MICRO CONSULTING, INC. v. ZUBELDIA No. CIV-88-1348-W.
813 F.Supp. 1514 (1990)
MICRO CONSULTING, INC., Plaintiff, v. Pedro ZUBELDIA and Medical Electronic Data Exchange, Inc., Defendants.
United States District Court, W.D. Oklahoma.
September 19, 1990.
Dr. George Hedrick—Special Master, Dept. Head, Computer Science Dept., Stillwater, OK, R. Lyle Clemens, Kandi Jepsen Pate, Clemens, Holshouser & Pate, Oklahoma City, OK, for plaintiff.
Thomas P. Goresen, Eric S. Gray, Roberts, Gray, Goresen & Moriarty, Oklahoma City, OK, for defendants.
LEE R. WEST, District Judge.*
This matter came on for trial
Findings of Fact
1. Plaintiff Micro Consulting, Inc. (Micro Consulting), is an Oklahoma corporation with its principal place of business in Oklahoma City, Oklahoma. It was formed in 1982 by defendant Zubeldia together with Victor Schuelein and Bill Halpain, the principals of Schuelein and Halpain Engineering, Inc. (S & H), a company which supplies engineering services to the construction industry. The purpose of Micro Consulting was to market consulting services to architects and engineers in Oklahoma City. In connection with such services, it used a heating, ventilation and air conditioning computer program created by Zubeldia at S & H's request.
2. Zubeldia provided technical expertise necessary to perform the computer consulting services and Schuelein and Halpain, through S & H, provided and/or arranged for financing. Zubeldia was Micro Consulting's president, a member of its board of directors and its sole employee. He owned (and still has) forty percent (40%) of the company's stock. Schuelein and Halpain, then secretary/treasurer and vice president, respectively, each held (together with
3. Demand for these consulting services declined and Micro Consulting, at Zubeldia's suggestion, decided to develop a consulting service for health care providers. To this end, Zubeldia created "Claimnet." It is a set of approximately 400 computer programs which processes insurance claims electronically for health care providers for submission to government programs, Medicare and Medicaid, for payment. It was initially developed in late 1982 and early 1983 by Zubeldia during the course, and in the scope, of his employment with Micro Consulting. The set of programs, which includes original as well as licensed programs and those in the public domain, was constantly being improved throughout Zubeldia's employment to meet the needs of clients and to conform to government regulations and rules.
4. Micro Consulting had difficulty generating sufficient revenue. It ventured into other areas such as the sale of computer hardware to its customers in Spain. It licensed certain of its technology to third parties but required these parties to execute nondisclosure agreements.
5. The parties also contemplated the idea of additional investors. A financial analysis was conducted and a business plan was prepared by a consultant at Zubeldia's direction in October 1987. The business plan indicated that Micro Consulting had an established value of $4,600,000.00. Schuelein testified at trial that a more realistic value at that time was $400,000.00 and both Schuelein and Halpain testified that the present value of the company, the principal asset of which is Claimnet, is no greater than $50,000.00. The decline in value is attributed to competition from other companies, primarily defendant Medical Electronic Data Exchange, Inc. (Medex), and to problems with Claimnet.
6. No investors were found and the parties differed in their opinions regarding Micro Consulting's operations and growth. Zubeldia expressed an interest in expanding Claimnet's capabilities and in developing software to process commercial insurance claims through National Electronic Information Corporation. Schuelein and Halpain wanted Micro Consulting to stabilize and become sufficiently profitable to repay its debts to S & H and other creditors before any significant expansion occurred. Certain loans were repaid during this time by Micro Consulting to S & H over Zubeldia's protests and as a result, the parties' business relationship began to deteriorate more rapidly.
7. Discussions ensued regarding Zubeldia's separation from the company. He resigned as president of Micro Consulting on March 22, 1988, and in his letter of resignation, he wrote:
Plaintiff's Exhibit 17.
8. Zubeldia's employment ended on May 15, 1988. No documents were executed by the parties regarding the terms and conditions of his termination from employment. Zubeldia however was requested orally and in writing to return all Micro Consulting property including Claimnet software he possessed and a 1982 Honda vehicle. The automobile was returned approximately one year later and the software was returned on February 6, 1990. While it is undisputed that Zubeldia had a so-called "back-up" tape at his home, there is great debate over the contents of the tape and whether he read or had access to appropriate hardware to read the tape.
9. From 1982 to mid-1987, Zubeldia worked on an hourly basis and kept time sheets reflecting the number of hours worked. By mid-1987, the record keeping stopped and he began working on a 40-hour per week basis.
10. Zubeldia, during his employment had access to the names of Micro Consulting's customers and with Schuelein's consent, he sent a letter dated May 18, 1988, to these customers and advised them that he was no longer employed by Micro Consulting and that Andy Zook would be the person responsible for operating Claimnet and training customers to do the same.
