Itofca, Inc. v. Megatrans Logistics, Inc.: an Examination of Res Judicata Principles Precluding Infringement Claims Arising from the Approved Purchase of a Copyright at a Bankruptcy Sale

• Jurisdiction: United States,Federal
• Citation: Vol. 37
• Publication year: 2002

37 Creighton L. Rev. 1029. ITOFCA, INC. V. MEGATRANS LOGISTICS, INC.: AN EXAMINATION OF RES JUDICATA PRINCIPLES PRECLUDING INFRINGEMENT CLAIMS ARISING FROM THE APPROVED PURCHASE OF A COPYRIGHT AT A BANKRUPTCY SALE

Creighton Law Review

Vol. 37

INTRODUCTION

The doctrine of res judicata provides a party cannot relitigate an issue raised in a prior action in which a court reached a final judgment on the merits.(fn1) The Restatement (Second) of Judgments expresses the same principle where it states civil judgments are subject to preclusive effects and defines those effects as limits on the opportunity to litigate claims in subsequent actions when a party had the option to litigate the claims in a prior action.(fn2) In bankruptcy cases, courts allow a debtor to sell assets free and clear of any interest in the asset.(fn3) Allowing the sale of an asset free and clear of claims gives the bankruptcy court the power to preclude subsequent claims that may have survived the bankruptcy proceedings.(fn4) This preclusion power can greatly affect the rights of a party to the bankruptcy, or their privy, because with notice of the proceedings, the party could lose rights the party felt it validly held in the asset.(fn5) Recent cases have shown failure to conclusively establish the rights of the parties to the bankruptcy sale can lead to precluding the seller from later claiming any rights in the copyright or the copyrighted product.(fn6)

Recently, in ITOFCA, Inc. v. MegaTrans Logistics, Inc.,(fn7) the United States Court of Appeals for the Seventh Circuit determined when a party to a bankruptcy sale failed to object before the bankruptcy court finalized the bankruptcy proceedings, the principles of res judicata applied to bar the party from asserting copyright infringement claims on a copyright transferred in bankruptcy in a later suit.(fn8) In ITOFCA, ITOFCA, Inc. ("ITOFCA") created the Comprehensive Intermodal Program ("CIP") which ITOFCA later transferred to ITOFCA's subsidiary, ITOFCA Consolidators, Inc. ("ICI").(fn9) When ICI later filed bankruptcy, ITOFCA failed to object to the transfer of the CIP software copyright Amerifreight purchased at the bankruptcy sale.(fn10) Amerifreight transferred the software to MegaTrans Logistics, Inc. ("MegaTrans") and ITOFCA later filed suit claiming copyright infringement against MegaTrans.(fn11) The United States District Court for the Northern District of Illinois, Eastern Division granted summary judgment to MegaTrans reasoning res judicata barred ITOFCA from continuing its lawsuit because ITOFCA failed to properly object at the bankruptcy proceedings.(fn12) The United States Court of Appeals for the Seventh Circuit affirmed the decision reasoning MegaTrans held a valid nonexclusive license, which allowed MegaTrans to alter and sell the software program without infringing on any right ITOFCA may have retained.(fn13) The Seventh Circuit also decided res judicata barred ITOFCA from attempting to relitigate its claims of copyright ownership because the bankruptcy court order authorized MegaTrans, ICI's transferee, to make and to sell an altered version of the software.(fn14)

This Note will first recount the facts and holding of ITOFCA.(fn15) This Note will then examine cases applying res judicata to parties asserting ownership rights in copyrights transferred by sale or agreement.(fn16) Next, this Note will discuss a case showing copyright law allows parties to assign a copyright where the parties intended to transfer the copyright.(fn17) Then, this Note will describe a case applying principles of copyright law to bar a copyright infringement claim where evidence existed there was a grant of a nonexclusive license to that copyright.(fn18) This Note will then analyze the decision in ITOFCA.(fn19) In particular, this Note will apply prior rulings to show intent determines whether the parties to an asset transfer actually conveyed the copyright.(fn20) Then, this Note will describe what rights MegaTrans gained through Amerifreight's assignment.(fn21) This Note will then review the reasons why ITOFCA was precluded from asserting its copyright infringement claim.(fn22)

FACTS AND HOLDING

Several large corporations created ITOFCA, Inc. ("ITOFCA") to provide freight consolidation and forwarding services for the owner corporations.(fn23) To provide these services, ITOFCA developed computer software, the "Comprehensive Intermodal Program" ("CIP"), to assist the owner corporations with their freight needs.(fn24) The CIP software consisted of several computer programs which enabled ITOFCA to provide freight services to its customers using various transportation methods.(fn25) ITOFCA owned the program, but never registered the copyright for the program.(fn26)

