economic monopoly that is the concern of antitrust law…”

and

“The intellectual property laws do not purport to confer any monopoly, however, but only the right to exclude others from producing the goods, expression or symbol covered by the intellectual property interest…Patent grant creates an antitrust “monopoly” only if it succeeds in giving me the exclusive right to make something for which there are not adequate market alternatives and for which consumers would be willing to pay a monopoly price.”

“In sum then, the intellectual property grant is a power to exclude…The power to exclude contributes greatly to the value of any property right, but it hardly entails that the thing covered by the right is a “monopoly”. That question must be answered by looking at the range of substitutes that are available”

Getting back to the subject, Judge Agmon-Gonen notes that copyright does not prevent someone independently creating a competing software product for trading securities. She references Elementary and Persistant Errors in the Economic Analysis of Intellectual Property”, 53 V and. L. Rev. 1727 (2000) and also Mark A. Lemley, “The Economics of Improvement in Intellectual Property Law, 75 Tex L. Rev. 989 (1996-97).

In one of her more interesting insights, Judge Agmon-Gonen notes that the incentive was prior to developing the software program, but that the antitrust considerations apply when a single player obtains monopolistic control of a market.

Citing Elkin-Coren again, she notes that software copyright can be abused to prevent competition.

Judge Agmon-Gonen then went on to note that package deals forcing customers to buy up a number of films from one producer and the like can be an abuse (this is interesting and of relevance to releasing songs in albums and forcing students to purchase a text book for one chapter of interest but is totally off the point).

Correctly, Judge Agmon-Gonen notes that the issue of unfair competition has to be proven and not merely alleged. It is necessary in the present case to show that copying the interface was required to prevent unfair competition. Since there were other software packages and the defense was alleged but unsubstantiated, Judge Agmon-Gonen rejected the defense.

In conclusion, Judge Agmon-Gonen considered the seven beta sites of a pilot as being a single infringement with, and found it fit to award a single payment of 90,000 Shekels for copyright infringement to the plaintiff without proof of damages.  She also awarded a permanent injunction against the defendant directly or indirectly selling or maintaining the competing software product. Since she had ruled copyright damages, she felt that there was no grounds to award additional damages for trade secret infringement.  For some reason the bottom line damages becomes 80,000 Shekels instead of 90,000 Shekels (one is presumably a typo, but which?) and 35000 Shekels legal costs.

T.A. 38918-12-09 Dan-el Advanced Software Solutions vs. Snapir, Judge Agmon-Gonen,  9 April 2014.

COMMENTS

I note that somewhat oddly, the programming expert is a lawyer. I’d have expected that he relates to similarities and differences and leaves the conclusions of copying to the judge. I refer readers to Judge Binyamini’s comments on the scope of expert opinions for the court.

The overall background section is a nice overview of copyright statements in the Hebrew Language, that totally ignores rabbinic sources, such as those summarized by Professor Rakover, and also makes little use of the valuable scholarship by non-Israeli scholars writing in English, beyond those quoted in previous Israeli rulings. It is fairly unnecessary and provides little that is new other than a book review of Shlomit Yanitsky-Ravid’s new book.

On the other hand, after her disastrous ruling concerning football broadcasting that was overturned by the Supreme Court (here),  Ms Agmon-Gonen may be reviewing everything to demonstrate that she is aware of what is actually happening in Copyright Law, or is educating herself in what other scholars think. Perhaps I am being unfair, and this ruling reflects a serious attempt to understand copyright. it is a good ruling.

Either way, this decision is rather better than some of her previous ones in that she is confirming to norms and trying to change things by evolutionary rather than revolutionary means. I think that eventually Agmon-Gonen may reach the Supreme Court and this decision shows a maturing of her approach.

One Response to Copyright in Software vs. Antitrust

  1. […] book has already been cited by Tel Aviv District Court Judge Michal Agmon-Gonen in a ruling relating to software and in the important ruling by the Committee for fixing royalties for service […]

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