JustMed, Inc. v. Byce

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

JUSTMED, INC., 
Plaintiff-counter-defendant- No. 07-35861
Appellee, D.C. No.
v.  CV-05-00333-S-
MICHAEL BYCE, MHW
Defendant-counter-claimant- OPINION
Appellant.

Appeal from the United States District Court
for the District of Idaho
Mikel H. Williams, Magistrate Judge, Presiding

Argued and Submitted
April 14, 2009—Seattle, Washington

Filed April 5, 2010

Before: Betty B. Fletcher, A. Wallace Tashima, and
Sidney R. Thomas, Circuit Judges.

Opinion by Judge B. Fletcher

5141
 JUSTMED, INC. v. BYCE 5145

COUNSEL

Shelly H. Cozakos, Perkins Coie LLP, Boise, Idaho, for the
defendant-appellant.

Jed W. Manwaring, Evans Keane LLP, Boise, Idaho, for the
plaintiff-appellee.

OPINION

B. FLETCHER, Circuit Judge:

At the heart of this case is a dispute over whether a small
technology start-up company owns the source code developed
5146 JUSTMED, INC. v. BYCE
for its product. Its informal employment practices raise
questions as to whether defendant-appellant Michael Byce
was an employee when he developed the source code. After
a bench trial, the district court entered judgment and ordered
a permanent injunction against Byce, in favor of plaintiff-
appellee JustMed, Inc., Byce’s former employer. Among
other things, the district court found that JustMed owns the
software program used on its digital audio larynx device
under the work-for-hire doctrine of the Federal Copyright
Act, because Byce wrote the source code for the company as
an employee, not as an independent contractor. The district
court also found that Byce misappropriated the software under
the Idaho Trade Secrets Act. Byce appeals both rulings. We
have jurisdiction under 28 U.S.C. § 1291, and we affirm in
part and reverse in part.

I

Joel Just and Michael Byce are former brothers-in-law who
together developed the idea of a digital audio larynx, a device
to help laryngectomees—individuals whose larynxes have
been surgically removed—produce clearer speech. Both have
degrees in electrical engineering and experience working in
the computer industry. Initially, the two began discussing the
idea in 1994 on a family vacation. Just and Byce brainstormed
ideas for how to advance such devices—in particular how to
produce a hands-free device, rather than one that required the
user to hold the device against the throat—and, in 1995, they
applied for a patent as co-inventors of a “system and method
for monitoring the oral and nasal cavity,” which was issued
to them in 1998.

Byce worked on the project between 1995 and 1998, but no
one did any further work on the device from 1999—when
Byce’s wife, the sister of Just’s wife Ann, unexpectedly died
—until 2003. Then, in 2003, Joel and Ann Just formed Just-
Med, Inc., based in Beaverton, Oregon, to continue develop-
ment of the product. Just recruited a former business
 JUSTMED, INC. v. BYCE 5147
associate, Jerome Liebler, to help work on the idea. He
offered founders’ options to Byce, and Byce ultimately
invested $25,000 in return for 130,000 shares. Byce also
accepted a position on JustMed’s board of directors, serving
with the Justs.

Just and Liebler worked full time developing a new hard-
ware prototype and writing source code for the product.1 Lie-
bler wrote a majority of the code, working at his home on his
own computers. The code was never released outside of the
company, and notices on the code stated that it was copy-
righted by JustMed, although the code was not registered with
the United States Copyright Office.

Since it was not yet producing a product, the company
operated financially by selling shares to family members and
by relying on loans from the Justs. Just and Liebler did not
receive a cash salary and instead were compensated with
shares of stock.

By the summer of 2004, JustMed had a marketable product
called “JusTalk.” Liebler, however, moved to Kentucky, mak-
ing it difficult for him to continue his work on the product. At
the same time, Byce expressed interest in becoming more
involved with the company. Liebler was still drawing half of
his salary, but agreed to have the whole package—at that
point, $90,000 per year, paid as 15,000 shares per month,
each share valued at 50 cents—transferred to Byce and to
have Byce take over development of the source code.

At trial, Just testified that Byce was hired as an employee
to replace Liebler, who was also an employee, and that Byce
agreed to be paid a salary in shares of stock. Byce, on the
1
Source code is code written in a programming language that is readable
by humans. Object code is produced by rendering those same program-
ming instructions in a binary form that the computer can read, a process
known as compiling.
5148 JUSTMED, INC. v. BYCE
other hand, testified that while he expected to be adequately
compensated in shares upon transferring ownership of the
source code, he never understood himself to be an employee
and had no “explicit knowledge” that he was accruing shares
as compensation.

