In my last post, I gave an overview of the current Facebook ownership litigation in which Paul Ceglia is claiming that he owns 84% of Facebook based on an old software development contract with Facebook’s founder Mark Zuckerberg.

A few years ago, Zuckerberg and Facebook also faced legal allegations that Zuckerberg stole the business idea and source code from some Harvard classmates to start Facebook.

Assuming for the sake of discussion that the allegations in both lawsuits are true:

What can entrepreneurs learn from Zuckerberg’s legal troubles?

Here are my top ten lessons.

1.  If you are wildly successful, people claiming ownership may come out of the woodwork.

If your business gets VC funding or becomes valuable, your company will become the target for any person or entity who has a potential case for ownership.

The skeletons will come out of the closet.

IP ownership disputes are very common.  Old employers, co-workers, partners or even classmates may claim that they are entitled to a piece of your new company based on former agreements, verbal or written, or intellectual property rights that they own or claim to have originally created.

2.  Don’t contaminate your company’s IP with any IP that you don’t have the right to use.

A cavalier attitude regarding ownership of software code can get you in trouble.  Just ask Zuckerberg. He’s probably lucky.  Taking someone else’s code can land you in jail.

To minimize the chance of any claims, it’s important to understand basic information about intellectual property law, especially trade secret law, so you know what you can and can’t use from what sources for your new venture.

When you incorporate intellectual property that you don’t own into your company, you contaminate your IP and make your entire company vulnerable to claims by others.

Some plaintiffs are very aggressive and may claim that they own everything that was built on the foundation of contaminated IP.  It’s sort of like fruit of the poisonous tree.  A plaintiff may try to get all of the fruit, especially VC money and related intellectual property rights.  (For another famous example, see my discussion of the famous Bratz doll case.)

Clean IP is very important to maintain the value of your company.  In the Facebook case, if the plaintiff can prove that it owned the intellectual property rights to the foundation of Facebook as well as the future alleged business interests, the plainitff’s damages expert will have a heyday.

3.  Software genealogy is important.

It’s super simple to copy and take software code.

Unfortunately, many software programmers freely use code written by others without understanding that copyright law and sometimes trade secret law protects software.

To keep IP ownership clean, it’s important to understand who wrote each section of code and what rights or licenses are related to it.  A company will want to make sure that it owns the code created by its employees and independent contractors and that it has an appropriate license for any open source code used.  Make sure your company really owns the code provided by the founder.

Ask your software programmers: Where did you get the code?  Did you write it? If not, who did?  If yes, when and where did you write it?  Does anyone else have a potential claim to the code?

Watch out for sections of code that is legally owned by others, especially former employers.  It’s very easy to do a software code comparison and it makes a stunning exhibit in litigation.

4.  Assume your business will be successful and treat equity like gold and not penny candy.

In the alleged contract between Zuckerberg and Ceglia, Zuckerberg allegedly gave up 50% ownership to the Face Book software and business interests.  The contract also had a bizarre penalty clause for delay in completion of the Face Book website of a 1% interest in the business per day.

This is crazy but not uncommon.  Some entrepreneurs don’t have an understanding of the potential value of a business interest.  Although equity in something worthless is worthless, even a small piece of equity in a valuable company may be very significant.

Don’t give away equity lightly as payment for services.  You may be paying a much higher price than you intended.

If someone is asking for equity they are assuming that you will be successful, you should assume so too.

5.  Read and understand any contract concerning ownership of intellectual property before you sign it.

I can’t stress this enough.  If you are giving away your IP rights, know and understand the boundaries of what you are giving up.  Make sure they are fair and reasonable for the circumstances. As an independent contractor, you have more negotiation power than you think.

Zuckerberg’s alleged signature on the Ceglia contract looks real.  My hunch is that Zuckerberg signed the alleged contract but didn’t read or understand it.  I’m also betting — considering the bizarre, hodpodge nature of the alleged contract — that the drafter didn’t understand the contract terms either.  It looks like part of it was copied from another unrelated source.  Indeed, the alleged contract is so convoluted the parties may be fighting about the meaning in court for a long time.

I’m sure Zuckerberg has read the contract by now but it is a little too late.

6.  Beware of contracts drafted by non-lawyers and don’t sign bizarre, crazy contracts.

Contracts like the alleged contract in the Facebook case make the hairs on the back of my neck stand up.

No one should ever sign a contract that looks like that.

7.  Know what you’ve signed and keep a copy of all contracts.

This is basic housekeeping.  Keep a copy of all contracts that you sign.  Know what you own and don’t own.

