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stating that plaintiff must demonstrate "that the defendant used the trade secret"
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95 Civ. 4552 (MBM).
September 19, 1996
WALTER KLASSON, ESQ., New York, New York, Attorney for Plaintiff.
BAILA CELEDONIA, ESQ., MARY KEVLIN, ESQ., Cowan Liebowitz Latman, P.C. New York, New York, Attorneys for Defendant R.W. Smith, Inc.
C. DEAN LITTLE, ESQ., STUART C. ALLEN, ESQ., BRIAN T. SCHUSTER, ESQ., Reed McClure, P.C. Seattle, Washington, Attorneys for Defendant R.W. Smith Associates, Inc.
CLIFF deQUILETTES Seattle, Washington, Defendant pro se.
MICHAEL QUINN, ESQ., Crummy, Del Deo, Dolan, Griffinger Vecchione Newark, N.J., Attorneys for Defendant ZIA Corporation.
OPINION AND ORDER
Plaintiff Fabkom, Inc., a software developer, has sued R.W. Smith Associates, Inc. ("RWS"), Cliff deQuilettes, and ZIA Corporation, alleging, inter alia, copyright infringement, misappropriation of trade secrets, breach of contract and unfair competition. Plaintiff moves for a preliminary injunction pursuant to 17 U.S.C. § 502 (1994), 15 U.S.C. § 1116 (1994), and state law, to enjoin defendants from marketing or distributing software developed by ZIA which RWS currently uses in its municipal bond trading operations and which plaintiff alleges was unlawfully copied from its own software. For the reasons stated below, the motion for preliminary injunction is granted.
I.
A. The Municipal Bond Trading Industry and Fabkom's MTS Software
Fabkom is a New York corporation with offices in New York City. Its principal line of business is the creation and marketing of software designed to manage the trading operations of municipal bond broker's-brokers. (Bloksberg Decl. ¶ 15) The municipal bond industry includes broker-dealers and broker's-brokers. Broker-dealers arrange for the sale and purchase of bonds. In such transactions, they may be acting either for their own account or on behalf of retail customers. (Id. ¶ 26) A broker's-broker, on the other hand, arranges transactions between independent sellers and buyers. It receives its compensation from a commission or from the difference between the price paid to the seller and the price received from the buyer. (Id. ¶ 25; Van der Merwe Decl. ¶ 2) It does not own any of the bonds involved in the transaction and functions solely as a matchmaker.
For the balance of this opinion, broker's-brokers will be referred to simply as brokers, and broker-dealers as dealers.
There are two principal transactions relevant to a broker's business, at least as it relates to the present action. One is a "bids-wanted" transaction. (Bloksberg Decl. ¶ 29) In effect, this transaction involves an auction: a seller submits a request to sell a bond, without specifying a price, and prospective buyers bid on the bond. (Id.) The auction usually lasts a short time, terminating at the cut-off time stipulated by the seller. The second type of transaction is an "offering." In an offering, the seller proposes a sale price and places no time limit on the sale. (Id.)
Brokers need certain information to effect these transactions. When executing a bids-wanted transaction, the broker must keep track of the bids on the subject bond, including the identity of each bidder, the bid amount, and the rank of the bids. (Id. ¶ 30) The bid may be expressed either as a dollar price or as a percentage yield on the bond. (Id.) The history of prior bids on the bonds also is useful to the broker. (Id. ¶ 32) Further, once a transaction is completed, the broker must produce a tangible record of the transaction, known as a "ticket," which is then used to generate a confirmation to the buyer and seller and to comply with internal accounting and record-keeping requirements. (Id. ¶ 31)
This information can be tracked manually, but its collection and use can be greatly facilitated with the aid of a computer. (Id. ¶ 30) Plaintiff developed software, called MTS, which facilitates these transactions. Plaintiff currently provides MTS to nine of the 21 municipal bond brokers in the United States, and is by far the largest provider of such software in the market. (Id. ¶ 16)
The MTS program's importance lies primarily in the execution of bids-wanted transactions. The initial screen contains a master listing of bonds being offered for sale, as well as information on the cutoff time and date, and the status of the sale. (Id., Ex. I) For each bond the broker may call up the "bid pad," which is the central feature of the software. The bid pad allows the broker to monitor the bids made by prospective buyers and to track their ranking. The pad contains a description of the bond, taken from a public source. (Id. ¶ 63) Below the bond description are nine columns of information on any outstanding bids:
Customer (the broker-dealer making the bid); Broker (the individual entering the bid for the customer); Lot (the amount of bonds bid on — allows acceptance of partial bids); Bid (for entry of a bid in the yield or basis format); Dollar Price (for entry of a bid in the dollar price format or calculated from a yield or basis bid); Bid Less Commission (a feature unique to MTS, which shows the bid, in whichever format it is entered, minus the dollar price commission and concession, if any); Dollar Price Less Commission (which calculates and displays the first ranked bid in dollar price format regardless of the bid format, and in a feature unique to MTS, calculates and displays the dollar price difference between each lower bid and the top bid); Status (a series of one letter indicators of the bid's status in the process from submission to the seller through acceptance and approval by each side); and Rank.
