In the previous blog post, we discussed the ongoing bankruptcy litigation between Crystal Cathedral Ministries and its founder Dr. Robert Schuller over the rejection of his Transition Agreement.  That contract purported to spell out the relationship between the parties as Dr. Schuller stepped aside from his post as senior pastor.  The determination of whether that agreement was intended to be an employment agreement, and subject to the strict limitations of section 502(b)(7), or a retirement benefit which is not so limited, is pending before the Supreme Court.  However, Dr. Schuller’s case also presented other interesting issues that could be instructive for other employers.

            In addition to his claim for damages based on the rejection of the Transition Agreement, Dr. Schuller sought compensation from tCrystal Cathedral (the bankruptcy debtor) in an undetermined amount, for allegedly improper use of his intellectual property.  The intellectual property, which consisted of more than 35 years of books, sermons and other writings, had been produced by Dr. Schuller while he was employed by the debtor as its senior pastor.  Dr. Schuller, individually and through a wholly owned corporation, asserted a copyright to these materials.  Under the Transition Agreement between the debtor and Dr. Schuller, the intellectual property was made available to the debtor for use pursuant to a royalty free license. 

During the bankruptcy case, Dr. Schuller filed a variety of claims, including one in which he asserted that the debtor’s dissemination of his works through a website was a broader use than the parties had contemplated in the Transition Agreement.  He claimed that this broader use of the materials was beyond the scope of the license, and that the debtor was liable to him for its infringing use. 

            At the hearing on the plan administrator’s objection to his claims, the bankruptcy court reviewed this claim in light of the elements required for successful infringement litigation.  During his testimony, Dr. Schuller could not detail a single adverse use of his materials.  Nor could he ascribe a dollar value to the harm caused by this allegedly infringing use of his intellectual property.  As a result, the bankruptcy court concluded that Dr. Schuller had not met his burden of proof in establishing his claim, because there was no basis upon which the court could assess damages. 

            The bankruptcy court went further and considered whether a claim could possibly exist assuming Dr. Schuller could prove any infringing use of the intellectual property.  In so doing, the court noted that no formal copyright existed for Dr. Schuller’s work on the Hour of Power, a televised program produced by the debtor.  The court also evaluated whether Dr. Schuller could obtain a copyright on his work for that program.  In reaching the conclusion that Dr. Schuller would not be able to assert a copyright for the intellectual property, the bankruptcy court found it was “work for hire.” 

            Under the Copyright Act, ownership of a unique work typically vests in its author.  There are exceptions.  For example, if the intellectual property was specifically commissioned as a part of a collaborative project, it becomes part of the project and belongs to the party who commissioned the work.  Another exception exists for “work for hire,” which is intellectual property created by an employee in the course of his or her employment and, consequently is owned by an employer.  The bankruptcy court found that the intellectual property at issue had been created by Dr. Schuller in the course of his employment by the debtor.        

            Applying the principals of agency law as directed by the U.S. Supreme Court in Community for Creative Non-Violence v. Reid, the bankruptcy court found that Dr. Schuller was an employee of the debtor and that his work on the Hour of Power used the instrumentalities and resources provided by the debtor.

           It is easy to see how Dr. Schuller could have believed he was the owner of the intellectual property generated in connection with the Hour of Power.  The debtor had never asserted ownership of this intellectual property before the claim litigation.  Dr. Schuller, for his part, had never sought royalties from the debtor for its use of his intellectual property.  However, this cozy relationship may have created the eventual conflict, because neither party felt the need to clarify the ownership issues.  Given the confidential relationship between Dr. Schuller and Crystal Cathedral Ministries, it would have been difficult for either the debtor or Dr. Schuller to have directly asserted ownership of the intellectual property.  Decades of congenial use put the parties at ease with one another, so the question of ownership appears to have never been actually addressed between them. 

            This case illustrates how easy it is to blur the line between an employee’s intellectual property and that of an employer.  Content creation is continual for many new economy businesses.  Many online businesses have intellectual property as their principal assets.  Moreover, the founders of these ventures frequently have many “ideas” floating around.  If a founder contributes intellectual property to the venture, the documents governing the contribution should plainly specify whether it is by royalty-free license or by outright transfer of the interest. 

            In addition, agreements between the parties should clearly indicate whether future developments made by the founder will be “works for hire” or if the individual will be free to have other intellectual property which is not an asset of the enterprise.  To address these issues, organizations should have employment agreements, or other arrangements with founding investors which clearly set forth the governing rules.  Also, these arrangements should be reviewed periodically and adjusted to reflect any changes that may have occurred in the relationship between the parties.

            In our next installment in this series, we will discuss other aspects of the employment relationship and ways to minimize the impact of the filing of a bankruptcy proceeding on executives, and actions a debtor can take prior to a filing that will make retaining key individuals during the reorganization process easier.