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> Sounds like he's getting paid to work on the same thing by a slightly different stakeholder.

This honestly sounds like the sort of thing I'd sit down with the employee, their new employer, and various "Compliance Team" members, and firm up a bit.

Sounds good for everyone.

We get our bugs fixed, $vendor gets to say "Well we have this thing that was developed in-house for BoshNet, that might solve your problem too, it's going to cost you <some comical amount>", and everyone's happy.

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No company with a legal rep is going to be happy with that situation - ever.

Who even owns the code the person is working on? Who is responsible when it goes wrong?

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Never happy is a bit of an exaggeration. SYSV UNIX had all of these risks and various legal departments went through them as they do regularly for more typical types of research.
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When it was explicit, and part of the relationship, sure. Because those questions aren’t questions.
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Which is why I said you'd sit everyone down and thrash it out.
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That’s the “firming up” bit. You have a contract that deems the code “work for hire” even though the money flow is wonky. Legally the guy is like any 1099.
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