Custom Software Development: Do’s and Don’ts

Many organizations being parties to the license agreement have seen the implications of customization when using software. This applies equally to both rights holders and licensees. And one of such issues is the possibility to customize the software product in the process of its use. Legislation equates software (computer programs) with literary works, but when it comes to the possibility of modifying a software product undoubtedly has its own specifics.

Let’s try to figure out what is meant by modifying or reworking (customizing) a software.

By its very nature, a software, unlike a literary work, is subject to much more frequent modifications. As distinguished from a literary work, in the case, for example, when the writer takes it as a basis for creating a script, then even the average user understands that the rules on the inviolability of the original literary work must be strictly adhered to. But is this the case with software?

According to subparagraph 9, paragraph 2 of Article 1270 of the Civil Code of the Russian Federation: “Reworking (or modification) of a computer program or a database means any changes made in them, including the translation of such a computer program or such a database from one language to another with the exception of an adaptation, i.e., changes made solely for the purpose of applicability of a computer program or a database to specific technical means of the user or under the management of specific programs of the user.”

Thus, it becomes clear that any actions of the Licensee, which are aimed at downloading, running and installing the software, the right to which is granted under the license agreement, as well as actions to enable its seamless interaction with the existing equipment, are allowed and will be an adaptation (adaption) of the software.

Often, the Licensor, who is also the right holder of the software by granting the right of use, independently carries out further modifications to solve certain tasks of the Licensee, to optimize certain business processes of the company. Also, often the Licensor itself provides further technical support. 

But what about the software which is still provided to the Licensee in its entirety for the solution of certain issues and the need for revision is inevitable?

If the scope of the right granted by the license agreement is not precisely defined, does this mean that the Licensee has the opportunity to use vague wording to feel more relaxed about the program used, or not and this use is clearly regulated by imperative rules of law, regardless of the oversight of the author of the contract?

As a rule, when granting the right and defining the scope of the granted rights, the license agreement contains approximately the following wording:

“The right to install, reproduce, store in the computer memory, activate and run solely for the organization (incorporation) and functioning of the enterprise, and only within the specified Territory.”

This is a fairly standard wording, which means that no change or modification is intended. However, as noted above, a software can rarely be a static product. More and more often, there is a need to modify it to solve a specific problem, and sometimes this modification is so significant that there is a new software product based on it. 

According to paragraph 87 of the Resolution of Plenum of the Supreme Court dated April 23, 2019 No.10 On Application of Part Four of the Civil Code of the Russian Federation:

“Revision of a work implies creation of a new (derivative) work on the basis of an existing one. The right to process a work is one of the ways of using the result of intellectual activity and as such belongs to the right holder, including the one who is not the author of the original work, who has the right to process the work (in particular, to modify a computer program or database) and to make subsequent use of the new (derivative) work independently of the author of the original work. The right to reprocess the work may be transferred among other rights as part of the transfer of exclusive rights under the agreement on alienation of exclusive rights in full (article 1234 of the Civil Code) or granted under a license agreement (article 1235 of the Civil Code), and may also pass on the grounds established by law without concluding an agreement with the right holder (article 1241 of the Civil Code).”

Thus, at the time of the conclusion of a license agreement, it is necessary to clearly define how the software is supposed to be used, i.e., whether the software product is the final necessary option to solve certain problems, such as accounting for retail sales, calculation of balances and necessary supplies, or it is initially assumed that the software will be modified through the provision of services by the right holder himself, or by the software developers of the Licensee’s company. 

In this regard, both parties to the license agreement need to clearly understand the legal ownership of all modifications created. It should be noted that often further improvements to the software are beneficial to both the Licensee and the rights holder themselves. Nothing stands still, and nothing develops as rapidly as the digital technology market. Therefore, if customized versions of the software will be created, improving this or that branch of business, including through the company, which uses the software product under the license agreement, it is fine, but in order not to violate the exclusive right of the author and owner of the property rights, there is a need of a juridical security in respect of all created modifications.

If the license agreement itself, or an additional service agreement concluded with it, or the agreement implementation provide for that the right holder delivers additional services for modification, revision and technical maintenance of the software, then in the vast majority of cases, the right holder will be that in respect of all new (customized) software versions. If it is assumed that the Licensee itself, employing its technical experts, will develop new versions of the software used, then this aspect must be given special attention.

The point is that in some cases, the right holder, without paying due attention to these terms of the license agreement, grants the right to use, but then gets disappointed when the unscrupulous Licensee, based on the provided source code and transferred materials on the software, developed new versions, thereby creating new copyright items, registered one or more software products, and then commercialized, having created all kinds of obstacles to the right holder himself.

As a result, it is necessary to prove that in the basis of the created program was used the object of copyright, which belonged to the right holder. It is not all bad, and it is possible, but time-consuming, and not always unambiguous.

Therefore, we often pay attention to this, before concluding a license agreement, when further cooperation seems cloudless. It makes sense to simulate the worst situation and litigation on these grounds. And maybe then it will make parties to the license agreement think more carefully about all the wording, or ask a lawyer for professional help in the preparation or analysis of the proposed agreement to sign which will be very helpful to clearly understand do’s and don’ts of custom software development.