(Id. ¶ 64). MTS also uses the same initial screen for displaying offerings transactions as it does for bids-wanted transactions, although some of the information is used only in one or the other transaction. (Id. ¶ 70)
The MTS program contains additional screens. A user may access a further detailed description of the bond being offered for sale. (Id. ¶ 109) This screen contains a space for notes and comments. (Id. ¶ 111) A user may also access the history of bidding on a particular bond. (Id. ¶ 112) The same screen is used for item description and history for both offering and bids-wanted transactions. (Id. ¶¶ 109, 112) Plaintiff obtained copyright registration for the MTS program on June 5, 1995, under copyright registration no. TXU 680-645. (Id. ¶ 83)
B. The Relationship Between Fabkom and RWS
RWS is a municipal securities broker. (Def. Mem., at 1) Plaintiff licensed its MTS software to RWS for five years under a licensing agreement signed in July 1992. (Bloksberg Decl., Ex. C) The agreement permitted RWS to use the software only in its own offices. It provided that RWS would have the software for "its own use only" and that it could not "in any manner demonstrate the software for any party who is not an employee, agent, representative or Affiliate . . . of customer, duplicate or reproduce the Software, or any part thereof, without the prior written consent of Fabkom." (Id., Ex. C at 3) Further, RWS agreed that
the Software (other than the Tailored Software), its source codes, revisions, upgrades and new revisions, and any copyright therein, is the sole and exclusive property of Fabkom, Customer agrees and warrants to keep such materials confidential, shall protect such materials and their contents, and shall not authorize disclosure or duplication by its agents, servants, employees or representatives.
(Id., Ex. C at 4)
As a result of disagreements between Fabkom and RWS, this arrangement was terminated by a written agreement dated December 27, 1994. (Id. ¶ 36) The December, 1994 agreement provided that the license would expire on March 31, 1995, although an extension was eventually granted through April 30, 1995. (Id. ¶ 36, 38) Plaintiff terminated the license four days early because of a series of alleged breaches. (Id. ¶ 39) In May, 1995, plaintiff learned that RWS was using a different system (the "deQuilettes software") that contained many similarities to the MTS software. (Id. ¶ 40) The new system had been developed by one of RWS's employees, Cliff deQuilettes. (deQuilettes Decl. ¶¶ 6-13; Allgood Decl. ¶ 19) Plaintiff claimed that the deQuilettes software was derived from its own proprietary software, in violation of the licensing agreement. It therefore commenced this lawsuit, claiming, inter alia, copyright infringement, misappropriation of trade secrets, and breach of contract.
After engaging in some months of settlement negotiations with RWS, plaintiff obtained a copy of a bid pad report generated by the software RWS was using at that time. (Bloksberg Decl. ¶ 44) This report, which had been created from software developed by defendant ZIA, seemed to plaintiff very similar to the MTS system's bid pad. (Id. ¶ 44)
C. ZIA's Broker Software
ZIA sells software to the municipal bond dealer market. (Burnett Aff. ¶ 3) Its TAOS software, developed in 1991, provides dealers with the necessary information for dealer trading. (Id. ¶ 9) It pulls together public information on each bond from many disparate sources. (Id. ¶ 11) Unlike MTS, the TAOS system does not allow the entry and organization of multiple bids for each bids-wanted request. Instead, it "allow[s] for inputting batches of bids wanted, as would be received from other dealers, retrieving bond descriptions from J.J. Kenny, entering bids on the items (one per item), and doing calculations on the securities and printing of bids wanted, with or without the bids." (Hartmann Aff. ¶ 3)
ZIA's relationship with RWS began in February 1994. (Burnett Aff. ¶ 13) ZIA agreed to license another of its products to RWS, and suggested during these discussions that RWS might retain ZIA to convert the TAOS program, originally designed for dealers, for use by brokers. (Id. ¶ 15) An actual agreement to provide such a system was reached in April 1995 for initial delivery by May 1, 1995 to replace the plaintiff's no longer licensed MTS software. (Id. ¶ 18) The delivery was then postponed until early July, as a result of RWS's decision to try the deQuilettes software after discontinuing its use of Fabkom's MTS program. (Id. ¶ 20) The ZIA program was eventually phased in at RWS offices from August 3, 1995 to September 12, 1995. (Allgood Decl. ¶ 24)
The broker trading software ZIA developed for RWS ("ZIA software") contains a master listing of bids-wanted and some description of each bond. Through this master listing, the user can access the bid pad for each bond, which contains nine columns of information. The columns, and their respective abbreviations, are as follows: Customer ("Cust"), Broker ("Brkr"), Lot, Bid, Dollar Price ("$Price"), Bid Less Commission ("Bid-Com"), Dollar Price Less Commission ("$Prc-Com"), Status, and Rank. (Bloksberg Decl., Ex. H; Hartmann Aff., Ex. K) The software also contains a detail or bond description screen, not included in the TAOS software, which allows for a more detailed description of bonds than the information above the bid pad. This screen includes space for notes and comments. (Hartmann Aff. ¶ 32) In this item description screen, some fields appear solely in bids-wanted transactions and not in offerings transactions, or vice versa. (Id. ¶ 34)
ZIA vehemently denies that it used the MTS software in the development of its own broker trading program. (Hartmann Aff. ¶ 45) It asserts that the software was developed by adapting its TAOS software to meet broker needs — specifically, by allowing for the entry of multiple bids for each bid wanted instead of only a single bid by a particular dealer. (Id. ¶ 16) Many of the changes from the TAOS program — including allowing for the entry of a partial bid, use of some headings not previously used, listing of the difference between winning bids and losing bids in the Dollar Price Less Commission column, and addition of a field to indicate the status of the transaction — were included at RWS's request. (See, e.g., Hartmann Aff. ¶¶ 25, 26, 29, 30) TAOS also had extensive discussions with RWS personnel, including Carl Van der Merwe, a trading assistant. (Id. ¶ 40)
Fabkom, however, claims that ZIA's program was copied from MTS. It presents documentary evidence to demonstrate ZIA's access to the MTS source code, including a facsimile dated June 7, 1995 from Barbara Hartmann of ZIA to Ben Allgood at RWS, containing source code for the ticketing feature of the MTS program. (Bloksberg Decl., Ex. F) Further, ZIA was given an RWS server, which allowed it access to RWS's network. (Burnett Aff. ¶ 26) Fabkom claims that the MTS software, or the variation on it — the deQuilettes software — was still on the RWS system during the time ZIA had access to the network. (Bloksberg Reply Decl. ¶¶ 32, 33) RWS does not dispute that Fabkom's software was not fully removed from the RWS system even after the April 26, 1995 license termination. (Id. ¶ 32) Neither, apparently, does ZIA.
