The Versata case: Third party beneficiary able to bring infringement claim of copyleft obligation in state court

Author: Sylvia F. Jakob

In Versata  the  court held  that a claim of a third party beneficiary, who wished to compel a software producer to license derivative works of  GPL software under the GPL, was not preempted by the Copyright Act.


In 1999 Versata Software Inc. and Ameriprise Financial Services entered into a Master License Agreement (MLA) granting Ameriprise a non-exclusive, non-transferable, perpetual right to use Versata´s Distribution Channel Management software (DCM) subject to several obligations. Specifically, the MLA required Ameriprise to limit access to the highly confidential DCM software to Ameriprise employees and certain permitted contractors, which were non-competitors of Versata and who had signed non-disclosure agreements regarding their work on the software.

The conflict arose when Versata alleged  Ameriprise allowed non-permitted contractors to work on the DCM software in violation of the license agreement and sued Ameriprise in Texas state court. Versata wished to rescind from the contract and demanded Ameriprise stop using and return the DCM Software to Versata.

Ameriprise counterclaimed arguing that Versata had at some point incorporated XimpleWare´s VTD-XML software, an open source product licensed under the GPL. As a result Versata should be compelled to make the DCM source code freely available to all users including Ameriprise and its contractors.

Procedural Issues

Before the court had a chance to make a decision on the material aspects, the parties engaged in procedural arguments: Versata maintained that the counterclaim could not be heard by the state court, because it was a claim under copyright law over which the federal courts had exclusive jurisdiction. The federal court took up the case at Ameriprise´s request and  applied its two-prong test developed in Carson v. Dynegy   to determine whether a state law claim was preempted by federal copyright law:

1) the claim is examined to determine whether it falls within the subject matter of copyright as defined by 17 U.S.C. §102

2) The cause of action is examined to determine if it protects rights that are equivalent to any of the exclusive rights of a federal copyright as provided in 17 U.S.C. §106 (extra- element test)

The court held that the GPL´s copyleft provisions imposed a positive obligation on any license holder to make the code of any derivative work freely available and open source. If the license holder failed to comply, the GPL was prone to terminate and the license holder was potentially liable for copyright infringement for distributing or copying the software without permission. The “viral” component, however, was separate and distinct from any copyright obligation. Ameriprise had not sued Versata for infringing XimpleWare´s copyright by distributing VTD-XML without permission – it was only a third party beneficiary and not the copyright holder - instead Ameriprise had sued based on Versata´s additional obligation: the affirmative promise to make its derivative works open source because it incorporated an open source program into its software.

The presence of an additional contractual promise, separate and distinct from any rights provided by copyright law meant that a claim to enforce that right was not preempted.

However, having found not basis for federal jurisdiction over this claimthe court did not deem it necessary to determine whether Ameriprise had standing to enforce the GPL as a third party beneficiary. It held that argument was better addressed to a court with jurisdiction over Ameriprise´s state-law claim.

Consequences of Versata

Versata turns on its facts. The court impliedly distinguished the dicta in Jacobsen v. Katzer , where it was decided  that the terms of the Artistic License were enforceable copyright conditions, including the duty to” place  the user´s modifications in the public domain or  make them otherwise freely available.”  Jacobsen, however, concerned the claim of a copyright owner vis-á-vis a copyright infringer, whose aim was to obtain injunctive relief and damages under the Copyright Act, whereas Versata deals with a third party beneficiary with no standing under copyright law. 

As such, Versata may open the floodgates for claims of third party beneficiaries, who might be able to compel software producers to  license derivative works of  open source software, where the license contains  a “viral” clause.   

That Jacobsen is still good law, was recently affirmed by XimpleWare v. Versata , where Ameriprise failed in its motion to dismiss XimpleWare´s copyright infringement claim.

As a result potential breachers of copyleft obligations might be pursued under both the Jacobsen and the Versata test, reinforcing  the credibility and reliability of the free and open source business model.