11. Zubeldia set out to create his own electronic claims processing service. The result: Medex. The service was actually formed in April 1988 and incorporated prior to Zubeldia's departure from Micro Consulting. Zubeldia is Medex's president and owns 100% of its stock. Medex's primary purpose is to be a nationwide clearinghouse to process all kinds of insurance claims. Computer hardware was ordered in July 1988 after Zubeldia located an investor to provide financing and Zubeldia thereafter began creating the software for his new service. He entitled his set of programs, "Uniclaim." Uniclaim has over 1100 programs and again includes original as well as licensed programs and those in the public domain.
12. Medex was not functional until November 1988 and then only able to process "paper" claims. It was not until December 1988 that Medex was able to process insurance claims electronically.
13. Clearinghouses that process claims electronically are not unique and they exist nationwide. Some operate intrastate and others interstate. They maintain computer programs that process insurance claims on a claim form known as Form 1500 and thus enable subscribing health care providers to avoid manual preparation and submission of insurance claims. A physician electronically transmits to the clearinghouse all information necessary to complete the Form 1500. The clearinghouse processes the information and generates the insurance claim form. It then forwards the processed claim electronically (or on paper) to the appropriate insurance carrier.
14. Both Uniclaim and Claimnet use the Form 1500 because the very nature of insurance claim processing requires all clearinghouses to do things similarly. They likewise require the same data to process since all insurance companies require the same claim information: patient's name, treating physician's name and diagnosis code. The electronic claim formats are strictly dictated by the insurance industry and each insurance carrier has its own unique way of receiving the electronic claims.
16. Thereafter, on July 28, 1989, the parties agreed further
17. Dr. Hedrick conducted a hearing during which he heard testimony by Dr. John Fagan, an associate professor of electrical engineering and computer science at the University of Oklahoma, Norman, Oklahoma, and by Zubeldia regarding similarities and differences between Claimnet and Uniclaim. Based upon this testimony and a review of documents and program listings supplied by the parties since such testimony "served in place of ... more rigorous examination of code on [his] part," Dr. Hedrick prepared and presented to the Court his report.
18. Based upon these findings, Dr. Hedrick concluded that
19. Dr. Fagan, whose deposition was presented at trial, was asked the following questions and gave the following answers:
Transcript (November 7, 1989) at p. 5, line 25 to p. 6, line 10.
Id. at p. 14, line 22 to p. 15, line 1.
Id. at p. 16, line 5 to p. 18, line 19; see also id. at p. 58, lines 19-21 ("What I use as a derivation, you know, it's an evolution, it's a derivative which means it logically flows out of the previous. In other words, it's derived from it.").
Id. at p. 20, lines 20-25.
Id. at p. 21, lines 11-13, 18-25 to p. 22, line 11.
Id. at p. 22, lines 16-20.
Id. at p. 27, lines 4-14.
Id. at p. 31, lines 12-16, 21-22.
Id. at p. 34, lines 9-23.
Id. at p. 35, line 24 to p. 36, line 10.
Id. at p. 49, lines 16-24.
Id. at p. 52, lines 11-21.
Id. at p. 55, line 7 to p. 56, line 4.
20. The following chart summarizes the testimony of Dr. Fagan and the exhibits admitted into evidence regarding the elements of Claimnet and Uniclaim:
Element Claimnet Uniclaima. Types of claims processed Medicare/Medicaid All types b. System structure Static Dynamic c. Data Storage Data base Flat file d. Processing steps Fixed at start-up Variable e. Electronic mail pieces One piece per step One piece only f. Electronic mail Unix CCITT X.430 g. Claim identification Scroll and Synchronize Paginate h. Claim validation Stops at first error Detects multiple errors i. User interface Interactive Batch j. Screen displays Menu oriented None k. Claim editor Screen oriented None l. Medicare interface BSC SNA/SDLC m. Medicare throughput 50 claims/hour 800 claims/hour n. Computer hardware Alspa & IBM-AT Compaq 386 o. Number of programs/pages 321/1271 697/2262 p. Programing language *C C q. Operating language *Xenix Xenix
Element Claimnet Uniclaimr. Input format **HCFA-1500 HCFA-1500 s. Output format ***Carrier defined Carrier defined t. Communication protocols Kermit ***Kermit ***xmodem ***3780/2780 Blast *
21. On August 25, 1988, a Certificate of Copyright Registration, TXU 333,509, was issued by the United States Register of Copyrights to Micro Consulting. The Certificate contained the following information:
Conclusions of Law
Micro Consulting asserted five causes of action in its amended complaint filed on September 27, 1988, three of which were presented at trial.
In Count II, the plaintiff alleged that the defendants engaged in unfair competition and false description of services under Section 43 of the Lanham Act, 15 U.S.C. § 1125(a). In Count III, the plaintiff alleged a claim for unlawful misappropriation of trade secrets under the Oklahoma Uniform Trade Secrets Act, 78 O.S. §§ 85-94.
