5 Key IP Issues in Software Development Agreements

In today’s technology-rich environment, in-house corporate counsel must necessarily handle a range of agreements that implicate intellectual property issues. Here are five key IP considerations to be aware of when retaining a contractor to develop software for your company.

1. Get Ownership Right

Companies can benefit from owning the IP rights in developed software; IP owners can use, commercialize, and modify the software free of the scope restrictions and termination risks often associated with license agreements. However, developers may have legitimate reasons to retain IP ownership; for example, they have invested knowledge capital in the project and may be able to reuse code or build on it for other client projects. Before insisting that IP ownership is a “must,” consider whether the software will be competitively sensitive (i.e., will it matter if the developer creates something similar for others?) and whether your company is likely to license it to others or otherwise commercialize it. If not, factors such as vendor bargaining power, cost savings, or even earning developer goodwill may be sufficient reason to allow a developer to retain IP ownership and grant a broad perpetual license to your company.

Beware of joint ownership: Jointly owning software IP with the developer can seem like an efficient way to sidestep difficult negotiations. Unfortunately, parties rarely consider the full implications of this choice. Joint ownership rules vary, not only by type of IP (e.g., patents, copyrights, or trade secrets), but by country. For example, under U.S. law each joint copyright owner may commercialize a copyrighted work without the other joint owners’ consent, but must account for licensing royalties received and may not destroy the value of the work. This is different from English copyright law (under which joint copyright owners cannot exploit their rights without the other joint owners’ consent), as well as U.S. patent law (under which joint owners have no duty to account to each other for licensing royalties). Parties can modify these default rules by contract, but when the agreement states only that the parties are “joint owners,” these restrictions and obligations may be unexpected.
           
Clarify the handling of residuals: If your developer requires the ability to reuse knowledge acquired while handling your project, it may insist the agreement include a “residuals” clause permitting the developer to freely use ideas, know-how, and techniques that its personnel retain in their unaided memory. These clauses present two important questions: should the developer’s rights in residuals be an exception to the agreement’s confidentiality restrictions, and should these rights constitute a de facto license under your company’s IP rights? There are no “right” answers, but to avoid unintended consequences the parties should ensure they address the topic with specificity.

2. Get Specific on Potential Transfers of Rights