Outsourced Software Development - Who Owns The Code?


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When Philip Roth wrote that "The road to hell is paved with works-in-progress", I wonder if he was thinking about contracts for the development of custom software. When a development project is successful, the world smells like roses. When it fails, well, you know the rest.

Good relationships don't just happen - they are the product of discussion, negotiation and commitment. If we succumb to the temptation of an agreement that's more like a one night stand, trouble is likely not far off.

In North America, tradition says that a good agreement will ward off most evils. Our Asian neighbours, on the other hand, place more reliance on longstanding business relationships. A thoughtfully negotiated contract, combining both, can make a big difference.

Client and software developer alike want a product that has been effectively created with regard to quality, time and cost. An awareness of the relevant issues and how they impact on each other can make the development process more productive and profitable for everyone. So, what are some of the issues?

Copyright is usually the main property right arising out of the development process. Copyright protects the way in which an idea is expressed - it does not protect the idea itself. It arises automatically, although there can be advantages to registering your ownership. In Canada, copyright generally lasts for the life of the author plus fifty years. Traditionally, copyright protection of software has followed the rules governing literary works, although a separate body of rules is developing.

In most cases, a software developer will prefer to license rather than transfer copyright to the client. Clients are usually more interested in preventing others from using the software - in the belief that it makes them more competitive. This is usually expressed by the client as a desire to own the copyright.

Conventional wisdom in our property based society is "if you pay for it, you own it". But this does not take into account that custom software is often built on portions of software previously developed for others. In other words, the solution for the client is likely based at least in part on prior work --and that the developer intends to use the routines and other components in future projects. More than one software developer has unwittingly transferred part of it's library of software when agreeing without clarification that the copyright in custom software belongs to the client.

The astute developer will recognize and discuss with the client the extent to which ownership of the copyright will accomplish the client's goals. For example, sometimes this issue can be diffused by showing that outright ownership does not operate as a significant barrier to entry for competitors.

As the law becomes clearer as to what parts can actually be copyrighted and which cannot, the parties discussions will also be affected. The present discussion assumes the software is copyrightable in it's entirety.

Having said that, ownership of the property rights in custom software is often left to chance. If nothing is said, a number of rules apply.

The author of a work is the first owner of the copyright. When an employee creates the custom software, the copyright belongs to the employer. If a consultant or outside contractor writes the custom software, the copyright belongs to the contractor. A provision of the Copyright Act provides that copyright in works prepared under the supervision of Her Majesty belong to the Crown.

Fortunately, all of these rules can be modified by agreement.

Some rules are more obscure. When taking an assignment of a copyright from the original author, the Copyright Act restricts an absolute assignment to the life of the author plus twenty-five years. The last twenty-five years of the copyright belong to the author's estate -- as the assignees of the composer Gilbert of Gilbert & Sullivan found out to their chagrin. It remains to be seen if this result can be avoided through legal artifice.

Some strategies that can be used to bridge the gap between developer and client include agreements that the custom software will not be sold to others in substantially the form delivered to the client. A developer might also agree not to assist a competitor of the client in developing a similar solution -- a variation of a restrictive covenant. These solutions have a potential real cost to the developer, however, which should not be overlooked.

My experience is that few developers include in their quotes compensation for giving up various property rights. The client may be asked to pay a premium for the additional property rights you are asking for. This approach has the advantage of expressing the issue in a way that permits a cost to benefit analysis.

Sharing these negotiating agendas can prevent these issues from becoming a block to concluding an agreement.

Whether an owner or licensee, it is in everyone's interest to ensure that agreements are in place with the authors of the software.

An author of software also possesses "moral rights". These rights prohibit the use of the copyrighted work by the owner in a way that would damage the reputation of the author. Until recently, these rights have been viewed as relevant more to literature and other art forms than to software. Prudence suggests that waivers of these rights be obtained in all cases.

Legal title to software also depends on a chain of ownership going back to the author. Before assuming that no one else has an interest in the code, some investigation is advised. This can be important if components of other software are being used in your project. Commonly, there are also missing links in the chain of title that can easily be remedied. For those needing motivation, this issue commonly comes up when you are selling the software, or even your company, outright. The purchaser will want to know you own, without encumbrance, what you are selling.

Client and developer can also use this as an opportunity to ensure that any desired restrictive covenants and confidentiality agreements are in place with the people involved in the development process.

Many years agoBill Gates, in his column Billionaire Bytes, wrote "The global marketplace is the one that really matters". Much of the literature in Canada makes reference specifically to U.S. law. Make sure that your agreement corresponds with the law in the country where you are doing business.

Regardless of who owns the copyright, one party is likely to end up with a license to use some or all of the software developed. The extent to which the license permits use of the copyrighted portions of the software can be very important- - to the end user and to the developer. Reference to a good shrink wrap license is a good starting point for exploring the issues.

Even by addressing just these issues up front, the developer and the client will have set part of the foundation in place for a successful project - and better yet, an ongoing relationship.




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