By Christopher T. Varas
Overview
As technology grows increasingly sophisticated, more and more companies are turning to third party software developers to create customized software solutions. It is not uncommon for parties negotiating agreements for the development of customized software to include language in their agreements characterizing the deliverable as a "work made for hire." In many cases, however, such language likely does not have the legal effect intended by the parties -and may also have significant consequences the parties did not intend. The purpose of this article is to summarize and provide context for some of the key issues raised by "work for hire" language in software development contracts, and to review some alternative mechanisms that parties negotiating such agreements might consider using to effectuate their intent.
Fundamentals: Copyright Ownership and the "Work Made for Hire" Doctrine
By default, the copyright in "original works of authorship fixed in any tangible medium of expression" vests in the person or persons who created it - i.e. the developer. 17 U.S.C. §§ 101, 102(a), 201(a). In the absence of an effective contractual arrangement to the contrary, this means that the developer enjoys the exclusive right to, among other things, reproduce, distribute and prepare derivative works based on the commissioned software. 17 U.S.C. §106.
The Copyright Act includes a significant exception to the default rule in the form of the "Work Made for Hire" doctrine. Under this doctrine, the copyright in certain works does not vest in the original author, but rather in the person who hired the author to create the work. 17 U.S.C. §201(b). For example, a work prepared by "an employee within the scope of his or her employment" is a work made for hire, the copyright in which is owned by the person's employer. 17 U.S.C. §101.
The Copyright Act also permits certain limited categories of works created by non-employees to be works made for hire. In order to qualify as a work made for hire by a non-employee, the parties must "expressly agree in a written instrument signed by them that the work shall be considered a work made for hire" and the work must be "specially ordered or commissioned for use as a contribution to a collective work, as a part of a motion picture or other audiovisual work, as a translation, as a supplementary work, as a compilation, as an instructional text, as a test, as answer material for a test, or as an atlas." 17 U.S.C. §101. The legislative history of § 101 makes clear Congress' explicit intent that these be the only categories of works that could be created as works for hire outside of an employer/employee relationship. See, e.g., H.R. Rep. No. 1476, 94th Cong., 2d Sess. 121-23 (1976) Notably, computer programs are not explicitly included in the statutory list of works that parties can contract to create as works made for hire by non-employees.
The Implications of "Work Made for Hire" Language in Software Development Contracts
It is not uncommon for contracts for the development of customized software to characterize the commissioned software as a "work made for hire." While one can surmise that the intent of such language is to vest copyright ownership in the purchaser rather than the developer pursuant to 17 U.S.C. §201(b), in many cases such language may have no legal effect on the ownership of the copyright, and in some cases it could also have unintended labor law consequences.
As noted above, Congress did not explicitly include computer programs in the exclusive list of works that can be contractually designated as works made for hire. Therefore, parties negotiating a contract for development of a customized software solutions should start with the assumption that as a matter of law, the deliverable being negotiated cannot be a work made for hire for purposes of the Copyright Act.
There are some limited circumstances in which such a deliverable could nevertheless fall within one of the exclusive categories specified in the Act. For example, both "compilations" and contributions to "collective works" can be works made for hire under § 101. The statute defines a "compilation" as "a work formed by the collection and assembling of preexisting materials or of data that are selected, coordinated, or arranged in such a way that the resulting work as a whole constitutes an original work of authorship." A "collective work" is defined as "a work, such as a periodical issue, anthology, or encyclopedia, in which a number of contributions, constituting separate and independent works in themselves, are assembled into a collective whole." 17 U.S.C. §101. The apparent overlap in these two definitions is not an accident. The legislative history of the Act explains that "a 'collective work' is a species of 'compilation' and, by its nature, must involve the selection, assembly, and arrangement of 'a number of contributions." H.R. Rep. No. 1476, 94th Cong., 2d Sess. 121-23 (1976). Under these definitions, it is possible that a deliverable such as a database or a contribution to a database could under certain circumstances qualify as a work made for hire.
The statute's inclusion of audiovisual works in the list of potential works made for hire could also be relevant if the work being commissioned is predominately audiovisual in nature. Although computer programs can be registered as "literary works," a program such as a video game in which audiovisual elements predominate can also be registered as a "'Motion picture/audiovisual work.'" Copyright Office's Circular No. 61 ("Copyright Registration for Computer Programs").
Parties considering "work made for hire" language in development contracts must also be aware that including such language can have unintended consequences on the legal relationship between the parties. For example, California Labor Code § 3351.5(c) expressly defines the term "employee" to include:
Any person while engaged by contract for the creation of a specially ordered or commissioned work of authorship in which the parties expressly agree in a written instrument signed by them that the work shall be considered a work made for hire, as defined in Section 101 of Title 17 of the United States Code, and the ordering or commissioning party obtains ownership of all the rights comprised in the copyright in the work.
Thus, the inclusion of "work made for hire" language can have serious labor law implications, or at least introduce undesirable ambiguity, depending on the applicable state law.
