Help with another copyright problem

We're having some problems with an ex-employee programmer who is claiming copyright protection for some code that he produced while he was working here. He was annoying enough about it (filing suit) that we signed an agreement stating that he can have the copyright, as long as we are licensed to both modify his code and continue distributing the software he developed free of charge. But the problem we're having now is that our programmers have been building on and refining and debugging that code, as well as incorporating pieces of it in entirely new programs. The ex-employee feels that use of any piece of the code he has copyrighted in a new program means that the agreement we signed must apply to that new piece of software.

My first question is, what kind of granularity can he legally claim for the copyright protection on his code? Does the incorporation of 4 lines of code from one of his programs give him any claim on the new program? Or does it take the use of a whole function? Or a library of functions?

And my second question is whether there is any concept of a derived work that applies here - how much modification must a software system go through before it's a new work? Can we claim that our agreement allows us to produce derived works, and therefore we get all the copyright protection for the new software?

Thanks,

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Jeff                            Sys Admin, Dept. of Radiation Oncology
lewis[_at_]radonc.unc.edu            UNC School of Medicine, Chapel Hill