AVTEC SYSTEMS, INCORPORATED, Plaintiff-Appellant, v. JEFFREY
G. PEIFFER; KISAK-KISAK, INCORPORATED; PAUL F. KISAK,
Defendants-Appellees. AVTEC SYSTEMS, INCORPORATED,
Plaintiff-Appellee, v. JEFFREY G. PEIFFER; KISAK-KISAK,
INCORPORATED, Defendants-Appellants, and PAUL F. KISAK,
Defendant.
No. 92-2521, No. 92-2607
UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT
21 F.3d 568; 1994 U.S. App. LEXIS 6522; 30 U.S.P.Q.2D
(BNA) 1365; Copy. L. Rep. (CCH) P27,242; 9 I.E.R. Cas. (BNA)
532
June 7, 1993, Argued
April 6, 1994, Decided
OPINION
PHILLIPS, Circuit Judge:
In these consolidated appeals, we consider a number of copyright and
state-law claims arising from the parties' failure to memorialize their
intentions regarding ownership of a computer program. We affirm in part, vacate
in part, and remand for further proceedings.
I
The facts, as described by the district court, Avtec Systems, Inc. v.
Peiffer, 805 F. Supp. 1312, 1315-17 (E.D. Va. 1992), [**2] are as follows.
Avtec Systems, Inc. (Avtec) markets space-related computer services and products
to the federal government. Its services include computerized simulations of
satellite orbital patterns. Jeffrey G. Peiffer began working part-time for Avtec
while in college and became the company's fifth full-time employee upon his
graduation in 1984. During his career with Avtec, his job description included
"implementing computer simulation" and, specifically, simulating "satellite
orbits." J.A. 232-33.
In 1984, Avtec purchased a Macintosh computer at Peiffer's suggestion. After
Peiffer demonstrated the computer's abilities to Avtec President Ronald Hirsch
and other employees, it became apparent that the company's orbital simulations
would be enhanced in several respects by using a Macintosh. It is disputed
whether that idea originated with Peiffer alone or in discussions with other
Avtec personnel; it also is disputed whether Avtec authorized Peiffer to begin
developing a computer program for that purpose ("the Program") as he did in
1985. Peiffer demonstrated the Program--called "the .309 version" --to Hirsch
and others at Avtec that same year, and again during his 1988 performance [**3]
[*570] appraisal as evidence of his initiative on the job.
At that point, Hirsch and another Avtec employee suggested several
modifications to enhance the Program's utility as a marketing tool for the
company. Peiffer charged time to an Avtec account for making those enhancements.
Peiffer also received a $ 5,000 bonus in early 1989 for helping to land a
contract by demonstrating the Program as a unique Avtec service. He performed
similar demonstrations for other clients as well. Later that year, Avtec issued
a written policy, of which Peiffer was aware, binding employees to duties of
confidentiality and nondisclosure respecting the company's proprietary
information and trade secrets.
In early 1990, another Avtec employee found some bugs in the Program. After
Peiffer fixed them, that other employee presented the corrected version to a
client. In 1991, Avtec labeled the Program as a trademark and advertised it as
unique to Avtec. J.A. 331. At no time before his eventual departure from Avtec
did Peiffer represent to his employer or to its potential clients that he had an
ownership interest in the Program.
In 1992, however, when Peiffer was asked to demonstrate the Program to NASA
as part of [**4] a contract bid, he used the old, uncorrected .309 version
without informing anyone at Avtec or NASA of that fact. Peiffer concedes that
Avtec did not win that contract in part because he showed the outdated version.
Shortly there after, when Peiffer was again asked to demonstrate the program, he
refused and said that he didn't have a copy of it at the office.
Unbeknownst to Avtec, Peiffer had met Paul F. Kisak early in 1989 and granted
Kisak's company, Kisak-Kisak, Inc. (KKI) an exclusive license to market the
Program. Sales generated $ 197,000 in gross revenues for KKI, of which Peiffer
received approximately half.
Avtec registered for a copyright in the .309 version of the Program on March
27, 1992. Six days later, Avtec commenced this action against Peiffer, Kisak,
and KKI (collectively, "defendants") charging copyright infringement,
misappropriation of trade secrets, and breach of fiduciary duty. n1 Avtec also
sought imposition of a constructive trust. On April 9, Peiffer registered his
copyright claim in the .309 version, which he called MacOrbit, and another
copyright claim in the 2.05 version, which he called the Orbit Program and
identified as derivative of the .309 version. [**5] J.A. 1924-25. Defendants
then counterclaimed for copyright infringement.
