* Lessons from the case of AMS vs. Gagnon
As I continue my research on intellectual property law developments in 2008, I came across an interesting (and sad) case that stimulated ideas that may be useful for both consultants and clients working together on software development. Since the Parkerian Hexad explicitly includes control or possession as one of the fundamental security attributes of information, I’ll give you the facts and my interpretation in one exceptionally long column today.
Quoting directly from the judgment by Milan D. Smith, Jr. of the U.S. 9th Circuit Court of Appeals, Sept. 9, 2008, in the case of Asset Marketing vs. Gagnon.
“Kevin Gagnon, doing business as Mister Computer (Gagnon), appeals from a grant of summary judgment in favor of Asset Marketing Systems, Inc. (AMS). Gagnon contends that AMS infringed his copyright in six computer programs that he wrote for AMS by continuing to use and modify them without his consent, and that AMS misappropriated trade secrets contained in the programs’ source code. Gagnon also challenges the denial of his ex parte application for an order denying or continuing summary judgment. The district court concluded that Gagnon had granted AMS an unlimited, nonexclusive, implied license to use, modify, and retain the source code of the programs that defeated his copyright infringement and trade secret misappropriation claims. The district court also denied Gagnon’s ex parte application. We have jurisdiction under 28 U.S.C. § 1291, and we affirm the district court.”
The defendant (Gagnon) worked for the plaintiff (AMS) as an independent contractor from May 1999 to June 2003. By the end of the term, AMS represented more than 98% of Gagnon’s income, which totaled over $2 million in fees from this single client. In the technical services agreement of May 2000 signed by AMS and Gagnon, there was no mention of a license. On June 12, 2002, according to AMS, “Gagnon signed a Vendor Nondisclosure Agreement (NDA). The NDA would have given AMS ownership of all intellectual property developed for AMS by Gagnon. Gagnon claims that the document is a forgery and that his signature cannot be authenticated.” In June 2003, Gagnon tried to get AMS to sign an Outside Vendor Agreement that would have granted all intellectual property rights to himself; AMS countered with a version that would have reversed the ownership to itself.
Gagnon declared war. “In a letter to AMS dated September 18, 2003, Gagnon demanded $1.75 million for AMS to have the right to continue to use the programs and $2 million for Gagnon’s agreement not to sell or disclose the programs to AMS’s competitors.”
What was left of the business relationship ended on Sept. 23, 2003, when AMS sent Gagnon a letter of termination that also demanded provision of all source code for what it described as its property and warned him that he was not authorized to use the software he and his employees had written for AMS under contract.
To add injury to insult, “Also on September 23, seven of Gagnon’s twelve employees resigned and were hired by AMS to provide directly to AMS the same services they previously provided to AMS through Gagnon. According to AMS, Gagnon’s former employees approached AMS for jobs, and AMS never solicited them. Gagnon disputes this.” Gagnon’s workers had all signed an “Employee Work Agreement” with Gagnon specifying “that the intellectual property arising out of or related to work performed for Gagnon was his property” and defining everything they had learned about AMS while working for Gagnon was a “valuable trade secret” belonging to Gagnon. “Finally, the employees agreed not to ‘engage in any employment or personal contractual agreement’ with AMS for twenty-four months without written consent from Gagnon.”
Finally, “In October 2003, Gagnon sent AMS a cease and desist letter, asserting that the use of the programs was unauthorized. It also asserted that the hiring of Gagnon’s prior employees violated their Employment Agreement with him. Gagnon demanded that AMS certify that it had undertaken to remove “all original and derivative source code” and all related files for the programs from AMS computers.”
“AMS responded by asserting that Gagnon could not unilaterally stop AMS from continuing to use and update the programs because it had an irrevocable license to use, copy, and modify the programs based on the course of conduct of the parties over the past two-and-a-half years. AMS also asserted that Gagnon could not use the programs because it contained AMS’s trade secrets. AMS also declined to pay Gagnon the $1.75 to $2 million he had requested in September.”
And so AMS then sued Gagnon for misappropriation of trade secrets and the case eventually wound up on appeal. Gagnon lost all rights to the code because, the judge ruled, there were many factors that showed that AMS had a bona fide claim to the software it had paid for. The following summarizes the points made by Judge Smith.
A. Copyright Infringement Claim: There was an implied license for AMS to use the software1. AMS requested the creation of the programs.
2. Gagnon created the software for AMS and delivered it.
3. Gagnon stored the source code on AMS servers.
4. Gagnon’s intent as manifested by his conduct supports the view that, at the time he was being paid for the work, he had no intention of limiting the software’s use by license agreements.
B. Trade Secret Misappropriation Claim:1. There was no basis in fact or law for such a claim because the trade secrets belonged to AMS as a consequence of their having the copyright on the programs they paid for.
2. The claim of violation of the noncompetition agreements was invalid because such agreements are contingent on the necessity to protect trade secrets — which belonged to AMS in this case.
Lessons for Consultants and for Clients:
1) Settle intellectual property issues in your initial contracts with the relatively inexpensive help of contract attorneys, not with the unbounded expenses of litigation attorneys in court after your relationship explodes.
2) Don’t change your mind about ownership of intellectual property created on contract once the intellectual property has been created.
3) Use digital signatures on contractual documents in addition to dribbling pigments through holes in the ends of sticks onto compressed cellulose fibers in sheets; i.e., take advantage of the near impossibility of forging or contesting digital signatures compared with the ambiguity of physical signatures created with a pen on paper.
4) If you as a consultant have arranged to maintain legal ownership of your source code, do not store it on your client’s servers.
5) Don’t expect non-compete agreements with your own employees necessarily to succeed in protecting you against their working for your client.
