IP Law Daily, COPYRIGHT—9th Cir.: Media company’s copyright claims revived against former employees, (Nov 8, 2024)

By Kevin M. Finson

Copyright claims related to software allegedly developed by disloyal employees using company resources should not have been dismissed because they were not time-barred and were properly pleaded.

A media company stated claims for copyright infringement against its former employees, the U.S. Court of Appeals for the Ninth Circuit has held in a nonprecedential opinion. Because the company plausibly alleged that the former employees used company resources to develop a software product they later sold for millions of dollars, a district (Lynwood Investments CY Ltd. v. Konovalov, No. 22-16399 (9th Cir. Nov. 6, 2024)).

Lynwood Investments CY, Limited (Lynwood) was a Cyprus limited liability company and the assignee of all interests belonging to Rambler Internet Holding LLC (Rambler), a Russian media company and web portal. Lynwood alleged that while working at Rambler several employees developed both an open source web server product known as Open Source NGINX as well as, secretly and on ring-fenced servers not accessible to the rest of the company, a proprietary, commercial version of NGINX known as NGINX Plus. The employees allegedly agreed to create their own company in California to commercialize the product NGINX product they developed using Rambler resources as Rambler employees, and eventually sold the new company for $670 million in 2019. Lynwood brought suit against the employees, the new company, and others alleging breach of contract, various tort claims, and copyright infringement. The trial court granted a motion to dismiss on statute of limitations and other grounds. Lynwood appealed.

Statute of limitations The court found no error in the trial court’s determinations that neither the theory of civil conspiracy nor the discovery rule extended the applicable statutes of limitations. Civil conspiracy applied only to tort claims, not the contract claim asserted, and to the extent that it was alleged in relation to certain tort claims, those claims on duties owed by certain employees under Russian law. That law was not adequately shown before the trial court. The discovery rule did not extend the applicable statute of limitations of any claim because, under California law, the plaintiff was imputed with the knowledge that a reasonable investigation would have uncovered at the time it was first placed on inquiry notice of wrongdoing. In this case, it was clear that Rambler was on inquiry notice far more than three years before suit was filed.

Copyright. Lynwood had alleged copyright infringement as to three categories of software: (1) the Open Source NGINX, (2) NGINX Plus “conceived” by Rambler employees at Rambler, and (3) NGINX Plus “developed” at Rambler. The trial court had dismissed claims as to all three categories.

As to the first category, the appellate court determined that there was no allegation that the development of NGINX Plus exceeded the scope of the Open Source NGINX license, which was distributed under an open source FreeBSD license. As to the second category, the appellate court held that ideas not yet fixed in a tangible medium cannot be copyrighted, so to the extent that Lynwood’s claims arose from ideas “conceived” by employees while they were at Rambler it was properly dismissed. As to the product actually developed by Rambler employees while working at Rambler, however, the appellate court held that Lynwood had properly stated a claim for copyright infringement, and also held that this claim was not time-barred because the limitations period did not begin to run until the defendants communicated a plain and express repudiation of Lynwood’s ownership. The court also noted that the claims were not an improper group pleading. Although the copyright claim was asserted against several defendants, the complaint made it clear exactly which acts were alleged against which defendants.

Dissenting in part opinion. Circuit Judge Daniel P. Collins wrote separately, concurring in part and dissenting in part. In addition to the majority’s finding that portions of the copyright infringement claims were sufficiently pleaded, he would have held that non-copyright claims based on misconduct of defendants secretly developing the NGINX Plus code while employed at Rambler were not time barred because a reasonable and diligent investigation would not have disclosed that kind of wrongdoing. The fraudulent concealment of this development, which allegedly included removing a server from Rambler’s inventory and deleting the material on it so that it could not possibly have been discovered without the aid of a whistleblower, meant that even if Lynwood had knowledge of other potential claims outside the statute of limitations all of the claims based upon that particular wrongdoing were not discoverable and therefore the statute of limitations should have been tolled as to them.

The case is Nos. 22-16399, 23-15672.

Judge: Per Curiam.

Attorneys: Brian Michael Affrunti (Burke, Williams & Sorensen, LLP) for Lynwood Investments CY Ltd. Matthew Dawson (King & Spalding, LLP) for Maxim Konovalov.

Companies: Lynwood Investments CY Ltd.

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