8.  Make sure you use proper assignment language in your contracts.

The alleged assignment language in the alleged Facebook contract is improper and bizarre.  Courts are very picky about the specific wording of IP assignments.  If the assignment provision in a contract is written incorrectly, it may not do what you think it does.

Moreover, don’t count on the “work made for hire” doctrine in the Copyright Act if you don’t understand it.  There are only a few statutory categories of work that apply to independent contractors.  Always have a fall back assignment provision if you really want to own copyrights for work you didn’t create.

9.  Understand that you will be subject to broad discovery if you are sued.

In litigation, everything within your possession, custody and control that is relevant must be given to the other side.  Archive tapes, random disc drives, thumb drives, old non-working computers and boxes in your attic and garage are all fair game.

Again, the skeletons will come out if you keep them.

10.  Even a crazy, amateur contract may be the basis for a lawsuit and enforceable.

This item is my favorite.  Just be aware that anything that looks like a contract may come back to haunt you if your startup is successful.

Other posts about IP ownership claims:

• Analyzing the Risk:  Will My Current Employer Claim Rights to My Startup’s IP?
• Preventing Your CA Employer From Owning Your Inventions
• Who Owns the IP Rights to Custom Software?

I just got back from vacation and I finally had a chance to read the legal complaint and alleged contract in the Facebook ownership debacle.  I love a juicy cautionary tale, especially when billions of dollars are implicated.

In this blog, I’ll discuss some of the potential issues in the case and what entrepreneurs can learn.  This post will give a case overview and my next post will discuss the lessons.

Case Overview

(Ceglia v. Zuckerberg, 10-CV-00569, U.S. District Court, Western District of New York (Buffalo))

If you haven’t heard the story, Facebook, Inc. and its founder Mark Zuckerberg were recently sued in New York for enforcement of a contract granting the plaintiff, Paul Ceglia, an 84% ownership interest in Facebook, Inc.  The plaintiff is also seeking 84% of all monies realized by Defendants from 2003 to the present.

Since the estimated value of Facebook is in the billions, this litigation may be going on for years if Facebook doesn’t win on its statute of limitations or laches defenses.  (Basically, Defendants are claiming that it’s too late for Ceglia to bring his contract enforcement action.)

Ceglia alleges that he hired college student Zuckerberg to write software code for two projects in 2003 and that Zuckerberg signed an agreement that sets out the terms.  The alleged contract states that it covers work for both a “StreetFax Database” and Zuckerberg’s “project with the working title The Face Book.”

Ceglia submitted evidence that he paid Zuckerberg a $1000 for this work.  This is a paltry sum given the estimated value of Facebook today but sufficient consideration under the law to have an enforceable contract.  Courts in general don’t look at the adequacy of consideration but in any event $1000 may have seemed like a lot to a college student.

The Alleged Contract’s Ownership Terms

As an intellectual property lawyer, I think this alleged contract is very, very poorly drafted.

It’s crazy!

In the alleged contract, there are dozens of fundamental contract drafting errors, inconsistencies and some bizarre and convoluted clauses—the signs of a contract drafted by an amateur.  Consequently, the lawyers will have lots of language to fight over and it will be an expensive nightmare to litigate.

Although the alleged contract is titled ”Work For Hire Contract,” it appears from the contract language that the drafter didn’t understand this copyright doctrine or its implications.

Section 9 of the alleged contract titled “Proprietary Rights” states:

“It is acknowledged that this is a work made for hire agreement and that all Intellectual property rights or patent rights are that of Streetfax Inc. . . .”

This will be yet another fertile area for dispute in the case.  Copyright protection automatically arises when source code is created and belongs to the author.  In some limited cases in an independent contractor situation, the Copyright Act may transfer ownership of the work to the person paying for the work.  This “work made for hire” doctrine is complicated and restrictive.  The work must fit within one of the enumerated statutory categories.  (See my post discussing this copyright doctrine.)  The language in this contract is a mess.  The alleged contract fails to include appropriate legal language and it doesn’t have a standard fall-back copyright assignment provision for the software.

And strangely, the scope of the ownership clause is both broad and narrow.  It’s also fundamentally unclear.  The alleged contract states:

“It is agreed that Purchaser [Ceglia] will own a half interest (50%) in the software, programming language and business interests derived from the expansion of that service to a larger audience.”

None of the key terms like “software,” “programming language” or “business interests” are explicitly defined in the contract.  And what the heck does “expansion of that service to a larger audience” mean?  If this case continues, the lawyers will no doubt spend a lot of time debating the meaning of these vague terms.

