Buying and selling title to software

Published 3 October 2019

Under English law, various intellectual property rights or IPRs, including rights in copyright, may subsist in aspects of software, including the source code, object code, database structure and various aspects of the user interface (as well as user guides and other documentation which may accompany the software).

What is an assignment?

An assignment refers to a voluntarily transfer of ownership of IPRs and can be distinguished from a situation where the software owner permits another party a right use the software, whilst ultimately not transferring title (i.e. a licence).

The requirement for an IPR assignment can arise in a variety of scenarios, for instance where a company decides to sell or acquire part of a business where particular software is acquired from a competitor, or perhaps where a supplier is commissioned by a customer to develop certain software.

Formalities

In order for an assignment of copyright to be valid under English law (specifically, section 90(3) of the Copyright Designs and Patents Act 1988), it must be in writing and the document must be signed by the assignor (the party transferring the copyright).

In practice, an IPR assignment is often effected through a deed (as opposed to a basic contract) and is signed by both parties. A deed is used to ensure that the agreement takes legal effect in situations where there is no consideration (or in effect value) in exchange for the transfer of the IPRs (e.g. if payment was made pursuant to another agreement). Furthermore, a deed is also used where a power of attorney is required (see below for why one is sometimes included). In practice though, even in situations where there is no uncertainty around consideration, and where a power of attorney is not needed, it is still commonplace for the parties to use a deed of assignment.

When drafting and negotiating on the terms of a deed of assignment, there are certain key legal aspects that are often the subject of negotiation. We have outlined some of the more material aspects below – looking at it from both a seller’s and buyer’s perspective.

The seller’s perspective

Under English law, the limitation periods for bringing a breach of contract claim is 6 years from the date of breach – but where a deed is used, this is extended to 12 years. Therefore a seller may sometimes prefer to use a contract, whilst a buyer may insist on a deed (as in practice, a seller would be more likely to face a breach of contract claim than a buyer). A seller would also ideally want to limit the contract/deed to only containing the assignment clause itself (and other essential boilerplate) and to avoid giving warranties (contractual statements relating to a particular state of affairs) and indemnities (an express obligation on one person to compensate, by making a monetary payment, for some defined loss or damage). This is sometimes known as a “bare assignment”. Furthermore, in situations where a seller is uncertain as to whether or not they are the sole owner of the software, or if a third party has any rights in the software, the seller may even be only willing to transfer such rights and interests as it has in the software (i.e. without any assurances as to ownership or non-infringement and so forth). However, unless the seller has a sufficiently strong bargaining position, this is unlikely to be acceptable to a buyer. The buyer should therefore be clear on whether it is transferring software which is entirely proprietary and unencumbered, or whether it is subject to third party rights (for instance where the software has been developed using open source software it may be assigned subject to open source licence terms) or if it has been developed using libraries of code which contain third party software or code in respect of which is to be retained by the seller (in which case the ownership position may need to be caveated).

The buyer’s perspective

Conversely, a diligent buyer would typically insist on receiving a suitably wide range of assurances and warranties from the seller concerning the software. Below we have set out some common provisions which a buyer would typically seek to include in a deed of assignment:

• Transfer of title – the buyer would typically ask for the software to be transferred absolutely (ie. not subject to a trust) and with full title guarantee - which implies certain covenants under the Law of Property (Miscellaneous Provisions) Act 1994, in particular that:
  • the seller has the right to dispose of the software;
  • the seller at its own cost, will do all that it reasonably can to ensure the buyer has good title to the software; and
  • the disposal is made free from all charges and encumbrances and all other rights exercisable by third parties, other than those which the seller does not and could not reasonably be expected to know about.
    
    A seller may prefer to give only a limited title guarantee – which only implies the first 2 above covenants.

• Defining what is being assigned - an appendix to the deed should ideally be included, setting out precisely what is being assigned.
• Rights to sue – the buyer should insist on an express right to sue in respect of past infringement or misuse of the software and a right to receive proceeds of any such litigation.
• Warranties – a buyer will typically seek a range of warranties from the seller concerning the software, including that the seller: is the sole legal and beneficial owner of the software, is unaware of any infringement or likely infringement of the software, has not licensed or assigned the software, and that the buyer’s use of the software will not infringe the rights of any third party.
• Indemnity – a buyer should seek a broad indemnity from the seller, whereby the seller would compensate the buyer if the seller breached any warranties.
• Further assurance – a buyer would usually require the seller (at the seller’s expense) to take any action as necessary to give full effect to the deed – for instance, signing further documentation.
• Power of attorney – the further assurance clause sometimes also appoints the buyer as the seller’s attorney, which enables the buyer to sign documentation on the seller’s behalf e.g. where the seller refuses to assist. Under English law, in order for a power of attorney to be valid, it needs to be set out in a deed.
• Separate Licence agreements – where the software has been licensed to other third parties (typically under separate agreements), then those agreements may need to be novated to the buyer, or, if such licence agreements are intended to remain with the seller, then the seller will need a licence back from the buyer, to continue to licence the software to those third parties.

If your business is potentially considering buying or selling software or assigning other types of intellectual property rights, please feel free to contact one of us for a no obligation initial consultation.