JustMed, Inc. v. Byce, 07-35861 (9th Cir. 2010), on appeal from JustMed, Inc. v. Byce, 05-cv-00333-MHW (D. Idaho 2010) (judge magistrate decision finding, inter alia,  conversion of data).

JustMed was a two man tech startup that was attempting to bring a hands-free digital voice larynx to market.  The defendant-counterclaimant was hired to revise and complete the source code for the product. The defendant began working full time on the code, and was paid in stock and not wages. The parties never entered an employment or independent contractor agreement (the company generally did not keep formal records other than a series of notebooks). The defendant also never filled out an I-9 employment verification or W-4 tax withholding form for much of the relationship, which lasted for a number of years. The company never issued the defendant a W-2 wage statement, withheld taxes, paid workers’ compensation or unemployment insurance, provided benefits, or reported the employment to the state. The defendant lived in a different state than the company and worked from home setting his own hours, and the company did not tell him how to spend his days.

The defendant was included in JustMed’s company profile brochure and had a business card. The defendant also updated the company website and attended conferences, marketing meetings, and demonstrations on behalf of JustMed.

The relationship between the owner of the company and the defendant soured when the defendant discovered a spreadsheet showing that there was a large disparity in the shares owned by him and by the President of the company, and when his finances became tenuous due to the lack of monetary payment. The company then collected tax paperwork from the defendant and issued three checks, which were never cashed. At that point, the defendant changed the copyright notice on the source code so it reflected his name, and deleted all copies of the source code from JustMed’s computers.

JustMed filed in state court alleging a series of state law claims including, among other things, conversion of the source code and misappropriation under the Idaho trade Secrets Act. The defendant removed to federal court asserting that the case required determination of ownership of the software under the Copyright Act, and later filed a counterclaim seeking a declaratory judgment that he owned the copyright in the source code.

Jurisdiction

The Ninth Circuit raised the issue of whether it had jurisdiction sua sponte. It’s important to remember, when accessing the court’s analysis, that the defendant’s counter-claim regarding copyright ownership does not impact jurisdiction. Courts look to the factual allegations underlying the well-pleaded complaint, and only the complaint, to determine whether a case arises under the federal Copyright Act. Holmes Group, Inc. v. Vornado Air Circulation Systems, Inc., 535 U.S. 826 (2002).

The Circuit found that JustMed was required to “prove it owned the source code to prevail on its trade secret and conversion claims, and that the ownership rights under the Copyright Act overlap with those constituting common law ownership.” The Circuit thus found that the allegations “directly implicate” and arise under the federal Copyright Act. This is an interesting extension of the findings in Community for Creative Non-Violence v. Reid, 490 U.S. 730 (1989), which the Circuit relied upon as precedent. CCNV was a dispute over copyright ownership. JustMed v. Byce, in contrast, was a dispute involving trade secret and common law (do we have a name for these?) rights in the data that was influenced by the issue of copyright ownership.

Work made for hire inquiry

The Circuit’s analysis of whether the work was made for hire also contained a substantive gloss on existing case law. Copyright usually vests in the author or authors of the creative work. The Copyright Act contains an exception to this general provision where, under 17 U.S.C. 201(b) (“works made for hire”),  “the employer or other person for whom the work was prepared is considered the author” and rightsholder. The Supreme Court found in CCNV that when “Congress uses the terms “employee,” “employer,” or “scope of employment,” it means to incorporate principles from the general common law of agency. Accordingly, “the hiring party’s right to control the manner and means by which the product is accomplished” is the central inquiry here. JustMed, Inc. v. Byce, 07-35861 (9th Cir. 2010) (citing CCNV, 490 U.S. at 740-4).

The Circuit found that the district court did not err in holding that the source code was a work made for hire. The Court noted that “as a small start-up company, JustMed conducted its business more informally than an established enterprise might. This fact can make it more difficult to decide whether a hired party is an employee or an independent contractor, but it should not make the company more susceptible to losing control over software integral to its product.” Among the Circuit’s more interesting findings:

JustMed’s treatment of Byce with regard to taxes, benefits, and employment forms is more likely attributable to the start-up nature of the business than to Byce’s alleged status as an independent contractor. The indications are that other employees . . . were treated similarly. Insofar as JustMed did not comply with federal and state employment or tax laws, we do not excuse its actions, but in this context the remedy for these failings lies not with denying the firm its intellectual property but with enforcing the relevant laws.