Protecting Your Proprietary Software
SOURCE CODE, SOURCE CODE, WHOSE GOT THE SOURCE CODE
Your company has just decided to dump six or seven figures into the development of proprietary software that will automate your order fulfillment process. Your projections say it will save 10 to 15
percent in direct operating costs not to mention giving you a much needed competitive advantage over your arch rival and competitor – “Breathing Down Your Neck, Inc.” Lacking adequate software development skills in-house, your IT staff submits a couple of proposals from software developers experienced in your needs. Having little experience in this area, you ask each of these vendors, Tweedle Dee and Tweedle Dum, to provide you with a written contract proposal. What will it say, what should you ask for, and what are the ways to reach a compromise?
First, break down the process to its components – development, installation, use and ongoing maintenance or upgrade modification. The first three will be part of the software development agreement
(SDA). The last should be covered by a maintenance agreement. SDAs are generally either fixed price or time and materials agreements. In either, but especially in a fixed price agreement, it is
important to make sure the scope of work (i.e. software specifications) is thoroughly defined. Not heeding this warning can lead to costly change orders. Along this line, be wary of too cheap a
price. You may be a good negotiator but not that good. Remember, you do want to go back to your friends on the golf course and explain why the program may have cost a buck but the key to turn
it on cost a million!
Next, you want to make sure that the payment and performance schedules are tied together and well defined. You want a reasonable interim period to test each phase of the project development.
Typically this is around ten days for testing and approval of interim phases and around a month for the complete project. However, this may vary depending upon your project. Who will own the program? Do you have the right to modify (e.g. upgrade) the underlying program? It may be your million dollars, but don’t be surprised if the SDA only grants your company a nonexclusive use license limited by geography and scalability (i.e. number of users). Your next shock comes when your vendor refuses to assign all the rights (e.g. all intellectual property, “IP”, rights such as copyright, or patent for a business process). His response is likely to be that the cost will be substantially higher if he is unable to use your proprietary software to create a more generic platform for sale to other end users. The compromise varies depending upon a number of factors not the least of which is the parties’ relative bargaining position. Things such as obtaining exclusivity of use for your industry or owning all IP rights while granting back to the vendor a license to use the program in non-competing industries are examples of available options.
Another area often appearing onerous in the vendor’s SDA covers the subject of warranties and indemnifications. Understandably, vendors carefully craft these provisions to the point where, from your prospective, they are more properly described as liability limiting rather than affirmative warranties and indemnifications. As a result, many customers wind up with little or no remedy against the developer when Breathing Down Your Neck, Inc. sues for infringement of their patent, copyright, or some other technology rights in “your” program.
Finally, who controls the source code? This is the programming language readable by humans. In turn, the source code is than compiled into an object or machine code readable by the computer. Your concern should be that if the vendor goes out of business, how could you obtain the critical source code so that you can continue to update or maintain the program. Now days, it is not uncommon for parties to agree to place the source code in a source code escrow. Depending upon the activities surrounding the escrow, this can be a costly proposition. On the other hand, this is a potential operational choke point. Just imagine a year or two from now and Breathing Down Your Neck, Inc. is gaining on you, the last thing you want to hear yourself asking is “source code, source code, whose got the source code?” … at least that’s what this lawyer thinks.
