5 Crucial IP Issues to Watch Out for in Software Development Agreement

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Software Development

When hiring a developer to develop specific software for your company, it is important to keep in mind that paying for their services does not automatically mean you will own all the rights to the software once it is completed. This is because, under copyright and patent laws, the person who develops the software owns all the IP. Naturally, before reaching an agreement with the developer, you should consider whether owning the intellectual property rights is crucial to your needs, or having a license to use it is sufficient.

Do I need to own the IP?

This depends mostly on how you plan to use the software and whether you could be affected by the developer creating similar software for your competitors. If your intention is to license or otherwise commercialize the software, owning the IP eliminates any potential restrictions arising from license agreements. This also applies to any further modifications to the software which you may want to make. On the other hand, if you don’t want or don’t have the capabilities to commercialize or further develop the software, drafting a license agreement may also have benefits. The developer has their own reasons why they might want to remain the owner of IP. Being able to commercialize the software themselves, modify it, or reuse the code for other projects could be some of them. Therefore, if drafting a mutually agreeable license agreement is possible, not insisting on owning IP could improve your bargaining position, as well as enable you to enjoy any future improvements to the software.

Regardless of whether you want to secure the ownership of IP for your company or decide that procuring a license for the software is more suitable for you, you might want some legal advice on software development agreements, as there are several important issues to be addressed within them.

IP ownership rights

When it comes to the ownership of intellectual property rights, there are three options to consider. As the developer of the software is the default owner of all IP arising from it, according to law, if your intention is for the ownership of intellectual property to be transferred to you, the agreement must address this in an assignment clause. Otherwise, if owning the IP is not crucial to your plans, you will need to draft a license agreement between you and the developer. The third option is to agree on joint ownership of the software. However, provisions regarding joint ownership vary depending on the type of intellectual property and should be considered carefully, since they regulate the right of both parties to commercialize copyrighted material and entitlement to licensing royalties.

Residuals

The developer may want to include a residuals clause in the software development agreement, or the NDA, allowing them to freely use techniques and know-how retained in the unaided memory of the developer’s employees during the development of the software, as an exception to confidentiality provisions.  As this could result in future consequences you would want to avoid (since the developer could work on a similar project for your competitor in the near future), such clauses should be addressed in detail.

Transfer of IP rights

If your company is to become the owner of intellectual property rights under the software development agreement, this should be formulated so that the transfer of IP rights comes into effect with the signing of the agreement and does not depend on future events, the completion of the software, for example. By doing so, you can avoid any disputes regarding the ownership of IP which may arise in the event of a future contract breach, such as the failure of the developer to deliver a software that meets the agreed upon qualities.  

Sub-licensing and transferring rights

In order to be able to grant sub-licenses or transfer rights, the software license agreement between you and the developer should include a clause about sub-licensing and transferability, as you will otherwise be unable to do so without the consent of the other party.

Bankruptcy

The bankruptcy of the licensor can result in certain complications regarding the rights of the licensee. These can be avoided through source code escrow, by including bankruptcy among escrow release events. This would ensure that the licensor receives the source code of the software, regardless of the developer going out of business. It would also be prudent to define escrow release events as exceptions to any restriction concerning the employment of the developer’s programmers, as their knowledge of the project is required in order to finish the software.

While the aforementioned may pertain to all software development agreements, nothing can be an adequate substitute to getting professional legal counsel, in order to ensure your rights are protected and that the agreement is personalized for your needs.

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