This week, the US Court of Appeals for the Second Circuit vacated portions of the US District Court for the Southern District of New York’s decision in the JLM Couture, Inc. v Hayley Paige Gutman case. Among other things, the case involved the determination of social media account ownership and the enforceability of non-compete obligations in the aftermath of the employment relationship breakdown between fashion designer and social media creator Hayley Paige Gutman and her former employer, JLM Couture.
To determine ownership of the social media accounts at play in the case, the Southern District of New York had proposed a new 6-factor test. The Second Circuit rejected this test stating that traditional principles of property law were sufficient for resolving the question of ownership, explaining that, “the analysis of social-media-account ownership begins where other property-ownership analyses usually begin—by determining the account’s original owner. The next step is to determine whether ownership ever transferred to another party. If a claimant is not the original owner and cannot locate their claim in a chain of valid transfers, they do not own the account.”
The Second Circuit noted that the lower court erred in failing to consider who the original owner of the account was, stating that if Gutman created the accounts at issue using her personal information and for her personal use then she owned them at creation, though the other party may have later taken ownership by operation of the contract between Gutman and JLM. The Court emphasized the distinction between ownership rights in the content displayed on the accounts and those of the accounts themselves, stating that even though Gutman may have transferred ownership rights in some of the content, this did not automatically result in the transferring of ownership rights in the account. Interestingly, the Court found ownership of social media accounts cannot be inferred by factors such as (i) the ability of others to assist in the management of a social media account and (ii) whether a party holds themselves out as owning the account.
The Second Circuit narrowly interpreted the coverage of the definition in the Gutman employment agreement of Gutman’s works that were to be assigned to JLM. The court found that the specific items listed in the definition (i.e. “designs, drawings, notes, patterns, sketches, prototypes, samples, improvements to existing works”) were closely related and held that the catch-all terms (i.e. “any other works conceived of or developed by [Gutman] in connection with her employment with the Company involving bridal clothing, bridal accessories and related bridal or wedding items”) must be interpreted to “embrace only objects similar in nature to those enumerated by the preceding specific words.” Since social media accounts were not similar in nature to the specific works listed in the definition, the lower court erred in concluding that they were assigned to the JLM by virtue of the contract.
The Second Circuit also found that the lower court erred in granting a preliminary injunction based on the non-compete clause in Gutman’s employment agreement because it failed to first consider whether or not the non-compete clause was enforceable under New York law. The Second Circuit emphasized that such clauses are generally frowned upon in New York as a matter of public policy and should be carefully scrutinized prior to enforcement. The Second Circuit remanded the issue to the lower court directing it to consider “(1) [whether the five-year term] is reasonable in duration, (2) whether JLM has made a sufficient showing that it has a legitimate interest warranting enforcement of [the clause], and (3) whether its interpretation of [the clause] is reasonable in scope and not overly burdensome on Gutman.”
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This holding is important for creators and their employers alike. Prior to entering into a working relationship it is imperative that both parties are on the same page as to who will own what and the written agreement accurately describes these intentions. Additionally, employers should take care to ensure that their non-compete clauses are carefully drafted, both in duration and scope, and understand that they’ll need to demonstrate a legitimate interest in the enforcement of these clauses.