What to Look for in Software Assignments | Practical Law

What to Look for in Software Assignments | Practical Law

A discussion of the transfer and assignment of rights in software. This Legal Update includes due diligence and drafting considerations to address the essential terms of transfer depending on the transactional context and whether the software owner is transferring title and possessory rights in a software copy or intellectual property rights in the software itself.

What to Look for in Software Assignments

Practical Law Legal Update 7-572-5625 (Approx. 5 pages)

What to Look for in Software Assignments

by Practical Law Intellectual Property & Technology
Published on 01 Jul 2014 • USA (National/Federal)
A discussion of the transfer and assignment of rights in software. This Legal Update includes due diligence and drafting considerations to address the essential terms of transfer depending on the transactional context and whether the software owner is transferring title and possessory rights in a software copy or intellectual property rights in the software itself.
Rights in software can be transferred in a variety of transactions, including, for example:
  • The sale of one or more tangible copies of a specific software solution.
  • A broader asset sale or carve-out transaction (the sale of a discrete business from a larger business enterprise).
  • A merger, acquisition or change of control.
  • An exclusive software license.
  • Conditionally, as security in a financing arrangement.
While assignments are the instruments most closely identified with the transfer of software rights, they may not be necessary or appropriate for some of these transactions. For example, under the US Copyright Act, a transfer of ownership of copyrights in software may be performed by any means of conveyance or operation of law, including by assignment, exclusive license, mortgage, will or laws of intestate succession (17 U.S.C. §§ 101 and 201(d)(1)). Therefore, when drafting or conducting due diligence of the terms of a software transfer, counsel must verify both the specific software solutions and rights conveyed and the transfer's transactional or other context.

Transferred Subject Matter

A key consideration in determining whether an assignment is the appropriate instrument of transfer and, if so, the appropriate terms of assignment, is whether the transfer covers either or both:
  • Intellectual property (IP) rights in the software.
  • Only the ownership of tangible copies of the software.

Assignment of IP Rights

While copyrights are the most common form of IP protection for software and software documentation, transferred IP rights in software may also include rights in:
  • Trade secrets, know-how and confidential information, for example, in the software's source code.
  • Patents on processes and methods practiced by the software.
  • Database elements of the software protected under:
    • US copyright law (if they have original content or selection and arrangement of content);
    • trade secret laws covering the database's structure, contents or method of operation; and
    • sui generis database rights recognized in the EU or other non-US jurisdictions (see, for example, Database Directive (96/9/EC)).
  • Designs such as computer screen displays, menus, icons and other software-generated graphic materials under EU or other non-US design protection laws (see, for example, Community Design Regulation (6/2002/EC) and EC Designs Directive (98/71/EC)).
  • Trademarks, including registered and unregistered marks and their associated goodwill.
  • Moral rights of attribution, integrity and non-destruction that non-US jurisdictions may vest in the creators of the software's documentation (but not the software itself).
If the transferee intends to receive an absolute transfer of all IP rights in the software and its related documentation, and not merely the title to one or more tangible copies of the software, the transferee should:
  • Seek an irrevocable written assignment to the transferee and its successors and assigns of all right, title and interest in and to the software and documentation in all forms, formats and media, including in object code and source code form.
  • Specify in the assignment grant that the assignment includes all IP rights, interests and assets comprised by or related to any of the software or documentation.
  • Include the geographic scope of the assigned rights (for example, "in the United States," "throughout the world" or, where satellite or other extraterrestrial use is contemplated, "throughout the universe").
  • Establish, through a due diligence review of the assignor's files and the records of the US Copyright Office, US Patent and Trademark Office (USPTO) and any applicable non-US registry, whether:
    • the assignor has granted or received any rights, licenses or other interests in the software; and
    • the software is subject to any earlier assignment, exclusive license or security interest, lien or other encumbrance.
  • Carefully review the terms of any license, security interest or other encumbrance identified in the due diligence search, including the license term, the assignor's obligations and the assignor's freedom to assign its rights under the license agreements' assignment provisions.
  • Include the assignor's license rights in the assignment.
  • Explicitly state that the assignment includes the transfer of the assignor's rights to any and all royalties, fees, income, payments and other proceeds derived from the use or exploitation of the software that are due or payable:
    • on and after the effective date of assignment; and
    • where applicable, before the effective assignment date.
  • If the parties intend to transfer to the assignee the software owner's right to sue for the past infringement, misappropriation or other violation of its rights in or relating to the software, include an express assignment of all rights to sue and receive damages and other legal and equitable remedies for these past, present and future violations.
  • Prepare an assignment grant in a form that may be recorded with the US Copyright Office, USPTO or both to protect the assignee's ownership interest in any federally issued, registered or applied-for copyright, patent or trademark rights in the software.
In addition, if the assignee seeks an unqualified transfer of all IP ownership rights in the software that is not limited to the specific IP rights owned by the assignor, it should use the precise phrase, "all right, title and interest" and avoid the potential quit claim qualifier "assignor's entire right, title and interest."
For specific terms of assignment and more drafting tips and practical guidance on drafting an assignment grant, see Standard Document, Software Assignment and Grant-back License Agreement (Pro-assignee).

Transfer of Physical Copies

In contrast with the ownership of software IP rights, the ownership of tangible copies of software is typically conveyed by the purchase, sale or other transfer of a license to use the software, rather than by assignment. Owners of IP rights in software and downstream distributors of their software products commonly provide in purchase orders, sale agreements and other instruments by which they transfer ownership of tangible copies of the software that all transfers of the software are under license, regardless of any terms of purchase or sale used in the transfer documents. This aims to clarify that the transferred software remains subject to the IP rights owner's license restrictions, for example, on the use, commercial exploitation, copying, adaptation and transfer of the software. Otherwise, if framed or construed as unconditional sales, these transactions could:
  • Negate the IP owner's license restrictions on the use and transfer of the software by triggering:
    • the first sale doctrine (under US copyright law); and
    • the doctrine of patent exhaustion (regarding any applicable US patents).
  • Invoke the purchaser's statutory right to make or authorize the making of another copy or adaptation of the software under the US Copyright Act (17 U.S.C. § 117).

Transfer of IP Rights and Ownership of Software Copies

In a business asset sale or carve-out transaction, the assignee typically acquires ownership of both the assignor's IP rights in and physical copies of the software. The assignee should ensure that the asset purchase agreement clearly identifies:
  • Both sets of rights being transferred (either or both in the main text of the agreement and attached schedules).
  • The specific software product or products and, if, the assignor has multiple copies of the software (for example in inventory), the number of units, serial numbers and other identifying features of these copies.
For more information on IP asset purchases in general, see Practice Note, Intellectual Property: Asset Purchases. For a sample assignment agreement transferring all IP rights in software in the context of a broader, asset sale or other principal transaction, see Standard Document, Software Assignment and Grant-back License Agreement (Pro-assignee).