Zuckerberg’s lawyers will likely be arguing that “software” noted in the contract has nothing to do with the “software” related to Facebook.com.  And what is the difference between “programming language” and “software”?   The defense lawyers will also likely argue that Zuckerberg didn’t even have any “business interests” at the time of the contract.

Definitions in software agreements are critical for clarity. The meanings of key terms are usually explicitly spelled out and the corresponding terms are thereafter capitalized in the document indicating a defined term.  The terms and their usage in this alleged contract are a hodgepodge.

Moreover, the bizarre kicker in the alleged contract is the penalty clause for delayed completion for the Face Book website:

“The agreed upon completion for the expanded project with the working title ‘The Face Book’ shall be January 1 2004 and an additional 1% in the business will be due the buyer for each day the website is delayed from that date.”

It seems bizarre that anyone would agree to such a vague and outlandish penalty term.  But it’s arguable that a naive college freshman would.

This alleged contract is quite simply a mess.  Although poor drafting alone doesn’t make a contract invalid, it will provide the defense lawyers with fuel to litigate this to death.

Defendants’ Defenses

Ceglia won’t own anything without a valid contract so it’s no surprise that Zuckerberg’s initial defense was to deny the existence and validity of the contract.  Was it forged?  Did Zuckerberg really sign it?

Eventually, if Facebook doesn’t win on its statute of limitations or laches defense, experts will likely debate both issues.  It doesn’t help Ceglia’s credibility that he’s been in some legal hot water lately, arrested and charged with fraud.

It also doesn’t help Zuckerberg’s credibility that his former Harvard classmates sued him on claims that he stole their business idea and code and turned it into Facebook.  This case was quietly settled but it implies that Zuckerberg may have had a weak understanding of intellectual property law and a cavalier attitude toward the intellectual property rights of others.

It’s important to note that Zuckerberg admits that he worked for Ceglia writing computer code when he was in college.  These facts will work in Ceglia’s favor.

A second layer of defense for Facebook is to deny that Facebook Inc. or its website falls within the subject matter of the contract.  The vagueness and ambiguity of the contract language will help the Defendants.  Moreover, Zuckerberg claims he hadn’t even thought of Facebook when he worked for Ceglia.  Commentators are quick to point out that Zuckerberg didn’t even register the Facebook domain until a year after the date of the contract.  Of course the commentators assume that domain registration is the very first thing that a budding entrepreneur would do.  This is a big assumption and very weak evidence that Zuckerberg hadn’t thought of the name, developed the idea, or written any related software code.   If he really signed the alleged agreement, it is clear evidence of his naivety and legal ignorance and not evidence of a savvy entrepreneur who would quickly register a domain for a new idea when he first thought of it.

Moreover, the fact that Zuckerberg worked on something called Facemash between the time he worked for Ceglia and starting Facebook doesn’t mean squat either.  Entrepreneurs often have multiple ideas they are pursuing and skip between projects.  Many don’t work on projects in a linear fashion.

There are plenty of issues to keep the parties’ lawyers very busy with legal research including whether you can give away part of a business before it’s incorporated.

Discovery

The discovery process will be critical in this case. The broad reach and scope of discovery in the US is astonishing.  Each party can get copies of electronic and paper documents in the possession, custody or control of the other side that are relevant to the claims. This includes emails and source code that go back for years including archived documents.  Some parties go to great lengths and hire forensic computer technicians who can unearth documents that the owners thought were destroyed.  It sometimes feels like electronic information can live forever.  Documents in the previous ownership dispute are also likely relevant and discoverable.

If either party is a pack rat who kept much material from 2003, this case is going to get very interesting.  One of the key issues is whether Ceglia has any software code in his possession that matches code that is in any version of the Facebook application. Ceglia kept the contract in a file for years so who knows if he kept any old computer disks or hard drives with the early versions of “The Face Book” project.

Although it is unlikely that much of Facebook’s original code is in its current website, Facebook or Zuckerberg may possess early versions of the code somewhere, which will be subject to discovery.  It’s not uncommon for a founder to keep archive tapes.  But considering that Zuckerberg was sued previously regarding claims of ownership he may have cleaned house and destroyed old, incriminating records.

Finding code from both parties that match would be a big win for the plaintiff.

Given the former litigation between Zuckerberg and his classmates, the geneology of the Facebook software may prove very interesting.

This case will be fun to watch.

Stay tuned for a discussion of the lessons entrepreneurs can learn from this case in my next post.

Ownership of the intellectual property rights to custom software created by an independent contractor can be tricky.  Because custom software can be highly valuable and expensive, it’s important to understand IP ownership issues.