JustMed and Byce had no written employment agreement.
Byce never filled out an I-9 employment verification form or,
until 2005, a W-4 tax withholding form. At most, Just docu-
mented Byce’s salary and duties in a notebook that he kept,
although the notation indicating when Byce started was not
recorded until several months after Byce began working on
the source code. Although Byce began full-time work on the
source code in September 2004 and began accruing JustMed
stock in October, he never received share certificates for the
stock he received as compensation. Indeed, the company gen-
erally did not keep formal records other than a series of note-
books Just maintained to track conversations and events.
While Byce worked for JustMed, the company did not issue
Byce a W-2 wage statement form, withhold taxes, or pay
workers’ compensation or unemployment insurance. Nor did
the company provide benefits for Byce or report his employ-
ment to the state. Just testified that he did not think much of
this was necessary because he thought of Byce as a JustMed
“executive,” and because JustMed was modeled on prior start-
up technology businesses that Just had been involved with,
where employees were paid exclusively in stock and the stock
was never reported as income because of its uncertain value.

Although Byce was carrying on Liebler’s duties, Byce
operated differently, because he did not live and work in Ore-
gon as Liebler had. Instead, Byce worked from his home in
Boise, Idaho, using his own computer. Just provided Byce
with the original code created by Liebler and various materi-
als necessary to Byce’s development work, including JusTalk
units, schematics, data sheets, batteries, chargers, assemblers,
source code, and headsets. Byce set his own hours, often
working late into the night, and Just did not tell him how to
 JUSTMED, INC. v. BYCE 5149
spend his days. As Byce developed new versions of the
source code, he would e-mail the new version to Just, who
would compile it and load it onto the JusTalk to evaluate its
performance. Whereas Just had previously worked side-by-
side with Liebler, Just and Byce often communicated by
phone or e-mail, and occasionally would meet in Boise or
Portland or somewhere in between. The two exchanged ideas
and discussed the functionality of the code, as well as
improvements that needed to be made. Just, admittedly a poor
programmer, never made changes to the source code, and by
the time this dispute arose, Byce had substantially rewritten
the source code Liebler had developed. According to Byce,
only 21 lines of code from the last version Liebler worked on
remained, out of approximately 3500 to 4000 lines total.

While he was working on the source code, Byce was
included in the company profile brochure and had a JustMed
business card. He was alternatively referred to as the “Direc-
tor of Research and Development” and the “Director of Engi-
neering,” the latter title supplied by Byce himself. Although
he was primarily working on the source code, Byce also
updated the company Web site and attended conferences,
marketing meetings, and demonstrations on behalf of Just-
Med.

Because he was not earning money, Byce was living on
credit, and by May 2005 he was worried about his financial
situation. He told Just that he would soon need cash. In
response, Just agreed to have JustMed pay Byce half in cash
and half in shares. Byce filled out a W-4 form, and the com-
pany issued three checks for him as payment for May, June,
and July 2005.

Byce, however, never cashed the checks. At this point,
Byce became concerned that Just did not view him as an
equal in the corporation. In order to protect what he perceived
as his intellectual property, Byce changed the copyright state-
5150 JUSTMED, INC. v. BYCE
ment on the software, so that it now read “Copyright (c) Mike
Byce 2005” instead of copyright JustMed.

Then, while Byce was working in the Oregon office two
days before Just was scheduled to meet with a potential
merger or buy-out partner, Byce deleted all copies of the
source code from JustMed’s computers. Byce testified that he
made the decision after seeing a spreadsheet showing a large
disparity between the number of shares Byce owned and those
shares that the Justs and Liebler owned. In its memorandum
decision, the district court found that Byce deleted the code
to gain leverage over Just in Byce’s efforts to acquire a
greater share of the company. The next day, Byce raised with
Just the disparity in ownership between Byce and the other
primary shareholders. The two talked for several hours, but
Just declined to give additional shares to Byce. During this
conversation, Byce did not mention that he had deleted the
source code from JustMed’s computers.

Just still had a recent version of the object code loaded on
a JusTalk unit, but after flying to Chicago for his demonstra-
tion meeting, Just could not get the unit to work. Hoping this
was a curable problem, Just tried to recompile the source code
on his laptop and then load it onto the unit, only to discover
that he no longer had a copy of the source code. Just called
Byce about the missing code, but Byce claimed to have
assumed “revision control,” meaning that he had removed the
source code to insure that no one else would make changes to
it.

Only upon returning to Oregon did Just realize that Byce
had deleted the source code from all of JustMed’s computers.
Just was able to recover some prior versions of the source
code files, but not the most recent one. Byce later returned the
latest version of the source code, with some of the program-
mer’s notes removed, but only after JustMed filed suit against
Byce and the Idaho state court issued a temporary restraining
 JUSTMED, INC. v. BYCE 5151
order.2 Because Just did not trust the code he received from
Byce, JustMed has since worked from older versions of the
code to develop the device.

