Legal Considerations for Mobile App Developers

Our guest post this week is written by Arina Shulga, who co-founded the apps development company Ingengo LLC together with her husband in 2011 in New York City.  The company started with an idea of creating apps preparing kids for admission to local elementary schools, developing their critical thinking skills and teaching different languages.  Kids love playing on mobile devices, which inspired the Ingengo founders to use the iPhone and iPad as teaching tools for their kids.  Arina is also an attorney admitted to practice in New York State, practicing business law out of Law Offices of Arina Shulga. 

Disclosure: The information contained in this article is for general informational purposes only.  It is not intended to and does not amount to legal advice.  You should not rely on the general statements of law which appear in this post, which may not be applicable to the particular facts of your situation.

Certain Legal Considerations for Mobile Apps Developers

As a small business lawyer and apps developer (KIDiPLAY Match and KIDiLEARN Russian Alphabet apps available on the App Store), I would like to share with you some of the legal concerns or considerations that often arise when developing an app.  Some of these are common to many startup businesses, while other considerations relate specifically to app development.  Obviously, this list is not exhaustive (one could, and maybe should, write a book about it).  If you have any questions or would like more information, you can find me on the MWA Forum, on Twitter (@Kidismart) or through my website http://www.shulgalaw.com.  I also have a blog, http://www.businesslawpost.com, where I discuss legal issues relating to small businesses.

Structuring Your Company

As an apps developer, you have started a business where intellectual property (IP) is your main asset.  The designs, graphics, source code, name, look and feel of your app are your most important assets.  You need to protect them.  In addition, you need to protect your personal assets from claims made against your business.

First, if you have not yet done so, consider incorporating your business.  Becoming a limited liability company or a corporation would give you limited liability protection from creditors or judgments, should this ever become necessary.  It is important, however, to follow corporate formalities, and remember to separate your personal and business finances and not to co-mingle assets, – i.e., always treat your business as a separate legal entity.

Second, you should decide whether at some future point you will be looking for outside investors.  If this is the case, then forming a second company may be a good idea.  This would allow you to have one company hold all IP assets (your most valuable assets!) and lease them to the operating company that would make all the sales.  This can afford you better asset protection (if customers ever sue, they would most likely sue the operating company, not the one that only holds IP).  In addition to asset protection, placing intellectual property in a separate company may help you, the founder, to maintain long-term control over your company.  If the operating company receives outside funding, there is a chance that you may lose control over the company.  Holding IP assets in a separate LLC may allow you to gain leverage in any future battles over control.

This reminds me of a recent sale of Skype and the related lawsuits.  At the time of the original sale of Skype to Ebay in 2005, the founders of Skype, Niklas Zennstrom and Janus Friis, kept the underlying source code of Skype’s peer-to-peer network in a separate company called Joltid, and instead of selling the source code, simply licensed it to Ebay.  The 2009 lawsuits span from the alleged infringement by Ebay on the founders’ copyright to the source code, and later allowed the founders to settle for a 10% stake in Skype.

Work-for-hire Agreements

Let’s now discuss the most common mistake many startups and small businesses make: they fail to enter into written work-for-hire agreements with their freelancers.  As the app is being developed, you appreciate any help you can get.  You should know that every time a freelancing developer writes source code for your app, he or she is creating copyrightable material.  Who holds the copyright to that code?  The developer who wrote it does, unless there was a work-for-hire agreement between the developer and the company that was signed prior to the commencement of the work.  Even if the company paid for the source code, the IP rights to it would still belong to the developer unless the developer signed a work-for-hire agreement.  The same concept applies to graphics, designs and every other aspect of the app.  Be careful when outsourcing.

On the flip side, if you are a developer who was promised a stake in the company for their work, insist on having a written agreement with the company’s owners that details the terms of the equity grant (which typically involves a vesting schedule).

Protecting Your Ideas

Before your app is released to the public, it is your trade secret.  It includes your unpublished source code, designs, business plan, marketing and pricing strategies.  There are three aspects to preserving a trade secret: (1) the secret information cannot become part of general knowledge, (2) it needs to have some economic benefit (which is surely the case since you have just invested a lot of money and/or time into it), and (3) you take reasonable steps to keep it secret.  This means you lock your doors, keep confidential information in files marked confidential, use a firewall on your computer, and enter into non-disclosure agreements (NDAs) with everyone you talked with about your app in enough detail, including investors, contractors, and potential business partners, among others.  In short, a non-disclosure agreement identifies the confidential information and establishes a duty to keep it a secret for a period of time, subject to certain exceptions.  Even beta testers should sign an NDA.

