United States District Court, W.D. Arkansas, Fayetteville Division
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 ...