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Dear Tilly and Fellow Monks,
this is indeed a sad story for Tilly and for the OpenSource community.
I'd like to point out that the law in germany is very close to this. AFAIK there is a little difference: if you'd do something in your spare time that is not related to your work it is considered to be your own property.
Nevertheless, whenever I release code that is in any way related to my work I ask for permission to do so. My (little) fault once was not to get this permission written down and signed but I was happy with a spoken permission to release my code. Yeah, you get it already: a few months later someone found the code and started getting angry. Fortunately these people are smart guys and they understand the benefits they get from OpenSource. It wasn't a big deal to clarify things.
But with another person this might have lead me into big, big(!) trouble (probably even bigger than Tilly's is now).
This should remind us - the coders of free software - of our responsibility! You can't just code and release! You have to be aware of legal issues. Not just the contract thing but think of other issues, esp. trademark violation stuff! It starts with taking the time of putting the GPL in your code, but that's not all there is to it.
As a personal note I'd like to add: Tilly, I think I know pretty well how you're feeling right now. I have once been victim of lawyers who were sueing me and some friends just for the money (trademark issue...) and the case itself was ridiculous. I don't have any words of wisdom for you, and maybe it's cold comfort just to know that you're not alone.
If you can, (n|bl)ame your contract partner, leave that company as fast as you can (obviously they're not worth your time and company) and invent new things. You got the guts to do good thinking and you are creative, you will always do new things (and from now on you'll make sure that you own them). And -who knows- if you can strengthen your position in The Community maybe The Community can develop quite a pressure on your employer to release the code?
It would be very cool to still have you on board the OpenSourceShip!
Update: Fixed Typo...