Holmes, How … Do I Negotiate a Custom Software Agreement and Protect My Trade Secrets?


If you hire a software developer to customize a program, or you’re a software developer providing that service, you can negotiate the terms of your agreement … and there’s good reason why you should. Beyond the expected standard contractual terms like pricing, payment and length of service, it’s also important to deliberate lesser-considered terms. Is your confidential business information protected when you share it with your software vendor? Who owns the customized software? And, what happens if you’re sued for using it? If you haven’t considered those issues, no worries. Let’s work through them together.

  1. Don’t Tell ‘Em … Unless: Often a business seeks customized software because it helps achieve something innovative that provides a competitive edge. That’s the stuff of a “trade secret”. To protect trade secrets, it’s important to limit who has access to that information, and have strong contractual terms in place to reinforce the importance of confidentiality. That way, a business can explain what it needs, and a developer can share the technical underpinnings for how to achieve the goal, with everyone in agreement not to blab. A word of caution – even with confidentiality terms in place, share only what’s truly necessary to achieve your objective. Keep the rest under your hat.

  2. Yours, Mine or Ours? If you hire and pay a developer to customize software for your business, don’t assume that you own it. Counterintuitive? Perhaps. However, unless you have a contract to the contrary, you may not own the underlying software program. The developers who authored the code (and/or their employers) typically own the copyright in the program, unless they explicitly assign those rights away. Software providers often use the same programming code repeatedly as a platform for several of their customers. Therefore, they have an important interest in maintaining its ownership. However, just as the software provider seeks to reinforce their intellectual property rights, so too can you. A well-drafted contract can reinforce your company’s ownership in its brands, copyrights, and trade secrets (such as customer lists, pricing information, business development plans, etc.). And, beyond protecting trade secrets, you may be able to negotiate certain exclusivities with the software provider to prevent them from servicing your competitors with software functionality similar to yours.

  3. Hold Me Harmless. Indemnification is a big word with a (fairly) simple concept. A contractual indemnity is a promise to hold someone harmless by paying the costs associated with a dispute. Typically, in a software context, a customer may request an indemnity from a software supplier in case the customer is sued for copyright infringement by a rival software provider. An indemnity is a reasonable ask because the customer didn't create the software, so they don't want to assume responsibility for defending it. However, if a developer customized the software to meet a customer's specific needs, the vendor may refuse to offer an indemnity. A step further, they may ask the customer to indemnity them. This is because the developer wants to limit their risks arising from customer requested changes to their standard software. Negotiating indemnities can be granular, but it’s an important measure to reduce costly legal expenses, such as defending a lawsuit in court.

Now, a word on practicality. Make the most of your time and legal efforts by negotiating a “master services agreement” with a software vendor who you’ll call on for project work repeatedly. That way, standard legal provisions like the contract term, confidentiality, trademark, copyright and trade secret ownership are negotiated just ONCE. Then, you can enter “statements of work” for discrete projects amongst business people, without re-opening negotiation on the baseline legal terms of your relationship with the vendor.

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JoAnn Holmes ("Jo") is the founder of HOLMES@LAW, LLC. She serves as Outside General Counsel to select, intimate management teams for midsize companies. Likewise, Jo provides strategic support for lean law departments.

Jo founded HOLMES@LAW to provide agile, result-driven legal solutions. Beyond risk management, we help identify opportunities. The firm's focus areas are business law and strategy, commercial contracts and global intellectual property management. We build long-term relationships as trusted collaborators, and our flexibility consistently yields great value for clients.

HOLMES@LAW is also committed to service work, including through supporting local schools and leadership groups, as well as domestic and international charities. Since its founding, the firm has dedicated more than 200 hours to community service.

Contact Us to discuss how we can work together for your business success. HOLMES@LAW - Your Business Ally™.

Holmes, How … about the Disclaimers?

Information shared by JoAnn Holmes and/or HOLMES@LAW, LLC ("We or Us") is for educational purposes only. It is not legal advice. Each situation is unique, so the information We share may not be relevant to your circumstance. Until you enter a formal engagement agreement with Us, We are not your legal counsel, and no attorney-client relationship exists. So, please do not share any confidential information with Us, and please only interact with Us if you agree to these ground rules. Thanks!

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