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n1 A claim for misappropriation of business opportunity was later withdrawn.
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After a three-day bench trial, the court found that Peiffer owned copyright
in the later version of the Program, reasoning that he had not created it within
the scope of his employment as is required by 17 U.S.C.A. § 201(b) (West 1977 &
Supp. 1993) in order for copyright to vest in an employer. Avtec, 805 F. Supp.
at 1317-19. On that basis, the court denied Avtec relief on Count I
and--pursuant to defendants' counterclaim--ordered Avtec to withdraw its
registration of copyright. n2 Id. at 1319, 1323.
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n2 The court found that defendants-counterclaimants failed to prove damages
from the "alleged" violation of Peiffer's copyright, and denied all parties
costs and fees. 805 F. Supp. at 1323.
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Avtec prevailed on its state-law claims, however. The court held that,
through its contributions to and use of the .309 version, Avtec had a trade
secret in the use of that version as a demonstration and marketing device
similar to "shop rights" that may arise in an employee's patented invention. The
court also found that Peiffer and KKI had misappropriated that trade secret. n3
Id. at 1320-21. Upon finding additionally that Peiffer breached fiduciary duties
owed to Avtec, the court imposed a constructive trust. The terms required
Peiffer and KKI: (1) to grant Avtec a perpetual license (as long as defendants
had a copyright interest) to use the Program "for the same purposes as a
purchaser might lawfully utilize it"; (2) to pay Avtec 15% of gross revenues
received from the Program in perpetuity from March [*571] 1, 1989; and (3) to
give Avtec all current and forthcoming versions, enhancements, and upgrades of
the Program before making them commercially available. Id. at 1322-23.
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n3 Kisak had by then been dismissed as a defendant from all but the copyright
infringement claim.
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Avtec's appeal and the defendants' cross-appeal from unfavorable portions of
the judgment followed and were consolidated for hearing and disposition in this
court.
We discuss in order the issue of copyright ownership as it bears upon the
conflicting claims of copyright infringement in Avtec's principal claim and the
defendants' counterclaim, the disposition of Avtec's pendent state law claims
for misappropriation of trade secrets and breach of fiduciary duty, and the
imposition of a constructive trust in favor of Avtec.
To recover on its copyright claim, Avtec had to show that it owned a valid
copyright in the Program and that defendants encroached upon one of the
exclusive rights it conferred. 17 U.S.C. § 501(a); Trandes Corp. v. Guy F.
Atkinson Co., 996 F.2d 655, 660 (4th Cir.), cert. denied, 126 L. Ed. 2d 377, 114
S. Ct. 443 (1993). Those rights include the control of reproduction,
distribution, and performance or display of the original, as well as the
production of derivative works. n4 17 U.S.C. § 106.
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n4 A "derivative work" is a work based upon one or more preexisting
works, such as a translation . . . or any other form in which a work
may be recast, transformed, or adapted. A work consisting of editorial
revisions, annotations, elaborations, or other modifications which, as
a whole, represent an original work of authorship, is a "derivative
work."
. . .
To "perform" a work means to recite [or] render . . . it, either
directly or by means of any device or process . . . .
17 U.S.C. § 101.
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These rights presumptively vest in the author--the one who translates an
original idea into a fixed, tangible means of expression. n5 Id. § 102(a). The
presumption of authorial ownership falls, however, if the work is made "for
hire," such as one "prepared by an employee within the scope of his or her
employment." Community for Creative Non-Violence v. Reid, 490 U.S. 730, 737-38,
104 L. Ed. 2d 811, 109 S. Ct. 2166 (1989) (quoting 17 U.S.C. §§ 101(1), 201(b)).
Under those circumstances, copyright vests in the employer for whom the work was
prepared. Id. at 737. This exception is overridden only by a clear writing
reserving authorship rights to the employee, 17 U.S.C. § 201(b), which
concededly did not exist in this case.
