JustMed, Inc. v. Byce

• Citation: 600 F.3d 1118
• Decision Date: 05 April 2010
• Docket Number: No. 07-35861.,07-35861.
• Parties: JUSTMED, INC., Plaintiff-counter-defendant-Appellee, v. Michael BYCE, Defendant-counter-claimant-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

600 F.3d 1118

JUSTMED, INC., Plaintiff-counter-defendant-Appellee, v. Michael BYCE, Defendant-counter-claimant-Appellant.

No. 07-35861.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted April 14, 2009.

Filed April 5, 2010.

COPYRIGHT MATERIAL OMITTED

Shelly H. Cozakos, Perkins Coie LLP, Boise, ID, for the defendant-appellant.

Jed W. Manwaring, Evans Keane LLP, Boise, ID, for the plaintiff-appellee.

Before: B. FLETCHER, A. WALLACE TASHIMA, and SIDNEY R. THOMAS, Circuit Judges.

BETTY B. FLETCHER, Circuit Judge:

At the heart of this case is a dispute over whether a small technology start-up company owns the source code developed for its product. Its informal employment practices raise questions as to whether defendant-appellant Michael Byce was an employee when he developed the source code. After a bench trial, the district court entered judgment and ordered a permanent injunction against Byce, in favor of plaintiff-appellee JustMed, Inc., Byce's former employer. Among other things, the district court found that JustMed owns the software program used on its digital audio larynx device under the work-for-hire doctrine of the Federal Copyright Act, because Byce wrote the source code for the company as an employee, not as an independent contractor. The district court also found that Byce misappropriated the software under the Idaho Trade Secrets Act. Byce appeals both rulings. We have jurisdiction under 28 U.S.C. § 1291, and we affirm in part and reverse in part.

I

Joel Just and Michael Byce 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. Initially, the two began discussing the idea in 1994 on a family vacation. Just and Byce 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—and, 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.

Byce worked on the project between 1995 and 1998, but no one did any further work on the device from 1999—when Byce's wife, the sister of Just's wife Ann, unexpectedly died—until 2003. Then, in 2003, Joel and Ann Just formed JustMed, Inc., based in Beaverton, Oregon, to continue development of the product. Just recruited a former business associate, Jerome Liebler, to help work on the idea. He offered founders' options to Byce, and Byce ultimately invested $25,000 in return for 130,000 shares. Byce also accepted a position on JustMed'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.¹ Liebler wrote a majority of the code, working at his home on his own computers. The code was never released outside of the company, and notices on the code stated that it was copyrighted by JustMed, although the code was not registered with the United States Copyright Office.

Since it was not yet producing a product, the company operated financially by selling shares to family members and by relying on loans from the Justs. Just and Liebler did not receive a cash salary and instead were compensated with shares of stock.

By the summer of 2004, JustMed had a marketable product called "JusTalk." Liebler, however, moved to Kentucky, making it difficult for him to continue his work on the product. At the same time, Byce expressed interest in becoming more involved with the company. 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 Byce and to have Byce take over development of the source code.

At trial, Just testified that Byce was hired as an employee to replace Liebler, who was also an employee, and that Byce agreed to be paid a salary in shares of stock. Byce, on the other hand, testified that while he expected to be adequately compensated in shares upon transferring ownership of the source code, he never understood himself to be an employee and had no "explicit knowledge" that he was accruing shares as compensation.

JustMed and Byce had no written employment agreement. Byce never filled out an I-9 employment verification form or, until 2005, a W-4 tax withholding form. At most, Just documented Byce's salary and duties in a notebook that he kept, although the notation indicating when Byce started was not recorded until several months after Byce began working on the source code. Although Byce began full-time work on the source code in September 2004 and began accruing JustMed stock in October, he 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. While Byce worked for JustMed, the company did not issue Byce a W-2 wage statement form, withhold taxes, or pay workers' compensation or unemployment insurance. Nor did the company provide benefits for Byce or report his employment to the state. Just testified that he did not think much of this was necessary because he thought of Byce as a JustMed "executive," and because JustMed was modeled on prior startup technology businesses that Just had been involved with, where employees were paid exclusively in stock and the stock was never reported as income because of its uncertain value.

Although Byce was carrying on Liebler's duties, Byce operated differently, because he did not live and work in Oregon as Liebler had. Instead, Byce worked from his home in Boise, Idaho, using his own computer. Just provided Byce with the original code created by Liebler and various materials necessary to Byce's development work, including JusTalk units, schematics, data sheets, batteries, chargers, assemblers, source code, and headsets. Byce set his own hours, often working late into the night, and Just did not tell him how to spend his days. As Byce developed new versions of the source code, he would e-mail the new version to Just, who would compile it and load it onto the JusTalk to evaluate its performance. Whereas Just had previously worked side-by-side with Liebler, Just and Byce often communicated by phone or e-mail, and occasionally would meet in Boise or Portland or somewhere in between. The two exchanged ideas and discussed the functionality of the code, as well as improvements that needed to be made. Just, admittedly a poor programmer, never made changes to the source code, and by the time this dispute arose, Byce had substantially rewritten the source code Liebler had developed. According to Byce, only 21 lines of code from the last version Liebler worked on remained, out of approximately 3500 to 4000 lines total.

While he was working on the source code, Byce was included in the company profile brochure and had a JustMed business card. He was alternatively referred to as the "Director of Research and Development" and the "Director of Engineering," the latter title supplied by Byce himself. Although he was primarily working on the source code, Byce also updated the company Web site and attended conferences, marketing meetings, and demonstrations on behalf of JustMed.

Because he was not earning money, Byce was living on credit, and by May 2005 he was worried about his financial situation. He told Just that he would soon need cash. In response, Just agreed to have JustMed pay Byce half in cash and half in shares. Byce filled out a W-4 form, and the company issued three checks for him as payment for May, June, and July 2005.

Byce, however, never cashed the checks. At this point, Byce became concerned that Just did not view him as an equal in the corporation. In order to protect what he perceived as his intellectual property, Byce changed the copyright statement on the software, so that it now read "Copyright (c) Mike Byce 2005" instead of copyright JustMed.

Then, while Byce was working in the Oregon office two days before Just was scheduled to meet with a potential merger or buy-out partner, Byce deleted all copies of the source code from JustMed's computers. Byce testified that he made the decision after seeing a spreadsheet showing a large disparity between the number of shares Byce owned and those shares that the Justs and Liebler owned. In its memorandum decision, the district court found that Byce deleted the code to gain leverage over Just in Byce's efforts to acquire a greater share of the company. The next day, Byce raised with Just the disparity in ownership between Byce and the other primary shareholders. The two talked for several hours, but Just declined to give additional shares to Byce. During this conversation, Byce did not mention that he had deleted the source code from JustMed'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 tried to recompile the source code on his laptop and then load it onto the unit, only to discover that he no longer had a copy of the source code. Just called Byce about the missing code, but Byce 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 did Just realize that Byce had deleted the source code from all of JustMed's computers. Just was able to recover some prior versions of the source code files, but not the most recent one. Byce later returned the latest version of the source code, with some of the programmer's notes removed, but...