The following article appears in the journal JOM, 48 (8) (1996), p. 60. JOM is a publication of The Minerals, Metals & Materials Society

Who Owns Copyrighted Work—Employer, Employee, Consultant?

A common situation that many companies face involves the decision to invest in a new custom-designed computer software system. Consider the following scenario. The company has an ace programmer on-staff who is working part time while he or she attends college, but the program is a major undertaking that the programmer cannot handle alone; an outside computer software consultant is hired to help with the design, programming, and implementation of the software. After much hard work, the ace programmer and the outside consultant create a tremendously effective computer software system. The company pays the outside consultant the agreed-upon fee, and the company assumes that, because of that payment, it has full ownership of the computer software system.

Several months later, the owner finds out that the computer consultant and the programmer have set up an independent business selling the computer system to the company's competitors. Understandably, the owner is not happy with this situation and seeks to stop this "pirating" of the computer system that the company paid to have developed and implemented. The owner schedules a meeting with a lawyer and gets the bad news-even though the company paid the ace programmer a salary and fully paid the consultant's fees, the copyright may still belong to the programmer and the computer consultant. Therefore, the programmer and consultant may have the right to sell or lease the program to anyone, including the company's competitors. Suppressing the urge to kill the messenger, our hapless business owner looks up at the ceiling, sighs, and asks why he or she didn't heed mother's advice and go to law school. What went wrong in this scenario, and what can you do to prevent getting into the same bind?

Ownership of copyright, such as the copyright in computer software, is governed by the provisions of the 1976 Federal Copyright Act. The key starting point for any ownership question is Section 201 of the act, which states that copyright protection initially vests in the author of the work. Our business owner was under the false, albeit seemingly logical assumption, that the owner of the copyright vests in the person who pays for the work. This does not always hold true, and under these facts the business owner's assumption is wrong. (Although this scenario focuses on computer software, any copyrightable work such as advertising materials, company brochures, paintings, or music is subject to the same rules.)

What then can be done to avoid the same predicament? The first and most important point to remember is never assume that paying someone to create a work means that you own all rights in the work. When hiring outside consultants to do work for your company, a written contract assigning all worldwide intellectual property rights, including copyrights, should always be used. This is the only sure-fire method of protecting your company.

What about employees? A prudent practice is to require all key creative employees to sign, as a condition for employment, agreements assigning to the company all rights in any intellectual property (including patents and copyrights) created while employed at the company. The key point to remember is that the employment agreement must be signed before the employee is hired or, if offered to a current employee, must be coupled with an increase in pay or responsibilities.

All is not lost, however, if an employee does not have an employment contract and creates a copyrightable work in the scope of his or her employment. U.S. copyright law includes a statutory provision called the "work made for hire" doctrine, which provides that the employer and not the employee/author is the author of a work prepared by an employee within the scope of his or her employment. Because the employer is considered the "author" of the work, the employer owns the copyright in the work under Section 201.

At one time, there was considerable controversy in the courts as to who was considered an "employee" under the work-made-for-hire doctrine. One court held that only "formal, salaried employees" are considered employees under the doctrine. On the opposite side of the spectrum, cases held that an employment relationship exists when the hiring party either retains the right or wields the right to control the actual performance of the work. A third approach used the principles of agency law to determine who is an employee.

The Supreme Court stepped into this fray in 1989. The Supreme Court adopted the third approach-an employment relationship was to be determined by applying agency law principles. The court enumerated several factors that are relevant in determining whether the hired party is an employee under the general common law of agency. These factors include the skill required for creating the work; the amount of control the hiring party has over the hired party; where the work is performed; the method of payment of the hired party; and the source of the hired party's tools, office space, and other instrumentalities of doing the job. The court also considered whether the hiring party has the right to assign additional projects, whether the work is part of the hiring party's regular business, whether employee benefits are extended to the hiring party, and the tax treatment of the hired party.

Returning to our hapless business owner, there is no question that under U.S. copyright law the consultant co-owns the copyright in the computer program. As a co-owner, he or she is free to market the program to others and must only account to the coauthor (i.e., the programmer) as to the money received. There is a factual question, however, as to whether the programmer is an employee under the work-made-for-hire doctrine. A host of questions must be answered before a final determination can be made. Inevitably, this uncertainty leads to controversy and maybe expensive litigation in the courts.

All of our hapless business owner's problems could have been avoided, however, with a written contract with the consultant and a written employment agreement with the programmer in which these people assigned their respective intellectual property rights (including copyrights) to the company. Therefore, make sure that signed agreements are executed before any intellectual property rights are created.