Alexey Chalimov / 30th May, 2016

How to Protect Your Idea and End Product When Outsourcing Software Development

software development contract

When you work with outsourcing companies, the question of security may arise in a very unpleasant way. In order to avoid possible complications, you should set your own rules with regards to who owns the software developed for your company. All the legal issues surrounding the development process may seem quite difficult at first, but they are crucial for startups when outsourcing. Therefore, we propose a simple and clear guide to help you protect the source code ownership and IP rights with a software development contract.

What is Intellectual Property and who owns it?

Intellectual property within the sphere of software development means that those who made any achievements during the working process owns the rights to them.

When outsourcing software development, you need to make sure that all the Intellectual Property Rights, your business ideas, and the source code will remain under your sole ownership.

Who can encroach on your IP?

In fact, everyone involved:

  • The outsourcing company – Even though you pay for their services, you will not necessarily be the owner, unless it is documented.
  • Employees/developers – They have the moral right to own the IP developed in the course of employment, but they can be restricted by legal methods.
  • Consultants/Individual contractors – Unless there is a written contract, they may own the IP.

What happens if you neglect the ownership issue?

The consequences may be grave. First of all, it will be costly. You’ll have to pay for obtaining the legal ownership more if you delay the question. Plus, the owners can demand additional payment from you.

Then, you may be unable to protect, exploit or commercialize the IP, because someone else will have the rights to do it, not you. In this case you will not be able to stop this “someone” from using the IP.

Furthermore, you will not be able to give warranties to your customers, which can ruin your reputation and the customer chain. If you work with investors,then they will also demand that it is you who owns the IP. Otherwise you run the risk of becoming less “attractive” for them and you may lose your potential investors as well.

What should you do to protect your IP rights?

STEP 1. Sign an NDA before discussing your ideas

NDA (non-disclosure agreement) means a full confidentiality of whatever you discuss with the company. It is a necessary precaution against the plagiarism of your IP. In our company, for example, NDA is an integral part of the software development contract. However, if your outsourcing company doesn’t offer you this step or even refuses it, then you cannot trust them.

STEP 2. Sign the software development contract

Remember, if it is not just consulting, an NDA is not enough. You must protect the software development intellectual property.

The custom software development contract is the most critical step. The contract can go under many names: Proprietary Rights Agreement, Invention Assignment Agreement, Patents and Inventions Agreement. The essence of the contract has to be the same. In any case, the essence of the contract has to be the same. It clearly says who owns the IP and what rights each party has to it.

Of course you do not have to write this agreement from scratch. Simply have your ownership lawyer to make sure the software development contract has been properly worded and has passed a legal review. At Eastern Peak Software, the customer is the sole owner of a product. Some of the important points included in our standard outsourcing contract are as follows:

  • Service delivery and acceptance terms. The service the company provides should be clearly stated and the conditions of the service as well. It prevents further controversies on this matter.
  • Ownership. As this is ‘work made for hire’, the client, not the outsourcing company, is considered the author and the owner of work. Note, that it is true only when the defined statute (17 U.S.C. § 101) ‘work made for hire’ is specified in the software development contract.
  • Payment terms. Here the payment and its conditions should be included. It will save your time, money and nerves.
  • Confidential information.This clause determines the particular pieces of information that has to be kept in secret.
  • Disclosure of product. It means that when your cooperation is over, you’ll get designs, drawings, documentation, and all the materials used in the process.
  • Warranties. This section of a software development contract usually includes:
    • The performance standard – the obligation to provide a high-quality service.
    • Competitive activities – the company will inform you about any engagement with your competitors.
    • Non-infringement – the company will not infringe and violate the IP rights.

STEP 3: Check employment agreements and consultancy agreements

You can put the requirements to sign those in the main software development contract. This agreement has to include the at-will assignment of all the inventions developed by the employee and the associated IP rights. In addition, there should be an obligation to help protect the ownership rights. It especially concerns the senior executives, because they have more access to confidential information. Usually their employment agreements address IP ownership.

STEP 4: Keep a record

You should keep a written record of who helped develop and create your source code. Watch out for dependencies on 3rd party IPs that were introduced into the code without your knowledge (particularly open source code). The Source Code Ownership Agreement is an additional protection and assurance, which may also be a part of the initial agreement with the company.

STEP 5: Have your lawyer perform an IP audit

If your lawyer keeps track of all the measures to protect your IP ownerships, it will prevent you from missing any details. Always remember to double-check and triple-check.

Oftentimes the question of ownership is neglected until the moment of launching a product. Unfortunately, at this time is too late. Be very careful with IP ownership issues. Only a secure and reliable company will lead your product to success.

Make sure to check out the first part of our outsourcing guide for startups ‘How To Successfully Recruit And Manage A Remote Software Development Team’.

Ready to discuss your software development project? Contact us for a free online consultation!

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