4. Ensure Ownership is Correctly Transferred
Use the present tense in any assignment of rights: Language intended to assign IP rights to your company should reflect a present transfer (“hereby assigns”), not a future promise to transfer (“will assign” or “agrees to assign”). Under the latter formulation, the developer’s failure to deliver the promised assignment may result in a breach of contract claim, but not necessarily ownership of the IP (particularly if the developer already assigned the rights to someone else).
“Work made for hire” is ineffective: Parties often characterize software as a “work made for hire” in development agreements, believing this language will cause copyright ownership to automatically vest in the company, rather than the developer. However, under U.S. copyright law software code generally cannot be a “work made for hire” when created by an independent contractor—even if the parties agree otherwise by contract. This problem can be avoided by including a present assignment of IP rights to your company together with the “work made for hire” language (although under California law including a work-for-hire clause may evidence an employment relationship with the developer and potentially expose your company to employee benefits or workers’ compensation claims).
Account for pre-existing rights: If the developer includes any of its pre-existing code or third-party code in developed software intended to be owned by your company, or if a license to other IP rights is necessary to use the software, to avoid IP infringement claims you should ensure the developer identifies those pre-existing rights and grants a perpetual, irrevocable license. In particular, the developer should identify any open source software (OSS) incorporated in the developed software so your company can take precautions to avoid using it in a manner that triggers the “viral” provisions of the applicable OSS license (e.g., prohibitions on collecting royalties for permitting others to use the developed software).
5. Monitor Indemnification Carve-outs
Software developers often indemnify their customers for third-party IP infringement claims, but the exceptions to this obligation warrant careful consideration. In general, a reasonable middle ground is to allocate infringement risk to the party that bears the greatest responsibility for the allegedly infringing conduct. For example, your developer may seek to avoid responsibility for software designed to your company’s specifications, but consider narrowing this to instances where non-infringing compliance with your company’s requirements is not possible. Similarly, developers may seek to exclude infringement claims relating to combinations of their software with your company’s or third-party services or materials, or that relate to post-delivery modifications. However, such carve-outs may be inappropriate when the software would have infringed third-party IP rights notwithstanding the combination or modification.
Daniel C. Glazer is a corporate partner at Fried, Frank, Harris, Shriver & Jacobson and co-head of the firm's technology transactions group. Mr. Glazer has extensive experience structuring and negotiating complex domestic and cross-border intellectual property and information technology transactions. He regularly advises on IP, technology, and commercial issues for a range of companies—from foundation-stage companies (particularly in New York and the U.K.) to Fortune 50 corporations—in industries such as telecommunications, financial services, consumer products, pharmaceuticals, food and beverages, media and entertainment, and sports. Arianne H. de Govia is a corporate associate at Fried Frank and focuses her practice on the intellectual property aspects of a wide variety of corporate transactions (including mergers and acquisitions, divestitures, financing, and licensing) and also on securing, evaluating, and enforcing intellectual property rights. The authors would like to thank summer associate Daniel Cherif for his assistance in preparing this article.
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