I
Paid For It Does Not Mean I Own It -
Company Ownership of Intellectual Property
By Gavin G. Galimi, Attorney, Katten Muchin Zavis Rosenman
Software
and technology companies have two critical assets: their people
and their intellectual property. A company's employees and independent
contractors are developing inventions, writing software code,
preparing manuals, designing packaging, and taking many other
steps to produce a product for sale. Many of these steps produce
intellectual property ("IP"). Who owns the IP? The
company usually thinks, "I paid for it, so I own it."
THIS IS OFTEN NOT TRUE. How could this happen and what can you
do to stop it? This article highlights some critical intellectual
property pitfalls for software and technology companies and
provides solutions for avoiding those pitfalls.
Background:
What Is IP?
Figuring out who owns a piece of IP usually starts with the
type of IP at issue. There are four major categories: (1) patents,
(2) trademarks - "TM" and "®", (3) copyrights
- "©", and (4) trade secrets. Under United States
law, a patent is the right, conferred by the United States government,
to exclude others from importing into, making, using, offering
for sale, or selling in the United States the patented invention
for, under most circumstances, 20 years from the date on which
the application for the patent was filed in the United States.
Under the 1976 Copyright Act, a federal law, a copyright is
a form of protection provided to the authors of "original
works of authorship" including literary, dramatic, musical,
artistic, and certain other intellectual works, both published
and unpublished. Unauthorized use of a copyrighted work is prohibited
for the term of a copyright, meaning that the copyright owner
has the exclusive right to reproduce, prepare derivative works
of, distribute copies or phonorecords of, publicly perform,
and publicly display the copyrighted work. Copyrights generally
last for the length of the author's life plus 70 years.
State
and federal statutes and case law govern trademarks. A trademark
is a word, name, symbol, or device that is used in trade with
goods (or services) to indicate the source of the goods (or
services) and to distinguish them from the goods (or services)
of others. A trademark owner has the right to prevent others
from using a confusingly similar mark, generally meaning that
someone can sell or make the same goods under a different mark
provided the consumer will not be confused as to the source
of the goods.
Under the Uniform Trade Secret Act as adopted in California,
a trade secret means information, including a formula, pattern,
compilation, program, device, method, technique, or process,
that (1) derives independent economic value, actual or potential,
from not being generally known to the public or to other persons
who can obtain economic value from its disclosure or use and
(2) is the subject of efforts that are reasonable under the
circumstances to maintain its secrecy. Another words, a trade
secret is a valuable secret that you work to keep secret.
When "I Paid For It" Does Not Mean "I Own It"
Paying for the development of IP does not by itself make the
company the IP's owner. If you are raising venture capital or
angel money, you probably are already aware of this. The term
sheets you have been reviewing should have a provision saying
something like, "All key employees and consultants to enter
into a nondisclosure and invention assignment agreement satisfactory
to Investor." This is the investor's recognition that IP
ownership for a company requires more than just footing the
bill for the IP's development. Specifically, ensuring company
ownership of its IP requires that the right legal infrastructure
- the right package of agreements, policies and procedures -
be put in place at the right time.
Does
this always occur? For myriad reasons, the answer is often no.
First, a fast-growing company may start using some forms (which
are likely outdated and of uncertain adequacy) that a founder
has from a previous job or the company is moving so quickly
that getting the IP paperwork keeps getting pushed to the bottom
of the to do list. In either example, appropriate legal infrastructure
for IP protection never gets adopted, so IP ownership may never
vest with the company. It is not until management focuses squarely
on the IP issue that it becomes a priority: investors ask about
IP ownership, the company goes to file a patent and has to complete
patent assignments, etc. Second, the IP ownership issues can
get very complicated, very fast. This article assumes that there
is a single company trying to have title vest in it, rather
than an employee or independent contractor. Contrast this scenario
to the IP ownership issues involved with increasingly commonplace
joint ventures and strategic alliances that use employees and
independent contractors of each of the partners and the sometimes
the joint venture entity to develop IP. For simplicity sake,
we have also assumed that the IP at issue was solely governed
by laws of the United States. What if branch offices in India
and America are jointly responsible for developing mission critical
IP?
Employee v. Independent Contractor?
