How to protect intellectual property when outsourcing software development?

Claudia Jelea
Avocat & Consilier in domeniul marcilor
@IP Boutique

OTHERS

One of the highest legal risks associated with software development outsourcing by a company (Client) to a software developer (Developer) is intellectual property (IP). IP covers copyright, trademarks, industrial designs, patents, trade secrets, know-how, etc. and it can take a wide range of forms (databases, source-code, logo, graphic interface, notebook, etc.).

When bound by such an outsourcing relationship, the Developer is to create the software program/application in a customized way, based on the Client"s directions and requirements, and adapted to such Client"s needs. The Client, on the other hand, is to pay a sum of money in exchange for the services provided by the Developer.

Without aiming to cover the topic in an exhaustive manner, this article mainly takes the Client"s perspective and the way in which it can ensure the preservation of the IP rights within the context of the outsourcing relationship. Hence, when deciding to outsource, I would recommend that you take the following steps:

1. Inventory of already existing IP

he first step would be to identify the IP items that you already own, how they are protected and which of them need to be disclosed for the outsourcing purposes (the IP should not be disclosed unless necessary). Next, you should check whether the contracts you have concluded with other parties (and which cover both the IP that was licensed/transferred by the Client to third parties and the IP that was licensed/transferred by third parties to the Client) forbid you from disclosing such IP or allowing that it be used by the Developer without the other contracting party"s consent.

2. Have you identified the right Developer?

Once you have chosen a Developer and checked his reputation, you should also find out whether he has the resources and capacity necessary for your IP to be protected against unauthorized use, loss or theft.

Moreover, it can be useful to review the legal framework applicable to IP in the Developer"s country and to identify the steps you are willing to take if the outsourcing agreement is damaged or fails. Make an exit strategy.

3. Key provisions in an outsourcing contract

A contract whereby the terms of the outsourcing relationship are set forth in detail can reach a very high volume and it can be difficult to follow. To protect IP rights, you can take into account a few relatively simple and easy-to-remember principles:

Insist that the contract"s governing law should be Romanian law (under a foreign law, the recommendations included in this article might not be applicable).
Include a confidentiality/non-disclosure provision covering the IP, the information provided by the Client, the internal work processes, any components of the software program/application, etc. (obviously, this only applies if a Non-Disclosure Agreement has not already been concluded).
Make sure that you own all IP rights in the software program/application created by the Developer throughout the duration of the outsourcing relationship. Why is that? This will ensure that at the end of the contractual relationship or even during it you can make use of the IP and even provide it to another developer, as preferred.
The contract must set forth, in detail, the way in which the Developer is to protect the IP: who will have access to it and under what circumstances, the fact that the Developer is to preserve all versions of the software program/application (for example, in Apache Subversion - SVN) and that he is not to delete the code or the data he no longer needs, etc.
The Developer should indemnify the Client in the event of an infringement of a third party"s IP rights during the development of the software program/application ordered by the Client, etc.

4. What happens in the absence of a written outsourcing contract?

Usually, under copyright law, a software program/an application created by a Developer upon a Client"s order and based on an outsourcing relationship is construed as work for hire.

As far as work for hire is concerned, Romanian applicable legislation mentions that copyright belong to the author (the individual person having created the work - in the case at matter the programmer who developed the software) - unless otherwise set forth in the contract. However, under the same legislation, the employer will hold the patrimonial copyright in all software created by the programmer-employee while carrying out his work tasks (except where the contract concluded between the employee and his employer states otherwise).

However, it is possible that under legislations of other countries the copyright in a software-work for hire belongs to the one having commissioned such work (namely the Client).

That is why the absence of a written contract clearly setting boundaries for the Client"s and the Developer"s rights and obligations may lead to confusion, especially where other elements must be considered as well (for instance one of the parties being a foreign national - situation which triggers a possible conflict of governing laws, the existence of other commercial agreements between the two parties covering other projects, etc.).

Clarity is relevant with IP rights especially if the Client intends to use parts of the software for other projects as well or wishes to sell the software (the buyer will request that you guarantee your legitimate ownership of the object of the sale).

5. Final notes

Many companies fear that if they hire a Developer, he will use the newly created software pretending that it is his property or that he will use the accessed know-how in favor of the next client.

To avoid running such risks, it is in both parties" interest for them to conclude a well written contract covering the way in which the software development outsourcing is to take place. Only by approaching these aspects right from the start will the Client and the Developer lay the basis for a successful project and for a long-term partnership. Also, one should not forget about the Client"s protection against the risk that his own employees may infringe on his IP rights (such employees have access to the source-code they created and to valuable/sensitive information within the company). A confidentiality/non-disclosure agreement concluded between the employer and the employee should act as an efficient protection tool in this case as well.

About author:

Claudia Jelea is an attorney-at-law specializing in copyright, trademarks, e-commerce, IT&C and personal data protection. She holds two master"s degrees in IT law and, respectively, in European intellectual property law from Stockholm University, Sweden. She is both a lawyer with the Bucharest Bar and a licensed trademark attorney.

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