Oliver v. Johanson

          MEMORANDUM OPINION AND ORDER

          Timothy L. Brooks, Judge

         On July 25, 2018, the above-captioned matter came on for a bench trial before the Court. Over the next three days, the Court heard testimony from witnesses and received exhibits into evidence. At the conclusion of the trial, the Court directed the parties to submit post-trial briefing on several issues. Those briefs were submitted on August 14, 2018. See Docs. 66, 67. Having received and reviewed the evidence and briefs submitted in this case, the Court issues the following Memorandum Opinion and Order setting out its findings of fact and conclusions of law and its rulings on the remaining claims.

         I. BACKGROUND

         A. FACTUAL BACKGROUND^[1]

         This case centers around a once-thriving business relationship that soured after more than a decade. Prior to their association with Plaintiff Dale Oliver, brothers Bruce and Blair Johanson (“the Johansons”) operated a firm, Johanson Consulting, Inc. (d.b.a. Johanson Group and hereinafter “Johanson Consulting”). As part of their work, the Johansons employed a methodology known as the Job Evaluation and Salary Administration Program (“JESAP”). The JESAP methodology had originally been developed in 1985 by the Johansons' father, a professor at the University of Arkansas school of business who opened the consulting business in 1973. At its core, the JESAP methodology was designed to enable a company to set up a fair and equitable compensation structure for its employees by using point-factor analysis, a technique that assigned particular weights to various factors relevant to overall employee compensation. This is a process that was employed in the industry, especially by the Hay Group, who led the field in the use of such a system for determining job compensation. The Johansons maintain, however, that the secret of their JESAP methodology lies in its unique consideration and differential weighting of various factors. In short, while two consulting groups could tell you that several factors were important, the specific factors employed by each group, the weight each group gave to their included factors, and the algorithms used to determine overall job compensation, could-and would-often vary considerably. Initially, the Johansons had to perform tedious hand calculations to compute the results of their salary studies. This often meant that Johanson Consulting's reports to individual clients took a considerable amount of time to produce. As computing technology developed over time, the Johansons decided to develop a computer software program that incorporated their methodology and thus produce results much faster. Unfortunately, because neither brother had computer programming experience, the need arose to hire someone who did. And this is where Mr. Oliver, a local computer programmer, enters the scene.^[2]

         In January of 2001, Oliver met with Blair Johanson to discuss streamlining Johanson Consulting's job salary studies. Oliver studied the JESAP methodology and agreed to help create the software program. Because it relied on the Johansons' JESAP methodology, the initial version of the software was entitled JESAP 2001. The automation of the program led to considerably faster processing times for the job studies that Johanson Consulting produced, so much so that their clients began to inquire about purchasing the software for their own internal use. Because of this customer demand, the three ultimately decided to go into business together to develop and commercialize computer software related to compensation management planning and advising.

         To achieve these goals, Oliver and the Johansons formed DB Squared as an Arkansas limited liability company on March 16, 2005, executing an Operating Agreement on the same day. The Operating Agreement provided that each of the three members would own a third of the newly formed LLC. Given their backgrounds, the work of the newly established company would be divided according to the owners' expertise, with the Johansons being primarily responsible for client relationships and Oliver serving as the strategy and product development leader.

         Continuous updates were made to the previous versions of the software, and by 2008, an improved version of the program, entitled JESAP 2008, had been created. The parties then sought to protect the work by registering the software program with the U.S. Copyright Office.

         On March 27, 2008, Oliver filed the registration application with the U.S. Copyright Office. Oliver signed and submitted the application in his capacity as an officer of DB Squared, but he also checked the box indicating he-individually-was the “Author” of the JESAP software. While processing the application, Tamika Butler, a Registration Specialist at the Copyright Office, sent an email to Olivier noting the inconsistency between his personal claim of authorship and his submission of the application on behalf of the Company. After first communicating with Blair Johanson, Oliver informed Ms. Butler that the application should list the program as work made for hire for the company DB Squared, LLC. The copyright application for the JESAP 2008 software was then approved, and the registration record lists the software as a work made for hire and DB Squared as the author of the copyright (the “JESAP 2008 Copyright”).

