WORK MADE FOR HIRE AGREEMENTS AND DERIVATIVE WORKS

Ivan Hoffman, B.A., J.D.


A recent case from Ninth Circuit presents further issues in terms of the boundaries of what is or is not a work made for hire and the legal and financial consequences of that determination.

 

In Auto Parts Network, Inc. vs. Parts Geek LLC et. al. these were the facts in summary form as told in part by the Court:

The story starts in 1996, when Richard Pine and Todd Daugherty founded BenzBin, a website that sold Mercedes–Benz car parts. By 2000, Pine and Daugherty met two more internet entrepreneurs, Brian Tinari and Lowell Mann.

Together they began to work on what had by then become Partsbin, a website selling replacement parts for cars of all makes. Partsbin needed software to help it process customer orders over the internet (e-commerce software) and so Tinari entered into discussions with a computer programmer, Lucas Thomason, to license an order processing program of Thomason's called Manager 2000. Thomason wrote the program in “late 1999 or early 2000,” while he was “self-employed and doing business as ‘Lucas Networks.’ “ Thomason gave Partsbin a “perpetual license to use” Manager 2000 and Partsbin began using the software in its business. (emphasis added)

Sometime around April 2001, after Thomason provided the company with the Manager software, Partsbin hired him as its “director of eServices.” (emphasis added) 

As part of his employment, Thomason worked on “modifications and enhancements” to Manager 2000.

Thomason tailored the Manager software to fit Partsbin's business changes. He added one of these modifications, called Auto Vend, around “2003 to early 2004.” Auto Vend is a distributor selection system: if a customer orders a part that is out of stock in Partsbin's own warehouse, Auto Vend will identify an appropriate distributor to fill the customer's order.

As Partsbin evolved, so did Manager 2000. In his time working at Partsbin, Thomason developed at least four more versions of Manager—Manager 2001, Manager 2001 v2, Manager 2003, and Manager 2005. There is no record of a written agreement between Thomason and Partsbin regarding the ownership rights to Thomason's “modifications and enhancements” to Manager 2000. (emphasis added)

As Partsbin became very successful, it was acquired by USAP and part of the acquisition agreement was to include Partsbin’s “Intellectual Property,” defined in relevant part as “all rights to and interests in · all Software, copyrights · registrations and applications thereof·” “Software” was defined, in turn, to mean “title and interest in the [Partsbin] software programs” identified in a schedule attached to the agreement.”

After the acquisition, Thomason continued to work on Manager 2000 as an employee of USAP.  However, in July, 2008, he resigned from USAP and later developed software for Parts Geek, called “Admin.”

Parts Geek was another success, growing to over $12 million in sales by the end of 2009. This rapid growth attracted USAP's attention and suspicion, culminating in this suit by USAP against Parts Geek and Thomason claiming, among other things, that Admin infringes USAP's copyrights in Manager. [emphasis added].

Clearly, the facts indicate that Manager 2000 was developed by Thomason before he became employed but the “modifications and enhancements” were developed during his employment.  The issue thus was whether Partsbin owned the rights in Manager 2000 (that it could then have sold to USAP) and whether Admin was an infringement of Manager 2000.

 

The Court stated it this way:

 

We must first determine whether USAP's theory of copyright ownership is based on a correct legal interpretation. The key to USAP's argument is the interaction of two provisions in the Copyright Act: the provision making employers the copyright owner of an employee's “work made for hire,” 17 U.S.C. § 201(b), and the provision governing copyright ownership of “derivative works,” id. at § 103. We consider each in turn.

 

The Court found:

 

Provided that Partsbin and USAP had the right to create derivative work based on Manager 2000, any separately copyrightable software source code developed by Thomason while at Partsbin, and later USAP, is a “work made for hire” if (1) Thomason was an employee of Partsbin and USAP, and (2) the development of software code was the type of work he was employed to perform, the work occurred substantially within the authorized work hours and space limits, and the work was actuated, at least in part, by a purpose to serve Partsbin and USAP.

 

So the issue was whether the “modifications and enhancements” were “separately copyrightable” works.   In that regard, the Court stated:

 

We next consider how and when enhancements to software programs such as Manager 2000 can be separately copyrightable as derivative works. A “work based upon one or more preexisting works” that “recast[s], transform[s], or adapt[s]” the preexisting work is referred to as a “derivative work.” 17 U.S.C. § 101.6 A copyright owner has the exclusive right to “prepare” and authorize the preparation of “derivative works based upon the copyrighted work.” Id. at § 106(2). A nonexclusive license of this right “may be granted orally, or may even be implied by conduct.” Effects Assocs. v. Cohen, 908 F.2d 555, 558 (9th Cir.1990) (quoting Nimmer on Copyright § 10.03[A] (1989)).

The resulting derivative work may be independently copyrightable, but the scope of this copyright is limited. For example, where the copyright owner has authorized a third party to prepare a derivative work based on the owner's pre-existing work, copyright protection in the derivative work will cover only “the material contributed by the author of such work, as distinguished from the preexisting material employed in the work.” § 103(b);

The lesson here is that when a copyright owner in the underlying work licenses another party to create a derivative work based upon that underlying work, best practices would seem to mandate that an agreement dealing with which party owns the rights to the said contributions so that disputes such as this one (and the substantial monies and time involved) might be avoided. 

