Frequently Asked Questions
Computer Law 101

Unlike some many areas of law, computer law is not necessarily intuitive.  You either know how it works or you don't.  In your everyday experience, you learn that you probably own something if you paid for it, but, it's not so simple with computer technology.  Read on for more information.  Remember, you can also search our site for even more content!

Table of Contents

1. Is it true that I may not own the software, even after I pay for it?
2. Does a software developer give a warranty, even if it doesn't say a word?
3. What's the difference between licensing and ownership?
4. Can I be liable for damages caused by my software, even if I gave it away for free?
5. Do I need a written contract?
6. Should I register my copyright or trademark?
7. Any general additional pointers?
8. Do I need an attorney?

Is it true that I may not own the software, even after I pay for it?

This is probably the most commonly misunderstood legal issue among purchasers and developers of software: An independent contractor continues to own the computer software even though it was paid to create the work by the "purchaser."

This is simply called the "What do you mean I don't own it, I paid for it, didn't I?" problem.

Copyright law provides that a work of authorship created by an employee, within the scope of employment, is owned by the employer. However, a work of authorship created by an independent contractor continues to be owned by the independent contractor, even though it was paid to create the work. What does the "purchaser" purchase? It depends, but possibly only an implied license to use the software within a certain scope of use.

Also, recent treaties permit developers to retain "moral" rights to the software even if the ownership is transferred. The moral rights cannot be transferred, but only waived using specific language.

The important point is that not properly structuring a transaction can be devastating for either party. And, it is usually far more cost-effective and reliable to dedicate the resources necessary to properly structure the transaction, rather than the costs of litigating and/or settling the matter later. Rarely can such a fundamental problem be resolved so as to place the parties in the position that was the essence of the bargain at the time of contracting.

Consider the problems associated with complying with representations and warranties concerning ownership of software in a future merger or acquisition. Consider the way this issue ratchets its way down through subcontractors.

Potential Solutions: Hire a true employee. Use assignment language in the transaction agreement. Use waivers of moral rights. Use specific licensing language. See our publication on Copyrights.  Contact us for more details.

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Does a software developer give a warranty even if it doesn't say a word?

Probably the second most fundamental misconception concerning software products: The Uniform Commercial Code (UCC) provides that a seller of computer software gives implied warranties of merchantability and fitness for a particular purpose, unless expressly disclaimed in a "conspicuous" writing. This is the reason you see so much bolded, capitalized, language in software license agreements—the authors are complying with the UCC.

This is simply called the "What do you mean I gave a warranty, I didn't say a word about warranties, did I?" problem.

A warranty of merchantability is a warranty that the software will perform its generally intended use. A warranty of fitness for a particular purpose is a warranty that the software will perform the use specifically intended and expressed by the purchaser. The UCC also imposes standards for express warranties and warranties of title.

Note, however, that the UCC does not govern pure service-related agreements, but, those types of agreements must be properly structured to avoid UCC warranty issues.

This issue also affects resellers. If a manufacturer disclaims warranties to its resellers, the resellers may still give implied warranties to its customers. Therefore, the reseller must also properly disclaim to its purchasers. In addition, the Federal Government has enacted the Magnuson-Moss Consumer Warranty Act, which provides that certain warranties may not be disclaimed, if sold to consumers. Coordination of contractual terms is crucial.

Potential Solutions: License, sell and resell computer software (and hardware) only pursuant to a written agreement which contains the exact written warranty that you intend to provide. "Conspicuously" disclaim all or remaining warranties. Consumer, rather than business-to-business, transactions must comply with the Magnuson-Moss Consumer Warranty Act.  Contact us for more details.

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What's the difference between licensing and ownership?

The intellectual properties are: patents, copyrights, trademarks and trade secrets. Computer software, which contains one or more of the intellectual properties, is either transferred outright or licensed. If licensed, a developer can retain ownership of the software, and transfer less than total ownership.

