Major Verdict Shows the Power of Per Se Theories
Ellis & Winters
How much is a per se theory under N.C. Gen. Stat. § 75-1.1 worth? According to a recent verdict in the U.S. District Court for the Eastern District of North Carolina, it’s worth 52.7 million dollars (plus, no doubt, a big claim for statutory attorney fees).
The verdict occurred in SAS Institute v. World Programming Ltd., a case tried earlier this month in federal court in New Bern.
The SAS case is important for at least three reasons:
- First, it shows how much a 75-1.1 claim can expand a plaintiff’s recovery.
- Second, it illustrates how preemption by the federal copyright laws works in the context of a 75-1.1 claim.
- Third, it shows the power and flexibility of per se theories under section 75-1.1.
SAS, based in Cary, North Carolina, is the largest privately held software company in the world. The company offers extensive software and services that help users analyze data.
World Programming, a company based in Great Britain, created software that closely resembles the SAS system. World Programming used this software to compete with SAS.
SAS alleges that World Programming created its software by buying a tutorial version of SAS called SAS Learning Edition, then using the Learning Edition software to help reverse-engineer the SAS system. World Programming also worked with a SAS customer to develop software that would work with other SAS-compatible software.
SAS sued World Programming for copyright infringement, breach of contract, tortious interference, fraud, and unfair and deceptive trade practices. Like many lawsuits between competitors, the litigation was long-running and intense. So far, Westlaw contains eighteen opinions in the case.
No copyright preemption
The first significant battle under section 75-1.1 came when World Programming moved to dismiss SAS’s 75-1.1 claim, arguing that it was preempted by federal copyright law. The court denied the motion in an extensive recommendation by Magistrate Judge James Gates—a recommendation that District Judge Louise Flanagan later adopted in its entirety.
In a case with copyright issues, the federal copyright laws preempt some state-law claims, but not others. Courts ask whether a state-law claim just restates a claim for copyright infringement. If so, it’s preempted. However, if a state-law claim requires an extra ingredient that goes beyond the elements of copyright infringement, preemption does not apply.
As Judge Gates explained, when the allegedly preempted claim is a 75-1.1 claim, this “extra ingredient” test has to be applied factually, not mechanically. The only substantive element of a 75-1.1 claim—“an unfair or deceptive act or practice”—is phrased so generally that, in a particular case, it might or might not be coterminous with the elements of copyright infringement. To overcome this problem, courts look past the formal elements and analyze the specific acts that make up a 75-1.1 claim.
In SAS, the alleged bad acts by World Programming extended beyond copyright infringement. At the motion-to-dismiss stage, Judge Gates treated World Programming’s alleged tortious interference as the main conduct underlying SAS’s 75-1.1 claim. The interference consisted of working with a SAS customer—in violation of that customer’s SAS software license—to run tests on the SAS system and use the results to improve the World Programming software. Because this customer interaction involved “obtaining allegedly copyright-protected material through improper means,” Judge Gates considered it separate enough from copyright infringement to defeat preemption.
SAS’s per se theories
As the case proceeded to summary judgment, it became clear that SAS’s 75-1.1 claim relied on a per se theory—an argument that the success of another claim automatically established liability under section 75-1.1 as well.
A per se claim, of course, rises or falls along with the predicate violations involved. If a lawsuit involves more than one predicate violation, the plaintiff’s chances of recovering under section 75-1.1 improve. That was the case in SAS.
At the 12(b)(6) stage, the court treated SAS’s tortious-interference allegations as the main predicate for the 75-1.1 claim. As in earlier cases, the court implied that tortious interference is a per se violation of section 75-1.1, but used language that actually falls short of declaring a per se violation.
In any event, at the summary-judgment stage, this predicate violation fell apart. The court held that “any interference [by World Programming] was justified by its legitimate aim of creating a non-infringing competing product.” Thus, the court granted summary judgment against SAS’s tortious-interference claim.
Luckily, SAS had another, more successful, predicate violation available: fraud. SAS alleged that World Programming lied when it represented, in the click-through license agreement for SAS Learning Edition, that it would use the program only to learn SAS, not to reverse-engineer it. This fraud claim survived summary judgment. It later became the centerpiece of SAS’s claims at trial.
In the end, the jury found that World Programming fraudulently induced SAS to enter into the license agreement for Learning Edition. The verdict awards single damages of $26,376,635. The jury also found that World Programming’s conduct affects commerce. Given the well-established rule that fraud is a per se violation of section 75-1.1, the jury’s findings seem certain to generate a judgment for treble damages—that is, an addition of 52.7 million dollars, plus attorney fees, to SAS’s recovery.
For this result, SAS can thank the powerful remedies available under section 75-1.1, the existence of per se theories under that statute, and SAS’s foresight in pursuing more than one basis for its 75-1.1 claim. These features survived the long history of the case and, in the end, produced an impressive recovery.
Author: Matt Sawchak