Potential Pitfalls for using Third Party Vendors/Contractors for Regulated Sports Betting Software

“The tighter regulation of sports betting software at the same level as a gaming device may, now or in the future, in some jurisdictions, require that the “manufacturer” of that software be subject to increased regulation.” Read more from Eric Abbott in this article published in the bar journal COMMUNIQUÉ (Mar. 2023)

Sports betting software (some such software is called a computerized bookmaking system) is regulated by state gaming regulators with different regulations in different states.

When sports betting companies expand into new states, these companies would generally like to use the same software across different states WITHOUT triggering additional licensing, suitability, or registration requirements of third-party contractors/vendors. The tighter regulation of sports betting software at the same level as a gaming device may, now or in the future, in some jurisdictions, require that the “manufacturer” of that software be subject to increased regulation. Other classifications of sports betting software by gaming regulators can also trigger registration, licensing, or an application for a finding of suitability.

For example, in Nevada, under NRS 463.0136(1), “computerized systems of betting at a race book or sports pool” is “associated equipment”. (Emphasis added.) Manufacturers and distributors of associated equipment must register with the Nevada Gaming Control Board (“NGCB”) prior to having such associated equipment made available to a Nevada casino. The NGCB’s Technology Division’s Associated Equipment Approval Request form requires information regarding the identity of both: the holder of any copyrights; and the designer and developer of the software.

The best way to ensure that a sports betting company owns all their third-party contractor/vendor’s intellectual property in the sports betting software is usually to have a written assignment in compliance with applicable law. However, there are potential pitfalls.

The most common mistake in this area is to assume that the copyrights in a “work made for hire” by a third-party contractor are automatically owned by the hiring entity. Under 17 USC § 101, for independent contractors, the work is a work made for hire only if: (1) an express agreement in writing that the work shall be considered a work for hire; and (2) the work itself must be one of the enumerated works in the statute (not all software is necessarily included). Note, as a matter of federal law, works created by US employees in the course and scope of his or her employment are works made for hire which makes the employer the “author” and thus the “owner”. So, for chain of title purposes, if a third-party vendor uses US employees, then, the third-party vendor/contractor is the author and owner. This is true unless in the rare instance that the employees coding the software were hired to perform another job function. If the third-party vendor/contractor uses subcontractors, then there should be written copyright assignments from those subcontractors.

The functionality of software is usually public knowledge, and usually not a trade secret. However, the source code is usually not public and thus can possibly be a trade secret under applicable state law. There could also be patentable inventions in the software. The substance of written assignments of any patents and trade secrets are generally the province of state law, with, for patents, some Federal legal issues that a practitioner should address.

Generally, written assignments of patents/trade secrets in accordance with applicable law from the subcontractors of third-party vendors/contractors will be necessary for chain of title. For employees, the issue varies by state. But, written assignments in accordance with applicable law would usually be the best practice in most situations.
The good news for Nevada practitioners is that Nevada is the only state that has a clear and relatively automatic statutory provision regarding employer ownership of trade secrets and patentable inventions created by employees:

[e]xcept as otherwise provided by express written agreement, an employer is the sole owner of any patentable invention or trade secret developed by his or her employee during the course and scope of the employment that relates directly to work performed during the course and scope of the employment.

See NRS 600.500

Open-source software is also used in a lot of software products. That software would be licensed by the third-party vendor/contractor and not owned by the vendor/contractor. Also, third party vendors may use contractors in foreign countries, and, if so, then those laws may apply which makes the legal issues potentially more complicated.

About the author

eric abbott

Eric L. Abbott, Esq, is Managing Member of ERIC ABBOTT LAW PLLC, a registered Patent Attorney, and licensed to practice law in Illinois, Nebraska, Nevada, and Pennsylvania. Eric’s practice focuses on technology transactions; commercial contracts; IP analysis; and M&A. Eric also serves as Alternate Municipal Court Judge for the City of Las Vegas.

About this article: This article was originally published in Communiqué, the official publication of the Clark County Bar Association, (Mar. 2023). See https://clarkcountybar.org/member-benefits/communique-2023/communique-mar-2023/.

© 2023 Clark County Bar Association (CCBA). All rights reserved. No reproduction of any portion of this issue is allowed without written permission from the publisher. Editorial policy available upon request.

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