Editors Note: Caroline Horton Rockafellow is a member of the Research Triangle Park law firm of Daniels Daniels & Verdonik, P.A.
_________________________________________________________________________________________Debunking myths is often the job of a technology attorney. One of the most common myths in the intellectual property world is that when a party engages a contractor to create a work of authorship (like a computer program), the party purchasing the services of the contractor owns the copyright in the work he creates. Although this makes perfect sense, it is simply not true.

So, if the contractor creating the materials retains the copyright in the work, what rights does the purchasing party have with respect to the work for which it paid? What rights does the contractor have to limit the use of the delivered work? The respective rights of each party are defined by the implied copyright license, a license that is at best ambiguous and at worst just plain misunderstood. Although in a perfect world, everything would be in writing and nothing would be left open to interpretation, the fact is that parties work on projects all the time without any writing in place. As a result, we are forced to understand and interpret the implied license that governs copyrighted works.

The Typical Scenario

Consider the common scenario where a technology company hires an independent contractor to create a piece of software for the company. The intent of both parties (or at least of the technology company) is that the company will own the work. However, no writing is in place between the parties, so regardless of the intent of the parties, the underlying copyright is not assigned to the company unless and until the parties put such assignment in writing. More importantly, since under the U.S. Copyright Act exclusive copyright licenses must be in writing, if terms of the license are not in writing, the underlying copyright cannot be exclusively licensed to the company. The easy fix to this dilemma is for the parties to put into writing the intent as of the date of the creation of the work, even if this writing is done after the date of creation. However, in the real word parties get greedy, disappear or are otherwise unable or unwilling to sign such documents. So what happens once the work is completed and delivered if the contractor will not assign or exclusively license the work after the fact?

The Implied License

In cases where there is no writing between the parties and the purchasing party therefore does not own the underlying copyright in the work and does not have an exclusive license to the work, then it only makes sense that the purchasing party must have some legal right to use the work it paid to have created. What it has is an implied license to exercise the rights under copyright to the extent implied by the parties’ actions at the time the work was created. For example, if a party purchases the creation of software and that software is delivered without a license or any other writing between the parties, then the purchasing party clearly has the right to use the software for its own internal purposes. The question gets more complicated when considering whether the purchasing party would also have the right to make copies of the software, create derivative works, distribute the software or exercise any other rights held by the copyright holder. These rights are implied by the conduct of the parties, and therefore are left open to interpretation on a case by case basis. As a result, there is significant litigation on this issue and there are a myriad of decision, not all consistent with each other.

Holdings of the Court

Courts will look to the totality of the parties conduct to determine the extent of the implied license. In a case known as Lulirama Ltd., v. Axcess Broadcast Services, for example, the U.S. Appellate Court examined a situation where a contractor created jingles for a company to be used in advertisements. In this case, there was no valid written agreement between the parties addressing ownership of a portion of the jingles created by the contractor. The contractor alleged that the company’s use of the jingles constituted copyright infringement.

The court held that not only did the use of the jingles not constitute copyright infringement, but so long as the parties were able to demonstrate that (i) the company requested the work, (ii) the contractor actually made the work, and (iii) the parties intended that the company has all rights consistent with copyright ownership, the company would have an implied nonexclusive license to exercise all the rights of copyright ownership under the license, including copying the work, preparing derivative works, distributing copies of the work and performing and displaying the work. The court went further to state that because the license was supported by consideration, (i.e. the company paid contractor to create the work), the license was irrevocable and the contractor could not decide at a later date to revoke the license.

