Work for Hire Rule in the Start Up Context

The case of JustMed, Inc. v. Byce involves a common fact pattern.

A start-up company, which conducted its affairs somewhat casually, developed valuable software for a new product (in this case a digital audio larynx device that helps laryngectomees – individuals whose larynxes have been surgically removed – produce clearer speech). The company faced a legal battle with a person (Byce) who contended that he had developed the software as an independent contractor, and not as an employee of the company.

Byce claimed that he -- not JustMed -- was the author and, therefore, the owner of the software. The question of whether Byce was an employee or an independent contractor proved crucial, as a brief review of the federal Copyright Act demonstrates.

Under the Copyright Act, the ownership of a given work vests in the author (or authors) of the work (17 U.S.C. § 201 (a)). Computer software, including source and object codes, can be subject to copyright protection (see Johnson Controls, Inc. v. Phoenix Control Sys., Inc., 886 F.2d 1173, 1175 (9th Cir. 1989)).

However, an exception to the “author ownership” rule exists for “works made for hire,” in which case the employer or other person for whom the work was prepared is considered the author and owns the copyright unless there is a written agreement to the contrary (17 U.S.C. § 201 (b)). A work made for hire is “a work prepared by an employee within the scope of his or her employment.” (17 U.S.C. § 101.)

In the JustMed case, the issue was whether Byce worked as an “employee” or as an “independent contractor.” To decide that issue, the court turned to general common law agency principles. Relevant factors considered by the court included:

• the skill required for the occupation;

• the source of the instrumentalities and tools;

• the location of the work;

• the duration of the relationship between the parties;

• whether the hiring party has the right to assign additional projects to the hired party;

• the extent of the hired party’s discretion over when and how long to work;

• the method of payment;

• the hired party’s role in hiring and paying assistants;

• whether the work is part of the regular business of the hiring party;

• whether the hiring party is in business;

• the provision of employee benefits; and

• the tax treatment of the hired party.

In making inquiry on this subject, the court explained that it would not use a “shorthand formula” or “magic phrase” that can be applied to find the answer. “All of the incidents of the relationship must be assessed and weighed,” said the court, “with no one factor being decisive.” Stated another way, “[t]he factors should not merely be tallied but should be weighed according to their significance in the case.”

In the JustMed case, Byce claimed he was an independent contractor because he was left on his own; could work at home; was not supervised or instructed how to work; and did not have taxes taken out of his checks. The court, however, held that he was an employee. In applying the factors listed above, the court took due note of the fact that this was a “start up” enterprise. The court emphasized that Byce was hired to replace another person who clearly was an employee; he worked on the software development as well as other company-related projects; he was not hired for a specific term or with a discretely defined end product in mind; the work in question was integral to the company’s regular business, instead of being an “outside” project that might have been the focus of an independent contractor.

Although the company did not exercise much control over the manner an means by which Byce created the source code, the court duly observed that “this is not as important to a technology start-up as it might be to an established company.” Moreover, “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. . . . 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.”

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, said the court, but it should not make the company more susceptible to losing control over software integral to its product.

The court concluded: “Weighing the common law factors in light of the circumstances and JustMed’s business, we conclude that the district court did not err in holding that Byce was an employee and that the source code was a work made for hire.”

The take-away lesson in this case is clear: Context matters. In disputes over the development of intellectual property, it is vital to demonstrate to the court the reality of the subject business and the parties’ actual working relationship and how it fits in with that reality.

We regularly counsel start-up businesses, including enterprises utilizing emerging technology.