Software development companies should conduct regular audits of their intellectual property to fully understand the rights they own and to make sure they do not, unwittingly, infringe on the intellectual property rights of their customers and competitors.

Let’s go back to basics.

Software and other related work product (i.e. manuals and other documentation) are protected by copyright.  They may also enjoy other protections, such as trade secret, patents, and even trademark.

With these basics in mind, then, when a vendor develops a piece of software for a customer, who should own the intellectual property rights used and/or generated in the transaction?  The majority of developers would probably assume that the customer should own the IP under the “work-for-hire” doctrine, but that is not necessarily true.

Let’s peel this onion.

There are at least two types of materials that come into play in the development of a specific piece of software: (1) Materials (including source code) developed under the software development agreement; and (2) Pre-existing materials (i.e. prepared independently outside the scope of the software development agreement).

It makes sense that if the customer paid for the development, then it should own the IP rights in the software.  But the negotiating game does not end there.  Even where the developer is creating a brand new piece of software, there are situations where the developer may wish to retain at least some or all of the IP rights in the software.   For instance, where a developer incorporated its pre-existing materials to a custom-developed specific piece of software, it would be iniquitous to grant all IP rights in the software to the customer.  In this case, the developer should retain IP rights in the pre-existing materials, or can risk losing rights to pre-existing materials.

If a developer uses the same pre-existing materials with more than one customer, then it better own the rights to those materials — otherwise it is exposing itself and subsequent customers to infringement (because the first customer was given all IP rights (including pre-existing rights)).

There are many factors that come into play when negotiating this piece of the agreement:

  • Does the developer expect to use the same pre-existing materials with other customers?
  • Does the developer have a competitive advantage over competitors in using the pre-existing materials?
  • Is the developer giving away its competitive advantage by giving the customer all IP rights, and potentially allowing third parties access to the materials?

IP clauses in software development contracts are critical for the developer and for the customer.  The parties should not assume that the work-for-hire doctrine applies automatically just because the nature of the transaction.  Both parties should carefully analyze the transaction from a legal as well as from a business model perspective.

To avoid the above scenario with the pre-existing materials, software development companies should conduct regular audits of their intellectual property to fully understand the IP rights they own and to make sure they do not, unwittingly, give them away.

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