Assignment as an Alternative to "Work for Hire" Language
Fortunately, parties can use other contractual mechanisms to achieve whatever division of ownership they wish to effectuate, notwithstanding the statutory restrictions on the "Work Made for Hire" Doctrine. In some cases where the parties are considering "work made for hire" language, an assignment of the copyright in the deliverable might be a preferable way to achieve the parties' intent. 17 U.S.C. § 201(d) provides that "[t]he ownership of a copyright may be transferred in whole or in part by any means of conveyance or by operation of law, and may be bequeathed by will or pass as personal property by the applicable laws of intestate succession." Even in cases where the parties agree that work made for hire language is appropriate for their specific circumstance, it will typically be advisable to include an assignment as well to ensure that the vagaries of the Work Made for Hire Doctrine with respect to computer software do not give rise to problems down the road.
Another advantage of contractual assignments is that they can be significantly more flexible than the Work Made for Hire Doctrine. As indicated by the "in whole or in part" language of the statute, an author can customize an assignment by assigning some rights while retaining others, and can also assign different rights to different people. By way of example, a copyright owner can, if he or she so chooses, assign the right of reproduction in a work to one person, the right to prepare derivative works to a second person, and retain all of the remaining exclusive rights granted to copyright owners. See 17 U.S.C. § 201(d)(2). This flexibility can make assignments a useful mechanism when parties are negotiating the terms of a contract for a customized software solution. As with any instrument affecting ownership or rights in an asset, parties negotiating a copyright assignment must carefully define what is and what is not being assigned. For example, virtually all modern software incorporates elements such as basic commands and/or third-party code that the developer cannot or will not want to assign. Developers in particular will also want to ensure that the assignment is not drafted so broadly that it could be interpreted as assigning ownership in what is commonly referred to as a developer's "know-how," or ability to apply his or her skills to other projects. If the developer wishes to use part or all of the assigned work in the future as the basis for future projects, the agreement should also be carefully drafted to ensure that such use will not violate the assignment.
It should be noted that assignments are subject to some limitations that do not affect works made for hire. Among other things, the Copyright Act allows an author or the author's heir to terminate an assignment under certain circumstances. 17 U.S.C. § 203. This is unlikely to have a practical impact in the context of computer software because such terminations cannot occur until at least thirty-five years after the assignment, and in some cases forty years. 17 U.S.C. § 203(a)(3). Moreover, if the assignment included the right to prepare derivative works, the assignee will retain ownership in the derivative works it created during the term of the assignment (though termination can limit or eliminate the assignee's right to prepare additional derivative works after the effective date of the termination). 17 U.S.C. § 203(b)(1). In an industry where software that is even one year old is frequently considered obsolete, it seems unlikely that the revocability of copyright assignments would present a significant obstacle in the negotiation of agreements for the creation of customized software solutions. Nevertheless, parties considering an assignment should seek the advice of qualified counsel to be sure they understand the implications of the particular assignment being contemplated.
Licenses as an Alternative to Formal Transfer of Copyright Ownership
If the parties contemplate that the copyright will remain with the developer, a license will be the more appropriate mechanism to specify the parties' respective rights and responsibilities. Copyright licenses are powerful tools that can be used to vest the licensee with a wide range of rights that can amount to the practical equivalent of ownership if that is what the parties wish to accomplish. A copyright owner can license any or all of the exclusive rights conferred by the Copyright Act, and the parties can contractually agree to a wide range of additional provisions. Licenses can be exclusive or non-exclusive, though in this context the vast majority of licenses would typically be exclusive.
Copyright licenses can be complex instruments, and should always be negotiated and drafted with the assistance of qualified counsel. Among other things, parties negotiating an exclusive software license should carefully consider and address the following intertwined (and non-exhaustive) issues:
- The identities of the parties to the license and whether there will be third-party beneficiaries; The specific scope of the rights granted to the licensee, accounting for terms of art and other factors unique to the particular industry and context of the license; What rights - if any -the developer will retain to continue using, modifying or otherwise exploiting the software or parts of it; The parties' respective rights and obligations with respect to the creation and ownership of derivative works; The parties' respective rights and obligations with respect to registering and enforcing the copyright in the software; Payment structure; The use of covenants (the violation of which gives rise to a claim for breach of contract) versus conditions (the violation of which can give rise to a claim for copyright infringement) as appropriate to define the scope of the license; The term of the license and the conditions under which the license can be terminated; The licensee's right to assign and/or sublicense its rights under the license; The parties' respective obligations with respect to confidentiality.
Whether an assignment or a license is appropriate for a particular agreement will vary from case to case, and parties should carefully consider the advantages and disadvantages of both mechanisms in the context of any given negotiation. Obviously when the parties opt for a license over an assignment, the question of whether to include "work made for hire" language is moot because the parties are not seeking to vest copyright ownership in the customer.
Conclusion
There are several reasons that both software developers and their customers should think carefully before including "work made for hire" language in software development contracts. In many cases, the restrictive language of the Copyright Act may render such language legally ineffective as a means to vest copyright ownership in the party purchasing the software. Moreover, such language can have significant implications - or at least create ambiguity -with respect to applicable labor laws. Parties negotiating such agreements should consider whether more flexible alternatives such as an assignment or a license would more effectively effectuate their intent.
OTHER RESOURCES
Copyright Office's Circular No. 9
Copyright Office's Circular No. 61
Protecting Your IP Assets in the Digital Age (Association of Corporate Counsel, 2013)