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n5 The protected material in this case consists of the Program's source and
object codes. Human beings write source codes, but computers can't read them
until they are mechanically translated by compiling programs into object codes,
which tell computers how to process data. Computer Assocs. Int'l, Inc. v.
Altai, Inc., 982 F.2d 693, 698 (2d Cir. 1992). The parties have not raised, and
we do not address, the issue of the potentially separate copyrightability of any
screen displays arising from the Program's operation. See id. at 703.
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It is essentially undisputed that Peiffer was Avtec's employee at the time of
the Program's inception. The contested issue throughout has been whether Peiffer
created the Program within the scope of his employment. Reid instructs that
common-law agency principles govern resolution of that question. 490 U.S. at
739-40 (citing Restatement (Second) of Agency § 228 (1958)). As expressed in
Section 228 of the Restatement, the key principle is that a servant's conduct is
within the scope of employment "only if: (a) it is of the kind he is employed to
perform; (b) it occurs substantially within the authorized time and space
limits; [and] (c) it is actuated, at least in part, by a purpose to serve the
master."
We agree with the district court that creation of the Program was "of the
kind" of work Peiffer was employed to perform. See 805 F. Supp. at 1318. When
that element of the Restatement test is met, courts have tended not to grant
employees authorship rights solely on the basis that the work was done at home
on off-hours. See Miller v. CP Chems., Inc., 808 F. Supp. 1238, 1242-44 (D.S.C.
1992) [**10] (computer program prepared at home during off-hours, without
direction or extra compensation from employer held work-for-hire), appeal
dismissed, No. 93-1045 (4th Cir. April 13, 1993); Marshall v. Miles Lab., Inc.,
647 F. Supp. 1326, 1330 (N.D. Ind. 1986) (same, regarding article written for
publication in scientific journal); In [*572] re Simplified Info. Sys., Inc.,
89 Bankr. 538, 542 (W.D. Pa. 1988) (same, regarding computer software).
On the other hand, copyright does not vest in the employer solely because
"the subject matter of the work . . . bears upon or arises out of the employee's
activities for his employer." Melville B. Nimmer, 1 Nimmer on Copyright § 5.03
[B][1][b][i] at 5-28 (1993) ("Nimmer"). Thus, Avtec had to show that Peiffer was
at least "appreciably" motivated by a desire to further its corporate goals in
order to satisfy the third element of the work-for-hire test. Restatement
(Second) of Agency § 236 cmt. b; id. § 235 (act falls beyond scope of employment
if "done with no intention" to serve master) (emphasis added).
The district court found that Peiffer had not developed version 2.05 [**11]
of the Program "within Avtec authorized time and space limits . . . [and] was
[not] motivated, at least in part, by a purpose to serve Avtec." 805 F. Supp. at
1318-19. On this basis, the court held that copyright vested in Peiffer, not in
Avtec, and accordingly rendered judgment in favor of defendants on Avtec's claim
and on their counterclaim.
Avtec contends that the district court should have applied the
scope-of-employment test more flexibly in light of its finding on the pendent
state-law claims that Peiffer breached duties that he owed to Avtec as its
employee. n6 See id. at 1316-17. Defendants rightly question whether the outcome
of pendent state-law claims may drive the analysis of the federal claim upon
which jurisdiction is based. But we conclude that the court did err, however, by
injecting into the analysis of copyright ownership an element contemplated
neither by the Restatement's scope-of-employment test nor by the law of
copyright generally--i.e., the court's preliminary finding that the .309 version
of the Program differed materially from the 2.05 version in terms of the use to
which it was put in the [**12] marketplace. To reiterate, copyright protects
not original ideas but their incarnation in a tangible means of expression. See
generally Feist Publications, Inc. v. Rural Tel. Serv. Co., 499 U.S. 340, 111 S.
Ct. 1282, 113 L. Ed. 2d 358 (1991). It appears undisputed that the original
expression at issue here is embodied in the source code for the .309 version of
the Program. n7 The commercial use to which that work is put does not alter the
owner's exclusive rights to copy it and to prepare derivative works based upon
it. n8 Cf. Mazer v. Stein, 347 U.S. 201, 218, 98 L. Ed. 630, 74 S. Ct. 460
(1954) (exclusive rights undiminished regardless of the "intended . . . or
[actual] use in industry" to which the work is put); Rogers v. Koons, 751 F.
