Saturday, February 5, 2011
Wednesday, September 15, 2010
Civil Theft, Breach of Contract, and Software Development with a Copyright Ownership Defense in Colorado State Court
A recent Colorado Court of Appeals case addresses an interesting situation involving claims by a software company which came up with an idea for a software program and then had a falling out with the company it hired to market and later write the program. The case is Steward Software Company, LLC v. Kopcho, No. 09CA1690, announced on September 2, 2010. Specifically, the software company came up with an idea for a banking software and hired the marketing company, and later the developer. The marketing company signed a nondisclosure agreement which stated that the it did not acquire intellectual property rights under the nondisclosure agreement except for the limited purpose of creating a marketing plan. However, no written contract was ever signed regarding the marketing work. Later, a developer was hired, but again, no written contract was signed.
After the initial version of the software was created, the parties had a falling out, apparently when the software company requested significant modifications to the program which took a great deal of time and increased the costs. The software company decided to withhold payments and the developer ceased work after it registered the copyright for the program.
The software company sued the developer and marketing company for breach of contract, breach of fiduciary duty, conversion, and civil theft, among other things. During the litigation, the software company apparently argued that the developer and marketer basically stole its trade secret idea and the corresponding program based thereon. As a part of its defense, the software company and marketer asserted that they owned the copyright in the program, a fact which would defeat at least a portion of the claims regarding whether it stole copyrighted intellectual property, i.e., you can’t steal what you own.
Interesting, the case was removed to federal court on the basis that it raised a federal question, copyright law. Generally, state courts have no jurisdiction to decide copyright issues as these are preempted by federal law. However, here, the federal court remanded (sent back to the state court) the case because it held that the raising of the ownership of a copyright as a defense to a state court claim did not raise a federal copyright issue which gave it jurisdiction to hear the matter.
Back at the state court, the trial court did not allow the developer or marketer to instruct the jury on the defense that it owned the copyright and therefore could not have stolen the copyrighted intellectual property. The jury determined that the developer and marketer had stolen something and awarded damages, but it was impossible to tell what exactly the jury believed had been stolen and whether this included the copyrighted materials.
The Colorado Court of Appeals held that one of the errors of the trial court was to fail to instruct the jury on the copyright ownership defense and remanded (sent it back to the trial court) the case.
This opinion case raises several points businesses should consider.
Should Have Created a Written Contract
First, as is a theme on this blog, the parties should have taken the time to draft and agree to a written contract. Initially, no one expects that their relationship will break down, but when it does, a written contract can be invaluable. For example, a written contract done well, would likely have addressed the scope of work and payment so that the contract could have provided a more efficient and cost effective way to deal the very sort of conflicts that gave rise to the falling out in this case. It could have not only identified rights and obligations, but also addressed the modification process, cost or time limitations, liability limitations and so on.
In addition, a well written contract dealing with intellectual property issues most likely would specifically address the ownership of the intellectual property at issue. For example, here, the question arises whether the software program developed by the developer was done for hire, a determination which affects ownership. There is also a question as to the scope of the trade secret idea which gave rise to the program, who owned that, and who owned derivations arising from the idea, and to what extent. Because there is no written contract to review regarding the roles, expectations, and intellectual property at issue, the issues get confused and it is likely nobody gets what they really wanted, and certainly not for the right price.
Who Owns the Copyright, Works for Hire
Second, in general, copyrights vest in the author of the work at issue. See 17 USC Section 201(a). However, works made for hire vest in the hiring party, if done as an employee within the scope of employment, or as a part of a contract where the parties expressly agree in writing, signed by them, that the work is considered for hire. See 17 USC Section 101. When hiring someone to generate copyrightable work in a non-employment situation, it is important to make sure you specifically get the copyright in writing, or it likely rests with the authoring party. Likewise, when hired to create copyrightable material, one should be deliberate about providing the specific rights one is giving away, while specifically retaining the others, and pricing the work accordingly. Lack of clarification can create some ugly situations.