         Following the registration of the JESAP 2008 Copyright, newer versions of the software were created. And consistent with its new marketing strategy, the company also made the decision to rebrand the software, as people had trouble pronouncing “JESAP” and as the name of the program did nothing to identify it with the company. Thus, in 2009, the JESAP software was renamed DBCompensation. Unlike the earlier JESAP software, where editions of the program were indicated by the year of publication (i.e., JESAP 2008), the various versions of the DBCompensation software were numbered sequentially (i.e., DBCompensation 10 was the tenth version). To complete the rebranding effort, a new corporate logo was created and DB Squared applied for and obtained a trademark for the new name and logo. As apparent from the record and testimony at trial, many iterations of the JESAP-and later DBCompensation-products prominently displayed a message reading: “© DB Squared, LLC.” As the member of the LLC with computer programming expertise, Oliver was responsible for changing the computer code so that these copyright registration notices would be displayed when users accessed the software. After this rebranding effort, newer versions of the DBCompensation software were created and Oliver and the Johansons, on behalf of DB Squared, made considerable efforts to sell, market, and license the software program to potential clients.

         However, lurking beneath the gloss of the company's new logo and latest version of the DBCompensation software product was Oliver's growing perception that the Johansons were more dedicated to the cause of their own consulting business (i.e. their separate revenue stream) than they were to maintaining and improving the DBCompensation software or DB Squared's value. On October 24, 2016, having exhausted his patience, Oliver submitted an email to the rest of the company announcing that he was resigning from DB Squared effective immediately. At the time of his resignation, Oliver was the Chief Technology Officer (“CTO”) of DB Squared. Blair Johanson responded by email to Oliver's resignation on October 26. His email noted that he understood Oliver's frustration with trying to finalize the newest version of the DBCompensation software, DBComp 10, but would like the opportunity to discuss the resignation with Oliver. He also asked if there was a way to get over this hurdle and move forward with the Company's strategic growth plan. On October 30, 2016, Oliver sent another company-wide email apologizing for his odd behavior the week before. In the email, Oliver noted that he had been trying so hard to bring DBComp 10 to a successful conclusion and that, if desired, “[he] will be pleased to temporarily continue on at DB Squared to see DBC 10 through to a successful conversion, testing, implementation, and conclusion.” (Doc. 35-16, p. 2). But Oliver's longer-term intent remained the same:

[o]nce the DBC 10 rollout has concluded (provided you decide that it would be helpful to have me back on the team until then) it seems like this presents an excellent opportunity for me [to] let Blair and Bruce take it from here. DB Squared is at a terrific place now with so many excellent things put in place, and with a very bright future ahead. Removing the cost of my services will free up additional financial resources for the company.

Id. The Johansons and DB Squared informed Oliver that they would carry on with the completion of the DBCompensation 10 program without Oliver's help. DB Squared separately informed Oliver that his resignation as CTO constituted a forfeiture of his one-third ownership interest in the company.

         Soon thereafter, Oliver began to assert that he was the sole owner of the DBCompensation software. In furtherance of this position, he retained attorneys who sent at least one cease-and-desist letter on his behalf to DB Squared alleging that, in the absence of the company obtaining a license from Oliver or his wholly owned company, Applied Computer Technology (“ACT”), he would have no choice but to begin litigation to vindicate his ownership interests in the copyright and DB Squared.^[3]

         In February 2017, Oliver submitted a new copyright registration to the Copyright Office for the DBCompensation software. In the application, he listed himself as the author of the copyright and indicated that, unlike his application for the JESAP 2008 software, this was not a work made for hire. In support of his application, Oliver submitted several pages of source code to the U.S. Copyright Office after first inserting “Author” and “Dale Oliver” throughout. (Doc. 35-4, p. 35). Those insertions were not native to the copy of the program stored at DB Squared. The copyright application was approved on February 21, 2017, and copyright TX 8-299-255 was issued for the DBCompensation software, listing Oliver as the sole author (the DBCompensation Copyright”).

         B. PROCEDURAL BACKGROUND

         Oliver then filed the present lawsuit, seeking (1) a declaration that he is still a member of DB Squared, LLC with a one-third membership interest; (2) judicial dissolution of DB Squared; (3) a declaration that he is the true author (and resulting owner) of the DBCompensation Copyright; (4) damages for copyright infringement; and (5) a claim for unjust enrichment.

