by Lee Gesmer | Sep 15, 2006 | Copyright
Copyright. Sometimes it just seems like the law is full of traps. Miss a filing deadline, fail to make the proper objection or motion in court, leave the many forms of “magic language” out of an agreement – any of these, and countless more, can result in disaster.
Our firm has recently seen two clients pay over $500,000 to buy their way out of what I call the “work for hire” trap. Both clients are software companies. In the first case, the client hired an independent contractor to develop its product, and failed to get a written assignment of ownership from him. After leaving under adversarial circumstances, the contractor claimed that he, not the company, owned the product. The second case involved similar facts, but the independent contractor/programmer worked for a small agency, and after several years the agency asserted ownership of the programmer’s work. Again, no written assignment, and again, a multi-hundred thousand dollar settlement to avoid litigation and get what the company should have owned outright.
In both cases the companies could have argued that they had an “implied license” to use and sell the software (since in neither case did the contractor warn the company of his ownership claim while the work was being done), but the implied license doctrine is messy, to say the least. What investor or purchaser wants to be told that the company it is investing in or buying doesn’t own its software, and that it has an “implied license” from a hostile former programmer? ‘Nuff said.
Here are “the rules” of work for hire under the Copyright Act:
First, the easy case: if the developer is truly an “employee” (works full time, at direction of employer, employer withholds taxes), and the work is within the scope of her employment, the employer owns the programmers work. In this context the disputes that usually arise are over the “scope of employment” question – when the employee works at home evenings or weekends, was the invention within the “scope”? Any ambiguities in this situation are usually resolved be a well written employment agreement that draws this line contractually.
Second, if the developer is an independent contractor (working for you directly or through an agency), you must get a written assignment. The assignment can be complicated and wordy, but it can also be as simple as one sentence: “I, John Doe, for good consideration, receipt of which is acknowledged, do hereby assign to Corporation all title and interest in the intellectual property I have created for Corporation.”
Leave out any mention of “work for hire” unless you are sure that the work falls into one of the nine narrow work for hire categories set forth in the Copyright Act (for example, a translation or an atlas). If the contractor is working on one of these items, then the contractor can agree in writing, before work is commenced, that his work is a work for hire. Note that a computer program developed by a contractor can never be a work for hire, because computer programs are not one of the nine categories.
Because of the legal technicalities associated with the work for hire doctrine as applied to independent contractors, any reference to a work for hire is both unnecessary and possibly dangerous. What if the contractor agrees that the computer program she is writing is a work for hire? Does this technically deficient agreement (since computer programs don’t fall under work for hire) undermine the “employer’s” ownership? Who needs to worry about these technicalities? The solution, plain and simple, is to get a blanket assignment. An assignment covers all bases: whether the developer is an employee or an independent contractor, and whether her work falls within the nine work for hire categories or not, the assignment transfers ownership.
Avoid the work for hire trap, and with one important caveat, get an assignment.
The caveat is that a non-employee may be able to terminate the assignment after 35 years.
by Lee Gesmer | Sep 11, 2006 | Litigation
Litigation.
“Of course, this letter is not intended to create, nor do you or we presently have any binding legal obligation whatever in any way . . ..”
In 1991 those words played a major role in the Massachusetts Appeal Court’s reversal of a $32 million trial judgment against Federal-Mogul Corp. in the case (infamous to Massachusetts business lawyers of the time) of Schwanbeck v. Federal-Mogul. The plaintiff in that case claimed he had a deal to buy a division of Federal-Mogul, and FM had breached that agreement. While the trial court agreed (resulting in the $32 million judgment), the Appeals Court reversed, in part on the language quoted above.
That case was an object lesson to attorneys in our firm involved in M&A transactions that it was essential to include “no legal obligation” language in every transaction, unless and until our client was prepared to be legally bound. An article that I wrote in 1991 discussing this case in more detail is linked here.
