• A Tale of Two Views of a Business Venture

    by  • March 15, 2013 • copyright • 0 Comments

    Sometimes you just can’t do better than the court in setting up a story:

    It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us. . . .

    Charles Dickens, A Tale of Two Cities (1859).

    This is a tale not of two cities, but of two vastly different views of a business venture that, at its inception, had the potential to be extremely profitable but which, during its management –– or mismanagement, as the case may be –– went horribly awry. Because there is no written agreement between the principal characters in this tale, the stories told vary greatly with no grounding in authoritative documents. There is disagreement as to who the real partners in this business venture were and even whether a partnership existed at all. What makes this case particularly puzzling is that the major players in this lawsuit are educated, sophisticated, experienced, savvy business people who, for reasons unknown to this Court, entered into this lucrative (this characterization is also disputed) business venture without a written agreement of any kind.

    I’ve blogged about this case before: when we last visited it the court had dismissed, with leave to amend, the case for failure to plead a federal claim. The parties have now had a bench trial on the fourth amended complaint.

    The case is about the tagline “Right at Home,”  the trademark “DeliverMed,” and a “mortar and pestle” logo:

    Along with a variety of non-IP claims, the parties disputed the ownership of the copyright in the logo and of the trademark rights in the logo, tagline and DeliverMed trademark. I’ll write about the copyright and trademark issues in two separate posts; today on copyright.

    It all started when plaintiff Mark Swift decided to form a mail-order pharmacy services company but needed a pharmacy to fill the orders. He went into business with defendant Michael Schaltenbrand, owner of Medicate Pharmacy. Since there was no formal memorialization of the parties’ business relationship, the court held that the business relationship was an oral general partnership, which the court referred to as the “JV.” Swift’s wife formed plaintiff DeliverMed Holdings, LLC, which would market the mail-order pharmacy services and Medicate would fill the orders.*

    Swift hired a company called Deeter Associates, of which Linda Deeter (“Deeter”) was executive vice president, to create a logo. Deeter Associates didn’t create it though; it hired Allan Kovin, d/b/a Kovin Design, to design the logo. The court describes the relationship this way:

    Kovin did not assign the logo copyright to Deeter or Deeter Associates by oral or written agreement in 2008. Kovin’s testimony that he intended to transfer the copyright in 2008 is not credible. Kovin and Deeter did not discuss or even contemplate the transfer of the logo copyright at that time. Kovin’s and Deeter’s testimony reflected a more pedestrian view of the agreement to develop a logo without consideration of intellectual property technicalities: Kovin would draw a logo and Deeter Associates would pay him for his efforts and allow its client to use it. Additionally, Kovin’s manner while testifying suggested a recent fabrication of old intentions, motivated by a desire to please Deeter Associates, a potential client, that did not truly exist at the time. The preponderance of the evidence shows that the 2008 agreement between Kovin and Deeter Associates was not an agreement, oral or otherwise, to transfer a copyright.

    Subsequently, “On March 20, 2012, Kovin executed a document entitled ‘Copyright Rights Assignment’ purporting to transfer to Deeter all his rights in the copyright of the logo. As evident from his agreement to ‘hereby assign . . . all of his rights of copyright’ (emphasis added) in the logo, Kovin did not view this document as a memorialization of the transfer of a copyright in 2008 but as a measure to transfer in 2012 any copyright interest he may still have retained in 2012.” Kovin wasn’t paid anything in 2012 when he executed the assignment.

    Despite the circumstances of the creation, the copyright in the logo was registered by DeliverMed, who claimed in the application that Deeter was the author of the logo and ownership was transferred to DeliverMed by written agreement.

