A LEGAL NIGHTMARE: The Unwritten License-Even Further Issues
IVAN HOFFMAN, B.A., J.D.
The essence of this topic is that parties who think they are “saving” money by not having a thorough and properly drafted written agreement are acting very unwisely. I cannot begin to count how many times parties have come to me and said “I don’t need a written agreement because the other party is my [insert here: “best friend” or “brother” or “sister” or you name it].” Keep in mind that the best way to preserve relationships including business relationships is to write it down so that all parties know what the deal is. The thing that breaks up relationships is not contracts. Those are just easy targets. The thing that breaks up relationships is the “I thought you said…” stuff that comes from no agreements or poorly drafted ones (including in the latter category, copied and pasted forms from books, the Internet or otherwise). Now of course in many instances, the project will not be successful and so it may not matter. That is not a comment on the substance of any project but just simply an arithmetical reality. So what parties who try to “do it themselves” are really doing is putting themselves into a lose-lose situation since if the project is not successful, they lose all the money they spent. And if the project is successful, they set themselves up for more claims than they can count and end up paying all their profits and other monies to attorneys to try and rescue them from their lack of vision. So it’s one foot on the accelerator and one on the brake. Read “Set To Fail.”
And if you do not believe that your project will be the one in a hundred that will be successful, what possible reason can you have for doing the project? And if you do so believe, remember: it never matters… until it matters… and then it matters! TM
Another case has defined further issues in this area, this time in a situation in which the underlying agreement was not drafted to specifically cover the situation and the parties continued to work together after the previously written agreement had expired without further defining their relationship in some additional writing. In Asset Marketing Systems, Inc. vs. Gagnon dba Mister Computer, these were the facts in summary form:
The parties had a long relationship in which Asset Marketing Systems, Inc. (“AMS” in the decision) engaged the services of Mr. Computer (“Gagnon” in the decision) to design and develop software. As indicated, the parties originally had an agreement but the relationship continued after the agreement’s term ended and…I know this is going to be hard to believe… the relationship soured [insert here “I don’t believe it” and “Gasp”] and Gagnon filed a civil litigation claiming that AMS infringed on Gagnon’s copyright by using and modifying the software after the term ended and infringed on Gagnon’s trade secrets by using the source code.
After the term of the agreement, AMS claimed that Gagnon signed a non-disclosure agreement and that by the terms of that NDA, rights to the software were transferred to AMS. Gagnon claimed he never signed the agreement and that his signature was a forgery. Gagnon submitted a different agreement to AMS by the terms of which the rights to the software and its source code would be owned by Gagnon, subject to a license to AMS. That agreement was never signed and AMS produced its own agreement in which the software was to be owned by AMS but the program code would be owned by Gagnon. This was never signed either.
So here is another fundamental lesson to be learned: never, ever begin or continue a relationship until the formalities, including but not limited to signing appropriate agreements have been signed. In my over 3 decades’ experience of deal making, I have found that it is either (a) impossible or (b) very difficult and always (c) much more expensive to make a deal once work has started or is in progress.
The Court stated the general rule:
But the issue is “what is the scope of that “implied” license? Who has what rights? For how long? How may they use such rights? etc. etc. Thus, the “nightmare.” And the reason it is a “nightmare” is because, among other reasons:Though exclusive licenses must be in writing, 17 U.S.C. § 204, grants of nonexclusive licenses need not be in writing, and may be granted orally or by implication.
a. There is a dispute which could have been avoided.The Court went on:
b. This dispute will cost thousands, or in the worst case, hundreds of thousands of dollars to try to resolve. Try and imagine the attorneys fees involved in a multi-year litigation and then an appeal. These fees likely could have been avoided completely had appropriate language been included in the underlying agreement.
c. During the pendency of the claim, the rights to the project, in this case, software, are clouded and neither party can do anything with that project.
The Court concluded that the work had been requested by AMS and that the software had been “delivered” and the issue narrowed down to what was the scope of the license. In other words, because there was nothing in writing, what did the parties intend that AMS could or could not do with the software? The Court stated:Thus, we have held that an implied license is granted when “(1) a person (the licensee) requests the creation of a work, (2) the creator (the licensor) makes that particular work and delivers it to the licensee who requested it,4 and (3) the licensor intends that the licensee-requestor copy and distribute his work.” I.A.E., Inc. v. Shaver, 74 F.3d 768, 776 (7th Cir.1996) (citing Effects, 908 F.2d at 558-59) (footnote added). We apply the same analysis we did in Effects to implied licenses for computer programs. The last prong of the Effects test, however, is not limited to copying and distribution; instead we look at the protected right at issue—here, whether Gagnon intended that AMS use, retain, and modify the programs.
The Court examined the evidence including unexecuted agreements and drafts to determine the intent. Another lesson: you always want to have thorough agreements so that you avoid ever having any other party, in this case multiple layers of courts, try to figure out what you intended.The First and Fourth Circuits consider the following factors to determine such an intent:
(1) whether the parties were engaged in a short-term discrete transaction as opposed to an ongoing relationship; (2) whether the creator utilized written contracts . . . providing that copyrighted materials could only be used with the creator’s future involvement or express permission; and (3) whether the creator’s conduct during the creation or delivery of the copyrighted material indicated that use of the material without the creator’s involvement or consent was permissible.
As to Gagnon’s trade secret claim, the Court stated:For the reasons outlined, we hold that Gagnon granted AMS an unlimited, nonexclusive license to retain, use, and modify the software. Furthermore, because AMS paid consideration, this license is irrevocable. See Lulirama Ltd., Inc. v. Axcess Broad. Servs., Inc., 128 F.3d 872, 882 (5th Cir. 1997); 3-10 Melville B. Nimmer & David Nimmer, Nimmer on Copyright § 10.02[B] (2008). “[A] nonexclusive license supported by consideration is a contract.” Lulirama, 128 F.3d at 882; see also Effects, 908 F.2d at 559 n.7 (an implied license is a “creature of law, much like any other implied-in fact contract”). If an implied license accompanied by consideration were revocable at will, the contract would be illusory. Lulirama, 128 F.3d at 882-83.
Here, however, having concluded that Gagnon granted AMS an implied, unlimited license to the programs software, we conclude that AMS could not have misappropriated Gagnon’s trade secret. Unlike Payday in S.O.S., AMS was legally entitled to use and modify the source code; the license included access to any trade secret embodied therein. Furthermore, having concluded that AMS was entitled access to this trade secret, we also conclude that the district court did not err in holding that the non-competition agreements with Gagnon’s employees were invalid. Under California law, non-competition agreements are unenforceable unless necessary to protect an employer’s trade secret. See Cal. Bus. & Prof. Code § 16600 (voiding any contract that restrains anyone from engaging in a lawful profession, trade, or business); Edwards v. Arthur Andersen LLP, 189 P.3d 285, 288 (Cal. 2008) (Cal. Bus. & Prof. Code § 16600 invalidates noncompete contracts unless they are necessary to protect an employer’s trade secrets); Application Group, Inc. v. Hunter Group, Inc., 72 Cal. Rptr. 2d 73, 85 (Ct. App. 1998) (same). Because the non-competition agreements were no longer necessary to protect Gagnon’s trade secrets against AMS, they were no longer enforceable in this case. [Read “Noncompetition Clauses Agreements Under California Law.”]
Consult an attorney with experience in the areas of law you need advice about and make sure the agreement covers all the contingencies.
And learn the lessons.
Copyright © 2008 Ivan Hoffman. All Rights Reserved.