"Source code" refers to "the literal text of a [computer] program's instructions written in a particular programming language. Once the source code has been completed, it is translated or is `compiled' into `object code' which is the "binary language comprised of zeros and ones through which the computer directly receives its instructions." Computer Int'l Assoc. v. Altai, Inc., 22 F.3d 32, 33 n. 1 (2d Cir. 1994) (citations omitted).
Plaintiff amended its complaint on March 12, 1996, to join ZIA as a defendant, claiming copyright infringement, misappropriation of trade secrets and unfair competition pursuant to the Lanham Act, 15 U.S.C. § 1125 (1994), and state law. Plaintiff now moves for a preliminary injunction prohibiting defendants from further disclosing, marketing, or distributing any software which used by RWS since 1992, including the current ZIA software. Plaintiff has requested that as part of the relief, RWS be permitted to continue to use the ZIA software during this litigation. RWS does not oppose the injunction, but requests that it be permitted to continue using the ZIA software in its operations during the course of this litigation. (Def. RWS Mem., at 1-2)
II.
Plaintiff seeks an injunction on two grounds: First, that defendants infringed the copyright covering the MTS system. Second, that defendants misappropriated trade secrets by obtaining and using copies or demonstrations of plaintiff's software in violation of the licensing agreement between Fabkom and RWS.
The copyright infringement issue presents difficult questions of whether plaintiff's MTS software constitutes expression protectable under the copyright laws. However, because I find that plaintiff has shown enough to obtain an injunction based on misappropriation of trade secrets, I need not resolve the copyright infringement issue at this early stage of the proceedings.
A. Choice of Law
There would appear to be a choice of law issue in this case as a result of the multitude of contacts that parties and occurrences had with a variety of states. However, because all of the parties rely on New York law, I will infer their consent to use New York law. See Tehran-Berkeley Civil and Envtl. Eng'rs v. Tippetts-Abbett-McCarthy-Stratton, 888 F.2d 239, 242 (2d Cir. 1989); Pompano-Windy City Partners, Ltd. v. Bear Stearns Co., 794 F. Supp. 1265, 1289 n. 12 (S.D.N.Y. 1992) (finding implied consent to apply New York law in tort case).
B. Preliminary Injunction — Irreparable Harm
To obtain a preliminary injunction, a party "must show (a) that it will suffer irreparable harm in the absence of an injunction; and (b) either (i) a likelihood of success on the merits or (ii) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly in the movant's favor." Tom Doherty Assoc., Inc. v.Saban Entertainment, Inc., 60 F.3d 27, 33 (2d Cir. 1995).
"An irreparable injury is one that cannot be redressed through a monetary award." JSG Trading Corp. v. Tray-Wrap, Inc., 917 F.2d 75, 79 (2d Cir. 1990). Irreparable harm is presumed where the defendant has misappropriated trade secrets because monetary measurement of such injury is nearly impossible. FMC Corp., 730 F.2d at 63 ("[I]t is clear that the loss of trade secrets cannot be measured in money damages. . . . A trade secret once lost is, of course, lost forever."); Computer Associates Int'l, Inc., 784 F. Supp. at 986 ("Of particular relevance to this action is the recognition by the Second Circuit that the loss of `trade secrets' is not measured in terms of monetary damages . . . and is thus considered `irreparable harm.'"). In addition, "the potential loss of an industry leader's present market and loss of the advantage of being the pioneer in [a] field and [a] market leader, may constitute irreparable harm."Computer Assoc. International, Inc., 784 F. Supp. at 986; see also Anacomp, Inc. v. Shell Knob Serv., Inc., No. 93 Civ. 4003, 1994 WL 9681, at *5 (S.D.N.Y. Jan. 10, 1994) ("This loss of market leadership, like the loss of a trade secret, could not be compensated through money damages.").
Fabkom has demonstrated that it will likely be able to prove that ZIA misappropriated the content, if not the source code, of its MTS software. Thus, losses from the unauthorized copying cannot be measured monetarily. Fabkom's dominant position in the broker market is threatened by ZIA's software. The likelihood of irreparable harm absent an injunction is real.
C. Preliminary Injunction — Likelihood of Success
We must now consider whether plaintiff has shown it is likely to succeed in proving that MTS is a trade secret and that ZIA misappropriated it in violation of a duty.
