Custom Developed Computer Systems: Who
Should Own What and Why - A Survey of Business and Legal Considerations
By Eric S. Freibrun, Esq.
"I'm paying you to develop this
system and I don't own it all?"
Software developers/system integrators
often hear this question from their clients for whom they develop large-scale custom
computer systems. But the issues of ownership is rarely an all-or-nothing proposition.
A major system development effort often
involves the integration of custom-developed software with existing programs, either
proprietary to the developer, the client or a third party. The developer, acting as system
integrator, typically:
* creates the necessary custom software
* procures required third party
proprietary software (perhaps providing its own as well) and hardware
* puts them all together so they work.
This article assumes that legal counsel
is involved and is well-versed in computer and intellectual property law, and that a
written contract will result. The absence of a written agreement guarantees uncertainty
over critical ownership issues and invites future conflict.
The developer's client expects its system
investment to provide a competitive advantage. It feels it must "own" the system
to restrict the developer from creating a similar one for its competitors. This often
entails prohibiting the developer from further using any new system development techniques
it may have acquired while working for the client. The developer, on the other hand, will
want to use elsewhere the processes, techniques and know-how underlying the code created
for the client and, possibly, the code itself.
How Should These Opposing Positions Be
Reconciled?
Custom Developed Code
Software in source and object code form
is copyrightable as a literary work. 1 Ownership of the copyright vests initially in the
work's author.2 Since the developer will usually be an independent contractor, not an
employee of the client, the custom software it creates is not a work made for hire
automatically owned by the client as employer. Absent a written assignment, and because
software is not among the items deemed works made for hire under the Copyright Act, the
developer arguably owns the copyright.3
Nevertheless, the client often expects
to own the copyright. The developer, meanwhile, may wish to reuse the code for other
purposes, believing it owns the copyright. Clearly, this issue must be resolved and stated
in the written agreement. If it is not, further assignment of the code to a third party by
the developer may result in a very upset client, and worse, a legal dispute.
Copyright law protects the physical code
(and documentation), not the underlying ideas. The copyright owner, has the exclusive
right to copy, distribute and modify the software.4 In general, development agreements
grant the copyright to the client, who reasonably expects to have exclusive rights for the
fees it pays the developer. (Copyright is one of the more obvious attributes of
ownership.) The developer may wish to negotiate retention of the copyright in order to
license the actual or modified code to others or use it to develop further software for
its own purposes. As an inducement to the client, the developer might reduce its
development fees.
In addition to the copyright, the client
will often seek to own all concepts, techniques and know-how underlying the software,
precluding the developer from adding to its knowledge base what it learned while working
for the client. Sometimes, the developer's pre-existing proprietary concepts will be
excluded from the ownership grant and the client licensed to use them.
Granting the client ownership of all
intellectual property rights underlying the software amounts to a non-competition
restriction of unlimited duration. This is not justified by the usual development fees. If
the developer cannot own or retain broad rights to use the concepts underlying the code,
its skill level is frozen at the beginning of the project. This is an unreasonable
restriction on the developer's business, inevitably leading to higher development costs.
If the client owns the copyright, the
developer cannot deliver the same or substantially similar code to anyone else. The
client's "lead-to-market" is thus reasonably protected. The developer must still
develop original non-infringing code for the next client needing a similar system.
The developer should also own whatever
patentable inventions result from its work. Inventions created by the developer are more
likely to have been built upon the developer's experience and know-how and relate to its
business - information technology - than the client's. The client should be licensed to
practice the invention as reflected in the software. If the client pays for the patent
rights, the developer should be licensed to practice the invention to enable it to enhance
its competitive position in its market.
Any forfeiture of rights preventing the
developer from using ideas, techniques and know-how specific to its information technology
practice should be agreed to by the developer only if the developer is additionally paid
for the resulting lost business opportunities.
Third Party Proprietary Software
The custom-developed software provided by
the developer will often work with or include pre-existing software owned by third
parties. The client will be licensed the right to use it by the vendor, or by the
developer as authorized sublicensor. The vendor's ownership of the software will usually
not be at issue.
If third-party software requires custom
modification for the client, and the client pays for it, ownership issues arise similar to
those involved with custom developed code. In this situation, however, the copyright to
the modification, a derivative work of the underlying program, should remain with the
vendor. If the vendor relinquished the copyright, it would lose the ability to use the
newly-created code in subsequent versions of its product.
If the third party software vendor
further relinquished ownership of the modification's underlying intellectual property
rights, it might risk jeopardizing the trade secret status of its software, since the
modification will likely reflect the base program's trade secrets. The vendor should own
and have unrestricted use of the modifications to its code, absent additional compensation
beyond the costs of its development.
Developer Proprietary Software
In many cases, the developer will have
preexisting proprietary software that may be useful to the client in operating the system.
These may be application products or computer assisted system engineering (CASE) tools.
The client's right to use them will usually be stated in a separate license agreement with
the developer. The discussion above regarding third-party vendor software and custom
enhancements is relevant for any proprietary products supplied by the developer.
Conclusion
The developer, its client and third party
vendors need to apportion ownership rights to a complex system's various components to
enable each to achieve their reasonable business objectives. This article summarizes only
a few of the frequently arising issues and varying perspectives of the parties. The task
of helping the parties resolve their competing interests - and putting it in writing -
falls to the intellectual property/computer lawyer who understands the benefits his or her
client should reasonably expect from its information technology investment.
1. See Apple Computer Inc., v. Franklin
Computer Corp., 714 F.2d 1240 (3rd Cir. 1983); GCA Corp. v. Chance, 217 U.S.P.Q. 718
(1982) Copyright L. Dec. (CCH) Par.25,464 (N. Cal. 1982).
2. 17 U.S.C. Sec 201(a).
3. Id.; 17 U.S.C. Sec 101; See also CCNV
v. Reid, 109 S.Ct. 2166 (1989), which describes the analysis to determine copyright
ownership of a specially commissioned work prepared by one not a formal salaried employee
of the commissioning party.
4. 17 U.S.C. Sec 106.
Attorney Eric Freibrun specializes in
Computer law and Intellectual Property protection, providing legal services to information
technology vendors and users. Tel.: 847-562-0099; Fax: 847-562-0033; E-mail: eric@freibrun.com.
Copyright © Eric S. Freibrun, Esq., Law Offices of Eric S. Freibrun, Ltd. All rights
reserved.
