Who Owns Software Copyrights?

The Copyright Act of 1976 provides that copyright ownership “vests initially in the author or authors of the work.” 17 U. S. C. § 201(a). This is a simple enough statement of law, but it frequently presents significant problems when individuals and companies assume that they understand who the “author” is and under what circumstances commissioning a work results in copyright ownership vesting in someone other than the author. This problem particularly manifests itself in the world of custom software creation and Web site development.

Several years ago the United States Court of Appeals for the Second Circuit decided a copyright infringement case requiring them to address whether the developer or the company was the owner of underlying copyrights. In Krause v. Titleserv, Inc., a disgruntled programmer who had been hired as an independent contractor by Titleserv and who had not assigned his copyrights, refused to allow the company who paid for the software to modify his work. This independent contractor chose rather to assert copyrights in an attempt to prevent the company from modifying the software they paid to be created. In other words, the programmer chose to sue by the company rather than give them the required permissions to modify the code that he had written. That this became an issue was all due to the failure of the company to contractually set expectations at the start of the relationship.

Unfortunately, this is an all too common situation. Companies enter into software development deals with independent contractors without adequately addressing copyright ownership. Many times, it is assumed by the programmer that the copyright, including the right to modify and prepare derivative works, remains with her or him. From the company side it is generally assumed that when someone is paid to create copyrighted material that flows from the original creation those copyrights will be owned by the commissioning party. Neither assumption is true, which means that when a dispute arises, litigation ensues and unnecessary expenses mount.

While the Krause/Titleserv copyright litigation may not evidence any failure to understand that the initial ownership of a copyright vests in the author, it at least demonstrates the consequences when such a mistake is made, or when an appropriate assignment agreement is not reached up front. The tale of this case dates back to the decade between 1986 and 1996. During that time William Krause, the plaintiff and programmer, performed computer and communications work for Titleserv, Inc. He wrote over thirty-five computer programs for Titleserv, eight of which were at issue in this litigation.

In 1996, Krause and Titleserv began negotiating Krause’s assignment of the copyrights in his programs to Titleserv in exchange for a five-year consulting agreement. Before any agreement was reached, Krause terminated his relationship with Titleserv after learning that Titleserv wanted to have him take direction from its new Director of Information Technology. When Krause left, he took his notebook computer, which contained the only copies of the programs, although he did leave executable versions of all eight programs at issue on Titleserv’s file servers, but locked them with a command that prevented them from being converted into a version that could be modified. Krause told Titleserv that it was free to continue using the executable code as it existed on the day he left, but asserted that Titleserv had no right to modify the source code.

The inability to modify the programs severely limited the value of those programs to Titleserv, for example, routine functions such as the addition of a new customer or a change of a customer address could not be performed. As a result, Titleserv ultimately circumvented the lock Krause had placed and a Titleserv employee made the adjustments to the program required, including the fixing of bugs, the addition of new customers, and changes in customer addresses.

After learning of Titleserv’s modifications Krause filed a copyright infringement action. Titleserv moved for summary judgment, primarily on the basis of 17 U.S.C. § 117(a)(1), which provides an affirmative defense against copyright infringement for anyone who: (i) owns a physical copy of a computer program, (ii) makes an adaptation “as an essential step in the utilization of the computer program in conjunction with a machine,” and (iii) uses it “in no other manner.” The district court, following the recommendation of the Magistrate Judge assigned to the case, concluded there was no genuine issue of material fact and granted summary judgment in favor of Titleserv.

The United States Court of Appeals for the Second Circuit agreed with the decision of the district court and determined that Titleserv had not engaged in copyright infringement because as the owner of copies of the various computer programs it was entitled under 17 U.S.C. § 117(a)(1) to make an adaptation where such adaptation was created as an essential step in the utilization of the computer program in conjunction with a machine and it was used in no other manner.

While Titleserv won this copyright infringement case, lengthy litigation was required. A victory in litigation and/or on appeal is in many regards only a hollow victory, thanks to the fact that much time, energy and financial resources are inevitably required to prevail in any such action. This type of problem is an altogether too frequent occurrence in the world of custom software development. Had Krause been an employee who had created the programs in question within the scope of his employment, the ownership of the copyrights would have vested in Titleserv. As an employee, had Krause brought a copyright infringement action against Titleserv, the employer would have likely been able to prevail at a very early stage of litigation. Similarly, had Titleserv entered into an appropriate development contract prior to commencement of development, or at the very least prior to delivery of the programs, this litigation could have been prevented or at the very least substantially shortened.

This case demonstrates problems faced by organizations that fail to plan ahead when engaging the services of outside consultants to develop software. Frequently, however, substantially similar cases end in the outside consultant being on the short end of the legal decision. In the cases where the outside consultant delivers the program and is not paid for the product the question arises as to whether the software consultant can claim copyright infringement, or whether the only recourse is a breach of contract action, which from a remedies standpoint is not nearly as attractive as a copyright infringement action. The failure to properly spell out the critical terms of such a development agreement, in writing, can and frequently does lead to litigation and unnecessary expenditure on attorneys fees.

The old saying that “an ounce of prevention is worth a pound of cure” is very true indeed.