Emphasis on Trade Secrets
Third, the case seems to highlight the potential good use of trade secrets to control derivative development of products and intellectual property. An idea is not able to be protected under copyright. However, a trade secret can be an idea, and can be protected, so long as it is secret and controlled. In contrast, copyrights adhere to the original work of authorship. As a result, while an idea is not copyrightable, the program, art, or literature that expresses the idea is copyrightable to the extent it is original.
What can happen, then, with appropriate contractual planning, is that the trade secret owner can keep control of the idea and use it to obtain a copyrightable product without releasing its advantage in the market related to its trade secret.
On the other hand, bad contractual planning can result in one party owning the trade secret, but failing to get the rights to the end result intellectual property. The developer arguably cannot use the product without concerns about misappropriate of the trade secret, but the trade secret owner cannot use the resulting intellectual property either. In short, the trade secret owner can spend a lot of money creating something they cannot use, while the copyright owner can demand more money to license the resulting product which is only really valuable to the trade secret owner.
Copyright Defense in State Court
Finally, the case seems to indicate that in a copyright related matter, a plaintiff with state court claims such as misappropriation of trade secrets or violation of a non-disclosure or non-compete agreement can remain in state court by electing to not pursue copyright infringement claims which may be weak. It also seems to mean that a defendant can still raise copyright related defenses even if they are not in federal court. This would be important on the one side when a plaintiff wants to limit its litigation expenses and focus on stronger claims unrelated to its possible copyright claims to protect a market, a business model, or to reserve future investment opportunities, and, on the other side, if a defendant has copyrights, even unrelated copyrights, which can limit its exposure to liability.
Regardless of how one looks at this case, it seems apparent that the appropriate use of, and planning with, contractual relationships involving intellectual property is key. Such use can significantly reduce costs and exposure to potential liability later on, allowing businesses to make informed decisions regarding product development, marketing, and investment.
Wednesday, September 1, 2010
First, let me apologize that this is the first post in over a month. At first I was real busy with work, and then a whole set of problems occurred at work that prevented me from being able to pay attention to the blog.
Of the most import is that my 5 year old son got sick, and when he did not get better after a day or two, we realized he might have an appendix problem. So we rushed him to the ER and confirmed that he had appendicitis. We then rushed to the hospital where they put him in surgery as soon as they could, and found out that his appendix burst. We ended up at the hospital for a full week as he recovered. Naturally, that took a lot of our attention.
It is a real blessing to have a work place and a job where I had the kind of flexibility that I do. I was able to spend nights and mornings with my son while my wife was able to keep the kids at home. Friends watched the kids during the day while caught up on sleep or went to the office. The hospital had wi-fi, so I was able to get basic work done while still attending to my son so he was never alone at the hospital. Essentially with my cell phone and laptop, I was able to maintain a remote office where ever I was and keep things going without having to be at the office.
I have to specifically thank the families from church and elsewhere that took care of our kids, provided food, prayed with us, or visited the hospital like the Hammersmiths, the Johnsons, the Lascors, the Adams, my parents, the Geoffrions, the Orranges, the Baggerlys, our neighbor Ms. Bunny, the Cranes, the Gores, and I hope I did not miss anyone. It was a blessing to see our faith community in action.
As I rushed around with our health crisis, it is clear how much things have changed in professional life. With a laptop and cell phone I was able to convert almost anyplace into a work zone. Face to face contact with clients, fellow attorneys, and staff remains important, but I could work around other pressing activities.
I’m getting back up to speed and hope to post some content again soon.
Wednesday, July 21, 2010
Recent federal cases point out that online hosts such as eBay and Google are not responsible for their users’ trademark infringements. A Second Circuit case, Tiffany v. eBay and Google v. Louis Vuitton Malletier, related to the identification of jewelry on-line as being from Tiffany, however, many of the items sold were counterfeit items. To the extent companies like Tiffany want to prevent such users from using their mark for false goods, they must track down each user and then take steps to prevent the infringement. This is extremely costly to those companies.