However, this problem is not limited to contracts – it arises surprisingly often in settlement discussions in litigation. Not too long ago our firm had a case in which the attorneys for the other side insisted that a verbal conversation with an attorney in our firm, followed by a confirmatory letter that outlined a settlement at a high level of generality, was enough to result in a settlement binding on our client. After months of depositions, days of arbitration, and well over a million dollars in legal fees on both sides, an arbitrator ruled that the agreement was not binding on our client, leading to even more litigation and, ultimately, a favorable settlement for our client.
Another permutation of this legal trap is illustrated in a recent decision by Superior Court Judge Allan van Gestel in the case Targus Group Int’l v. Sherman. There, following a private and nonbinding mediation, the parties entered into a written and signed “Agreement in Principle,” setting out settlement terms. The Agreement did call for “execution and exchange of final settlement documents and mutual releases in a form satisfactory to counsel ….,” but did not contain “no legal obligation” language.
The settlement faltered as the parties tried to negotiate final settlement documents, and the parties ended up in court, with Targus arguing the Agreement in Principle was binding on Sherman.
The result? Judge van Gestel granted summary judgment for Targus, holding that the Agreement in Principle contained all the essential terms and therefore was binding.
Practice pointer: unless you intend to be bound, always, always, include language to the effect that there is no binding agreement until a final agreement is reached. Calling a settlement agreement an agreement “in principle” and making it subject to a later agreement satisfactory to counsel is not enough to guarantee avoiding the result in the Targus case. Although this should be obvious to most experienced lawyers, its surprising how many lawyers miss this simple point. In my office I have an easy way avoid this result: whenever settlement negotiations begin I send an email to opposing counsel, stating that we have no deal until we have a final settlement agreement, approved and signed by the clients. Opposing counsel inevitably writes back agreeing, and the risk of having an agreement forced on my client is avoided.
by Lee Gesmer | Sep 6, 2006 | Miscellaneous
Ok, my family is a little geeky, I admit it. We watch documentaries together more than we watch family friendly movies. What do I discuss with my beautiful wife and exceptional 12 year old daughter as we walk along the beaches of Cape Cod? They both love astronomy, and every year I remind my lovely daughter that there are more stars in the Universe than grains of sand on all the beaches of Earth. However, I’ve always had a nagging doubt about this – is it true? It seems just, well, inconceivable.
This year, upon returning to civilization (and a computer) I googled “are there more stars in the Universe than grains of sand on all the beaches of earth?” It turns out that scientists think about this stuff too. The first hit is an authoritative appearing article from North American Skies which reads –
In my astronomy classes I have often used the claim that there are “more stars in the heavens than all the grains of sand on all the beaches on Earth.” The claim is certainly not original with me, but I had always accepted it without question. Then one day began to wonder if it is really true. After all, there must be a really big number of sand grains on all the planet’s beaches!
The discussion concludes, after much mathematical calculation and many “to the nth powers,” that there are 200 billion billion more stars than grains of sand(!) Note that there are an estimated 50 billion galaxies with an estimated 100 billion stars per galaxy. Do the multiplication, and this adds up. Our neighbor, the Andromeda Galaxy, has an estimated trillion stars.
Read the full article comparing numbers of stars and grains here.
Now where’s that lost shaker of salt?
Update Jan 2025: Our Universe has more galaxies than Carl Sagan ever imagined
based on what we see around nearby Milky Way analogues, there ought to be at least 6 trillion galaxies contained within the observable Universe, and it’s plausible that a number that’s more like ~20 trillion — with approximately 100 small, satellite galaxies for every Milky Way-like galaxy out there, throughout cosmic time — might be an even better estimate. . . . “
by Lee Gesmer | Aug 18, 2006 | Minority Shareholder/Fiduciary Duty, Noncompete Agreements
Noncompete Agreements. Plaintiffs seeking to enforce noncompete agreements by means of preliminary injunctions have been up against it as of late. In Payson’s Trucking v. Yeskevicz (pdf file) Judge Peter Agnes denied the plaintiff’s motion, which was brought against a contracting party (as opposed to an employee), on the grounds (among others) that the agreement was too vague as to its geographic reach and in the identification of the plaintiff’s actual customers.
