Software copyright and contractors: the importance of assignment arrangements

In this month’s commercial law article, we look at how businesses can retain the rights to computer software developed on their behalf.

I read somewhere an analysis of what lock-down would have been like in 2005 before the launch of smart phones. The key point was that it has only been 15 years since no-one had a powerful technology device on their person most of the time and lock-down would have been a whole lot worse.

Now that most of us do have smart phones, we expect every business to have some form of virtual presence that we can access from nearly everywhere. This means that every business needs to engage with software as a way of communicating with their stakeholders through websites and apps.

Software is, at its heart, a (long) series of written characters that give instructions. In order to protect software from copying, the owner needs to rely on copyright protections.

The copyright arises because a computer program is defined as an original literary work and is protected from copying for a period of time. The work is original if it is the “author’s” own creation. In this case the author is a software developer or “coder.” Copyright protection goes further than the source code, and can be used to protect the graphical design elements, database deployments, text, images and sounds used to create the overall functionality of the product.

What does a business need to do, to protect its copyright?

On one level, the answer is nothing. Copyright springs up automatically upon the creation of the work. Businesses can choose to use the © symbol to reinforce that work is copyrighted but there is no need to register copyright with an authority to be entitled to protections.

However, if it were that simple, I would not be writing an article about it! The difficult issue is ensuring that the copyright belongs to the correct legal entity. This is particularly important when working with contractors, be it larger “agency” style contractors, or individual temporary workers.

Corporate entities, such as companies, partnerships and sole traders are unable to be authors in the sense they cannot pick up a pen or type – instead they rely on their humans (this is beginning to sound like a “Far Side” cartoon) to author for them. If the humans are employees of the corporate entity, the copyright automatically passes to the employer, subject to so-called “moral rights” to be identified as the author. However, if the people are working under a contract for services, by default the contractor owns the copyright in their outputs.

The contractor pitfall

And therein lays the problem. Lots of businesses will work with contractors for the provision of software development. In lots of cases, software development won’t be a core activity for the business – it will be incidental, related to marketing or making the business more efficient and it will make sense to outsource this. In other more technical or engineering businesses, the software developed may be a fundamental part of their product offering and form part of the business’s key assets and contractors are used to flex the workforce when priorities or business conditions necessitate. Either way, the business will have specified what they want and they will have paid for the deliverables, but they will not own the copyright (sometimes broadly referred to as the intellectual property or IP) unless express steps are taken to transfer ownership.

If the agreement appointing the contractor is silent on copyright, a licence will be implied into the agreement in order to make the agreement work. But the licence will only be as wide as necessary to enable the agreement. A licence is not the same as ownership and may be limited to a narrow use and not necessarily allow sub-licencing to customers or other third parties. This causes inflexibility and can be highly damaging for technology and engineering companies.

In addition, should the business wish to change service providers in the future, they may find that they cannot access the software code or systems without paying further charges to the original contractor. Another potential problem arises if the owners of the business wish to sell or raise finance. The new owner or funder will value the business less if the IP ownership is not clear-cut or subject to ongoing fees to third parties.

Contractual Remedies

Copyright can be simply assigned in contracts of appointment. An assignment must be in writing, verbal agreement is insufficient.

Particularly when working with agencies, there may be complications to assignment arrangements, where the agency regularly reuses a library of software that has been developed for repetitive functions (for example a shopping basket utility) or where the contractor is themselves using or integrating a licenced product into the software.

When entering into a software related agreement it is important to check whether any components are subject to a third party licence and if so, on what terms. Make sure to understand what elements of the deliverables can and will be assigned to you as part of the arrangements.

When working with freelance contractors, it is good practice to include a standard assignment clause in the contract of appointment. This also applies to directors and owners of businesses who might (for tax and structuring reasons) not technically be employees.