On the one side, it is important to note that not all uses of trademarks are infringing. Marks can be used to properly identify products such as a car dealer advertising that it has Ford Mustangs for sale, a church stating it provides Starbuck’s coffee to attendees before services, or an individual stating that they only use Apple computers. Therefore, users who are actually re-selling Tiffany products on eBay can state that the products are from Tiffany so long as they do not indicate that they are endorsed by or are affiliated with Tiffany. Accordingly, online hosts can note that they have users who are re-selling Tiffany, or other trademarked, products.
On the other side, there is such a thing as secondary liability for trademark infringement which is a lot like conspiracy or aiding and abetting. In the copyright context, Napster cannot provide a means for others to engage in widespread infringement knowing that this is what is going on, and then avoid liability by asserting that it is not the one actually engaging in the illegal copying. In the trademark context, an online host cannot ignore specific infringement taking place on its site, turn a blind eye to infringement about which it should know, or otherwise facilitate infringement.
The recent case law continues to place the burden on trademark owners to enforce their marks. Online hosting companies do not have to do this job for them. However, they do have to respond and engage appropriately when infringement is brought to their attention. Accordingly, companies with valuable trademarks have to continue to spend time policing their marks, one user at a time. One can easily imagine the almost impossible task this can be given how any individual user on Facebook, Myspace, Twitter, eBay, Google, personal blogs, and so on, might be infringing at any given time.
This is another example of how the case law demonstrates the drastic changes taking place. What is interesting is that the traditional models focus on control as held by the corporate entities, when it is the various consumers and small sellers who’s activities, in aggregate, are beginning to rival those of the corporate entities.
Trademark law is about protecting consumers. The traditional model is that the government gives the person with the most incentive the power to protect the consumers, i.e., the seller who wants to build their brand and convince consumers to buy their products. Companies have traditionally ignored the consumers themselves and focused on the distribution chain as well as their competitors. Perhaps trademark owners need to start using the technology that is causing them such a hard time to start to engage their customers more directly. Perhaps a re-seller registration system focused on consumers rather than sellers where potential buyers could quickly communicate with the trademark owner to verify the authenticity of the product in question. I’d be interested to know if that has been tried….
Wednesday, July 7, 2010
In the case of Condo v. Conners, No. 09CA1130, from May 27, 2010, the Colorado Court of Appeals held that the provisions of the operating agreement for an LLC which prevented a member from assigning his membership interest without the unanimous written consent of the other members are valid, and the assignment is void.
In Condo, one of the members of an LLC assigned his membership interest (in the form of the right to receive distributions from the LLC) to his ex-spouse as a part of his divorce. The Operating Agreement for the LLC required that any assignment be approved in writing by the other members. The other members of the LLC refused to approve the assignment and instead purchased the assigning member’s interest from him. The former member’s ex-spouse then brought an action against the remaining members for tortious interference with contract and civil conspiracy on the basis that their actions had resulted in the divestment of her contractual right to the monetary distributions from the LLC. The Court affirmed the summary judgment of the ex-spouse’s claims.
In reaching its conclusion, the Court of Appeals for Colorado first noted that for a tortious interference with contract claim to succeed, there must be a valid contract. In general, Colorado statutes provide that an LLC membership interest is personal property which can be assigned and transferred. C.R.S. § 7-80-702(1). Any person who receives a transfer or assignment has the same rights as the member. C.R.S. § 7-80-702(3). However, the Court also noted that LLC's are governed by operating agreements which control over provisions of the statutes contrary to the operating agreement terms, subject to exceptions certain inapplicable exceptions. C.R.S. § 7-80-108(1). The goal of the statutes governing LLCs in Colorado is to give maximum effect to freedom of contract in operating agreements. C.R.S. § 7-80-108(4).
Accordingly, because the operating agreement at issue prohibited assignments without the consent of the other members, the Court found that the assignment was void. The assignment was void because the member who made the assignment was limited by the terms of the operating agreement, and because the operating agreement governed over contrary statutes which otherwise might have allowed for the assignment.
