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                   __________________________________

                   Winter 1992-93, Volume 1, Number 1
                   __________________________________

                       By George, Donaldson & Ford
                            Attorneys at Law
               A Registered Limited Liability Partnership
                           1000 Norwood Tower
                         114 West Seventh Street
                          Austin, Texas  78701
                             (512) 495-1400
                          (512) 499-0094 (FAX)
                   ___________________________________

           Copyright (c) 1993 George, Donaldson & Ford, L.L.P.
              (Permission is granted freely to redistribute
            this newsletter in its entirety electronically.)
                   ___________________________________

David H. Donaldson, Jr., Editor  <DHDONALD+aGD&F%GDF@mcimail.com>

Peter D. Kennedy, Associate Editor <PDKENNED+aGD&F%GDF@mcimail.com>
                   ___________________________________



Part Two - Legal Bytes


4.   CAN YOU INFRINGE A COPYRIGHT WHILE ANALYZING A COMPUTER PROGRAM?

      Copyright law can also threaten the process of analysis companies use
to review competitors' products to develop and improve their own product.
The copyright law guarantees to a copyright owner the right to make and
sell copies of its work as well as modifications, improvements or different
versions of its original work.  Many times, in order to more fully
understand a competitor's product, a computer software or hardware company
will examine a competitor's product, including authorized copies of the
competitor's program, to determine how it operates and ways in which it can
be improved.  This was the situation in ATARI GAMES CORPORATION v. NINTENDO
OF AMERICA, INC., 975 F.2d 632 (Fed. Cir. 1992).  NES, the maker of
Nintendo, incorporated a special program (10NES) on its game cartridges
that would activate and allow the Nintendo game console to operate the game
cartridge.  Without the special program, the game would not work in the
Nintendo console.

      Atari wanted to determine how this system worked and duplicate it,
if possible so it could sell Nintendo-compatible games without having to
get a license from Nintendo.  Atari obtained copies of Nintendo's special
chip, physically dissected them to determine the object code on the chip
and worked on its own program to duplicate the 10NES program.  It also
improperly obtained a copy of the program from the copyright office and
used it to further hone its decryption of the Nintendo chip.  Nintendo
claimed that Atari's actions infringed its copyright on the 10NES program
that provided the decryption.

      Nintendo argued that copying its program was a violation of the
Copyright Act and a copyright infringement.  But the Federal Circuit said
the Copyright Act is not just for the benefit of authors in controlling and
exploiting their writings, it also serves society's competing interest in
the free-flow of ideas and information.  Under the Copyright Act society
is free to exploit facts, ideas, processes or methods of operation in a
copyrighted work.  Most importantly, the "Copyright Act permits an
individual in rightful possession of a copy of a work to undertake
necessary efforts to understand the work's ideas, processes, and methods
of operation."  So the Act exempts from copyright protection reproductions
for the purpose of research.  This allows authors and thinkers of the
future to make use of and build upon advances in the copyrighted work.
Finally, the court noted "when the nature of a work requires intermediate
copying to understand the ideas and processes in a copyrighted work, that
nature supports a fair use for intermediate copying.  Thus, reverse
engineering object code to discern the unprotectable ideas in a computer
program is a fair use."

      This pronouncement from the federal circuit is very important for
developers of computer software.  It sets limits on the protection derived
from the Copyright Act and lays out some favorable ground rules for the
intermediate steps in developing new software.
_________________________________________________________________________

5.   DOES ANTITRUST LAW HAVE A PLACE IN THE COMPUTER INDUSTRY?

      In the infancy of the computer industry, when IBM mainframes
dominated the landscape, IBM was accused of using its dominant position to
stifle competition and prevent other manufacturers of peripheral equipment
from offering products that could be used with an IBM mainframe.  Massive
lawsuits were pursued by both the United States government and private
companies accusing IBM of antitrust violations.  With the changes in the
market and the political and legal landscape in the late 1970's and the
Reagan-Bush era, interest in antitrust lawsuits faded substantially.  Such
claims seemed particularly inappropriate in the highly competitive personal
computer markets on the theory that there were plenty of alternatives
available that prevented any company from accumulating enough market power
to create antitrust concerns.

      A recent case decided by the United States Supreme Court suggests
that antitrust concerns can play a role in the computer industry.  In
EASTMAN KODAK COMPANY v. IMAGE TECHNICAL SERVICES, INC., 112 S. Ct. 2072
(1992) the Supreme Court held that a group of independent service
organizations (ISO's) that worked on Kodak copiers could maintain an
antitrust claim against Kodak.  The ISO's asserted that Kodak's practice
of refusing to sell parts to ISO's and selling only to those who used Kodak
service illegally tied the sale of Kodak's service for its machines to the
sale of Kodak's parts, a violation of  1 of the Sherman Antitrust Act, and
had monopolized the sale and service of its machines, a violation of  2
of the Sherman Act.

