Do You Own Your Code?
We recently did work for a client who told us a horror story about their previous software development company. They hired this company to build a custom CRM (Customer Relationship Management). They thought they owned this new CRM outright, and could do what they wanted with it, but they later learned the final product was actually owned by the software developer. Nothing stings quite like spending a boatload of money creating something and learning you don’t own it. Lawsuits were filed and trouble followed.
So, if your company is using outside help to create a website or build custom software of any type, don’t assume you own the work product just because you’re paying someone to build it. Here’s what you need to know about ownership in custom software contracts, and what to do to protect your business or organization.
The basic rule is that the person who writes the code or does the design work is the owner of the copyright in that work, unless one or two things is true: (1) if that person is a W2 employee whose job is to do those things, the employer owns the copyright in the work, (2) if there is a written and signed contract that makes the copyright someone else’s.
Here are a few examples of how you might deal with the copyright ownership issue in your own development agreements.
Types of Software Agreements About Copyright
There are four general options for copyright ownership in software contracts:
- The company developing the software retains all ownership of the code they write for their client and grants a license to the client to use it.
Sometimes this license can be rather restrictive and not in the best interest of the client. This is the option that you as a client should be on the lookout for. We recommend that you steer clear of this type of agreement if you want to own the work outright. However, if the software company is planning to resell the software to other clients AND you are getting a steep discount on the work, this type of contract could be useful to offset an otherwise expensive project.
- The company developing the software assigns all ownership for the software project to the client.
This is definitely the most favorable option for the client as the client gets complete ownership of code.
- The company developing the software retains all ownership of the code they write for the client, but grants a non-restrictive license to the client to use and modify the code as needed.
This option is a middle ground of sorts where the development company keeps ownership of the code, but grants a license that is not restrictive which allows the client to basically use the code as needed by their organization. The reason a development company would go this route is because it would allow them to reuse code in future projects which helps keep costs down.
- The company developing the software assigns all ownership of the code they write for your software project to the client, but the client grants a perpetual license to the developer to use and modify the code in future projects.
This option is a variation on the third option with the difference being the client gets ownership of the code and grants a non-restrictive license to the development company so they can reuse code in future projects.
These are somewhat simplified descriptions, and obviously each project has its own details to figure out. Make sure, for example, that you know what each parties’ rights and responsibilities are for any open source components, or pieces and parts that might be licensed from third parties as part of the build.
At L+R, our contracts typically use options 3 or 4. This allows our clients to get unrestricted use of the software for their needs and we get the ability to re-use code in future projects helping to lower development costs in the future. In fact, your project with us will possibly benefit from these cost reductions. Win - win.
What to Ask Your Software Developer
Once you have a contract in your hands, you should know who owns the final software. But that’s often the final stage of the negotiation process. Save yourself a last minute surprise and ask your software developer these questions:
- Who owns the final software?
- After the software is complete can I use another vendor (or in-house staff) to make changes to the software?
- Do you plan to ever re-use the software or any part of it for another client?
- What, if any, open source or licensed components are going to be included?
Most software developers should be able to easily answer these questions without any pushback. If they hesitate to answer any of those 4 questions you might want to consider another vendor.
How to Protect Yourself From Bad Software Contracts
All things being said, we are software developers, not attorneys. Ultimately, you need a good attorney, preferably with experience writing software contracts, to review any contract you sign. Don’t depend on the software developer or their attorney to write a contract on your behalf.
Special thanks to Chris Gatewood of Threshold Counsel PC for reviewing this article.