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____________ N o. 09- 1620

____________ I N R E : PR O FE SSIO N A L V I D E O A SSO C I A T I O N , I N C . , D ebt or

M I CH AE L J . HOR AN, A ppel l ant

v. W IL L IA M D A N T O N ; P R O F E S S IO N A L V ID E O A S S O C IA T E S , IN C .;

VI DEO LOT TE RY CONSUL TANTS , I NC.

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( Fi l ed: D ece m ber22, 2009 )

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____________Ho r a n a n d Da n t o n h a d a b u s i n e s s r e l a t i o n s h i p th a ti n v o l v e d P VA. 1 V L C w as ow ned byD ant on. 2 2 F IS H E R , C i r cui tJudge . M i chae l J . H or an ( “H or an”) appea l s fr om an or derof the D i s t r i ctC our taff i r m i ng an or derof the B ankrupt cyC our thol di ng thatPr ofes s i onal V i deo A s s oci at i on, I nc. (“ P V A ” ), W ill iam D a n to n (“ D a n to n ” ), an d V id e o L o ttery C o n su ltan ts, In c . (“V L C ” ) d id notbr eac h a s et t l ementagr eementbyfai l i ng t o turn overthe r i ght s t o a s oftw ar e pr oduct t o Ho r a n . F o rt h e r e a s o n s s t a t e d h e r e i n , we wi l l a f f i r m. I. W e w r i t e exc l us i vel yfort he part i es , w ho ar e fa m i l i arw i t h t he fa ctual cont extand l egal hi s t or yof thi s cas e. T her efor e, w e w i l l s etfor t h onl ythos e fa ct s nece s s aryt o our analy si s. T hi s cas e comes befor e ourC our tforthe s econd t i m e i n t he cour s e of l i t i gat i on s panni ng t en y ear s . H or an i nvent ed a c om put ers oftw ar e pr ogr am know n as E l i m i nat i on D ra w P o k e r in th e e a rly1 9 8 0 s. In A p ril 1 9 8 5 , H o ra n a ss ig n e d th e p a ten t, co p yrig h t, ru le s , d e s ig n , f

o rm a t, s y s te m , a n d re la te d h a rd w a re f o r E lim in a tio n D ra w P o k e r t o P V A . T en y ear s l at er , on J anuary6, 1995, PV A fi l ed a Chapt er11 vol unt arypet i t i on for b a n k ru p tcy. T o re so lv e o w n e rsh ip d isp u tes su rro u n d in g P V A , the p a rties to th is a p p e a l, H or an, PV A , D ant on, and V L C , exec ut ed a Sett l ementA gr eementthatpr ovi des as 1 2 foll ow s:T he Set t l ementA gr eementdefi nes “Softw ar e A s s et s ” as “‘ E l i m i nat i on D r aw 3 Poker ’ t ogetherw i t h t he Pat ent , r el at ed copyr i ght s , rul es , des i gn, form at , s y s t em and re la te d h a rd w a re .” (J A 1 6 3 .) 3 “ P V A , w ith th e jo in d e r o f D a n to n , h e re b yg ra n ts a n d c o n v e y s to H o ra n , all ex clus ive d istri b u ti o n an d all o ther related ri g h ts i n an d to the S o ftw are As s e t s , i n c l u d i n g a n ya n d a l l u p g r a d e s , u p d a t e s , mo d i f i c a t i o n s , th e n a me and/ ornew ver s i ons i n [10] excl us i ve l ocat i ons , w hi ch r i ght s i ncl udes [s i c] the e x clus ive righ t t o sell , ad v erti se, distr ibu te, d em o n str ate, m an u fa cture a n d d u p lic a te th e S o f

tw a re A s s e ts .” ( J A at164. ) T he B ankrupt cyC our tappr oved the A gr eementon M ar ch 4, 1997.

3 I n D ece m ber1999, D on Pi er ce pr oduced a near l yi dent i cal s oftw ar e pr ogr am ( “Pi er ce Pr oduct ”) byl ooki ng atE l i m i nat i on D r aw Poker , butnotbycopy i ng i t s s our ce code ( J A at242, 244) , forPV A ’ s s ucce s s ori n i nt er es t , For tune Ent ert ai nm ent C orpor at i on ( “FE C ”) . A t hi r d- par t ygovernm ent al r egul at orybodydet erm i ned thatthe Pi er ce Pr oductw as notoper abl e, butPi er ce t es t i fi ed thatthe s oftw ar e w as “99. 9 per cent compl et e” a nd j us tneede d t o be “hook[ ed] . . . up” t o t he pr operhar dw ar e. ( J A at242, 2 4 7 .) On Ap r i l 1 7 , 1 9 9 8 , Ho r a n c o mm e n c e d a n a d v e r s a r yp r o c e e d i n g a g a i n s tP VA, D ant on, and V L C forfai l i ng t o tur n overthe r i ght s t o the Pi er ce Pr oduct . H or an ar gued t hatt he Pi er ce Pr oductcons t i tut ed an upgr ade, updat e, m odi fi cat i on, ornew ver s i on of the S o ftw are A ssets p u rsua n t t o the S ett lem en t A g ree m en t. T h e B an k rup tcyC o u rt e n ter e d ju d g m e n t in f