         Defendants sought (1) a declaration that the Company is the rightful owner of the copyrighted software in question, because Oliver's subsequent registration of the DBCompensation Copyright was procured by fraud on the Copyright Office, and thus invalid and/or unenforceable; (2) damages for infringement of the JESAP 2008 Copyright owned by DB Squared; (3) damages for Oliver's alleged breach of a fiduciary duty; (4) injunctive relief to prevent Oliver from committing trade secret misappropriation by attempting to offer the DBCompensation software, which allegedly contains trade secrets, to others; (5) injunctive relief to prevent Oliver from using the software programming that comprises the content covered by the JESAP 2008 Copyright; (6) an accounting for any instances where Oliver attempted to sell or market the software at the center of this dispute; and (7) a declaration as to Oliver's ownership interest in DB Squared.

         The parties then each submitted cross-motions for partial summary judgment. Oliver sought partial summary judgment on the ground that he remained a one-third owner of DB Squared despite his resignation from the company in October of 2016. Defendants sought partial summary judgment that they are the rightful owners of the DBCompensation software. They contended that ownership of the DBCompensation software vested in the company for three separate reasons: (1) Oliver contributed his software development work to the company in exchange for an ownership share in the company and generous disbursements since then; (2) Oliver's breach of the fiduciary duties he owed DB Squared were sufficient as a matter of law to cause all rights in the software to accrue to the company; and (3) the version of the software rebranded as DBCompensation was a work made for hire that, pursuant to the Copyright Act, vests authorship (and resulting ownership) in the company.

         In a Memorandum Opinion and Order filed on June 29, 2018 (Doc. 52), the Court granted Oliver's motion for partial summary judgment and denied Defendants' motion. As to Oliver's motion, the Court declared as a matter of law that he remained a one-third owner of DB Squared. As to the Defendants' motion, the Court found that there remained genuine disputes of material fact that precluded the Court from deciding the ownership issue on the summary judgment record. As the Court remarked then, the first two arguments advanced by Defendants as to why DB Squared owned the copyright to the DBCompensation software appeared to be either directly contrary to the Copyright Act or at least arguably pre-empted by it. Finally, on the work for hire^[4] question, the Court indicated that many of the agency factors used to decide whether an individual was an employee or independent contractor at the time the work in question was created appeared split, such that determining the ultimate question of Oliver's status could not be decided based on the current record.

         The Court's summary judgment opinion clarified the important issues that remained for trial. Chief among these issues were: (1) whether Oliver was an employee or an independent contractor during the time he authored the versions of the software at issue in this case; (2) whether the later DBCompensation 10 software was a derivative work of the earlier JESAP software; (3) whether one or both of the copyright registrations in this case (for the JESAP 2008 and DBCompensation software) were invalid either because of mistaken representations in the applications or fraud on the U.S. Copyright Office; and (4) whether Oliver or the Johansons breached the fiduciary duties they owed to DB Squared through their actions in this case. The answers to these questions would largely resolve the remaining claims in this case. The parties subsequently notified the Court that they intended to try the case to the bench. As noted above, the bench trial was held from July 25-27, 2018.

         Having heard the evidence and considered the relevant law, the Court now issues the following findings of fact and conclusions of law pursuant to Rule 52 of the Federal Rules of Civil Procedure.^[5]

         II. DISCUSSION

         A. FINDINGS OF FACT

         The Johansons and Their Methodology

         1. Before associating with Dale Oliver, Bruce Johanson and Blair Johanson operated a firm, Johanson Consulting. As part of their consulting business, the Johansons employed a methodology related to job valuation and employment compensation based on point-factor analysis. The compensation system is based on several job-related factors, each of which is associated with a specific value. While point-factor analysis is used by other companies in their consulting work, the specific factors and, more importantly, the specific values assigned to each factor is a secret that the Johansons sought to protect through the use of licensing and confidentiality agreements. (Def. Ex. 40). Oliver himself password-protected the software code (including the code that revealed the particular values that the Johansons assigned to the various factors) and obtained signed confidentiality agreements from individuals such as Chris Devine who would later work on the code.

         2. The proprietary methodology, known as the Job Evaluation & Salary Administration Program (“JESAP”), was first developed by the Johansons' father in 1985 and has been continuously refined, improved, and used by Johanson Consulting since then.

