Cite as 886 F.2d 1081 (9th Cir. 1989)
STANDARD OF REVIEW
We review grants of summary judgment de novo. Darring v. Kincheloe, 783 F.2d 874, 876 (9th Cir.1986). We must determine, viewing the evidence in the light most favorable to the nonmoving party, whether there are any genuine issues of material fact and whether the district court correctly applied the relevant substantive law. Ashton v. Cory, 780 F.2d 816, 818 (9th Cir.1986). Because we begin our review with the district court’s grants of summary judgment in favor of Payday, we view the facts initially in the ight most favorable to S.O.S.
FACTS
S.O.S., Inc. specializes in furnishing computer hardware and software to companies that process payrolls, ledgers, and accounts receivable. Payday, Inc. is a company which provides payroll and financial services to the entertainment industry.
In October 1978, S.O.S. acquired from Hagen Systems (not a party to this action) a non-exclusive license to unpublished business software called “Brown Tank.” Under the license, S.O.S. could sublicense Brown Tank to end users provided Hagen Systems’ proprietary and confidential rights in the software were protected. S.O.S. also had the right to prepare derivative works based on Brown Tank.
In November or December 1983, Payday’s outside accountant, Mike Waldrip, told S.O.S.’s president, Bob Oliver, that Payday wanted to computerize in order to attract an important client. The initial understanding between Oliver and Waldrip was that Payday would use software furnished by S.O.S. on Waldrip’s computer instead of installing a computer in its own office.
On December 14, 1983, Oliver sent Payday a draft contract, which Payday’s president signed, providing for the purchase of a terminal and other hardware, to be installed in Payday’s office; the lease of a disk drive and other hardware to be installed at Waldrip’s office; and a software agreement. The software agreement provides, in full:
A software agreement covering the software outlined in the documentation furnished PAYDAY by SOS. The total purchase price of this software is $5,325 including sales tax. SOS agrees to modify the system to produce a text file capable of transfer in ASCII string code to magnetic tape at 800BPI for transfer of information to EDP (Service Bureau). This series of programs is the property of SOS, and PAYDAY is acquiring the right of use, SOS retains all rights of ownership. The payment schedule covering the software is $1,325 upon execution of this agreement and $1,000 on the 14th day of each month until a total of $5,325 has been paid. Changes and modifications other than those mentioned above, will be on a time and material basis at the rate of $50 per hour.
(Emphasis added.)
The contract does not use the terms “copyright” or “trade secrets.” The parties did not discuss the meaning of the highlighted language referring to rights of “ownership” and “use.”
Most of the programming of the payroll software was done by two employees of S.O.S., Eiichi Koyama and Bacchus Chu. 236 separate programs comprise the total package prepared for Payday. Of these, approximately 89 were derived or adapted from Brown Tank. Payday’s controller, Sharon Goodman, was the liaison to the programming team. She described Payday’s needs to S.O.S. but did not participate in the coding process.
The system (software and hardware) that S.O.S. provided was adequate for Payday’s new client but not for Payday’s entire business. In March 1984, S.O.S. and Payday modified portions of the contract. Under the modified agreement, Payday was to use S.O.S.’s computer for a monthly fee of $1,500; also, Payday agreed to pay monthly an additional $1,500 against accumulated programming charges. S.O.S. continued developing programs for Payday.
In late February 1985, Chu and Koyama left S.O.S. to form an independent consult-
