Notes & Comment
Vol. 2008, No. 3
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Intellectual Property
The Risk of Lousy Documentation: Implied Licenses
When parties to a software development project fail to properly document the deal at the start of their relationship, or they fail to document the deal at all, there’s substantial risk of potential problems later. This may seem obvious, but some businesses don’t fully appreciate the point -- at their peril. That’s perhaps the most important lesson to be drawn from the Ninth Circuit’s recent decision in Asset Marketing Systems, Inc. v. Gagnon, 2008 U.S. App. LEXIS 19179 (9th Cir. September 9, 2008).
Asset Marketing involved an IP consultant, his proprietary software, an unhappy customer and lousy deal documentation. The dispute landed in federal court, the IP consultant lost, the unhappy customer got broad use his proprietary software -- and the lousy documentation was pivotal to the outcome.
The Facts
Kevin Gagnon (Gagnon) was an independent contractor hired to develop custom software for Asset Marketing Systems, Inc. (AMS), an account that represented 98% of Gagnon’s business. Gagnon worked for AMS for four years, generating over $2 million in fees, including $250K in custom software development fees. He developed six custom programs for AMS.
At the outset of the relationship, Gagnon and AMS signed Gagnon’s template “Technical Services Agreement”, an informal document that broadly described his services and fees, but omitted language about software licensing, and, apparently, language about intellectual property ownership of the custom software that Gagnon was to develop for AMS. A couple years later, the Technical Services Agreement expired, though the Gagnon-AMS relationship continued. Meanwhile, the parties had signed a non-disclosure agreement that purportedly gave AMS ownership of any intellectual property Gagnon developed for AMS, though Gagnon later disputed the legitimacy of that NDA.
After the original Technical Services Agreement expired, Gagnon proposed a new “Outside Vendor Agreement” (OVA) to AMS. That proposed contract included language granting to Gagnon ownership of any intellectual property Gagnon created for AMS. AMS would not sign the proposed OVA, however, and edited it to read that AMS, not Gagnon, would own the IP Gagnon created for AMS. The OVA was never finalized. Shortly thereafter, AMS terminated the relationship.
As part of Gagnon’s work for AMS, he had developed and delivered several software programs to AMS in both object code and source code. Although the source code versions were subject to security controls, AMS had possession of and access to the source code delivered by Gagnon. None of the documentation between the parties (except perhaps the disputed NDA) discussed software licenses to AMS or ownership of the underlying IP created for AMS by Gagnon.
Normally a customer like AMS would have not access to source code, but Gagnon had delivered to AMS both object code and source code. The source code was stored on AMS computers in a secure development room at AMS’ facility and AMS personnel had access to it. There was never discussion between Gagnon and AMS about the confidentiality of the source code, nor the scope of any license AMS may have had to use, copy or modify the source code Gagnon delivered to AMS.
After the relationship soured, Gagnon charged that AMS was improperly continuing to use his proprietary software. AMS responded by claiming that, by virtue of the relationship with Gagnon, AMS had received an irrevocable license from him to use, copy and modify both the object code and source code versions of the software that had been delivered to AMS during the relationship. Litigation soon followed.
The Decision
The core issue in the case was whether AMS had, by virtue of its relationship with Gagnon, received from him an implied irrevocable license to continued use, copying and modification of custom software source code Gagnon had created for and delivered to AMS. Gagnon alleged, among other things, copyright infringement and trade secret misappropriation. In response to the infringement claim, AMS asserted an implied license defense.
The Court of Appeal agreed with AMS. Although the documentation was incomplete and no express written software license had been granted to AMS by Gagnon, the trial court, according to the Ninth Circuit, was correct to conclude that Gagnon had in fact granted AMS an implied license to the source code: "[W]e have held that an implied license is granted when '(1) a person [AMS] requests the creation of a work, (2) the creator [Gagnon] makes that particular work and delivers it to the licensee [AMS] who requested it, and (3) the licensor [Gagnon] intends that the licensee-requestor [AMS] copy and distribute his work.'" [Citations omitted]. The Court held that the last prong (intention to permit copying and distribution) also encompassed an intention to permit use, retention, and modification of the software.
First, the appellate court found, there was no question AMS had asked Gagnon to create the software at issue. Second, Gagnon created the work and delivered it to AMS. For the Ninth Circuit, delivery of the source code to the customer was significant, although delivery alone did not decide the issue. Third, Gagnon’s conduct and the incomplete documentation that did exist between them manifested an objective intent by Gagnon to grant AMS an unlimited license to use, copy and modify the delivered software. Finally, because AMS paid Gagnon substantial money to create and deliver the software, the Court deemed AMS’ implied license to be irrevocable, unlimited and non-exclusive.
Summary and Conclusion
This decision is a common sense outcome to a very difficult problem. After the relationship ended, Gagnon proposed a formal license agreement for substantial additional money and AMS rejected that proposal, having already paid Gagnon some $2M in fees. Without finding an implied license, therefore, AMS’ substantial investment would have been worthless.
Here, the software developer (Gagnon) and the customer (AMS) were both negligent for not properly documenting the deal at the outset. Before paying a lot of money for custom software development (or similar professional services involving the creation of intellectual property), a business customer should insist upon clear written rules of the road at the start of the project, including comprehensive license grants and ownership of intellectual property.
© Matthew Joseph 2008. Law Offices of Matthew Joseph, San Mateo, California, practices in the areas of intellectual property licensing, commercial real estate leasing, corporate formations and business transactions. No legal advice is intended by the information provided herein and recipients should independently consult counsel before taking any action related to this subject matter.