         3. Johanson Consulting owned trademarks to the JESAP name. (Def. Ex. 40). U.S. Patent and Trademark Office (“USPTO”) records show that two registrations for the JESAP name (with different slogans beneath the JESAP title) were registered to Johanson Consulting but were ultimately cancelled. Those registration numbers are 3326312 and 3650242.^[6]

         4. Prior to the automation of the process through the software at issue here, the Johansons had performed their job valuation calculations by hand and, later, using Microsoft Excel spreadsheets, word processors, and calculators.

         The Early Years/Versions of the Software

         5. In 2001, Johanson Consulting contracted with Oliver to create and develop a computer software program known as JESAP 2001 that implemented the point-factor analysis method that the Johansons had been using previously. At some point during the relationship, Oliver and the Johansons decided that the automated software was commercially viable.

         6. The JESAP software had many iterations that were named according to their year of completion. The first such version was created in 2001. There was also a 2005 version and, ultimately, the 2008 version that was registered with the U.S. Copyright Office.

         7. As the only computer programmer working on the software until early 2007, Oliver was responsible for creating the software that incorporated the Johansons' JESAP methodology.

         DB Squared Formation

         8. Oliver and Bruce and Blair Johanson formed DB Squared, LLC as an Arkansas limited liability company on March 16, 2005, for the primary purpose of developing and commercializing computer software in the field of compensation management planning and advising.

         9. The Operating Agreement for DB Squared identified three owners, each having one-third ownership interests and proportionate management rights.

         10. On August 24, 2006, DB Squared, LLC entered into a licensing agreement with Johanson Consulting. The licensing agreement mentions the JESAP methodology and notes that it has been referred to as JESAP since 1985. In the licensing agreement, Johanson Consulting grants to DB Squared an irrevocable, perpetual license to the JESAP Methodology, and DB Squared grants to Johanson Consulting an irrevocable, perpetual license to the JESAP software. (Def. Ex. 4).

         The 2008 Registration

          11. On March 27, 2008, Oliver, using a DB Squared check (Pl. Ex. 14), filed an application for registration of the JESAP 2008 software with the U.S. Copyright Office. In the original application, Oliver listed himself as the “Author” of the JESAP 2008 software as well as a Principal of DB Squared. He therefore indicated that the work was not a work made for hire. (Pl. Ex. 1).

         12. The copyright application for the JESAP 2008 software notes that the 2008 software includes pre-existing JESAP material from 2001, 2005, and 2006. (Pl. Ex. 2).

         13. On June 29, 2009, Oliver received an email from Tamika Butler, a Registration Specialist at the U.S. Copyright Office, explaining the “work for hire” doctrine, its effect on authorship of the copyright, and inquiring about the appropriate designation of the work as either a work made for hire or a work owned exclusively by Oliver. The email also referenced and attached a Circular further explaining the doctrine. (Def. Ex. 3).

         14. Oliver discussed the email with Blair Johanson. After doing so, he wrote back to Tamika Butler, stating in the email that he had read the attached materials and that the U.S. Copyright Office should note that the JESAP 2008 application was a work for hire for the company DB Squared. (Def. Ex. 3).

         15. The U.S. Copyright Office approved the registration, and Registration TX 6-942-486 was approved for JESAP 2008, listing the software as a work made for hire with DB Squared listed as the author.

         Post-2008 History/Rebranding Efforts

         16. In 2009, after consulting with an advertising/branding company, and in light of customer comments that the term “JESAP” was confusing, hard to pronounce, and didn't signify who owned the software, the software was re-named DB Compensation. Unlike the JESAP versions, where the year of release was incorporated into the title, DB Compensation was named using the release number.

         17. As part of the rebranding effort, DB Squared adopted a new logo, and the company applied for a federal trademark registration for the name “DBCompensation.” The United States Patent and Trademark Office issued Registration No. 3, 763, 179 for “DBCompensation” to DB Squared, LLC (Def. Ex. 5).

         Work for Hire/Employer-Independent Contractor

         18. Both before and after the creation of DB Squared, Oliver was paid through his wholly-owned company, Applied Computer Technology, a business Oliver formed in 1999. Between 1999 and 2016, in addition to his work with DB Squared and the Johansons, Oliver consulted with around sixty clients.