Defendant Zubeldia counterclaimed to recover wages in the amount of $25,500.00 allegedly due and owing from his employment with Micro Consulting.
1. Subject matter jurisdiction over the federal causes of action exists under title 28, sections 1338(a) (original and exclusive jurisdiction in cases arising under copyright law) and 1338(b) (original jurisdiction of claims of unfair competition when joined with substantial and related claim under copyright laws) of the United States Code. Pendent jurisdiction over the state law claims and counterclaims arises because a common nucleus of operative fact exists. E.g., United Mine Workers v. Gibbs, 383 U.S. 715, 86 S.Ct. 1130, 16 L.Ed.2d 218 (1966).
2. Venue is proper under title 28, section 1400(a) (suits arising under copyright laws may be instituted in district in which defendant resides or may be found) of the United States Code.
3. Dr. Hedrick's findings must be accepted unless they are clearly erroneous, Rule 53(e)(2), F.R.Civ.P., and the Court hereby accepts the same as evidence (along with all other evidence) of the similarities
4. Section 501(a) of the Copyright Act provides that
17 U.S.C. § 501(a).
5. Under section 106, the owner of a copyrighted work has the exclusive right
Id. § 106(1), (2).
6. Copyrightable works include "computer data bases, and computer programs
7. This central principle is stated in section 102(b).
17 U.S.C. § 102(b). Thus, it is "clear that the expression adopted by the programmer is the copyrightable element in a computer program, and that the actual processes or methods embodies in the program are not within the scope of the copyright law." H.R.Rep. No. 1476, at 57, U.S.Code Cong. & Ad.News 1976, p. 5670.
8. To prevail on a claim of infringement under section 501, the plaintiff must prove by a preponderance of the evidence
(1) that it owns a copyrighted work and
(2) that the defendants copied the work.
Plains Cotton Cooperative Ass'n v. Goodpasture Computer Service, Inc., 807 F.2d 1256, 1260 (5th Cir.1987) (citations omitted).
9. It is undisputed that Micro Consulting owns Claimnet. There is however a dispute which arose post-trial as to whether Claimnet, in whole or in part, is copyrighted. This dispute is based primarily upon two arguments advanced by the defendants: (1) the plaintiffs have copyrighted only one of the many programs that constitute Claimnet and (2) if the plaintiff has copyrighted Claimnet as a whole, such is impermissible since Claimnet is comprised of programs already copyrighted by others and programs in the public domain.
10. The plaintiff has the burden of identifying the subject of its copyright and the Court concludes that the plaintiff has met this burden. The Court considers Claimnet to be the "program" identified in Micro Consulting's copyright registration, the entire
11. As to the defendants' second argument, the plaintiff admittedly cannot claim ownership of any of the constituent programs that were licensed from others or were adopted from the public domain.
12. Thus, having concluded that the plaintiff has proven element one, the Court must now determine whether the plaintiff has likewise proven the second essential element: that the defendants copied Claimnet in creating Uniclaim.
13. Copying may be shown by proof of both access to the copyrighted material and "substantial similarity" between the works. E.g., Baxter v. MCA, Inc., 812 F.2d 421, 423 (9th Cir.1987) (direct evidence of copying is rarely available; circumstantial evidence of access and substantial similarity of both general ideas and expression is sufficient). Zubeldia was the creator of Claimnet and as such, the Court finds that he had access to it (either through use of the "back-up" tape or because he created it). Thus, only proof of substantial similarity is needed in order for the plaintiff to establish this second element.
14. As one commentator has noted, "the determination of the extent of similarity which will constitute a substantial and hence infringing similarity presents one of the most difficult questions in copyright law...." 3 Nimmer on Copyright § 13.03, at 13-23 (1989) [hereinafter Nimmer]. This determination is made even more difficult because as stated, it is only similarity between protectible original expression taken from a preexisting work that is protected and while courts have long struggled with separating idea from expression in more traditional areas, the task is even more daunting in the field of computer software.
15. Various tests have been created to determine similarity of idea and expression between works: the abstractions test, Nichols v. Universal Pictures Corp., 45 F.2d 119 (2d Cir.1930); the total concept and feel test, Roth Greeting Cards v. United Card Co., 429 F.2d 1106 (9th Cir. 1970); the iterative test, E.F. Johnson Co. v. Uniden Corporation, 623 F.Supp. 1485 (D.Minn.1985); and the structure, sequence and organization test, Whelan, 797 F.2d at 1222.