JustMed filed suit in state court, and Byce removed the
case to federal court, asserting that it required determination
of ownership of the software under the Copyright Act. The
district court denied JustMed’s motion to remand after it
decided that the case required application of federal copyright
law, in particular, the work-for-hire doctrine. Byce later coun-
terclaimed, seeking a judgment declaring that he is the sole
author and owner of the software under the Copyright Act.
JustMed asserted only state law claims, including misappro-
priation of a trade secret, conversion, breach of fiduciary duty,
and intentional interference with a prospective economic
advantage.

After a bench trial, the district court found in favor of Just-
Med and held that Byce was an employee when he wrote the
software, so that JustMed owned the copyright to the soft-
ware. The court also found Byce liable for misappropriation
of a trade secret, conversion, and breach of his fiduciary duty.
This timely appeal followed.

II

[1] Although neither party raised jurisdictional concerns,
we must satisfy ourselves that we have jurisdiction over this
case. The district court asserted it had jurisdiction under 28
U.S.C. § 1338. In its denial of JustMed’s motion to remand,
the district court ruled that JustMed’s claims required con-
2
Programmer’s notes or comments are annotations within the source
code that comment on the source code and try to make it easier to under-
stand. While such comments are typically ignored by the compiler or
interpreter when compiling source code because they do not affect the
operation of the object code, several of JustMed’s witnesses testified that
they considered the comments part of the software.
5152 JUSTMED, INC. v. BYCE
struction of the Copyright Act and therefore fell under the
second prong of the test articulated in T.B. Harms Co. v.
Eliscu, 339 F.2d 823, 828 (2d Cir. 1964), for determining
when an action “arises under” the Copyright Act. This court
has adopted the Second Circuit’s test in T.B. Harms. See, e.g.,
Scholastic Entm’t, Inc. v. Fox Entm’t Group, Inc., 336 F.3d
982, 986 (9th Cir. 2003); Topolos v. Caldewey, 698 F.2d 991,
993 (9th Cir. 1983).

Under T.B. Harms,

an action “arises under” the Copyright Act if and
only if the complaint is for a remedy expressly
granted by the Act, e.g., a suit for infringement or for
the statutory royalties for record reproduction, 17
U.S.C. § 101, or asserts a claim requiring construc-
tion of the Act . . . or, at the very least and perhaps
more doubtfully, presents a case where a distinctive
policy of the Act requires that federal principles con-
trol the disposition of the claim. 339 F.2d at 828
(citation omitted).

“In summary, the T.B. Harms test requires the district court
to exercise jurisdiction if: (1) the complaint asks for a remedy
expressly granted by the Copyright Act; (2) the complaint
requires an interpretation of the Copyright Act; or (3) federal
principles should control the claims.” Scholastic Entm’t, Inc.,
336 F.3d at 986. “The test outlined in T.B. Harms is essen-
tially a reiteration of the ‘well-pleaded complaint’ rule that
federal jurisdiction exists only when a federal question is
presented on the face of a properly pleaded complaint.” Id.;
see also Nimmer on Copyright § 12.01[A][1][d][1]. However,
the well-pleaded complaint rule has a necessary corollary—
the artful pleading doctrine. “[U]nder the artful pleading rule
‘a plaintiff may not defeat removal by omitting to plead nec-
essary federal questions in a complaint.’ ” ARCO Envtl.
Remediation, L.L.C. v. Dept. of Health & Envtl. Quality of the
State of Mont., 213 F.3d 1108, 1114 (9th Cir. 2000) (quoting
 JUSTMED, INC. v. BYCE 5153
Franchise Tax Bd. of Cal. v. Constr. Laborers Vacation Trust
for S. Cal., 463 U.S. 1, 22 (1983)); see also Nimmer,
§ 12.01[A][1][d][I] (“[A] plaintiff may not defeat federal
court jurisdiction through the simple expedient of artfully
pleading around necessary federal questions.”).

[2] The owner of a copyright has several exclusive rights
under the Copyright Act, the most relevant being the rights to
reproduce the work, create derivative works, and distribute
the work. 17 U.S.C. § 106(1)-(3). Although a complaint may
not state a Copyright Act claim on its face, federal jurisdiction
may be appropriate if resolution requires application of the
work-for-hire doctrine of the Copyright Act, which the
Supreme Court examined in Community for Creative Non-
Violence v. Reid, 490 U.S. 730 (1989) (CCNV). That case
involved an ownership dispute between an artist hired to pro-
duce a sculpture and the organization that hired him. CCNV,
490 U.S. at 733. The Supreme Court determined it had to
“construe the ‘work made for hire’ provisions of the Copy-
right Act,” id. at 732, noting that “[t]he contours of the work
for hire doctrine . . . carry profound significance for freelance
creators—including artists, writers, photographers, designers,
composers, and computer programmers—and for the publish-
ing, advertising, music, and other industries which commis-
sion their works.” Id. at 737. In this context, the Court
reasoned that “[e]stablishment of a federal rule of agency,
rather than reliance on state agency law, is particularly appro-
priate here given the Act’s express objective of creating
national, uniform copyright law by broadly pre-empting state
statutory and common-law copyright regulation.” Id. at 740
(citing 17 U.S.C. § 301(a)). “This practice reflects the fact
that ‘federal statutes are generally intended to have uniform
nationwide application.’ ” Id. at 740 (quoting Miss. Band of
Choctaw Indians v. Holyfield, 490 U.S. 30, 43 (1989)).

