December 21, 2014

Tenth Circuit: Special Master Must Employ Abstraction-Filtration-Comparison Test for Copyright Infringement

The Tenth Circuit Court of Appeals issued its opinion in Paycom Payroll, LLC v. Richison on Friday, July 11, 2014.

David Richison, with his niece and nephew, Shannon and Chad Richison,  formed a payroll processing company, Ernest Group, d/b/a Paycom Payroll, in Oklahoma in the 1990s. During his time with Ernest Group, David wrote two payroll processing software programs, BOSS and Independence. He transferred his authorship interest in BOSS to Ernest Group in the 1990s. When the relationship between David and Chad deteriorated in 2001, David moved to Maryland and formed his own company called Period Financial Corporation. At Period, he wrote a new software program based in part on Independence, which he called Period Indy. In May 2009, Ernest Group filed a copyright infringement lawsuit against David, asserting that Period Indy infringed on Ernest Group’s copyright in BOSS. Ernest Group subsequently filed for copyright on Independence, stating that it was a work for hire. By 2011, David had written another program, Cromwell.

In August 2011, the parties settled and agreed to the entry of a consent decree. All of Ernest Group’s claims were released except its claim for injunctive relief based on copyright infringement, and all rights to Independence were assigned to Ernest Group. The partied agreed that the district court should appoint a special master to write a report regarding whether the Cromwell program infringed on either BOSS or Independence, and the district court should decide the issue based on the special master’s report. The parties disagreed as to which version of Cromwell should be used for the analysis, but not which versions of BOSS and Independence. The special master opined in his report, marked “Attorney’s Eyes Only,” that Cromwell infringed upon both BOSS and Independence. The district court adopted the special master’s findings and ordered that all copies of Cromwell should be destroyed.

After the report was filed, David objected to the “Attorney’s Eyes Only” restriction, noting that as the author of all the software in question, he could assist his attorneys in reviewing the substance of the report. Ernest Group opposed the motion, and the district court denied it, stating that David advanced no grounds to support lifting the restriction. David’s attorneys filed objections to the special master’s report, arguing that the special master failed to conduct the abstraction-filtration-comparison test, or at least that he did not document his application of the test. Ernest Group’s attorneys agreed with the objections to some extent and requested that the report be resubmitted to the master for further findings. Before the district court could rule, Ernest Group’s attorneys mailed David’s “highly critical” objections directly to the special master. David’s attorneys called for a new special master, claiming that Ernest Group had irrevocably tainted the master’s neutrality. The district court, instead of resubmitting the report to the special master, called on Ernest Group’s attorneys to offer a more substantive response to David’s critique of the report, which they did. The district court adopted the special master’s report in its entirety, ruled that Cromwell infringed upon Ernest Group’s copyrights in both BOSS and Independence, and ordered all copies of Cromwell destroyed. This appeal followed.

David raised four issues on appeal: (1) the “Attorney’s Eyes Only” restriction should be lifted, (2) the special master erred by evaluating versions of BOSS and Independence that were never registered with the copyright office, (3) the special master’s report was inadequate and the versions were not substantially similar, and (4) a new special master should be appointed if remand is necessary. The Tenth Circuit evaluated these claims in turn. The Tenth Circuit declined to agree with David on the first claim, noting that he agreed to the restriction in a consent decree and allowing David to view the report was not so fundamental of a right as to be unwaivable, and commenting that such restrictions are common in trade secret litigation. For the second claim, the Tenth Circuit similarly rejected David’s arguments, since he impliedly consented to the versions in two documents submitted to the court and his argument was therefore waived.

As to the third claim, the Tenth Circuit reversed the district court’s adoption of the special master’s report. The Tenth Circuit agreed that the special master should have documented his application of each step of the abstraction-filtration-comparison test, which he did not do. The report contained little evidence that the master performed the abstraction test, and in fact the report seemed to deem abstraction superfluous. Because the abstraction test was not performed, the special master’s findings regarding filtration were limited, and his entire analysis was flawed. The case was remanded for more complete reporting by the special master. In his fourth claim, David requested that a new special master be appointed, due to potential bias from the master receiving David’s critique. The Tenth Circuit disagreed, because the parties had agreed to this particular special master, and also noting that it only addressed David’s contentions in this appeal so if need arose for a different special master in the future that claim would not be barred.

The district court’s judgment was reversed and remanded for further reporting by the special master using the abstraction-filtration-comparison test.

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