         19. DB Squared did not issue any W-2 forms to Oliver. Instead, DB Squared issued IRS form 1099s to ACT. DB Squared deducted no payroll taxes and provided no employment benefits to Oliver during his work for them.

         20. Oliver worked from home approximately 3 days a week, usually spending only two days in his office at DB Squared.

         21. ACT issued invoices to Johanson Consulting and, later, DB Squared for Oliver's services. (Pl. Exs. 62, 65). DB Squared's profit and loss statements show that Oliver's compensation was classified as expenses for “consulting services.” 22. DB Squared provided the instrumentalities and tools used by Oliver and other programmers to develop the software. The software code and data were located on DB Squared computers and servers.

         23. In fact, emails in the record show that even ACT's website and Oliver's ACT email account were hosted on DB Squared servers. (Pl. Ex. 105).

         24. As the individual among the original three with computer programming expertise, Oliver was responsible for changing the computer code so that the JESAP and later DBCompensation products would display the following notice: “© DB Squared, LLC.” 25. Throughout his tenure with DB Squared, Oliver occupied a number of positions, including Chairman, Chief Technology Officer, and Vice President of Product Development and Information Technology. In these roles, Oliver did more than just develop software. For instance, Defense Exhibit 6 is an email where Oliver indicates his desire to transition into providing board-level leadership service versus the hands-on software development services he was currently providing. Oliver also took the lead in working with Modthink, a marketing company that partnered with DB Squared to help with its development goals. (Def. Ex. 12).

         Chris Devine

          26. At some point in 2006, another computer programmer, Chris Devine, was hired to assist with the development of the software. Chris Devine was (initially) paid through ACT, which deducted no employment taxes and provided no insurance benefits to Devine. Devine was introduced to DB Squared by Oliver and interviewed for his position at DB Squared headquarters. At the conclusion of the interview, the three owners of DB Squared discussed Devine and determined that he would be suitable to assist with computer programming and software development. Devine began work on the computer software in early 2007.

         27. Chris Devine also owned a company, Vista Engineering (later Cyberdyne Systems). Devine was paid, like Oliver, through this wholly-owned company. Devine became the Senior Systems Engineer for DB Squared, LLC. Following Oliver's resignation, Devine was paid directly by DB Squared.

         28. An alleged agreement, dated June 27, 2006, between Dale Oliver/ACT and Chris Devine/Vista, specifying that Devine is an independent contractor and that all intellectual property developed by Devine was the property of ACT, was not signed. (Pl. Ex. 99). Although Devine remembers having email conversations with Oliver about this agreement (Pl. Ex. 100), he does not recall signing the agreement. No signed version of the agreement was ever produced.

         29. ACT issued invoices to DB Squared for Devine's services. (Pl. Ex. 62).

         30. Despite Oliver's contentions that he directed all of Devine's work, the evidence also shows that Devine received substantial direction from the Johansons. For instance, in October 2016, Devine sent an email to Bruce asking what Bruce/Blair would prefer that he work on-DBCompensation 10 or LTL/WM vendor project. (Pl. Ex. 97).

         Software Development Post-Hiring of Chris Devine

         31. The software modification logs for DBCompensation show that both Devine and Oliver made numerous changes and additions to the software, beginning with DBCompensation 6. (Def. Ex. 34; Pl. Exs. 21, 29, 30, 33).

         32. According to Oliver in an email to a client, Devine developed the Web components for the system and would be the most knowledgeable about how the system works, how it can be configured, and any security considerations. That email also explains that Devine is “our senior developer.” (Def. Ex. 38).

         33. However, the greater weight of the testimony revealed that Devine's programming work on JESAP was minimal. There were no modification logs from which to ascertain the extent of his programming work until the later versions of the DBCompensation software.

         34. Devine estimated that 97-99 percent of the coding on “form main” of the DBCompensation software was completed by Oliver. “Form main” is a landing page of sorts for the computer software. The testimony at trial supports the conclusion that “form main” existed in some form since the early versions of the software and was not a brand-new invention for the DB Comp 10 program. Nevertheless, the computer code that composes the DB Compensation 10 software contains much more than just “form main.” It is composed of some 87 forms and numerous modules.

         Oliver's Resignation and Subsequent Registration of ...