However, not all decisions are as favorable to the company paying the bill. In the case of MacLean Associates, Inc. v. Wm. M. Mercer-Meidinger-Hansen, Inc., another U.S. Appellate Court held that an implied license to software granted to a company by the contractor who developed the software at the request of the company could only be extended only as far as the market for the software intended by the parties as of the date of grant; it could not be further developed by the company for an entirely different and unrelated market. In that particular case, the company was developing a system specific for one particular client. When the company engaged the contractor, the company clearly indicated to the contractor that the development work was to be done for just the one client and there was no expectation on the part of either party that it would be further developed for other clients. The court found that once the company took the original software created by the contractor and then modified it in order to incorporate it in a separate product and commercialize it for an entirely different purpose than originally anticipated, that action was outside of the implied license and constituted copyright infringement.

Implied License — Risks for the Purchasing Party

So assuming that the implied license can effectively give the purchasing party all of the rights of a copyrights holder and all of the rights necessary to move forward with its product development (although this assumption may not be a good one), then is there any other risk for the purchasing party? Yes, there is absolutely a significant risk for the purchasing party. Most importantly, if the purchasing party has only a non-exclusive license, that means that the contractor retains a non-exclusive right to use the materials created for the purchasing party and to exercise all of its copyright holder rights thereunder, including the right to sell or assign the copyright to a third party. This could be potentially devastating for the purchasing party, particularly if the software that the purchasing party paid to develop is sold to its competitors.

Fortunately, the purchasing party may have some right to restrict this action if the copyright materials include the confidential information of the purchasing party and there was at least a minimal nondisclosure obligation between the parties. In other words, while the purchasing party may not be able to secure all of the exclusive copyrights to the materials, it can prevent the contractor from disclosing the company’s confidential information if the contractor is under an obligation not to disclose such information. In addition, if the copyrighted materials created by the contractor read on claims covered by patent rights held by the purchasing party, then the purchasing party can prevent the contractor from making, using or selling a product that would infringe the purchasing party’s patent rights. In other words, if the functionality of the software is protected by a patent owned (or exclusively licensed) by the purchasing party, even if the contractor owns the copyright in the software, the contractor may not be able to use the software without a license from the purchasing party.

Implied License — Risks for the Contractor

If a contractor is knowledgeable about copyright law and intends to exercise its retained rights under the copyright, should the contractor rely solely on the implied license? Absolutely not. If the parties agree that the rights to be granted to the purchasing party will include only a nonexclusive license, and the parties therefore forego any written contract providing such license, the contractor still risks the purchasing party making a use of the work that is beyond what is intended by the contractor, but that still does not violate the implied license. For example, if the contractor entered into the implied license with the understanding that the purchasing party was a small entity and its use of the copyrighted work would have minimum impact on the business of the contractor, a sudden growth in the size or market share of the purchasing party or a merger of the purchasing party into a large company could have significant impact on the competitive business of the contractor. This might not violate the implied license, but would likely have negative consequences for the contractor. Accordingly, if the intent of the parties is for the purchasing party to have only a nonexclusive license, the parties should still put this license in writing in order to clearly define the expectation of the parties and any restrictions on the license or specific owner reservation of rights.

Conclusion

It is always best when running a business to get everything in writing and to get important writings reviewed by legal counsel. This is important in all aspects of business, but is particularly important when it comes to intellectual property and specifically copyright ownership. In cases where the parties fail to put a written document in place, it is always recommended to clean up the initial understanding by putting written agreements in place once the parties realize the oversight. Such documents should assign ownership where appropriate, identify and grant exclusive licenses where appropriate and define nonexclusive rights with all limitations and restrictions where appropriate.

When it is not possible to secure a later written document, either because people are no longer available or because they are no longer willing to document their original agreement, the scope and extent of any implied license must be carefully analyzed and considered in view of the exercise of rights under any implied license in order to avoid unnecessary disputes and litigation.
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Daniels Daniels & Verdonik, P.A. has been serving the legal needs of entrepreneurial and high technology clients for more than 20 years. Caroline Horton Rockafellow concentrates her practice in the representation of entrepreneurial and technology-based business, focusing on corporate, technology and licensing matters. Questions or Comments can be sent to crockafellow@d2vlaw.com