Are you sure YOU own your software source code?

If you outsource your software development or are considering doing so, are you aware of your rights and legal standing in this area? You might be surprised to learn that the default option is for the developer to retain ownership of the source code. The last thing you need is to discover this by way of a costly legal issue and disruption to your clients’ labs or electronics equipment.

At their worst, disagreements can be protracted and costly. In 2021 a 15 year dispute between South African company Medscheme and software developer Neil Harvey & Associates was not winding down, it was escalating. The legal costs are eye-watering, and that’s before considering lost revenue and reputational damage as a result of claims that Medscheme has been “stealing software”.

What you need to know: Copyright and source code

Software ownership issues are about who owns the intellectual property. In UK law, as in many other countries, this boils down to who owns the rights to the source code.

It is not always feasible to employ your own developers with the range of skills needed to create bespoke software. Contracting a third party supplier is an efficient and cost-effective way to access the expertise you need to create a software solution that fulfils your exact requirements.

For this relationship to function well, however, you need to be aware that the default intellectual property agreement is very different when you contract with a supplier to develop your software, compared to an employee doing the same.

If an employee develops software, the software source code they’ve written will belong to their employer. If a contractor develops software, they will retain ownership of the source code unless the ‘contract for services’ stipulates otherwise. If an employee and a contractor jointly create the software they jointly own the copyright, meaning the contractor could still legally object to the company accessing, amending or using the source code.

A poorly drafted contract can create a whole world of pain, especially if your developer isn’t as skilled as you expected. Towards the end of 2021, Transparently Ltd brought a legal case for compensation. It had terminated a £350k software development project that was two-thirds complete because it was unhappy with the supplier’s work. The judgement didn’t award any compensation, however because the contract provided for software ownership rights to be transferred upon full payment, which never happened. The client has been left without access to the source code and an expensively useless outcome.

Thankfully, potential disagreements can be ironed out easily enough with attention to the detail of your contract if you are aware of the legal landscape at the outset. Read on for an outline of your options and the benefits and drawbacks of each.

Which kind of software agreement do you need?

There are three main types of software agreement that are relevant when you’re hiring a software development firm or a freelancer. We will outline them below and give an indication of what you, as the client, get as a result of each type of agreement.

Non-exclusive licensing agreement
Exclusive licensing agreement
Transfer of copyright (this is where you, the client, own the source code)

Non-exclusive licensing agreement

A common situation when buying a software package that’s already been developed is for the purchaser to be granted a non-exclusive licensing agreement. A really good example of this is Microsoft 365. When you buy a licence, you are one of many users who can buy and use the software.

If you are outsourcing software development and there is nothing stipulated about ownership of the source code in your contract, then they will almost certainly retain legal ownership. That means they still have the right to allow others to use the software, much like a non-exclusive licensing agreement.

Benefits:

Non-exclusive licences will almost certainly be the cheapest option, as the developer retains full ownership and has the option to sell to a number of customers.
Easy software maintenance as all bug fixes, code updates and software upgrades should be managed by the developer for the duration of your licence (check your licence agreement to be sure).

Drawbacks:

Your competitors can also buy a licence and use the software too. This might be fine for Microsoft Word, but what about the bespoke software allowing your Biotech device to share medical readings efficiently with your customers’ databases?
Plus all the other drawbacks listed under ‘Exclusive licensing agreement’ below.

Exclusive licensing agreement

A common option for bespoke software development is for the purchaser to be granted an exclusive licence. For the duration of the licence, only the purchaser can use the software. The developer cannot use the software source code in projects for anyone else and they also can’t use it themselves until the licence expires.

Benefits:

Cost: exclusive licences will almost certainly be cheaper than purchasing ownership of the software and its source code.
Easy software maintenance as code updates and software upgrades should be managed by the developer for the duration of your licence (check your licence agreement to be sure).
Exclusive use means you know your competitors cannot use the software or its source code for the duration of your licence.

Drawbacks:

Lack of control over timetable and quality of bug-fixes and code updates because you are wholly dependent on the developer. If your products support medical researchers to efficiently gather data in the field, what is your contingency plan for your software development agency going bust?
Problems re-licensing or using the software again at a later date if your licence lapses and your developer issues an exclusive licence to someone else.
Hidden costs or lack of control over future costs, because you are tied to the original developer even as your business needs change.
Problems if you plan to seek investment or sell your product (or company) later down the line. Not owning your business critical software is a big vulnerability in this area.

Transfer of copyright (or ownership)

If you need a bespoke software product, for example if you provide specialised electronics to customers who rely on the stability of your products, you will ideally want to own your software outright. If the transfer of these rights isn’t explicit in your ‘Contract for service’ then it is very unlikely you will have any legal basis for ownership of the software.

Something important to note is whether or not third-party or open source code forms a part of your bespoke software. Developers may use snippets of publicly available code to reduce costs and development time. You can’t own the rights to third party or open source code, even under a transfer of copyright agreement. This does not present a problem for your project as long as you are aware of it and a responsible developer will let you know if this is the case.

Benefits:

No one else can use your software or share the source code with anyone else without your agreement.
Complete control over the timetable for bug-fixes, code updates, upgrades and further development of the core software as your business need changes.
Seeking investment or selling your company will be easier. You will be able to transfer full ownership of the software and source code, making your product or company a much more attractive proposition.

Drawbacks:

This is the most expensive option.
You need to have a plan and budget in place for software maintenance and upgrades. However, if you partner with the right software developer this will be something you discuss up front and shouldn’t cause a problem.

Gain a competitive advantage … and hang on to it

We approach software development from your perspective. If you need bespoke software to deliver tangible results and delight your customers, we are here to work with you. Part of this is ensuring you get the best long-term solution to meet your needs.

We hand over full ownership of the source code for your software and this will be detailed in any contract we enter into. We understand that you need full control over the software that is integral to your products performing the way you want them to.

We also manage your software hosting and maintenance and we’ll discuss these (and likely future development needs) with you up front, so you can be sure you’ll get the complete solution you need and expect. Whether you’re focused on increasing the efficiency of what you do, improving an existing product or bringing a new product to market, we’re interested in the long term view and helping to develop the full potential of your product or solution.