16. Acknowledging that all tests have been criticized by one or more commentators
17. The plaintiff in its attempt to demonstrate substantial similarity has relied upon the "total concept and feel" test first articulated in Roth Greeting Cards and then developed in Sid & Marty Krofft Television Productions, Inc. v. McDonald's Corp., 562 F.2d 1157 (9th Cir.1977). The United States Court of Appeals for the Ninth Circuit in Krofft established a two-part test to determine substantial similarity: an "extrinsic test" to determine similarity in idea and an "intrinsic test" to compare the particular expression used. Id. at 1164. It found that while analytic dissection of and expert testimony regarding the objective details of the two works were appropriate for the extrinsic test, the intrinsic test depended "on the response of the ordinary reasonable person" to the works. Id. (citations omitted).
18. The second of this two-part test was applied in the context of audiovisual games in Atari, Inc. v. North American Philips Consumer Electronics Corporation, 672 F.2d 607 (7th Cir.1982), a case cited and relied upon by the instant plaintiff. In Atari, the United States Court of Appeals for the Seventh Circuit stated the test of substantial similarity "is whether the accused work is so similar to the plaintiff's work that an ordinary reasonable person would conclude that the defendant unlawfully appropriated the plaintiff's protectible expression by taking material of substance and value." Id. at 614 (citing Krofft, 562 F.2d at 1164). The Seventh Circuit affirmed that this test "does not involve `analytic dissection and expert testimony,' but depends on whether the accused work has captured the `total concept and feel' of the copyrighted work." Id. (quoting Arnstein v. Porter, 154 F.2d 464, 468 (2d Cir.1946); Roth Greeting Cards, 429 F.2d at 1110).
19. The Seventh Circuit criticized the defendants' offer of a "laundry list" of specific differences and stated that "[t]he sine qua non of the ordinary observer test ... is the overall similarities rather than the minute differences between the two works," 672 F.2d at 618 (citations omitted), and that "[w]hen analyzing two works to determine whether they are substantially similar, courts should be careful not to lose sight of the forest for the trees." Id. (citation and footnote omitted).
20. In the case-at-bar, the Court finds the same so-called "laundry list" offered by the defendants is significant; it demonstrates (1) that any software designed to process insurance claims electronically using designated forms will have the same "concept and feel" of another, (2) that the overall similarities in protected expression, if any, between Claimnet and Uniclaim are qualitatively insignificant, are to be expected in any program written in C and are dictated by the insurance industry and (3) that the differences in protected expression between Uniclaim and Claimnet are not minute.
21. Furthermore, use of the "total concept and feel" test in the field of computer software has been criticized on the ground that it "is geared toward simplistic works that require only a highly `intrinsic' (i.e., unanalytic) evaluation[,]" Nimmer § 13.03[A], at 13-35, and it has been suggested that this test "serves no purpose in the realm of computers where analytic dissection and expert testimony emphatically are needed." Id. (footnote omitted).
22. It has been further suggested that "the touchstone of `total concept and feel' threatens to subvert the very essence of copyright, namely the protection of original expression. `Concepts' are statutorily ineligible for copyright protection; for courts to advert to a work's `total concept' as the essence of its protectible character seems ill-advised in the extreme. Further, the addition of `feel' to the judicial inquiry, being a wholly amorphous referent, merely invites an abdication of analysis." Id. (footnotes omitted).
24. The United States Court of Appeals for the Third Circuit in Whelan rejected the applicability of the ordinary observer test in copyright cases involving exceptionally difficult materials like computer programs and adopted "a single substantial similarity inquiry according to which both lay and expert testimony would be admissible." 797 F.2d at 1233 (citations omitted). The Third Circuit counseled that a court in applying this test "must make a qualitative, not quantitative, judgment about the character of the work as a whole and the importance of the substantially similar portions of the work." Id. at 1245 (citations omitted).
25. The Third Circuit also announced a rule for distinguishing idea from expression in computer programs: "the purpose or function of a utilitarian work would be the work's idea, and everything that is not necessary to that purpose or function would be part of the expression of that idea." Id. at 1236 (emphasis deleted and citations omitted). In Whelan, the purpose or idea of the two programs was to aid in the efficient business operations of dental laboratories and anything more specific, including the programs' nonliteral aspects — structure, sequence and organization — was considered protected expression.
26. Commentators have agreed for the most part that the test in Whelan "extend[s] copyright protection too far," Nimmer § 13.03[A], at 13-38, and that the crucial flaw in the rule announced in Whelan is that it "assumes that only one `idea,' in copyright law terms, underlies any computer program, and that once a separable idea can be identified, everything else must be expression. All computer programs are intended to cause the computer to perform some function. The broad purpose that the program serves, be it managing a dental laboratory ..., is an idea. Other elements of the program's structure and design, however, may also constitute ideas for copyright purposes." Id. § 13.03[F], at 13-62.28.
27. The Court finds the more appropriate test for use in the case-at-bar is the "abstractions test" articulated by Judge Learned Hand in Nichols, 45 F.2d at 119.