      The evidence offered by the ISO's showed:

      (1)  Kodak's high volume photocopier and micrographics equipment was
      unique, with software program and parts that were not compatible with
      competitive equipment.

      (2)  ISO's began repairing and servicing Kodak equipment in the early
      80's, buying parts from Kodak or its part manufacturers.

      (3)  In the mid-80's Kodak began selling replacement parts only to
      buyers of Kodak equipment who used Kodak service or who repaired
      their own machines, cutting off the supply of Kodak parts to ISO's.
      ISO's either went out of business or lost a lot of money.

      (4)  Kodak controlled nearly 100% of the parts market and 80% to 95%
      of the service market for its machines and there were no readily
      available substitutes.

      The Supreme Court found that there was sufficient evidence of an
arrangement that "tied" Kodak service to the purchase of Kodak parts.  Such
tying arrangements are illegal if the company possesses "market power" --
the power, in that market, to force a purchaser to buy something he would
not buy in a competitive market. The key question was whether Kodak had
"market power" in the aftermarket for parts and services.

      The court rejected Kodak's claim that it didn't have market power
because of the highly competitive market for copying equipment.  Kodak
argued that it couldn't act unfairly in the aftermarket for service and
parts because if its service costs were too high, people would buy other
copiers with cheaper service.  But the Supreme Court accepted the
commercial reality that consumers are not going to be perfectly informed
about service costs when making a buying decision and are not going to buy
alternative equipment just because service costs prove to be a little
higher.  The court felt that these characteristics gave Kodak power in the
aftermarket to force its copier owners to buy its service with Kodak parts.

      Nor could Kodak convince the court that insistence on Kodak service
along with Kodak parts assured quality service and was justified
competition.  The ISO's showed that they could provide quality service
also, raising a fact question about Kodak's competition claims.

      This case is important for the personal computer industry because in
the copier industry, like the personal computer industry, no company
dominates the market for machines, but the aftermarket for service and
parts for those machines can be subject to some of the same practices.

      The Supreme Court did not say that Kodak's practice *was* illegal:
that will depend upon the ultimate facts presented and found at trial.  But
the decision that the legality of Kodak's practices involved fact questions
and could not be determined as a matter of law justifies attention. In most
instances in the computer field there are so many alternatives that tying
products to service would be allowed because customers would be free to go
elsewhere. But there could be circumstances where a supplier of equipment
could become so dominant that its insistence on practices like Kodak's
could create an antitrust issue.
_________________________________________________________________________

6.   WHAT DO YOU MEAN WE DON'T OWN THE SOFTWARE?

      In 1989 the United States Supreme Court finally tackled a problem
that had plagued the courts:  What is a work made for hire under the
Copyright Act?  This jargon-filled question seems one only lawyers would
have an interest in, but a recent decision by the U.S. Second Circuit Court
of Appeals that applied the Supreme Court's analysis suddenly makes it
vitally important that software developers pay attention to the deals they
make with those who work on their software.

      In COMMUNITY FOR CREATIVE NON-VIOLENCE v. REID (reported at 490 U.S.
730 (1989)), the Supreme Court was asked to decide whether a sculptor
commissioned to create a work of art for the CCNV owned the copyright on
the work he created.  The CCNV claimed the artist's efforts were a "work-
made-for-hire," a term of art defined in the Copyright Act (the federal law
that defines copyright rights) as (1) a work prepared by an employee within
the scope of his or her employment; or (2) a work specially ordered or
commissioned for use... if the parties expressly agree in a written
instrument signed by them that the work shall be considered a "work made
for hire."  17 U.S.C.  101.

      The CCNV argued that Reid was an "employee," so that his work was a
"work made for hire, " which meant that CCNV owned the copyright on his
work.  The U.S. Supreme Court decided that employee status depends on:

            1)  the hiring party's right to control the manner and means
            by which the product is accomplished;

            2)  the skill required for the work;

            3)  the source of the instrumentalities and tools used for the
            work;
            4)  the location of the work;

            5)  the duration of the relationship between the parties;

            6)  whether the hiring party has the right to assign additional
            projects to the hired party;

            7)  the extent of the hired party's discretion over when and
            how long to work;

            8) the method of payment;

            9)  the hired party's role in hiring and paying assistants;

            10)  whether the work is part of the regular business of the
            hiring party;

            11)  whether the hiring party is in business;

            12)  the provision of employee benefits; and

            13)  the tax treatment of the hired party.

No single factor was determinative, leaving much to the discretion of the
fact-finder.  In that case the Supreme Court observed that because Reid was
independent, directed his own work, used his own tools, and generally
worked with no impact or interference from CCNV, he was an independent
contractor, not an employee.  So he owned the copyright.

