It's a basic principle known to any law student: The courts prefer to stay within the four corners of an agreement when resolving a dispute between parties in a contractual relationship. In Edgenet Inc. v. The Home Depot USA Inc., the 7th Circuit applied that principle in a case in which a vendor tried to use federal copyright law to retain rights to its intellectual property that it failed to protect in a contract.

In order to sell its products online, home-improvement retailer Home Depot contracted with Edgenet, a vendor that collects and organizes data. Edgenet created a taxonomy for Home Depot's product offerings (that is, a database that organized the products into categories). According to the terms of a 2004 contract, Edgenet owned the intellectual property rights in the taxonomy and licensed Home Depot to use it. In 2006, the parties executed a supplemental agreement that granted Home Depot a no-cost license to use “the product collection taxonomy” as long as the contract remained in effect. If the parties ended their relationship, Home Depot would be required to stop using the taxonomy at once. However, the contract gave Home Depot the option to purchase a perpetual license in the taxonomy for $100,000, due immediately if the contractual relationship between the parties ended.

In 2008, Home Depot began to develop an in-house database that integrated Edgenet's taxonomy. When Edgenet discovered this, it registered a copyright on the version of the taxonomy currently in use.

In 2009, Home Depot informed Edgenet that it would be ending the contractual relationship, and sent a $100,000 check order to exercise the option to purchase the perpetual license. Edgenet returned the check and filed a lawsuit, alleging that Home Depot was violating its copyright in the taxonomy registered in 2008.

Taxonomy Troubles

A district court ruled in Home Depot's favor, and Edgenet appealed. Edgenet argued that by beginning work on the derivative database before paying the $100,000, Home Depot infringed on the copyright and invalidated its option to buy a perpetual license. However, the 7th Circuit held that because the contracts gave Home Depot the right to use the taxonomy in any way it wished, it had the right to prepare a derivative database.

Edgenet also claimed that “the product collection taxonomy” meant only the version developed in 2004. However, the court noted that as Home Depot added or dropped products, the taxonomy changed. The court said that if Edgenet's 2006 promise “meant only that for $100,000 Home Depot could use an old version of the taxonomy, then it was offering nothing that Home Depot would want to buy.” Also, the court interpreted the words of the contract to clearly identify one evolving taxonomy rather than multiple taxonomies frozen in time.

Lastly, Edgenet claimed that because the Home Depot's Canadian affiliate stopped using Edgenet's taxonomy in 2008 and Home Depot did not tender the $100,000 at that time, it forfeited its option to acquire a perpetual license. The court noted that perhaps Edgenet could have treated this as a breach of contract and revoked the license, but because it didn't, it waived any potential breach. The court added that if Edgenet had terminated the contract due to the breach, Home Depot could have paid the $100,000 at that time to obtain the perpetual license.

Cautionary Tale

Mark Thomas, a partner at Williams Mullen, explains that parties to a contract of this nature need to understand what sort of relationship they are entering into: one that is stable and relatively predictable or one that is likely to evolve over time. He cautions parties in evolving relationships to craft contracts that take the dynamic nature of the relationship into consideration.

The parties to agreements involving intellectual property must draft exceptionally clear contracts, according to David Jankowski, a partner at Knobbe Martens. “You really should strive mightily to draft a document that, on its face, with no help, can be understood by everyone—that's how to protect your own rights,” he says.

Lynda Zadra-Symes, a partner at Knobbe Martens, suggests that Edgenet may have believed it had some kind of right in the compilation of the data. Yet in the U.S., she says, “it is really hard to protect any kind of database.” Jankowski adds that “Edgenet appears to have viewed the license grant that was given to Home Depot as much more restrictive than it actually was. The court decided it was a very unrestricted license, that Home Depot could do as it pleased with this taxonomy.”

The bottom line, according to Thomas, is that “parties on both sides of these relationships must remember that they need to be thoughtful, think forward and use the latitude they have in devising these contracts to cover the ground. If they see that things are evolving differently, they need to adjust their contractual relationship accordingly, but they should not expect the courts to completely rewrite the contracts for them.”