Oh, What a Tangled Web!

Oh, what a tangled web we weave when first we practice to … go into business with our friends.25“Oh what a tangled we weave/ When first we practise to deceive!” isn’t Shakespeare. And that business involves software. Some strands are easily torn asunder, but those of intellectual property can end up binding you ever closer to your adversary! This week’s lesson is brought courtesy of the U.S. District Court for the Western District of Arkansas and its decision in Oliver26The opinion spells this O-L-I-V-E-R and O-L-I-V-I-E-R. I suspect the former is correct, but for fun, I’m going to use the latter. v. Johanson, et al.

I’ve got the copyright; you’ve got the trade secrets. Let’s go make lots of money!

The Johanson brothers were consultants who helped employers evaluate and effectively reward their employees. Their father had developed a sophisticated methodology for this. It was mostly public, but some special, secret tidbits were passed down solely to the brothers, who maintained the tidbits’ secrecy. The brothers used and further developed the tidbits in their work.
The methodology required tedious calculations, and the brothers decided to computerize the process. They hired a local software developer named Olivier27Not the Shakespearean actor. to write the computer code. The computer program was a big success, and the brothers and Oliver saw a business opportunity: license the software to the brothers’ customers. To do this, they formed a new company, DB Squared.28If you’re wondering: Mr. Olivier’s first name is Dale, and the brothers’ names are Bruce and Blair, hence D + B + B sort of = DB2. The brothers handled business operations and client development, while Olivier handled the technology stuff.

The Benefits and Perils of Copyright Registration

After forming DB Squared, Oliver applied to register the computer program with the U.S. Copyright Office. He originally named himself as the author but signed the application as an officer of DB Squared, but someone at the U.S. Copyright Office thought maybe he made a mistake. Did he perhaps create the computer program as a work made for hire for DB Squared? Oh, perhaps he did make mistake? After checking with the brothers, Olivier changed the author to DB Squared and checked the “work made for hire” box on the form.
If you’re unfamiliar with copyright law, you might wonder how DB Squared could be the author of anything. And it’s true: normally, the “author” of a work is the human being who made it. But there is an exception: if the work was “made for hire,” the person—which could be a corporation, partnership or the like—for whom it was made is actually the “author.” It’s not a matter of the “real” author transferring the copyright to the employer; the employer is treated as the “real” author.
The difference between the two situations almost never has any practical significance. Either way, the employer ends up with the copyright.29The one exception I can think of involves “termination” rights, sometimes also known as “recapture” rights. This occurs when the author has transferred the copyright to another person and enough time has passed (how much depends on when the work was made and is not intuitive). If the author complies with a raft of complex procedures, he or she can get the copyright back. As a practical matter, this is only relevant for works that remain profitable far in the future, like a classic rock song. You’ll note that this only works if the author transferred the copyright. If the work were made for hire, then no transfer occurred and the maker has termination/recapture rights. But here, the existence of a work made for hire might have confused Olivier and the brothers. It’s likely that they intended for DB Squared to own the copyright in the computer program. And they might have thought that the U.S. Copyright Office’s suggestion that the computer program was a work made for hire solved the problem of whether DB Squared owned the copyright in the program.
It did not. You don’t have to know a lick of copyright law to see why. By the time the program was written, there was no such thing as DB Squared. There’s no way DB Squared could have been the author of the program.

You Keep Using that Word. Because This Is Copyright Law, it Probably Doesn’t Mean What You Think it Means.

Why couldn’t the brothers (or, more accurately, their company) be the author? After all, they “hired” Olivier, and he made the program “for” them, right? And that’s true! But, funnily enough, not every work that is made of hire is a “work made for hire.” Sorry, I don’t make up the terminology of copyright law, but this won’t be the last time that the legal meaning of a term is different from its normal meaning. A work is “made for hire” only if (a) the maker is employed by the hirer and he or she made the work in the scope of his or her employment; or (b) the work falls into one of nine categories, none of which applies to computer programs, and there is a written agreement among the parties that’s explicit on the subject.
That Olivier wasn’t the brothers’ employee doesn’t quite end the inquiry either because “employee” doesn’t mean what you think it means. See, I told you it wouldn’t be the last time a term’s legal meaning is different from the normal meaning. It comes down to an extensive set of factors that mostly have to do with who controls the creative process. If the hirer controls the creative process enough—e.g., providing the work space and the tools and closely supervising the work—then it’s a “work made for hire.” Suffice it to say that the brothers exercised almost no creative control over Olivier’s work. They knew nothing about computer programming (which is why they hired Olivier in the first place) and didn’t provide him with much of anything, except payment for Olivier’s work.
After several years, Olivier fell out with the brothers. Olivier was hard at work on a new version of the program, but Olivier felt wasn’t getting enough support to bring it to fruition. The brothers were being pulled in two directions: they still had their consulting business, and old habits die hard (especially where one’s livelihood is concerned). So Olivier bailed and took the software with him. He planned to start his own business licensing the software.
Smart, huh? He wrote the code before joining DB Squared, so the copyright in the code is his, obviously. Too bad for the brothers that they didn’t get Olivier to assign the copyright to DB Squared when everyone was still chummy.
Not so fast. Olivier had a little problem and a big problem.

