[conspire] More on legal follies and software: Barracuda v. merger

[Rick Moen]

Here's another tale of legal follies using fake names (and, for all you
know, fake facts).  As they might have said on Dragnet, the legal issues
are true; only reality has been changed to protect the innocent.

I always explain that I could cite either names or anedotes but not
both; the anecdotes are more interesting.  However, if these
misadventures aren't exciting enough without public disclosure of real
names, as some have complained, then please feel free to go forth unto
businessland, and generate some calamities of your own.


Louise is an accomplished C developer and sysadmin in Miami, who formed
a team with three other coders (the "Gang of Four") to help out a
rapidly growing, services-rich Internet hosting company, Crunchco, that
they all use -- by rapidly prototyping and coding a much-needed C
codebase, Barracuda, that they intend to make available free of change
to Crunchco, filling a high-visibility hole (as a result of
disappearance of a third-party product) in Crunchco's offerings to
customers.  Harvey, founding CEO at Crunchco, is busy trying to staff up
Crunchco and consolidate its too-scattered and slightly chaotic &
overworked operations, drawing them together to new offices near where
he lives in Minneapolis.  Harvey _especially_ wants to hire Louise, in
part because they're rapidly migrating their servers off HP/UX to
Debian, because they have almost no Debian expertise, and because Louise
is a Debianista.  He makes an oral deal (if a somewhat fuzzy one) to
hire her, and tells her she should immediately wind up her commitments
to existing clients.  She starts turning down new prospects, e.g., a
$10,000 local consulting gig, to keep herself available.

Barracuda gets close to deployment status, and seems likely to be a
valuable property.  The Gang of Four line up plans to form an LLC
(limited liability corporation) to licence out Barracuda as a
proprietary software product, with Crunchco intended as the first
official "Barracuda chum" -- a set of favoured, free-of-charge or
low-cost customers.  Harvey arranges to meet with Louise and the others
at conferences and on business trips; he sets up flying two of them out
to Minneapolis HQ in March.

At the same time, Louise and the others hear of something else,
essentially unrelated, that's approaching at the same time:  Harvey has
been putting together, during those same business trips, a _merger_ deal
with Engulfco, a Java shop of about the same size, in Nashville.
Engulfco has more cash; Louise's estimate is that, in substance, it's
really more an outright acquisition than a merger, but these PR
characterisation games are pretty common.[1]

The merger proceeds:  It's to result in a firm called, in a fit of
delirious optimism, Synergistic Engineering[2], with Engulfco CEO Sally
remaining in the resulting firm's CEO spot, and Harvey moving to VP of
Engineering.  The firm picks up the cost of flying Louise and other new
hires up to Minnesota for a week, to sign them on.  Despite having the
typical Floridian's bad luck walking on frozen sidewalks, Louise enjoys
finally meeting her future co-workers and hobnobbing with Harvey, who
among other things hands her (and one of the other Gang of Four members,
who is likewise to be hired) Cruchco's proprietary inventions agreement
as a necessary initial step for her to get hired.  She signs.

Things seem a little haphazard, but she knows from experience that
there's a lot of chaos and missed cues at startups.  It's nothing
personal; you just deal with it.  Nobody's yet done an offer letter.
She expects a pretty good salary, because she's of proven high value to
Crunchco, but making something happen seems to need a kick.  So, she
sends an e-mail to Ron, her intended future boss, reminding him that
this needs to be taken care of.  Ron seems a bit disoriented by the
question, and kicks it over to Sally.  

Sally replies back saying:  "Hmm, I don't know if we can hire you at
this date.  Maybe in a few months, if we get additional funding, and if
we really need a Barrucuda maintainer on staff, which we're not sure we
will."

Louise is understandably peeved:  She's been made a clear offer of
employment, albeit one with some vagueness, by Harvey, has started
turning down other business based on their request that she do so, and
has shlepped 2000 miles into the northern winter -- only to be told by
some clown in Nashville that it's not happening.  She has to wonder: Is
there a complete breakdown in communication between Harvey and Sally?
Do those Java weenies in Nashville simply not understand, unlike the
better-clued Crunchco crowd, exactly how much the firm needs her
talents?  (It later turned out that the answer was "Yes" to both -- but
that _that_ wasn't the full story, either.)