1. Status of the MTS Software as a Trade Secret
To prove misappropriation of trade secrets under New York law, "the plaintiff must demonstrate (i) that it possessed a trade secret and (ii) that the defendant used that trade secret in breach of an agreement, a confidential relationship, or duty, or as a result of discovery by improper means." Hudson Hotels Corp. v. Choice Hotels Int'l, 995 F.2d 1173, 1176 (2d Cir. 1993).
Under the Restatement of Torts, which New York has adopted,see FMC Corp. v. Taiwan Tainan Giant Indus. Co., 730 F.2d 61, 63 (2d Cir. 1984) (per curiam); Ashland Management, Inc. v.Janien, 82 N.Y.2d 395, 604 N.Y.S.2d 912 (1993), "A trade secret may consist of any formula, pattern or device or compilation of information which is used in one's business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it." Restatement of Torts, § 757, cmt. b (1939). New York courts must evaluate six factors in deciding whether a party possessed a trade secret:
"(1) the extent to which the information is known outside of his business; (2) the extent to which it is known by employees and others involved in his business; (3) the extent of measures taken by him to guard the secrecy of the information; (4) the value of information to him and to his competitors; (5) the amount of effort or money expended by him in developing the information; (6) the ease or difficulty with which the information could be properly acquired or duplicated by others."Restatement of Torts, § 757 cmt. b; see Integrated Cash Management Serv., Inc. v. Digital Transactions, Inc., 920 F.2d 171, 173 (2d Cir. 1990); Eagle Comtronics, Inc. v. Pico, Inc., 89 A.D.2d 803, 803-04, 453 N.Y.S.2d 470, 472 (4th Dep't 1982).
In general, "[c]omputer software, or programs, are clearly protectable under the rubric of trade secrets, if the other elements are also proven." O-Co Industries, Inc. v. Hoffman, 625 F. Supp. 608, 617 (S.D.N.Y. 1985); see also Computer Assoc. Int'l, Inc. v. Altai, Inc., 982 F.2d 693, 717 (2d Cir. 1992) ("Precisely because trade secret doctrine protects the discovery of ideas, processes, and systems which are explicitly precluded from coverage under copyright law, courts and commentators alike consider it a necessary and integral part of the intellectual property protection extended to computer programs."); Business Intelligence Serv., Inc. v. Hudson, 580 F. Supp. 1068, 1072 (S.D.N.Y. 1984). Both the underlying source code, and the architecture of a computer program, may qualify as trade secrets. See Integrated Cash Management Serv., Inc., 920 F.2d at 174; Computer Assoc. Int'l, Inc. v. Bryan, 784 F. Supp. 982, 988 (E.D.N.Y. 1992) ("[E]ven though independently each of the `building blocks' may consist of general or public knowledge, collectively the various components may form a `unique whole.'").
Here, evidence on the first factor is uncontested. The source code, format, structure, and organization of the software is certainly not known outside the business. Further, defendants do not challenge plaintiff's claim that information regarding the general functioning and preferred methods of operations in the broker's business, information integral to the creation of the software, is "not known outside of the securities industry." (Bloksberg Decl. ¶ 74)
The second and third factors encompass the requirement that the matter be secret. "While absolute secrecy is not necessary . . . a showing of substantial measures to protect the secret nature of the process is required." Julie Research Laboratories, Inc. v.Select Photographic Engineering, Inc., 810 F. Supp. 513, 520 (S.D.N.Y. 1992), aff'd in part and vacated in part, 998 F.2d 65 (2d Cir. 1993); see also Defiance Button Mach. Co. v. C C Metal Prod. Corp., 759 F.2d 1053, 1063 (2d Cir. 1985), cert. denied, 474 U.S. 844 (1985). The plaintiff must show that the information could be acquired only through improper means. Id. at 1063.
Plaintiff has taken measures to preserve the secrecy and confidentiality of both the source code, and the architecture of its system. First, MTS is distributed to its customers only in its executable object code form. (Bloksberg Decl. ¶ 76) This means that any person attempting to reveal the programming instructions would see an incomprehensible sequence of numbers, representing machine level commands to the computer's central processing unit. (Id.) The source code form, which would reveal the English words of the programming language, is restricted to plaintiff's principals. (Id.)
Second, the software is given to clients only after they have signed a confidentiality agreement. Plaintiff enters confidentiality and non-disclosure agreements with its customers before allowing them to use its software. (Bloksberg Decl. ¶ 77) For instance, the licensing agreement between plaintiff and RWS contains a clause prohibiting RWS from copying or demonstrating the MTS software to any non-employee. (Bloksberg Decl., Ex. C at 3) Distribution to clients of a computer program through a licensing agreement requiring confidentiality does not destroy secrecy of a trade secret, but rather reinforces it. See, e.g., Trandes Corp. v. Guy F. Atkinson Co., 996 F.2d 655, 664 (4th Cir.), cert. denied, 510 U.S. 965 (1993); Data General Corp. v. Grumman Sys. Support Corp., 825 F. Supp. 340, 359 (D. Mass. 1993), remanded in part, 36 F.3d 1147 (1st Cir. 1994);ISC-Bunker Ramo Corp. v. Altech, Inc., 765 F. Supp. 1310, 1334 (N.D. Ill. 1990).
