MPAY Inc. v. Erie Custom Computer Applications, Inc.

CourtDistrict Court, D. Minnesota
DecidedJune 22, 2021
Docket0:19-cv-00704
StatusUnknown

This text of MPAY Inc. v. Erie Custom Computer Applications, Inc. (MPAY Inc. v. Erie Custom Computer Applications, Inc.) is published on Counsel Stack Legal Research, covering District Court, D. Minnesota primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
MPAY Inc. v. Erie Custom Computer Applications, Inc., (mnd 2021).

Opinion

UNITED STATES DISTRICT COURT DISTRICT OF MINNESOTA

MPAY Inc., Civ. No. 19-704 (PAM/BRT)

Plaintiff,

v. MEMORANDUM AND ORDER

Erie Custom Computer Applications, Inc., PayDay USA, Inc., Payroll World, Inc., Proliant, Inc., Proliant Technologies, Inc., and Kevin Clayton,

Defendants.

This matter is before the Court on Plaintiff’s Motion for Partial Summary Judgment and Defendants’ separate Motions for Summary Judgment. For the following reasons, Plaintiff’s Motion is denied, Defendants Erie Custom Computer Applications, Inc. and Payroll World, Inc.’s Motion is granted in part and denied in part, and Defendants PayDay USA, Inc., Proliant, Inc., Proliant Technologies, Inc., and Kevin Clayton’s Motion is granted. BACKGROUND This dispute involves software source code for payroll systems. Nearly twenty years ago, Plaintiff MPAY (then known as MattPay) and the Defendant entities,1 all of whom

1 Defendants are Erie Custom Computer Applications, Inc., Payroll World, Inc. (which together filed one of the pending SJ motions and will hereinafter be referred to collectively as “Erie”), PayDay USA, Inc., Proliant, Inc., Proliant Technologies, Inc. (collectively “Proliant”), and Kevin Clayton, who is the managing member of OnePoint, the president of PayDay and Proliant Technologies, and the CEO of Proliant. are payroll processors, formed a limited liability company called OnePoint Solutions, LLC, to license a payroll software called Millenium from MPAY. Over the course of their

relationship, the parties have executed numerous agreements. The interplay among these various agreements creates many of the issues in the case. At the inception of their relationship, the parties executed a Member Control Agreement (“MCA”) for OnePoint (Am. Compl. (Docket No. 17) Ex. 3) and a Software Development and License Agreement (“SDLA”) between MPAY and OnePoint (id. Ex. 4). Both Agreements gave OnePoint and its members the right to use MPAY’s software.

(Id. Ex. 3 § 5.1; Ex. 4 § 2(a).) Defendant entities are “Class L” members of OnePoint; MPAY is OnePoint’s only “Class D” member. The SDLA provided that OnePoint could modify the software to develop “Enhanced Software Products.” (Id. §§ 2(e), 3.) The SDLA specifically allows OnePoint to “hire its own independent software developers to develop Enhanced Software Products” (id. § 3(a))

and provides that OnePoint “shall exclusively own on a worldwide basis, all of their respective right, title and interest in and to the Phase Two Enhanced Software Products and all intellectual property rights therein.” (Id. § 3(d).) OnePoint was to pay MPAY a royalty of two cents “per pay check issued or processed by [any entity] using” the software, either the original code or “enhanced” products. (Id. § 3(b).)

Over the next several years, the parties disagreed about their duties under their contracts. These disagreements culminated in a lawsuit in this District, OnePoint Solutions v. MattPay, Inc., 03cv2879 (ADM/AJB).2 That lawsuit was resolved with a letter agreement, dated May 21, 2003. (Am. Compl. Ex. 5 (Docket No. 17-1).) The letter

agreement required OnePoint to give MPAY notice of any independent contractor hired to help develop the enhanced software products and prohibited OnePoint from disclosing MPAY’s source code to the contractor unless the contractor signed a confidentiality agreement. (Id. ¶¶ 2(1), (3).) This letter agreement also “clarif[ied] that, although OnePoint owned the copyrights in any additions or modifications to MPAY’s software, MPAY continued to own the “copyright and other ownership rights in the remainder of the

source and object code in the resulting product.” (Id. ¶ 3.) However, MPAY did not register any copyrights in any of its code until February and March 2019, very shortly before it filed this copyright-infringement action. In 2007, after MPAY apparently “failed to fulfill its obligations to furnish OnePoint with the source code,” more litigation ensued. MPAY v. Erie Custom Comp. App., Inc.,