The Court went on to note that Colorado does not require any “magic words” in the operating agreement to make the assignment void such as a specific statement that the assignment would be void. Rather, the language in the operating agreement that the assignment, without the written consent of the other members, was not effective for any purpose, was sufficient to void the assignment. As a result, the ex-spouse assignee was never, and could never be, a member, or have any membership interest.
In the operating agreements we do for clients, as well as buy-sell agreements incorporated therein, we broach this and other similar issues with the members of the expected LLC asking them, for example, to determine whether, and how, they will allow the transfer or assignment of membership interests (whether voting rights, rights to distributions, or otherwise). It is an important exercise that many potential members do not initially recognize, or realize, they should address. But very often, when potential members consider the issues, they do not want to allow the membership interests to be freely transferable and they want to have some control over who can be, or become, a member of the LLC. For example, even if a divorce does not come into play, none of the members will live forever, and the succession of the membership interests in the estate of a deceased member, for the stability and perpetuation of the business, must be considered.
The Condo case reinforces that operating agreements are valid and will be enforced by the courts under Colorado law. The case shows that the members at the formation of the LLC have real power and their choices have real consequences which should be taken into consideration before there is a dispute. Furthermore, LLCs which exist, but where the members have not addressed these issues, or do not even have an operating agreement, can, and should, spend the time and money to put something in place before a dispute arises.
Wednesday, June 30, 2010
One of the first posts on my blog was Copyright Law Not the Problem for Indy Film. The film was Sita Sings the Blues and is centered around a song that the film maker, Nina Paley, could not get licensed after she already made the movie around the song.
The American Bar Association Journal contained an article about the film in its May 2010 edition which is called No Longer Singing the Blues.
While the ABA article highlights some of Ms. Paley’s crusade regarding copyright alternatives, what I thought was particularly interesting was the report that Ms. Paley did eventually obtain a license. Originally, the demand was for more than $200,000; however, she was able to negotiate a deal for $50,000 per 5000 units sold. Since then, she has been able to do some distribution of the film and, if you follow the link above, you can apparently view the film for free on Google videos.
The point is that Ms. Paley has obtained a workable license under the current copyright regime. While the argument remains that some copyright owners can use their rights to prevent the creation of artistic works, it is debatable whether that is necessarily a bad thing.
If the song is so valuable that someone wants to create a film centered around the song, it is hard to argue that the song has no value, or that the author of the song should not be able to obtain the benefit of the value they have created. The copyright laws are focused on trying to encourage the creation of such works by giving authors the ability to capture this value. And one has to wonder whether the song on which the film is based would have been created, or made available to others, if the copyright law incentives had not existed. In many ways, the film, and its value, are dependent on the song and would never have existed without the song.
This raises the relational issues on which I like to focus. Songs and other works are often more than just an independent work. They are created and tied to their creator in intangible ways, they have a context. Some don’t want their work used for purposes that are antithetical to their views, values, or goals. An example is when a politician uses a song by an artist that is diametrically opposed to the politician. From the author’s perspective the use of the song twists and perverts their creation. It’s like taking a quote out of context.
While we want to promote the creation of works for the public’s use, I am not sure that it is good to completely severe works from the authors intent, desires, dreams, and hopes. Some things may never be created or said, but that is the necessary corollary of actually being able to say or create something of meaning or value. It is the necessary corollary of expression.
Furthermore, it should be noted that often times it is the limits which force the creation of the best works. Boundaries are not in and of themselves a bad thing. They simply establish the scope of the work. A painting has to have edges, and a novel has to use words. In fact, it is those limits which create the medium in which one operates. Likewise, access to a limited world of possibilities is often what forces us to do better with what we have, instead of relying on others.
Regardless, Ms. Paley got a license and the world keeps turning.
Wednesday, June 23, 2010
One of the frequent questions I get is whether a copyright owner has to register their works in order to have a copyright or to obtain protection under the federal Copyright laws. Last year, I wrote a short post highlighting registration asking the question: “Should I Register My Copyright?” Initially, I noted that one has a copyright regardless of whether one registers the work. I then focused on the advantages of registration including statutory benefits such as enhancing damages, and evidentiary benefits such as having presumptive proof (if the registration is successful) that the work is protected by copyright law.
