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A lawsuit over a software marketing deal that went sour must stay in federal court because the plaintiff’s state law claim of tortious interference effectively lodges a challenge to the defendant’s copyright distribution rights and is therefore pre-empted by the Copyright Act, U.S. District Judge R. Barclay Surrick has ruled. In MCS Services Inc. v. Raleigh Johnsen, et al., Surrick, of the Eastern District of Pennsylvania, found that the plaintiff’s breach of contract claim was not pre-empted because it alleged an “extra element” that went beyond any copyright claim. But Surrick found that the suit was nonetheless subject to federal jurisdiction because the plaintiff’s second claim — for tortious interference with prospective business and contractual relations — focused on a right exclusively protected by the Copyright Act, making it “equivalent to” a claim of copyright infringement. According to the suit, Philadelphia-based MCS owns and licenses software for an inventory system that permits ophthalmologists, optometrists and opticians to track and maintain their eyeglass and lens inventory. In March 2000, the suit says, MCS hired Johnsen and his Downingtown, Pa., company, Rivercross Inc., to develop a new software product, which came to be known as the retail inventory optical system, or “RIOS,” to replace its existing product. Under the original contract, MCS was to pay $15,000 in three equal installments, and Johnsen was to receive royalties of no less than 20 percent of the software selling price for each installation. Although the contract made no mention of copyright ownership, it did say that MCS intended to “distribute ownership based upon participation and capital” and that Johnsen and Rivercross’ ownership would not be less than 20 percent. MCS also agreed to provide systems design and analysis information, as well as support from its systems experts, and to foot the bills for any expenses incurred by Johnsen while he was developing the RIOS project, the suit says. In a renegotiation of the contract, MCS pledged an additional $2,500, and both sides agreed that their “ultimate goal” was to “form a company that will fund, promote, refine and market the product.” But in March 2001, MCS claims in the suit, MCS discovered that Johnsen had no intention of turning over the “source code” for the software. The suit alleges that without MCS’ knowledge, Johnsen had filed to obtain a copyright for the RIOS project and was claiming 100 percent ownership of it. Ignoring the contract, the suit alleges, Johnsen licensed the RIOS software to several of MCS’ customers. MCS’ lawyer, Jay E. Kagan of Philadelphia-based Dilworth Paxson, filed suit in the Philadelphia Court of Common Pleas, alleging breach of contract and tortious interference claims. Johnsen’s lawyer, Thomas K. Schindler of Brown, Mayhart, Martin & Schindler in West Chester, Pa., removed the suit to U.S. District Court and filed an answer with counterclaims, seeking a court declaration that Rivercross had properly copyrighted the software and that MCS had breached the contract by refusing to accept delivery and to market it. The counterclaim also seeks damages of $200,000 for Johnsen’s lost time and effort in writing the program or, in the alternative, for the work he turned away while toiling on the project. Kagan moved for remand to state court, arguing that the case did not involve copyright issues or the ownership of the RIOS copyright but instead focuses only on Johnsen’s performance under the contract. Surrick said his task was to determine whether either of the claims asserted by MCS was pre-empted by the Copyright Act. State laws claims are expressly pre-empted under the Copyright Act, Surrick said, “only if they create rights that are ‘equivalent’ to the exclusive rights within the general scope of copyright.” Under a two-part test announced by the 2nd U.S. Circuit Court of Appeals in its 1983 decision in Harper & Row Publishers Inc. v. Nation Enterprises, Surrick said, the court “must first determine whether the work is the appropriate subject matter of a copyright and then whether the state law creates rights equivalent to the exclusive rights protected by the Copyright Act.” Surrick found that the law was “unsettled” on the issue of whether a contract claim is pre-empted and that the 3rd U.S. Circuit Court of Appeals had never tackled the question. But the “general rule,” Surrick found, is that contract claims are not pre-empted because they require an “extra element” of a promise by the defendant that “renders the claim qualitatively different from a claim for copyright infringement.” Not all contract actions are free from pre-emption, Surrick said, but claims that seek to enforce rights not equivalent to those protected by the Copyright Act will avoid pre-emption. In MCS’ case, Surrick said, the contract claim is not pre-empted because MCS will have to prove the existence of a contract to prevail. But Surrick said the same logic did not apply to the tortious interference claim. “A claim of tortious interference with prospective business and contractual relations is more likely to be pre-empted because interference claims more often involve the same elements as copyright infringement,” Surrick wrote. Kagan argued that the claim included the “additional elements” of awareness and intentional interference that are not part of a copyright infringement claim. Surrick disagreed, saying such elements “go merely to the scope of the right” and can’t change the fact that the state and federal rights at issue are fundamentally equivalent. “Essentially, plaintiff is alleging that defendants distributed copies of RIOS without plaintiff’s authorization in violation of the Copyright Act. Distribution is an exclusive right that is protected under the Copyright Act,” Surrick wrote. “Courts have typically found tortious interference claims involving distribution to be pre-empted by the Copyright Act.” Kagan argued that MCS’ tortious interference claim was more pointed since it focuses on the harm resulting from Johnsen’s distribution to a finite sphere of identifiable and existing MCS customers. Surrick disagreed, saying, “At its core the claim involves distribution.” MCS could have avoided federal pre-emption, Surrick said, by pleading its tortious interference claim in a way that didn’t implicate one of the exclusive rights under the Copyright Act. If the claim challenged Johnsen’s refusal to turn over the RIOS source code, Surrick said, it would not be pre-empted because it would have the added element that MCS was prevented from entering into new contracts. But since MCS’ tortious interference claim clearly challenged the distribution rights of a copyright holder, Surrick said he had no choice but to “convert” the claim into a claim under the Copyright Act and to deny the motion for remand to the state courts.

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