Securing and Protecting Software Code for Start-ups

One of the most important issues for a technology start-up company is ensuring that it is adequately securing and protecting its proprietary software code.

  1. Securing Your Software Rights

A start-up must first be sure that it has secured all rights in any software code that it considers proprietary.  The most important step to achieving this goal is to have written agreements with each person who is developing software for the company, particularly independent contractors, and that the agreements include terms that not only designate the software as work made for hire but also assign to the company all rights in the proprietary software.  Some background in copyright law demonstrates why an agreement containing those terms is essential.

Under copyright law, a work, including software code, is owned by the author of the work.  An employer is considered the author of the work if the work is a “work made for hire.”  A company’s rights in its software code may be relatively well protected when the software developer is an employee of the company because software code written by an employee within the scope of his or her employment constitutes work made for hire.  An employee for purposes of the work made for hire doctrine means an employee under the general common law of agency.[1]  An employer is the author, and therefore the owner, of the copyright in software code written by an employee within the scope of his or her employment under the federal copyright statute.[2] 

The same is not true if the company’s software developer is not an employee of the company.  When the developer is not an employee, the software code may not be considered work made for hire even if the company and the developer have entered into a contract specifically designating the code as work made for hire.  The reason is that when the developer is not an employee of the company, the work only constitutes work made for hire, giving the company the status of the author of the work, if: (a) the work is specially ordered or commissioned by the company; (b) the parties expressly agree in a written instrument that it is work made for hire; and (c) the work falls within one of nine specific categories.  It is the last of the three requirements that makes reliance on the work made for hire doctrine problematic for the company.  The reason is that the nine categories are as follows:  (1) a contribution to a collective work; (2) a part of a motion picture or other audiovisual work; (3) a translation; (4) a supplementary work; (5) a compilation; (6) an instructional text; (7) a test; (8) answer material for a test; and (9) an atlas.[3]

It is not necessarily clear whether a company’s software code will fall within any of the nine categories.[4]  The result is that even if the company has a written agreement with the developer specifically designating the software code as a work made for hire, the agreement is not necessarily sufficient to give the company copyright ownership.  Instead, the company must also be sure that the company’s agreement with the developer includes assignment terms that effectively transfer to the company all ownership rights in the proprietary software.[5]

In fact, a written agreement with work made for hire and assignment terms is absolutely advisable even when the developer is an employee of the company in order to avoid any claims by the developer that he or she was not an employee or that the software code was developed outside the scope of his or her employment.

Having an agreement that effectively transfers to the company the necessary rights in the software is important to protect the company’s software for its operations.  It will be just as important, and likely even more so, upon any sale of the company.  A potential buyer of the company will typically want to know that the company has adequate rights to all its proprietary software, and will want to ensure as part of its due diligence prior to the purchase that the company has secured those rights through written agreements.

  1. Protecting Your Software Code

In addition to properly securing the rights to software, a company must also properly protect those rights. There are a number of legal measures that a company can take to help protect their rights in software code.

a.) Trade Secret Protection

The common law will provide trade secret protection to software code provided that the code is in fact a trade secret.  In order to maintain protection of the code as a trade secret, a company must take adequate measures to keep the code a secret.[6]  Those measure include actions such as limiting access to the code to only employees who have a legitimate need for such access, having confidentiality agreements with persons that have access to the code containing provisions prohibiting them from disclosing the code or using it for any purpose other than as allowed by the company, and implementing other safeguards, including security measures, to keep the code from becoming known to the public.  While confidentiality agreements will protect a company against the disclosure or use of software code by a party to a confidentiality agreement, trade secret law will also protect the code from being used by those that have not signed a confidentiality agreement if they threaten to use the code in breach of a confidential or fiduciary relationship, or have acquired the code by improper means.[7]

b.) Copyright Protection

Copyright protection automatically exists when a work, for example, software code, is reduced to a tangible medium.  Assuming the company owns the copyright to the software code, copyright law will prohibit others from copying, distributing, displaying, or making adaptations of the code.  The copyright will typically protect the work for the life of the author plus 70 years and potentially longer if the software code constitutes a work made for hire.[8]   The company can enhance those rights by registering the copyright with the United States Copyright Office.

Registering the copyright provides several additional advantages.  Subject to certain exceptions, in order to bring a lawsuit for copyright infringement against an infringer under the federal copyright statute, the copyright must be registered.[9]  Additionally, federal copyright law provides that the holder of a registered copyright that has been infringed may also be awarded attorney’s fees by the court[10] and be eligible for statutory damages of between $750 and $30,000 per work regardless of whether actual damages can be proven.[11]  However, those provisions only apply, again subject to some exceptions, if the infringement commenced after the copyright was registered unless the copyright was registered within three months of first publication and the infringement did not begin until after publication.[12]

c.) Patent Protection

Finally, a company may also be able to patent software code.  The patentability of software code has been the subject of much litigation in recent years. While software code can in some circumstances be eligible for a patent, it can only be patented if it meets certain criteria.  The main benefit of a patent as compared to a copyright is that a copyright protects the expression of an idea but not the idea itself.[13]  The patent, in contrast, can protect the underlying idea.

By considering these issues and taking appropriate measures, a start-up company can help protect what may be one of their most important assets, while at the same time enhancing the company’s value and attractiveness to a potential acquirer.

J. Michael Wood, Esq. is a partner in Boylan Code LLP’s Business and Corporate Finance department, and focuses his practice on business transactions.

[1] Community for Creative Non-Violence v. Reid, 490 U.S. 730 (1989).
[2] 17 U.S.C. § 201.
[3] 17 U.S.C. § 101.
[4] Compare Stanacard, LLC v. Rubard, LLC, 2016 WL 462508 (S.D.N.Y 2016) with Pay(q)r, LLC v. Sibble, LLC, 2015 WL 9583034 (N.D. Ohio 2015).
[5] 17 U.S.C. § 204.
[6] See, e.g., Schroeder v. Pinterest, Inc., 133 A.D.3d 12 (1st Dep’t 2015).
[7] Id.
[8] 17 U.S.C. § 302(a) and § 302(c).
[9] 17 U.S.C. § 411.
[10] 17 U.S.C. § 505.
[11] 17 U.S.C. § 504.
[12] 17 U.S.C. § 412.
[13] 17 U.S.C. § 102(b).

To read the published article in the Daily Record, click here.

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