In 1982, ITOFCA established ITOFCA Consolidators, Inc. ("ICI") as a wholly owned corporate subsidiary.(fn27) In December 1986, ITOFCA transferred a substantial amount of its assets to ICI; the asset transfer agreement contained recitals that expressed ITOFCA's desire to transfer all freight forwarding operations and assets to ICI.(fn28) Among the transferred items were two copies of the CIP software.(fn29) Over the next five years, ICI used and modified the CIP software to benefit its business.(fn30)

In January 1991, ICI filed for Chapter 11 bankruptcy in Illinois.(fn31) As required in bankruptcy proceedings, ICI filed a schedule identifying all personal property including "patents, copyrights, franchises, and other general intangibles."(fn32) The schedule claimed no property fitting this description.(fn33) ICI listed the software copies as an asset on its Schedule B-3 as "property of any kind not otherwise scheduled."(fn34) Without opposition from ITOFCA, the bankruptcy court approved the sale of ICI's "right, title, and interest in all patent, copyright and trade secret rights in and to all computer software and corresponding documentation developed or acquired by [ICI]" to Amerifreight.(fn35) The approved sale acknowledged Amerifreight had only a nonexclusive right in the software and that ICI could sell additional copies of the CIP software to other parties.(fn36) Amerifreight sold its interest in the CIP software in September 1991 to MegaTrans Logistics, Inc. ("MegaTrans").(fn37) Since 1991, MegaTrans further adapted the CIP software and licensed the modified program to other users.(fn38)

ITOFCA, which became dormant after the divesture of its assets to ICI in 1986 and after ITOFCA dissolved in 1991, filed for reincorporation in Illinois in 1996.(fn39) In March 1999, ITOFCA registered a copyright for the original CIP software.(fn40) ITOFCA later filed a supplemental registration claiming both ITOFCA and ICI created the CIP software in 1991 therefore making ICI a co-owner of the copyright.(fn41) ITOFCA also asserted in the supplemental registration its ownership of the original CIP software program which ITOFCA created in 1986.(fn42)

ITOFCA sued MegaTrans in the United States District Court for the Northern District of Illinois, Eastern Division.(fn43) ITOFCA alleged MegaTrans copied and sold the CIP software thereby infringing on ITOFCA's exclusive copyright on the program.(fn44) ITOFCA's infringement claim stated MegaTrans altered the software to remove any references to ITOFCA and sold the altered software to four other companies under the moniker "MegaLink."(fn45) ITOFCA sought an injunction against MegaTrans from subsequent infringement and to force MegaTrans to produce all copies of the CIP software, which ITOFCA claimed were in violation of its rights under copyright law.(fn46) MegaTrans filed a counterclaim alleging ITOFCA did not have a copy-right in the CIP software and MegaTrans received a nonexclusive license to the software rights by assignment from Amerifreight.(fn47) MegaTrans also sought to void the 1999 copyright registration of ITOFCA on the basis ITOFCA did not hold a valid copyright to the software.(fn48) MegaTrans further moved for summary judgment asserting ITOFCA's claim to an exclusive copyright was already litigated in bankruptcy court and therefore, issue preclusion barred ITOFCA's argument.(fn49) But Judge Ruben Castillo, writing for the district court, applied the doctrine of claim preclusion because the bankruptcy court's decision barred ITOFCA's copyright infringement claim.(fn50)

The court applied three principles of claim preclusion under federal law in granting MegaTrans' motion for summary judgment on the grounds of res judicata.(fn51) The court stated the three principles were: both lawsuits involved the same parties, or the privies of the parties; the same claim was involved in both suits; and there was a final judgment on the merits in the prior case.(fn52) The court determined ITOFCA and Amerifreight, as MegaTrans' privy, were both parties to the previous suit.(fn53) The court further explained ITOFCA's attempt to relitigate the ownership of the copyright involved the same claim and reasoned ITOFCA's failure to appeal the bankruptcy court's approval of the sale of the CIP software resulted in a final judgment on the merits in the prior case.(fn54) The court maintained ITOFCA's failure to appeal precluded ITOFCA from claiming ICI was not the owner of the CIP copyright, which was subsequently sold to MegaTrans.(fn55) Finally, the court dismissed all of MegaTrans' counterclaims without prejudice because the court determined those counterclaims may have become moot and the...