Id. at 121 (citations omitted). This method of analyzing a work to determine where the line between idea and expression should be drawn, though created for use with literary works, appears readily adaptable to analyzing computer software.
D. Nimmer, R. Bernacchi & G. Frischling, "A Structured Approach to Analyzing the Substantial Similarity of Computer Software in Copyright Infringement Cases," 20 Ariz.St.L.J. 625, 637-38 (1988) [hereinafter A Structured Approach].
28. Thus, at the outset exist the problem and subproblems, the unprotected ideas: abstract entities which do not take into account the details of how the entities are actually realized. The end product is the program: that set of statements or instructions used, directly or indirectly, in the computer in order to bring about the desired result.
29. Between these two points protected expression begins and thus, the Court in employing this "top-down" approach in the case-at-bar, has first identified the problem to be solved by Claimnet and Uniclaim: processing insurance claims electronically. This overall function is accomplished in part by receiving and storing claims from health care providers, identifying, validating and editing those claims and then transmitting the claims to insurance carriers. These components are inherent in the idea of processing insurance claims electronically. They are specific subproblems which were addressed by the programmer, Zubeldia. These quasi-independent parts or modules resulted in specific code so that the subproblems not only were solved but also were fitted together in a specific way so that the overall problem was solved.
30. The Court finds further no substantial similarity between Claimnet and Uniclaim at this level of protected expression. For example, to solve the subproblems of claim identification and claim validation, Claimnet scrolls and synchronizes, stopping at the first error. Uniclaim, on the other hand, paginates and is able to detect multiple errors. Furthermore, the ordering and sequence of these smaller tasks while probably sufficiently unique and creative to qualify as protected expression is different.
31. There is also no dispute that the two source codes while written in the same
Dr. Hedrick specifically stated in his report that Uniclaim's use of these should not contribute to a finding of infringement. Acknowledging that copied portions may be relatively small in proportion to an entire work, if such are qualitatively insignificant then there is no substantial similarity between the two works. Thus, the Court likewise finds that neither the use of a standard technique nor incorporation of a program in the public domain constitutes similarity sufficient to justify a finding that section 501 has been violated.
32. Accordingly, the Court finds there is no substantial similarity either at the lowest level of abstraction, the literal codes, or at any higher expression level.
33. The plaintiff has advanced additional, but related, arguments: (1) "but for" Claimnet, Uniclaim — the "next generation" — would not exist and (2) Uniclaim is a "substantial derivation" of Claimnet.
34. As stated, the plaintiff must prove both prongs of the second element: access and substantial similarity. E.g., Krofft, 562 F.2d at 1172 (no amount of proof of access will suffice to show copying if no similarities). "It is not enough that [the] defendant have access to [the] plaintiff's work and that [the] plaintiff's work serve as a sine qua non to the creation of [the] defendant's work. The works still must be `substantially similar' for liability to ensue." A Structured Approach, 20 Ariz.St.L.J. at 627 n. 6 (citation omitted).
35. The evidence is undisputed that there is deliberate noncopying. The defendants did not merely make superficial changes in the literal and nonliteral aspects of Claimnet to disguise intentional appropriation, e.g., See v. Durang, 711 F.2d 141, 142 (9th Cir.1983) ("Copying deleted or so disguised as to be unrecognizable is not copying."); they have legitimately avoided infringement by intentionally making sufficient significant changes in Uniclaim. E.g., Eden Toys, Inc. v. Marshall Field & Co., 675 F.2d 498, 501 (2d Cir.1982) (citations omitted). Zubeldia's experience in creating Claimnet inevitably became part of his expertise. He testified that he did not undertake
36. The second argument advanced by the plaintiff is that Uniclaim is a "substantial derivative" of Claimnet. The term under the Copyright Act is "derivative work" and like any other accused work, a derivative work does not infringe unless it has been substantially copied from the preexisting work. E.g., Vault Corp. v. Quaid Software Ltd., 847 F.2d 255, 267 (5th Cir.1988) (to be considered a derivative work, infringing work must incorporate portion of and be substantially similar to copyrighted work); Litchfield v. Spielberg, 736 F.2d 1352, 1357 (9th Cir.1984). Thus, substantial similarity is again the key to finding a violation under section 501.
37. The second claim brought by the plaintiff is that the defendants engaged in unfair competition in violation of Section 43(a) of the Lanham Act, 15 U.S.C. § 1125(a), which proscribes false designations of origin and false representations. This statute, as amended by the Trademark Law Revision Act of 1988, provides that
15 U.S.C. § 1125(a). As a remedial statute, it is to be broadly construed to effect its primary propose: to protect the public from confusion; it is not however a catchall for all alleged unfair business practices or conduct by a competitor.
38. The parties discussed the issues in Count 1 under the Copyright Act at great length and with great attention to detail; little has been said about the Lanham Act. In fact, both parties' brief arguments are grounded on their alleged success under the Copyright Act. While the Court's findings and conclusions as to Count 1 are relevant to Count 2, they are not dispositive.