Optimus Prima Facie

The little problem first. Remember the copyright registration? It says DB Squared is the owner of the copyright. That’s a problem, but not fatal. One of the benefits of timely30In this case, “timely” means the registration was applied for within five years of publication of the work. copyright registration is that it’s “prima facie” evidence that (a) the copyright is valid, and (b) all the facts stated in the registration—including ownership—are correct. “Prima facie evidence” just means that, if there were no other evidence at all, the registration would be enough by itself to prove validity and the stated facts. But prima facie evidence can be rebutted, which is why this is sometimes called a “rebuttable presumption.”
In this case, the “fact” of ownership was pretty easily rebutted. The brothers couldn’t really dispute that the code was written before DB Squared even came into existence. But you can imagine situations where the evidence of ownership might be a lot closer, and in those cases, the registration will make the difference. Imagine, for example, if instead of forming a new company, the brothers had just made Olivier a part-owner of their existing company, and imagine that Olivier had his own workspace at the brothers’ office and wrote the software as part of his regular IT and development duties. That’s a close call at to whether the software would be a work made for hire, and I think the registration would be more than enough to tip the answer in the brothers’ favor.

It’s a Secret to Everybody

OK, so Olivier can overcome his mistake with the copyright registration. But he is also faced with an insurmountable problem. He might own the copyright in the code, but the software uses secret methodologies that the brothers brought to the table.
Nobody can use those secret methodologies—or even disclose them—without the brothers’ permission.31I suspect the trade secrets are technically owned by the brothers’ consulting business, but trade secret law has a fairly forgiving and expansive view of who may enforce trade secrets, so nothing prevents them from enforcing the trade secrets through DB Squared, which, obviously, they now control. I’m going to out on a limb here and say that, even if you could somehow separate the secrets from the code, the software is useless without the secrets.
What we’re left with is a package that’s locked in a chest to which only Olivier has the key, but is too heavy for Olivier to lift by himself. The brothers can do what they want with their own secrets, but if they want to automate their methodology, they’ll have to start from scratch with the code. Reading between the lines, that’s a significant undertaking. Olivier is in an even worse position. He can’t reasonably compete against the brothers because he doesn’t know enough about the subject matter to come up with his own methodology that’s not derived from the brothers’ secrets. He could, I suppose, go into business with one of the brothers’ competitors, but that’s awfully risky for the competitor. How can it be assured that Olivier isn’t using the brothers’ secrets and thus getting the competitor into trouble?32One final thing. If Olivier thought he was not only taking the software for his own use and development, but also stopping the DB Squared and the brothers—and their licensees—from using the software, he was in for a surprise. Having commissioned and paid for the software, the brothers, and hence DB Squared, had an implied license to use the software in the manner they and Olivier intended. Since Olivier was a co-owner of DB Squared, he could hardly claim ignorance of the ways DB Squared was planning on using the software, including sub-licensing it to customers.
The court has the last word:

As has hopefully become clear now, the only way that he parties are likely to experience success with their software or business operations going forward is if they resume making decision like they used to: together.

Here’s hoping!
Thanks for reading!

Rick Sanders

Rick is an intellectual-property litigator. He handles lawsuits, arbitrations, emergency injunctions and temporary restraining orders, opposition and cancellation proceedings, uniform dispute resolution proceedings (UDRPs), pre-litigation counseling, litigation avoidance, and other disputes, relating to copyrights, trademarks, trade secrets, domain names, technology and intellectual-property licenses, and various privacy rights. He has taught Copyright Law at Vanderbilt University Law School. He co-founded Aaron | Sanders with Tara Aaron-Stelluto in 2011.