Copyright Registration

Copyright protects the source code, artwork, design, text and other content of an app.  Technically, your app automatically gets copyright once the work is done or there is at least a working version of the program, even if incomplete.  However, it is still recommended to file a copyright application with the U.S. Copyright Office for the following reasons:

• Registration establishes a public record and lets others know that you hold a copyright to this work.
• Registering the app with the U.S. Copyright Office within 5 years of publication (i.e., release date) creates a legal presumption that you are its owner and that all facts in your copyright application are true.
• If you find out that someone is copying your app, you need to have the registration done in order to be able to bring a law suit in the federal court.
• If you register your app prior to an infringement or within 3 months of publication (ex: release date), you may be entitled to recover statutory damages and attorney fees from the person you sued. Otherwise, you can only get the actual damages and lost profits, usually a much smaller amount.
• It does not cost much to register a copyright with the US Copyright Office (currently, $35 for an online registration and $50 for a mail-in one). But the benefits are obvious.

A copyright application contains three elements: (1) a completed application form, (2) a fee, and (3) a non-refundable deposit (a copy of the work being registered and “deposited” with the Copyright Office).  The main concern that developers express is that the deposit requirement causes them to reveal their confidential source code.  Circular 61 available on the Copyright Office website addresses their concerns and lets developers deposit only parts of the code.

Trademark Registration

Next, I want to briefly discuss trademarks.  A trademark is a name, logo or symbol that is used to identify the company’s products or services and differentiate them from the products or services of the other companies.  If you are creating a brand and using your company or app name to sell your products or services, you should consider filing a trademark application for it with the United States Patents and Trademark Office (USPTO).

A trade name (the name of your company) may or may not be a trademark.  It depends on how you use it.  For example, my apps company name is Ingengo LLC.  This is a trade name and is not a trademark, because I do not use it to promote my apps.  On the other hand, KIDiSMART, KIDiLEARN and KIDiPLAY are all names of our website or our apps, and are being used as trademarks.

Trademark is created the moment you start using it.  You do not have to register it to have it.  However, this so called “common law” trademark protects your goods or services only in the territory of use (not nationally).  Also remember, – trademark law is all about who was the first to use that particular mark.

In short, federal registration (registration with the USPTO) gives you the following advantages:

• Exclusive nationwide ownership of the mark.
• Official notice to other potential users that the mark is not available (you can put an ® after the trademark is reviewed and registered by the USPTO; you should have TM after the mark in all other cases).
• Right to sue in federal courts (where it is more likely to win an infringement lawsuit and get larger damages, including attorney fees).
• Presumption that the trademark owner is the rightful owner of the mark (although this presumption can be rebutted with proof of prior use by another party).
• An option for the owner to file an “intent to use” application (instead of traditional actual use).  This still gives the owner priority of use provided the owner filed the application before another party used the mark and the owner later puts the mark to actual use.

Using Copyrighted Works

The last concept I want to discuss is when it is permissible to use other people’s work in your app.  If you use an image or a sound you found on the Internet without permission, then each app download is a separate case of infringement.  Replacing the infringing material in a new version may not be enough to remedy the situation.  The copyright owner can still take you to court for damages based on the number of downloads.  Pay careful attention to whether it is OK to use what you find on the Internet.  There are sites that offer public domain images or sounds.  There are other sites that offer works under an attribution license.  Many licenses specify that the work may not be used for commercial purposes (so, not in paid apps) or that it may be downloaded only a limited number of times.  The so called “royalty-free” images and sounds may carry restrictions that render these materials unusable in most apps.

As you probably know, no permission is required to use public domain works, which are works that were published in the United States prior to 1923 or any copyrighted works that were published before 1964 and whose copyright was not renewed, as well as any materials produced by U.S. government employees or materials specifically placed by their authors into public domain.

You can also use portions of copyright works without author’s permission under the doctrine of “fair use”.  Fair use is any copying of copyrighted work for a limited “transformative” purpose, such as criticism, comment, news reporting, teaching, scholarship, research or parody of the work.  The bad news is that there is no way to know for sure whether what you are using falls under the “fair use”.  Judges look at four factors when deciding about “fair use”:

• The purpose and character of the use, including whether such use is of commercial nature or is for nonprofit educational purposes;
• The nature of the copyrighted work;
• The amount and substantiality of the portion used in relation to the copyrighted work as a whole; and
• The effect of the use upon the potential market for, or value of, the copyrighted work.

It is not defined how many words one can copy without authorization.  It is clear, however, that acknowledging the source of the copyrighted material does not substitute for obtaining permission.

Conclusion

In conclusion, some of the concepts described here should be implemented with the help of an attorney.  However, many steps do not necessarily require legal help.  For example, obtaining proper permissions to use copyrighted work, entering into work-for-hire agreements with freelancers, installing firewalls and other protections to safeguard the trade secrets can be implemented by the developers themselves.  Also, it is always helpful to be aware of the issues that developers may face, to be able to avoid them entirely or to minimize their risks.