## Facts

- S.O.S., Inc. supplied payroll-related computer hardware and software to businesses; Payday, Inc. provided payroll and financial services in the entertainment industry.
- S.O.S. held a nonexclusive license to certain unpublished business software and could sublicense it to end users while protecting proprietary rights; S.O.S. also had rights to prepare derivative works.
- In December 1983, the parties executed an agreement providing, among other items, a software arrangement for a fixed price and a commitment by S.O.S. to make a specified modification to produce an ASCII-transferable text file.
- The agreement stated that the programs were S.O.S.’s property; Payday acquired a “right of use”; S.O.S. retained “all rights of ownership.”
- The agreement also provided that “changes and modifications other than those mentioned above” would be performed on a time-and-material basis at a stated hourly rate.
- S.O.S. employees performed most programming work; the software met a particular client need but later proved inadequate for Payday’s full operations, leading to later contract adjustments.
- Payday copied at least one S.O.S. program and created modified versions without S.O.S.’s permission, which S.O.S. alleged exceeded the license and violated copyright and state law.
- The district court granted summary judgment for Payday on all claims; S.O.S. appealed.

## Issues

1. Whether the contract’s “right of use” language, coupled with S.O.S.’s retention of “all rights of ownership” and the paid-modifications clause, limited Payday’s authority to copy and modify the software.
2. Whether Payday’s copying and creation of modified versions constituted unauthorized derivative works and copyright infringement when undertaken beyond any license authorization.
3. Whether summary judgment was proper on S.O.S.’s pendent state-law claims (trade secret, contract, and tort) arising from the same conduct.

## Decision

- The Ninth Circuit reviewed summary judgment de novo and viewed the record in the light most favorable to the nonmoving party.
- The court rejected the district court’s reading that Payday’s license authorized the full scope of Payday’s copying and modifications.
- The court reversed summary judgment for Payday on the copyright claim because the license was limited and did not clearly authorize Payday’s unilateral extensive modifications, leaving issues requiring further proceedings.
- The court affirmed summary judgment on certain other claims that were inadequately supported or otherwise not viable on the record.
- The case was affirmed in part, reversed in part, and remanded.

## Legal Principles

- Software license scope is determined by the contract’s express terms; a grant of a “right of use” with an express reservation of ownership can be materially narrower than rights to copy, modify, or prepare derivative works.
- A clause allocating “changes and modifications” to the licensor on a paid basis supports an inference that the licensor retained control over modifications and did not authorize unilateral licensee alterations.
- Conduct exceeding a license’s scope may constitute copyright infringement (not merely breach of contract) when it implicates the copyright owner’s exclusive rights, including the right to prepare derivative works.
- Summary judgment is improper where contract interpretation and license scope, applied to the challenged copying/modification, present genuine disputes of material fact or reflect an incorrect application of substantive copyright principles.

## Conclusion

The Ninth Circuit held that Payday’s software license was limited to use and did not automatically authorize extensive copying and modification; because exceeding license scope can amount to copyright infringement, the court reversed summary judgment on the copyright claim (and related matters), affirmed dismissal of other unsupported claims, and remanded for further proceedings.


S.O.S., Inc. v. Payday, Inc., 886 F.2d 1081 (9th Cir. 1989)