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Justices rule on Web IP issue

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In a suit between a company and the marketing firm that created and hosted its Web site, the Indiana Supreme Court determined the Uniform Commercial Code doesn't apply and the marketing firm may collect for its work under principles of common law contract. The high court also held copyright law supports ownership by the designer in a counter-claim alleging conversion of the intellectual product.

The high court affirmed the judgment in favor of Gray Loon Outdoor Marketing Group, Inc. in its suit against Piece of America for non-payment of Web design and hosting fees and against Piece of America in its counter-claim for conversion.

POA hired Gray Loon to design and publish its Web site; Gray Loon completed the project in December 2003 and was paid in full by POA. Later, POA verbally requested changes be made to its Web site without requesting a proposal or quote. Once Gray Loon made the requested changes, POA said it didn't want to implement the changes. Gray Loon tried to recover the fees to make the changes, but POA didn't pay the invoice or the monthly hosting fee. After several months, Gray Loon took the Web site offline.

In Dennis Conwell and Frank Splittorff d/b/a Piece of America v. Gray Loon, No. 82S04-0806-CV-309, the high court had to determine which law applies in interpreting the agreement between the parties; whether the applicable law recognizes a contract here and whether POA should be required to pay Gray Loon; and whether Gray Loon committed conversion by taking down the Web site and not making a copy of the original site for POA.

Using the conventional "predominant thrust" doctrine to decide whether a transaction involves the transfer of goods or performance of services, the Supreme Court ruled the Uniform Commercial Code didn't apply because the arrangement between POA and Gray Loon contemplated a custom design for a single customer and an ongoing hosting relationship, wrote Chief Justice Randall T. Shepard. A Web site created under arrangements calling for the designer to fashion, program, and host its operation on the designer's server is neither tangible nor movable in the conventional sense.

Examining Gray Loon's claim for payment under common law principles, the trial court was correct to enforce the agreement even though Gray Loon hadn't provided a cost estimate for the Web site changes. The original contract didn't explicitly call for changes in writing. In addition, POA asked for changes and didn't ask how much it would cost and there's no evidence Gray Loon tried to force POA into paying an unreasonable fee, wrote the chief justice.

The justices determined Gray Loon was an independent contractor rather than POA's employee, so the Web site wasn't a "work made for hire" under the Copyright Act of 1976, which would have given POA ownership of the site. The Supreme Court also ruled the language in Gray Loon's proposal indicating the company's philosophy that clients purchase goods and services from Gray Loon and "that inherently means ownership of those goods and services" doesn't carry the weight and certainty required by the Copyright Act. In addition, POA had a nonexclusive license, which doesn't constitute transfer of ownership rights. Since POA never had ownership of the Web site, it can't bring a claim for conversion, wrote Chief Justice Shepard.

Justice Theodore Boehm concurred in result with a separate opinion, agreeing with the majority's analysis and conclusions on the record in the case, but he wrote separately to explain why he agrees POA isn't entitled to relief for "what amounts to a destruction of the website it had paid Gray Loon to construct." Because the first version of the Web site was paid in full, POA therefore acquired an irrevocable license for the Web site which Gray Loon dishonored when it performed its updates, wrote Justice Boehm. Gray Loon should have preserved the original version of the Web site and POA retained its right to access those files under its nonexclusive license, he wrote.

"Whether POA had any damages from Gray Loon's breach is a matter of speculation on this record. POA elected to pursue only a conversion theory, presumably in hopes of treble damages and attorney fees in this dispute over an amount that surely is dwarfed by the cost of this litigation," he wrote. "Similarly, when Gray Loon sued for its fees, POA did not assert breach of its license as either an affirmative defense or set-off."

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