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__________________________________
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Winter 1992-93, Volume 1, Number 1
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__________________________________
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By George, Donaldson & Ford
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Attorneys at Law
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A Registered Limited Liability Partnership
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1000 Norwood Tower
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114 West Seventh Street
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Austin, Texas 78701
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(512) 495-1400
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(512) 499-0094 (FAX)
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___________________________________
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Copyright (c) 1993 George, Donaldson & Ford, L.L.P.
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(Permission is granted freely to redistribute
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this newsletter in its entirety electronically.)
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___________________________________
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David H. Donaldson, Jr., Editor <DHDONALD+aGD&F%GDF@mcimail.com>
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Peter D. Kennedy, Associate Editor <PDKENNED+aGD&F%GDF@mcimail.com>
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___________________________________
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Part Two - Legal Bytes
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4. CAN YOU INFRINGE A COPYRIGHT WHILE ANALYZING A COMPUTER PROGRAM?
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Copyright law can also threaten the process of analysis companies use
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to review competitors' products to develop and improve their own product.
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The copyright law guarantees to a copyright owner the right to make and
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sell copies of its work as well as modifications, improvements or different
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versions of its original work. Many times, in order to more fully
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understand a competitor's product, a computer software or hardware company
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will examine a competitor's product, including authorized copies of the
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competitor's program, to determine how it operates and ways in which it can
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be improved. This was the situation in ATARI GAMES CORPORATION v. NINTENDO
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OF AMERICA, INC., 975 F.2d 632 (Fed. Cir. 1992). NES, the maker of
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Nintendo, incorporated a special program (10NES) on its game cartridges
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that would activate and allow the Nintendo game console to operate the game
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cartridge. Without the special program, the game would not work in the
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Nintendo console.
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Atari wanted to determine how this system worked and duplicate it,
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if possible so it could sell Nintendo-compatible games without having to
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get a license from Nintendo. Atari obtained copies of Nintendo's special
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chip, physically dissected them to determine the object code on the chip
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and worked on its own program to duplicate the 10NES program. It also
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improperly obtained a copy of the program from the copyright office and
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used it to further hone its decryption of the Nintendo chip. Nintendo
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claimed that Atari's actions infringed its copyright on the 10NES program
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that provided the decryption.
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Nintendo argued that copying its program was a violation of the
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Copyright Act and a copyright infringement. But the Federal Circuit said
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the Copyright Act is not just for the benefit of authors in controlling and
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exploiting their writings, it also serves society's competing interest in
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the free-flow of ideas and information. Under the Copyright Act society
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is free to exploit facts, ideas, processes or methods of operation in a
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copyrighted work. Most importantly, the "Copyright Act permits an
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individual in rightful possession of a copy of a work to undertake
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necessary efforts to understand the work's ideas, processes, and methods
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of operation." So the Act exempts from copyright protection reproductions
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for the purpose of research. This allows authors and thinkers of the
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future to make use of and build upon advances in the copyrighted work.
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Finally, the court noted "when the nature of a work requires intermediate
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copying to understand the ideas and processes in a copyrighted work, that
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nature supports a fair use for intermediate copying. Thus, reverse
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engineering object code to discern the unprotectable ideas in a computer
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program is a fair use."
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This pronouncement from the federal circuit is very important for
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developers of computer software. It sets limits on the protection derived
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from the Copyright Act and lays out some favorable ground rules for the
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intermediate steps in developing new software.
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_________________________________________________________________________
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5. DOES ANTITRUST LAW HAVE A PLACE IN THE COMPUTER INDUSTRY?
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In the infancy of the computer industry, when IBM mainframes
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dominated the landscape, IBM was accused of using its dominant position to
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stifle competition and prevent other manufacturers of peripheral equipment
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from offering products that could be used with an IBM mainframe. Massive
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lawsuits were pursued by both the United States government and private
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companies accusing IBM of antitrust violations. With the changes in the
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market and the political and legal landscape in the late 1970's and the
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Reagan-Bush era, interest in antitrust lawsuits faded substantially. Such
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claims seemed particularly inappropriate in the highly competitive personal
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computer markets on the theory that there were plenty of alternatives
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available that prevented any company from accumulating enough market power
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to create antitrust concerns.
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A recent case decided by the United States Supreme Court suggests
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that antitrust concerns can play a role in the computer industry. In
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EASTMAN KODAK COMPANY v. IMAGE TECHNICAL SERVICES, INC., 112 S. Ct. 2072
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(1992) the Supreme Court held that a group of independent service
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organizations (ISO's) that worked on Kodak copiers could maintain an
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antitrust claim against Kodak. The ISO's asserted that Kodak's practice
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of refusing to sell parts to ISO's and selling only to those who used Kodak
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service illegally tied the sale of Kodak's service for its machines to the
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sale of Kodak's parts, a violation of 1 of the Sherman Antitrust Act, and
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had monopolized the sale and service of its machines, a violation of 2
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of the Sherman Act.