      Enter Clifford Scott Aymes, a computer programmer. Mr. Aymes,
representing himself without a lawyer, convinced the United States Court
of Appeals for the Second Circuit that he was not an employee and that he,
not the company that hired him, owned the copyright on his work.  In AYMES
v. BONELLI, 980 F.2d 857, 1992 WL 351197 (2d Cir. 1992), decided December
2, 1992, the Second Circuit agreed with Mr. Aymes that because he wasn't
given employee benefits and was not treated as an employee for tax
purposes, he was *not* an employee of Island Swimming Sales, Inc. even
though he had worked there for two years.

      Mr. Bonelli, the President and Chief Executive Officer of Island, had
hired Clifford Scott Aymes to create a series of programs to maintain
records of cash receipts, physical inventory, sales figures, purchase
orders, merchandise transfers, and price changes.  Aymes worked at Island
on a semi-regular basis, but he was paid by the project and would submit
invoices for his work.  Unfortunately for Mr. Bonelli and fortunately for
Mr. Aymes, he had no written agreement with Mr. Aymes.

      Although Mr. Bonelli generally directed the design of the programs
by telling Mr. Aymes what he wanted from the programs, he did not have the
skill to write the program himself. Mr. Aymes alleged that he had an oral
agreement with Mr. Bonelli that his programs, called CSALIB, would only be
used in one location.

      Business was good for Island Swimming Sales, and Island installed
CSALIB on other computers at other locations. Mr. Aymes had also done so
well on the projects that he had performed for Island that Island did not
need as much work from him.  When Mr. Bonelli tried to cut Mr. Aymes'
hours, Mr. Aymes insisted on some $14,000 he was owed, plus payment for use
of his programs at other Island locations.  When Mr. Bonelli refused, Mr.
Aymes registered the copyright on the program in his own name and sued for
copyright infringement.  When Mr. Aymes lost in the trial court, he
appealed to the Second Circuit.

      The Second Circuit's opinion is very important for those who use
consultants to develop computer programs.  The Second Circuit, while paying
lip service to the existence of the other factors, said that you don't
simply give each factor equal weight. The most critical factors were (1)
the hiring party's right to control the manner and means of creation; (2)
the skill required; (3) the provision of employee benefits; (4) the tax
treatment of the hired party; and (5) whether the hiring party has the
right to assign additional projects tot he hired party.

      Although Island had the right to control the manner in which CSALIB
was created and could assign additional projects, the most critical issues
were Island's refusal to provide Aymes the same benefits as were provided
to other employees and its failure to treat him as an employee for tax
purposes.  That sunk Island:  "Island definitely and unequivocally chose
not to treat Aymes as an employee.  Island deliberately chose to deny Aymes
two basic attributes of employment it presumably extended to its work
force.  This undisputed choice is completely inconsistent with their
defense." The case went back to the trial court to resolve other issues.

      MORAL FOR BUSINESS:  If a programmer is not on your payroll and
classified and treated as an employee, have a written agreement specifying
ownership of the copyright on any work created by the programmer at your
request or in accordance with the agreement.  Don't simply recite that the
work will be a "work made for hire"; have the developer assign any
copyrights that may arise from work under the contract to you, the
employer.

      MORAL FOR SOFTWARE DEVELOPER:  Be wary of agreements like that
outlined above unless you are fully informed as to their effects. Consider
a license agreement contingent on payments and a royalty. If you are going
to assign your work, make the assignment contingent on payment as provided
under the agreement, and try to provide that the work reverts to you if the
employer no longer uses it.

      MORAL FOR BOTH:  Don't rely on a handshake.  Sit down and talk about
who will own what before the work starts, then write down the agreement and
have both parties sign it.  This will specify both parties' rights and
reduce disputes when the work is done.

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ABOUT THIS NEWSLETTER

LEGAL BYTES is a service to our clients and friends.  These articles are
intended to be summaries and brief discussions of emerging legal issues in
the field of computer law.  They are not intended to be exhaustive
discussions of the topics.  Because of their nature, they should not be
relied upon as legal advice or used as a basis for reaching a conclusion.

If you have ideas or topics you would like to see discussed in LEGAL BYTES,
drop us a line on e-mail.

ABOUT GEORGE, DONALDSON & FORD

George, Donaldson & Ford is a registered limited liability partnership
specializing in litigation and in counseling clients in a broad range of
practice areas, including computer law, copyright, trademark, trade
secrets, business, libel, invasion of privacy, and constitutional law.

Attorneys at George, Donaldson & Ford are not board certified in any
specialty.  No designation has been made by the Texas Board of Legal
Specialization for a Certificate of Special Competence in the area of
computer law.

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