Supp. 474, 477 (S.D.N.Y. 1990), aff'd, 960 F.2d 301 (2d Cir.), cert. denied,
U.S. , 121 L. Ed. 2d 278, 113 S. Ct. 365 (1992).
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n6 Because Avtec does not raise the issue, we do not address the court's
rejection of the alternative contention that Avtec's copyright in the Program
arose from its joint authorship of the work with Peiffer. See 805 F. Supp. at
1319. [**13]
n7 Thus, we reject as meritless defendants' contention that Avtec seeks
copyright on ideas, not expression. See Appellee Br. 27-28.
n8 Certain types of noncommercial use may, of course, provide a "fair use"
defense to a claim of copyright infringement, 17 U.S.C. § 107, but there is no
contention that the defense is applicable in this case.
We also note, for clarity's sake, a matter addressed by neither party:
Publication of works prior to March 1, 1989 without notice of copyright
ownership risks forfeiture of the Copyright Act's protections. 17 U.S.C. §§
401, 405; Michael D. Scott, Scott on Computer Law § 3.37 (1991). Publication
occurs upon "the distribution of copies . . . by sale or other transfer of
ownership" and by "offering to distribute copies . . . for purposes of further
distribution, public performance, or public display." 17 U.S.C. § 101. "A public
performance or display of a work does not of itself constitute publication,"
however, id ., and it is generally agreed that "publication does not include the
distribution of copies under an obligation of confidence." Scott § 3.37 at
3-134.
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Instead of focusing upon the question whether the .309 version was created
within the scope of Peiffer's employment, however, the district court made a
preliminary finding that Avtec used the original version solely as "a
demonstration and marketing device," while the later 2.05 version was a "
'stand-alone' software package that could be marketed commercially," which Avtec
neither [*573] could nor would have developed. n9 805 F. Supp. at 1316.
Relying on this utilitarian distinction between two versions of the program, the
court expressly confined its decision on the question of copyright ownership to
"the current 2.05 version" of the Program. Id. at 1318-19. Finding dispositive
the facts that Peiffer worked on the Program at home, on his own equipment and
time, as a "personal hobby, and not to satisfy specific work obligations for
Avtec," the court reasoned that "while Peiffer allowed earlier versions of the
Orbit Program to be used by Avtec for various client demonstrations, Avtec did
not . . . persuade the Court that Peiffer's development of the 2.05 version . .
. was actuated by his desire to serve Avtec" and held that Avtec [**15] could
not "claim complete or joint ownership of the 2.05 version." Id. at 1319
(emphases added). These factors call into question both the court's assessment
of the evidence before it and its application of the law to the facts of the
case. Anticipating our de novo review of the legal component of the
scope-of-employment issue, the parties emphasize conflicting evidence supporting
their respective positions on that issue. Avtec points to evidence that it
authorized Peiffer to work on the project at home during off-hours and contends
that Peiffer's resulting behavior compels the inference that he intended the
work, at least in part, to contribute to Avtec's successful pursuit of its
business objectives. n10 Defendants counter with the evidence relied upon by the
district court that Peiffer developed the Program as a hobby and that Avtec
failed to exercise significant control or supervision over the project. n11
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n9 The court's analysis illustrates the tension between copyright law's
competing policies of rewarding individual initiative and creativity versus
promoting broad public access to original works, Twentieth Century Music Corp.
v. Aiken, 422 U.S. 151, 156, 45 L. Ed. 2d 84, 95 S. Ct. 2040 (1975), and implies
an intention to resolve that conflict, at least with respect to computer
programs having a relatively short market life, in favor of broad access. See
Matthew R. Harris, Note, Copyright, Computer Software, and Work Made for Hire,
89 Mich. L. Rev. 661 (1990).
Defendants urge us to extend this express language to encompass the .309
version as well, arguing that such a finding is implicit in the court's order
that Avtec withdraw its registration of copyright in that version. We do not
believe the implication is possible; several factors weaken it. The first, of
course, is the court's deliberately exclusive focus upon the 2.05 version in its
express references to Peiffer's copyright ownership. The court did describe him
as "the .309 version's creator," 805 F. Supp. at 1320, but that passing
reference occurs in its discussion of Avtec's trade secret claim--in which
consideration of Peiffer's copyright interest is, as we discuss below, notably
absent, and in which the court found that Avtec had a significant interest in
the "use" of the .309 version. Moreover, the court held that "Peiffer owns the
version of the Orbit Program for which he made copyright application," id. at
1323, when he had in fact applied for copyright in both versions.