Over the last decade I’ve seen both businesses who paid for custom software and software developers  be surprised and outraged by ownership issues.  I’ve seen millions of dollars spent on litigation trying to untangle IP ownership and millions of dollars of potential revenue lost because IP ownership issues couldn’t be cleaned up after the code was created.

IP ownership to custom software in part depends upon:  1) the relationship between the software developer and the client; and 2) the authors of the code.

1)  The  Relationship

Without a clear contract between an independent software developer and a client that defines and clarifies intellectual property rights, copyright assignment or license terms, IP rights to custom software will be murky at best.

And it doesn’t matter if the client paid a large amount of money for the creation of the custom software.  Without a clear, written contract, the client may end up with nothing but a limited, implied license to use the software.

The default law under the Copyright Act is that the author of the work — the independent software developer— owns the copyright to the software.  Moreover, a transfer of the ownership to the software’s copyright is only valid if it is in writing and signed by the author or owner of the work.

To further complicate matters, if the client contributed design ideas or process information that qualifies as a trade secret and this IP was integrated into the custom software, the client may be a joint owner of some IP rights.

Importantly, the parties may have different views on IP ownership that may or may not have been discussed as part of the business deal.

The Client’s Perspective. A business client that is paying for complex, custom software may want to own all of the copyright rights to the custom software.  For example, it may want to be able to make derivative works — modifications of the original program — or the ability to sublicense the software or sell it to others.  A business client with this attitude and a lawyer may require a standard independent contractor agreement that fully assigns all IP to the client.  A business client without a written contract or an understanding of copyright law, however, may mistakenly assume that it owns the copyright if it paid for the creation of the custom software.  (See my former post for an explanation of the types of copyrights rights.)

The Software Developer’s Perspective. In contrast, an independent software designer who has spent several years creating the core code that is customizes for clients, will probably want to retain some or all of the IP rights.  He may want to reuse the core code for future clients and only give the client a non-exclusive license to the custom software.  Of course some developers may not care about owning any rights to the custom code.  They my also not care about infringing the copyright to their former work.

Importantly, the software developer who wants to retain some IP rights  may have signed an independent contractor agreement early in its relationship with a client and may need to renegotiate the terms regarding IP rights.  It is possible to negotiate a carve out of some IP rights, even with a big client, but the independent contractor may need a lawyer’s help.  An independent contractor may be able to negotiate this carve out with the client’s lawyer himself but he may not get the rights he thinks he is getting.  (I’ll write more about what a software developer needs to watch out for in a licensing clause in later posts.) .

The only way to hammer out IP rights is with a written contract.  Oral agreements are not valid to fully transfer copyright ownership.  Contracts need to address trade secret issues and be specific about who owns what and the limits to the corresponding rights.  Both parties need to understand what they can and can’t do with the software.

2)  The Authors of the Code

Ownership of custom software gets even more complicated if:  a) more than one software developer worked on the code; b) the software developer has a development company that doesn’t own his works; or c) open source code with a restrictive license was used in the custom software.

Oh what a tangled web.

a.  Multiple Developers

First, if the custom software was developed by more than one developer, all developers may be joint authors and owners.  One key is whether the developers have independent contractor agreements or IP assignment agreements that assigned any IP rights to code they created to a larger umbrella company that then owns the rights and has the ability to transfer or license those rights.  Without written contracts with all developers, there is an IP ownership mess.  This is why some clients require a warranty from the developer regarding ownership of the IP being transferred or licensed.  A breach of the warranty may negate the contract and lead to hefty damages.

b.  Software Development Company Rights

A second issue is whether the software development company even owns the rights to the custom software.  A software developer who owns a development company may not have even assigned his rights to his own company.  Indeed, the code may have even been created before the incorporation of the development company.  Moreover, the software may be sold through a different business entity without an employment relationship  or written contract with the software developer.

Warning.  A contract between a software development company and a business client may not transfer or license the IP rights to the software if the development company didn’t obtain the original rights from the actual software developer.

Is your head spinning yet?

c.  Open Source Code

Third, incorporation of open source code into the custom software may complicate IP ownership even further.  Some open source code requires a restrictive pass through license that creates a legal mess.  Some clients are aware of this issue and scan custom code to ensure that all open source code is identified and that any underlying licenses are appropriate for the transaction.

The bottom line is that clean IP ownership to custom software requires a written contract and a genealogy of the creation of the code.  Without both, IP ownership of custom software will remain unclear.

This post was probably as clear as mud.  Any questions about the general information?

For more information about copyrights see the following related posts:

• Copyright Rights and Licenses
• Why Copyright Assignments Can Be Critical for Your Company
• Copyrights, Independent Contractors, & the Work Made For Hire Doctrine

In a previous post, I explained the work made for hire doctrine of the Copyright Act as it applies to employees.  In this post, I’ll generally explain the most troubling, confusing subject — how the doctrine applies to independent contractors.