    So it’s pretty easy to see where this is going. Kovin was the initial owner of the copyright. There was no separate legal entity “Kovin Design” who could own the copyright as a work made for hire. It also wasn’t a work made for hire of Deeter Associates under either of the bases described in 17 U.S.C. § 101: Kovin wasn’t an employee of Deeter Associates nor was there a signed, written instrument commissioning the work. The 2012 agreement didn’t do the trick; Kovin did not contemplate in 2008 that he was assigning the copyright** so “they cannot now, in retrospect, make more of the agreement than it really was.” Furthermore, Kovin testified that he did the work for “Deeter Associates” but the assignment was to Deeter, so the document could not be ratifying an earlier oral agreement. The language of present transfer—”hereby assigns”—also meant the document could not be ratifying a 2008 agreement.

    The 2012 agreement also wasn’t an assignment effective in 2012—it failed for lack of consideration. The compensation Kovin received in 2008 was to design the logo, not for the assignment, and since he wasn’t paid anything more in 2012 there was no consideration for the assignment.

    Piling on, Deeter had executed an “Agreement for Assignment of Copyright” in 2011, agreeing to transfer the copyright in the logo to DeliverMed so DeliverMed could file the suit. But this was an executory agreement with no evidence that Deeter ever performed, so DeliverMed’s claim of ownership failed for this transaction too.

    And Billy Bob Teeth, a doctrine that limits attacks on ownership of a copyright, didn’t strike. Here’s why:

    Unlike Magnuson and Eden Toys [predecessors to Billy Bob Teeth], where the issue was the validity of an assignment that neither the assignor nor the assignee contested, the issue here is whether the assignor was actually the author and had authority to assign the copyright –– or, as the case may be, to promise to do so in the future. Additionally, Deeter and DeliverMed do not agree on whether the April 8, 2011, “Agreement For Assignment of Copyright” actually transferred the copyright at that time; DeliverMed argues it did, but Deeter testified it did not. Had Deeter been an author, and had she and DeliverMed agreed that the assignment was effective at that time and was valid despite the lack of a writing, the defendants might not have been able to challenge DeliverMed’s ownership based on the lack of a written assignment. However, that is not the case.

    As an alternative basis for finding no copyright infringement, the court also held that Medicate had an implied nonexclusive license to use the logo to advance the purpose of the JV. There is an implied, nonexclusive license when (1) a person (the licensee) requests the creation of a work, (2) the creator (the licensor) makes that particular work and delivers it to the licensee who requested it, and (3) the licensor intends that the licensee-requestor copy and distribute his work. Here, based on Kovin’s testimony, the court found that Kovin gave a license to the JV through Deeter Associates and therefore Medicate’s use wasn’t infringing. (I’m not sure why this matters; Kovin wasn’t a party and therefore wasn’t claiming copyright infringement. But the same argument holds true for Deeter and Deeter Associates, assuming arguendo that one of them was the owner.)

    Finally, the copyright registration. Inadvertent mistakes will not invalidate a registration but a material misstatement intending to defraud the Copyright Office—one that might have caused the Copyright Office to reject the registration—will. And that was the case here. Swift, in his application, misrepresented the ownership: “Truthful statements would have revealed that Swift had no claim to copyright ownership in the logo. Swift purposefully caused these misrepresentations to be included in the application in an effort to gain an advantage in this lawsuit by deceiving the Copyright Office and causing it to issue DeliverMed a copyright registration to which it was not entitled.”

    This is the one piece I disagree with. No one gets the ownership claim right in copyright applications, particularly those involving a work made for hire. Deeter’s belief that Kovin’s work was a “work for hire,” which would make her the author of the work, is a common and pervasive misunderstanding of the law. But it was clear Swift was out to destroy Schaltenbrand, so the court was having none of it.

    And the final insult: the case was so lopsided that the defendants were awarded attorneys’ fees on the copyright infringement claim.

    Next time, the trademarks.

    DeliverMed Holdings LLC v. Schaltenbrand, No. 3:10-cv-00685-JPG-DGW (S.D. Ill. Oct. 15, 2012).

    *Edited on March 17 to correct the role of DeliverMed Holdings LLC.

    **The court discusses it as an assignment document rather than an agreement that the work is a work made for hire, which is a bit confusing, but the document doesn’t work for either situation.

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