Micro Focus (US), Inc. et al v. Genesys Software Systems, Inc.

Filing 24

Judge Nathaniel M. Gorton: MEMORANDUM & ORDER entered denying 7 Motion to Dismiss for Failure to State a Claim (Danieli, Chris)

United States District Court
District of Massachusetts
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Plaintiffs,
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v.
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GENESYS SOFTWARE SYSTEMS, INC., )
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Defendant.
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MICRO FOCUS (US), INC. and
MICRO FOCUS IP DEVELOPMENT
LIMITED,

Civil Action No.
14-14049-NMG

MEMORANDUM & ORDER
GORTON, J.
This case arises from an alleged breach of a software
license agreement by defendant Genesys Software Systems, Inc.
(“Genesys”), a company that develops payroll and human resources
management software.

Plaintiffs Micro Focus (US), Inc. and

Micro Focus IP Development Limited (jointly “Micro Focus”)
allege that Genesys breached the End User License Agreement
(“the EULA”) governing the use of their proprietary software
program Net Express.
Pending before the Court is defendant’s motion to dismiss.
For the reasons that follow, the motion will be denied.

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I.

Background
A.

The End User License Agreement

Micro Focus is the author and owner of Net Express, a
software program consisting of a collection of tools for
editing, compiling and debugging computer applications written
in the programming language COBOL.

According to the plaintiffs,

Net Express translates source code written in COBOL into an
“executable” stand-alone software application embedded with
Micro Focus software code.
Users of Net Express must purchase both a “development
license” to create and develop an application as well as a
“deployment license” to permit the deployment of the Net Express
software that has been incorporated into an application.

The

“named user license” is a type of development license that
permits one person specifically identified by the licensee to
use Net Express.
As part of the installation process, all licensees of Net
Express must accept the terms of the EULA which prohibits thirdparty use of the software program.

A licensee agrees to use Net

Express “solely for its own internal use and benefit,” subject
to certain narrow exceptions.

Specifically, a licensee agrees

that it will not 1) use the software for outsourcing or hosting
other data processing services to third parties, 2) use or
permit any third party to use a software application program
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created with Net Express without a valid deployment license or
3) assign, sell or otherwise transfer the software to any third
party.
The EULA also requires a licensee to purchase support
services for all licensed copies of Net Express if such service
is purchased for any copy of the program.

Accordingly, either

all licenses of Net Express must be covered by Micro Focus
support services or none of them is permitted to be covered.
B.

Alleged Breach by Genesys

Between July, 2000 and March, 2011, Genesys acquired
licenses from Micro Focus for the use of Net Express to run its
software application “Genesys Payroll.”

For example, in

January, 2003, defendant purchased a “named user license” for
version 3.1.00 SP1 of Net Express.

Although defendant has had

more than one Micro Focus development license installed and in
use, it maintained only one of its licenses on support services.
Genesys has also purchased a deployment license but that license
is not installed or in use and support services for that license
has not been renewed since April, 2001.
In March, 2011, Genesys updated and installed a single user
license for Net Express version 5.1.04.

As part of the

installation process, defendant accepted the terms of the EULA
which governed that version of Net Express as well as all prior
versions.
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Plaintiffs assert that Genesys violated the EULA in the
following ways: 1) by hosting Genesys Payroll on one or more
servers that defendant makes accessible to its customers over
the internet, thereby allowing third parties to access the
application without installing the software on their own
computers or paying Micro Focus license fees associated with
such installation; 2) by impermissibly deploying Net Express
through “user-acceptance testing” whereby defendant tests the
performance of Genesys Payroll in an environment that simulates
that of the customer; and 3) by maintaining support services for
only one of its Net Express licenses.

Finally, plaintiffs

expect to confirm through discovery that defendant permitted a
third party, PeopleStrategy, Inc., to use the licensed Net
Express software.
C.

Procedural history

Plaintiffs filed their complaint in October, 2014 alleging
that defendant breached the EULA by 1) impermissibly hosting
services and permitting third party use of Micro Focus’s
software (Count I), 2) deploying the software in an unauthorized
manner (Count II) and 3) failing to maintain required support
services (Count III).
Genesys moved to dismiss the complaint in January, 2015 and
the Court held a hearing on that motion in April, 2015.

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II.

Defendant’s motion to dismiss
A.

Legal Standard

To survive a motion to dismiss, a complaint must contain
sufficient factual matter, accepted as true, to “state a claim
to relief that is plausible on its face.” Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 570 (2007).

The Court must accept all

factual allegations in the complaint as true and draw all
reasonable inferences in the plaintiff’s favor. Langadinos v.
Am. Airlines, Inc., 199 F.3d 68, 69 (1st Cir. 2000).

The Court,

however, need not accept legal conclusions as true. Ashcroft v.
Iqbal, 129 S. Ct. 1937, 1949 (2009).

