You work from home with your own computer? You are not paid cash salary or benefits or have taxes withheld? You're an EMPLOYEE!

It could be one of hundreds of similar situations that occurs every day in the Valley. A developer-founder paid only in shares, working from a remote (out-of-state) location, with no benefits, and no withholdings — and is ruled to have been an employee of his company for purposes of copyright ownership.

 

What's more, this same employee, after becoming aware of a possible serious dispute with the co-owners of the company, deleted all copies of the firm's core product source code (which he alone had written) from all company computers, including the laptop PCs of the co-founders. He alone had the only copy of the company's heart, blood and soul. And as if that couldn't possibly be topped, a federal court has ruled that such conduct failed to rise to the level of trade secret misappropriation — and the developer faced no legal consequences for his conduct.

 

The case of JustMed, Inc. v. Michael Byce, 9th Circuit Court of Appeals (No. 07-35861) (April 5, 2010) presents a compelling set of facts; something like a mix of geek and Sopranos. The adversaries in the case, Joel Just and Michael Byce, are two double E majors and tech company veterans — and former brothers-in-law, who co-developed a hands-free digital audio larynx deviced for patients whose layrnxes have been surgically removed. The case is notable, however, for two reasons. First, the court ruled that an employment relationship existed based on facts that , relationship, signifying rather significant post-hoc liabilities for a small cash-strapped startup, based on facts that arise every single day here in the Bay and beyond.

The brothers-in-law secured a patent on the device in 1998. However, shortly after this patent issued, Byce abruptly ceased work because his wife, and his partner's sister, died unexpectedly at that time. No activity arose again until 2003, when Joel and Ann Just formed JustMed, Inc. in Beaverton, Oregon.

The Justs offered and Byce accepted 130,000 founder shares in return for $25,000, and Byce served on the company board. Byce worked full time developing source code for the product along with another engineer the company retained, Jerome Liebler. Byce, however, completely rewrote more than 99% of Liebler's code.

No one in the company was receiving a cash salary. All worked for shares. The company's cash for expenses came from angels in the form of family members and friends, and a loan from the Justs.

After months of grueling work ("Byce set his own hours, often working late into the night ...." JustMed, p. 5148), around May 2005, Byce was freaking out, having received no cash with which to eat and pay the landlord(?) and living entirely off of credit. He convinced the Justs to start paying half his compensation in salary. To that end, the company agreed, and issued three salary checks — none of which he ever cashed.

At this point, as the Ninth Circuit put it, "Byce became concerned that Just did not view him as an equal in the corporation."

Therefore, Byce, "in order to protect what he perceived as his intellectual property", modified the copyright notice in the code (from "(C) JustMed" to "(C)Mike Byce"). And shortly thereafter — in fact, on the eve of a significant meeting with a potential acquiror — 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."

At this point, it's impossible to tell the story better than the Ninth Circuit does here (kudos to Judge Betty B. Fletcher and/or her law clerks):

 

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.

 

Up until receiving half his salary in paychecks he never cashed, Byce was receiving 15,000 shares per month, each share valued at 50 cents. The Ninth Circuit consistently characterized this as the equivalent of a cash salary.

The lesson here is stark for primary financing co-founders: your worst nightmare come true. You bring a guy on board who seems and is proven to be committed, smart, and talented. Jeez, he's even FAMILY. And what does he do? He hold's the company's future in his hands for ransom, and gets away with it legally. Sure, the company indisputably owns the code — but now it's got a US appellate court finding a retroactive three-year long employment relationship existed.

Make sure you have all your employees sign proprietary inventions and information agreements ("PIIA"). Make sure it's in writing that you own the code, whether you are dealing with an employee or contractor.

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