10.05.2011 Edgenet, Inc. v. The Home Depot USA, Inc., et al – Seventh Circuit Holds that Contract Gave Retailer the Right to Purchase a Perpetual Copyright License in Inventory Database Taxonomy and to Use that Taxonomy to Create Its Own Version

On September 2, 2011, in Edgenet, Inc. v. The Home Depot USA, Inc., et al, No. 10-1335 (7th Cir, September 2, 2011), the U. S. Court of Appeals for the Seventh Circuit affirmed a district court decision and held that The Home Depot USA, Inc. (“Home Depot”) was entitled, under its contracts with Edgenet, Inc. (“Edgenet”), to buy a perpetual license in the “taxonomy” Edgenet created to organize Home Depot’s computer database for Home Depot’s national product inventory. In doing so, the Seventh Circuit provided useful guidance for companies that contract for copyrightable works and those vendors that create them. 

Home Depot’s need for Edgenet’s software arose from Home Depot’s national system of more than 2,000 retail stores and its complex inventory of goods in many broad categories, such as hand tools and appliances. Home Depot needed to organize the products database for use by its own stores, and enable its customers to access the inventory for on-line purchases at Home Depot’s web site. The general classifications of products, such as hand tools, had many sub-classifications, for example, hammers, which were further subdivided into many types by product attributes (by length, material, and so forth). The manufacturers who sold these items to Home Depot furnished electronic records detailing their products’ attributes, but Home Depot needed to organize the data into a comprehensive database system. 

Home Depot therefore contracted with Edgenet in 2004, to develop what the parties called a “taxonomy”, a classification system that would organize Home Depot’s products database. The companies agreed that Edgenet would own the intellectual property rights in the taxonomy and would license Home Depot’s use of it, while the product manufacturers would own the intellectual property rights in their respective products’ attributes data. 

In 2006 Edgenet and Home Depot entered into a supplemental agreement that gave Home Depot a no-extra-cost license to use “the product collection taxonomy” Edgenet created, as long as Edgenet remained Home Depot’s data-pool vendor and Home Depot continued paying for services. The 2006 agreement provided that the license would terminate with the contract, at which time Home Depot must immediately stop using the taxonomy unless it exercised an option to purchase a perpetual license for $100,000. 

By 2008 Home Depot was developing an in-house database system, incorporating the Edgenet taxonomy. Edgenet learned of this and registered a copyright in what it termed the “Big Hammer Master Collection Taxonomy and Attributes 2008”. In February 2009 Home Depot sent Edgenet a letter saying that their business relationship would end soon, and enclosing a check for $100,000 to exercise Home Depot’s option to buy a perpetual license in the taxonomy. Edgenet did not accept this transition, returned the check to Home Depot, and filed this lawsuit. The federal district court dismissed the case, and Edgenet appealed. 

On appeal, Home Depot conceded that it used Edgenet’s taxonomy to create Home Depot’s own classification system, called HomeDepotLink, which was thus a derivative of Edgenet’s copyrighted work. However, Home Depot contended that it had exercised its right to pay $100,000 for a perpetual license to use “the product collection taxonomy’, and had not violated either Edgenet’s copyright in developing its own system. 

In affirming the district court’s dismissal of Edgenet’s claims, the Seventh Circuit agreed with Home Depot’s position. The following points of the court’s decision provide practical guidance to parties contracting for such software services. 

The court found that both the 2004 contract and the 2006 supplemental contract between the parties did not refer to “the “Big Hammer Master Collection Taxonomy and Attributes 2008” registered by Edgenet. Instead, the contracts licensed “the product collection taxonomy”, which was the current version of the taxonomy developed by Edgenet, as long as the contracts were in force. The taxonomy was, the court said, “a work in progress”, and as Home Depot added or dropped products, the taxonomy changed. Home Depot was not buying the right only to use an older version of the taxonomy; if its right to buy a perpetual license had applied only to the older versions, then Edgenet would have been offering Home Depot “nothing that Home Depot would want to buy”. The court rejected this reading of the contracts. 

Neither of the contracts limited the way in which Home Depot could use the taxonomy, and thus the unrestricted license allowed Home Depot to prepare a derivative work incorporating the taxonomy as it pleased. Any limits on what Home Depot could do with the taxonomy was dependent on the terms of the contracts, and Edgenet failed to impose such contractual limits. 

The court also found that when Home Depot stopped using Edgenet’s services, Home Depot lost the right to a no-extra-cost license, but, while the contracts were in force, Home Depot had the option to pay $100,000 to obtain the perpetual license to use Edgenet’s taxonomy. Home Depot exercised this option while the license was still in force. Thus, Home Depot’s use of the taxonomy in HomeDepotLink was no infringement of Edgenet’s copyright. 

Edgenet is a timely reminder that parties who contract for the creation and licensing of copyrightable works must consider how their relationships will develop over time. The case is also a stern reminder that the courts will enforce the words the contracting parties have chosen – and will not rewrite such contracts to include limitations that the parties themselves failed to add. 

For more information about this topic, please contact the author or any member of the Williams Mullen Retail Industry Service Group.