Database denouement

Avoid indigestion  — be careful what you cook up in that database agreement!

Anyone working in intellectual property law is familiar with the questions surrounding agreements to create, maintain and use customized databases.  Yes, the client owns the data; yes, the database specialist designs and services it; yes there’s some boilerplate about intellectual property — but when the relationship with the database software company comes to an end, who is it who gets to pick up which ball and go where?  Often this is not addressed in the contract.  Even when it is, nomenclature is usually less than entirely revealing in terms of the intent of the parties.

The reason for this is that the parties haven’t really thought about the question, or dared to confront each other over it.  Or the lawyers on one or both sides hope it will just never be a problem — perhaps massive sunspots will destroy mankind before this issue comes up! — and don’t want to raise the icky issue that is likely to get them accused of being “the lawyers who stood in the way of the deal.”

But the sunspots hardly ever come in on their cue, do they?

Mark Thomas of the Rocket Docket IP Blog reports on an important Seventh Circuit decision, Edgenet, Inc. v. Home Depot U.S.A., Inc., which, as he says, “is a timely reminder that parties who contract for the creation and licensing of copyrightable works must consider how their relationships will develop over time. The case is also a stern reminder that the courts will enforce the words the contracting parties have chosen – and will not rewrite such contracts to include limitations that the parties themselves failed to add.”  What happened here?

In this case, it turns out that the lawyers were hardly shy about negotiating a pretty deep level of post-relationship rights with respect to the database in question.  It sounds as if they did, even using fancy words like “taxonomy.”  Yet when things went south, there was still plenty to litigate about — mainly what use Home Depot, the huge retailer that has lots and lots of product data needing database management, could put to the database structure it had paid to have developed:

Home Depot therefore contracted with Edgenet in 2004, to develop what the parties called a “taxonomy”, a classification system that would organize Home Depot’s products database. The companies agreed that Edgenet would own the intellectual property rights in the taxonomy and would license Home Depot’s use of it, while the product manufacturers would own the intellectual property rights in their respective products’ attributes data.

In 2006 Edgenet and Home Depot entered into a supplemental agreement that gave Home Depot a no-extra-cost license to use “the product collection taxonomy” Edgenet created, as long as Edgenet remained Home Depot’s data-pool vendor and Home Depot continued paying for services. The 2006 agreement provided that the license would terminate with the contract, at which time Home Depot must immediately stop using the taxonomy unless it exercised an option to purchase a perpetual license for $100,000.

By 2008 Home Depot was developing an in-house database system, incorporating the Edgenet taxonomy. Edgenet learned of this and registered a copyright in what it termed the “Big Hammer Master Collection Taxonomy and Attributes 2008”. In February 2009 Home Depot sent Edgenet a letter saying that their business relationship would end soon, and enclosing a check for $100,000 to exercise Home Depot’s option to buy a perpetual license in the taxonomy.  Edgenet did not accept this transition, returned the check to Home Depot, and filed this lawsuit. The federal district court dismissed the case, and Edgenet appealed.

On appeal, Home Depot conceded that it used Edgenet’s taxonomy to create Home Depot’s own classification system, called HomeDepotLink, which was thus a derivative of Edgenet’s copyrighted work. However, Home Depot contended that it had exercised its right to pay $100,000 for a perpetual license to use “the product collection taxonomy’, and had not violated either Edgenet’s copyright in developing its own system.

In affirming the district court’s dismissal of Edgenet’s claims, the Seventh Circuit agreed with Home Depot’s position. . . .

Neither of the contracts limited the way in which Home Depot could use the taxonomy, and thus the unrestricted license allowed Home Depot to prepare a derivative work incorporating the taxonomy as it pleased. Any limits on what Home Depot could do with the taxonomy was dependent on the terms of the contracts, and Edgenet failed to impose such contractual limits.

If I read this right, the argument by Edgenet was that Home Depot had a right to buy the taxonomy outright, but not to make a derivative work out of it.  It’s not a crazy argument, because a derivate work of Edgenet’s technology could, in theory, even be spun off to compete against Edgenet itself.  That’s something it conceivably would want to bar, or at least pay far more to allow, at the front end of the deal.  Evidently, however, much of the battle was over whether Home Depot had purchased an option to buy the initial version of the Edgenet taxonomy, or the “evolved” version as it existed as long as the service contract was still in place and in whatever form it had been developed by that stage:

[I]f its right to buy a perpetual license had applied only to the older versions, then Edgenet would have been offering Home Depot “nothing that Home Depot would want to buy”. The court rejected this reading of the contracts.

Neither of the contracts limited the way in which Home Depot could use the taxonomy, and thus the unrestricted license allowed Home Depot to prepare a derivative work incorporating the taxonomy as it pleased.

You can only do so much, it seems.  The guys with the orange vests may be hard to find when you’re trying to figure out where they moved that bin of thingamabobs that screws on the end of the whatsits, but Home Depot evidently knows where to find good technology licensing lawyers.



Ron Coleman

I write this blog.

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