January 2000

What Do You Mean I Don’t Own It?

9 min

"What do you mean I don't own it?" This is a question I hear from clients with surprising regularity. They tell me, "That can't be right. It was my idea. I hired the programmer, gave her advice, and paid for it - of course I own it." When I tell them that in fact they may not own the program, incredulity would be a mild understatement for their response.

The idea that, after paying for a product, one does not own it is an alien concept to most business people. Surprisingly, it is also a fact often overlooked by in-house counsel and even the most astute business lawyers with no background in copyright law.

It has been more than 10 years since the Supreme Court ruled in CCNV v. Reid, and yet its holdings have not taken hold in the consciousness of American business. CCNV has been cited almost 1,000 times in a wide variety of cases. With such a broad application one would think that the case's basic conclusions would have been established firmly in the business landscape. Yet they have not.

CCNV v. Reid was a case about ownership of copyright between the commissioning party (the Community for Creative Non-violence) and the commissioned party (James Reid). CCNV commissioned sculptor Reid to create a sculpture. It raised the money, helped provide ideas for the design, and sent delegates to the artist's studio to track his progress. A dispute arose between the artist and the organization. As a result of the dispute, which initially had nothing to do with copyright, the issue over who owned the copyright in the sculpture came to the forefront.

At the time of the dispute, the circuits were split as to how to decide ownership of copyrights in commissioned works absent a written agreement clearly defining ownership. Under copyright law, the parties can always allocate ownership with a properly drafted agreement. Unfortunately, each year thousands of computer programs, architectural plans, written works, videos, multimedia creations, Web sites, artworks, and various other intellectual properties are commissioned in which the ownership issue is not addressed in writing. (Alas, no such agreement existed in this case.) As we will see below, the requirement of a written agreement is paramount.

Work for Hire

Under current law, in order for a commissioning party to own a copyright, there must either be a valid work-for-hire agreement or a written assignment of the copyright. Work for hire is a much used and misunderstood term - a specifically defined term of art with specific conditions set out in the Copyright Act of 1976 that must be adhered to. Even if the parties intended ownership of the intellectual property to vest in the commissioning party, if the strict guidelines set out in the act are not followed, the ownership will vest in the creating party - frustrating the intent of the parties.

To be a work for hire, the creation can be a work created by an employee in the scope of his or her employment. Or it could be a specially commissioned work in which there is a written agreement stating that the work is a work for hire and the commissioned work fits into one of nine very specific and limited categories. Since the nine categories generally do not apply to computer programs or Web pages, an agreement signed by the parties describing the program as a work for hire will be ineffective.

In the computer and e-commerce worlds, we often find that programs and Web sites are written and designed by outside companies - independent contractors. By definition these individuals or entities are not employees and, as such, copyright ownership will by default vest with them. Unless an employee of the commissioning party writes the program or designs the Web site within the scope of his or her employment, the commissioning party generally is out of luck.

The key issue in CCNV v. Reid was how far one could stretch the definition of an employee. Before 1978, if one paid for work and exercised supervision and control over an independent contractor, the commissioning party owned the copyright. All that changed with the Copyright Act of 1976, which took effect Jan. 1, 1978. Yet many judges had a hard time unlearning the lessons and rulings of 70 years. A number of courts were finding people who were clearly independent contractors to be employees solely for the purpose of losing their copyrights. In CCNV, the Supreme Court decided that the definition of an employee should be that which is found in the Restatement of Agency. Since the CCNV decision, courts have been almost uniform in finding, in the absence of a formal employment relationship, that creative/commissioned parties are independent contractors and not employees.

The ownership, or lack of ownership, problem for intellectual property affects not only small associations and businesses, who might be expected not to understand the nuances of a sophisticated area of the law, but also the largest trade associations and Fortune 500 companies, with their in-house counsel and large armies of outside attorneys. Even when the matter is properly handled in the initial agreement between parties, it is often overlooked in subsequent agreements for revised computer programs or Web sites or in new projects. Often the commissioning party simply assumes that the "deal" that they had in the prior agreement will be binding and effective for the new arrangement. This is not the case with the intellectual property, each new copyrightable product requires a separate and distinct writing executed by the parties.

