A federal court in Virginia recently held that claims for conversion and unjust enrichment were preempted by the Copyright Act.


A federal court in Virginia recently held that claims for conversion and unjust enrichment were preempted by the Copyright Act.

Software developer Microstrategy claimed that its licensee, Netsolve, violated restrictions imposed by Microstrategy's clickwrap license agreement.

Netsolve purchased licenses to Microstrategy's copyrighted software containing "restricted use" or "limited use" provisions. Microstrategy claimed that these provisions limited the number of named users that could utilize the software and the number of times the software could be used per CPU (central processing unit).

After Microstrategy conducted an audit at Netsolve to determine whether it was complying with the license restrictions, Microstrategy was convinced that the company was not complying with the agreement. Instead, it was using the software outside the limits of the agreement.

Microstrategy sued Netsolve in April 2005 for copyright infringement, unjust enrichment and conversion. In response, Netsolve filed a motion to dismiss the latter claims, arguing that they were preempted by the Copyright Act.

The court agreed, following a two-step analysis.

First, the court wrote that a state law claim is preempted if the work is within the scope of the subject mater of copyright.

Since the conversion and unjust enrichment claims were premised on Netsolve's allegedly wrongful use of the copyrighted software, they were within the subject matter of copyright.

Second, the court wrote that a state law claim is preempted if the rights granted under state law are equivalent to any exclusive rights within the scope of federal copyright. It noted that a right granted under state law is not equivalent when there is an extra element that changes the nature of the state law action so that it is qualitatively different from a copyright infringement claim.

The court held that the conversion and unjust enrichment claims were not qualitatively different from the infringement claim.

Under Virginia law, conversion is any wrongful exercise or assumption of authority over another's goods, depriving him of their possession, and any act of dominion wrongfully exerted over property in denial of the owner's right (or inconsistent with it).

The court held that Microstrategy was "alleging mere unauthorized reproduction of the software, placing the conversion claim squarely within the province of the Copyright Act." It did not assert that Netsolve had retained a physical object and refused to return it. It only alleged retention of intangible property -- intellectual property.

Unjust enrichment under Virginia law means that a plaintiff conferred a benefit on the defendant, the defendant had knowledge that the benefit was conferred, and the defendant accepted or retained the benefit under circumstances that rendered it inequitable for the defendant to retain the benefit without paying for its value.

Microstrategy alleged that Netsolve was unjustly enriched "by its unauthorized and unlawful use" of the software without paying for it.

The court held that the unjust enrichment and copyright claims were equivalent.

As a result, the court dismissed the conversion and unjust enrichment claims from the complaint.

Case: Microstrategy Inc. v. Netsolve Inc.
Court: U.S. District Court for the Eastern District of Virginia, Judge J. Lee, case no. Civ.A. 05-334, decided May 13, 2005
Counsel for Microstrategy: Michael Jude McKeon, Washington, D.C.
Counsel for Netsolve: Thomas J. O'Brien, Washington, D.C.

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