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$2.5 Million Jury Verdict Shows Need for Detailed Contracts With Consultants

April 1989

A recent jury verdict for over $2.5M in favor of a computer consultant dramatically evidences the need for companies to carefully prepare written agreements for programming services.

In this case, the client, Bank of America, had engaged Tinmahan Consultants to develop a transaction processing system. The bank required Tinmahan to sign an agreement stating that all software he produced for the bank would be “works for hire,” owned by the bank. Tinmahan also signed an agreement granting the bank a nonexclusive license to the software.

However, the bank’s contracts apparently omitted to specify the parties’ rights in software that Tinmahan had developed prior to his contract. Thus, Tinmahan was in a position to assert rights in the software he produced. He claimed that the product of his work for the bank was essentially an adaptation of software he had developed prior to the bank contract.

During the early stages of the litigation, Tinmahan obtained a court order requiring the bank to provide him with a copy of the disputed software, which was being held by the bank. Based on his allegations that the bank then deleted part of the program and ruined others, the jury awarded Tinmahan $1M in punitive damages, in addition to $1.5M in damages to compensate for his actual economic loss.

The litigation started in 1983, and is continuing: Recently, the court which tried the case threw out the jury’s award of punitive damages. Nevertheless, the case clearly demonstrates the need for both consultants and their clients to enter into contracts which define their respective rights in the software to be produced.

TLB Comment: Critical issues which should be addressed in any development agreement are:

  • Ownership of the code produced by the consultant.

  • Whether the software will contain other software that is proprietary to the consultant or a third party. The client must be sure that it will have the right to use that software as part of the programs to be produced under the contract.

  • Whether the client will have the right to allow its affiliates to use the software, or the right to sell it to others.

  • Whether the client will obtain the source code.

  • Whether the consultant will be available to provide support (bug fixes, updates and user training) after the contract ends.