[3] In this case, the complaint asserts JustMed’s ownership
of the source code, while at the same time acknowledging that
ownership is disputed. These allegations directly implicate the
5154 JUSTMED, INC. v. BYCE
Copyright Act. JustMed was required to prove it owns the
source code to prevail on its trade secret and conversion
claims, but the ownership rights under the Copyright Act
overlap with those constituting common law ownership.
Because ownership normally vests in the author of a work,
JustMed would have ownership only under the Copyright
Act’s work-for-hire doctrine because there was no written
agreement as to ownership. Thus, application of the work-for-
hire doctrine is central to this appeal. The instant case, there-
fore, arises under the federal law governing copyrights. See
Scandinavian Satellite Sys., AS v. Prime TV Ltd., 291 F.3d
839, 845 (D.C. Cir. 2002) (“[A] dispute that turns on whether
a copyrighted work was created independently or as a ‘work
made for hire’ is an ownership dispute that unquestionably
arises under the Copyright Act.” (citing CCNV, 490 U.S.
730)). We conclude that the district court correctly retained
jurisdiction over the case and that we have jurisdiction over
the appeal.

III

Having satisfied the jurisdictional inquiry, we now turn to
the merits. We review de novo the district court’s conclusions
of law following the bench trial, including its determination
that the source code was a work made for hire and its interpre-
tation of state law. See Twentieth Century Fox Film Corp. v.
Entm’t Distrib., 429 F.3d 869, 879 (9th Cir. 2005); Paulson
v. City of San Diego, 294 F.3d 1124, 1128 (9th Cir. 2002) (en
banc). We review the district court’s factual findings for clear
error. See Twentieth Century Fox, 429 F.3d at 879.

A

[4] Under the Copyright Act of 1976, copyright ownership
“vests initially in the author or authors of the work.”3 17
3
Computer software, including the source and object codes, can be sub-
ject to copyright protection. See Johnson Controls, Inc. v. Phoenix Control
Sys., Inc., 886 F.2d 1173, 1175 (9th Cir. 1989).
 JUSTMED, INC. v. BYCE 5155
U.S.C. § 201(a). An exception exists, however, for “works
made for hire,” in which case “the employer or other person
for whom the work was prepared is considered the author”
and owns the copyright, unless there is a written agreement to
the contrary. Id. § 201(b). As it is relevant here, a “work made
for hire” is “a work prepared by an employee within the scope
of his or her employment.” 17 U.S.C. § 101. Thus, whether
Byce owns the source code copyright turns on whether he was
an employee of JustMed or an independent contractor.4

[5] The Supreme Court has explained that absent any tex-
tual indications to the contrary, when Congress uses the terms
“employee,” “employer,” or “scope of employment,” it means
to incorporate principles from the general common law of
agency. CCNV, 490 U.S. at 740-41. Accordingly, “the hiring
party’s right to control the manner and means by which the
product is accomplished” is the central inquiry here. Id. at
751. Factors relevant to this inquiry include: the skill required
for that occupation, the source of the instrumentalities and
tools, the location of the work, the duration of the relationship
between the parties, whether the hiring party has the right to
assign additional projects to the hired party, the extent of the
hired party’s discretion over when and how long to work, the
method of payment, the hired party’s role in hiring and paying
assistants, whether the work is part of the regular business of
the hiring party, whether the hiring party is in business, the
provision of employee benefits, and the tax treatment of the
hired party. Id. at 751-52 (citing Restatement (Second) of
Agency § 220(2) (1958)). Because “the common-law test con-
tains no shorthand formula or magic phrase that can be
applied to find the answer, all of the incidents of the relation-
ship must be assessed and weighed with no one factor being
decisive.” Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318,
324 (1992) (quoting NLRB v. United Ins. Co. of Am., 390 U.S.
4
The parties do not appear to dispute that if Byce was an employee, he
was acting within the scope of his employment when he wrote the source
code.
5156 JUSTMED, INC. v. BYCE
254, 258 (1968)) (quotation marks and alteration omitted); see
also Aymes v. Bonelli, 980 F.2d 857, 861 (2d Cir. 1992) (“It
does not necessarily follow that because no one factor is dis-
positive all factors are equally important, or indeed that all
factors will have relevance in every case. The factors should
not merely be tallied but should be weighed according to their
significance in the case.”).

