This article has been written by Shubhodip Chakraborty pursuing a Diploma in Technology Law, Fintech Regulations and Technology Contracts at Lawsikho. 

This article has been published by Sneha Mahawar.

Introduction

The advent of the computer system brought about a new landscape of innovation in the world of technology and has been almost single-handedly transforming the technology and network space. Any computer is run by two operative platforms, the software and the hardware. From a layman’s point of view, we can put it across as the hardware being the tangible component and the software being the intangible component. Any intellectual property which is granted to either of these components is also different from one another. Often, such hardware components can have protection under the patent laws of the country considering it pertains mainly to the physical devices, which may include computer systems or computer components such as disk drives, memory chips, bus architectures, and monitors. Accessories for computers, such as a keyboard with improved construction, are also suitable for patenting. However, most of the laws regarding IP Rights or, for emphasis, the IP Rights ownership of software are still clouded with several intricacies. Any form of intellectual property rights seeks to reward innovation, novel, and creative ideas for the exclusivity and change it brings to the creator’s innovation.

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In this article, we will discuss the idea of copyright protecting the software, and the laws surrounding the same as in who is the rightful owner of the software, and we will also look into the aspect of on whom the IP ownership vest when software is built by an employee of a company. Lastly, we would be discussing and putting forth some of the considerations that need to be undertaken before engaging a software development company to build the software for one’s needs.

Copyright protection of software

Generally speaking, software is protected under copyright laws, with the person who writes the software’s source code or the author being vested with the ownership of copyright over the software. Copyright does not protect the idea or the facts alone, but it protects the way or in the manner, it is expressed and put across in a tangible form. Therefore, only the final tangible medium of expression that can be reproduced is granted copyright protection.

Historically, computers and computer programs were not granted any such copyright protection because, until a time, computer programs were viewed as intangible objects. The copyright laws were further extended to include machine-readable software codes with the same copyright status as ‘literary works’.

The Copyright Act of 1957 includes computer programs, tables, and compilations including computer databases as a part of the definition of ‘literary work’. Section 13 of the Act provides for the categories of work in which the copyright subsists which includes original literary work.

As per the Indian Copyright Act of 1957, computer software that does not lead to a technical effect is granted protection under copyright law. For granting copyright protection, computer software is required to be original and sufficient effort and skill must also be put into it to signify its originality.

Copyright and your development company employees and contractors

As discussed above, unlike other IP rights such as patents, trademarks, etc. copyright does not require a formal registration to own the IP right over the work. Although, formal registration of the copyright has its advantages in the case of proving IP rights in the courts in cases of disputes. infringements, etc. Thereby, the copyright over work vests upon the author upon creation of the same.

In a software development company or any other company, there are two sets of workers or individuals who help in building software or aid in providing the services. The employees are the ones who have been hired to perform the tasks and are on the payroll for their daily performance at work. The other set of workers are the contractors or freelancers, who are hired to provide a particular or specialized service and the completion of such service entails the freelancers or contractors being eligible for a certain fee from the company, thereby their contract with the company coming to an end. The company enters into an agreement with both of these sets of individuals, wherein a clause relating to the IP assignment clears the air as to who owns the IP right when performing services for the company. 

Typically, employers would enjoy the right of ownership of any IP right created by their employees. A separate IP assignment contract may be entered into with the employee. However, the usual practice has been to include the assignment rights under the employment agreement. The software or any such material which is created by the employees is considered to be work made for hire. Thus, the ownership lies with the employers upon creation. The IP assignment clause under the contract is very carefully drafted to ensure that no IP remains with the employee for any creation. 

For a software development company, if an employee writes the code of software, even despite being the author, the copyright for such work would remain with the employer or the company. However, it would be interesting to understand a scenario wherein such an individual has created a software code in his capacity during the official working hours of the company he is employed with. In such a scenario, a company or the employer may have a claim over the software if it falls within the scope of his employment, i.e., if it is related to the industry or scope of services the company performs. A company may also choose to involve freelancers or vendor contractors to perform services for them or even to develop software for the company. In such a case, it is always better to safeguard the IP rights of the company by entering into a work-for-hire agreement with such freelancers, with the freelancers transferring any such right of ownership over the work, created specifically for the company to vest with the company itself. It is upon the company to be aware of the same and ensure such a contract is entered upon with the freelancers. In the United States, there are no mandates that any of the work created by the freelancer, would result in a work for hire unless a contract specifically mentions the same. Therefore, it becomes essential for any company engaging any freelancers, vendors, or contractors to enter into a separate contract wherein the ownership of the IP rights is transferred to the company.