As I’ve said, I hate this convoluted, confusing doctrine.  This is the type of law that keeps lawyers in business.  This complex concept is difficult to understand and you must refer to the case law for guidance.  What is actually covered by this section keeps shifting as judges decide new cases.

Basically, if you want the work made for hire doctrine to apply to the work that you commission to have created, you must have a written agreement with the independent contractor and it must be a specific type of work recognized by the Copyright Act.

And the agreement should still have a default assignment clause just in case the doctrine really doesn’t apply so that the copyrights are assigned to you.

Under the Copyright Act, ownership rights to copyrights automatically vest in the author of the work — not the person or entity who paid for the creation of the work— unless an exception like the work made for hire doctrine applies.

If the work made for hire doctrine applies, then the intellectual property rights shift to another entity or person and they are technically considered the “author.”

Section 101 of the Copyright Act defines a “work made for hire””

A “work made for hire” is —

(1) a work prepared by an employee within the scope of his or her employment; or

(2) a work specially ordered or commissioned for use as a contribution to a collective work, as a part of a motion picture or other audiovisual work, as a translation, as a supplementary work, as a compilation, as an instructional text, as a test, as answer material for a test, or as an atlas, if the parties expressly agree in a written instrument signed by them that the work shall be considered a work made for hire. For the purpose of the foregoing sentence, a “supplementary work” is a work prepared for publication as a secondary adjunct to a work by another author for the purpose of introducing, concluding, illustrating, explaining, revising, commenting upon, or assisting in the use of the other work, such as forewords, afterwords, pictorial illustrations, maps, charts, tables, editorial notes, musical arrangements, answer material for tests, bibliographies, appendixes, and indexes, and an “instructional text” is a literary, pictorial, or graphic work prepared for publication and with the purpose of use in systematic instructional activities. (emphasis added)

If the author of a specially commissioned work is not an employee but an independent contractor under common agency law, then section 2 of the work made for hire doctrine may apply.

Section 2 may only apply if 1) the parties expressly agree in writing that the work is a work made for hire; and 2) the work fits one of the nine categories enumerated by the statute.

Determining whether a work fits in a statutory category is confusing.

Careful lawyers never rely on the work made for hire doctrine alone.  They always put in a just-in-case clause in the written agreement with an independent contractor that assigns the copyrights to the entity who pays.

The bottom line is that you need a carefully worded contract if you want to own the copyrights to the work you pay a non-employee (like a website or logo designer) to create.

I’ll be honest.  I hate the work made for hire doctrine in the Copyright Act.  It’s a confusing mess to understand and it tends to give some companies a false sense of security about intellectual property ownership.

In some cases, like for regular, salaried employees, the doctrine is somewhat straight forward. But for independent contractors, the doctrine is complex and confusing and more of a problem than a help in many situations.

So today, I’ll start with the simple part and address how the work made for hire doctrine applies to regular, real employees.

First, what is the work made for hire and why should I care?

Usually, pursuant to the Copyright Act, when an original work of authorship is created and fixed in tangible form, like typed into a computer program or written on a piece of paper, copyright protection arises and the copyright automatically becomes the intellectual property of the author who created it.

The Copyright Act created an exception to that rule.  Under the work made for hire doctrine, if an original work is a “work made for hire” then the Copyright Act defines the employer as the author and copyright owner and not the employee.

The first part of Section 101 of the Copyright Act states:

A “work made for hire” is —

(1) a work prepared by an employee within the scope of his or her employment; or . . .  .

This exception can help companies retain copyright rights when they fail to have their regular employees sign a written copyright assignment.

But of course the definition of “employee” isn’t the standard, everyday definition that companies actually use.

Rather, “employee” means employee as determined by the general common law of agency.

Agency Law.  There are several factors that determine whether an “employee” is really an “employee” under agency law including but not limited to the following:

1.  The employer’s control of the work

• Does the employer tell the employee how to do the work?
• Is the work done at the employer’s location?
• Is the work done with the employer’s equipment?

2.  The employer’s control over the employee

• Does the employer control the employee’s schedule?
• Does the employer tell the employee what to do?
• Does the employer determine how to pay the employee?

3.  Employer’s status and conduct

• Does the employer withhold taxes?
• Does the employer pay benefits?
• Is the employer in the business of selling the work?

Although the courts have not been clear about which factors must be present to establish an employment relationship in this context, if most of the answers to these questions are “yes,” it is more likely that the person would be an employee.