This is similar to an owner of real estate leasing property. The owner retains ownership, but the lease gives an interest in the land. The lease provides for rent, exclusivity, term, upkeep of the property, assignability, subletting, etc. The formalities of transferring real estate ownership, however, tend to keep the transfers of title obvious.

Not so with computer software. All right, title and interest in software can be transferred orally. This is called the "What do you mean I sold the software outright, I just sold a license to use the software, didn't I?" problem. (See Question 1.)

Generally, purchasers prefer to obtain ownership of custom software commissioned by them. Developers prefer to license the software. The balancing of interests of the purchaser and developer, and knowledge of the industry, is crucial to properly structuring a transaction. For example, if properly negotiated, a source code escrow can be an alternative to an outright transfer of ownership.

Also, developers should be cautioned not to allow use of licensed software without a written license agreement. For example, consider a future purchase of the software developer's business: the purchaser will want a representation and warranty by the developer that there are no outstanding claims against the software. If use of the software was permitted without a written license, the user may claim that it owns the software outright, may copy and distribute the code, etc. Not using written licenses can prevent consummation of a deal.

Solution: Have a written license agreement or sales agreement which contains express provisions relating to the transfer. See our publication on Copyrights.  Contact us for more details.

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Can I be liable for my software, even if I gave it away for free?

As soon as a developer places computer software in the marketplace, it bears complete responsibility for the non-injurious performance of the software—even if it was distributed free of charge.

This is called the "What do you mean I'm liable, I didn't even charge the user, did I?" problem. This is also called the shareware/freeware problem.

The damages to be paid by a software developer for errors bears no relation to the cost of the software package. For example, if a developer sells an accounting package for $1,000, but an error causes damages of $1,000,000, then the developer may be liable for $1,001,000 ($1,000,000 in consequential damages and $1,000 for the cost of the software). Similarly, even if a developer places a hard disk organizer into the public domain, without disclaimers to the contrary, the developer could be liable for any damages to users' hard disks, even if the software was distributed for free.

It is imperative to have a strong understanding of the interplay between the warranty (see item No. 2) provided by a developer and the agreed upon remedy. The warranty provisions create a standard of performance. The remedy provisions create the entitlement of the injured party if the warranty standard is not achieved. Common remedies include the developer's option to repair, replace or offer a work-around. If not properly structured, the developer could be devastated by a damages claim which is completely unlimited.

Usually general liability insurance policies do not cover breaches of contract and warranties. Generally, such claims are covered only by errors and omission policies, and, even then, errors and omission policies may disclaim breaches of warranty.

Potential Solutions: Have a written license agreement which provides an express limited remedy and disclaims other liability, regardless of whether a fee is charged for the software.  Contact us for more details.

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Do I need a written contract?

You've seen the movies. Same thing here. Unless a contract is properly structured, your statements can be used against you.

This is called the "What do you mean I have to do that? Sure, I said that in the proposal, but it's not in the contract, is it?" problem. This is also the "What do you mean I have a contract, I didn't sign anything, did I?" problem.

If there are promises, there is a contract. An oral contract is as legally effective as a written contract, just more difficult (and expensive) to prove the terms.

Certainly, if there is no written embodiment of the contract, then everything tending to prove the terms of the oral agreement becomes evidence thereof. For example, requests for proposal, proposals, correspondence, change orders, etc. It gets messy.

Consider that there are three points in time related to the signing of a contract: prior to signing, contemporaneously with signing, and after signing.

The bottom line is this: if you intend a written agreement to be the final embodiment of the terms and conditions of the contract, then the contract must expressly indicate that fact.

If the contract is not intended to be modified unless in writing, then both parties must provide a contractual structure for written change orders. As a result, the legal and business issues must be effectively coordinated. Consider the risk associated with voluntarily performing an amendment to specifications, and the services performed pursuant to the amendment cause a significant error. Consider the difficulty in fixing a value for the changes following completion of the contract.

