Custom Software and Technology Development. Do You Actually Own the Deliverable(s)?

By: Ivan T. Kirchev and Derek C. Stettner

I.  Introduction
When a business “hires” a vendor and pays for the development of custom code or another deliverable, a common belief is that the business or customer “owns” the deliverable provided by the vendor. After all, if a business pays for office equipment, furniture, an automobile and a myriad of other items, a transfer of ownership is part of the transaction. However, every-day experience is not an appropriate guide when dealing with intangible property. This article provides an overview of the ownership rights of customers that purchase information technology development services.

II.  Default Ownership Rules
Intangible property (such as patents or copyrights) is not transferred merely because possession of an item changes hands. Software and other deliverables are protectable under intellectual property laws and these laws govern the ownership and right to use such items. While other laws can be important, copyright law is the focus of this discussion.

As a general rule, ownership of a copyright initially vests in the “author” of a work. Copyrightable works include works of art, novels, screen plays, music, marketing materials, technical drawings, specifications and software code. Copyright exists as soon as an author reduces the work to a tangible form (such as creating a file with source code). In other words, when a work is written down or otherwise set in tangible form, the copyright immediately becomes the property of the author of the work. Only the author or those deriving rights from the author can rightfully claim copyright. To transfer ownership, the author must sign a written agreement that expressly transfers or assigns his or her rights to another person or entity.

III.  Works Made For Hire
There is an important exception to the general ownership principles discussed above. Certain works are classified as works “made for hire.” Works made for hire are defined by federal law in the Copyright Act. If a work is properly classified as a work made for hire, then ownership does NOT vest with the author. Depending on the circumstances, the author’s employer or the entity that has contracted with the author, owns the copyright in the work. The statutory definition of the term “work for hire” does not cover “hand shake” or other informal transactions where a vendor is paid money to create a work.

The statutory definition of a “work for hire” is as follows:

1.  a work prepared by an employee within the scope of his or her employment; or

2.  a work specially ordered or commissioned that falls into one of nine classes: (1) a contribution to a collective work, (2) a part of a motion picture or other audiovisual work, (3) a translation, (4) a supplementary work, (5) a compilation, (6) an instructional text, (7) a test, (8) answer material for a test, or (9) an atlas, provided the parties expressly agree in a written agreement that the work will be considered a work made for hire.

In cases where a business hires a vendor to create a deliverable, the vendor is an independent contractor and not an employee. As a consequence, the deliverables of the vendor will not qualify as a work prepared by an employee. In such circumstances, statutory work for hire rule applies only if the work falls into one of the nine classes and the parties enter into a written contract. While “software” is not explicitly listed in the statute, certain software might be classified as audiovisual works. However, other software may not qualify for any of the statutory classes. So, reliance on the work for hire exception is unwise. 

IV.  Suggestions
Because default ownership rules favor authors (not buyers) and work for hire exceptions to ownership may not apply when purchasing technology services, it is critical that buyers enter into a written contract with their vendors. The contract must include a specific provision that addresses ownership of any deliverables that the buyer expects to own. The contract should also include license provisions that specify the rights of the buyer to use any deliverables that are provided by the vendor. In the absence of such an agreement, the buyer will most likely end up with no ownership rights and only an implied license of uncertain scope to use the deliverables. Since the ownership and license provisions can be complex, consulting an experienced lawyer can help ensure that a buyer receives appropriate rights in exchange for the remuneration paid to the vendor.

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