Byce argues on appeal that the district court improperly
weighed the factors and ignored crucial facts, especially Just-
Med’s tax treatment of Byce, the failure to provide him with
benefits, the failure to fill out appropriate employment forms,
the lack of any written agreement regarding Byce’s employ-
ment or salary, and the lack of stock certificates for shares
Byce was accruing.

However, taking the various factors into account, we con-
clude that the district court did not err in finding that Byce
was an employee. In particular, the contemplated duration of
the relationship, the tasks Byce did for JustMed, the fact that
Byce earned a salary from JustMed, and the nature of Just-
Med’s business all support the finding that Byce was an
employee. While no one factor is decisive, we draw some
guidance in weighing the factors from JustMed’s status as a
technology start-up company. The evidence of the way Just-
Med operates gives support to the finding that Byce was an
employee. Admittedly, some of the factors that Byce points to
support his position, but mostly they are entitled to little
weight when viewed in light of the way JustMed conducts its
business.

[6] JustMed hired Byce primarily to work on the JusTalk
software, but he was not hired for a specific term or with a
discretely defined end product in mind. Cf. CCNV, 490 U.S.
at 753 (independent contractor hired for single task of produc-
ing sculpture). JustMed continuously worked on the source
code to improve its effectiveness and capability. Although
Byce’s work on the source code lasted only nine months, it
 JUSTMED, INC. v. BYCE 5157
was halted not because the code’s development had reached
a logical termination point but because of the parties’ dispute.
Thus, the fact that the parties contemplated a relationship of
indefinite duration cuts in favor of finding Byce an employee.

[7] Byce did other work for JustMed as well. He updated
the company’s Web site and demonstrated the JusTalk units
at tradeshows. Byce had previously worked on the Web site
when he acted only as a director and shareholder for the com-
pany, but his continued work on tasks besides programming
indicates JustMed could have assigned additional projects to
Byce. Moreover, his formal title indicates that he had broad
duties within JustMed, as well as a relationship with the com-
pany that was intended to be permanent.

[8] JustMed hired Byce to replace Liebler, an employee,
and paid him the same salary that Liebler received.5 At trial
Byce disputed that there was any agreement as to how he
would be paid, and Byce continues to argue that the lack of
a written agreement regarding salary and the lack of stock cer-
tificates undermine the salience of this factor. But the district
court did not find credible Byce’s inability to recall what he
was being paid and how. Although independent contractors
are often paid upon completion of a specific job, see CCNV,
5
While an employer’s designation of a person as an employee or inde-
pendent contractor is not always relevant because employers often have an
incentive to designate an individual as one or the other, see, e.g., Vizcaino
v. Microsoft Corp., 97 F.3d 1187, 1189 (9th Cir. 1996) (“Large corpora-
tions have increasingly adopted the practice of hiring temporary employ-
ees or independent contractors as a means of avoiding payment of
employee benefits, and thereby increasing their profits.”), aff’d en banc,
120 F.3d 1006 (9th Cir. 1997), both Liebler and JustMed believed they
had an employee-employer relationship. See Restatement (Second) of
Agency § 220(2)(I) (listing parties’ subjective conceptions of the relation-
ship as one factor in master-servant determination). This fact cuts in favor
of similarly finding Byce an employee, as he essentially stepped into Lie-
bler’s role. That Byce replaced Liebler also indicates that the JusTalk soft-
ware was an ongoing concern for the company, not a discrete project that
JustMed expected Byce to simply finish and be done with.
5158 JUSTMED, INC. v. BYCE
490 U.S. at 753 (independent contractor was to be paid upon
completion of sculpture), Byce was paid a regular monthly
salary in the same way as other JustMed employees. This
weighs heavily in favor of finding him an employee, even
though much of the salary came in the form of stock.

[9] Also militating in favor of JustMed is the fact that its
primary business was the development and marketing of the
JusTalk device. Byce’s work was integral to JustMed’s regu-
lar business, since the JusTalk cannot work without function-
ing software. Cf. Aymes, 980 F.2d at 863 (finding
programming work for swimming pool company not part of
the firm’s regular business but stating that “work done by a
computer programmer employed by a computer software firm
would be done in the firm’s regular business”). Indeed, there
is evidence that JustMed tried to sell consumers on the Jus-
Talk precisely by emphasizing that the software could con-
stantly be updated. It seems highly unlikely that JustMed
would leave such an important, continuous responsibility to
an independent contractor who would terminate his relation-
ship with the company upon completing a working version of
the software.

