April 13, 2022

IP Considerations for Source Code Acquisitions: Measure Twice and Cut Once

Are you or your company expecting to spend a considerable sum anytime soon on computer software? If so, you should consider the caveats and points highlighted in this brief article before finalizing your license or purchase.

Companies often acquire computer software without much concern — other than the price/cost of the product. This can be a risky approach. 

Whether your intended purchase involves a new operating system, fully automated software that facilitates product sales via a website or even word processing or email client software, there are a number of risks to be aware of when acquiring source code that is integral to your company’s business – especially if you are paying a significant price for the software. You may not get everything you think you’re entitled to get, and you may even be unknowingly exposing yourself and your company to costly litigation and unexpected competitors. You may even be required to offer your expensive new software to others for free.

It is hard to imagine a scenario where the adage “measure twice and cut once” is more fitting. This article highlights for you a handful of issues that should be considered when conducting due diligence prior to the purchase or license of costly new software. 

Generally, the issues we will highlight for you pertain to:

  1. Copyright ownership
  2. Use of open source code
  3. Existence of prior licenses
  4. Other pre-existing third party obligations
  5. IP infringement risks.

Copyright Ownership

It is absolutely vital for you to ensure that the company or person(s) intending to sell you the software actually owns the copyright in the software. Or, depending on the deal, at least has sufficient rights to grant you a license to the copyright(s) in the software and source code. If you fail to confirm copyright ownership/control, your right to exploit the software may be significantly impacted.

Determining whether the conveying party has sufficient rights in the copyright(s) to the software code may seem like a straightforward process. After all, if someone has the code resident on a hard drive or server—ready for you to access, inspect, and buy—wouldn’t they necessarily own the copyright? The answer is “no; not necessarily.” Under United States Copyright Law, copyright ownership derives from “authorship” of a “work.” And, in the absence of a “work made for hire” context (See: 17 U.S.C. § 101 – “work made for hire” is oft misunderstood and, thus, will be the topic of a subsequent article), the person(s) who created the software code is/are the owner(s) of the copyright in the software. Thus, copyright ownership is an issue quite distinct from mere ownership of the medium on which the software resides, e.g., a hard drive or server. 

Moreover, if the conveying party/seller has employed consultants and/or other third parties to assist in creating the software but has not secured the copyright rights possessed by those other parties, then there is a risk that those having copyright rights in the software may assert a claim against you (for money or to prohibit you from using the software) for using the software without paying them a fee or securing a license or other permission from them. 

A thorough investigation of the source code’s development history is crucial to evaluating the risk that persons other than the seller may possess copyright ownership rights in the software you are about to purchase. 

Open Source Issue

During the development process, software coders often rely on open source code written by third parties. True “open” source code is code that is covered by a license approved by the Open Source Initiative. The license, then, allows developers to freely use or modify the code—even for commercial purposes. However, the right to use and modify that code comes with strings attached. In some cases, the strings may be thin, such as including a notification that the code is covered by an open source license. But, in other cases, the obligations may be much more significant. For example, some open source licenses require developers who incorporate open source code into a larger proprietary work to provide the proprietary work to others for free.

If you’re acquiring proprietary source code from a developer, you’ll do well to understand whether the code you’re planning to buy or license incorporates any open source code components and, if so, what requirements and limitations pertain to the use of such open source code.

Prior Licenses

Are you acquiring software with the expectation that you’ll have the exclusive right to exploit it, free from competition by others exploiting the same code? If so, it’s important to investigate whether the company selling or licensing you the code has already licensed any others to use the code.

Other Third Party Obligations

Similar to the issue of prior licenses, it’s key to investigate whether the seller/licensor from which you’re acquiring the source code does not have any pre-existing obligations to third parties, such as a non-competition agreement, that may prohibit the company from selling or licensing the software to you or in some other way limiting your right to use the software.

IP Infringement Risks

Even the most thorough due diligence can’t provide you with a guarantee that you won’t face legal claims for infringing the IP of another by using or updating your newly acquired software. For example, there may be a software patent that covers your newly acquired source code, and it is possible that the party selling the code to you is not aware of the patent. But, the past can sometimes predict the future. And, the company or individual from which you’re acquiring the source code may have previously faced IP infringement claims or even conducted their own internal studies to examine whether patent or other IP issues surround the code. You should inquire about this, and you should also consider conducting your own internal studies/patent searching and getting an indemnification from the seller for any IP claims that arise— before closing your software acquisition deal.