Why You Must Secure IP Transfer Agreements from Independent Contractors Developing Software

When engaging independent contractors for software development, it is imperative to secure a clear, written intellectual property (IP) transfer agreement. Failing to do so may leave your business in a precarious position – financially exposed and legally constrained – despite having funded the development effort. Although this issue is often overlooked in fast-paced development environments, the risks are substantial and merit careful attention.

• Understanding the Legal Risks of Failing To Secure IP Transfer Agreements from Independent Contractors

The first and most fundamental risk stems from the absence of automatic ownership. Under U.S. copyright law, software created by independent contractors does not default to the hiring party. Unlike employees, whose contributions may sometimes be deemed “works made for hire,” contractors retain ownership of the code unless there is a written assignment transferring those rights. This legal distinction means that, without an IP transfer agreement in place, your company may lack legal title to the software it paid to have built. From a client advisory perspective, this is a critical gap that must be addressed proactively.

In addition to ownership uncertainty, failure to formalize IP transfer can expose your business to direct competition from the very contractor who developed the software. If rights remain with the contractor, they may lawfully license, reuse, or even sell the same codebase to competitors or other third parties. This scenario not only compromises your competitive edge but also raises the possibility of IP conflicts down the line—conflicts that are costly to resolve and damaging to your brand.

Moreover, the absence of formal ownership may restrict your ability to maintain or adapt the software. Without clear rights, your business could be legally barred from modifying or building upon the original code, limiting scalability and innovation. This is particularly problematic for companies with evolving product lines or those relying on iterative development cycles.

• The Pitfalls – and Limited Safeguards – of Implied Licenses

In the absence of a written IP assignment, courts may under certain circumstances recognize an implied, non-exclusive license. This can occur when: (1) the client specifically requested the creation of the software; (2) the contractor completed and delivered the work; and (3) it was reasonably understood by both parties that the client would use the software. In such situations, the client may be permitted to use the software for its intended purpose.

However, relying on an implied license is a risky and incomplete safeguard. These licenses are typically narrow in scope—limited to the specific use originally contemplated—and are often non-transferable and revocable. Crucially, they do not prevent the contractor from licensing the same code to third parties, nor do they guarantee the right to modify, expand, or reuse the software. While an implied license may offer a limited legal fallback in dispute scenarios, it should not be treated as a reliable foundation for long-term business planning.

To mitigate this risk, businesses should document expectations explicitly at the outset of the relationship, even if the parties are operating on a short timeline. If a full agreement cannot be executed immediately, a preliminary letter of intent or short-form assignment confirming the contractor’s obligation to transfer IP rights can provide a temporary safeguard until the formal agreement is finalized.

• Implementing Best Practices to Protect Your Business

To safeguard your business’s interests, incorporate a robust IP assignment clause into every independent contractor agreement. This clause should unambiguously transfer all intellectual property rights in the software – including source code, documentation, and any derivative works—to your company. It is equally important to include a waiver of moral rights and, where appropriate, a non-compete covenant preventing the contractor from exploiting the software in competing ventures.

Once the assignment is executed, consider registering the copyright in the company’s name. While registration is not required for ownership, it strengthens enforcement rights and facilitates damages claims in the event of infringement.

• Conclusion: Protecting Your Investment Requires Proactive Legal Structuring

Ultimately, neglecting to obtain a proper IP transfer agreement can jeopardize your company’s ability to protect, commercialize, or even continue using the software it relies on. This is not a mere formality – it is a cornerstone of sound legal and commercial planning. An IP transfer agreement helps ensure that a business retains full control over its software assets and is well-positioned for future growth, enforcement, and innovation. Click HERE to learn more about Derek Fahey, Esq., the author of this article.