a v o r o f th e d e f e n d a n ts, a n d th e D istric t C o u rt a f f irm e d . O n a p p e a l, w e vac at ed the por t i on of the D i s t r i ctC our t ’ s opi ni on thathel d t hatthe Pi er ce Pr oduct4

w a s n o t a “ n e w v e rs io n ” o f th e S o f tw a re A s s e ts b e c a u s e it w a s n o t o p e ra tio n a l. In re P r of’ lV i deo Ass ’ n I

nc. , N o. 05- 1655, 2006 W L 859042, at*3 ( 3d C i r . A pr . 3, 2006) ( unpubl i s hed di s pos i t i on) . W e expl ai ned thati tw as uncl ear “w hethers om ethi ng t hati s ‘ i noper abl e’ count s as an upgr ade, updat e, m o d if ica tio n , o r n e w v e rsio n if it i s 9 9 .9 p e rc e n t co m p lete a n d ju st n e e d s to b e ‘h o o k [e d ] . . . u p . ’” I d. W e di r ect ed the B ankrupt cyand D i s t r i ctC our t s t o exami ne on r emand “t he [Pi er ce Pr oduct ’ s ] eff

ect i venes s ” as w el l as “i t s val ue t o PV A , FE C , and H or an. ” I d. O n re m a n d , the B a n k ru p tcy C o u rt d e ter m in e d th a t th e S e ttl e m e n t A g re e m e n t o n ly gi ves H or an di s t r i but i on r i ght s and thata pr oductthati s 99. 9 per centcompl et e i s notan upgr ade, updat e, m odi fi cat i on, ornew ver s i on of the Softw ar e A s s et s . A ccor di ngl y , t he C our tconcl uded thatt he def endant s di d notbr eac h t he Set t l ementA gr eementbyfai l i ng t o tur n overt he Pi er ce Pr oductr i ght s t o H or an. T he D i s t r i ctC our taff i r m ed, and H or an f iled a tim e lyn o tice o f

a p p e a l. II. T h e D istri ct C o u rth ad juri sd ict ion o v er the ap p ea l from the B an k rup tcyC o u rt under28 U . S. C . § 158a( 1) , and w e have j ur i s di ct i on pur s uantt o 28 U . S. C . § 158( d) ( 1) and 28 U . S. C . § 1291. W e appl yt he s ame st andar d as the D i s t r i ctC our ti n r evi ew i ng t he B a n k ru p tc yC o u rt ’s d e c is io n . Fe llh e im e r, E ic h e n & B r a v e r m a n , P .C . v . C h a r te rT e c h s ., I nc. , 5 7 F . 3 d 1 2 1 5 , 1 2 2 3 (3d C ir . 1 9 9 5 ). W e the ref o re rev iew the B an k rup tcyC o u rt ’s fac tual det erm i nat i ons undera cl ear l yerr oneous s t andar d and exe r ci s e pl enaryr evi ew5