When to have the conversation about copyright with your development team

In the interest of both parties, it would be the best practice to discuss at the very initial stage regarding whom the copyright should vest. Ideally, an in-house software development team consists of individuals who are their employees; thereby they ought to have an IP assignment clause under their employment agreement. However, if they have not agreed upon such a clause, the employer should ensure an IP assignment agreement is entered upon with the development team. Such assignment and ownership of copyright will come into effect upon completion of the development of the software. It is also noteworthy, that such an agreement should explicitly state that it was a “work-made-for-hire”. If any developer would like to have any right to use the software at a later stage or in different projects, the developer must negotiate a license to the software in the same way any third-party would. Therefore, every well-written software development contract will contain a clause designating the code a work-made-for-hire, assigning the code to the client on completion, or granting the client a license to use the code on completion.

Considerations when engaging with a software development company

It has been observed over the years that the biggest software development companies have started engaging external software development teams in order to produce or develop software for them. These companies have perceived various managerial and technical benefits in outsourcing the work by engaging other vendors. However, such benefits also welcomed certain legal concerns which have been overlooked by the market players. Therefore, it becomes crucial for any company which is looking to engage an external party to develop software for them to have a certain checklist in order to prevent such legal ramifications. We have chalked out some of these considerations which need to be delved into before or while engaging a vendor. 

a. Contractual 

One of the foremost important considerations that need to be decided upon by the management would be whether to enter into a formal contract or not with the external party. Entering into a formal contract would lay the foundation for all the other points to follow and would thereby assist in ensuring that certain essential elements are captured and not laid to rest upon a verbal discussion.

b. Ownership

As discussed in this article above, it becomes very crucial to understand and decide upon whom the ownership of the software and the IP rights vest. Both parties should discuss and broach upon the aspect of who would be the owner of the technology and also the intellectual property that would result in the full development of the particular software. However, it may so happen that there would be specific pre-existing IPs or background IPs of these vendors, which may not be transferred to the company considering those are explicitly owned by these vendors.

The aspect of ownership does not end with only deciding upon the owner but also any restrictions that come along with it. Such third-party vendors may be restricted from not disclosing to any other third party, and it shall not be subcontracted to others, etc. 

c. Control of intellectual property

It may be put forth along with the point regarding ownership of IP but it is indeed crucial to decide upon who controls how the IP is controlled and ensure the protection of such IP. Ideally, this vests upon the owner. However, the company may opt for discussing and receiving inputs from the vendor developing the software. 

d. Process management

Strictly from the business point of view, there are certain specifications about the development, its acceptance criteria, development of a beta version, incorporating updates, and delivery timelines, etc. that need to be met with. It is always in favour of the service receiver to understand and have such elements in the contract to align with their needs and requirements properly.

e. Liabilities and infringement indemnity

A provision relating to the liabilities and also the indemnity against infringement of any third-party IP becomes crucial primarily when an external software development team is engaged in performing the services. What needs to be broached upon is whether as service recipients, we are entitled to such indemnities and are such indemnities enforceable in a court of law.

f.  Termination

Lastly, an essential aspect of any contract is the termination of the contract. What needs to be captured in the contract relating to termination is the right to termination and what are the consequences of termination. Consequences of termination are important, especially in the context of the position of the IP upon termination and also the work which was being performed/work in progress. Parties may also opt to specify the reasons or cause of termination.

Conclusion

The usage of external vendors or software developers has been a strategic tool for various companies in the United States and other nations. If one is willing to opt for an external software development team, one must take into consideration the above pointers for conducting the due diligence and understand the ramifications of opting for the same. However, it is all the more important to look into the aspects of IP rights with a lawyer or IP specialist to comprehend the position of IP in the software.

 References

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