While these advantages remain true, new developments in the law help to clarify the importance of registration, importance which I think must be emphasized.
Ownership versus Right to Enforce
First, let me point out that there is a difference between having a copyright, and being able to enforce the copyright. Using the real property example, it is one thing to own your house lawn, it is another to actually prevent others from walking on your lawn. With copyright, the walking on your lawn is someone else making a copy of your work without permission. You, as the author, may own the copyright in the work, but the fact of ownership does not in itself prevent someone from making a copy of the work. The power of ownership really takes effect when you can use the fact of ownership to prevent someone from making copies.
Accordingly, while one may have a copyright in their original work of authorship by virtue of having actually created the work, one must also be able to prevent copying.
Copyright Protection Other than a Lawsuit
Second, there are ways to prevent copying other than filing a lawsuit. For example, if one never shows their work to anyone else, no one can make a copy of the work. One can also use physical barriers or technology to prevent copying, like watermarks, encryption and so on. Use of these types of measures is a key part of creating a copyright protection system and should not be ignored. However, these measures have their limits, including their feasibility and applicability.
A Legitimate Lawsuit Option for Enforcement
Third, the perhaps the last component of a copyright protection system is a legitimate threat of litigation against those who are copying the work. One thing to be noted is that copyrights are a federal right and can only be enforced in federal court, i.e., by making a federal case out of it. But in addition, this is where registration becomes key.
The Reed Elsevier v. Muchnick Case
A recent case from the U.S. Supreme Court addressed registration as a pre-requisite for enforcement of copyright claims. The case is Reed Elsevier, Inc. v. Muchnick et al., 130 S.Ct. 1237 (2010). There, some of the parties seeking copyright protection under federal law had not registered their copyrights. The trial court raised the question on its own (without the parties raising the question) of whether it had the ability to handle the case if those parties had not registered their works. Another way of saying this is to say that the court raised the question of whether it had jurisdiction to hear the copyright claims.
This came about because the federal copyright statutes state that a party cannot file certain copyright claims (for our purposes, it is enough to note that the certain claims at issue are pretty much the ones most important to copyright owners) unless they have registered the copyright. Specifically, the statute states, in part, “no civil action for infringement of the copyright in any United States work shall be instituted until preregistration or registration of the copyright claim has been made in accordance with this title.” 17 U.S.C. Section 411.
Applying this statute, the trial court determined that it did not have jurisdiction, and the parties appealed the issue all the way to the Supreme Court.
In resolving the question, the Supreme Court stated that trial courts do have jurisdiction to handle cases involving unregistered works. However, the Supreme Court indicate that registration was an essential element of a claim for violation of a copyright under the statute. In short, this means that while the court can hear the case, the copyright owner still has to prove they registered, or tried to register, the copyright with the Copyright Office to succeed in their lawsuit.
Like any lawsuit, a party has to prove they are entitled to relief or a remedy. If one is claiming someone else trespassed on their property by walking on it without permission, they not only have to prove that the other person actually walked on their property, they have to also prove that they own the property at issue. If they cannot prove this, they cannot prove an essential element of the trespass claim and they will loose.
With copyright violations, the federal statutes establish the elements of the claim that a copyright owner has to prove to win. It may be obvious that a copyright owner has to prove the the other person actually copied the work at issue, but the Reed Elsevier case also suggests that the copyright owner will have to prove that they at least attempted to register the work with the Copyright Office as well if they want to win. If they cannot prove this requirement, they will likely loose.
The reason I say that they have to prove they at least attempted to register the copyright is because registration does not have to be accepted for the copyright owner to file suit. A copyright owner has to have either successfully registered the work before they sue, or have tried to register properly, but been denied registration. In addition, in some situations, the registration can occur within three months of the suit for a violation of the copyright.
It is integral to be able to enforce a copyright in court against others who copy. Without the ability to enforce the copyright, one really has nothing from a legal perspective. Accordingly, because one must register their copyright to be able to win in a lawsuit about copyright infringement, registration is exceedingly important.