The answer lies in copyright law. Your description did not describe that the agreement that you had with the programmer was a work for hire. Therefore, the programmer is an independent contractor with all rights to his workproduct expressed in a tangible media. He owns what he created for your company. Your program can be considered to be derived from his product and you are probably in violation of his copyright. Even though you modified it extensively, rather than starting over, fair use is not a defense because of the commercial nature of the transaction.

I would suggest that you or an attorney negotiate a settlement for the work, rather than going to trial. There are many plaintiff attorneys who would represent the programmer for a percentage of the recovery. I would avoid litigation if you can.

Good luck!

I come out on the other side of this question. Copyright would not likely be violated by a heavily modified code, particularly if you take precautionary steps to protect yourself. You would do well to take the position it was basically "totally rewritten" rather than "modified" or "supplemented" or even "still exists" and you should be telling him (hopefully correctly) that what he provided was of no use, was ditched, and no longer exists. Then you need to get his stuff (except non-creative common stuff) out of the program. I think plaintiff's lawyers taking this loser copyright case on a contingency for the programmer would be foolish in Illinois. However, there is a serious lesson here. You need to have "work for hire" agreements with ALL your programmers, artists, authors, etc. You also need to have patent agreements, as you have not apparently even considered that aspect. You are going to get in serious trouble if you keep doing this stuff verbally or without legal help.

I can help you on this if you call. There is quite a bit you can do to insulate yourself from the "many plaintiff attorneys who would represent the programmer for a percentage of the recovery" and you need to do that sooner rather than later. If you try to cleanse the program AFTER you get sued it won't work, in my opinion, and could even make the situation worse. But, if you do it now, it will nearly always be effective. Don't get scared by the prior comment, but BE WARNED! You are currently heading down a path leading to a "legal cliff". Best make a detour so you don't go crashing over the edge. The impact at the bottom of the cliff could be ugly..