In Re (#04 April 2013)

Software Protection under Software Development Agreements

Bogdan P. Borovyk

“The development of computer programs requires the investment of considerable human, technical and financial resources while computer programs can be copied at a fraction of the cost needed to develop them independently”, is stated in the preamble of EU Directive 2009/24/EC on legal protection of computer programs, one of the basic and most important legislative documents in European Union (the EU Directive) on software protection. In Ukraine the most important legislative act on protection of the rights of software is the On Copyright and Related Rights Act No.3792-XII (the Copyright Act). While the Copyright Act itself is quite extensive, it is not the law, but its applicability in practice, which matters. Unless you can effectively enforce the law, it remains in the mere theoretical layer, and has no impact whatsoever impact for business and society. In Ukraine in the sphere of legal software protection in addition to the well-known issues with law enforcement the two following reasons contributed to the law on protection of software remaining very much undeveloped: the small size of the software market in comparison with developed countries and the widely spread and accepted, even by the state, disrespect of copyright, i.e. the piracy. This is on the negative side. But on the positive side, the everlastingly increasing role of Ukraine as a software development outsourcing destination, activities of multinational corporations, like Microsoft and Adobe actively protecting rights to their software, opening of a Google office and acquisition of Magenta by eBay last year together with the rapidly evolving start-up movement altogether contributed to the trend of the last couple of years, when software started to be regarded as a valuable property, which needs to be protected. So far the development of court practice on software protection has just started remains rare and controversial. But the need for further rapid legal development is there and will continue to grow. As in many cases, when our legislation or legal practice is not up to date we look at the more developed jurisdictions. In the case of Ukraine we would very much recommend in each case, when there is no clear or crisp understanding of how to apply any norm of the Copyright Act regarding software in practice, to look at the above cited EU Directive. Although the latter is not mandatory in Ukraine, can provide very solid and good arguments and reasoning while applying the Copyright Act on software.

Very often, when a new subject of legal regulation arises, at the first stage of legislative development the rules and norms for the already existing subject, which is as close as possible to the new one, are applied. In case of computer programs they are protected under copyright law as literary works (see Article 18 of the Copyright Act), which is also fully in line with the EU Directive. This has its lacks and benefits in comparison with, for example, patent protection of software-related inventions.

The benefit is the simplicity of the copyright as it does not require any formalities, such as registration. Copyright on software begins as soon as the program is created. The lack or rather limitation of the copyright is that it does not protect the idea, method or concept of the program. Just the expression is protected, i.e. the code itself. Should the client aim to protect the idea of the software, other means than copyright should be investigated such as patenting for algorithm, trademarks for naming, copyright for design of user interface.

As the software is protected by copyright, the agreement on its development should be regarded as the copyright agreement or agreement on creation of custom product (in our case program). Such an agreement is important for understanding when the copyright on program emerges, who is the owner and how the copyright is transferred from developer to customer. While speaking about copyright in this context, we mean the material rights to a program, which include all kinds of rights for its commercial use. The so-called non-material rights, such as, for example, the right to be named as an author, are non-transferable and always stay with the person(s), who created the program. Thus, non-material rights are not the subject of this article. Based on the rules of the international private law regardless of the law, which governs such agreement, the issues of copyright protection in Ukraine and origination of copyright on software developed in Ukraine, which includes all three above questions, are governed by Ukrainian law. According to Articles 429 and 430 of the Civil Code of Ukraine, the copyright to the product created under contract, both labor or commercial contract, belongs jointly to its creator and to the client (customer), unless otherwise provided in the contract. Thus it is very important to stipulate in the contract that all material rights to the developed software belong to the customer. It is also advisable to list all such rights.

Another issue is that despite the protection of computer programs as literary works, the code itself is not enough to define the subject of copyright. According to the definition of computer program under the Copyright Act, it has three following features, which qualify it as a copyright subject: (1) it is a set of instructions expressed in words, symbols, etc. (the code), (2) it shall be readable by computers, and (3) as a result of the code’s execution by computer it should lead to a certain result, achievement of a certain goal. The last component should not be overseen.

As example of court practice here would be Case No.59/200 State Enterprise Informational Court Systems against Art-master LLC regarding the vindication of the groundlessly received remuneration for development of the program running the online Unified State Register of Court Decisions. The economic court stated that as the final product does not comply with all the requirements set in contract specification, which means, that the program does not have all the functionality built into it, as was expected by the customer, Art-master LLC has not duly transferred all the rights to the software to the customer, and thus shall return the received remuneration to the State Enterprise Informational Court Systems. While the decision is rather controversial, it cannot be excluded, that its argumentation will be used in other cases. Thus defining what exactly a computer program should do, checking the end product for this, and agreeing between the customer and the developer that the end product corresponds to all requirements, is critical for both the customer to ensure its copyright, and for developer to avoid the risk of vindication of the obtained remuneration.

