Former contractor claiming he owns the code he wrote for us - we never signed IP assignment agreement

I'm freaking out. We hired a contractor in 2023 to build our core platform. Paid him $85K over 6 months. He did great work, we launched, everything was fine.

Now he's threatening to sue us claiming he owns the copyright to all the code he wrote because we never had him sign an IP assignment agreement. He wants $250K to "license" it to us or he says he'll file a DMCA takedown.

I just went through our paperwork and he's right - we have invoices and a basic SOW, but nothing about IP ownership. Our lawyer at the time apparently never sent the IP assignment agreement.

Are we completely screwed here? Can he really claim ownership of work we paid him to create?

Oh man, this is one of those classic startup mistakes. Unfortunately, yes - without an IP assignment, the contractor generally retains copyright ownership of the code they create. This is one of the first things any startup lawyer should handle.

Don't panic yet though. There are some defenses and the DMCA threat is probably BS.

IP attorney here. This situation is messy but not hopeless. Let's break down what's happening:

Default Rule: Under copyright law, the person who creates a work owns the copyright unless there's a written agreement stating otherwise. So technically, yes, the contractor owns the copyright.

However, you likely have an implied license to use the code. When someone creates custom software for you and you pay them for it, courts generally find an implied license to use that software for its intended purpose - even without a written IP assignment.

What does this mean practically?

• He probably can't stop you from using the code
• He probably CAN'T successfully file a DMCA takedown (that would be a bad faith claim)
• But you might not be able to sell or license the code to others without his permission
• And if you ever want to sell the company, this will be a major problem in due diligence

Okay, that's slightly reassuring. The implied license thing makes sense - we obviously hired him to build software for our business.

But what about his $250K demand? Is that even a reasonable number? The whole company is only worth like $2M max.

The demand is likely a negotiation tactic. Here's what I'd recommend:

1. Don't respond to his demand directly. Get a lawyer involved immediately.
2. Have your lawyer send a letter explaining the implied license doctrine and why his DMCA threat is baseless.
3. Look at your SOW and invoices - do they say anything about "deliverables" or "work product"? Even generic language can help establish that IP was meant to transfer.
4. Check if your state has adopted work-for-hire provisions for contractors (some states have).
5. Gather evidence of the working relationship - emails, Slack messages showing he understood he was building YOUR product.

Most likely outcome: you'll need to pay him something to get a clean IP assignment retroactively, but it should be way less than $250K. Maybe $15K-$30K plus your legal fees.

I handle these disputes regularly. David's advice is solid. I'd add a few things:

Check your SOW for any language about "work made for hire" even if it's not a formal WMFH agreement. Courts sometimes give weight to this.

Also, look at the contractor's own business practices. Does he have a website that says "custom software development"? Does he advertise that he builds software for clients? All of this supports the implied assignment/license argument.

And re: the DMCA threat - if he files a false DMCA takedown, you can sue him under 17 USC 512(f) for damages including attorney's fees. Make sure your lawyer mentions this in their response.

This is really helpful. I found the SOW and it does say "Contractor will deliver all source code and work product to Company." Does that help?

Also, all his invoices say "Software Development Services for [Company Name]" which seems pretty clear about who he was building it for.

Yes! The "deliver all work product" language is very helpful. That shows clear intent that you would own what he created. While it's not as bulletproof as an IP assignment, it significantly strengthens your position.

Your case is actually better than I initially thought. I'd estimate you have about 70-80% chance of prevailing if this went to court. But litigation would cost you $50K-$100K, so settlement still makes sense.

Offer him $20K for a retroactive IP assignment and full release of claims. If he balks, go to $30K max. If he still won't settle, then you litigate and probably win, but it'll be expensive and time-consuming.

I had this exact same issue in 2019. Contractor came back 2 years later claiming he owned the code. We settled for $25K and got a clean IP assignment.

Expensive lesson but cheaper than litigation. Now we have a checklist and won't even start work with a contractor until the IP assignment is signed.

For anyone reading this: get IP assignments signed BEFORE contractors start work. Not when they finish, not "eventually" - before they write a single line of code.

From an investor perspective: this is a standard diligence issue we see constantly. It's not a deal-killer if you clean it up before we invest, but it absolutely has to be resolved.

We've walked away from deals where founders couldn't produce IP assignments for major portions of their codebase. It creates too much uncertainty about what the company actually owns.

Pay the guy a reasonable amount, get it cleaned up, and move on. Then audit all your other contractors and employees.

Update: Our lawyer sent him a letter laying out the implied license doctrine and pointing out that a DMCA claim would be bad faith. Also offered $20K for a retroactive assignment.

He came back at $75K. We countered at $30K. Waiting to hear back.

$75K to $30K is a huge drop. He's negotiating. You'll probably settle around $40K-50K. Still way better than his original $250K extortion attempt.

Final update: Settled at $45K. He signed a comprehensive IP assignment covering all past and future work, plus a release of all claims.

Painful but necessary. And we immediately had our lawyer draft IP assignment templates that we're now using with all contractors and new hires. Lesson learned the hard way.

Thanks everyone for the advice and reality check.