IP Rights In Software Development Agreements
Software development agreements contain a number of important terms to be negotiated. These include things like fees, payment terms, testing and acceptance, and how to allocate risk and liability.
Often one of the most significant terms—and the subject of this post—is ownership of work product, meaning intellectual property rights in the software that’s created. (As a refresher, intellectual property includes things like copyright, patent, and trademark.)
More often than not, when a contractor is hired to create something in other settings, the default assumption is that the customer will own the rights to the deliverables. You can see this concept expressed in general legal principles like “word made for hire” and assignment provisions.
In the software development setting, this default will usually hold true if the developer has been hired to create custom code more or less from scratch. In that instance, the customer will likely insist on receiving the source code and ownership rights over the work product. This is all the more likely if the custom code provides the customer an advantage over its competitors—the customer will want to ensure the code is proprietary and can’t be accessed by the competition.
Tip: Even where the customer insists on ownership of the work product, the developer can usually include limited carve-outs for things like open source components, third-party materials, and the like.
If, on the other hand, the developer is customizing existing software, the customer may not insist on ownership. In that case, the developer may be able to instead license the software to the customer and provide the object code, rather than the source code. Licensing is particularly desirable to developers who want to retain the ability to perform similar services for other customers.
Whether software is assigned or merely licensed to the customer may also depend on the customer’s budget. As you might expect, it’s almost always cheaper to pay for a license than it is for ownership of the software. Hence, economic realities can, and sometimes do, dictate how IP rights will be allocated in software development agreements.