In that case, the copyrightable work created by the employee within the scope of her employment is owned by the employer.

Of course, the work must be created “within the scope of his or her employment” to be a work made for hire.  Again what exactly is within the scope of employment is open for argument.

But for the most part, if the employee is doing what they were hired to do and paid to do, then the work is more likely to be considered a work made for hire and the employer would automatically own any copyrights to the work.

But I think it is very, very fool hardy to rely on this doctrine to transfer copyright rights.  I consider it to be more of a save your but in a bad situation doctrine.

I believe that a company should always have its employees who are creating valuable work  sign a broad intellectual property assignment agreement that covers more than copyrights and directly transfers rights to the company.

My next post will discuss the nightmare of how the work made for hire doctrine applies to independent contractors.  At least I’ll try.

As discussed in my last post Copyright Rights, a copyright isn’t a single right – it’s a bundle of rights.  And a copyright owner can transfer some or all of the rights.

A full transfer of rights is called a copyright assignment.

For startups, it’s important to get full copyright assignments for logo designs, website designs, and other works including software written by independent contractors.

Why should a company care about copyright assignments?

Generally, if you don’t have a written, signed, full transfer of rights to the work from the original copyright owner, which is usually the author, you don’t own the copyright.

It’s like when you buy a book.  You own a copy of the book but you don’t own the copyright to the book.  The original author (or publisher by written assignment) retains ownership of the copyright.  You can read the book you purchased but you can’t copy and sell copies of the book, make a new work based on the book (a derivative work), or publicly perform or display the book without permission of the copyright owner.

When you are paying for the creation of copyrighted work for your business, you usually want to own all of the rights.

And pursuant to Section 204 of the Copyright Act, if you don’t have a written copyright assignment signed by the owner of the copyright or its agent, you don’t own the copyright.

You may just have rights to a single copy.  This is important because you won’t be able to register the copyright to your logo or website to get statutory protection and you may be guilty of copyright infringement when you modify the original work.

A copyright assignment may be critical for your business.

For example, if you don’t have a written copyright assignment for the software being written by an independent contractor for your startup, you don’t own the copyright.  It seems so wrong but it’s true.  The developer can resell and use the code and try to stop you from using it.  You may pay hundreds of thousands of dollars for the creation of software that you don’t have a clear right to use.

This was the fact situation for the first copyright trial I worked on as an IP attorney.  The alleged independent contractor sued our client for copyright infringement after it had paid an enormous amount of money for the creation of the custom software at issue.  Our client won an implied, temporary license to use the software but only after a very expensive legal battle and trial.

The battle and expense could have been avoided with an upfront, simple, written contract with the alleged independent contractor that assigned the copyrights to the company.

It’s important for startups to think about copyright assignments at the beginning of a project before they pay designers and independent developers.

And software startups need to be aware of ownership issues if they plan on reusing code in future projects for other companies and they hire independent developers to write code.

It’s cheaper and easier to hammer out these IP ownership issues in contracts in the very beginning of your relationships and projects.

And I know that copyright rights can get crazy complicated when you work with multiple software developers who want to use old code and open source.  That will be the subject of later posts.  This post is just the beginning of the conversation to help startups see the relevance of copyright assignments to their business success.

Have you ever wondered why most copyright licenses have a laundry list of rights?

For example, the MySpace.com Terms of Use Agreement has a typical copyright license which you grant to Myspace when you upload content to the site.  It says:

By displaying or publishing (“posting”) any Content on or through the MySpace Services, you hereby grant to MySpace a limited license to use, modify, delete from, add to, publicly perform, publicly display, reproduce, and distribute such Content . . .

There is a reason for the list that most non-lawyers don’t understand:  a “copyright” isn’t just one right — it’s actually a bundle of rights — and a copyright owner can agree to license or transfer some or all of the rights.

The Copyright Act specifically says (emphasis added):

§ 106. Exclusive rights in copyrighted works

Subject to sections 107 through 122, the owner of copyright under this title has the exclusive rights to do and to authorize any of the following:

(1) to reproduce the copyrighted work in copies or phonorecords;

(2) to prepare derivative works based upon the copyrighted work;

(3) to distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending;

(4) in the case of literary, musical, dramatic, and choreographic works, pantomimes, and motion pictures and other audiovisual works, to perform the copyrighted work publicly;

(5) in the case of literary, musical, dramatic, and choreographic works, pantomimes, and pictorial, graphic, or sculptural works, including the individual images of a motion picture or other audiovisual work, to display the copyrighted work publicly; and

(6) in the case of sound recordings, to perform the copyrighted work publicly by means of a digital audio transmission.