o v e r i ts c o n c lu s io n s o f

la w . Mel l on B ank, N

. A . v. Metr o C om m c’ ns , I nc. , 945 F. 2d 635, 6 4 1 (3d C ir . 1 9 9 1 ). III . H or an as s er t s t w o r el at ed ar gum ent s on appea l . Fi r s t , H or an cha l l enges the B ankrupt cyC our t ’ s fi ndi ng t hatt he Set t l ementA gr eementi s s ol el ya di s t r i but i on agr eementand ar gues t hathe had the r i ghtunderthe A gr eementt o m ake the Pi er ce Pr oductoper abl e. Second, H or an cont ends thatthe B ankrupt cyC our terr ed i n hol di ng t hatt he Pi er ce Pr oducti s notan upgr ade, updat e, m odi fi cat i on, ornew ver s i on of the Soft w ar e A s s et s undert he Set t l ementA gr eement . W e w i l l addr es s eac h ar gum enti n tur n. A. T he B ankrupt cyC our tdet erm i ned thatthe Set t l ementA gr eementonl yent i t l es H o ra n to d istrib u tio n rig h ts. (JA 2 2 .) H o ra n , h o w e v e r, ar g u e s th a t th e A g re e m e n t is n o t a m er e di s t r i but i on agr eementbeca us e i tgr ant s hi m “al l excl us i ve di s t r i but i on and al lother re la tedrig h ts i n and t o t he Softw ar e A s s et s . ” ( J A 164 ( emphasi s added) . ) T her efor e, a c c o rd in g to H o ra n , h e sh o u ld h a v e b e e n a llo w e d to m a k e th e P ier c e P ro d u c t o p e ra b le u n d e r th e S e ttl e m e n t A g re e m e n t. T he cl ear , unambi guous l anguage of the Set t l ementA gr eements uppor t s the B ankrupt cyC our t ’ s i nt erpr et at i on. T he A gr eementexpr es s l ydefi nes the di s t r i but i on and r el at ed r i ght s as i ncl udi ng “the exc l us i ve r i ghtt o s el l , advert i s e, di s t r i but e, demonstr at e, m an u fa cture an d d u p li ca te th e S o ftw are A ssets. ” (JA 1 6 4 . ) C o n tr aryto H o ran ’sA l t hough i ti s s om ew hatuncl eari n t he br i efs , H or an conc edes thatthe i s s ue i s not 4 w h ethe r th e P ierce P rod u ct ca n b e c lassifi ed as o p era ti o n al. (H o ran R ep lyB r. at 5.) R ather , t he ques t i on, i n ourvi ew , i s w hetherthe Pi er ce Pr oductcount s as an upgr ade, updat e, m odi fi cat i on, ornew ver s i on of the Softw ar e A s s et s – namel y , of El i m i nat i on D ra w P o k e r – u n d e r th e S e ttl e m e n t A g re e m e n t. 6 as s er t i on, t hes e r i ght s ar e al l act i ons thatar e t aken w i t h a fi ni s hed pr oduct . T he A gr eementdoes notgi ve H or an the r i ghtt o i m pr ove orchange near l ycompl et ed S o f tw a re A ss e ts to m a k e th e m o p e ra b le. T h e re f o re , the B a n k ru p tcy C o u rt c o rre c tly c o n c lu d e d th a t th e P ie rc e P ro d u c t w a s “ o f n o v a lu e o r u s e ” to H o ra n . (J A a t 2 5 .) I n s um m ary , w e agr ee w i t h bot h t he B ankrupt cyand D i s t r i ctC our t s thatthe Set t l ementA gr eementi s s ol el ya di s t r i but i on agr eementand thus thatH or an di d nothave t he r i ghtt o m ake the Pi er ce Pr oductoper abl e. B. H o ra n a lso c h a llen g e s th e B a n k ru p tcy C o u rt’s c o n c lu sio n th a t a p ro d u c t th a t is “99. 9 per centcompl et e” i s notan upgr ade, updat e, m odi fi cat i on, ornew ver s i on of E li m ination D raw P o k er u n d er the S ett lem en t A g ree m en t. (JA at 21 , 2 3 -24 . ) M o re 4 sp ec ifi ca ll y , H o ran arg u es th at, d esp it e the P ierce P rod u ct’s i n ab il ityto ru n o n F E C ’s s peci fi c gami ng har dw ar e, t he Pi er ce Pr oducts oftw ar e w as oper at i onal on comput er s and t hus qual i fi es as an upgr ade, updat e, m odi fi cat i on, ornew ver s i on underthe Set t l ement A g re e m e n t.T he p art i es st i pu l at ed at or al argum ent before the B ank rupt cyC ou rtthat these 5 te rm s a re n o t te rm s o f

a rt w ith in th e s o f

tw a re o r g a m in g in d u s tr ie s . (J A 2 1 .) 7 T he B ankrupt cyC our tbas ed i t s contr aryconcl us i on on t he comm on defi ni t i ons of

“ u p g ra d e ,” “ u p d a te,” “ m o d if ica tio n ,” a n d “ n e w v e rsio n .” (JA a t 2 3 -2 4 .) Its a n a ly sis is 5 s ound. T he Pi er ce Pr oductcannotbe an “ upgr ade” or“updat e” of E l i m i nat i on D r aw Pokerbeca us e, bei ng i ncompl et e, i tnei t her“i m pr oves ” El i m i nat i on D r aw Pokernor b rin g s it “ u p to d a te” b yin c o rp o ra tin g n e w in f o rm a tio n . L ik e w ise , the P ier c e P ro d u c t is nota “modi fi cat i on” or“new ver s i on” – a “ change ” or“s peci al form ” – of El i m i nat i on D ra w P o k e r b e c a u se P ier c e d id n o t u se th e E lim in a tio n D ra w P o k e r so u rc e c o d e to devel op i t . I n s hor t , t he fa ctt hatt he Pi er ce Pr oductm i r r or s the es s ent i al natur e of E l i m i nat i on D r aw Pokeri s noti n and of i t s el f s uffi ci entt o m ake the Pi er ce Pr oductan u p g ra d e , u p d a te, m o d if ica tio n , o r n e w v e rsio n u n d e r th e S e ttl e m e n t A g re e m e n t. T her efor e, s eei ng no err ori n the B ankrupt cyC our t ’ s fac tual det erm i nat i ons or l egal concl us i ons , w e agr ee thatH or an di d nothave r i ght s t o t he Pi er ce Pr oductundert he S e ttl e m e n t A g re e m e n t. I V. F o r th e f o re g o in g re a so n s, w e w ill a f f irm th e o rd e r o f

th e D istric t C o u rt.