While some factors initially seem to favor Byce, on closer
examination they are insufficient to find him an independent
contractor.6

It is true, for example, that Just did not exercise much con-
trol over the manner and means by which Byce created the
source code. However, this is not as important to a technology
start-up as it might be to an established company. Byce was
an inventive computer programmer expected to work indepen-
dently.7 The business model and Byce’s duties do not require
6
Some of the factors also are inconclusive. For example, Byce was
unlikely to need additional help, so it is not relevant who might pay for
this hypothetical extra help.
7
In this regard, see Restatement (Second) of Agency § 220, comment e,
which explains that “[t]he custom of the community as to the control ordi-
narily exercised in a particular occupation is of importance.”
 JUSTMED, INC. v. BYCE 5159
that the project be completed in a particular manner or that
Just continuously oversee Byce’s work, so long as JustMed
eventually found itself with a marketable product. Moreover,
Just did have some input into Byce’s work on the software,
even if it was given by e-mail and phone. Cf. id. at 862 (input
from client regarding computer program’s functions “weighs
heavily in favor of finding [programmer] . . . an employee”);
but see CCNV, 490 U.S. at 572 (“[T]he extent of control the
hiring party exercises over the details of the product is not
dispositive.”).

The nature of the business and the work similarly means
that Byce’s ability to set his own hours and the fact that he
worked from home are not particularly relevant. As a pro-
grammer, Byce could, in essence, ply his craft at any time and
from any place without significant impairment to its quality
or his ability to meet JustMed’s needs. So although physical
separation between the hiring party and the worker is often
relevant to determining employment status, it is less germane
in light of the kind of work Byce was doing. Of course, com-
puter programming is a skilled profession, which weighs in
favor of finding Byce not an employee, but given the other
factors and the fact that JustMed’s regular business requires
it to employ programmers, we find this far from conclusive.

[10] Byce’s strongest argument turns on JustMed’s failure
to pay benefits and fill out the appropriate employment forms,
and JustMed’s tax treatment of Byce. Some courts have relied
heavily on these factors as “highly probative of the true nature
of the employment relationship.” See Aymes, 980 F.2d at 861,
863-64 (“[E]very case since [CCNV] that has applied the test
has found the hired party to be an independent contractor
where the hiring party failed to extend benefits or pay social
security taxes.”); see also Kirk v. Harter, 188 F.3d 1005, 1009
(8th Cir. 1999) (agreeing with Aymes that employee benefits
and tax treatment are especially significant to determination
of employee status). There is a danger, however, in relying on
them too heavily, because they do not bear directly on the
5160 JUSTMED, INC. v. BYCE
substance of the employment relationship—the right to con-
trol. In this case, the factors do not decisively favor Byce,
especially when one considers JustMed’s business model.

We note Byce did eventually fill out a W-4 form and have
taxes withheld once he started receiving paychecks from Just-
Med. The tax treatment here is therefore more ambiguous
than in other copyright cases where courts have relied on the
hiring party’s treatment of the hired party as an independent
contractor—for example, by not withholding taxes and by
giving the hired party 1099 forms—and only later asserted
that the individual was an employee. See Aymes, 980 F.2d at
859; Kirk, 188 F.3d at 1009. While an inherent unfairness
exists in a company claiming a worker to be an independent
contractor in one context but an employee in another, see
Aymes, 980 F.2d at 859, that is not the case here.

[11] JustMed’s treatment of Byce with regard to taxes,
benefits, and employment forms is more likely attributable to
the start-up nature of the business than to Byce’s alleged sta-
tus as an independent contractor. The indications are that
other employees, for example Liebler, were treated similarly.
Insofar as JustMed did not comply with federal and state
employment or tax laws, we do not excuse its actions, but in
this context the remedy for these failings lies not with denying
the firm its intellectual property but with enforcing the rele-
vant laws.

[12] As a small start-up company, JustMed conducted its
business more informally than an established enterprise
might. This fact can make it more difficult to decide whether
a hired party is an employee or an independent contractor, but
it should not make the company more susceptible to losing
control over software integral to its product. Weighing the
common law factors in light of the circumstances and Just-
Med’s business, we conclude that the district court did not err
in holding that Byce was an employee and that the source
code was a work made for hire.
 JUSTMED, INC. v. BYCE 5161
B

[13] We next consider JustMed’s misappropriation claim.
Idaho has adopted a slightly modified version of the Uniform
Trade Secrets Act (UTSA). See Idaho Code Ann. §§ 48-801
to -807. Significant for our purposes, Idaho explicitly includes
a definition of “computer program” as a protectable trade
secret. See UTSA (amended 1985) § 1, Action in Adopting
Jurisdictions (Idaho), 14 U.L.A. 540 (2005); Idaho Code Ann.
§ 48-801(4), (5). The Idaho Trade Secrets Act (ITSA) pro-
vides for damages or injunctive relief if a plaintiff’s trade
secret is misappropriated by another. Idaho Code Ann. §§ 48-
802, 48-803. The Act defines misappropriation as:

