2020 NCBC 57
N.C. Bus. Ct.2020Background
- TLMC (software provider of a triage‑nurse platform featuring an "Easy Read Screen") licensed its software to ITS in 2011 under a System License Agreement containing Section 3.b (six restrictive covenants) that survive termination.
- Section 3.b prohibited (i) sublicensing/transfers, (ii) reverse‑engineering/re‑creating, (iii) copying/reproducing, (iv) disclosing to third parties, (v) developing substantially similar software, and (vi) disclosing payment terms.
- TLMC alleges ITS, while a licensee, gave TLMC software access to a developer (PQC Tech), which produced a competing product called On‑Call Hub released in 2019. TLMC sued for breach of contract and common‑law unfair competition.
- ITS moved to dismiss under Rule 12(b)(6). The court considered copyright preemption, contract construction (divisibility of subsections), and reasonableness of the non‑compete‑style clause.
- Court held: breaches based on subsections 3.b.ii (reverse‑engineering) and 3.b.v (developing similar software) may proceed (not preempted), but claims based on 3.b.iii (copying) and 3.b.iv (disclosure/distribution) are preempted by the Copyright Act and dismissed; 3.b.v (indefinite non‑compete) is unreasonable and unenforceable and dismissed; unfair competition claim dismissed without prejudice for insufficient pleadings.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Copyright preemption of contract claims arising from license restrictions | TLMC: some licensing restrictions (e.g., ban on reverse engineering and ban on developing competing products) are valid contract terms and are not equivalent to Copyright Act rights | ITS: many restrictions (copying, disclosure, broad non‑compete) are equivalent to copyright exclusive rights and thus preempted | Court: apply "extra element" test; provisions forbidding pure copying/distribution (3.b.iii, 3.b.iv) are preempted; bans on reverse engineering (3.b.ii) and on developing competing software (3.b.v) include extra elements and are not preempted (but see 3.b.v enforceability) |
| Breach of 3.b.ii (reverse‑engineering / re‑creating) | TLMC: ITS provided TLMC software to PQC Tech to re‑create a similar product, breaching the reverse‑engineering ban | ITS: reads the restrictions as a single broad covenant and argues restraint‑of‑trade/public policy | Court: treats 3.b.ii as a standalone covenant; reverse‑engineering prohibition is a contractual limitation (not mere copying) and TLMC has pleaded sufficient facts to proceed |
| Breach of 3.b.v (developing substantially similar software / non‑compete) | TLMC: ITS caused development of substantially similar software and thus breached the covenant against developing competing products | ITS: the clause is an unreasonable, perpetual restraint on trade (a naked non‑compete) and unenforceable under N.C. public policy | Court: Section 3.b.v is an indefinite perpetual restraint and unreasonable as a matter of law; unenforceable and dismissed (but divisible so other reasonable covenants survive) |
| Common‑law unfair competition claim | TLMC: alternatively pleads misappropriation of competitive advantage by ITS’s conduct | ITS: challenges sufficiency—no allegation ITS was a competitor or that consumers were confused | Court: unfair competition claim not preempted but dismissal without prejudice because complaint fails to allege ITS acted as a competitor or consumer confusion |
Key Cases Cited
- Lasercomb Am., Inc. v. Reynolds, 911 F.2d 970 (4th Cir. 1990) (overly broad non‑compete in license can constitute copyright misuse and may be analogized to antitrust concerns)
- MDY Indus., LLC v. Blizzard Entm’t, Inc., 629 F.3d 928 (9th Cir.) (copyright/contract intersection; licensing and circumvention issues)
- SAS Inst., Inc. v. World Programming Ltd., 874 F.3d 370 (4th Cir.) (reverse engineering and scope of contractual/licensed restrictions)
- Altera Corp. v. Clear Logic, Inc., 424 F.3d 1079 (9th Cir.) (contractual waiver of reverse‑engineering rights and relation to copyright)
- Madison River Mgmt. Co. v. Bus. Mgmt. Software Corp., 351 F. Supp. 2d 436 (M.D.N.C.) (contract claims based on daily copying of a software database preempted by Copyright Act)
- Compton v. Metal Products, Inc., 453 F.2d 39 (4th Cir.) (patent misuse analogy relied on in Lasercomb)
- Jewel Box Stores Corp. v. Morrow, 272 N.C. 659 (N.C.) (sale‑of‑business non‑competes historically enforceable for long durations)
- Beverage Sys. of the Carolinas, LLC v. Associated Bev. Repair, LLC, 368 N.C. 693 (N.C.) (court may sever/blue‑pencil unreasonable covenant and enforce divisible, reasonable parts)
- Corwin v. British Am. Tobacco PLC, 821 S.E.2d 729 (N.C.) (standards for dismissal under Rule 12(b)(6))