Defendant ZIA argues that the inputs into the system, i.e., the different categories of bid data, are public information and therefore the MTS program, which merely synthesizes this information, is unprotected. However, even if the components of the system are public, courts have found that the architecture, or organization and structure, of a program may itself be protectable as a trade secret, even when the component information is not. See Integrated Cash Management Serv., Inc., 920 F.2d at 174. Thus, even if the various categories of information significant for bond trading are widely known, the architecture, structure and organization of the plaintiff's program is still unique and constitutes a trade secret. Moreover, the source code is certainly not public knowledge.
The fourth factor — the value of the information to the trade secret holder and his competitors — encompasses the competitive advantage which a plaintiff derives from a process. See Julie Research Laboratories, 810 F. Supp. at 517. Plaintiff has certainly demonstrated that the MTS program gives it considerable advantage in the market for software for municipal bond broker trade execution. Plaintiff's software is used by nine of the 21 municipal bond broker in the country. (Bloksberg Decl. ¶ 16) No other competitor has managed to accumulate more than two clients. (Id.) RWS notes that "[f]rom 1990 to May, 1995, Fabkom was the sole vendor of such software to the 21 broker's brokers in the United States market." (Def. RWS Mem., at 3) This is strong evidence of the information's competitive significance. See, e.g., Data General Corp., 825 F. Supp. at 359.
Moreover, plaintiff commands substantial fees for the use of its software. For instance, the licensing agreement between plaintiff and RWS provided for monthly fees for the first three years of the license of $300 for the first 10 work stations equipped with the program, $250 for the next 10 work stations, $200 for the third group of 10, and $150 for any further work stations. These fees were reduced by 40% in the fourth year. (Bloksberg Decl., Ex. C, Schedule D) Such fees demonstrate the value of the MTS program to Fabkom and the competitive advantage Fabkom derives from it.
Plaintiff also has presented uncontroverted evidence of the fifth and sixth factors — the amount of effort expended on the development of the process and the amount of effort required from a competitor to duplicate the process. Plaintiff notes that extensive effort and experience is required for the creation of bond trading software. (Bloksberg Decl. ¶¶ 18, 19, 75) This is true from both an industry and a computer software perspective. Extensive knowledge of the municipal bond industry is required to create a program to manage trading. (Id. ¶ 75) Any software competitor seeking entry into the municipal bond market would need to expend a considerable amount of energy to develop such a program. Further, from a technical standpoint, software development inherently requires much time and investment. Defendant ZIA admits that at least one of its employees working on the project spent 600 hours to create broker software for RWS. (Hartmann Aff. ¶ 39) Thus, plaintiff has demonstrated that it will likely be able to prove that the MTS software constitutes a trade secret.
2. Misappropriation and Use of the Trade Secret
The second requirement for a misappropriation-of-trade-secrets claim is that a plaintiff demonstrate "that the defendant used the trade secret in breach of an agreement, a confidential relationship, or duty, or as a result of discovery by improper means." Hudson Hotels Corp., 995 F.2d at 1176. There are two facets to this inquiry: first, the trade secret must be used; and second, the use must be in breach of an agreement or duty.
"Misappropriation and misuse can rarely be proved by convincing and direct evidence. In most cases plaintiffs must construct a web of perhaps ambiguous circumstantial evidence from which the trier of fact may draw inferences which convince him that it is more probable than not that what plaintiffs allege happened did in fact take place." O-Co Industries, Inc., 625 F. Supp. at 618 (quoting Greenberg v. Croydon Plastics Co., 378 F. Supp. 806, 814 (E.D. Pa. 1974)). Specifically, "[c]opying can be established by showing access and substantial similarity." Julie Research Laboratories, 810 F. Supp. at 517.
Here, plaintiff claims that defendant RWS breached the licensing agreement by disclosing the MTS program to defendant ZIA. Plaintiff has not yet taken discovery, and so lacks direct proof of duplication of the actual source code of the MTS program in the ZIA program. (Bloksberg Decl. ¶ 84) Instead, Fabkom relies on the evidence of ZIA's access to the MTS program through RWS's unauthorized demonstration or disclosure, to show that ZIA could have used the trade secrets in developing its own program, and on the substantial similarities in the MTS and ZIA software programs to show that ZIA did so.
Plaintiff points to several pieces of evidence to prove ZIA's access to the MTS software. First, and most important, plaintiff provided a copy of a facsimile relating to the ticket generation function of the MTS program that it obtained from RWS during their settlement discussions. (Bloksberg Decl. ¶ 89) The facsimile, dated June 7, 1995, appears to have been sent from Barbara Hartmann, a systems analyst/programmer at ZIA, on a ZIA facsimile cover sheet, and was addressed originally to Ben Allgood, the Director of Business Development at RWS. (Bloksberg Decl., Ex. F) A line has been drawn through Allgood's name, with an arrow pointing to the letters CdQ, which presumably stands for Cliff deQuilettes, Director of Management Information Services at RWS at that time. Attached to the cover sheet are three pages of text, with two columns of writing on each page. At the top of the first page is the title "Tickets definitions," right above the words "Fabkom (Mts) system." The first column of text is headed "Field Name," while the second column is headed "Field Type." The title at the top of the second page is "Ticket definitions," while the title at the top of the third page is "Ticket Parts (Fabkom)." Next to some of the column entries are handwritten comments.
