The answer to who owns “your” software is important in a number of everyday business circum-stances. As the title of the article rhetorically suggests, the answer to “Who owns ‘your’ software?” might be, “not you”. Consider the following 5 scenarios:

1. Company A hires an independent contractor for $100,000 to write a program that the Company intends for internal use. The contractor decides to market the program to Company A’s competitors. Can Company A stop the contractor? As importantly, can the con-tractor stop Company A from marketing the program to third parties?
2. Company A hires Company B to write a computer program. Company B agrees to assign all copyrights to Company A. Company B then hires independent contractors to do the programming. Does Company A own the resulting program?
3. Company A has purchased some of its programs from developers. Other pro¬grams were created by independent contractors. Still others were created by employees. Can Company A reasonably prove to a venture capitalist or a prospective buyer that title to its pro-grams is clear?
4. Company A wants to sue Company B for copyright infringement of Company A’s soft-ware in object code form. Company A employees created the source code but used a commercial compiler and several commercial libraries in creating the final program. Third-party copyright notices appear in Company A’s object code. Does Company A have the right to sue Company B without involving those third parties?
5. Company A is the exclusive licensee of the U.S. reproduction and distribution rights in a pro¬gram. The licensor has not registered the copyright in the program. Can Company A register the copyright to protect its rights?

7 Rules of Ownership

Resolving these scenarios requires knowing 7 basic rules of U.S. copyright law. The rules under the 1976 Copyright Act, as amended, are easily stated, but often difficult to apply:

1. The owner of a copyrightable work has the exclusive right to reproduce, modify, distribute, and, for certain works, publicly display or perform the work.
2. An exclusive licensee of even a part of copy¬right is an “owner” of that right for U.S. copyright law purposes.
3. A voluntary transfer of ownership (including an exclusive license) in a copyright¬ed work requires a written document (a) identifying the work and (b) signed by the owner of the rights being transferred (or by the owner’s duly authorized agent).
4. (4) Only a copyright owner can register the copyright in a work.
5. (5) The copyright in a work created by an employee for an employer is automatically owned by the employer as a “work made for hire”, unless the parties have expressly agreed otherwise in a written document signed by them. For works automatically owned by the employer, the employer is considered to be the author of the work for purposes of U.S. copyright law.
6. (6) The copyright in a work created by an independent contractor is initially owned by the independent contractor (with a few specific exceptions relating to specially ordered or commissioned works that fall into one of 9 specific categories – which generally exclude software – and if the parties expressly agree in a written instrument signed by them that the work shall be considered a “work made for hire”).
7. (7) Any copyright owner is entitled to sue for infringement of that owner’s exclusive rights in a work.

Other ownership rules do exist, relating, for example, to joint authorship, collective works, survivors’ rights, and termination rights. However, the 7 basic rules are the most important to keep in mind when analyzing common copyright ownership problems.

Applying the Rules

Consider now how each of the 5 scenarios described above may be answered by applying these 7 rules:

Scenario (1) — If the person hired by Company A is truly an independent con¬tractor, then the independent contractor owns the copyright in the program that the contractor created (Rule 6). Accordingly, the contractor has the right, under U.S. copyright law, to market the program (Rule 1). Company A may be able to argue that information given to the contractor in order to implement the program constituted a trade secret of Company A. Accordingly, Company A may be able to stop the contractor from exploiting the program on the grounds that it contains Company A’s trade secrets.

On the related question, the independent contractor may be able to stop Company A from marketing the program to third parties. In most cases, Company A would be held to have at least an implied license to use the program for the original purpose for which it was written. Marketing the program may well be considered as beyond the scope of the license, and hence Company A could be held to infringe the copyright in the program for which it paid.

Company A may be able to argue that the independent contractor was in fact an employee, and not an independent contractor. However, determining whether the creator of a copyrightable work is an employee or an independent contractor requires an involved fact-oriented analysis. For example, in 1989, the Supreme Court ruled that a “consultant” may be considered an employee within the meaning of U.S. copyright law if the “consultant” as a matter of fact meets the common law tests that distinguish an employee from a non-employee. If this is the case, the works created by the “consultant” are “works made for hire”, and the employer automatically owns the works.
In determining whether a hired party is an employee under the general common law of agency, a number of factors are considered – the Supreme Court identified at least 13 factors. No one of these factors is supposed to be determinative. However, a number of courts have decided that if an employer treats an “employee” as an independent contractor for federal tax purposes (e.g., where a Form 1099 would be required under IRS rules), that fact alone is virtually an admission by the employer that the person is an independent contractor rather than an employee. In other words, the employer cannot treat a programmer as an employee for U.S. copyright law purposes, and an independent contractor for tax law purposes. Whether these cases apply the Supreme Court test too narrowly or not remains to be determined. However, the mere existence of these decisions indicates that an employer should not rely upon an after-the-fact determination of a programmer’s status to determine whether the employer owns the copyrightable works created by that programmer as a work made for hire.

