Running your company may entail having a mix of employees and independent consultants who create or make intellectual property, including inventions, discoveries, content, logos, and software. You might assume that this intellectual property belongs to your company, but this isn’t always the case.
There is a difference between intellectual property created by your employees and intellectual property created by your independent consultants. Who owns this intellectual property depends on the type of work performed and what agreements, if any, are in place between your company and the employee or independent consultant.
Ownership of Intellectual Property Created by Employees
Under U.S. Copyright law, the employer is deemed the owner of copyrights in works created by an employee, provided the works were created in the course of the employee’s employment. “In the course of employment” means that creation of the work was part of their duties and occurred during work time. Issues sometimes arise, however, over what “work time” means including whether something an employee works on during non-working hours or outside their job description is deemed to be in the course of their employment.
For patentable inventions, there is no analog to the Copyright Act’s “in the course of employment” language. Under patent law, the inventor of a patentable invention is deemed the owner of the rights to that invention unless those rights are assigned to the employer. In the absence of an assignment, though, some courts have decided that there is implied consent to an assignment of the rights to a patentable invention created in the course of the inventor’s employment. This isn’t something you should rely on though.
To avoid claims over ownership of intellectual property in works created by your employees, it’s important to have them sign a written agreement which includes the following provisions:
- All rights in any work product developed by the employee, whether made during or outside working hours, or on or off the work premises, are assigned to your company.
- The employee must assist your company in protecting its intellectual property rights in any work product developed by the employee.
- The employee grants your company a perpetual, assignable, royalty-free license to use any work product developed by the employee during the employee’s employment, even if the rights to such work product aren’t assignable to your company.
Ownership of Intellectual Property Created by Consultants
In contrast to employees, ownership of intellectual property created by independent consultants is more complex. Independent consultants own the intellectual property in the works they create. This is true even if the work is created at your company’s worksite and/or within the scope of the independent consultant’s engagement.
To avoid this problem, and ensure the intellectual property in work created by your independent consultant belongs to your company, you should have written agreements with your independent consultants that (1) state clearly that it the engagement is a “work for hire” agreement, and (2) contain a provision in which the independent consultant assigns your company all intellectual property in the work they create under its engagement.
The reason for including the assignment provision in your independent consultant agreement is that the “work for hire” provision only applies to certain types of work:
- Work specially ordered or commissioned for use as a contribution to a collective work.
- Work that is part is part of a motion picture or other audiovisual work.
- Work that is a translation
- Supplementary work (e.g., a “Foreword” to another copyrighted work).
- Instructional texts
- Answer material for tests
So, even if the work being created by your independent consultant doesn’t fall within one of these categories, the assignment provision in your agreement will still vest ownership of the intellectual property in that work with your company.
Other important provisions to include in your independent consultant agreement include that:
- The independent consultant’s engagement with your company is a “work for hire” relationship.
- All rights in any work product developed by the independent consultant within the scope of its engagement are assigned to your company.
- The independent consultant must assist your company in protecting its intellectual property rights in any work product developed for your company.
- The independent consultant grants to your company a perpetual, assignable, royalty-free license to use any work product developed by the independent consultant within the scope of its engagement, even if the rights to such work product aren’t assignable to your company.
A related problem concerns company “founders”. Founders often create, develop, and register the intellectual property used by the company before the company is incorporated, including brand names, algorithms, and inventions. Since founders are often busy developing products/services and building their company, they may neglect to enter into employment or consultant agreements vesting this intellectual property in the company.
The absence of these agreements with founders creates a risk to the company should one of them leave to form competing businesses and use the intellectual property originally created for your company. Once a founder leaves, it is difficult for your company to “claw back” this intellectual property, especially if a lot of time has passed. If the intellectual property the founders take is critical to their former company, the very survival of that company may be threatened. As such, it’s best to ensure that company founders promptly enter into agreements with the company to transfer ownership of all past intellectual property to the company and to ensure that all of their future intellectual property vests in the company as well.
Consequences of Failing to Secure Intellectual Property
Here are some consequences to your company if it fails to secure ownership of the intellectual property created by its employees and independent consultants:
- If an employee or independent consultant leaves your company and is unwilling to transfer back the intellectual property they create, your company may have to pay a substantial sum (perhaps even more than it’s worth) to obtain what it should have owned to begin with.
- Your company may become involved in a lawsuit with, or be otherwise prevented from exploiting the intellectual property by, the employee or independent consultant based on a claim of infringement.
- The company won’t be able to prevent competitors or counterfeiters from using intellectual property it doesn’t own.
- If a potential investor/acquirer of your company discovers during its “due diligence” that your company doesn’t own the intellectual property that it’s supposed to: (1) your company may become a less attractive and more risky investment, (2) the investment in, or sale of, your company may fall apart if the issue can’t be remedied, (3) even if the investment doesn’t fall apart, delays will ensue until the issue is resolved (this can be a big problem if one of the purposes of the potential investment is to provide your company financing), (4) the value of your company may be adjusted lower and the investor may seek to renegotiate the terms of the transaction.
Protecting Your Rights
In addition to making sure founders and employees sign agreements transferring all existing and future intellectual property to your company as discussed above, founders and employees should be required to identify any intellectual property they owned prior to starting employment. They should also periodically disclose intellectual property they create for your company, as well as intellectual property they create outside of their employment.
Finally, you should specify in your agreement with founders, employees, and independent consultants the consequences of misappropriating and/or infringing your company’s intellectual property. This includes securing the right to seek an injunction preventing them from using or disclosing company intellectual property without the company’s authorization.
How Becker Law LLC Can Help
Becker Law LLC works with creatives, freelancers, startups, and small or medium businesses to protect their copyrights, trade secrets, and other forms of intellectual property. Our subscription services offer an affordable alternative to in-house counsel—making it easier than ever to get the legal services you need while sticking to a tight budget. Contact us today to get started.