Recently, the Ninth Circuit Court of Appeals issued a ruling concerning a neglected area of law where copyright and employment law overlap, and where the everyday activities of software developers can create headaches for employers and mobile employees.

In U.S. Auto Parts Network, Inc. v. Parts Geek LLC, the court faced an all-too-common scenario: before becoming an employee, a software developer had created software on his own. After becoming an employee, the developer modified the pre-existing software code to benefit the employer, left the company at a later date for a competitor, and created similar software for the new employer. Litigation arose, as the parties disputed who owned the software. Because the software was a mixture of pre-existing code and code written for the plaintiff-employer, the answer was not clear.

Under the Copyright Act, the Work-for-Hire doctrine defines who owns a copyrightable work created by an employee. Where a written contract does not resolve the question by agreement—such as in cases where an employee brings software written before taking the job onto the employer's premises—the Copyright Act provides for a balancing of interests. The test is more employee-friendly than the test for ownership and assignment of employee inventions, which is defined by state law. The Copyright Act provides that, in some cases, an employee can own a copyrightable work if it was not the type of work the employee was hired to perform, the work was not created substantially within the employer's time and space limits, and the employee did not create the work with some intention to serve the employer.

Within this framework, the Ninth Circuit was faced with a situation where an individual licensed pre-existing, copyrightable software code to a company, later joined the company as an employee, and then proceeded to modify the pre-existing code to assist with the employer's business. The employee eventually left for a competitor and allegedly wrote software for the new employer that was purported to be substantially similar to the code written for the former employer.

Because the portion of the software written for the plaintiff-employer appeared to satisfy the criteria for employer ownership under the Work-for-Hire doctrine—but the pre-existing code clearly did not—the court had to consider the tangled question of whether the plaintiff-employer could own, as a stand-alone derivative work, the portion of the software created when the developer was an employee.

The Ninth Circuit held that an employer can own a portion of software created by an employee to modify a pre-existing work even when the employee retains ownership of the pre-existing work, so long as the portion is original, non-trivial, and sufficiently independent of the pre-existing work. The court remanded so that the trial court could resolve these issues.

Both employers and employees have an interest in avoiding such tangled, unpredictable battles over the ownership of copyrightable software code. The best solution is to include clear contract terms covering Work-for-Hire ownership, the employer's license to any pre-existing works an employee incorporates into the employer's business, an identification of relevant pre-existing works, and a requirement that the employee disclose in writing any plan to incorporate such pre-existing works ahead of his or her employment.

These problems are not uncommon among software developers because developers often create code on their own time for hobby projects that easily can blend into subsequent work-related efforts. Maintaining clear rules and consistent practices regarding such intermixture can avoid litigation risks.

Wilson Sonsini Goodrich & Rosati is actively following developments around the country with respect to the intersections of copyright law and employee mobility, and the firm is available to assist companies, employees, newly formed businesses, and investors with counseling and litigation regarding these issues. For more information, please contact Fred Alvarez, Ulrico Rosales, Marina Tsatalis, Laura Merritt, Charles Tait Graves, or another member of the firm's employment and trade secrets litigation practice.