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The evidence offered by the ISO's showed:
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(1) Kodak's high volume photocopier and micrographics equipment was
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unique, with software program and parts that were not compatible with
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competitive equipment.
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(2) ISO's began repairing and servicing Kodak equipment in the early
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80's, buying parts from Kodak or its part manufacturers.
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(3) In the mid-80's Kodak began selling replacement parts only to
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buyers of Kodak equipment who used Kodak service or who repaired
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their own machines, cutting off the supply of Kodak parts to ISO's.
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ISO's either went out of business or lost a lot of money.
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(4) Kodak controlled nearly 100% of the parts market and 80% to 95%
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of the service market for its machines and there were no readily
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available substitutes.
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The Supreme Court found that there was sufficient evidence of an
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arrangement that "tied" Kodak service to the purchase of Kodak parts. Such
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tying arrangements are illegal if the company possesses "market power" --
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the power, in that market, to force a purchaser to buy something he would
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not buy in a competitive market. The key question was whether Kodak had
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"market power" in the aftermarket for parts and services.
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The court rejected Kodak's claim that it didn't have market power
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because of the highly competitive market for copying equipment. Kodak
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argued that it couldn't act unfairly in the aftermarket for service and
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parts because if its service costs were too high, people would buy other
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copiers with cheaper service. But the Supreme Court accepted the
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commercial reality that consumers are not going to be perfectly informed
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about service costs when making a buying decision and are not going to buy
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alternative equipment just because service costs prove to be a little
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higher. The court felt that these characteristics gave Kodak power in the
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aftermarket to force its copier owners to buy its service with Kodak parts.
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Nor could Kodak convince the court that insistence on Kodak service
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along with Kodak parts assured quality service and was justified
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competition. The ISO's showed that they could provide quality service
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also, raising a fact question about Kodak's competition claims.
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This case is important for the personal computer industry because in
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the copier industry, like the personal computer industry, no company
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dominates the market for machines, but the aftermarket for service and
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parts for those machines can be subject to some of the same practices.
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The Supreme Court did not say that Kodak's practice *was* illegal:
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that will depend upon the ultimate facts presented and found at trial. But
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the decision that the legality of Kodak's practices involved fact questions
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and could not be determined as a matter of law justifies attention. In most
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instances in the computer field there are so many alternatives that tying
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products to service would be allowed because customers would be free to go
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elsewhere. But there could be circumstances where a supplier of equipment
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could become so dominant that its insistence on practices like Kodak's
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could create an antitrust issue.
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_________________________________________________________________________
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6. WHAT DO YOU MEAN WE DON'T OWN THE SOFTWARE?
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In 1989 the United States Supreme Court finally tackled a problem
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that had plagued the courts: What is a work made for hire under the
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Copyright Act? This jargon-filled question seems one only lawyers would
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have an interest in, but a recent decision by the U.S. Second Circuit Court
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of Appeals that applied the Supreme Court's analysis suddenly makes it
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vitally important that software developers pay attention to the deals they
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make with those who work on their software.
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In COMMUNITY FOR CREATIVE NON-VIOLENCE v. REID (reported at 490 U.S.
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730 (1989)), the Supreme Court was asked to decide whether a sculptor
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commissioned to create a work of art for the CCNV owned the copyright on
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the work he created. The CCNV claimed the artist's efforts were a "work-
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made-for-hire," a term of art defined in the Copyright Act (the federal law
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that defines copyright rights) as (1) a work prepared by an employee within
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the scope of his or her employment; or (2) a work specially ordered or
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commissioned for use... if the parties expressly agree in a written
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instrument signed by them that the work shall be considered a "work made
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for hire." 17 U.S.C. 101.
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The CCNV argued that Reid was an "employee," so that his work was a
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"work made for hire, " which meant that CCNV owned the copyright on his
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work. The U.S. Supreme Court decided that employee status depends on:
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1) the hiring party's right to control the manner and means
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by which the product is accomplished;
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2) the skill required for the work;
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3) the source of the instrumentalities and tools used for the
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work;
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4) the location of the work;
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5) the duration of the relationship between the parties;
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6) whether the hiring party has the right to assign additional
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projects to the hired party;
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7) the extent of the hired party's discretion over when and
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how long to work;
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8) the method of payment;
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9) the hired party's role in hiring and paying assistants;
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10) whether the work is part of the regular business of the
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hiring party;
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11) whether the hiring party is in business;
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12) the provision of employee benefits; and
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13) the tax treatment of the hired party.
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No single factor was determinative, leaving much to the discretion of the
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fact-finder. In that case the Supreme Court observed that because Reid was
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independent, directed his own work, used his own tools, and generally
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worked with no impact or interference from CCNV, he was an independent
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contractor, not an employee. So he owned the copyright.