So, Louise carefully writes a reply outlining the extent of Crunchco 
commitments to her, and the fact that her role is hardly to be confined
to, or even principally concern, Barracuda.  She clarifies that she
can't sit around and wait for job opportunities, and names a date by
which it'd have to occur or be written off -- and mentions that
Barracuda's direction of course remains in the Gang of Four's hands, 
_not_ Engulfco/Synergistic's.

Sally sends IM to Louise asking Louise to call her.

They talk:  Sally claims that Louise has already, inherently, signed
over all her rights to Barracuda, when she signed her Crunchco
proprietary inventions agreement, a couple of days ago, and that
Engulfco/Synergistic now owns it outright, by virtue of owning Crunchco.
Sally says she knows this because of comments by someone at Crunchco
about Barracuda, to the effect that Engulfco would be "buying" Barracuda
as part of the merger deal.  In any event, Synergistic doesn't have the
cash flow for more staff at this time, unless and until Louise can find
and bring in a sufficiently compelling revenue model for Synergistic's
property, Barracuda.

However, this is not Sally's lucky day.  This is one of those rare
occasions when not only is an executive (Sally) reaching beyond her
firm's rights out of ignorance (which is _very_ common), but she also
has the poor fortune to try this on someone who _knows the law_.  Louise
now (very politely) lowers the boom on her.

Sally has made several severe errors:

1.  Crunchco never owned Barracuda's copyright.  There is a bulletproof 
    trail of documentation of the Gang of Four's title.
2.  The proprietary inventions agreement was explicitly incidental
    to employment -- which never happened.  In fact, Louise has never
    received anything that can be pointed to as "valuable consideration"
    as a required element of any contract.
3.  Even if it were valid, that proprietary inventions agreement would
    give Cruchco a claim only to the copyright on _new_ work Louise 
    performed within the scope of her employment, under the 
    Copyright Act's "work for hire" rule.
4.  Actually, come to mention that, Sally has completely misunderstood 
    the "work for hire" rule.[3]
5.  According to the Copyright Act, for the Gang of Four to give over
    their _existing_ title (concerning work to date), all would 
    have had to sign a separate transfer-of-copyright legal paper, 
    which never happened.
6.  Only two of the four were ever even courted as potential employees,
    whereas all four members hold title.
7.  And, by the way, Louise pointed out, somehow Crunchco and Engulfco
    seem to have missed the fact that one of the developers is a _minor_,
    and therefore would be entitled to void most contracts he might sign
    upon reaching adulthood, anyway.
8.  There was considerable paperwork on the record from Harold speaking,
    both as Crunchco CEO and as Synergistic Engineering VP, of her 
    employment as an agreed fact.
9.  The entire series of events, taken as a whole, look difficult to
    distinguish from a fraudulent business scheme to cheat Louise out
    of her copyright title through false and misleading documents, 
    erroneous and possibly illegal claims about ownership, and
    insincere business offers.

During the rest of her day, Sally does the one truly intelligent thing
she's managed during this entire fiasco:  Being a Java weenie, she has
contacts at Sun Microsystems, including the legal experts who helped
establish the OpenSolaris project and its CDDL (open source) licensing.
She calls them:  They tell her she's completely wrong and right on the
brink of big trouble.  

She immediately sets up a conference call with the Gang of Four.  To
Louise's surprise and relief, Sally acts on the basis of the Sun guys'
advice, recognising that Synergistic had _no_ title to Barracuda, and
adding that she regretted her prior errors on that point, which were an
honest mistake.  They close the call with the (genuine) possibility of
future business dealings -- since the Gang still wants Synergistic as
the first "Barracuda chum" -- but, alas, with little likelihood of a job
for Louise.


A few points about that anecdote: 

1.  There's a lot of honest, innocent chaos and fsck-ups inside the
businesses that we imagine to be always running well:  It's seldom
really the SPECTRE/Blofeld model, where some guy with a Persian cat &
monocle knows everything and occasionally hits a button to send some
misbehaving underling to the flames below.  More often, it's more like
Chesterton's "The Man Who Was Thursday", where you have multiple people
going around completely clueless about what each other is doing.  Put
another way, think of most businesses as collections of ganglia:  The
organisation has little in the way of a central nervous system.  When
the company does something unpleasant to you, it's often not only "not
personal", but also largely _inadvertant_.