(a) Acquisition of a trade secret of another by a per-
son who knows or has reason to know that the trade
secret was acquired by improper means; or

(b) Disclosure or use of a trade secret of another
without express or implied consent by a person who:

(A) Used improper means to acquire
knowledge of the trade secret; or

(B) At the time of disclosure or use, knew
or had reason to know that his knowledge
of the trade secret was:

(i) Derived from or through a person who
had utilized improper means to acquire
it;

(ii) Acquired under circumstances giving
rise to a duty to maintain its secrecy or
limit its use; or

(iii) Derived from or through a person
who owed a duty to the person seeking
5162 JUSTMED, INC. v. BYCE
relief to maintain its secrecy or limit its
use; or

(C) Before a material change of his posi-
tion, knew or had reason to know that it
was a trade secret and that knowledge of it
had been acquired by accident or mistake.

Id. § 48-801(2).

The term “trade secret” “means information, including a
formula, pattern, compilation, program, computer program,
device, method, technique, or process” that “[d]erives inde-
pendent economic value . . . from not being generally known
to, and not being readily ascertainable by proper means by,
other persons who can obtain economic value from its disclo-
sure or use” and “[i]s the subject of efforts that are reasonable
under the circumstances to maintain its secrecy.” Id. § 48-
801(5). Improper means, in turn, “include theft, bribery, mis-
representation, breach or inducement of a breach of a duty to
maintain secrecy, or espionage through electronic or other
means.” Id. § 48-801(1).

[14] It is undisputed that the source code, as a whole, is a
trade secret. The district court found Byce liable for misap-
propriation, although under which definition of misappropria-
tion it found liability is unclear. We first examine Byce’s
acquisition of the source code.

[15] We find that Byce did not “acquire” the source code
through improper means because he already had possession of
it as an employee.8 Acquire means “to come into possession,
8
Byce did act improperly when he changed the copyright notice on the
code to reflect his ownership rather than JustMed’s, deleted all other cop-
ies of the code, and failed to turn over a complete copy of the code when
required to do so. However, these actions amounted to improper retention,
not improper acquisition. For the same reason, Byce did not breach his
duty of confidentiality in acquiring the source code.
 JUSTMED, INC. v. BYCE 5163
control, or power of disposal of.” Webster’s Third New Int’l
Dictionary 18 (3d ed. 1993). Byce already had possession of
the source code through his work for JustMed. Indeed, he cre-
ated much of it. In that capacity, however, he did acquire it
“under circumstances giving rise to a duty to maintain its
secrecy or limit its use.” Idaho Code Ann. § 48-
801(2)(b)(B)(ii). Thus, if Byce used or disclosed the trade
secret, he is liable for misappropriation. Id. § 48-801(2)(b).

[16] Although Byce disclosed a portion of the source code
to the Copyright Office, the district court did not decide
whether this portion of the code alone had the necessary eco-
nomic value to be a trade secret. Moreover, disclosure of a
portion of the source code to the Copyright Office, in itself,
is not necessarily inconsistent with maintaining the secrecy
and value of the trade secret. See Compuware Corp. v. Serena
Software Int’l, Inc., 77 F. Supp. 2d 816, 821-22, 823 n.18, 825
n.24 (E.D. Mich. 1999) (holding that computer software
maintained status as protected trade secret, under Michigan
law, even after a copy was deposited with Copyright Office
in connection with a copyright application). Not only did
Byce submit only a portion of the code, but also “[i]t is the
general policy of the Copyright Office to deny direct public
access to in-process files and to any work (or other) areas
where they are kept” and thereafter the office releases repro-
ductions of works under limited circumstances only. See 37
C.F.R. § 201.2. Thus, the district court’s findings on disclo-
sure are insufficient to hold Byce liable for misappropriation
under a disclosure theory.

[17] Beyond the disclosure of several pages to the Copy-
right Office, JustMed has not alleged that Byce otherwise dis-
closed the code. Therefore, we examine Byce’s “use” of the
source code as an independent basis of liability. Restatement
(Third) of Unfair Competition § 40 (1995) (Appropriation of
Trade Secrets) discusses the scope of use:

There are no technical limitations on the nature of
the conduct that constitutes “use” of a trade secret
5164 JUSTMED, INC. v. BYCE
for purposes of the rules stated in Subsection (b). As
a general matter, any exploitation of the trade secret
that is likely to result in injury to the trade secret
owner or enrichment to the defendant is a “use”
under this Section. Thus, marketing goods that
embody the trade secret, employing the trade secret
in manufacturing or production, relying on the trade
secret to assist or accelerate research or develop-
ment, or soliciting customers through the use of
information that is a trade secret all constitute “use.”