Another aspect to pay attention to while contracting the software development firm is that programs are developed by people, who are in a certain legal relationship with a software development firm. As indicated above, copyright basically pertains to the person who developed it, unless otherwise stipulated in the agreement. Thus, it is advisable at least to let the software development firm guarantee in the contract, that all contracts with their employees have respective clauses clearing the software of the copyright of employees.

At best, it is advisable to review such employment contracts.

The same applies if the programmers work for a software development firm and are not under an employment agreement, but under civil law or commercial agreements (freelancers).

Immediately after the software is created, the copyright on such program is deemed to arise. No registration or any other formalities are required. This is the beauty and simplicity of copyright. Thus, the only thing which is required to validate the copyright on software is to be able to prove that it was created, and when it was created. In the past, one of the ways to do this for literary works was for the author of the work to send it to himself by registered mail. Thus, the author would have the work with the data stamp of the post, confirming that at least at that time, the work already existed. We are not suggesting that customers do this with the computer code, but in view of this practice the following advice will not look too weird. After the program is developed do not just execute the act of transfer and acceptance of describing the program in general terms, but print out the code and let both parties, the customer and the developer sign it, confirming that this is the result of software development and the copyright is transferred to the customer, who has claims as to its quality.

The customer has proof of its copyright, and the developer is sure that the customer checked the software and has no complaints.

Another way to ensure the protection of your copyright is to register it with in the State Register of Certificates of Copyright on Works. This registration is not obligatory and basically does nothing more than the above two alternatives, with the exception that the applicant receives an official certificate. The term “registration” is to a certain extent misleading, as all what the respective state authority does is deposit the work and confirms that at a specific point in time the applicant claimed his copyright. The regulation on such registration explicitly states that while conducting such registration neither the review of the work nor identification of authorship is carried out. Thus, such registration does not guaranty that a third person has not registered the copyright to the same work earlier, or that he can prove its authorship even without a registration. Software can also be registered in such a way. For this purpose the code together with other required documents shall be provided to the state authority in an objectified form. That is, the code shall be printed out in full or in parts. Two points of advice follow from this: the contract on software development shall contain a clause prohibiting the developer to register the software on its name, and, the previous bit of advice, to print out the code and let it be signed by both parties proves to be not wrong, as it is faster and easier, than state registration, which requires additional documents. State registration can be carried out afterwards.

Court practice in protection of software remains very sparse. There are no reams of decisions on disputes regarding software development and infringement of copyright on software in the state register of court decisions.

However, there are two aspects which generally arise while protecting rights on software in court.

The first one is the gathering of proof of the infringement of copyright on software. We are not talking about the distribution of pirated CDs, as the latter have long ceased to be the main or whatsoever considerable distribution channel for software. Most distribution is done online. So to prove that a third party uses the software you have to prove that the software is on their computer. And there is no legal way to obtain such a computer as opposed to a sample purchase in the case of CDs. In such a situation the opening of a criminal procedure against a transgressor based on Article 176 of the Criminal Code of Ukraine, which lately became much easier in view of the new Criminal Procedural Code, and let computers be seized as the evidence in criminal case, is a vivid alternative. Thereafter a probe of such evidence can be conducted to prove the facts of software usage.

Another issue which still remains unresolved in court practice is what kind of forensic examination the court shall rely on in cases relating to copyright on software: on intellectual property or computer-technical examination. Of course, this depends on questions to be clarified by such an examination. However, it cannot be excluded that in many cases technical details will play a major role while defining whether the copyright on software was infringed, which means that a computer-technical examination should be preferred. However, we have seen in some decisions, including the above mentioned case No.59/200, that the court tended to appoint a forensic examination on intellectual property, even for issues of a technical nature.

So either the experts in intellectual property should develop a pool of experts, with technical knowledge in software, like technical knowledge required in some kind of patent disputes, or both the computer-technical and intellectual property probe shall be used in software disputes.

To sum up the above, we would advise the parties to a contract on software development to regulate and ensure as many details as possible at the stage of contract drafting and fixing the results of its fulfillment, even though it will cost some extra paper work. This might seem like advice of sorts, which is not very unique, but in the case of software it is reinforced by far undeveloped court practice. Such a conclusion looks kind of mournful, however if we contemplate the issue from a positive side, it also means that the development is on the way and we, as practicing lawyers, have the opportunity to steer it, hopefully, into the right direction.

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