Every retailer today uses some form of software, whether it be a computer program running on local hardware, a hosted web site or an application running in the cloud or on a mobile device.

Unfortunately, many retailers purchase such software or hire a programmer without thorough legal review of the contract.  Such retailers risk having wasted money on a software product or service that does not meet expectations, contains errors, costs way more than originally estimated, or even worse, infringes someone else’s intellectual property rights or causes a security breach, resulting in expensive litigation.

These risks can be avoided with proper legal review by a lawyer experienced in technology contracting.  This article provides a summary of some of the key provisions and legal risks that need to be dealt with in a software development and licensing arrangement.

Ownership

Software consists of lines of written code which in Canada are subject to copyright protection. In addition, patents may be registered for any novel and useful processes that the software carries out.  When hiring a developer, whether it be for a large project or just a few customizations, the contract needs to clearly deal with ownership of the intellectual property rights in the deliverables.  If a retailer wants to ensure that it owns the software that it paid for, under Canadian intellectual property laws, it must have written assignments of all intellectual property rights and waivers of moral rights from the developer and all authors who wrote the code for the software. Otherwise, it does not own the software and the owner could stop the retailer from using it or sue for infringement.  Unlike the U.S. which has a “work for hire” rule, where an organization owns the copyright in the work that they paid for, Canadian law is different.

Licenses

If the retailer does not own the developed software, it may simply have a license.  However, unless the scope of the licensed rights and restrictions is clearly spelled out in the contract, the retailer may not have all the rights that it needs to properly use the software.  A common mistake in software licenses is the granting of the right to “use” the software.  Under Canadian copyright law, the right to “use” is not one of the exclusive rights that copyright owners have under the Federal Copyright Act.  A right to “use,” in addition to other rights, is provided in the Federal Patent Act.  However, if no patents have been registered for the software, what rights is a retailer really getting in a software license which just provides a right to “use”?  Does that include the right to copy or modify the software?  Under the Copyright Act, the rights that are capable of being licensed are very specific, such as the right to “copy,” “publish,” “translate,” “rent,” “communicate to the public by telecommunication,” etc.  If a retailer does not have a contract that grants to it the specific rights that exist under applicable law, the retailer may be infringing the software owner’s intellectual property rights by using the software.

Also, the scope of the licensed rights needs to be clear.  There are significant differences between sole, exclusive and non-exclusive licenses, some of which can prevent competition.  Licenses can also be restricted to a certain time period, by object vs. source code, territory, assignability, sublicensability and by other factors.  It is also important to consider what happens to any data that may be processed, accessed or stored by the software when the contract comes to an end. 

As a software owner or licensee, a retailer would want to be able to take full advantage of the software that it paid for and to ensure the software meets all of its business needs. On the other hand, a software developer or licensor would want to be careful not to give away too many rights which could hinder its future business development and revenue streams. 

Contracts often contain “grant-back” clauses to deal with this issue.  A grant-back clause can be either a license or a transfer of ownership, of certain or all intellectual property rights in the software and/or any improvements, back to the developer. A grant-back clause may allow the developer to continue to sell the software and/or improvements to others, to use the software for the purposes of maintaining it, to develop upgrades or to create new or derivative works.  Sometimes, the fees payable by a retailer for a software license are tied to certain metrics, such as number of users, gross or net sales.  If the retailer has an exclusive license which prohibits the developer from further using, selling or licensing the software, the developer would want to get the software rights back if the retailer fails to fully commercialize and achieve the revenues for the software as the parties had originally contemplated.

Risks of Software Development

Software development is a complicated process.  Code may be written by one or many programmers, with components obtained from third party sources such as the open source community.  As a customer, a retailer would want to ensure that there are no cost overruns, that the software it paid for will work properly, that there will be no intellectual property infringement, and that the software will be tested properly and will be secure.  A software developer would want to make sure it gets paid for the development work and that the customer gives it the assistance needed to complete the work on time and on budget.

Problems arise in software development contracts when the parties do not have a contract that clearly deals with these key issues:

    • the ownership or licensing of the deliverables and any pre-existing intellectual property;
    • confidentiality;
    • scope of the work to be completed and any contributions by the customer;
    • exclusions to the development;
    • the functional and technical specifications required;
    • regulatory compliance (such as CASL and privacy laws);
    • security;
    • future modifications;
    • the cost and timing of the project;
    • the testing criteria and processes;
    • the ability to assign or subcontract some of the work to others;
    • the remedies for failures;
    • how disputes will be handled;
    • how the contract can be terminated;
    • insurance provisions;
    • unforeseen circumstances (e.g., force majeure); and,
    • the disclaimers and limitations on each party’s liability. 

In addition, software development contracts need to contain certain legal representations, warranties and indemnities (e.g., for third party claims) to protect each of the parties from issues unique to software development.  Several of these warranties and indemnities need to survive the termination or expiry of the contract and be carved-out from the other disclaimer and limitation of liability clauses, in particular, those dealing with quality, security, confidentiality and infringement.

An experienced technology law practitioner, who is familiar with Canadian intellectual property law, will be able to guide you through these issues to ensure that your organization has all the appropriate legal rights and remedies.  Bottom line is that you don’t want your organization to incur additional costs renegotiating rights that it thought it already had, to not be able to use the software, to not have access to its data or to get sued for intellectual property infringement or breach.

For more information or enquiries, please contact Lisa Abe-Oldenburg at [email protected] or 905-415-6484.