Restatement (Third) of Unfair Competition § 40, cmt. c
(1995) (citation omitted). The term “use” in the context of
misappropriation of a trade secret generally contemplates
some type of use that reduces the value of the trade secret to
the trade secret owner. See 1 Trade Secrets Law § 3:20 (“The
primary interest of the plaintiff in trade secret cases is the
preservation of the exclusive rights to, and the continued
secrecy of, the appropriated information . . . . In some cases,
such as where the trade secret has not been disclosed or used,
an injunction may be the only appropriate remedy.”); see also
Omnitech Int’l, Inc. v. Clorox Co., 11 F.3d 1316, 1325 (5th
Cir. 1994) (the purpose of the trade secrets statute is to pre-
vent someone from profiting from another’s trade secret, thus
acquiring a free competitive advantage); Univ. Computing Co.
v. Lykes-Youngstown Corp., 504 F.2d 518, 539 (5th Cir.
1974) (“The defendant must have actually put the trade secret
to some commercial use. The law governing protection of
trade secrets essentially is designed to regulate unfair business
competition, and is not a substitute for criminal laws against
theft or other civil remedies for conversion.”). “[T]o sustain
a trade secrets action under the ‘use’ prong of the statutory
definition of ‘misappropriation,’ a plaintiff must necessarily
demonstrate that the defendant received some sort of unfair
trade advantage.” Omnitech Int’l, Inc., 11 F.3d at 1325 (inter-
preting Louisiana’s misappropriation statute, which requires
“disclosure or use of a trade secret of another without express
or implied consent by a person who . . . at the time of disclo-
 JUSTMED, INC. v. BYCE 5165
sure or use, knew or had reason to know that his knowledge
of the trade secret was . . . acquired under circumstances giv-
ing rise to a duty to maintain its secrecy or limit its use.” (cit-
ing La. Rev. Stat. Ann. § 51:1431(2)(b)(ii)(bb))).

[18] Besides filing for a copyright and threatening to with-
hold the source code, Byce made no other “use” of the source
code. Rather, Byce obtained leverage over negotiations with
JustMed by deleting all copies of the source code from Just-
Med’s computers, giving Byce exclusive possession. While
Byce threatened misappropriation, his actions did not rise to
the level of misappropriation. Indeed, had Byce misappropri-
ated the source code such that he diminished its value or
secrecy, he would have lost his leverage over JustMed and
also hurt his own bargaining position.

[19] That Byce did not use the source code is evident from
the damages analysis. See Restatement (Third) of Unfair
Competition § 40, cmt. c (“The nature of the unauthorized
use, however, is relevant in determining appropriate relief.”).
In Idaho, typically, the court will “construe ‘actual loss’ to
mean lost profits, lost customers, lost market share, and simi-
lar losses.” GME, Inc. v. Carter, 917 P.2d 754, 756 (Idaho
1996). The district court awarded JustMed damages of
$41,250.00, which covered the salary for Just and Liebler for
the three months they spent recreating the source code after
Byce had deleted all versions of the source code from the
JustMed computers. These damages, however, do not reflect
damages from Byce’s use, as opposed to his mere possession,
of the source code. Byce returned the source code to JustMed
after the court ordered him to do so. His possession of the
source code for some period of time did not result in a loss
of secrecy or a loss in value, which is evident from the fact
that the court did not award damages for lost value or unjust
enrichment. Thus, not only are damages not appropriate under
Idaho law, but neither is a finding that Byce misappropriated
the source code.
5166 JUSTMED, INC. v. BYCE
[20] Nothing here brings Byce’s inappropriate conduct
beyond the realm of simple conversion into that of misappro-
priation of a trade secret. Thus, we reverse the district court’s
finding that Byce misappropriated the source code under the
ITSA.

[21] Nonetheless, under Idaho law, “[a]ctual or threatened
misappropriation may be enjoined.” Idaho Code Ann. § 48-
802. Therefore, while damages for misappropriation of a trade
secret are inappropriate here because of the lack of “use” or
“disclosure” as contemplated in the context of trade secret
protection, the district court may grant an injunction against
Byce’s threatened use or disclosure of the source code if
appropriate. We remand to the district court to allow it to
make this determination in the first instance. In addition,
while damages are not appropriate under the ITSA, we
remand to the district court to determine whether JustMed can
recover damages under either the conversion or breach of
fiduciary duty claims.

Conclusion

For the foregoing reasons, we agree with the district court
that Byce was an employee of JustMed at the time he wrote
the JusTalk source code, and that JustMed owns the software.
We reverse the district court’s determination that Byce misap-
propriated the source code and the award of damages under
the ITSA. We remand the case for the district court to deter-
mine whether and in what amount JustMed can recover dam-
ages on the conversion or breach of fiduciary duty claims and
whether an injunction to prevent future misappropriation is
warranted. Each party shall bear its or his own costs on
appeal.

AFFIRMED in part, REVERSED in part, REMANDED.