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A plaintiff has failed to make an adequate showing of likelihood of success or irreparable harm in seeking injunctive relief against a former client who is allegedly using computer source code property for which it has not paid, a magistrate judge has said in recommending that a preliminary injunction not be granted. iXL Inc. v. AdOutlet.com Inc., No. 01-C-0763, N.D. Ill. Alleging unauthorized use of intellectual property and copyright infringement, Web consultant iXL Inc. sued after its business relationship with AdOutlet deteriorated, initially seeking damages under theories of breach of contract, accounts stated, open book account and quantum meruit. ‘WORK FOR HIRE’ Under the terms of an agreement struck by both parties in March 2000, iXL was hired to provide AdOutlet with consulting and Web design services on an hourly fee and expense basis, with the total cost of the project to exceed $2.5 million. According to a March 29 report and recommendation by U.S. Magistrate Judge Sidney I. Schenkier of the Northern District of Illinois, a “substantial” part of the services involved the creation of “source code” to assist in the operation of AdOutlet’s Web site. In six statements of work, iXL agreed to use certain “pre-existing works” it had developed. According to the consulting terms and conditions, the ownership rights of the services excluding the pre-existing works “shall constitute ‘work made for hire for [AdOutlet] … and [AdOutlet] shall be considered the author and shall be the copyright owner of the Works.” The provision continued, “[I]f any of the works . . . do not qualify for treatment as a ‘work for hire’ or if iXL retains any interest in any components of the Works for any other reason, iXL hereby grants, assigns and transfers to Client ownership of all United States and international copyrights and all other intellectual property rights in the Works.” SOURCE CODE According to the report, during the summer of 2000, iXL began sending via e-mail to AdOutlet portions of the source code, which bore legends stating that AdOutlet owned the copyrights. However the source code was fraught with defects, AdOutlet claims, resulting in modifications as well as financial and staff burdens that would have been unnecessary had the product performed more capably. The argument is disputed by iXL, which asserts that most of the code it supplied was satisfactory and only minimally changed by AdOutlet. Regardless, both parties applied for copyrights to the code in February and March 2001, according to the report. PROVISION CITED In examining iXL’s likelihood of success, Judge Schenkier first determined that the copyrights in question were indeed valid but that legitimate questions existed as to the ownership of the source code. Because the language within the statements of work identify the services — including source code — provided by iXL as “works made for hire” for AdOutlet, the burden shifts to iXL to prove that the parties “expressly agreed otherwise” by making full payment of the invoices a condition precedent to source code ownership. The plaintiffs billed AdOutlet for $2.9 million, yet received only $1.2 million in compensation, according to the report. However, because the source code was designated a work made for hire, under the Copyright Act the person for whom the work was prepared is the author and owns the rights comprised in the copyright in the absence of an express agreement, Judge Schenkier held. Claims by iXL that provisions within the consulting terms and conditions constitute such an express statement were rejected. “It is hard to envision when [the provision] on which iXL relies would ever come into play. To the extent that there is any ambiguity about it, that uncertainty cuts against iXL, which drafted the contracts,” the report states. MISSED PAYMENTS Furthermore, iXL’s argument that in the absence of a clear contractual provision, the court should imply payment by AdOutlet as a prerequisite to vesting of authorship of the source code was unpersuasive, Judge Schenkier held. “In this case, iXL drafted the Agreement and Statements of Work, and negotiated it at arms length with AdOutlet. iXL had every opportunity, and presumably every incentive, to provide … for adequate safeguards to ensure payment — including a provision that conditioned AdOutlet’s right of ownership in use of the copyright information upon payment of the full invoice price. Now that the contract has gone sour, iXL asks the Court to step in and provide it with a remedy (and with leverage) that iXL did not bargain for. The Court does not believe that iXL has shown some likelihood of succeeding in that effort,” the report states. Because iXL failed to make a sufficient showing of likelihood of success, no presumption of irreparable injury applies, Judge Schenkier held. iXL is represented by Ronald A. Sandler, James A. White and Stacy Ann Baim of Jones, Day, Reavis & Pogue in Chicago and Eric Lang and Rebecca McCabe of Paul, Hastings, Janofsky & Walker in Atlanta. Michael P. Foradas and Nader R. Boulos of Kirkland & Ellis in Chicago and William J. Pohlman of Vorys, Sater, Seymour & Pease in Columbus, Ohio, represent AdOutlet.com.

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