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Startup company uses flawed software-development contract with outside consultant, ends up having to go to court to stay alive

It’s not an uncommon tale:

  • A startup company hired a software programmer as an independent consultant. The company paid the consultant some $370,000 over three years as part of a $6 million overall development effort. [EDIT: The startup also granted shares of its stock to the consultant.]
  • Eventually, the company started to run out of money and stopped paying the consultant’s invoices.
  • The consultant resigned from the engagement. The company hired someone else to continue development of the consultant’s code — in response, the consultant sued for copyright infringement.
  • The existence of the lawsuit delayed the company’s product launch. Worse, it caused problems for the company’s efforts to raise much-needed additional venture capital.

The consultant’s code didn’t qualify as a work made for hire. Consequently, the consultant retained ownership of the copyright.

The written contract between the company and the consultant was sketchy: It didn’t address who owned the copyright in the consultant’s code, nor what the company was allowed to do with it.

A U.S. district court ruled that the company may well have had an implied license to modify the consultant’s code — see Numbers Licensing, LLC v. bVisual USA, Inc., No. CV-09-65-EFS (E.D. Wash. Jul. 15, 2009) (denying consultant’s motion for preliminary injunction). (Hat tip: Loeb & Loeb.)

This preliminary ruling didn’t undo the damage that the startup caused to itself, though:

  • after spending a lot of money to have the software developed, the startup was forced to spend more money — not to mention management time — defending its right to do further development;
  • the existence of the ownership dispute, and especially the lawsuit, put the startup’s very existence in danger.

A better approach would have been for the startup to have included, in the contract, a clause explicitly stating its right to modify the consultant’s code. The sample clauses for a services contract include an optional provision to that effect — scroll down to the clause, “Right to further develop deliverables.”

EDIT: I certainly sympathize with the consultant, who wasn’t being paid for the work he had done. But his lawsuit threw a wrench into the startup’s efforts A) to launch, and B) to raise more money, either of which would have measurably improved the odds and timing of the consultant’s getting paid. In this case, the consultant shot himself in the foot just as surely as the company did.

{ 5 comments… add one }
  • Fernando Martins 2009-07-29, 09:29

    That’s a mess…

    But I don’t really think the consultant has shot himself in the foot.
    Maybe he’s trying to cut a better deal for himself, like having a piece of the cake, i.e. the startup company.

    In such case, this would allow him to improved the odds of getting paid, plus an extra bonus for the inconvenience of not being paid on time.

    I believe the risk and money involved on both scenarios, not getting paid or getting paid much latter, does compensate the try to get a piece of the company.
    That’s an neutral or win situation for the consultant. If he looses, than he would be at the starting point, nothing changes so that’s neutral. If he wins, he can win a lot more that the money he’s asking.

  • chrisco 2009-07-30, 06:32

    Good post. BTW, I didn’t notice a contact form or email address on your website. Also doesn’t look like you follow people back on Twitter when they follow you (since you follow zero people). Might want to fix both of those things. Not saying you should follow everyone who follows you (you shouldn’t), but probably that number/ratio should be more than zero. Cheers!

    • DCT 2009-07-30, 06:37

      @chrisco – thanks. FYI, I used to follow people on the OnTechnologyContracts Twitter account, but then decided to consolidate all my follows on my personal Twitter account.

  • RG 2009-07-30, 15:20

    Wouldn’t a better approach still have simply been for the startup to not have the consultant perform work it had no intention of paying for? Let’s face it, if there were multiple invoices that didn’t get paid, some portion of the work was ordered with the clear intent to defraud the consultant.

    Without knowing all the details, we have to assume the startup meanwhile managed to keep its office space and keep its other employees paid. It sounds like they tried to take advantage of a small vendor and it cost them. (Certainly, they would not have tried this if the consultant had been with IBM or Accenture, who have more frightening legal teams.)

    I only wish shady operators like this got their comeuppance more often!

  • DCT 2009-07-30, 20:36

    @RG, you’re assuming facts not in evidence when you say that the company had the consultant perform work it had no intention of paying for, and that there was “clear intent to defraud the consultant.”

    It’s very easy for people who suffer harm as a result of bad decisionmaking to jump to the conclusion that the decisionmakers were evil and intended it thusly.

    But it’s totally plausible (absent more facts) that the company’s management didn’t intend to stiff the outside consultant, they just [fouled] up — quite likely as a result (in part) of the congenital management disease of overoptimism, in this case about its prospects for raising more money and/or generating revenue.

    The law recognizes this all-too-human tendency to hurl accusations of fraud. It’s not a coincidence that such accusations must be proved not just by a preponderance of the evidence, but by clear and convincing evidence, which is the highest standard of proof in civil cases.

    I’m starting to understand the perspective of a lot of the developer community that has commented here and at Hacker News. It’s different than the way many founders would view the matter, I think.

    Thanks for visiting.

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