39. The plaintiff has advanced two theories for finding the defendants liable under this statute: (1) the defendants falsely designated the origin of Uniclaim in that the defendants presented Uniclaim as a product independently created and distinctly different from Claimnet when in fact Uniclaim is but a derivative of Claimnet and (2) the defendants misrepresented to Micro Consulting's customers that Micro Consulting would be unable to survive without Zubeldia and thus, would be unable to provide further services to its customers.
40. To prevail under either theory, the plaintiff must prove by a preponderance of the evidence the following essential elements:
E.g., Manufacturers Technologies, Inc. v. Cams, Inc., 706 F.Supp. 984, 1003 (D.Conn. 1989) (citations omitted).
41. There is no dispute that goods or services are involved in this case and that an alleged impact on sales or goodwill of goods or services in interstate commerce will result in interstate commerce being affected. The key in this case to finding liability under the plaintiff's first theory under the Lanham Act is proof of the third element and such proof requires a showing
42. Indeed, the critical factual finding this Court must make in resolving the plaintiff's claim for alleged false designation of origin under the Lanham Act is whether the plaintiff has proven "likelihood of confusion." E.g., Centaur Communications, Ltd. v. A/S/M Communications, Inc., 830 F.2d 1217, 1220 (2d Cir.1987) (purpose of § 43(a) is to prevent consumer confusion regarding product's source); Lois Sportsware, U.S.A., Inc. v. Levi Strauss & Co., 799 F.2d 867, 871 (2d Cir.1986). This factor is the sine qua non of an unfair competition claim based on false designation of origin. The statute does not expressly mandate a finding of confusion; rather, it has been judicially imposed to provide the causal connection between the alleged false description of source and injury in the marketplace.
43. In all circuits, "likelihood of confusion" is determined by analyzing and balancing a number of factors. The list varies from circuit to circuit and in the Tenth Circuit, the factors which must be considered to determining likelihood of confusion are:
(1) the degree of similarity between the two goods or services;
(2) the intent of the defendants;
(3) the relation in use and in manner of marketing between the two goods or services; and
(4) the degree of care to be exercised by customers in purchasing the goods or services.
Jorache Enterprises, Inc. v. Hogg Wyld, Ltd., 828 F.2d 1482, 1484 (10th Cir.1987) (citations omitted).
44. The first factor-degree of similarity between the goods or services—has been addressed under the Copyright Act. As stated, the Court has determined that Uniclaim and Claimnet are similar only in ideas, in use of standard techniques and in use of public domain and licensed elements; they are not similar in creative expression. Any similarity is outweighed by the differences in the two works.
45. Case law exists to support the proposition that absent substantial similarity, there can be no violation under Section 43(a) for false designation of origin. E.g., Hartman v. Hallmark Cards, Inc., 833 F.2d 117, 121 (8th Cir.1987); Mihalek Corp. v. Michigan, 814 F.2d 290, 296 (6th Cir. 1987); Litchfield, 736 F.2d at 1358; Warner Bros. Inc. v. American Broadcasting Companies, Inc., 720 F.2d 231, 246 (2d Cir.1983) (absence of substantial similarity leaves little basis for asserting likelihood of confusion); Cory Van Rijn, Inc. v. California Raisin Advisory Board, 697 F.Supp. 1136, 1145 (E.D.Cal.1987). Because no one factor is dispositive and all must be evaluated in the context of how each bears on the ultimate issue, the Court opines that the absence of substantial similarity is not a complete answer to the plaintiff's claim for false designation of origin. Accordingly, the Court has considered the remaining factors identified by the Tenth Circuit in Jordache Enterprises.
46. The second factor focuses on the defendants' intent; that is to say, did the defendants intend to confuse customers and prospective customers into believing that Uniclaim was derived from Claimnet? As the Tenth Circuit has stated, "`[t]he proper focus is whether [the] defendant[s] had the intent to derive benefit from the reputation or good will of [the] plaintiff.'" 828 F.2d at 1485 (quoting Sicilia Di R. Biebow & Co. v. Cox, 732 F.2d 417, 431 (5th Cir.1984)).
47. Zubeldia's letter dated May 18, 1988, to Micro Consulting customers, the defendants' announcement of Uniclaim dated September 23, 1988, and the lack of contrary credible evidence show (1) that Zubeldia advised the plaintiff's customers that he was no longer associated with Micro Consulting and (2) that Uniclaim was
48. The third factor to be considered by the Court is relation in use and manner of marketing. The two works are in direct competition in the same market for the same customers. However, as stated, the evidence presented indicates that Uniclaim was being marketed as a new, more enhanced and efficient program and in a way designed to dissociate itself with existing systems.