According to plaintiff, the names under the "Field Name" column are the "exact names, or labels, used by plaintiffs in its MTS data base design and code to identify fields of data to be filled in and manipulated by the rest of MTS, here in connection with the Tickets screen and functions." (Id. ¶ 91) The "Field Type" column consists of codes defining the kind and size of the data referred to in each field. (Id.) Plaintiff also claims that the comments reveal a significant understanding of the MTS program. (Id. ¶ 92)
Defendant ZIA fails to fully explain this apparent access to and analysis of the plaintiff's source code. Hartmann, in her affidavit, explains that she was reviewing the information to determine how to interface the ZIA program with the program developed by another software manufacturer, BONDCO, which RWS used in its back office operations. (Hartmann Aff. ¶ 43) However, rather than denying that the facsimile includes the source code for the MTS program, or that she had ever seen it, Hartmann merely claims that the organization of the information in the facsimile does not make sense and that this information was not used in the development of the ticketing function of the ZIA system or in the interface with the BONDCO program. (Id. ¶¶ 43, 44) Although it remains unclear whether any of the particular information contained in the facsimile was used in the ZIA program, the facsimile itself demonstrates that ZIA had access to at least part of the source code of the MTS program and that it may have utilized it, even if only minimally, in the development of its own software.
Plaintiff claims also that ZIA had access to plaintiff's software through two servers which RWS shipped to ZIA. A server is "a central computing unit on a [local area network] on which a main program, such as MTS, is located for use from other computers." (Bloksberg Decl. ¶ 97) The first server was shipped in late May or early June. It contained data that was capable of disclosing information regarding the database developed internally by deQuilettes for use by RWS, which plaintiff alleges was developed using the MTS program. (Allgood Decl. ¶ 25) When RWS realized that access to this data could provide access also to the architecture of its system, it immediately requested that the server be returned, and ZIA claims it never accessed any information on the server. (Id.; Burnett Aff. ¶ 24)
A second server was sent in late June, 1995. That server did not contain any Fabkom data. (Allgood Decl. ¶ 28) However, that server did allow ZIA to connect with RWS's network. ZIA claims that it did not receive fiber optic connection to allow access to the RWS network until August 1995, by which time, according to ZIA, the MTS program had been removed from the system. (Burnett Aff. ¶ 27) Plaintiff hotly disputes the claim that the MTS program was no longer on the network at the time ZIA was able to log on. It states that the MTS program was on the system until November, 1995, (Bloksberg Decl. ¶ 43; Bloksberg Reply Decl. ¶ 32) and RWS does not contradict this claim. However, even before the date on which ZIA obtained a fiber optic connection, ZIA concedes that it had modem access to the system. (Burnett Aff. ¶ 27) ZIA claims that security measures prevented access to MTS software through the modem without monitoring by Tim Haggerty, the network administrator at RWS, but this claim is contradicted by Haggerty's statement that he did not start monitoring ZIA's access until July 17, 1995. (Haggerty Decl. ¶ 10) Haggerty notes that, before that date, the "system was not secure," and access to the network could be achieved through modem. He states that he does not know whether, prior to July 17, 1995, "some unauthorized person had access to the Smith computer system." (Id. ¶ 15) Further, even after that date, he "cannot guarantee that Fabkom, ZIA, or some other unauthorized person could not have entered the RWS computer system in order to open files containing Fabkom software. . . ." (Id.) Thus, from early June to July 17, 1995, ZIA could freely access the RWS network, including MTS and RWS's internally developed software, with no supervision, and after that point ZIA still may have been able to access the network. Access to the RWS network is yet another piece of evidence that suggests that ZIA could have used Fabkom's software to develop its own.
In addition to proof of access, plaintiff emphasizes the similarities between the MTS product and the ZIA product as evidence that this access was translated into actual use and copying. The area of greatest congruence is in the organization and structure of the bid pad. Both bid pads contain the same nine entries, in the same order, with nearly the same headings, and with nearly the same capabilities in each column.
The organization, presence, and labelling of these columns represented a deviation from ZIA's previous dealer software. (Bloksberg Decl. ¶ 105 and Ex. J; Hartmann Aff., Exs. A, B) ZIA claims that some of the similarities in labels to the MTS program are the result of requests by RWS for certain formats. (Hartmann Aff. ¶¶ 26, 27; Burnett Aff. ¶ 43) Further, ZIA claims that these labels conform to industry custom and that the columns are necessary to perform the trading tasks. (Burnett Aff. ¶ 38) However, the RWS employee who functioned as the consultant to ZIA in the development of the ZIA software, when listing the minimum industry requirements for a software program, left out some of the entries which both the MTS and the ZIA programs contain and which ZIA now claims were requested and customary within the industry. Carl Van der Merwe, a trading-assistant employed at RWS, lists in his declaration the following required entries on a bid pad, which he states that he communicated as requirements to ZIA personnel:
(a) the identity of the selling broker; (b) the specific bonds; (c) the "lot" — which is a broker's broker customary term for the quantity of bonds; (d) the identity of each bidding dealer; (e) the price which is bid by each dealer; (f) the rank of the bids from high to low; (g) the bid price less the commission, because it is the high-bid price less commission which is communicated to the selling broker, and (h) the amount by which each lower bid was under the higher bid. . . .
(Van der Merwe Decl. ¶ 12) Not included within this list are features that appear in both the MTS program and the ZIA software, including: almost identical status information, listing of the bid in yield terms, and the capability of making partial bids.