The Supreme Court remanded CCNV to the District Court to see if a joint authorship relationship had been established as a result of the CCNV's input. The case was settled before the issue was decided. Yet other parties who found themselves in similar situations found fleeting hope in the argument of joint authorship. As a joint author, you are a joint owner. A number of cases decided shortly after CCNV involved people who contributed the ideas behind the copyrightable materials and the funds and who claimed to be joint authors.

Author, Author

The courts have fairly uniformly held that in order to be a joint author you have to first be an author. In other words you have to contribute copyrightable material. Copyrightable material must be original material, fixed in a tangible form. Therefore, giving advice, ideas, direction, and funds will generally not rise to the required level of authorship. Commissioning parties who went down this path were generally disappointed.

Certainly, if a commissioning party did not own the work, at a minimum they would have the exclusive rights to exploit that which they paid for. Wrong again! Under copyright law all exclusive licenses must also be in writing. If there are no documents, or the documents do not specifically state that the commissioning party is receiving an exclusive license, no exclusive license is being granted. This is also true in order to effect the sale of a copyright - an assignment. It must also be in writing. Simply put, if there are no specific writings, it is not a work for hire and there is no exclusive license or any assignment of copyright.

What then does the commissioning party have after they have provided assistance, ideas, and most of all money? If there is no writing or an insufficient writing, what is the commissioning party left with? Based on the state of the law today, it would seem that they have an oral non-exclusive license. This is where the true fun begins - figuring out the omitted terms and never-discussed scope of an oral non-exclusive license.

Defining the License

How do we determine the scope of the license? Perhaps documents exist that outline the basic framework for the uses that the commissioning party specifically obtained a work. In such circumstances, it certainly can be argued that the license being granted will cover the intended uses of the commissioning party.

What happens, however, when the programmer was not made fully aware of the scope and nature of the uses of his or her program? The instances in which the ultimate use of the program or its scope is kept confidential or provided only on an as-need-to-know basis are widespread. It proves difficult to argue that the programmer was granting a license to the commissioning party for uses of which they were unaware. Cases like these often degenerate into arguments of who knew what and when.

Even if one is able to establish the parameters of the preliminary license, what happens with the creation of new versions, patches, fixes, and adaptations? Are they included? One of the exclusive rights of the copyright holder is the right to create derivative works out the underlying work. Translating a computer program from one language to another, adding features, or modifying it will often be considered creating derivative works, and only the owner of the copyright will be entitled to undertake those tasks or grant authority for others to do so. Proving that the oral license extended to those types of derivative works is very problematic.

One can, of course, bring in experts to claim "custom of trade" in that specific niche of the industry where "everyone knows" that these are the type of licenses that are always granted. Although most courts are finding ways of fashioning non-exclusive licenses, they have not all taken that path. In the particular area of architectural works, courts have not been receptive to the idea of oral non-exclusive licenses. There, courts have found even where a license exists in regard to the drawings, no license has been granted to actually build a structure.

The issue as to who has the burden of proof in regard to proving the terms of the oral non-exclusive license is certainly not a settled matter. Nor are the effects of various defenses that a programmer can raise. For example, most jurisdictions provide that a contract without a fixed term is terminable at will. If so, then the non-exclusive oral license could be terminated by the copyright owner at any point in time. What of the statute of frauds? A contract that cannot be completed within the term of the year is normally considered in violation of the statute of frauds. If the terms of the oral non-exclusive license provide for the right to use the program, ongoing maintenance, or the payment of royalties that extend beyond a one-year term, it would appear to violate the statute of frauds unless it is in writing. One must look to the various states to see how their laws have been applied to the validity of such agreements.

What of the moneys paid? Do they have to be returned in the event that a non-exclusive license is found to be in place instead of the exclusive license or assignment or work for hire that the commissioning party believed they were paying for? Are the courts going to allow such windfalls to the commissioned parties or require them to pay back certain sums? These are all questions currently being litigated throughout the country.