Second Circuit Clicks “I Agree” Affirming Website Agreement Protects Web Application from Misappropriation by Users

The Second Circuit recently considered whether using language from the Copyright Act in a website’s Terms of Use (“TOU”)—specifically, the phrase “derivative works”—meant that the TOU should be interpreted using copyright law principles.  Affirming the district court, the Second Circuit held that the TOU should be construed applying normal contract principles without reference to the Copyright Act.  

Broker Genius developed an automated ticket-pricing technology, called AutoPricer, which allows ticket sellers to price tickets dynamically (that is, the prices automatically change based on market conditions). Broker Genius had filed a patent application for the technology, but it was rejected. So to protect AutoPricer, Broker Genius required the users of its web application (mostly ticket brokers) to accept its TOU, in which the brokers agreed not to reverse engineer the technology or derive any source code or underlying ideas of the site. The TOU also provided that users could not create “derivative works” of the site, apps, or content.

Broker Genius sued Seat Scouts LLC and its co-founder, Drew Gainor, for breach of contract and misappropriating proprietary information. It alleged that after Gainor signed up for a Broker Genius account and accepted the TOU, he violated the TOU by using information he learned about AutoPricer as a Broker Genius customer to develop a similar product for Seat Scouts called Command Center. Following a jury trial, and a verdict for Broker Genius awarding it $4.5 million in damages, the district court entered judgment on the verdict and issued a permanent injunction against Seat Scouts.

Seat Scouts raised “a host of issues” on appeal, but the core of Seat Scouts’ briefing focused on three arguments: (1) that Broker Genius lacked a proprietary interest in AutoPricer; (2) that the breach of contract claim should have been governed by copyright law; and (3) that Broker Genius’s misappropriation claim was preempted by the Copyright Act, and the district court erred in finding this argument waived.

The first of these arguments—that Broker Genius lacked a proprietary interest in AutoPricer—was, more specifically, that because AutoPricer was based on publicly available information, it was not Broker Genius’s “property” and thus could not have been misappropriated by Seat Scouts. The Second Circuit recognized the principle—publicly available information cannot be misappropriated—but it declined to find that this was the situation here. Instead, it noted that AutoPricer’s TOU restricted the reproduction and distribution of user content and data. And it rejected Seat Scouts’ argument that the disclosures Broker Genius made in its patent application and during demonstrations meant that the information underlying AutoPricer was no longer confidential. On the contrary, the court found that Broker Genius’s disclosures were limited and thus that there was sufficient evidence to support the jury’s finding that Broker Genius had a proprietary interest in AutoPricer.

Seat Scouts’ second core argument on appeal—that Broker Genius’s breach of contract claim should have been governed by copyright law—was based on the assertion that in prohibiting “derivative works,” the TOU did nothing more than track the definition of “derivative works” from the Copyright Act. The district court had disagreed and instructed the jury—without looking to the Copyright Act to determine the meaning of “derivative works”—simply that “[t]he term ‘derived’ means something originates from something else. A later-created product is derived from an earlier product if, one, the two products or elements therein are similar, and two, the commonalities present in the later-created product are traceable to the earlier one.” The Second Circuit (reviewing the instruction de novo) agreed. It held that even if the TOU included language from the Copyright Act, the instruction was warranted based on the provision in the TOU that broadly prohibited users from “attempt[ing] to derive any source code or underlying ideas” from Broker Genius’s site or apps.

The third of Seat Scouts’ core arguments on appeal—that Broker Genius’s misappropriation claim was preempted by the Copyright Act, and the district court erred in finding this argument waived—was easily rejected. As the court of appeals noted, a finding of waiver is reviewable only for an abuse of discretion. And here, the court observed that Seat Scouts first raised preemption as a defense “less than a month before the start of the trial and over a year after the action commenced.” Also, while the court recognized that finding waiver “may not be proper where the defense is raised at the first pragmatically possible time,” it refused to justify Seat Scouts’ delay on that basis. Instead, it found that Seat Scouts had not provided any reason for not raising the defense earlier nor even contended that it raised the defense at the “first pragmatically possible time.” Accordingly, the court held, finding waiver in these circumstances “was not an abuse of discretion.”

The case is Broker Genius Inc. v. Gainor, No. 19-2686-CV, 2020 WL 1908341 (2d Cir. Apr. 20, 2020).