970 F.3d 1010, 1014-15 (8th Cir. 2020). The parties settled their differences with a “Mediated Settlement Agreement” (Am. Compl. Ex. 6 (Docket No. 17-1)) that extinguished most of OnePoint’s obligations under the SDLA as of the new Phase II date, except the obligation to pay royalties and other obligations not relevant here. (Am. Compl.

2 There have been at least two other lawsuits in this District between these parties. See OnePoint Solutions v. MPay, Inc., 07cv196 (JRT/RLE). OnePoint also sued MPAY a few weeks before MPAY filed the instant matter, but the Court dismissed that lawsuit for lack of jurisdiction. OnePoint Solutions v. MPAY, Inc., 19cv465 (PAM/BRT). There is a lawsuit among at least some of these parties currently pending in state court. MPAY, Inc. v. OnePoint Solutions, 27-CV-19-4069 (Minn. 4th Jud. Dist.). According to Proliant, MPAY fairly recently filed a fourth amended complaint in that action. (Docket No. 488 at 15-16.) Ex. 6 ¶ 6.) Thereafter, OnePoint provided the source code to Proliant and other Defendants, and those Defendants performed updates and upgrades to the Phase II software. (Proliant’s

Reply Mem.) In 2015, Erie and Payroll World formed StarrLee, ostensibly as a software development company. (Pieper Decl. Ex. 18 (Docket No. 433-15) (StarrLee operating agreement).) Erie and Payroll World each own 45 percent of StarrLee; the remaining ten percent is split between Mr. Starr and Mr. Lee, who respectively own Erie and Payroll World. Two years later, Erie and Payroll World formed another company, Taslar. StarrLee

owns 60 percent of Taslar. None of the Defendants directly owns any stake in Taslar; according to MPAY, Taslar provides software to the six payroll entities that own the other 40 percent of Taslar. MPAY contends that these six entities are former MPAY customers, and that Taslar was formed with the express purpose of “poaching” MPAY’s customers. MPAY cites to deposition testimony that Mr. Lee and Mr. Starr pitched the idea of Taslar

as the “F! MPAY” group. (MPAY Supp. Mem. (Docket No. 427) at 10.) Erie and Payroll World also granted a sublicense for the Phase II software, now referred to as ReadyPay, to StarrLee. StarrLee, in turn, granted a sublicense to Taslar. MPAY contends that these sublicenses were prohibited under the parties’ agreements. MPAY contends that Defendants violated the parties’ agreements by providing

source code for the software to entities who did not qualify as “independent contractors” or “software developers” as ostensibly required by the software-licensing agreement. MPAY also asserts that Defendants violated the parties’ agreements by sublicensing the software to entities in which no Defendant owned a majority stake. Finally, MPAY complains that it has not received royalty payments from Defendants since it filed this lawsuit. As discussed below, Defendants have held the amounts due MPAY in escrow since MPAY filed this lawsuit. 3 MPAY asserts that both the providing of source code and

allegedly improper sublicensing are breaches of the parties’ contracts and also constitute copyright infringement—direct, vicarious, and/or contributory—and trade-secret misappropriation. MPAY now seeks summary judgment on Counts I through III of its Amended Complaint, alleging copyright infringement, and Count VIII, which claims breach of

contract. MPAY also asks for summary judgment on Defendants’ affirmative defenses. MPAY’s Motion, however, in fact seeks only partial summary judgment on these counts, because it asks for summary judgment only as to the source-code issue, leaving the claims arising out of the sublicensing for the factfinder to determine. Defendants assert that summary judgment is warranted as to all of MPAY’s claims,

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