A technology start-up company can be an informal environment – both Apple Computer and Hewlett-Packard famously started out in garages, and Yahoo!, Google and Facebook were developed, initially at least, in college dorm rooms. But informality can, and frequently does, lead to legal disputes down the road. In JustMed, Inc. v. Byce, 2010 U.S. App. LEXIS 6976 (9th Cir. Apr. 5, 2010), the Ninth Circuit was faced with a dispute over ownership of the source code for a program that operated a digital audio device.
Michael Byce, the programmer who wrote most of the code in question, claimed to be an independent contractor and thus the author, and copyright owner, of the code. JustMed claimed that Byce was an employee and that the code was a work for hire, with copyright ownership vested in the company. The appeals court concluded that the well-established factors for making the intensely fact-sensitive determination of employee status should be weighed specially in light of the fact that the company involved was a technology start-up and the activity in question was computer programming.
JustMed arose out of an idea that Byce and his then-brother-in-law Joel Just had for an improved digital audio device (a digital audio larynx). They worked on the project informally before the JustMed company was formed. JustMed’s operations were financed through the sale of stock to various friends and relatives, including Byce, who took a position on the Board of Directors. Just was a programmer who became a company employee, paid in shares of stock. His primary task was writing and revising the software source code for the digital device, a task Byce eventually took over in return for the same salary as Just, also paid in additional shares of stock. Byce substantially rewrote the software code from the version that was provided to him by Just.
Byce eventually asked for and was granted a cash salary for a short time but he never cashed the checks. Byce decided to leave, taking with him the most recent version of the source code and deleting copies of it from the company servers. Byce took the position that he was the copyright owner of the code and that he was protecting his intellectual property rights.
Under the Copyright Act, copyright ownership vests initially in the author of a work, except in the case of "works made for hire" as to which "the employer or other person for whom the work was prepared is considered the author" and thus owns the copyright. In particular, "a work prepared by an employee within the scope of his or her employment" is a work for hire. If Byce was an employee, the source code was a work for hire, owned by JustMed, but if Byce was an independent contractor, then the copyright ownership vested in Byce.
Although the court found that at first glance, certain of the facts appeared to favor the conclusion that Byce was an independent contractor, closer consideration supported the conclusion that he was in fact an employee, given that the factual context involved a technology start-up company.
Of course, the dispute over Byce’s status might have been more easily resolved had there been an employment agreement, but there was not.
Degree of control – The company exercised little control over the manner and means by which Byce, who worked remotely from his home in another state, created the source code. But as "an inventive computer programmer," the court said, Byce was "expected to work independently" provided that he eventually produced a marketable product. Such input as he needed, the court found, was given by phone and e-mail.
Physical separation from the employer – Byce’s physical separation from the company, and the fact that he set his own hours and worked from home were not conclusive, the court found, because the nature of computer programming is such that it can be done "at any time and from any place without significant impairment" to the quality of the work or the programmer’s ability to meet the company’s needs.
Skilled profession – Ordinarily the fact that the activity involved is a skilled profession supports a conclusion of independent contractor status. But that fact was "far from conclusive," the court found, because the company’s regular business required it to employ programmers.
Treatment as an employee by the company – The fact that tax forms were not filed and withholding and employment tax deductions were not made was not conclusive, the court found, considering JustMed’s "business model." The failure to file the appropriate employment tax forms was "more likely attributable to the start-up nature of the company," because it treated everyone who did work for the company similarly. Not that the company’s failure should be defended, the court found, "but in this context the remedy for these failings lies not with denying the firm its intellectual property but with enforcing the relevant laws." Sounding a policy note, the court commented: "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."
At the end of the day, the court found that JustMed was the copyright owner of the code, upholding the district court ruling on that point.
There are further points of interest in the opinion concerning jurisdiction in disputes raising issues of copyright law, and availability of remedies under the Idaho Trade Secrets Act under the circumstances of the case.