A “derivative work” is basically a new work that is based on the original work — it’s a modification of the original work.  This is why a list would talk about the right to change the original work and why MySpace.com’s Content license lists the right to “modify, delete from, add to” your posted material.

Since a copyright owner can license or transfer some or all or the rights, careful lawyers specify which rights are being licensed or transferred. They write out a list.

I have seen some bizarre  contracts drafted by web designers who didn’t understand copyright rights.  They actually created an IP mess because they didn’t understand how to write a copyright license or transfer.

When you are granting a license or getting a license to copyrighted work, you want to see a list of the specific rights involved.

It’s important to know your rights as a copyright owner and what you are transferring or licensing.  It’s also important to know a copyright owner’s rights when you want to use or own another’s copyrighted work.

My next post will talk about a full transfer of copyright rights — a copyright assignment.

To learn more about copyright law and why it’s important if you are paying someone else to design your website read How a Legally Ignorant Web Designer Can Create an IP Mess for a Startup’s Website.

Copyright law is confusing.  Consequently, it’s frequently misunderstood.

Many people think copyright law protects ideas.

Wrong.

Copyright law does not protect mere ideas.

Not in your head. Not in your bed. Not in your book. Not on a hook.  Not in a play. Not in any way.  Not in your code. Not in any mode.  And yes, I’ve been reading a lot of Dr. Seuss lately.

And copyright law does not care about proper attribution of ideas.  That’s the province of the morality and plagiarism.  College grads may be confused because their professors made it seem like all plagiarism is illegal copyright infringement. It’s not.

Further, copyright law does not protect concepts, facts, names, titles, slogans, procedures or methods.

Copyright law only protects “original works of authorship fixed in a tangible medium of expression.”

Copyright law protects the creative expression that explains an idea if it is fixed in a tangible form like scribbling on the back of a napkin or typing in a computer program.

Copyright law protects how you write about an idea on a piece of paper but not the idea itself.  The line between an “idea” and the “creative expression of an idea” can be blurry.  It keeps lawyers fighting in court.  For example, have you ever wondered about copyright infringement cases based on stealing the “ideas” for TV shows?  These types of cases tend to give the general public the mistaken impression that naked ideas are protected by copyright law.  They aren’t.  Copyright law may protect a written expression of an idea that includes a complex outline, well-developed characters and plot.

You can’t claim a copyright on a naked idea.  So if you have a brilliant idea, write it down in complex, creative detail and you automatically have a copyright.

Also to read why “ideas” are not protected by patent law, read the post on Patent Myths.

I understand that you may be trying to start a company and build a website on a shoe string budget.

You may think that you are saving money by hiring an individual or a small Web design shop to create your website.

You may think that you are getting a real deal because the individual or tiny shop happens to be highly creative and truly talented.

You may think that you are saving money by not having an IP attorney review the contract, if any.

You may think that you own the website design and logo that you paid to have designed.  Your Web designer may even tell you that you do.

You may think that the contract that the Web designer gives you really assigns the copyright to you because it vaguely talks about ownership and copyrights in the same paragraph.

You may think that your Web designer will understand copyright law and not rip off other sites and put infringing material on your site.

YOU MAY BE VERY, VERY WRONG!

Legally ignorant Web designers (“Amateur Web Designers”) can create a legal cesspool.

Warning!  Some Web designers don’t understand the basics of copyright law!

Amateur Web Designers may be exceptionally talented and legally clueless.

Amateur Web Designers may be launching their own startup on a shoe string budget.  They may decide to save time by not researching the law.  They may decide to cut costs by not getting competent legal help.  They may rely on a best friend’s girlfriend’s brother or a friend of a friend for business and legal advice.

Amateur Web Designers may stick their heads in the sand and ignore the legal issues related to their work.

An Amateur Web Designer’s lack of legal knowledge can have serious consequences for your business.

Amateur Web Designers will not use proper contracts with their clients that correctly assign (transfer) the design copyrights to the person or company who pays for the design.

Cavalier Amateur Web Designers won’t use a written contract of any kind.

Earnest Amateur Web Designers may try.  They may have good intentions.  They may even draft a contract trying to transfer the copyrights and give you a copyright assignment.

But if they don’t understand copyright and contract law basics, they won’t use the proper assignment language.

Amateur Web Designers may think that it is utterly unnecessary to learn about copyright law.  They may think they can just use what seems like logical language rather than legal language.  They may think that legal language is unnecessary and utter hogwash.

But Amateur Web Designers who draft their own contracts may create a legal quagmire.

