file-enc.c -- golf edition (148 bytes)

// Version 1: 158 bytes
int*i,*o;char*k;int c,l;main(int _,char**v){i=fopen(v[1],"r");o=fopen(v[2],"w")
;k=v[3];l=strlen(k);while((c=fgetc(i))!=-1)fputc(c^*k,o),k=k==v[3]+l?v[3]:k+1;}

// Version 2: 148 bytes
main(c,v,k,i,o,l)char**v,*k;int*i,*o;{i=fopen(v[1],"r"),o=fopen(v[2],"w"),
l=strlen(k=v[3]);while((c=fgetc(i))^-1)fputc(c^*k,o),k=l+v[3]-k?k+1:v[3];}