Don’t Get Screwed – Managing Website Vendors

THE SALES PITCH

Have you ever built a website before? Most small businesses lack the technical ‘know-how’ or time to establish a strong online presence. As such, small businesses outsource their online presence to one of the many Internet vendors. Sadly, not all vendors are trustworthy and small businesses often fall prey to illegitimate vendors or legitimate vendors with low ethical standards. Yes, we get the myriad of pushy emails and phone calls to from salesmen too. They all promise to increase customers through design, SEO, email lists and so forth. It can be quite overwhelming, even to someone who knows what they are doing!

The reason many small businesses fall into trouble with building their online presence is because copyright laws in the United States and other nations tend to be downright counter-intuitive. We’ve all grown up with the idea that “You own what you pay for.” Copyright law does not adhere to that principle– its much more nuanced and fact dependent. So much so, that you’d be surprised how many intelligent business leaders get into trouble. The trap is simply the following: “Independent contractors automatically own the copyright of the copyrightable work product they produce.” The corollary to this rule is, “employers own the copyrightable work product of their employees,” but that’s not true of independent contractors. These rules can only be changed with the right contract.

GETTING SCREWED ONLINE

Have you been to Florence, Italy, to see the Statue of David by Michelangelo? If not, you need to put it on your bucket list. If you were David (should you be so lucky) and you hired Michelangelo to create a sculpture of you, who owns the sculpture? Under modern day copyright law, you would own the one sculpture produced by Michelangelo, but Michelangelo would own the copyright, enabling Michelangelo and only Michelangelo (not you, even though you commissioned the work) to reproduce the sculpture and create derivative works.

The same concept applies to the modern day Internet, websites and any software you “commission” to be created on your behalf. The independent contractors you hire actually owns the copyrights of the copyrightable work product they produce. In other words, if you hire independent contractors to produce your website, they actually own the copyright of the website (even though you may own the one website they built). Same thing with software. Now many businesses wonder why they should care? They care more about getting money from the website. Who cares who owns the website? How does this become a trap?

Let’s say you build your first website. We’ll call it Version 1.0. Where is it hosted? Who is running it for you? Is it custom built or does it run on some sort of “content management system?” Does it require some special software to work or does it use a widely available software?

Those basic questions are usually never considered. In fact, most business leaders don’t even know to ask those questions. What happens then, is that your Version 1.0 website is dependent upon your independent contractors. You are locked into a contract. When it comes time to make Version 2.0 of your website (and trust us, you will need to update your website sooner than you think), you need to go through the same independent contractors. If they are not scrupulous, they can trap you by not releasing the software you need to run your website and those same independent contractors can actually prevent you (using copyright law) from making a Version 2.0 based off your Version 1.0 (because it would be considered a derivative work, which is protected under copyright law). So you are quite simply stuck in a Catch-22 dilemma, to continue using a service that is taking advantage of you or start over from scratch?

One of our clients fell into this trap, with an e-commerce website that ultimately was responsible for almost one-half of our client’s revenues. The monthly maintenance fees became too much to bear and they wanted their employees to be able to manage the website on a new provider (instead of the independent contractors). Doing this would save the business $20,000 per month. The problem was, the existing provider would not release the website without our client paying $500,000 for “a full license” of their website, despite the fact that our client had paid this provider hundreds of thousands of dollars over the past few years. We got involved as a law firm, but the independent contractor hired a good law firm out of DC which raised the prospect of a very expensive legal bill when the law was simply stacked against our client.

A similar trap occurs with software. We have many clients who hire independent contractors to develop smart-phone apps. The problem is once those independent contractors are done getting paid developing the app, they turn around and sell that same app to their competitors! And there’s simply nothing that can be done about this, if a proper contract wasn’t executed before the job started.

HOW TO AVOID GETTING SCREWED

Now keep in mind, we are not advocating against website designers and vendors. There are plenty of great designers and services at your disposal. However we are advising that small businesses use caution. Ask around. Check reviews. Read contracts. Five minutes now can literally save a business hundreds of thousands of dollars down the road. How does a small business avoid the trap of getting screwed by website vendors? When it comes to contracts, look for the following phrases:

• Copyright Assignment Clause. Make sure the words “work made for hire” are included in the language. Basically, you want to make sure “that any and all work product that can be copyrighted, shall be deemed a work made for hire under US Copyright law, and the Client (that’s you) shall own all right, title and interest in the work product produced under this Agreement by the Independent Contractor.”
• Source Code and Data Model. Make sure your contract specifies that the Independent Contractor will release all source code and the data model to you upon request and upon job completion, and that said source code and the data model will be sufficiently commented and documented.
• Indemnity from Infringing Work. Make sure the Independent Contractor represents and warrants that he/she/it will not use any third-party material, software, images, graphics or other work without your permission, without maintaining a proper catalog or list, and that is not properly licensed to you for your purpose. There should be an “indemnity clause” that indemnifies and holds you harmless for any third-party lawsuits related to the Independent Contractor violating this term, but remember, such an indemnity clause is like credit — it’s value is tied to the value of the one making the promise. Is your Independent Contractor a high-school student or off-shore contractor from guru.com or similar? If so, assume they will never be able to honor this clause, and therefore choose your Independent Contractor carefully.
• Confidentiality and Trade Secret. Make sure there is a confidentiality and trade secret provision that protects not only the source code, but any customer lists or other data that might be imported into a database or otherwise made available to the Independent Contractor.

To summarize the above, to prevent you and your business from being screwed by your website vendor simply follow these three rules: Be very selective in who you hire, try to avoid paying for “custom work,” and have a good contract in place.

We at L4SB have many template contractor agreements for just this purpose. We believe that no two businesses are alike and agreements need to be tweaked depending on the job and circumstances, which is why we don’t simply make a document available on our website for free. Contact us and we’ll be happy to help you.

Law 4 Small Business (L4SB). A little law now can save a lot later.