Brett Miller is the president of Custom Software by Preston (CSP). For more than 10 years, CSP has impressed clients with highly effective software solutions and teams of multi-talented software engineers.

A software development client should complete a thorough “due diligence” before selecting a developer for his critical project. Then, he must complete the finalization process by drafting and executing the legal contract/agreement.

Contracts attempt to define the responsibilities and duties of each party; however, people often overlook whether a contract covers certain risks associated with non-performance.

Take a look at the eight scenarios below. These tips can help your company cover its legal bases when contracting a software developer, or vice versa.


1. Time & Material (T&M) or Fixed-Price Contracts


In a “time and materials” contract, the client assumes the burden of cost overruns, whereas in a “fixed-price” scenario, the developer assumes this risk. Weighing the two, many clients assume they are ahead of the game by passing the potential for cost overruns to the developer. However, they but fail to consider that the developer must add that cost-potential into their fixed-bid up front. So in a fixed-price contract, the client pays the extra cost, even if it proves to be unnecessary.

Fixed-price contracts also have the potential to create disputes. Often, deliverables that were implicitly intended might not be included in the original project scope. Both parties should be very aware of what exactly is included in the project. Fixed-price means there is a fixed scope of work, unless additional moneys are paid.

In a time and materials contract, the developer gets paid on an hourly basis. The motivation to finish quickly may be diminished by the opportunity to bill more hours. In this case, the client takes the risk that the developer will prioritize his own desire to profit on the project.


2. General Note on Contracts and Non-Disclosures (NDAs)


Contracts and NDAs are legal instruments which establish the rights, duties and privileges of those who are a party to the agreement. These instruments protect both parties to the extent that they are willing to pursue them in a court of law.

Here is a simple rule of thumb, although I encourage you to also check with legal counsel. Unless the dispute is over $10,000, most attorneys won’t take the case. And even if they do, they usually keep one-third of any money they collect. It can take several years to win in court, and the problem is further exacerbated by the fact that the losing party may no longer be in business or have assets from which to pay. One last note, many contracts call for the losing party to pay the legal costs for the winning party, which can save you money if you win, but cost dearly if you don’t.


3. Advanced Payment – The Industry Standard


Many contracts call for advanced payments or retainers. Essentially that means the developer works on the client’s money, and therefore, the client bears the risk for the developer’s potential lack of performance. This is the norm in the information technology field. Very few developers will take money out of their own pockets to build a client projects (in the hopes that the client will pay).

An improvement to this model would be to limit the retainer to two week’s worth (or less) of development time/labor (weighing the progress of deliverables). Upon client acceptance, the retainer can be replenished for the next cycle. Sending a wire or paying via credit card allows for instantaneous payment. Client risk is bit more limited when using this approach.


4. Phased Payments – The Other Industry Standard


Some projects are divided into three or more segments. The first phase is paid up-front (client risk); the second is paid at some pre-arranged interval (equal risk); and the last payment is made upon project “completion and acceptance” (developer’s risk). In this scenario the last payment can be problematic to collect, as subjective issues can arise regarding quality and scope.

One minor modification to the phased payment method specifies that the developer finish the final deliverable in their own environment, to which the client has access for testing. Upon client acceptance, the final payment is made and the vendor transfers ownership of the application and all code to the client. This is a very solid, technique balancing risk.


5. Warning! Warning! Kill Switches


Some unscrupulous software vendors build a kill switch into their applications. In the event of a dispute (and the client refuses to pay), the vendor can remotely shut down the application. I recommend that your contract include language that prohibits this “extortion like” practice.


6. Disappearing Freelancers


Many IT Professionals have heard this story before: A company finds what appears to be a knowledgeable (and affordable) freelancer on the Internet. Initial contacts with the individual indicate great responsiveness. Payment is made, a few conversations take place, some small progress is shown — then all communication goes dark and the freelancer disappears.

I believe this most often occurs when, with the best of intentions, a freelancer takes on a project and finds out he bit off more than he could chew. He believe his efforts were substantial, but things just didn’t work out (in other words, “not their fault”). Even more important, as a freelancer he is simply not in a position to refund any money. It’s easier to disappear than to deal with the conflict, so he runs.

