International Law

Avoid a Tug-of-War

By Rahul Cherian Jacob

Many software companies outsource software development to subcontractors. The software company may integrate the outsourced software into its own software and license the entire package as a solution to clients, or they may give the software to the party that engaged the company to develop the software.

The outsourcing model for software development brings about its own share of legal issues, which, if ignored, could have serious consequences for the company outsourcing its software development.

This article deals with the legal issues involved in outsourcing software development and the steps to be taken by companies that develop software using the outsourcing model so as to protect their interests.

Nitty-gritty of protection

To understand the legal issues involved, it is essential to understand what protection is available to software programs. Software programs are protected in India predominantly by the Copyright Act, 1957. This Act protects `works’ such as artistic, literary and musical works and sound recordings, cinematograph films and other matter.

The protection extended is limited to expression and not to the ideas behind the expression. For example, in the case of a book, what is protected is the actual writing, not the theme or plot behind the book. The registration of a `work’ under the Copyright Act is not a pre-requisite for protection under the Act.

However, a certificate of registration of a `work’ is considered prima facie proof of ownership.

A computer program is protected as literary work under the Copyright Act. It is defined as “a set of instructions expressed in words, codes or schemes or in any other form, including a machine-readable medium, capable of causing a computer to perform a particular task or achieve a particular result.” This definition is sufficiently wide and covers source codes as well as object codes.

Since copyright law protects only the expression and not the idea, if the source code to a program is obtained by a competitor, it would not be an infringement of the copyright to develop a new source code based on the ideas behind the original source code.

This is one of the reasons why Microsoft spends millions of dollars to prevent the source code of Windows being disclosed to the public.

Under copyright law, the owner of the software program is the author of the code for the program.

An exception to this rule is when an employee writes the code in the course of his employment or apprenticeship. In such a case, the employer becomes the owner of the copyright automatically on the creation of the code by the employee, even though the employee is the author of the code.

When software development is outsourced to subcontractors, the legal position becomes a little complicated.

Since the subcontractors are not `employees’ but independent entities, they will be the owners of the code. Thus, if the subcontractor owns the code, then the person or party who has engaged them, (the contractor), does not have the copyright in the code. Consequently, the contractor cannot exercise all the rights that a copyright holder could with respect to the code, including copying, licensing and selling the rights to the code. The contractor would, however, have certain rights such as the right to use the code for internal purposes.

The practical problems of this peculiar position of the subcontractor owning the copyright in the code, as per the Copyright Act, could arise if for some reason the subcontractor who wrote the software, decides to use the same (or similar) software to develop a new product or license the software to another party and wishes to minimise the exploitation of the software by the contractor.

The subcontractor could take action under the Copyright Act for violation of copyright against the contractor and prevent the contractor from modifying the software, licensing the software or receiving maintenance and support for the software. Copyright violation is particularly dangerous since it is also a criminal offence.

If the subcontractor decides to take action, it could have potentially disastrous consequences for the contractor. If the subcontractor succeeds in getting an injunction against the contractor, then the contractor could have to stop using the code written by the subcontractor. If this code is essential to the software as a whole, then the software would be unusable by the contractor.

If the contractor has licensed out the software, then the licensees could also be unable to use the software. The contractor could then be liable to licensees for any loss they might suffer as a result. Similarly, if the contractor has developed the software for a third party, they could also be unable to use the software, thereby causing such parties to take action against the contractor.

The Need for a Detailed Written Contract 

It is essential, when engaging a subcontractor to write code, that a detailed agreement is entered into with the subcontractor. Such agreement must, apart from placing confidentiality restrictions on the subcontractor and stating the terms of engagement, also lay down that all code which is created shall be assigned to the contractor and the contractor shall be the owner of all rights in the code.

The agreement should also include a provision that the subcontractor shall sign or execute any document that the contractor may require to confirm the rights of the contractor in the software. It is also critical to get a warranty from the subcontractor that the subcontractor has not violated the intellectual property rights (IPR) of any third party when writing the code and that the subcontractor will compensate the contractor for any loss that the contractor incurs due to the code violating the IPR of some third party. In addition to entering into a detailed agreement, it is also essential that the subcontractor complies with all the requirements relating to assignment that are specified by copyright law.

Parties generally enter into agreements only when they fear the worst. In most business relationships, a simple oral agreement will suffice. While one can hope for the best and work without an agreement, it is important to prepare for the worst.

Having a proper agreement in place in all instances will protect the contractor in the one instance where the business relationship sours. The business of a company is the most critical aspect of its functioning, and the legal planning and strategy will ensure that the company can spend more time on its business and less on its legal problems.

Full post as published by Technology Law India on April 18, 2007 (boomark / email).