April 30, 2011

KEEPING CURRENT: The 'Work for Hire' Doctrine and Start-up Technology Companies

Elaine D. Ziff

Two 2010 federal cases, JustMed, Inc. v. Byce, from the Ninth Circuit, and Woods v. Resnick, from the Western District of Wisconsin, suggest that courts are stretching the "work for hire" doctrine to accommodate the commercial realities of how start-up technology companies operate. In particular, courts are taking into account that start-ups use creative compensation arrangements, have informal record-keeping, and that software programmers tend to work independently. As a result, the traditional factors for finding that an author is an "employee" for purposes of vesting copyright in the hiring party may be less relevant where start-up technology companies are concerned.

Under U.S. copyright law, the author is the initial owner of the copyright in a copyrightable work. Software code has long been recognized as copyrightable, as a form of literary work. The copyright owner (and only the copyright owner) has the statutory right to reproduce the work, prepare derivative works of it (i.e., modify or add to it), distribute copies of it to the public, and perform and/or display the work publicly.

If, however, the copyrighted work is created by the author as a "work for hire," then the copyright automatically vests in the hiring party. A work for hire has obvious advantages for a hiring party, even over obtaining an assignment of the copyright from the author. Authors have the right to terminate all assignments and licenses of their work during the period between 35-40 years after the grant was made, to give them a second bite at the apple to exploit the work, should it have become famous. Authors also have remedies under the Visual Artists Rights Act to prevent destruction or distortion of works of visual art. Neither of these rights applies to works for hire. In addition, the duration of the copyright term for a work for hire is the more straightforward, based on the number of years from publication or creation of the work rather than from the author's demise.

There are two ways that a work can be classified as a work for hire, set forth in the Copyright Act itself. If there is no written agreement between the author and the hiring party, then the only way that work for hire status can be obtained is "[a] work prepared by an employee within the scope of his or her employment." Principals of agency law apply to determine whether an author is an employee for work for hire purposes.

The U.S. Supreme Court in Committee for Creative Non-Violence v. Reid, 109 S. Ct 2166 (1989), set forth a multi-factor rubric for determining who is an employee under the Copyright Act. Known informally as the "Reid factors," they include the level of skill required for the task; who provides the tools; where the work is performed; who sets the work schedule; the duration of the relationship; whether the hiring party can assign other tasks to the hired party; how the hired party is paid; whether employee benefits are provided; and how the arrangement is treated for tax purposes.

Courts have historically relied on the tax and benefits treatment accorded the hired party as an important, if not the determinative, factor. How the parties themselves treated the arrangement financially was considered a virtual admission of an employment relationship. Further, it would be inequitable to allow the employer to benefit from independent contractor status for benefits purposes while claiming an employee relationship for authorship purposes.

Nevertheless, in JustMed, Inc. v. Byce, 600 F. 3d 1118 (9th Cir. 2010), the Ninth Circuit gave the financial factors short shrift in finding that a computer programmer was an employee; and the code he produced, a work for hire for the hiring party. Byce wrote a program for an artificial larynx for use by JustMed. On the one hand, Byce was engaged indefinitely, was compensated monthly, and did other work for the company, such as working on the company website and appearing at trade shows; all factors that would favor an employment relationship. On the other hand, Byce was paid solely in stock until right before the case was filed, worked from home in another state, received little direct supervision from the company, and, significantly, did not receive employee benefits or fill out employment tax forms. Byce did, however, replace an employee, Leibler, who worked on the code but quit after taking a job in a distant state.

The Ninth Circuit applied the Reid factors and held that Byce was an employee. In so holding, it made some sweeping pronouncements regarding start-up technology companies that may reverberate in future cases, in particular: "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 court also noted that small start-ups operate more informally and that fact "should not make the company more susceptible to losing control over software integral to its product." Finally, with regard to programmers, the court concluded that they are expected to work independently and customarily are subject to a lesser degree of control.

Following on the heels of the JustMed decision, the Western District of Wisconsin, in Woods v. Resnick, 725 F. Supp. 2d 809 (W.D. Wis. 2010), held that Woods, the co-owner of a start-up technology company, F & I Source, LLC, owned the copyright in the code he wrote for an auto finance product. Indeed, the Reid factors suggested that the programmer was an independent contractor, as Woods wrote the code at home on his own computer, set his own hours, did not receive employee benefits, and was paid a cash draw against profit distributions, while other employees received a salary. However, the court did not rest its holding on this. Instead, it found that Woods, a 50 percent owner of F & I Source's equity interests, was neither an independent contractor nor an employee for work for hire purposes. As a co-owner he had an inherent right to control the business and, so, was not an agent of it when he wrote the code. By default, Woods owned the copyright as the sole author.

The holdings in JustMed and Woods indicate that courts are looking beyond the strict application of the Reid factors to the gestalt of the relationship of the author to the hiring party. This approach is particularly meaningful in the context of technology start-ups, where programmers routinely telecommute and may also be equity holders. However, it may have application to other start-up companies where, in the words of the Ninth Circuit, business is conducted "more informally than an established enterprise might."

The ambiguity surrounding whether an author is an employee, independent contractor, or neither, may well be resolved by a written agreement. Although it is not certain that a court would enforce the parties' characterization of their relationship if Reid factors clearly do not favor it, an agreement, like the tax and benefits treatment in past decisions, would be a useful piece of evidence of the parties' intent.

Elaine D. Ziff

Counsel, Skadden, Arps, Slate, Meagher & Flom LLP

Ziff is a counsel in the Intellectual Property and Technology Group of Skadden, Arps, Slate, Meagher & Flom LLP. The views expressed in this article do not necessarily represent the views of Skadden Arps or any one or more of its clients.