Freelance software developers do offer expertise, experience and cheaper rates due to lower overhead, but the clear risk is a lack of any substantial backing. Therefore, this model does have more risk for the end client.


7. Payment via PayPal or Credit Card Carriers


Many developers accept payment via PayPal, and some even accept credit cards. These credit carriers offer “dispute” mechanisms that allow the payee to challenge any charge which was not delivered as promised or described. This method should be encouraged by the client (even if they need to pay the credit card processing fees), as it provides additional protection.

Vendors have an opportunity to respond to any dispute. Carriers to a certain degree are arbitrators and if they receive enough complaints, a vendor’s account can be canceled.


8. Risk Assessment


Software development projects carry financial risk factors for both parties. These risk factors need to be considered seriously and should be discussed with an attorney. Clients and developers alike need to know what they are getting into and prepare for scenarios that don’t work out as planned.

Image courtesy of iStockphoto, OtmarW, Flickr, quaziefoto, slimmer_jimmer

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Nitin Gupta is the co-founder of LawPivot.com, an online marketplace for businesses to receive crowdsourced legal advice from lawyers. You can follow LawPivot on Twitter @LawPivot. This post was co-authored by Eric Hutchins, a patent attorney at Kilpatrick Townsend, & Stockton.

On Sept. 8, Congress passed a patent reform bill named the “Leahy-Smith America Invents Act.” President Obama signed the act into law on Sept. 16. The most relevant aspect of the act for startups is the switch from a “first-to-invent” to a “first-to-file” system.

The United States has long been the sole nation with a first-to-invent system, which ensures — in theory — that the first person to invent something receives the patent protection for that invention. The rest of the world has long employed a first-to-file system, in which patent rights are awarded to the first person to file an application for the invention, regardless of the date of invention. The America Invents Act will harmonize U.S. patent laws with international standards.

Here are three things startups should do, given the new patent reform.


1. Have the Rights to File Patent Applications on Behalf of Your Employees


Add language to employee agreements that give your company the right to file patent applications on behalf of the inventor. Prior to the Act, the Patent Office required a declaration from an inventor stating under oath that he or she was indeed the first person (to his or her knowledge) to conceive of the invention. While this declaration was of key importance to the first-to-invent system, the Act recognizes the realities of the modern workforce, where inventors migrate frequently between employers, and provides companies with the ability to submit a substitute statement. This statement functions in lieu of an executed inventor declaration. In it, the employer states that it has the legal authority to seek the patent without the inventor’s declaration because the inventor is deceased, legally incapacitated, unable to be found after a reasonable search, or refuses to assign his or her patent rights to the employer in violation of a valid contract to do so.

Startups should review existing employee agreements and revise them if necessary so that they can use these substitute statements to avoid delays when locating a former employee or when obtaining his or her consent proves difficult.


2. Encourage Your Employees to Quickly Report the Inventive Aspects of New Product Features


Emphasize to your teams the importance of quickly reporting inventive aspects of new product features. Rather than leave the process to chance, work with your patent lawyer to have a clear protocol in place to identify inventive features and to prepare a description of the invention that will allow business managers to decide whether a patent makes sense. This will enable the lawyer to quickly prepare the application.


3. Make Rapid Decisions on Whether or Not to File Patent Applications


Once a team member identifies an inventive feature, decisions on whether or not to file a patent application will need to be made quickly in a first-to-file system. More frequent communication with your patent lawyer is key. Rather than hold monthly or quarterly meetings with your patent lawyer to discuss new inventions and the status of pending applications, plan to notify your lawyer of new inventions earlier and more often to avoid being beaten to the patent office.


The first-to-file system will take effect 18 months from now. This gives you time to plan ahead, consult patent attorneys and adjust your processes to account for these changes.

Image courtesy of iStockphoto, aluxum

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Arguments have raged across the web during the past week about the Verizon-Google Legislative
Framework Proposal (read the full document). Opinions range from “it’s great” to “this threatens the underlying foundation of the Internet” and “Google’s gone evil”.