49. Admittedly, there is evidence of intent to compete; there is however no evidence of any intent to foster false impressions regarding the origin of the competitive work, Uniclaim and no evidence that customers or potential customers would make incorrect mental associations between Uniclaim and Claimnet or between Medex and Micro Consulting.
50. The fact that one work may bring to mind the other does not in itself establish likelihood of confusion as to origin. The law cannot guarantee total absence of confusion in the marketplace; it can only safeguard against unfair competition resulting from such confusion.
51. The fourth factor—degree of care exercised by customers—weighs against any finding of confusion. Health care providers determined to transmit claims electronically to insurance carriers for payment are likely to use a high degree of care in purchasing the hardware and software necessary to perform this task. While these health care providers may not be sophisticated in the field of computer technology, due to the price of the computers and appropriate software and due to the important nature of the tasks the software was designed to accomplish, the Court finds that these customers would be selective in their purchases: the more discerning the buyer, the less likelihood of confusion on the buyer's part.
52. Finally, as the Tenth Circuit has noted, "the best evidence of a likelihood of confusion in the marketplace is actual confusion." Jordache Enterprises, 828 F.2d at 1487 (citing Standard Oil Co. v. Standard Oil Co., 252 F.2d 65, 74 (10th Cir.1958)). A plaintiff need not prove actual confusion to prevail—it serves only as additional evidence on the issue. Furthermore, the absence of such evidence does not mandate a finding that confusion is unlikely.
53. The instant plaintiff offered no evidence of actual confusion. It offered only speculation by Dr. Fagan that "some of the users that would be using [a] program probably couldn't tell the difference between Claimnet and G.E. Terminet and [Uniclaim]." Transcript at p. 49, lines 21-23. Confusion, pre- or post-sale, must be probable, not merely possible and the Court concludes based upon the foregoing, that the plaintiff has failed to prove the necessary elements of a violation under Section 43(a) based upon false designation of origin.
54. The second theory advanced by the plaintiff under Section 43(a) is grounded on the defendants' alleged misrepresentations about Micro Consulting's continuing ability to provide services to Claimnet customers. This statute, as stated, prohibits express or implied false representations made in connection with the sale of goods or services.
55. The plaintiff's claim for alleged false representations is akin to a claim based upon false promotion under Section 43(a). In analyzing relevant extant case law, the Court finds that the defendants made no facially false or affirmatively misleading material representations regarding Micro Consulting that did, or were likely to, influence a customer's purchasing decision. Zubeldia's letter of May 18, 1988, to Micro Consulting customers clearly advised that Micro Consulting would be operational after Zubeldia's departure and that it would continue to service Claimnet and train users because Andy Zook, a former Micro Consulting employee, had returned.
56. The plaintiff's final claim seeks relief under the Oklahoma Uniform Trade Secrets Act, 78 O.S. §§ 85-94, for alleged misappropriation of trade secrets. The plaintiff has contended that the defendants used Claimnet to create and implement Uniclaim
57. To prevail on this claim, the plaintiff must prove by a preponderance of the evidence
E.g., Black, Sivalls & Bryson, Inc. v. Keystone Steel Fabrication, Inc., 584 F.2d 946, 951 (10th Cir.1978).
58. The term "trade secret" as defined in the Oklahoma Act
78 O.S. § 86(4).
59. The defendants have argued that Claimnet does not qualify as a "trade secret" because it has no economic value and because Micro Consulting failed to maintain its secrecy. Proving the existence of a trade secret requires proof of (1) information not generally known in the industry (2) which gives rise to a competitive advantage to the owner of such information and (3) which is maintained as a secret.
60. Trade secret law clearly applies to computer software and trade secret protection attaches to a broad range of subject matter: computer programs and accompanying documentation as well as the ideas and the expression of those ideas contained therein.
61. Admittedly, the idea of electronic submission of insurance claims to carriers for payment was generally known in the health care and insurance industries. On the other hand, the "information" such as the source code, algorithms and modules and the arrangement of Claimnet's elements, their sequencing and order, which implemented this idea were sufficiently novel and not generally known.
62. Because of this, Micro Consulting derived a competitive advantage through its ownership of Claimnet. Claimnet was equal, if not superior, in quality to other products then on the market.
63. The evidence also demonstrates that Micro Consulting maintained Claimnet as a secret. Secrecy need not be absolute. Micro Consulting took reasonable precautions to insure that the component elements of Claimnet were retained in secrecy and not disclosed. Micro Consulting restricted access to Claimnet's source code, it advised customers as well as potential customers
64. Accordingly, the Court finds that the plaintiff has proven the existence of a trade secret.
65. The next element—misappropriation —is defined in Oklahoma as the
78 O.S. § 86(2)(b)(2)(b).
66. Proving the existence of this element likewise requires proof of subelements: acquisition by a person who is privileged to the information by reason of some special relationship and unauthorized use of the same.