To the extent that any functional difference between the versions resulted
from revisions of the original, the matter properly is addressed through
derivative-works analysis undertaken after resolution of the copyright-ownership
issue. See generally Stewart v. Abend, 495 U.S. 207, 109 L. Ed. 2d 184, 110 S.
Ct. 1750 (1990). [**16]
n10 It is uncontested that Peiffer invoked the .309 version to show his
initiative at Avtec; that he made changes suggested by Avtec managers; that he
demonstrated the Program at their request; that he was rewarded for doing so
with a sizeable cash bonus; that he modified the Program at the suggestion and
with the aid of other Avtec employees, billing the time to a specified Avtec
account on at least one occasion; and that he failed at any relevant time to
allege any proprietary interest in the Program. See 805 F. Supp. at 1315-16.
n11 The district court rightly questioned the extent to which an employer's
control over a work remains a dispositive factor in "work for hire" analysis
following the Supreme Court's qualified rejection of such analyses in Reid, 490
U.S. at 738-39. See 805 F. Supp. at 1318.
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As indicated, we have concluded that the district court's resolution of the
scope-of-employment issue was flawed by a misapprehension of the controlling
legal principles. We are not in a position to resolve [**17] that heavily
fact-laden issue in the first instance; among other reasons, credibility could
be decisive. Though we regret the necessity, [*574] we must instead vacate
those portions of the judgment respecting the claim and counterclaim for
copyright infringement and remand those claims for reconsideration, in light of
this opinion, of the dispositive common issue whether the original Program was
created within the scope of Peiffer's employment. If upon that reconsideration
the court again concludes that it was not so created, the court should of course
again give judgment in favor of defendants on Avtec's copyright claim, and must
of course then also reconsider the effect of such a finding upon defendants'
counterclaim for copyright infringement. n12 Should the court conclude instead
that Peiffer created the .309 version within the scope of his employment with
Avtec, it must then determine whether defendants infringed the copyright (for
example, by preparing unauthorized derivative works n13); whether Kisak and KKI
are liable for such infringement; and any statutory remedies that may be
warranted by wrongful copying of protected material. n14 17 U.S.C. §§ 502 [**18]
-505.
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n12 As to that possibility, we offer these observations for such guidance as
they may provide the court upon any reconsideration of the counterclaim. While,
as the district court properly found, assuming Peiffer owned copyright, any
infringement that occurred caused defendants no actual damage, Appellee Br. 47,
defendants rightly contend that 17 U.S.C. § 504(c) mandates consideration of
statutory damages in lieu of actual damages, with modifications for instances of
"innocent infringement." On this issue, we note that the court found implied in
Peiffer's conduct a grant to Avtec of a limited use license in the Program. 805
F. Supp. at 1320. Expressing no view on the factual basis for that holding,
which is not now in issue, we further note that such an implied license is
necessarily nonexclusive and revocable absent consideration. See MacLean
Assocs., Inc. v. Wm. M. Mercer-Meidinger-Hansen, Inc., 952 F.2d 769, 778-79 (3d
Cir. 1991); 3 Nimmer§ 10.02[B][5]. Thus, while an implied license may fail to
vest a proprietary interest in the licensee that is enforceable against other
licensees, it may provide a defense-properly pled by Avtec, J.A. 85--to the
counterclaim. See MacLean Assoc., 952 F.2d at 779. [**19]
n13 Peiffer and KKI concede that "all versions of the Orbit Program" are "to
some extent" derivative of the original .309 version, Appellee Br. 29. See
Stewart, 495 U.S. at 223-24, 234-36.
n14 The parties concede that it is within the district court's discretion to
award or deny attorneys' fees as part of the costs of the action. 17 U.S.C. §
505.
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II
On their cross-appeal from the judgment against them on Avtec's claim for
misappropriation of trade secrets, the defendants raise two major issues.