Some crappy amateur contracts are internally inconsistent, talk about some of the individual copyright rights in strange ways, and create a tangled mess that is actually worse than no contract at all.

I know it’s hard to read contracts and that legal language sounds like mumbo jumbo.

But Web designers need to understand that the copyright statute and judicial decisions that interpret the statute and language in litigated contracts actually dictate the proper wording for copyright assignments.

Law makers and judges determine what language is appropriate.  And if the contract isn’t written properly, it won’t legally do what the designers thinks it does and it may create a putrid, legal cesspool.

You may be wondering, does it really matter that I don’t own the copyright to my website design?

If the Web designer doesn’t use a proper contract, then you won’t have clean IP rights to the website.

Without a signed, written copyright assignment, the default law is that the Web designer owns the copyrights.

No skin off the designer’s back.  It is your problem going forward, not his.

If you don’t own the copyright to your website design:

• Depending on your contribution to the content, you may not be a joint author and you may only have an implied license to use your company’s site.
• You may be infringing the designer’s copyright when you change or redesign your company’s site at a later date.
• You won’t be able to sell your website to a competent company who does IP due diligence.
• You can’t register the website copyright with the Copyright Office.  If you don’t register the copyright and someone copies your site, you can’t bring a legal action for infringement, get statutory damages or attorney fees.
• Depending on the specific facts, if pissed off, your Web designer may have the power to stop you from using your company’s site.

Too bad for you.

If you don’t have a written, signed copyright assignment for the design of your website, you may want to make the Web designer your BFF.

If your Web designer doesn’t understand copyright law, you may be in for more unpleasant surprises.

Amateur Web Designers may infringe the copyrights of others and use unlicensed or improperly licensed material on your site.  When you operate the site, you will be the infringer.

Amateur Web Designers may use video that they don’t have the clear legal right to use.

Amateur Web Designers may be so clueless that they don’t have a proper copyright assignment to video that they have independent contractors shoot for them.  If they don’t have an Independent Contractor Agreement that assigns the copyrights to their business for the contractor’s work, then the contractor — yea the guy who shot the video — owns the copyrights.

When you use the video on your site, you will be relying on a tangled IP mess and a domino line of implied licenses.

Amateur Web Designers may use software that they don’t have the clear legal right to use.

They may copy and use unlicensed code.  They may use code that they think they own that is really owned by their former employer.

Amateur Web designers may also unwittingly use open source code that has horrible commercial implications for your site.

You may pay a small price for Web design now and pay a big price later.

What does a professional Web designer do?

A professional Web design company will have a proper contract drafted by an attorney who understands copyright law issues.  A proper contract will assign the copyrights for the overall design, new images and any logos to you.  This will allow you to register copyrights to your logo and website if you so desire.  (There is usually a carve out for designer’s software that gives you a license to use old code that the designer reuses.)

A professional Web design company will have a proper license to use any photographs and other third party material on your site.

A professional Web design company will disclose any source code that they use for the website’s foundation, have proper licenses to use the software, and give you a copy of the related licenses when asked.

A professional Web design company won’t copy other sites and infringe the IP of third parties.

A professional Web designer may be well worth the money.

In my personal opinion, you may want to hire a professional Web designer if:

• If you are not married to, closely related to, or best friends with the Amateur Web Designer who is creating your site
• You are paying a lot of money for the creation of your website
• The designer is creating a lot of original images for the site
• The designer is creating your company logo
• You plan on using your site for at least a year
• You plan on modifying your website at a later time
• Your website is the core of your business
• You might want to sell your website in the future

I’ve used small shops for the design of my websites to save costs but I’ve taken precautions.

I required the designers to sign a contract that assigned the copyrights to me.  I also reviewed the contracts for underlying open source code that was used for the foundation for my sites.

I ABSOLUTELY WOULD NEVER HIRE A DESIGNER WHO WON’T SIGN A DESIGN COPYRIGHT ASSIGNMENT!

I also believe the best practice for licensing photographs on your site is to license the photos yourself after the designer has selected them from a stock shop. This way you make sure that there is a license and that the license is appropriate.  I’ve also gotten a signed written copyright assignment from a photographer friend who has taken photos for my sites.

To make sure that you have the proper rights to your website’s IP, you can hire an Amateur Web Designer and an IP attorney to draft a proper website design contract for you.  Let the attorney explain the contract to the Amateur Web Designer.

Ultimately, protection of your website’s IP and reducing your risk of copyright infringement is up to you.

You need to make sure that you have the legal right to use every element of your website.  In business, it pays to be informed.

If you want to understand more about copyright law, download the free ebook IP Law FAQ or go to the Copyright Office’s website.