Even if ZIA could explain the similarities in the bid pad with reference to RWS's requests, it is likely that RWS's requests were influenced, if not dictated, by the structure of the MTS program which it had been using for years. Communication of these requests to ZIA in any specific manner, and use of specific requests to develop the ZIA program, would constitute demonstration of the plaintiff's software, in violation of the licensing agreement, and thus a breach of the agreement. (Bloksberg Decl., Ex. C) In effect, RWS would be using requests for features as a way of painting a word picture of how the Fabkom system worked — i.e., demonstrating the system. Contrary to ZIA's assertions, Fabkom is not thereby granted a monopoly over information pertaining to the municipal bond broker industry. Rather, ZIA should have been more vigilant in collecting data regarding the industry to ensure that such information was not colored by years of exposure to plaintiff's software.
The similarities between the two programs go far beyond the inclusion of similar information. The entries on the bid pad appear in the same order. The column headings are almost identical. While similarity in some of the headings is unsurprising, e.g., "cust" for customer, others present greater evidence of duplication, e.g., "SPrc-com" for price in dollars less commission. Further, some unique features of the MTS program appear in the ZIA program, including the capability of making partial bids; the listing of each bid below the winning bid not by the dollar price but by the difference between that bid and the winning bid; and creating a distinct column to enter the bid price in either yield or dollar terms and then another column converting this price into price less commission. (Hartmann Aff., Ex. K; Bloksberg Decl., Ex. H) It is difficult to believe that such substantial similarities are attributable merely to coincidence.
Plaintiff presents other similarities in the flow and structure of the program which defendant alleges are either not similarities or are explainable through common industry practice. These issues will be resolved at a later stage of the proceedings. Suffice it to say that while there are many contested issues, the uncontested similarities alone are sufficient, in combination with the evidence of access, to demonstrate that plaintiff will likely be able to prove some copying of the MTS program by ZIA.
3. Use of the Trade Secret in Breach of Agreement, Confidential Relationship, or Duty
Beyond use of its trade secret, the plaintiff in a misappropriation of trade secrets case must demonstrate that such use breached an agreement, a confidential relationship, or a duty. See Hudson Hotels Corp., 995 F.2d at 1176. A misappropriation of trade secrets claim may be based on the breach of an agreement by a third party where the party receiving and using the trade secret knows or has reason to know that its receipt of the information breaches the third party's duty. See Computer Assoc. Int'l, Inc., 982 F.2d at 718 (quotingRestatement of Torts, § 757 (1939)). It is irrelevant whether the breach is committed by an employee of the defendant or by a third party; all that is required is that the defendant know or have reason to know of the breach and still continue to use the trade secret. See, e.g., Forro Precision, Inc. v.International Business Mach., 673 F.2d 1045, 1057 (9th Cir. 1982); Williams v. Curtiss-Wright Corp., 681 F.2d 161, 164 (3d Cir. 1982).
Constructive notice of the breach is sufficient to impose liability. Computer Assoc. Int'l, Inc., 982 F.2d at 718. A defendant is on constructive notice of a breach when "from the information which he has, a reasonable man would infer [a breach of confidence], or if, under the circumstances, a reasonable man would be put on inquiry and an inquiry pursued with reasonable intelligence and diligence would disclose the breach." Computer Assoc. Int'l, Inc., 982 F.2d at 718; see also Data General Corp., 825 F. Supp. at 360 ("[T]he requisite notice may be found where the defendant knew or should have known that the proffered information is the trade secret of another.").
When there is enough evidence to show that ZIA likely used MTS software to develop its own broker trading program, it is a small step to find that such use occurred in breach of the Fabkom-RWS licensing agreement. The licensing agreement provided that RWS could not "in any manner demonstrate the software for any party who is not an employee, agent, representative or Affiliate . . . of Customer, duplicate or reproduce the Software, or any part thereof, without the prior written consent of Fabkom." (Id., Ex. C at 3) Further, RWS agreed that
the Software (other than the Tailored Software), its source codes, revisions, upgrades and new revisions, and any copyright therein, is the sole and exclusive property of Fabkom, Customer agrees and warrants to keep such materials confidential, shall protect such materials and their contents, and shall not authorize disclosure or duplication by its agents, servants, employees or representatives. (Id., Ex. C at 4) By providing the source code for the ticketing function to ZIA, and giving ZIA both access to the MTS program and a demonstration through its verbal descriptions of the program's features, RWS breached its agreement to keep confidential MTS and its source code.
