Suppose a computer programmer is hired by a local pet shop to develop a custom inventory feeding management system. The programmer has got his own business: he’s either a sole proprietor, Subchapter S corporation or some other “legal animal.” The point is, he’s not hired as a formal salaried employee of the pet shop, but as an independent contractor. He tells his client the project should take about two months, he’ll be working about half the time at his own office and, balancing this project with the needs of his other clients, should be able to devote about 20 hours per week to it. His client tells him to work whenever and wherever he can.
The programmer’s client tells him how her business operates and what she needs the software to do. Relying on his programming skills and expertise, she gives him free rein to design and code it. She contributes no existing code. There’s no formal contract, just a couple of letters confirming the retention and the anticipated fee for the project. Nothing about ownership or copyrights. The programmer does the development work on his own pc, installs the software on the new one he has recommended his client purchase, and everything works. His sole compensation is his $15,000 fee, which the pet shop owner gladly pays.
For the pet shop, business is booming. Its owner attributes this directly to the efficiencies gained by using the software. She thanks the programmer for the terrific competitive advantage and begins to think she might make a fortune marketing the software to other pet shops. Meanwhile, the programmer has kept a copy of the software and has the same idea. Who has the right to commercialize this software? The programmer, who created it? Or his client, who paid the programmer $15,000 to do it.
The answer may be surprising to most lay persons: in this case, only the programmer can further market the software. He owns the underlying copyright in the software. The pet shop owns the single physical copy of the software delivered by the programmer. Section 106 of the Copyright Act affords the owner of a copyright the exclusive right to copy, create derivative works (modifications) and distribute the copyrighted work (as an exception, the owner of a copy of software can create a copy for back-up purposes). In the case of computer software, these rights are essential to commercialization. Anyone exercising these rights without the permission of the copyright owner is an “infringer” and subject to being sued for damages. These rights arise automatically upon creation of the copyrightable work (software is a copyrightable work of authorship) and vest in the creator or “author,” in this case the programmer.
The pet shop would own the copyright under these two circumstances: (i) if the programmer were not an independent contractor, but an employee of the pet shop, in which case the software would be a “work made for hire” under section 201(b) of Copyright Act, prepared by the programmer within the scope of his employment; or (ii) there was a written contract between the pet shop and programmer clearly assigning ownership of the copyright from the programmer to the pet shop. The Copyright Act also lists various types of works that, by their nature, will be considered works made for hire, and thus owned by the hiring party, if the parties agree in writing that the works are to be works made for hire. These include “works 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….” Software is not on the list.
Disputes over copyright ownership involving works created by independent contractors are numerous. Quite often, the parties will agree on the preparation of a work without any formal written contract or, if there is one, it won’t address the issue of copyright ownership. This often turns out be a guarantee of expensive headaches down the line.
Back to our example. As you recall, there is no formal contract between the programmer and the pet shop, just a couple of letters, neither of which speak to the issue of copyright ownership. The pet shop owner wants to market the software and prevent the programmer from doing so. She sues. Let the headaches begin!
One of the key factors courts will examine in this type of disputes is whether the nature of the relationship between the hiring party and the “independent contractor” more closely resembles a traditional employment relationship. For copyright purposes, this is critical. Remember, if an employee creates a copyrightable work within the scope of his or her employment, the employer owns it. Not so, if the author is an independent contractor.
A key recent U.S. Supreme Court case on the subject, Community for Creative Nonviolence v. Reid (109 S. Ct. 2166 (1989)), affirmed the principle that, in determining who owns the copyright for a work created by someone not a formal salaried employee, courts must look at the true nature of the relationship between the parties. A court will look beyond what the parties have said or agreed in writing to determine whether the purported independent contractor should really be considered an employee. A non-exhaustive list of relevant factors includes: the hiring party’s right to control the manner and means by which the product is created; who provides the tools; where the work is performed; the duration of the relationship; whether the hiring party has the right to assign additional projects; the level of discretion the hired party has over when and how long to work; the method of payment; the hired party’s role in hiring and paying assistants; the provision of employment benefits; and the tax treatment of the hired party.
In our example, the programmer was able to control when and how he worked. The project was of limited duration. He received no employment benefits, used his own computer, had other clients, and paid his own taxes. In court, the likely outcome is that his independent contractor status will be upheld and he will retain ownership of the copyright to the software.
Meanwhile, his $15,000 project fee has been eaten up in court costs and legal fees, it’s a year and a half later, and he’s had to defer, pending the outcome of the lawsuit, any possibility of marketing the software or selling the copyright.
How could this aggravation have been avoided? The issue of copyright ownership should have been negotiated before work was begun and the agreement reflected in a signed written contract prepared with the assistance of experienced legal counsel. While this is no guarantee future disputes won’t arise, the likelihood is greatly diminished if both parties agree and document their respective rights and obligations from the start.
Attorney Eric Freibrun specializes in Computer law and Intellectual Property protection, providing legal services to information technology vendors and users. Tel.: 847-562-0099; Fax: 847-562-0033; E-mail: email@example.com.