Who created a company's IP? There are two main answers: an employee
or an independent contractor. (A third answer, the founder,
is discussed at the end of this article.) While there are different
rules governing IP ownership created by employees and independent
contractors, the distinction matters most when cleaning up an
problem retrospectively, rather than addressing all the issues
prospectively. Prospectively, the legal infrastructure will
consist of policies and agreements that work together to vest
title to IP in the company, regardless of whether it is developed
by an employee or an independent contractor.
For cleaning up an IP ownership problem after the fact, however,
developing a solution starts with the type of IP involved and
then centers on whether a person is an employee or independent
contractor. Various agencies in the federal government (e.g.,
IRS, OSHA, and the Department of Labor) and in California (e.g.,
Franchise Tax Board, Workers' Compensation Appeals Board, Unemployment
Insurance Appeals Board, Employment Development Department)
have varying guidelines on how to do the analysis. See the Useful
Websites call-out box for a link to a summary of some of the
different factors. The analysis tends to focus on how much control
the principal (you) have over the person doing the work. It
is a very fact specific inquiry; the more control you have,
the more likely that the person doing the work is an employee.
IP Legal Infrastructure - Ensuring Company Ownership of IP
Assuming you have determined whether a person is an employee
or an independent contractor, determining whether the company
or the person owns a particular piece of IP is the next step.
For patents, when an employee develops an invention, the patent
rights to that invention belong to the employee, not the
employer. This is true even if the employee thought of and developed
the invention on the employer's time, in the course of employment,
and using the employer's tools and materials. Similarly, absent
written provisions to the contrary, an independent contractor
who develops an invention owns the patents rights in that invention.
The company's solution in either case is to enter into a written,
enforceable agreement with the employee or independent contractor,
before work commences, assigning all of the individual's rights
in the invention to the company. Without this written assignment,
the best a company acting as an employer could hope for would
be shop rights, which are effectively a non-assignable and non-exclusive
license to use the employee's invention in the employer's business.
This sort of IP provides little, if any, barrier to entry and
is not something that will generate measurable investment interest
in your company.
Click Image
to Enlarge
Some
states, particularly California, have imposed some limits on
how broad an assignment employees can be required to provide.
In California, the legislature responded some time ago in Section
2870 of the California Labor Code by specifically prohibiting
employee assignment to an employer of inventions that the employee
developed entirely on his or her own time without using the
employer's equipment, supplies, facilities, or trade secret
information, except for those inventions that either: (a) relate
at the time of conception or reduction to practice of the invention
to the employer's business, or actual or demonstrably anticipated
research or development of the employer; or (b) result from
any work performed by the employee for the employer. California
law further requires that the employer disclose the provisions
of the Section 2870 to employees in connection with the assignment.
A related Labor Code provision specifically requires employers
to disclose that provisions in an employment agreement requiring
assignment of an employee's rights in an invention to the employer
do not apply to inventions which qualify fully under Section
2870. This means that your employee patent assignment provisions
must include a Section 2870 disclosure.
Under copyright law, the author initially has title to a work,
unless a work is a "work for hire." The law provides
that a work prepared by an employee within the scope of his
or her employment is a "work for hire" and ownership
in a copyright would vest with the employer. Given the challenges
outlined above in determining if a person is an employee or
an independent contractor, you should not rely solely on the
existence of an employer-employee relationship. In case the
person is found to be an independent contractor, it may be helpful
to have a work for hire provision in the employment agreement
or employee manual and an assignment provision which assigns
ownership of the copyright to the company, in the event the
work is not found to be a work for hire. The assignment provision
could help to avoid costly litigation to determine that a person
is an employee and that the work in question was within the
scope of employment.
Copyright law also provides that a work is a work for hire if
it is "specially ordered or commissioned for use as a contribution
to a collective work, as a part of a motion picture or other
audiovisual work, as a translation, as a supplementary work,
as a compilation, as an instructional text, as a test, as answer
material for a test, or as an atlas, if the parties expressly
agree in a written instrument signed by them that the work shall
be considered a work made for hire." Under independent
contractor relationships that involve works covered by this
language, i.e. specially ordered or commissioned and of the
listed type, a written agreement providing that the work shall
be a work for hire is an important step in developing your company's
IP legal infrastructure and obtaining ownership for the Company
of such copyrighted material. Just as with employees, such an
agreement should also include an assignment provision in case
the work for hire provision is invalidated. Please note that
some courts require that these assignment agreements must be
signed by both parties before any work commences.