We have adopted the Second Circuit's test for ascertaining whether a derivative work meets copyright law's fundamental requirement of originality. In order to be copyrightable, (1) “the original aspects of a derivative work must be more than trivial” and (2) “the original aspects of a derivative work must reflect the degree to which it relies on preexisting material and must not in any way affect the scope of any copyright protection in that preexisting material.” Entm't Research Grp. v. Genesis Creative Grp., 122 F.3d 1211, 1220 (9th Cir.1997) (quoting Durham Indus. v. Tomy Corp., 630 F.2d 905, 909 (2d Cir.1980)). This Durham test establishes two ways of asking the same underlying question: whether the derivative work meets the “constitutional requirement” of originality enunciated in Feist Publications, Inc. v. Rural Telephone Service Co., 499 U.S. 340, 346 (1991). In Feist, the Supreme Court held that “[t]o qualify for copyright protection, a work must be original to the author,” meaning that “the work was independently created by the author (as opposed to copied from other works), and that it possesses at least some minimal degree of creativity.” Id. at 345. Thus, the first prong of the Durham test asks whether the derivative work is original to the author and non-trivial, i.e., possesses the minimal degree of independent creativity required by Feist. Durham, 630 F.2d at 909; Entm't Research Grp., 122 F.3d at 1220. The second prong asks whether the author of the derivative work made so few changes to the preexisting work that issuing a copyright for the derivative work would prevent the owner of the preexisting work from exercising some of its rights under copyright law. Entm't Research Grp., 122 F.3d at 1220.

           

Applying this test, we conclude that in order to be copyrightable derivative works, Thomason's contributions to Manager 2000 would have to be lawfully based on Manager 2000 and contain non-trivial enhancements that do not affect the scope of copyright protection in Manager 2000. See Entm't Research Grp., 122 F.3d at 1220.

           

 

Having separately examined the work for hire and derivative work provisions of the Copyright Act, we now must read them together. Based on our review, we conclude that absent a written agreement to the contrary, the employer is the author of a work made for hire. § 201(b). If such a work is lawfully derived from a preexisting copyrighted work, the employer holds the copyright to the original, non-trivial material contributed to the preexisting work. § 103. (emphasis added)

 

 

The Court reviewed the evidence and concluded that a jury could find that Thomason was an employee of Partsbin at the time he created the “modifications and enhancements” and thus, to that extent, Partsbin (and thus USAP) were the owners of the rights to those “modifications and enhancements” as works made for hire by an employee, there being no agreement to the contrary.

 

This conclusion leads to the next question, whether any of Thomason's work on Manager while employed by Partsbin and USAP was copyrightable under the rules applicable to derivative works. To answer this question, a fact finder must determine (1) whether Partsbin and USAP lawfully derived the enhancements to Manager 2000 that led to the subsequent versions of the software, and (2) whether any of these enhancements were “more than trivial” such that they did not affect the scope of the copyright in Manager. Entm't Research Grp., 122 F.3d at 1220; Durham, 630 F.2d at 909; § 103(b).

 

As to the first question above, the Court concluded that a jury could reasonably find that, even though the original copyright remained with Thomason (since “Manager 2000” was not created during employment and was only subject to a license from Thomason), Thomason gave Partsbin and implied license to make modifications (which Thomason then did after he was employed). 

 

As to the second question, the Court stated:

 

Moreover, a jury could reasonably conclude that the copyright to the Auto Vend feature is “independent of, and does not affect or enlarge the scope” of Thomason's preexisting copyright in Manager 2000. § 103(b). The record shows that Partsbin used Manager 2000 for two or three years before Auto Vend was added, which provides evidence that Auto Vend added an independent functionality to the preexisting Manager 2000. Thus, it is reasonable to infer that Thomason would be free to copy and license Manager 2000 (without Auto Vend) to others, and that such licensees would not have to be concerned about vulnerability to suit from Partsbin for infringement of the Auto Vend feature. Cf. Entm't Research Grp., 122 F.3d at 1220; Durham, 630 F.2d at 909. Because Partsbin's ownership of the copyright to Auto Vend would not circumscribe Thomason's right to copy or license Manager 2000, a jury could reasonably conclude that Auto Vend was a copyrightable element of Thomason's work made for hire. See Entm't Research Grp., 122 F.3d at 1220.

 

Conclusion

 

The Court thus found that a jury could reasonably conclude (this was a motion for summary judgment and thus the issue on appeal was whether there were any questions of fact that should have gone to a jury) that although Thomason retained ownership of the underlying software called “Manager 2000,” he gave Partsbin an implied license to create modifications to the same and the said modifications, made when Thomason was an employee, were more than “trivial” and would be independent of the underlying copyright in “Manager 2000.”

 

Even with employees, it is best to have valid, thorough, written and signed agreements covering all the issues related to employment including, as in this instance, issues related to copyrights and other forms of intellectual property. 

 

What I have said many times is: “I have been at both the litigation table and the negotiation table and the latter is almost always cheaper than the former.”  Or in a more pithy way: “Help me is almost always cheaper than fix me.”TM

 

 

Copyright © 2012 Ivan Hoffman.  All Rights Reserved.

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This article is not legal advice and is not intended as legal advice.  This article is intended to provide only general, non-specific legal information.  This article is not intended to cover all the issues related to the topic discussed.  The specific facts that apply to your matter may make the outcome different than would be anticipated by you.  This article is based on United States law.  You should consult with an attorney familiar with the issues and the laws of your country.  This article does not create any attorney client relationship and is not a solicitation.

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No portion of this article may be copied, retransmitted, reposted, duplicated or otherwise used without the express written approval of the author.

 


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