2.  The reason we're not generally aware of this widespread craziness
and patterns of screw-ups is that, typically, everyone involved is
either an interested party or is under a non-disclosure agreement.
So, all of it goes beneath the radar of the general public.[4]

3.  Though business people often attempt to push others around with
mind-numbing legal instruments and impressive-sounding notions about
rights and responsibilities, most of the time they have no earthly idea
what they're doing.  The fact that they hit you up with a bullshit legal
claim probably doesn't reflect evil, fraudulent intent:  It's more often
simple error and wishful thinking.

4.  At the same time, they get in the _habit_ of that legal gamesmanship
because it works -- against computerists, particularly, who generally
are really easy to snow, and (being introverts and legally naive) slow
to assert their interests.  To quote J.P. Morgan, "The meek shall
inherit the earth, but not the mineral rights."

5.  Business executives, especially those trying to build startups, tend
to hand out wild promises in all directions -- far more than they'd
_ever_ be able to fulfill -- just to keep things rolling.  Although it
should be obvious that the oral ones are flimsy, what may _not_ be so
obvious is that the written ones aren't necessarily much more
trustworthy.

(It's likely that Sally was actually insincere in her claim that she
hadn't known of any plan to put Louise on staff:  That doesn't jibe with
her being put through the new-hire process at the same time as several
other hires.  In fact, likely Sally simply decided Louise's salary as a
veteran developer was too expensive, and unilaterally decided to renege
on Harvey's commitments.)

6.  Certain large business initiatives, including mergers and
acquisitions, develop an inertia all of their own:  If you're perceived
as being in their way (as Louise was), you can find yourself subjected
to some tactics of questionable sanity and legality, because you're seen
as easier to move than is the thing you're blocking.  Crazy talk
directed at you by business people often has a perfectly rational
underlying (financial, legal, regulatory) cause, that might just not be
visible from your perspective.




[1] See also:  Electric Lichen.  (Where are they, now that we need them?)

[2] Conventional wisdom is that mergers and acquisitions in the tech
field are even more risky than elsewhere, because so much of the
acquired firms' value resides in the employees.  Many such purchases
have left the buyer holding an empty bag, when disaffected staff depart
for elsewhere.

[3] "Work for hire" is an exception in the Copyright Act and surrounding
caselaw, to the general rule that, the moment you invent a creative work
"in fixed form", you gain copyright title over it:   17 USC 101 and
201(b) says that, if you are an _employee_ and create something within
the scope of your employment (_or_ if it's a specially ordered or
commissioned work), title goes directly to the funder, not to you,
unless there's an agreement to the contrary.  This was a little vague;
the matter was clarified in 1989 in the Supreme Court case of CCNV v.  Reid
(http://www2.tltc.ttu.edu/Cochran/Cases%20&%20Readings/Copyright-UNT/reid.htm).

The term "employee", here, is not defined in the everyday-English sense,
but rather uses the word's meaning from the area of law called "agency
law".  Whether you're _called_ an employee or not has _zero_ relevance.
Employee vs. not an employee is decided according to three criteria,
forming a picture that a court would evaluate, taken as a whole:

o Control by the employer over the work.  (E.g., does putative employer
  have right to dictate how, where, with what tools the work gets done?)
o Control by employer over the employee.  (E.g., does putative employer
  have right to dictate worker's schedule, assignments, method of
  payment, assignment or non-assignment of assistants?)
o Status and conduct of employer.  (E.g., does employer provide job
  benefits?)

For a "specially ordered or commissioned work" to be work for hire, per
17 USC 101(1), there must be a written agreement to that effect, plus
the work can be only in one of nine specifically listed categories:
motion picture, other audiovisual work, translation, supplementary work,
compilation, instructional text, test, answer for a test, or atlas.

Louise politely pointed out that Crunchco had no claim to her copyright
title under either provision.

[4] Do you think there's a news story, every time a bank uncovers a
multimillion dollar embezzlement?  Not if the bank can help it.  In
fact, the culprits are often in a position to negotiate their keeping
all or part of the theft, when caught -- if the sum is big enough:  
The bank's publicity exposure is worrisome enough that parting with the
money is cheaper.