31 Aug Who owns software developed for your company?
It happens all the time. A company hires an independent computer programmer to write software. All too often, it’s software the company uses to run an important part of its business. All too often as well, there is no written contract.
Even when there is a written contract, the specifics of ownership of the intellectual property in the software are often not addressed.
Years later (perhaps as a result of the sale of the company or a falling out between the company and the programmer) the issue of the ownership of the intellectual property rights in the software arises.
Without a valid “work made for hire” agreement between the programmer and the company, the programmer will own the copyright in the software. Under copyright law, the owner of a copyright holds the exclusive right to copy, adapt, display, perform and distribute the work.
If the programmer doesn’t authorize any further work on the software, what happens? Does that leave the company in the lurch as far as its ability to add new capabilities to the software or to migrate it to a new operating system?
A recent case, Krause v. Titleserv, Inc., addresses that question.
The Krause case deals with Section 117 (a) of the Copyright Act. Section 117(a) provides an affirmative defense against copyright infringement.
While rather awkwardly worded, Section 117(a) allows the “owner of a copy of a computer program” to adapt the program provided that the “adaptation is created as an essential step in the utilization of the computer program in conjunction with a machine, and that it is used in no other manner.”
In the Krause case, Krause was a programmer who worked as an independent consultant for Titleserv for approximately 10 years. After a dispute, Krause terminated his consulting arrangement with Titleserv and took the source code for two programs that Krause had written for the company.
Krause told Titleserv that it was free to continue using the executable code as it existed on the day that he left, but that Titleserv had no right to modify the source code. Inability to modify the source code severely limited the value of programs to Titleserv.
Titleserv had to prove three things in order to fall under the protection of such Section 117(a).
First, it had to prove that it was the owner of a copy of a computer program. There was no dispute as to whether Titleserv possessed copies of the computer program, however, the concept of ownership is more complex. Krause contended that Titleserv was merely a licensee who possessed a copy of the computer program pursuant to an oral license agreement.
Titleserv argued that it owned the copies of the computer program because it paid Krause a large amount of money to develop them, and had the undisputed right to possess them and use them permanently.
The court concluded that the inquiry into ownership should be based on whether a party exercises sufficient “incidence of ownership” over a copy of the program to be sensibly considered the owner of the copy for purposes of Sec. 117(a). The court looked at the following factors in making its determination that Titleserv owned the program:
• Titleserv paid Krause a substantial amount of money to develop the programs for Titleserv’s sole benefit;
• Krause customized the software for Titleserv’s operation;
• The copies were stored on a server owned by Titleserv; and
• Krause never attempted to repossess the copies used by Titleserv and agreed that Titleserv had the right to continue to possess and use the programs forever.
As a result, the court concluded the Titleserv owned a copy of the computer program.
Titleserv then needed to demonstrate that the modifications of the computer program made were “an essential step in the utilization of the computer programs in conjunction with a machine.” The court concluded that the modifications made by Titleserv (correcting program errors, changing the source code to add new clients and perform other routine tasks, incorporating the programs into a Windows-based system, and adding capabilities that allowed the program to be more responsive to the needs of Titleserv’s business) were essential steps in the utilization of the computer programs.
The major question for the court for that element was whether the addition of new functionality was “essential” to the use of the program. The court rejected Krause’s contention that the word “essential” applies only to modifications without which the program could not function. Because the word “essential” was ambiguous, the court ultimately looked at the legislative history of the Copyright Act and determined that Sec. 117(a) contemplated protection for modifications adding features rather than merely securing continued functioning of what was originally created.
The court noted that the modifications made to the functionality of the program by Titleserv were relatively modest and that a different scenario might be presented if the changes were more radical or might in some way interfere with Krause’s access to, or ability to exploit, the copyrighted work that he authored.
The final step in the test under Sec. 117(a) was to determine whether the adaptations that were created as an essential step in the utilization of the program were “used in no other manner.” In evaluating this factor, the court relied on the fact that the software was used for the processing of transactions related to Titleserv’s relationships with its customers. The fact that the nature of those relationships had changed (for example, clients of Titleserv were able to dial up a connection to the software rather than having the software operated solely by Titleserv’s personnel) did not change the manner of use (processing transactions) but, rather, just increased the versatility of the programs.
While this case is an interesting one for copyright lawyers, the key takeaway item for business people should be that the parties to this dispute likely spent tens, if not hundreds, of thousands of dollars to resolve the dispute. This dispute should never have taken place because the parties should have contractually addressed these issues well before the software was written. For technical reasons under the copyright law, entering into a valid work-made-for-hire agreement with a computer programmer is problematic. However, an assignment agreement or perpetual license can be nearly as effective. By leaving ownership issues open, businesses invite expensive litigation. While Titleserv won its case, there is no assurance that a company with a different set of facts would arrive at the same result.
The opinions expressed herein or statements made in the above column are solely those of the author, and do not necessarily reflect the views of Wisconsin Technology Network, LLC. (WTN). WTN, LLC accepts no legal liability or responsibility for any claims made or opinions expressed herein.