Justmed, Inc. v. Byce

600 F.3d 1118 (9th Cir. 2010)

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Nature of the Case

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Facts

Joel Just and P are former brothers-in-law who together developed the idea of a digital audio larynx, a device to help laryngectomees--individuals whose larynxes have been surgically removed--produce clearer speech. Both have degrees in electrical engineering and experience working in the computer industry. They began discussing the idea in 1994 on a family vacation. Just and D brainstormed ideas for how to advance such devices--in particular how to produce a hands-free device, rather than one that required the user to hold the device against the throat. In 1995, they applied for a patent as co-inventors of a 'system and method for monitoring the oral and nasal cavity,' which was issued to them in 1998. D worked on the project between 1995 and 1998, but no one did any further work on the device from 1999 until 2003. In 2003, Joel and Ann Just formed P, to continue the development of the product. Just recruited a former business associate, Jerome Liebler, to help work on the idea. He offered founders' options to D, and D ultimately invested $ 25,000 in return for 130,000 shares. D also accepted a position on P's board of directors, serving with the Justs. Just and Liebler worked full-time developing a new hardware prototype and writing source code for the product. Liebler wrote a majority of the code, working at his home on his computers. The code was never released outside of the company, and notices on the code stated that it was copyrighted by P. The code was not registered with the United States Copyright Office. P operated by selling shares to family members and by relying on loans from the Justs. Just and Liebler a cash salary and instead were compensated with shares of stock. By the summer of 2004, P had a marketable product called 'JusTalk.' Liebler could no longer continue his work on the product. D expressed interest in becoming more involved. Liebler was still drawing half of his salary, but agreed to have the whole package--at that point, $90,000 per year, paid as 15,000 shares per month, each share valued at 50 cents--transferred to D and to have D take over development of the source code. Just testified that D was hired as an employee to replace Liebler, who was also an employee, and that D agreed to be paid a salary in shares of stock. D claimed he never understood himself to be an employee and had no 'explicit knowledge' that he was accruing shares as compensation. P and Byce had no written employment agreement. D never filled out an I-9 employment verification form or, until 2005, a W-4 tax withholding form. D began working on the source code. D never received share certificates for the stock he received as compensation. Indeed, the company generally did not keep formal records other than a series of notebooks Just maintained to track conversations and events. P did not issue D a W-2 wage statement form, withhold taxes, or pay workers' compensation or unemployment insurance. Nor did the company provide benefits for D or report his employment to the state. D worked from his home in Boise, Idaho, using his computer. Just provided D with the original code created by Liebler and various materials necessary for D's development work, including JusTalk units, schematics, data sheets, batteries, chargers, assemblers, source code, and headsets. D set his own hours, often working late into the night, and Just did not tell him how to spend his days. D e-mailed the new versions of the source code to Just, who would compile it and load it onto the JusTalk to evaluate its performance. D communicated by phone or e-mail, and occasionally would meet in Boise or Portland or somewhere in between. Just, a poor programmer, never made changes to the source code. D had rewritten the source code Liebler had developed. According to D, only 21 lines of code from the last version Liebler worked on remained, out of approximately 3500 to 4000 lines total. D was included in the company profile brochure and had a P business card. He was alternatively referred to as the 'Director of Research and Development' and the 'Director of Engineering,' the latter title supplied by D. D also updated the company Web site and attended conferences, marketing meetings, and demonstrations on behalf of P. D was living on credit and told Just that he would soon need cash. P agreed to pay D half in cash and half in shares. D filled out a W-4 form, and the company issued three checks for him as payment for May, June, and July 2005. D never cashed the checks. D began to believe his own paranoia and changed the copyright statement on the software so that it now read 'Copyright (c) Mike Byce 2005' instead of copyright JustMed. Two days before Just was scheduled to meet with a potential merger or buy-out partner, D deleted all copies of the source code from P's computers. He did this after seeing a spreadsheet showing a large disparity between the number of shares D owned and those shares that the Justs and Liebler owned. D raised with Just the disparity in ownership between D and the other primary shareholders. Just declined to give additional shares to D. D did not mention that he had deleted the source code from P's computers. Just still had a recent version of the object code loaded on a JusTalk unit, but after flying to Chicago for his demonstration meeting, Just could not get the unit to work. Hoping this was a curable problem, Just then discovered that he no longer had a copy of the source code. D claimed to have assumed 'revision control,' meaning that he had removed the source code to insure that no one else would make changes to it. Only upon returning to Oregon Just realize that D had deleted the source code. Just was able to recover some prior versions of the source code files. D later returned the latest version of the source code, with some of the programmer's notes removed, but only after P filed suit against D and the Idaho state court issued a temporary restraining order. D removed the case to federal court, asserting that it required determination of the ownership of the software under the Copyright Act. D later counterclaimed, seeking a judgment declaring that he is the sole author and owner of the software under the Copyright Act. P asserted only state law claims, including misappropriation of a trade secret, conversion, breach of fiduciary duty, and intentional interference with a prospective economic advantage. The court found in favor of JustMed and held that D was an employee when he wrote the software. P owned the copyright to the software. The court also found Byce liable for misappropriation of a trade secret, conversion, and breach of his fiduciary duty. D appealed.