18 Jan, 2018

Spotlight on IT Companies – Have You Settled Your Rights and Obligations with Your Developers?

Over the past decade, Serbia witnessed an unprecedented growth of its IT/ICT market, becoming one of the most attractive outsourcing and R&D destinations in Eastern Europe (link).  Key players such as Microsoft, Adobe, Oracle, Google, HP, SAP, IBM, Siemens, Intel, Cisco, NCR Corporation, Telenor, Erickson, Endava and others grabbed this opportunity, either by establishing development centers in Serbia or outsourcing services to local IT companies (link).  This resulted in two prevailing models – providing services through employed programmers/system architects/etc. (“developer/s”), or by engaging external developers (primarily registered entrepreneurs), a rather novel development.  Because software may, as an original intellectual creation, represent a copyrighted work, the developer that created it, alone or together with other developers, has the capacity of an author or co-author. Therefore, according to the Copyright and Related Rights Act (the “Copyright Act”), developers have certain material and moral rights over software as their copyrighted work. 

In an increasingly popular outsourcing & development center that is Serbia, and a wide range of IT services provided by local companies, of special importance are various programming services, from website and app development, to development of specific computer programs (“software”), both for commercial use by IT companies’ clients as well as for the internal business use.  IT companies deliver these programming services (both for internal and commercial use) through their own employed developers, or by engaging external developers (mostly entrepreneurs), when specifics of a project require so.

To that extent, as noted above, it is important to emphasize that a software may, as an original intellectual creation, represent a copyrighted work. Hence, a natural person that has created such a software, alone or together with other natural persons, has the capacity of an author or co-author.  This leads to the conclusion that developers have certain material and moral rights over software as their copyrighted work.

Although the relationship between IT companies and developers with regard to both types of rights, moral and material, surely deserves close attention, this piece mainly addresses the issue of material copyrights related to IT companies’ commercial use of software.

Namely, IT companies, in business as usual scenario, independently use software created by employed developers for commercial purposes, or deliver said software to clients for a certain fee, whereby those clients continue to commercially use the subject software, most often without any limitation imposed by the IT company that compiled and delivered said software, or by developers who directly worked on the development of the particular software.  However, given that the developer, as the author of the software, is the original holder of the right to use the subject software, the question arises – which rights do IT companies have in connection with a software made by its employees or externally engaged developers? On a similar note, do IT companies, by regulating their relationships with employees or externally engaged developers, create a sufficient legal basis to independently use the subject software for commercial purposes and/or deliver it to clients for further independent use?

When it comes to the developer’s material copyrights over the software, if the developer is an employee of the IT company, the Copyright Act stipulates that the IT company, as the developer’s employer, is the sole owner of all material copyrights over that software, unless otherwise provided in the employment agreement. This means that an employee developer, as the author of the software, ex lege assigns to his employer exclusive material copyrights over the software from the day the software was created.

However, is this provision of the Copyright Act sufficiently precise in determining the rights of IT companies and does it give a sufficient legal basis for the IT company to use this software independently and to deliver it to its clients for further independent use?

In this regard, it is undisputed that, on the basis of the Copyright Act, the IT company becomes the holder of all material copyrights over the software made by its employees in performance of their work duties. This means that the IT company can, ex lege, exclusively use the software without any substantial, temporal or territorial restrictions, while, at the same time, all rights related to the use of the subject software by the employee developer, as an author, is excluded.

Nevertheless, does this provision of the Copyright Act entitle the IT company to deliver the computer software to its clients and at the same time transfer all usage rights over said software? Does the developer have the right to an additional fee for the transfer of rights over the software to IT companies’ clients or an additional fee for the commercial use of the software by its employer, the IT company? In other words, does the provision of the Copyright Act enable the IT company to use the computer software without any restrictions and further obligations towards an employee developer, as the author of that software?

We are of the opinion that the above-mentioned provision of the Copyright Act raises doubts as to the scope of the IT company’s right to use the software created by its employees, as well as to mutual rights and obligations between an IT company as an employer and its employed developers, especially when it comes to commercial use of the software.  This conclusion can be derived from another relevant provision of the Copyright Act.  Namely, when it comes to exclusive assignment of copyrights, the Copyright Act clearly stipulates that the acquirer of the material copyrights may transfer the acquired rights to a third party only with a special permission of the author. Therefore, in light of this rule the aforementioned provision—that governs rights related to the software created in the employment status, but does not stipulate the right of the employer to assign rights over the software to third parties without the permission of the employee as the author of the software—can be interpreted in the following manner: the IT company can in fact use the software created by its employees, but is not authorized to deliver said software to its clients without the permission of the employee/author of the software.

All the above also applies to a situation in which the software is made by an external developer, e.g. an entrepreneur providing computer programming services as requested by the IT company—given that the Copyright Act determines that, even in this case, the client of the ordered software (the IT company) acquires all the rights over the software, but, as is the case with employee developers—does not stipulate the right of the IT company to assign the acquired rights over the software to third parties without the permission of the software author.

In general, the Copyright Act prescribes that if a copyrighted work is made by an employee in the course of their employment, the employer becomes the sole holder of copyrights, with a time limit of 5 years from the day the copyrighted work was completed. Moreover, it is explicitly stipulated that the employee, as an author, is entitled to a special compensation from the employer; such compensation being dependent on effects of usage of the copyrighted work. On the other hand, when it comes to copyrighted software created in the employment relationship, the legislator introduced an exception in the form of unlimited rights of the employer.

Notwithstanding any of the above, interpretation of the relevant provisions leads to the conclusion that the exception in question only refers to the extent and duration of the employer’s rights in relation to the software created by its employees, but it does not exclude the right of the employed programmer to a special compensation arising from commercial usage of the software. In other words, when it comes to a software created during the course of the employment, the employer only has the right to use the subject software for internal purposes, but the employee developer has the right to an additional fee, regardless of its salary, on the basis of commercial use of the software, unless otherwise provided in the employment agreement.

Thus, the final conclusion can be drawn that the Copyright Act does not provide IT companies with an unambiguous and undeniable legal basis to freely and without any limitations and further obligations use and dispose of a software created upon their request by employees and otherwise engaged developers. Therefore, in order to eliminate legal uncertainties and possible different interpretations of the intention behind the Copyright Act provisions, we find it useful for IT companies to regulate this in advance, either in their employment agreements with developers, or in agreements entered with external developers—all to eliminate any dilemma as to the scope of their rights and the future use of the subject software.

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