News & Views

Tech development contracts - who owns what

When a tech developer and customer come together, the main focus of the initial conversations is always around what the tech will do and how exciting the new tool will be for the businesses involved. In this situation, you want your solicitors to balance being both the enablers of the deal and the worrywarts of the details. One of the key areas that can stifle those conversations however is that of ownership.

Default position

The general default legal position in England and Wales is that whoever creates the new tech will own that new tech. This position has been enshrined in copyright practices for decades, with the latest legislation still being founded on the Copyright, Designs and Patents Act 1988. The key asset created is essentially the source code in the new tech development and it is the copyright in such that is afforded automatic protection, whereby the new copyright will vest in the creator (developer) whilst the user (customer) will only be able to use such solution by virtue of a licence from the creator/owner. 

It is important therefore to dispel the myth that just because you have paid for a tech solution, you automatically own that new offering. Fortunately, the default position can be contracted out of, provided that both parties are in agreement.

What you can agree: outright ownership or licence?

If you are building a new tech from scratch, then the undertaking will be quite a task for the software developer and so fees may be quite high, and the question of ownership will need to be front and centre of initial conversations. Over recent years, we have seen software developers becoming more willing to assign over their rights in the new tech to the customer - particularly so when the original ideas and business logic comes from that customer. The value of that assignment often forms part of the consideration of the contract, with the assignment ultimately meaning that the customer effectively becomes the owner of the new tech and they can use the tech as they wish.

An alternative to an assignment, is a licence from the developer to the customer. Under a licence arrangement, it means that the developer remains the owner of the new tech and the customer is only able to use that tech in accordance with the licence granted by the developer (with such permissions as agreed between the parties). An exclusive licence means that the customer would be the only entity that the developer would be able to licence the tech onto. A sole licence goes one step further and means that not only will the customer be on the only licensee, but the creator may not even be able to use the tech themselves. Phrasing of the licence is important as getting it wrong may even inhibit a customer from using the tech within its own group of companies.

Is mixed or co-ownership possible?

It is possible for the parties to agree co-ownership of the intellectual property (IP) in the new tech, but this has proven time and time again to become a tricky relationship to handle and can often lead to confusion or complications down the line. 

When the new tech development is being made to an existing solution, then the conversations tend to become a little more guarded around ownership, particularly so if the developer owns the original tech solution. At this stage, the conversations need to be firm but fair around how this will pan out. After all, the new tech development may stand to benefit the original developer’s solution, and so the customer may ultimately fund a benefit that the developer can then capitalise for themselves. Conversely, the development may be so unique that it can only benefit the customer, and the parties can more easily agree who owns the newly developed components to the tech solution.

Depending on the relationship between the size of the parties, and the sums involved, this might just be a moot topic, and the customer may be happy for the developer to own, benefit, and even sell-on the development as the original customer ultimately still gets what they want and originally paid for. Whether or not the customer may later benefit from the developer’s future exploits is a commercial point that can be discussed.

As above, the options available to the parties are for the newly developed component to be either licensed to or assigned over to the customer. If a licence is in play, then it’s important to ensure that the terms of the new arrangement align with the original existing terms and a non-exclusive, exclusive or sole licence of the new component is agreed as appropriate.

If the customer wants to own the newly developed components themselves, then we venture towards the overall tech becoming a composite solution with multiple and mixed ownership. Whilst assignment of the new tech over to the customer may restrict the developer from being able to exploit the new component without a suitable licence back to them, the customer may ultimately end up owning something that they could not otherwise use at a later date without the underlying original tech.

Finding an amicable, pragmatic, and workable solution is essential in this situation and documenting the assets being created and how it interacts with the existing tools equally so.

Future proofing

Ownership of the technology can also become an important factor later down the line if the developer or customer look to sell on their business. Ownership of an underlying tech may add to the multiple applied to a corporate sale, albeit an appropriately worded licence should also allow the transfer for the technology where necessary.

Should a customer not own their underlying tech then this is going to come out in the due diligence of a sale and may ultimately either scare off any buyers or potentially stifle the customer’s ability to drive up the value of the company.

Conversely, another essential consideration to the development will be what happens if one of the parties ceases to trade. Relying on a licence arrangement with an insolvent developer can be disastrous for a customer, and so, ensuring that the agreement suitably caters for this eventuality is also important. The storage of software solutions in escrow seems to be a dying art, but is still an option, if the cost and logistics of the arrangement can work for the parties involved. Equally, ensuring that the infrastructure has suitable back-ups and/or trigger events that transfer ownership can ensure continuity.

So do you need to own the new tech?

For fear of deploying the classic lawyer’s answer: it depends. 

There is a fine balance to strike to ensure that each party’s initial interests are met and are also offset against their respective long-term goals. If it is important to one party that they own what is created, then that can be reflected with the payment being made and/or the parameters of the licence between the parties.

If the new development is so unique to the customer that it is intrinsic to their business, then that party may want to own the development outright as something that is uniquely theirs, whereas the reality is it may be futile getting into arguments over ownership as the development may be of no use to anyone else. Equally, if bespoke development would not be useful to anyone without the underlying system in place, then ownership may become more a point of vanity than practical purpose.

Should the new development potentially be beneficial to other parties however, then either the developer or the customer may want to retain ownership and/or the right to exploit the development with multiple third parties. In this case, ownership of the underlying tech may limit which party can actually do this, and to what extent one or both of the parties may financially benefit from that future exploitation.

We have acted on both sides of the argument with there being merits in both camps. What is abundantly clear though, is that it is important to know the options available to you and to determine what you want to do about ownership from the offset – maybe before any further commercial discussions even happen with your counterparty. Once you have decided what is important for you and your business, you can then set your stall out early doors as to who will own what and consider the actual pragmatic implications of the contract arrangement for both parties.

For further information, please email Mark Hughes or Philip Bowers or call 0151 906 1000.