In Merchant Business Solutions v. Arst (pdf file) Judge Richard Connon denied a preliminary injunction against a former sales employee on the grounds that the geographical limits were too broad and that the plaintiff was seeking protection from ordinary competition (among other reasons). Both cases are worth reviewing, since the impression one takes away is that the pendulum has swung (yet again) in the direction away from enforcement of these agreements. A plaintiff simply needs better facts than the parties had here in order to obtain a preliminary injunction to enforce a noncompete agreement.
Derivative Shareholder Suits. When it turns out a company has made an operational mistake it can expect two lawsuits. The ubiquitous and much publicized class action and the less well-known derivative shareholder suit. The latter seeks damages on behalf of the corporation from the officers and directors who allegedly were involved in the wrongdoing. Often the two suits are coordinated by plaintiffs’ counsel,hoping that a squeeze play will bring the corporation to the settlement table that much sooner.
The standard response to the derivative suit is for the corporation to appoint a special litigation committee (SLC) to investigate the claims and recommend whether the suit should go forward or not. Without going into too much detail, this recommendation and the corporation’s decision implicate the so-called “business judgment rule” (read more about this rule here). Not surprisingly, the SLC typically recommends against bringing any claims against the officers/directors, and the plaintiff then accuses the SLC of bias in favor of the officers and board members. Therefore, it is of paramount importance that the SLC not only be independent, but that it not demonstrate any signs of bias in favor of the individuals whom it is investigating.
These issues are highlighted in Massachusetts Superior Court Judge John Agostini’s recent decision in Blake v. Friendly Ice Cream Corp. Judge Agostini held that the recommendation of the SLC appointed by the Friendly’s Board did not act independently, and ordered that the derivative case go forward. This case is an unusually extensive analysis of the law relating to special litigation committees and derivitive suits. For a discussion of some of the interesting and unusual facts underlying the case that do not appear in the decision, click here.
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Freeze-Out of Minority Shareholders. Majority shareholders in a close corporation cannot “freeze- out” a minority shareholder, that much is clear. The Supreme Judicial Court established the close corporation/fiduciary duty doctrine in 1975 in the case of Donahue v. Rodd Electrotype Co. Exactly what constitute a freeze-out is less clear than some might hope. However, the doctrine seems not yet to have reached its outermost limits.
In Brodie v. Jordan, the Appeals Court held that the majority had engaged in a freeze-out of the widow of a minority shareholder when the majority denied her a corporate office, rejected her request for financial and operating information, and stonewalled her efforts to obtain an appraisal of her stock. Of greatest interest in this case is the remedy the court provided to Mrs. Brodie: the Appeals Court affirmed the trial judge’s order that the majority purchase her shares at a price based upon an appraisal value provided by a court-appointed expert. As a dissenting judge noted, this is the first time an appellate court in Massachusetts has ordered such a remedy, thereby venturing, as the dissenting judge noted, “onto uncharted waters.”
by Lee Gesmer | Aug 18, 2006 | Technology
First, Google wants to digitize every book ever written.
Now, YouTube wants to make available, for free, every music video ever created:
YouTube, which sprung out of nowhere a year ago to now claim over 100 millions views a day, is negotiating for rights to post current and archive music videos on its site, and said any commercial model it decides on will offer the videos free.
“What we really want to do is in six to 12 months, maybe 18 months, to have every music video ever created up on YouTube,” co-founder Steve Chen told Reuters. “We’re trying to bring in as much of this content as we can on to the site.” (continued)
Right. When will Westlaw or Lexis step up and make every law case ever decided available for free? Now that would be worth getting excited about.
