In JLM Couture v. Hayley Paige Gutman, the Second Circuit Court of Appeals has rejected a novel test developed by a Southern District of New York trial court judge in a case brought by Hayley Paige Gutman, a designer who had appeared on the TV show “Say Yes to the Dress,” against her employer JLM Couture. 

In granting her appeal, the court of appeals found there are no specialized rules governing the transfer of social media accounts, such as Instagram and Pinterest.  Instead, normal contract rules apply. 

Both individual founders of companies with a significant social media presence, and their successors who frequently contract to take control of such social media accounts, will welcome the ruling, which simplifies the determination of an issue that has often divided the founders of successful growing internet companies from their corporate backers.

The background to the dispute is straightforward:  Hayley Paige Gutman created the accounts in question well before JLM Couture entered into a detailed contract governing her employment as well as the use of the accounts.  In that contract, JLM Couture promised to pay Gutman a substantial salary, and she in turn agreed to contribute the results of her labors to the company; to manage content on the two social media accounts in question; and agreed not to accept competitive employment during the remaining term of the parties’ agreement.

The lower court found that Gutman had indeed breached the agreement, prompting JLM Couture to terminate both the contract and Gutman’s employment.  The lower court therefore enjoined Gutman from engaging in, promoting or advertising any business engaged in designing and/or selling bridal apparel, or even “identifying herself” to the public as a designer of goods that compete with JLM Couture for sale of its products until the restrictive covenant in Gutman’s contract expired.  The court also found that the company, not Gutman, had come to own the social media accounts by virtue of how the parties operated them.

On appeal, the Second Circuit affirmed the issuance of an injunction against much of Gutman’s conduct (but not all, as explained below), and reversed the lower court on most other issues before it, primarily whether JLM Couture had acquired ownership of the social media sites.  The court of appeals found that instead, when the company promised to pay Gutman’s salary, the parties merely agreed to various procedures by which Gutman would continue to post to the social media accounts.  The court of appeals rejected a more complicated six-part test developed by the lower court for determining ownership of social media sites, concluding that such property “should be treated in the first instance like any other form of property,” citing New York Court of Appeals precedents from 1805 and 1910. 

As a result, ownership of these assets will usually depend first on the social media platform’s terms of service at the time when the accounts were created.  Next, a court must decide whether the initial owner subsequently agreed to sell or transfer an account to someone else (here, to the employer).  Once again, the court of appeals reversed the lower court’s finding that the employer owned the website, finding no firm guidance in the parties’ contract for the notion that Gutman actually conveyed the accounts to her employer. 

As noted above, the court of appeals also ruled that the lower court should not have enjoined Gutman from “identifying herself as a designer of certain products.”  Citing “powerful considerations of public policy which militate against sanctioning the loss of a man’s livelihood,” the court dissolved the injunction against Gutman, ordering the lower court to reanalyze whether the restrictive covenant was justified by a “unique and extraordinary” employee, and whether its five-year term was longer than courts will enforce, in light of the policy issues described above.

Owners of significant social media accounts have welcomed the ruling, which avoids the adoption of special rules for determining who is the owner or a social media account.  Provided parties make plain in their contracts when the actual owernship is being transferred, rather than merely allocating responsibility for operating an account, the Second Circuit’s ruling should help guide both the founders of businesses with social media accounts, and those who unambiguously acquire rights in those accounts via contract.