Threadbare recitals of the

legal elements, supported by mere conclusory statements, do not
suffice to state a cause of action. Id.

Accordingly, a

complaint does not state a claim for relief where the well-pled
facts fail to warrant an inference of any more than the mere
possibility of misconduct. Id. at 1950.
B.

Application
1.

Preemption by the Federal Copyright Act

Defendant contends that the claims for breach of contract
in Counts I and II of the complaint are preempted by the
Copyright Act because plaintiffs are essentially alleging that
Genesys distributed their copyrighted software.

Genesys further

contends that plaintiffs have failed to state a claim for
copyright infringement because they do not allege the necessary
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elements of ownership of a valid copyright registration or any
copying of the Net Express software.
Section 301(a) of the Copyright Act precludes enforcement
of any state cause of action that is equivalent in substance to
a federal copyright infringement claim. 17 U.S.C. § 301(a); see
also John G. Danielson, Inc. v. Winchester-Conant Properties,
Inc., 322 F.3d 26, 44 (1st Cir. 2003).

The rights protected

under the Copyright Act include the rights of reproduction,
preparation of derivative works, distribution and display. 17
U.S.C. § 106.

A state law claim will not be preempted by the

Copyright Act, however, if that cause of action
requires an extra element, beyond mere copying,
preparation
of
derivative
works,
performance,
distribution or display [because] the state cause of
action is qualitatively different from, and not
subsumed within, a copyright infringement claim...
Data Gen. Corp. v. Grumman Sys. Support Corp., 36 F.3d 1147,
1164 (1st Cir. 1994) abrogated on other grounds by Reed
Elsevier, Inc. v. Muchnick, 559 U.S. 154, 130 S. Ct. 1237, 176
L. Ed. 2d 18 (2010) (internal quotation marks omitted).
A majority of courts to address the issue have found that
claims for breach of contract in the software licensing context
are not preempted by the Copyright Act. See, e.g., Altera Corp.
v. Clear Logic, Inc., 424 F.3d 1079, 1089 (9th Cir. 2005) (“Most
courts have held that the Copyright Act does not preempt the
enforcement of contractual rights.”) (emphasis in the original);
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Bowers v. Baystate Technologies, Inc., 320 F.3d 1317, 1324 (Fed.
Cir. 2003) (collecting cases from the Fourth, Fifth, Sixth,
Seventh and Eighth Circuit Court of Appeals).

The Eighth

Circuit Court of Appeals has explained, for example, that a
contractual restriction on the use of a licensed software
program constitutes
an extra element...making [the] cause of action [under
contract law] qualitatively different from an action
for copyright.
Nat'l Car Rental Sys., Inc. v. Computer Associates Int'l, Inc.,
991 F.2d 426, 431 (8th Cir. 1993).
Similar reasoning applies to plaintiffs’ claims.

In Count

I, plaintiffs contend that defendant breached the EULA by
engaging in hosting services and permitting third party access
to Net Express.

In Count II, Micro Focus avers that defendant

impermissibly deployed Net Express by performing user acceptance
testing.

Both claims require the extra element of unauthorized

use of the software’s end-product beyond the required elements
for stating a copyright infringement claim. See Altera Corp.,
424 F.3d at 1090.

Plaintiffs’ contract claims in Counts I and

II are therefore not preempted by the Copyright Act.
Moreover, the Court concludes that plaintiffs have
sufficiently stated their claims for breach of contract because
they have alleged the existence of contractual obligations owed
by Genesys and that defendant breached those obligations. See
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RRC Ne., LLC v. BAA Maryland, Inc., 413 Md. 638, 658, 994 A.2d
430, 442 (2010).1
Accordingly, the motion to dismiss Counts I and II of the
complaint will be denied.
2.

Count III

Defendant contends that plaintiffs’ claim for breach of
contract due to failure to pay contractually mandated
maintenance fees is wholly conclusory and lacks factual
allegations to survive a motion to dismiss because Micro Focus
fails to allege the number of Net Express licenses issued to
Genesys, the content of such licenses and the maintenance
required.
The Court disagrees.

The complaint alleges that the EULA

requires a licensee to purchase support services for all copies
of its Net Express licenses but that Genesys breached the
contract by purchasing support services for only one of its
licensed copies.

Plaintiffs have also alleged damages resulting

from the breach.

Those assertions are sufficient to state a

claim for a breach of contract.
The motion to dismiss Count III of the complaint will
therefore be denied.

1

Plaintiffs state that the EULA is governed by Maryland law.
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ORDER
For the foregoing reasons, the motion to dismiss filed by
Genesys Software Systems, Inc. (Docket No. 7) is DENIED.
So ordered.
/s/ Nathaniel M. Gorton
Nathaniel M. Gorton
United States District Judge
Dated April 3, 2015

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