One of the biggest — and most expensive — mistakes made by startups is not having signed contracts in place with everyone who has a role in creating their intellectual property. That IP can be anything: code, functional specifications, artwork, graphics, a photograph, video, music, a sculpture, an article or a new product, process, business method or technology. Startups (and you know who are you are!) are understandably queasy about formal written contracts, since these use up time and legal fees and seem to create needless friction between easygoing collaborators who can’t wait to bring their new whatsit to market. Be advised, however, that in intellectual property circles there is a technical legal term for companies which develop their IP based on a handshake: screwed.
Copyright: Not Everything is a Work Made for Hire
In general, the person who creates an original work of authorship (such as a photo, painting, movie, poem, book, software program, web page, musical composition or sound recording) owns the copyright unless he or she makes a written assignment of that copyright to someone else. There is a widely known exception for “works made for hire,” where the hiring party is considered the author of the work and, therefore, owns the copyright.
What is not so widely known is that simply paying someone to create a work does NOT mean it is a “work made for hire.” A work created by an employee within the scope of his or her employment (i.e., doing what he or she is paid to do) is automatically a “work made for hire,” and the employer owns the copyright. However, what if the author is an independent contractor rather than an employee, as is common in the software and web development industries? In this case, the work becomes a “work made for hire” ONLY if it is a very specific type of work (such as a part of a movie or other audiovisual work, a contribution to a collective work, a translation or an atlas) AND it has been specially commissioned and the parties agree in writing that it is a “work made for hire.”
This is a very limiting definition, which means that copyrightable works created by non-employees are generally not “works made for hire,” and a written assignment is necessary to transfer the copyright to the hiring party. In the absence of a written assignment, then, the contractor walks away with the copyright, and the hiring party gets only a license. So a decision to keep things informal means that you may end up paying a developer or programmer good money to create a website or code for you, only to watch helplessly as they commercialize the product themselves or develop the same whatsit for your competitor.
Another potential pitfall is joint authorship. If more than one person plays a role in authoring a copyrightable work, and it is not a “work made for hire,” all of the authors will share the copyright, which means that each can commercialize the work without the others’ consent, but must share any licensing royalties with the other copyright owners. Typically this is not the result intended when a group of creative types get together to pool their intellectual resources in the service of a common business enterprise. It’s much better to handle the allocation of rights and any restrictions on exercising those rights via contract at the outset than have a disgruntled partner be able to undercut the enterprise by going out on his own.
Patent: An Inventor is an Individual, Not a Company
A patent is awarded to the individual inventor named in the patent application, unless that individual transfers the rights to an entity or other person through (you guessed it!) a written assignment. With patents, there is no “work made for hire” doctrine. An employee who invents something within the scope of his employment will own the patent unless he makes a written assignment to the employer. Under state law, an employee is contractually required to assign an invention to his employer if the employee was hired for the purpose of using his inventive ability to solve a specific problem or to design a specific procedure or device for the employer, but this is a narrow exception. In all other cases, where the employee devises the invention on the employer’s time and at its expense, using the employer’s materials and facilities, the employee will get the patent, and the employer gets only a “shop right” (a narrow, non-transferable license to use the invention).
Needless to say, without a written assignment, there is no protection for the hiring party where the inventor is an independent contractor rather than an employee. Again, the hiring party may end up paying for the invention, only to see its employee or contractor walk away with a multimillion-dollar patent.
Co-inventorship creates further complications. All individuals who contribute meaningfully to the conception and reduction to practice of the invention must be named in the patent application (or the patent may be invalidated) and, unless they assign their rights, will be co-owners of the resulting patent. If the rights in the patent are being transferred, then all of the inventors must sign written assignments. Otherwise, each co-inventor has the right to commercialize the invention without the approval of the others and without any obligation to share the proceeds (note the difference with joint authorship in copyright). This lack of control can severely undercut the monetizable value of a patent, since the patent cannot be sold in its entirety and no one can grant an exclusive license for a geographic region or market without the concurrence of all the owners.
For these reasons, the allocation of rights in an invention and any restrictions on exercising those rights should be handled by written contract before the serious work begins.
Confidentiality and Trade Secrets: If It’s Confidential, Then Act Like It!
If you discuss sensitive details of a project openly with someone else and allow that person free access to information and materials relating to the project, but do not require them to sign a non-disclosure agreement (or NDA), you should not be surprised if the project ends up walking out the door one day (perhaps accompanied by the patent and copyright!). Even more galling, you will get little sympathy from the robed sages in our halls of justice. To obtain legal trade secret protection for information or materials you consider proprietary, you must take reasonable measures to preserve their secrecy, including requiring users to sign NDA’s and notifying them (such as by stamps, legends, memos or e-mail headers) of their obligation to keep specific information or materials confidential. A little formality here goes a long way.
What Contracts Are Needed?
All of these IP issues are easily solvable by a little contracting at the inception of a project. If you want your company to own the IP rights in any developed work, your employees and contractors should be required to sign a simple confidentiality, work product and invention assignment agreement prior to beginnning work. Under this agreement, they would assign all intellectual property rights, including all copyrights and patent rights, in any works of authorship or inventions that they create, conceive, develop or reduce to practice in connection with their employment or engagement, and they would also agree to sign any ancillary documents (such as patent assignment forms to be filed with the U.S. Patent Office) which might be needed to further establish or enforce the company’s rights in the developed work. Furthermore, they would agree to keep confidential and not use or disclose (except as permitted by the company) any confidential or proprietary information of the company, including any IP developed in projects in which they are involved. Such agreements are standard operating procedure in most established businesses.
Where you are developing IP with partners, rather than employees or contractors, you may agree on a more intricate allocation of ownership rights, along with restrictions on the various parties’ ability to exercise those rights. For example, one party might own the patent, while another might be granted exclusive (even as against the patent owner) license rights for a certain period of time to market and sell products based on the invention in particular regions or markets. Or the parties might agree on co-ownership of the patent, but with restrictions on each party’s ability to license its rights to third parties. There are many possibilities. Here, too, it is best to address ownership and usage issues by contract at the formation of the relationship, when the IP has not been created yet, the parties’ interests are more closely aligned, and everyone is eager to proceed so that the money can start rolling in.
Whatever you do, NEVER bet your IP on a handshake.
[...] with someone else, who may be able to sell or license it independently as they see fit. In fact, I blogged about the need to nail down ownership last May, so you know how near and dear this issue is to my [...]