Do contractors help develop your software? Read this if you plan to sell or license it to others.

A recent decision from the United States District Court for the District of California could, if upheld, significantly limit companies’ ability to transfer its proprietary software unless the company has obtained an assignment from each and every developer.

In a decision published November 5, 2012 in Amaretto Ranch Breedables LLC v. Ozimals Inc., Ozimals argued that Amaretto Ranch infringed its copyright in software used in connection with the online virtual reality site Second Life. Amaretto Ranch filed a declaratory judgment action and argued that it could not infringe because Ozimals did not own the software. Three developers created the software, but only two of them had executed assignments in favor of Ozimals.

The court agreed with Amaretto Ranch’s argument and held that in order to transfer a copyright, all authors must agree to the assignment.  Otherwise, the attempted assignment is merely a non-exclusive license.

The decision indicates that companies who have others develop custom software must be extremely vigilant in obtaining assignments of copyrights.  The decision could be significant in many ways, including:

  • Start-ups whose software was developed by contractors or founders before IP assignment agreements were in place must ensure that they that the creators have assigned all work, no matter when created.
  • Established companies who use contractors to develop software should ensure that the development agreement includes a clear assignment clause.  The contractor should also warrant that it obtained a similar assignment from all individuals who work on the project.
  • Venture capital investors, private equity investors, and purchasers in M&A transactions should perform thorough due diligence on the development history of the target’s proprietary software before making the investment or purchase.

To reach its conclusion, the Northern District of California relied on the Ninth Circuit’s decision in Sybersound Records Inc. v. UAV Corp., which held that a co-owner of a jointly owned copyright cannot grant an exclusive license without obtaining consent from all co-owners.

The new case does seem to conflict with various decisions by other courts, so it’s likely that this case will be appealed, or perhaps interpreted by other courts.  Nonetheless, it should serve as an alarm that companies who develop, acquire, or invest in proprietary software must carefully document the terms of the development agreement.

One response to “Do contractors help develop your software? Read this if you plan to sell or license it to others.

  1. Very helpful, Jim. Thanks. Nir.

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