The entire problem for Company A could be resolved by simply requiring that the independent contractor execute an assignment of all copyrights in the program to Company A (Rule 3).

Scenario (2) — Company A may feel that it has avoided the problem of the first scenario by requiring that Company B execute an assignment of all copyrights to Company A. However, Rules 1 and 6 again apply with respect to the independent contractors hired by Company B. That is, if those programmers are truly independent contractors, they will own the copyrights in the programs they write. Since Company B never owned that copyright, Company B’s assignment of the copyright to Company A is not binding on the independent contractor. Accordingly, Company A is in the same position as in scenario (1).

This problem can be avoided by Company A contractually requiring that Company B have all of its employees and independent contractors execute assignments of copyright in favor of Company B (or, if desired, directly in favor of Company A) and have Company B provide proof of compliance.

Scenario (3) — Company A can prove that it owns “its” software using Rules 3 and 5. That is, the copyrights in the programs purchased from developers or created by independent contractors can be transferred to Company A by written assignment (Rule 3). With respect to the works created by Company A’s employees, Rule 5 vests title and authorship in those works directly in Company A without a requirement for a written agreement (assuming that the “employees” are in fact true employees and Company A has not expressly agreed otherwise with its employees).

Absent written assignments from the developers and independent contractors, Company A may not be able to prove that it holds clear title to its programs. Accordingly, Company A should, as soon as possible, obtain written assignments from its developers and independent contractors (preferably in a form record able with the U.S. Copyright Office).

Scenario (4) — If Company A owns the copyright in its programs, it is entitled to sue for infringement in accordance with Rule 7. Since the work was created by Company A’s employees, Company A is the copyright owner in accordance with Rule 5. The work that was created was the source code written by Company A’s employees. That source code will be com¬piled with and possibly linked with code from third parties. If Company A has a valid license to the compiler and commercial libraries used in writing the program, then the inclusion of the third-party code in the compiled object code has no effect on the underlying copyright to Company A’s source code. It has been held by the courts that object code is the mere translation of source code into a machine read¬able form. Accordingly, if Company B has copied Company A’s object code, then Company B will have infringed Company A’s source code.

Under the facts given, Company A could sue Company B for violation of that source code copyright without having to involve the third-party compiler and library vendors.

Scenario (5) — In this scenario, Company A is an “owner” of at least part of the copyright in the program because of its exclusive license in the U.S. (Rule 2). As an owner of at least part of a copyright, Company A would be entitled to register the copyright in the work to protect its rights (Rule 4).

Company A would also be entitled to record its exclusive license, since it is a “transfer” of a copy¬right. Recording a transfer of copyright is no longer required for any reason, BUT recordation does “perfect” the legal title of the transferee and thus protects the transferee from a conflicting (e.g., fraudulent) transfer of the same copyright. Accordingly, recording all transfers of copyright for important works is highly recommended.

Conclusion

Mistaken assumptions about the ownership of software can jeopardize legal rights. In particular, the tests for distinguishing employees from non-employees are complex and at times difficult to apply. There¬fore, the wisest course is to enter into a written agreement with a consultant or in-dependent contractor, signed by both parties, that all copyrights in any work created for the hiring party are assigned to that party.

Although the examples above have focused on the ownership of copyrights in computer programs, all of the rules and scenarios apply to other works, such as photographs and art work for company brochures, documentation, and brochures and ad copy. Thus, you should be aware of the potential issues regarding ownership of any copyrightable works when any potential independent contractor or other third party has created or helped to create the work.

Note that works first published before January 1, 1978 fall under the 1909 Copyright Act, and the analysis required by this older law may lead to different conclusions as to ownership of a work.

Lastly, a fundamental point to remember is that the answer to the question of “who owns your software?” is not always intuitive. Making the wrong determination can have disastrous consequences. Accordingly, if you don’t know the answer to the question without a doubt, seek advice from copyright counsel.

John Land is a Partner in Jaquez, Land, Greenhaus & McFarland. He is a graduate of Caltech (BS with Honors 1975) and USC (JD 1978). He practices in the area of patents, copyright law, licensing, and the business problems of technologically-oriented clients.