Apparently for the first time on appeal, they contend that the trade secrets
claim is preempted by the federal provision of a cause of action for copyright
infringement. See generally Sears, Roebuck & Co. v. Stiffel Co., 376 U.S. 225,
11 L. Ed. 2d 661, 84 S. Ct. 784 (1964). Because Avtec did not treat the issue as
waived, and because we find it necessary to vacate the judgment and remand for
reconsideration of the trade secrets claim, we note that the defense must fail
under this circuit's recent decision in Trandes Corp., 996 F.2d at 660. [**20]
The Trandes court considered whether the Copyright Act preempted an action
brought under Maryland's trade secrets statute which, like the Virginia law at
issue here, closely tracks the Uniform Trade Secrets Act. Compare Md. Com. Law
II Code Ann. § 111201(e) (1990 & Supp. 1993) with Va. Code Ann. § 59.1-336
(Michie 1992) and UTSA (reprinted in 2 R. Milgrim, Trade Secrets app. A (1991)).
We rejected the preemption defense on the basis that recovery for trade secret
misappropriation requires proof of breach of confidence--an element of proof
additional to those necessary for recovery in an action for copyright
infringement. Trandes, 996 F.2d at 659-60; H.R. Rep. No. 1476, 94th Cong., 2d
Sess. 132 (1978) reprinted in 1976 U.S.C.C.A.N 5659, 5748 (anticipating no
preemption of actions to enforce "the evolving common law rights of . . . trade
secrets . . . as long as the cause[] of action contains elements, such as . . .
a breach of trust or confidentiality, that are different in kind from copyright
infringement."). The same result follows here.
Defendants argue alternatively that the trade secrets claim fails on the
merits. In [**21] Virginia, a trade secret is information such as "a formula,
pattern, compilation, program, [*575] device, method, technique, or process"
that has independent economic value due to its secrecy and that is subject to
reasonable attempts to keep it secret. Va. Code Ann. § 59.1-336.
Misappropriation is the improper acquisition or disclosure of a trade secret by
one who "knew or had reason to know" that acquisition occurred "under
circumstances giving rise to a duty" to maintain confidentiality. Id. Thus, the
hallmark of a trade secret is not its novelty but its secrecy. Dionne v.
Southeast Foam Converting, 240 Va. 297, 397 S.E.2d 110, 113 (1990).
The court found that Avtec had an interest--described variously as a "trade
secret," a "license," and a "right" akin to the equitable "shop rights" of
patent law--in the "use of the .309 version . . . as a demonstration and
marketing device." 805 F. Supp. at 1320. There is no difficulty in finding the
existence of a trade secret in the source or object codes to computer programs
where question of copyright ownership is not in issue, Trandes, 996 F.2d at 662,
or, even more [**22] clearly, where the owner of the alleged trade secret also
owns copyright in the mate 12 rial sought to be protected. n15E.g., Computer
Assocs. Int'l., Inc.,982 F.2d at 715-16, 720. Of course, a plaintiff "may not
obtain a double recovery where the damages for copyright infringement and trade
secret misappropriation are coextensive." Id . at 720.
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n15 Although Avtec alleged in its complaint that defendants misappropriated
its trade secrets in "the Program," in its client lists, and in its marketing
techniques, J.A. 22-23, on appeal it focuses argument exclusively on the alleged
trade secret in the Program, Appellant Reply Br. 21-26, and we confine our
decision accordingly.
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But defendants rightly question a judgment that, in effect, imposes liability
upon a copyright owner for "misappropriating" his own work. n16As discussed
above, the court made no express finding that Peiffer owns copyright in the .309
version of the Program, and that question has been [**23] remanded for
resolution by the district court. Expressing no opinion upon it, we do note a
critical consequence of a ruling upon it in Peiffer's favor in regard to Avtec's
trade secret claim. It would mean that from the moment of the Program's
inception, Peiffer has owned the exclusive right to license performances of the
original and of any derivative works. And as discussed above, absent a written
agreement regarding Avtec's use of the Program, any use license held by Avtec
would be implied and therefore nonexclusive. See n.12, supra. Avtec offers no
authority, and we have found none, for the proposition that the alleged "owner"
of a trade secret, Dionne v. Southeast Foam Converting & Packaging, Inc., 240
Va. 297, 397 S.E.2d 110, 113 (Va. 1990), could maintain the secrecy of material
that is subject under federal law to publication at the will of another. We do
not believe that a nonexclusive use license in copyrighted material can support
the reasonable expectation or right of secrecy necessary to predicate a claim
that the identical material is a trade secret protectible under Virginia law.
n17 See Restatement (First) of Torts § 757 cmt. b (1939) [**24] (trade secret
must have "a substantial element of secrecy . . . so that, except by the use of
improper means, there would be difficulty in acquiring the information"; one
factor in determining trade secrecy is the ease or difficulty with which the
information could be properly acquired by others) (emphasis added).
