Copyright Ownership in Software & Other Independent Contactors Agreements: Can Work-For-Hire” Be Retroactive?

Regardless of industry, intangible assets are often the greatest drivers of business opportunity and shareholder value. Companies increasingly recognize intellectual property rights are a critical part of the value of the total assets of the company. Great care should be given to maintaining and enhancing their power and value. Innovative companies that outsource the development of copyrightable works such as computer software, creative or media content and other “tangible” works with the expectation of owning both the resulting product and the underlying copyrights must be mindful of ownership risks.

Successfully leveraging copyright rights and assets is critical to the opportunities presented by the current economic environment. Yet, without clear ownership of copyright rights, a company can not exploit the exclusive rights it believes it owns. Under U.S. Copyright law, only the copyright owner has the exclusive right to reproduce, distribute, public display/perform and modify a work. This leads to the inevitable question: who owns the copyright to a work made for hire?

To be effective, agreements that assign ownership of copyrightable works must be in writing. It is not enough that the company or client may have commissioned and paid for the work. Written agreements that vest copyright ownership commonly appear in two forms. In the first, the developer of the work “assigns” his or her rights to the new owner. Under U.S. law, specific language of assignment must evidence the transfer.

Many software companies, in their zeal to create and commercialize their products, fail to consider the need to clearly establish ownership of software copyrights when using developers and programmers. This begs the question, can a company retroactively secure copyright to a work by later designating it as a “work made for hire?”

The Seventh Circuit first addressed the issue in Schiller v. Nordisco Corp., 969 F.2d 410 (7th Cir. 1992). The Court held that a “work made for hire” agreement must precede the creation of the work, because the writing requirement under the “work made for hire” doctrine is not merely a statute of frauds provision “designed to protect people against false claims of oral agreements.”

Under Community for Creative Non-Violence v. Reid, 490 U.S. 730, 109 S.Ct. 2166, 104 L.Ed.2d 811 (1989), a work is “made for hire” only if it falls in one or more of the categories of intellectual property enumerated in section 101(2), of was specially commissioned and the parties had signed a statement to that effect.

The requirement of a written statement regarding the copyright on a specially commissioned work is not merely a statute of frauds, although that is the purpose emphasized by the cases. It is not only designed to protect people against false claims although there is authority that it must be signed before suit is brought. The signed-statement requirement in section 101(2) makes the ownership of property rights in intellectual property clear and definite, so that such property will be readily marketable.

The creator (author) of the property is the owner, unless he is an employee creating the property within the scope of his employment or the parties have agreed in a writing signed by both that the person who commissioned the creation of the property is the owner. The writing must precede the creation of the property in order to serve its purpose of identifying the (noncreator) owner unequivocally. Assignment under 17 U.S.C. § 201(d), conveys both the copyrights and with them the right to sue for infringement of them. SAPC, Inc. v. Lotus Development Corp., 921 F.2d 360 (1st Cir.1990).

The sale of the physical embodiment of intellectual property does not “of itself” transfer the intellectual property. 17 U.S.C. § 202. Obviously when a software programmer sells a CD-ROM to a customer (or uploads a software program to a Web-based vendor of downloads) it does not mean to transfer the copyright in them so that the distributor could copy the software and sell the copies without paying anything to the programmer. An agreement that divides ownership in this way would be inefficient Penn Central Corp. v. U.S. Railroad Vest Corp., 955 F.2d 1158, 1160 (7th Cir.1992)).

A Company’s ownership of copyright in works created by independent contractors may be a lesser concern than a company’s ability to sue for infringement of that copyright. “[T]he right to claim copyright in a non-infringing derivative work arises by operation of law, not through authority from the copyright owner of the underlying work.” 71 NIMMER ON COPYRIGHT § 3.06, at 3-34.34. We have cited Nimmer with approval on this point.

On this point Liu v. Price Waterhouse LLP, 302 F.3d 749, 755 (7th Cir.2002) is instructive. Price Waterhouse owned the copyright to a computer-software program, and Yang, an employee, was asked to help recruit a Chinese computer programmer to increase the speed of the program. Price Waterhouse entered into a series of agreements with Yang that provided Price Waterhouse would own the intellectual-property rights to the improved software. When Yang refused to give Price Waterhouse the source code to the improved software Price Waterhouse sued for infringement (and won) because the owner of a copyrighted work has the exclusive right to control the preparation of derivative works, the owner could limit the derivative-work author’s intellectual-property rights in the contract, license, or agreement that authorized the production of the derivative work.

Although the right to claim copyright in a derivative work arises by operation of law—not by permission of the underlying copyright owner— the parties may alter this general rule by agreement.

Companies must take the necessary steps to protect their intellectual property rights in outsourced development of copyrightable works (whether computer software, entertainment content or other “works of authorship”). First, understand the legal requirement that an agreements addressing ownership of copyrights must be in writing. Second, if a company intends to be the copyright owner, ensure that the company uses a written agreement establishing ownership of the work. Third, ensure that written agreements include appropriate “work made for hire” provisions, so the company will own the copyright in the work and in all derivative works for the full life of the copyright. Lastly, evaluate existing intellectual property to ensure that ownership of intellectual property rights has been effectively transferred to the company.

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