Why A Properly Drafted Intellectual Property Clause is Essential for Nearshore Clients

Citing a recent IT services case, Gabriela Smith explains why having a clear intellectual property clause saved her client from disaster.

intellectual property

I recently helped a client win an intellectual property case against their customer over the following question: who owns the intellectual property to the software developed by the developer?

Most people will answer this question with: “the intellectual property belongs to the client who paid for the software development.” Unfortunately, for those who answer that way, the actual answer is: “it depends on what your contract says.”

Basics of Intellectual Property

When software code is copyrighted it becomes intellectual property under the laws of the United States. Now, most people believe that if they pay someone else to write software, the person paying for the service is the rightful owner of the work product, which is the terms used for the software created by the contractor. But, is that really the case?

This belief has its roots in 17 U.S.C § 101 of the Copyright Act in the “work for hire” doctrine, which generally states that the works created by an employee within the scope of employment are the property of the employer.

Three criteria must be met for the “work for hire” doctrine to apply: the work product must be specially ordered or commissioned; the customer and developer must have a written contract stating that the deliverables are a “work for hire”; and the work product must come within one of nine categories: a contribution to a collective work; a part of a motion picture or other audiovisual work; a translation; a supplementary work; a compilation; an instructional text; a test; answer material for a test; or an atlas.

In the case of Nearshore IT services, most software does not come under any of the categories under the aforementioned Copyright Act, and Nearshore companies or contractors are not typically “employees”, so the “work for hire” doctrine does not have a clear application to those relationships.

Learning from an IP Case Study

The case I mentioned previously involved the customer’s failure to pay substantial sums to the developer for the software development work. To make matters worse, that customer then went into bankruptcy, leaving the developer with a substantial amount in unpaid bills.

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How did the nearshore company win the case? They had a contract that was properly drafted and that took care of the question of intellectual property ownership in the case of payment problems. As a result, the developer obtained a favorable result in the bankruptcy case.

It is common practice to expressly write in the agreement that the work product or deliverables are “work for hire.” It is also good practice for customers to also obtain assignments to the work product or deliverables from software developers. To effectuate a proper assignment, there must be words of an irrevocable intent to transfer software ownership, such as “software developer hereby assigns all right title and interest to the work product”.

Of course, the software developer can make the “assignment” subject to certain contingencies, such as receipt of payment. Proper language can help developers protect ownership of the work product and tie ownership to payment for the services rendered.

Next time you are reading your software development agreement, don’t skip over these “boring and legalese” parts of the agreement, as they can help you in the long run.

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