There are two factors here that strongly suggest that ZIA was or should have been on notice that RWS was breaching its confidentiality obligation under the licensing agreement by revealing the source code and content of the MTS program. First, ZIA was on notice, through statements of RWS employees and its awareness of the commencement of this litigation, that plaintiff considered the MTS program to be a trade secret and that any copying or disclosure of this program to a third party would breach RWS's duties under the licensing agreement. ZIA began development of its broker software for RWS in April 1995. (Burnett Aff. ¶ 18; Allgood Aff. ¶ 20) At that time, "Smith gave specific instructions to its employees . . . and to ZIA, that ZIA was to modify its TAOS software without reference to, access to, or use of Fabkom's MTS software. . . ." (Allgood Aff. ¶ 21) ZIA's admonitions to its employees early in its relationship with RWS to refrain from viewing the MTS program demonstrates its understanding of RWS's obligations under the licensing agreement. (Burnett Aff. ¶ 23) Further, on June 16, 1996, plaintiff filed this lawsuit against RWS claiming, inter alia, copyright infringement and misappropriation of trade secrets. This complaint asserted that the MTS software was a trade secret, and that RWS had a duty under the licensing agreement not to disclose, copy or demonstrate the program for a third party. (Compl. ¶ 21)
Second, it is standard industry practice to market software through licensing agreements that impose confidentiality obligations on customers. See Data General Corp., 825 F. Supp. at 360 ("Moreover, Grumman admitted that it knew confidentiality agreements were widely used in the business to restrict disclosure of proprietary information by customers and former employees."); ISC-Bunker Ramo Corp., 765 F. Supp. at 1323; Leonard T. Nuara, The Importance of the Scope of the License Grant Clause for Multimedia Software Development Agreements, 418 PLI/Pat 71, 76 ("Many traditional software license agreements include provisions which utilize phraseology such as `software must be used for "internal use" only' or other similar language."). Such agreements are the only way to restrict dissemination of software beyond intended users and to capture fees for its use. Thus, ZIA, a participant in the software development market and aware that RWS was charging fees for MTS, must have been aware at least of a high probability that there was a confidentiality agreement protecting MTS.
D. Preemption
Although I have found that the plaintiff is likely to succeed on its allegation of misappropriation of trade secrets, there remains the issue of whether the trade secret claim is preempted by the Copyright Act. Were I to conclude the MTS software is not protectable expression, preemption obviously would not be an issue. However, even if the software is copyrightable, the misappropriation of trade secrets claim would not be preempted.
"A state law cause of action is preempted by federal copyright laws if the subject matter of the state-law right falls within the subject matter of the copyright laws and the state-law right asserted is equivalent to the exclusive right protected by federal copyright law." Ex-Tixz, Inc. v. Hit-Tix, Inc., 919 F. Supp. 728, 737 (S.D.N.Y. 1996). However, if the state law claim requires an element which the copyright claim does not, it is not preempted by federal law. Kregos v. Associated Press, 3 F.3d 656, 666 (2d Cir. 1993), cert. denied, 510 U.S. 1112 (1994). A misappropriation of trade secrets claim advanced under New York law is therefore not preempted because beyond proving some sort of copying, the plaintiff must also demonstrate a breach of duty or agreement. Computer Assoc. Int'l, Inc., 982 F.2d at 717.
In the present case, plaintiff has alleged the extra element required to avoid federal preemption. It claims that defendant RWS had a duty not to disclose its program information; that ZIA "knew or should have known that Plaintiff claimed all intellectual property rights in MTS and that ZIA had no right to receive from DeQuilettes or otherwise from Smith any information concerning MTS or to use, copy or disclose any part of MTS or any information derived from MTS;" and that defendants "have willfully and intentionally engaged in and permitted unauthorized use and disclosure of Plaintiff's trade secrets and confidential business information in violation of Plaintiff's rights and defendants' obligations." (Amended Compl. ¶¶ 91-94)
III.
Even if Fabkom had not proved a likelihood of success on the merits, it could obtain a preliminary injunction also if it demonstrates "sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly in the movant's favor." Able v.United States, 44 F.3d 128, 130 (2d Cir. 1995) (per curiam). As noted above, plaintiff has certainly raised serious questions regarding ZIA's possible misappropriation and use of the MTS program to develop its own program, with constructive notice that such disclosure and copying were in breach of the Fabkom-RWS licensing agreement.
The balance of hardships tips decidedly in Fabkom's favor. If ZIA has misappropriated plaintiff's trade secrets and used the MTS program to develop a competing program, ZIA will be able to market the improperly developed program in the broker market during the litigation in direct competition with Fabkom. Any diminution of Fabkom's market share would be difficult to reverse. Fabkom claims, and ZIA does not deny, that ZIA has already begun to solicit Fabkom clients. (Bloksberg Reply Decl. ¶ 71) To allow ZIA to benefit from its misdeeds for any period of time would be highly inequitable.
ZIA, on the other hand, will suffer little harm from a preliminary injunction. Its major market strength lies in the dealer market with its TAOS software. That market will be unaffected by any injunction, because ZIA may continue to market its TAOS software, which was developed before ZIA's relationship with RWS began. ZIA's only current broker client is RWS, which it may retain. Any loss of future clients as a result of the injunction is purely speculative. ZIA therefore will suffer little harm from a limitation on the sale of its broker software during this litigation. ZIA's claims of harm to its reputation are unfounded; the preliminary injunction does not represent a final judgment as to its guilt, but merely a preliminary assessment of the case. Certainly, ZIA has presented no concrete evidence of any loss of business that may result from an adverse ruling. Thus, the balance of hardships tips decidedly in plaintiff's favor.
* * *
For the reasons set forth above, the motion for a preliminary injunction is granted and defendants are ordered to refrain from marketing, advertising, distributing or otherwise disclosing to any third party, directly or indirectly, any copy, part or derivative of any computer software which RWS is currently using or has used since 1992 for its munipal bond trading operation, including all information about such software. RWS may continue to use its current software throughout the course of the litigation.
A conference will be held on September 24, 1996, 9:15 a.m., to discuss an appropriate bond, see Fed.R.Civ. 65(c), and further steps to be taken in this case.
SO ORDERED: