The Compliance Source, Inc. v. GreenPoint Mortgage Funding, Inc.: Fifth Circuit Reverses Summary Judgment for Plaintiffs’ Breach of Contract Claim

he Compliance Source, Inc. v. GreenPoint Mortgage Funding, Inc., __ F.3d __, 2010 WL 4056112, No. 09-10726 (5th Cir. Oct. 18, 2010)

Slip Opinion

In Compliance Source, Inc. v. GreenPoint Mortgage Funding, Inc., the United States Circuit Court for the Fifth Circuit reversed and remanded the decision of the United States District Court for the Northern District of Texas, which had granted summary judgment in favor of the defendant, a software licensee, on the plaintiffs’ claim for breach of contract. The court also affirmed the district court’s grant of summary judgment to the plaintiffs on the defendant’s counterclaim for breach of their settlement agreement.

The Fifth Circuit held that the license agreement for licensor’s database technology did not permit the licensee to authorize third-party use, even if such use was on behalf or for the benefit of the licensee. In so holding, the court took a narrow approach to its interpretation of the agreement, distinguishing the license in GreenPoint from earlier cases in light of its clear withholding of rights not expressly given.

The Internet Cases blog provides a brief overview of the case. WTN News features an analysis that discusses how the decision might leave open the possibility that a breach claim could extend to situation where third parties merely access software or technology licensed under similar terms.

The plaintiffs are Compliance Source, a creator of mortgage-financing forms, and Digital Docs, a software maker that prepares residential-mortgage loan documents. Together they developed database technology that allows mortgagees to manage and organize their mortgage loan documents. The defendant, GreenPoint, a mortgage-financing operation, licensed the plaintiffs’ technology in 2002. The license included terms which specified that no ownership or proprietary interest was conveyed and that the licensee will “take all steps necessary to prevent any third party . . . from acting in any way that is inconsistent with GreenPoint’s obligations” under the agreement. The license also expressly restricted third-party access and use in several other areas. GreenPoint instructed its outside attorneys to access and use the technology to prepare loans. After attempting and failing to convince GreenPoint to deny access to third parties, the plaintiffs filed suit for breach of contract.

In its holding, the court distinguished this case from two of its earlier cases, Geoscan, Inc. of Texas v. Geotrace Technologies, Inc., 226 F.3d 387 (5th Cir. 2000), and Hogan Systems, Inc. v. Cybresource International, Inc., 158 F.3d 319 (5th Cir. 1998). The court noted that in both of those cases, the contract “explicitly granted limited rights to licensees to provide general third-party access.” However, in this case, the contract between the plaintiffs and GreenPoint expressly prohibited third-party use. Specifically, the contract does not grant the defendant any right “to ‘copy, make, use, have made, sell, support, or sub-license’ the licensed technology” to a third-party. In light of these withholdings, the court concluded that the district court erred in following those decisions and in granting summary judgment for the defendant.

The Internet Cases blog reports that the Fifth Circuit’s decision in this case "could have notable implications for both providers and users of software." By focusing narrowly on the plain language in the contract, the court prevents licensees from allowing third-party use of licensed software. However, as WTN News points out, given the reasoning in this case, future decisions may also limit the ability of licensees to provide "third party access to licensed software" (emphasis added).

Nathan Lovejoy is a 1L at the Harvard Law School.