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Enter Clifford Scott Aymes, a computer programmer. Mr. Aymes,
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representing himself without a lawyer, convinced the United States Court
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of Appeals for the Second Circuit that he was not an employee and that he,
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not the company that hired him, owned the copyright on his work. In AYMES
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v. BONELLI, 980 F.2d 857, 1992 WL 351197 (2d Cir. 1992), decided December
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2, 1992, the Second Circuit agreed with Mr. Aymes that because he wasn't
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given employee benefits and was not treated as an employee for tax
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purposes, he was *not* an employee of Island Swimming Sales, Inc. even
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though he had worked there for two years.
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Mr. Bonelli, the President and Chief Executive Officer of Island, had
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hired Clifford Scott Aymes to create a series of programs to maintain
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records of cash receipts, physical inventory, sales figures, purchase
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orders, merchandise transfers, and price changes. Aymes worked at Island
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on a semi-regular basis, but he was paid by the project and would submit
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invoices for his work. Unfortunately for Mr. Bonelli and fortunately for
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Mr. Aymes, he had no written agreement with Mr. Aymes.
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Although Mr. Bonelli generally directed the design of the programs
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by telling Mr. Aymes what he wanted from the programs, he did not have the
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skill to write the program himself. Mr. Aymes alleged that he had an oral
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agreement with Mr. Bonelli that his programs, called CSALIB, would only be
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used in one location.
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Business was good for Island Swimming Sales, and Island installed
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CSALIB on other computers at other locations. Mr. Aymes had also done so
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well on the projects that he had performed for Island that Island did not
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need as much work from him. When Mr. Bonelli tried to cut Mr. Aymes'
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hours, Mr. Aymes insisted on some $14,000 he was owed, plus payment for use
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of his programs at other Island locations. When Mr. Bonelli refused, Mr.
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Aymes registered the copyright on the program in his own name and sued for
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copyright infringement. When Mr. Aymes lost in the trial court, he
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appealed to the Second Circuit.
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The Second Circuit's opinion is very important for those who use
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consultants to develop computer programs. The Second Circuit, while paying
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lip service to the existence of the other factors, said that you don't
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simply give each factor equal weight. The most critical factors were (1)
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the hiring party's right to control the manner and means of creation; (2)
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the skill required; (3) the provision of employee benefits; (4) the tax
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treatment of the hired party; and (5) whether the hiring party has the
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right to assign additional projects tot he hired party.
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Although Island had the right to control the manner in which CSALIB
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was created and could assign additional projects, the most critical issues
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were Island's refusal to provide Aymes the same benefits as were provided
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to other employees and its failure to treat him as an employee for tax
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purposes. That sunk Island: "Island definitely and unequivocally chose
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not to treat Aymes as an employee. Island deliberately chose to deny Aymes
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two basic attributes of employment it presumably extended to its work
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force. This undisputed choice is completely inconsistent with their
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defense." The case went back to the trial court to resolve other issues.
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MORAL FOR BUSINESS: If a programmer is not on your payroll and
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classified and treated as an employee, have a written agreement specifying
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ownership of the copyright on any work created by the programmer at your
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request or in accordance with the agreement. Don't simply recite that the
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work will be a "work made for hire"; have the developer assign any
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copyrights that may arise from work under the contract to you, the
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employer.
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MORAL FOR SOFTWARE DEVELOPER: Be wary of agreements like that
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outlined above unless you are fully informed as to their effects. Consider
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a license agreement contingent on payments and a royalty. If you are going
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to assign your work, make the assignment contingent on payment as provided
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under the agreement, and try to provide that the work reverts to you if the
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employer no longer uses it.
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MORAL FOR BOTH: Don't rely on a handshake. Sit down and talk about
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who will own what before the work starts, then write down the agreement and
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have both parties sign it. This will specify both parties' rights and
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reduce disputes when the work is done.
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=========================================================================
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ABOUT THIS NEWSLETTER
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LEGAL BYTES is a service to our clients and friends. These articles are
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intended to be summaries and brief discussions of emerging legal issues in
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the field of computer law. They are not intended to be exhaustive
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discussions of the topics. Because of their nature, they should not be
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relied upon as legal advice or used as a basis for reaching a conclusion.
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If you have ideas or topics you would like to see discussed in LEGAL BYTES,
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drop us a line on e-mail.
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ABOUT GEORGE, DONALDSON & FORD
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George, Donaldson & Ford is a registered limited liability partnership
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specializing in litigation and in counseling clients in a broad range of
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practice areas, including computer law, copyright, trademark, trade
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secrets, business, libel, invasion of privacy, and constitutional law.
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Attorneys at George, Donaldson & Ford are not board certified in any
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specialty. No designation has been made by the Texas Board of Legal
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Specialization for a Certificate of Special Competence in the area of
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computer law.
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=========================================================================
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