It is more than just a trend: companies doing business around the world have discovered crowdsourcing as a modern, cost saving and fast way to outsource tasks by using the creativity and talent of a crowd, such as their customers or other people interested in presenting their ideas. It might also be a good chance for young, talented freelance creatives to get in touch directly with the company that has launched an open call.

While outsourcing work to a crowd can be an efficient way to achieve high quality results, there are potential commercial and legal risks – for example, the use of crowdsourcing may give a company’s competitors insight into future product development. Also, crowdsourcing may create extra work for those company employees tasked with evaluating the responses in case of a high number of submissions. Perhaps most importantly, however, there may be questions over who owns the rights to the resulting intellectual property (IP)– especially copyrights, patents and trademarks – that the business will want to exploit.

Copyright Law is an Issue

Anyone interested in crowdsourcing creative designs such as logos, a tune or a computer game must carefully consider copyright laws. Copyright originally vests in the person who creates the work. It is that person, the author, who has the right to exploit, reproduce, distribute and show the work. Under German law, for

example, an author cannot transfer copyrights as such, but can – by way of an explicit or implicit agreement – grant (exclusive or non-exclusive) rights to exploit a copyright.

It is also worth noting that co-ownership of copyright may come about where the work is produced by joint authors, which can easily occur in crowdsourcing scenarios. The right of publication and distribution of a jointly produced work belongs jointly to the co-authors. A licensee must, therefore, obtain permission from all coauthors and alterations of the work are permissible only with the consent of all coauthors.

In Germany, rights in a copyright can be assigned without any form (e.g., even orally) as there is no register for copyright transactions. This means that any assignee of a copyright takes the risk that there are prior assignments of which he is unaware. If there is a prior assignment, his only recourse may well be claims for damages against his assignor.

License Contracts are Essential

These complications of crowdsourcing a creative work may result in the crowdsourcing company not having any rights in a given work – or even infringing the rights of a third party from which a contributor may have stolen his or her contribution. (How would you know whether the entire work product offered by way of a crowdsourcing project is original?)

It is, therefore, essential for crowdsourcers to enter into appropriate contracts with the contributors of their crowdsourcing projects. This is particularly important as the US work-for-hire principle will probably not apply in Germany. Where a given work is a “work for hire,” the rights of anything created by a person hired to do so or by an employee will vest in the company. Work-for-hire rights exist only to a very limited extent in Germany, for example, with regard to the neighboring rights of producers, i.e,. rights that are not actually conferred by existing copyright law as they do not belong to the author, but “neighbor” those rights. Consequently, companies should not only include appropriate warranties and indemnities as to third party rights in their contracts with contributors to a crowdsourcing project, but also comprehensive licensing provisions that clearly define, for example, the extent and purpose of usage and the right to register IP rights.

Consumer Protection Laws Restrict Contract Terms

When drafting licensing contracts with “the crowd”, crowdsourcers are not exactly free to craft the terms as broadly as they might like. As such contracts will have to be concluded with a large number of contributors on a standard basis (likely in the form of electronic click-through agreements over the Internet), consumer protection laws, such as the German law on Standard Terms and Conditions (TC), may apply, imposing quite significant restrictions on what terms can be agreed. Contracts that infringe these provisions may be null and void.

A Comprehensive Buy-Out May be Void Under German TC Law

As a matter of German law it is, therefore, important to balance adequately the interests of the crowdsourcing company and the crowd so that the solution implemented is not too onerous on the crowd and can, indeed, be enforced. Contracts, for example, that require each member of the crowd who provides a response to grant an exclusive, irrevocable, perpetual license to use any IP included in the response without any further payment would – while eliminating the risk of infringement claims from the crowd – likely be found unfair and, thus, void and unenforceable.

Mandatory Rights: Bestseller Provision

Moreover, there may be mandatory rights of contributors that – even with the best possible contract – cannot be completely ruled out. Under German copyright law, for instance, the author has a claim to a higher remuneration than that to which he had agreed in the licensing contract if the stipulated consideration is grossly disproportionate to the income received by the licensee from the utilization of the work. Based on this so called “bestseller provision”, there can arise considerable claims for compensation where, for example, a contributor to a crowdsourcing campaign introduces a tune that becomes an economically successful advertising jingle or a design that becomes a company’s well known trademark.

How to Protect Yourself as a Company?

In order to effectively cope with the IP-related risks of crowdsourcing, businesses should be mindful of the applicable law. A well-considered approach with the right paperwork in place increases the chance to enjoy the benefits of crowdsourcing with as little legal exposure as possible. This can be best achieved by using valid contributor agreements with well-balanced license as well as indemnity and warranty provisions.