This is my take. The proposal primarily affects US Internet users and, although I’m not a US citizen, the issues will almost certainly affect and/or influence other parts of the world. I do not claim to have unbiased opinions or legal expertise. You may agree or disagree; the discussions will continue for many months — probably years.

What is Net Neutrality?

In essence, net neutrality means all web traffic is treated equally. It does not matter whether the user is downloading a Wikipedia article, a YouTube video, a spam email, or an illegally copied MP3 — no data packet has priority over any another.

The Internet operates under this principal … to an extent. Individual ISPs may restrict your bandwidth or perhaps limit torrent downloads during busy periods. Mobile operators usually operate stricter controls to ensure networks remain responsive: they can — and will — block certain content.

The Federal Communications Commission (FCC) had been negotiating with leading providers to outline a framework for the future regulation of US Internet services. This effort was recently abandoned.

What is the Google and Verizon proposal?

The Verizon-Google Legislative Framework Proposal is a response from both companies to the debate in Congress about the National Broadband Plan and the US Government’s role in the future of the Internet.

Google and Verizon are free to make any recommendations they choose. Both companies have an agenda and neither would make a statement that was not in their best interest. Congress can choose to accept, reject or ignore any proposal and the recommendations are not US legislation. Yet.

The key points are summarized below:

1. Non-discrimination against lawful Internet content
A broadband ISP would be prohibited from preventing user access to lawful content or services. The provider must disclose accurate information about their capabilities and network management. The FCC would be responsible for enforcing consumer protection and can impose fines of up to $2 million for companies violating the rules.

These proposals appear reasonable and received the least attention. However, non-discrimination is limited to “lawful” content without clarifying that term or identifying the policing authority. The flip-side of the proposal is that ISPs could block illegal content.

Laws differ from country to country. Even legal practices in one US state may be outlawed in another. Possible issues include:

  • Sectors such as the entertainment industry could argue that certain types of content breach copyright laws. This could include pirated material or works that mention or are influenced by another.
  • Companies could use legal precedents to block competitor services and gain an advantage.
  • Individuals or organizations could use privacy or other laws to block negative articles.

The proposal could hinder free speech and innovation. In addition, an ISP could be exempt from net neutrality principles if it can claim it’s upholding the law. Even a $2 million fine would be a negligible risk to most large carriers — especially if they can profit from prioritizing content.

Finally, it’s interesting to look back to January 2010 when Google threatened to quit China because its Government blocked content which it deemed illegal. How is this different?

2. Network management
ISPs are permitted to engage in reasonable network management to provide a reliable service, e.g. reduce congestion, ensure security, addresses harmful traffic, etc. Many have latched on to this issue as a direct attack on net neutrality but ISPs already engage in the practice. The proposal states they should be transparent and disclose all network management policies.

The most controversial element is Additional Online Services. In effect, ISPs would be free to offer alternative non-internet services which are “distinguishable in scope and purpose from broadband Internet access service”. These services can make use of the internet and prioritize traffic. The FCC would monitor the systems to ensure they do not threaten the meaningful availability of broadband Internet access.

Services such as health and gaming systems have been mentioned, but it’s difficult to evaluate the effect of alternative networks until they’re implemented. It’s unlikely we’ll see separate commercial networks for websites such as YouTube but it remains a possibility. Few people would want to use a fragmented Internet.

3. Exclusion for wireless
With the exception of service transparency, wireless networks are excused from legislation because of their “unique technical and operational characteristics”. This seems strange and many have speculated a conspiracy: Google could want Verizon to prioritize Android devices.

Wireless networks could become the predominant method of net access over the next few years. If that occurs, what is the point of these proposals? Again, there’s no definition of what constitutes a wireless network. Could a cable ISP put a router outside your house, claim they have a wireless network and avoid legislation?

Overall, I find it strange that Google and Verizon have stepped into the political debate. They may be key players but many of the proposals seem too vague to be workable. At worst, the companies appear to be advocating net neutrality exclusions and have been attacked accordingly. The biggest worry is that Congress will approve legislation without an appreciation of the underlying technical issues.

The debate has just begun.