Potential Solutions: Have a written contract, the terms and conditions of which override prior and contemporaneous communications, and provide for modifications to be made only in writing.  Contact us for more details.

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Should I register my copyright or trademark?

Computer law requires an understanding of the intellectual properties, but also requires a strong understanding of the business implications of any particular course of action.

The full benefits of some methods of protection cannot be obtained at a later date. This issue has importance to sellers and purchasers alike.

For example, after three months from the time of first publication of copyrighted software, the full benefits of a registered copyright may be waived. If a patent application is not filed within one year after the disclosure of a patentable invention, the right to a patent is waived. Obtaining a corporate name, in accordance with state procedures, may be an admission of a violation of a federally registered trademark. Alternatively, by not registering a trademark immediately, you could waive your right to the marketing territories where you intend to do business. By not having effective employee agreements relating to confidentiality, you could be waiving your right to trade secret protection.

There are a number of legally available forms of protection available for computer software and related intellectual properties. A developer of software must recognize the need to proceed immediately with obtaining and implementing the available forms of protection. A purchaser must inquire about what methods a developer has undertaken to protect the work intended to be transferred.

Potential Solutions: Have trademark searches performed. Use non-disclosure agreements in the ordinary course of business. Register copyrights and trademarks. Obtain patents, if available. Have employment agreements in place. See our publications on Copyrights, Trademarks and Patents.  Contact us for more details.

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Any additional pointers?

•    Ensure that development specifications are exacting so that both parties understand when the development effort has been performed. A standard of compliance should be established, i.e. to develop in strict conformity with the specifications or substantial conformity with the specifications.

•    Ensure that the type of software development contract is identified as either a pure service contract or a deliverables-based contract. Adjust the warranties, remedies and acceptance procedure accordingly.

•    Ensure that short-form Pennsylvania contracts/licenses comply with the recently passed Plain Language Consumer Contract Act. Ensure that consumer software contracts/licenses comply with the Magnuson-Moss Warranty Act. Comply with Federal Fair Trade Regulations relating to the advertising of any merchandise sold by mail order.

•    When establishing new business ventures, ensure that any technology owned by certain principals is properly transferred into the new business entity.

•    Purchasers of technology (including developers who are purchasing technology from subcontractors) should review all subcontractor agreements, and should require express license and/or assignment language.

•    Perform computerized trademark and service mark research to ensure that business names, product names, and logos thereof, are able to be federally registered marks. Obtaining a corporate or fictitious name registration with a state does not imply that the mark is available for a federal registration.

These are only a few of the additional issues to be considered when properly structuring a transaction.  Contact us for more details.

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Do I need an attorney?

The issues addressed in this pamphlet are legally complex, and the purpose of this article is merely to introduce you to a number of non-intuitive legal issues. You will need to retain an attorney to assist you with your specific requirements.

Properly structuring a transaction requires an understanding of the technology, the industry, and the legal options available to foster consummation of the transaction.

If you do not have legal representation, then contact us. If you have legal counsel, with whom you are currently satisfied for your general legal representation, then suggest our services to assist as special counsel for technology and business-related matters.

The Zegarelli Law Group offers a number of pricing and payment opportunities, including retainer-based discounts that may provide a significant savings for you.

If you would like to obtain our other firm publications, and/or our newsletters, then please call us as soon as possible to be placed on our mailing list.  Contact us for more details.

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Articles and information are for general information only, and often address issues, without expressly indicating, in generalizations. Laws vary between and among jurisdictions.  You should not rely upon any information provided by or on the website, including articles, as applicable to your particular situation. The law, filing fees, etc., change often, so the information in this document may not be current. The laws of various jurisdictions may be different than provided here.  Please contact us at info@zegarelli.com if you are interested in becoming our client--only then would this office be in the position to provide advise with regard to your particular situation.  It is important for you to review Terms of Use.

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