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n16 With respect to whether copyright ownership may provide a defense to a
claim for misappropriation of trade secrets, the defense cannot be overcome by
invoking patent-law "shop rights." Congress expressly declined to incorporate
such rights into copyright law. See 1 Nimmer § 5.03[C] (citing H. Rep. No. 553,
supra, at 121, reprinted in 1976 U.S.C.C.A.N. at 5736-37).
n17 We reject defendants' argument that, even if Avtec had a trade secret,
secrecy was lost when the company demonstrated the Program to clients. Trandes,
996 F.2d at 663-64. We do not address the alternative contention that Avtec
failed to take reasonable steps to protect the secrecy of the source code
because we anticipate reconsideration of the evidence on remand, noting only a
tension between the district court's finding that Avtec did take such
precautions, 805 F. Supp. at 1320, and the court's prior observation that "the
evidence is far from convincing that Avtec ever continuously possessed the
software." Id. at 1319.
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - - [**25]
For the above reasons, we must vacate the portion of the judgment in favor of
Avtec on its trade-secret claim, and remand it for reconsideration in light of
this opinion.
[*576] III
Peiffer argues that the district court erred as a matter of law in concluding
that he bore any fiduciary duties toward Avtec and that he breached those
duties. We have considered his arguments, and reject them. "A fiduciary
relationship exists in all cases when special confidence has been reposed in one
who in equity and good conscience is bound to act in good faith and with due
regard for the interests of the one reposing the confidence." H-B Ltd.
Partnership v. Wimmer, 220 Va. 176, 257 S.E.2d 770, 773 (Va. 1979). Employees
owe their employers the duty to "be candid . . . and [to] withhold no
information which would be useful to the employer in the protection and pursuit
of its interests." Community Counselling Serv., Inc. v. Reilly, 317 F.2d 239,
244 (4th Cir. 1963). The district court rightly found that Peiffer breached
those duties through his nondisclosure of his business relationship with Avtec's
competitor KKI and by demonstrating the outdated version of [**26] the Program
to Avtec's detriment and without its knowledge.
IV
In view of our disposition of the various claims, the remedial portion of the
district court's judgment, including the constructive trust it imposed, must be
vacated, with appropriate remedy to abide results on remand. If the court were
to conclude that Avtec does hold copyright in the .309 version and all
derivatives, any infringement of its exclusive rights may be remedied as
provided under the statute. 17 U.S.C. §§ 502-505. Specifically, Avtec would be
entitled to all revenues generated through the infringement, and not merely a
percentage of profits as was awarded under the constructive trust, and Avtec
need only show, as it has, defendants' gross profits from the Program. Id. §
504(b). If Avtec were to prevail on the reconsidered trade secret claim, the
court should award such damages, not coextensive with any awarded for copyright
infringement as could be shown. Computer Assocs. Int'l., Inc., 982 F.2d at 720.
Conversely, if the court finds against Avtec on the issue of copyright
ownership, its damages would be limited to those flowing from the [**27] breach
of fiduciary duty whose finding by the district court we have affirmed, while
the defendants' recovery on their counterclaim would be limited to such
statutory damages as they could prove entitlement to.
V
To summarize. We vacate those portions of the judgment which pertain to Avtec
's claim and the defendants' counterclaim for copyright infringement, and remand
for further proceedings consistent with this opinion. We vacate that portion of
the judgment finding defendants liable to Avtec on the latter's claim for
misappropriation of trade secrets, and remand that claim for further proceedings
consistent with this opinion. We affirm that portion of the judgment determining
that Peiffer breached fiduciary duties owed to Avtec. We vacate the entire
remedial portion of the judgment to abide the determination of liability on the
various claims upon remand.
SO ORDERED