Software Litigation Memorandum, Case Study Example

I enjoyed meeting you last week when you arrived and want to welcome you again to Wonderful World of Software, Inc. (WWS). The purpose of this memorandum is to review the Slick Software litigation. As you know, our basic product is a statistical software package (CAL), a set of interrelated computer programs originally developed by our five shareholders over a period of years at great expense. Although the development costs were substantial, the company’s founders made a firm decision to gamble on the new product and, against all odds, the product was a great success. The package, of course, was copyrighted shortly after its completion.

One drawback in marketing CAL is that the package can only be used on HAL hardware. To remedy this problem, a research team has been adapting CAL for use on other hardware. This project is near completion and we expect to be in a position to market the new product in about a year.

In marketing CAL we use a license agreement which prohibits a licensee from selling the package to others. Two years ago we entered into a licensing agreement with Slick Software, Inc. (SS), a New Jersey corporation. SS received, as part of the package, the source codes for the programs. A year ago we discovered that SS was working on a translation of CAL for use on computers other than HAL machines and that the translation would hit the market at about the same time as our new product. We immediately filed suit in federal district court asking for preliminary and permanent injunctions which would prevent SS from infringing on our copyright and violating the licensing agreement by marketing the translation. A preliminary injunction was issued and the case will go to trial a year from now.

Last week we received a settlement offer from SS which would provide us with a return of $1.5 million. That is, SS would pay us this amount in cash if we drop our suit and allow SS to continue with the development and marketing of the translation. If we refuse the offer and continue with the litigation — and if the court issues a permanent injunction — we estimate that the returns from our new adapted package will be $1 million a year greater than without the injunction. The adapted package has an estimated life of nine years; hence, the injunction is worth approximately $9 million to WWS. To date our expenses and fees paid to outside counsel total $150,000. If we continue with discovery and proceed with a trial, it is likely that, beyond any award of costs, an additional $200,000 will be expended in legal fees and costs (which we must pay even if we win).

The legal issues in the lawsuit are numerous and quite complex but essentially we are asserting that the actions of SS infringe on our copyright and result in misappropriation of our trade secrets. The key issues that must be resolved in our case are as follows:

1. Similarity. In order to win on either the copyright infringement or the trade secrets theory, we must prove that the SS package is substantially similar to CAL. This is a difficult issue to resolve; we must hire several experts and take a number of depositions before we know better whether similarity exists. However, the chances are better than even that we will be able to prove substantial similarity in court.
2. Access. In order to win on either theory we must also prove that SS had access to our package before developing its own package. This issue is not as clear as my summary of the facts above might indicate in that SS is claiming that its package was in the development stage before it purchased CAL. Although there is evidence to support the SS claim, we have concluded that access to CAL was essential in completing the SS package and it is likely we will be able to prove this in court.
3. Validity of Copyright. SS has claimed that our copyright is invalid on the grounds that our program cannot be separated from the idea (the algorithm) it implements and ideas cannot be copyrighted. Because this claim has little merit, there is a high probability that the court will hold that our copyright is valid (which will mean that we win the case and an injunction will be issued).
4. Preemption. Even if the court decides that our copyright is invalid, we might still prevail on a trade secrets theory. There are really two trade secrets issues that the court must decide. First, the court must determine whether federal copyright law preempts state trade secrets law. We have determined that the probability of the court deciding that copyright law does not preempt state trade secrets (and therefore that we may proceed with our trade secrets argument) is very high.
5. Trade Secrets Violation. The second trade secrets issue is whether SS has misappropriated our trade secrets. It is likely that we will prevail on this issue.

I now need your advice with respect to the following matters.

1. List any additional information (apart from the above legal analysis and other information relating to the law) that would be useful in your review of the case. (In answering questions 2-6, please make any necessary assumptions concerning this additional information.)
2. On the basis of my analysis of the five issues, what is your estimate of our overall probability for success if we go to court? (Select a probability number from .01 to .99.)
3. Do you recommend that we settle the case for $1.5 million or continue with the litigation? If you select continue, how low would the overall probability for success have to be before you would settle?
4. Assume that there is a substantial difference of opinion within the law department regarding the similarity and copyright validity issues. A few members of the law department think that our chances for success on the similarity issue should be rated “even” rather than “better than even.” These same attorneys are even more pessimistic about the validity of our copyright; they have concluded that there is only a “better than even” chance that the court will hold that our copyright is valid, rather than the “high probability” conclusion reached by most of the attorneys in the department. A summer intern, who will be returning to college in a few weeks, has enough time to do further research and refine our probability assessment for only one of these two issues. Given this resource constraint, which issue would you select for additional research? (Or given the above differences of opinion, would you decide that one issue cannot logically be selected over the other?) Why? Note: Ignore the pessimistic assessments when answering 2, 3, 5 and 6; instead, use only the original assessment.
5. If we continue with the litigation, we hope to hire several eminent computer scientists to testify on our behalf during the trial. If they are willing to testify, it is likely that we will prevail on the similarity issue (rather than having a “better than even” chance). Unfortunately, their fees are very high. What is the maximum amount we should pay them for testifying for us during the trial? Why? (Assume that this amount is not included in the legal fees and costs described above.)
6. Based on my legal analysis, assign the probability number from .01 to .99 that most clearly reflects our chances for success with respect to each of the five issues.

Please answer these questions in the space provided on the tear sheet, using your common sense and intuition. I need your practical advice. Do not consult with others in answering the questions. No outside research is necessary.

Software Litigation Tear Sheet

Additional, non-legal information (there may be more or less than four possibilities):

There needs to be research conducted in order to determine if there are other companies that have similar patents or software that relate to the CAL package, and the dates of copyright or patent entry. If there are other similar software packages, the similarity issue may be more difficult to win in court

Are the same individuals at SS, who signed the contract with Wonderful World of Software, Inc. (WWS) involved in the production of the similar software package for their company?

What is SS’s algorithm for their developing software package?

Does SS have approved Quality Control documents with dates and signatures to compare to the contract signed with Wonderful World of Software, Inc.?

Overall probability of success: ____0.60_____________

Circle one: Settle or Continue

If continue, how low? (State a probability) _________________

Circle one: Similarity or Copyright Validity or Cannot Select

Reason

I think that the issue that should be selected for additional research should be the similarity issue. I think that the validity of the copyright has a better chance of being held valid versus the similarity issue. If the similarity issue were to be fully investigated and several experts were hired to testify or give statements to the court, and there was clear evidence of a similiarity issue, probability of winning the case would increase. In addition, there is free help with the summer intern. The intern can research and coordinate the experts, reducing some fees that would acrue.

Amount: ____$30,000______

Reason: The maximum amount that should be allocated for the expert computer scientists are $30,000. This amount is for three computer experts. They will be given a retainer at $4000 each and will be paid $500 per day. This does not include any travel costs, hotel stays, and food expences. This is based on the average amount that forensic computer scientists get paid to review data and testify for court litigation. In addition, this evidence will increase the probability of the similarity issue, which could ultimately win our case; therefore, and additional $30,000 to $200,000 in court fees will be worth the risk.

Probabilities:

Similarity: 0.20____________________

Access: 0.25_____________________

Validity of Copyright: 0.50___________

Preemption: 0.80__________________

Trade Secrets Violation: 0.80________