67. There is no dispute that Zubeldia had access to Claimnet as its author and in his position as president and a director of Micro Consulting. Thus, his knowledge of any secret information at first blush appears to have been "acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use." Id.
68. In Amoco Production Co. v. Lindley, 609 P.2d 733 (Okla.1980), the Oklahoma Supreme Court in determining whether a trade secret existed which gave rise to a duty not to disclose or adopt to one's own use, stated
Id. at 745 (citing Structural Dynamics Research Corp. v. Engineering Mechanics Research Corp., 401 F.Supp. 1102, 1111 (E.D.Mich.1975) (if subject matter of trade secret is brought into being through initiative of employee in its creation, innovation or development, even though relationship is one of confidence, no duty arises since employee may have interest in subject matter at least equal to his employer or such knowledge is part of the employee's skill and experience)).
69. In balancing the equities in this case, the Court is mindful of the financial resources Micro Consulting made available for the development of Claimnet and of the protection that should be afforded Micro Consulting; the Court must be equally sensitive to the defendants "to insure that [Zubeldia] is not restrained from using his knowledge, skill and experience to gain his likelihood. To the extent that such use does not entail use or threaten disclosure of trade secrets of a former employer ..., authority universally recognizes that one's former employee cannot be restricted from using his knowledge, skill and experience in subsequent employment in competition with his former employee." 1 Milgrim § 5.02, at 5-21 (1990). Furthermore, "the mere organization of a corporation in order to compete, although the organization is accomplished prior to [the employee's] termination [from] employment, does not in and of itself, bespeak of misappropriation of trade secrets. Id. at 5-29 n. 37 (citations omitted).
70. The Oklahoma Supreme Court is in accord with this majority view and has expressly recognized that "[a]n employee has the right to engage in a competitive business for himself and to compete for the business of customers of his former employer provided such competition is fairly
71. To prevail the plaintiff must also prove that the defendants "used" secret information and the Court finds that the plaintiff has not met its burden.
72. As stated, the plaintiff did not identify particular component parts of Claimnet as trade secrets; rather, it characterized Claimnet as a whole as the trade secret used by the defendants and the Court has found that information such as Claimnet's source code, algorithms and modules and its arrangement of elements, their sequence and order, which implemented the idea of electronic submission of insurance claims to carriers for payment, were sufficiently novel to constitute a trade secret.
73. The evidence however is clear that Uniclaim is not a copy of Claimnet and that the source code and structure of Uniclaim are different from the source code and structure of Claimnet. Admittedly, a person may not make use of another's trade secrets; but, a person has the right to use ideas generally known to all and may combine with such general knowledge his own abilities and his knowledge of the customs of the market, the methods of obtaining business and all other factors which affect his particular field and to compete with his former employer.
74. Because the Court finds that the plaintiff has failed to prove wrongful use by the defendants, it has not considered the third element—damages—of the plaintiff's state law cause of action.
75. Also before the Court is the counterclaim of defendant Zubeldia for back wages allegedly due and owing for services performed while employed by the plaintiff.
76. To recover past due wages, Zubeldia must prove each of the following elements of his counterclaim by a preponderance of the evidence:
77. The Court concludes that Zubeldia has failed to sustain his burden of proof with respect to his counterclaim. It is undisputed that Zubeldia worked at Micro Consulting with the expectation of some compensation from his employer and without doubt, such services were beneficial to Micro Consulting.
78. Zubeldia has failed to prove by preponderance of the evidence the amount of compensation he was to receive. By his own testimony, the amount claimed is only his "best estimate" of the amount allegedly due and owing to him based upon time sheets completed and hours worked under different circumstances.
79. In sum, the Court finds that the plaintiff has failed to prove the essential elements of any of the three causes of action which it pursued at trial and thus, that judgment should be entered in favor of the defendants on these claims. The Court finds further that defendant Zubeldia has failed to prove the essential elements of his counterclaim for back wages and that judgment should therefore be entered in favor of the plaintiff on such counterclaim. Judgment shall issue forthwith in accordance with the Court's findings and conclusions.
This action came on for trial before the Court, The Honorable Lee R. West, District Judge, presiding, and the issues have been
Based upon the Court's Findings of Fact and Conclusions of Law, it is hereby ORDERED and ADJUDGED that judgment be entered in favor of the defendants, Pedro Zubeldia and Medical Electronic Data Exchange, Inc., and against the plaintiff, Micro Consulting, Inc., on the three claims of the plaintiff so that the plaintiff take nothing by way of its claims.
It is further ORDERED and ADJUDGED that judgment be entered in favor of the plaintiff/counterclaim defendant, Micro Consulting, Inc., and against the defendant/counterclaimant, Pedro Zubeldia, so that the defendant/counterclaimant take nothing by way of his counterclaim.
It is further ORDERED and ADJUDGED that each party bear its own costs of this action.
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