The Ninth Circuit in JustMed v. Byce found that a startup founder’s former brother-in-law and part-time code developer was indeed an employee when he wrote the code — and the code was therefore indeed a work for hire. This meant the company owned the code and the disgruntled former brother-in-law did not have any independent ownership rights in it. This was despite the fact that he had not been treated as an employee, there was no written agreement governing ownership, and the manner in which he performed the work made it appear, in many respects, that he would be treated as an independent contractor for ownership purposes.
Since I last reported on Byce another court has come out the other way in somewhat similar circumstances. In this case, the type of legal entity involved made a significant difference. Woods v. Resnick involved two equal partners in a startup that developed technology for the auto finance industry. One partner conceived of the idea for the company’s new technology but the other partner, who had relevant software engineering expertise, developed the code. This second partner worked out of his home, setting his own hours, without input or oversight from the first partner, to develop the code. All of these factors were relevant to the court, in its analysis. This second partner was paid a draw against future profit distributions; there were other workers receiving wages and treated as W-2 employees. The court found that the partner was an independent contractor, for purposes of determining the ownership issue, and therefore the technology was not developed as a work-for-hire. This meant the second partner did indeed retain ownership rights and the company did not clearly own its own code. The court distinguished the Byce case, in large part for the reason that Byce involved a corporation but Woods involved an LLC. In an LLC an owner is not treated as an employee for tax purposes, and, the court seemed to be saying, the owner should not be treated as an employee for IP/work-for-hire issues either.
It hardly seems reasonable that whether the startup is formed as an LLC versus as a corporation will determine whether the startup itself owns its own code. And the courts discussed above may have come out differently because, in Byce the plaintiff was trying to use the code to prevent a transaction from occurring in order to exract more money from the closing for himself, but in Woods, the parties had already held out to the public that the code was in fact owned by the developer-partner and only later were they disputing this. Still, it is important to note that the manner in which a startup’s founders structure the new business can have significant I.P. consequences beyond the cap table.