For trademarks, the analysis is very similar to copyrights.
Generally, trademark rights arise from usage of the mark, i.e.
a logo used with a particular product to indicate the source
of the product. Development of the trademark often involves
a work that is copyrighted. Companies must be sure that their
IP legal infrastructure encompasses trademarks, similar to how
it addresses copyrights.
Trade secrets add another layer on top of the infrastructure
you have created for patents, copyrights and trademarks. Think
of the formula for a popular soft drink. In addition to having
the protective measures relevant to patents, trademarks, and
copyrights, there needs to be a requirement of secrecy. After
all, the key to trade secret ownership centers on maintaining
the secrecy of the trade secret. Once the trade secret ceases
to be a secret, it is no longer a trade secret. Thus, a company
needs to adopt trade secret policies, physical and other safeguards
as applicable, and impose comprehensive confidentiality and
nondisclosure obligations on anyone (employee, independent contractor,
and others) who may have access to the trade secret. Please
see the Trade Secret Checkup for additional guidance. It is
a useful starting place for reviewing your trade secret safeguards,
but is not all-inclusive. Moreover, the type of work your company
does and the nature of its trade secrets will guide what protective
measures are appropriate.
The Infringement Risk
Infringing on another's IP rights can create substantial liability
for a company. For example, if found guilty of infringement,
infringing goods can be seized and destroyed, damages may have
to be paid, courts can issue injunctions stopping sales of the
infringing products, and you may have to pay substantial licensing
or royalty fees to the injured IP owner. One example of possible
infringement is where a company sells a shrink-wrap software
product, but ownership in the code was never vested in the company.
The individual who wrote the code still owned it. When that
product becomes successful and a substantial sum of money is
at stake, the individual sends a cease and desist letter to
the company, demanding large royalty fees and threatening a
lawsuit.
Click
Image to Enlarge |
Consider,
however, a slightly more subtle infringement scenario. Your
company hires two people to develop a new website and content.
Assume your company properly characterized the two people,
one as an independent contractor and one as an employee,
and that appropriate IP legal infrastructure is in place
to have given ownership of the IP they created to the company.
The two people get the project done before deadline and
under budget. You are delighted, until you receive a letter
demanding (i) large royalty payments for the six months
the website has been up and (ii) that you take your new
website down because its contents are infringing upon the
copyrighted contents of another website.
The other website owner is seeking punitive damages, putting
your company at risk for having to pay treble damages. |
The independent contractor is paid and long gone. The employee
will have to be investigated and possibly disciplined. Your
on-time and under budget project is now a giant and expensive
legal headache.
There are steps to take to mitigate this sort of risk. First,
the IP legal infrastructure that you worked so hard to develop
to ensure your company owned its IP also needs certain protective
provisions. These protective provisions would prohibit infringement
on the IP rights of others by your company's employees and independent
contractors. Also, it can be helpful to require employees and
independent contractors to indemnify your company, to the extent
permitted by law, for their infringement of others' IP rights.
In addition, if your company generates a lot of IP, consider
implementing processes to screen out plagiarized material before
your company broadly uses such materials. For example, if you
produce a lot of content which you are selling to your customers,
part of your quality control likely will include screens for
plagiaristic content.
A third example relates to a newly hired employee, the "forms
from a former employer" problem. The company hires a new
sales person, who brings a large binder of documents to work
on his or her first day with your company. Just as you have
carefully developed the legal infrastructure to ensure your
company's ownership of any IP generated by this new hire while
working for your company, you must assume that his or her former
employer has, too. This means part of your diligence before
even hiring the person requires understanding what restrictions
the person is under, like nondisclosure, nonsolicitation, and
rarely in California, noncompetition restrictions. The binder
of documents could run afoul of some of those restrictions,
particularly the nondisclosure ones. Moreover, any use by your
company, its employees or its independent contractors of any
of the information in that binder could constitute infringement
on the former employer's IP. Accordingly, do your diligence
and make sure your IP legal infrastructure prohibits infringement
and provides, to the extent permitted by law, for indemnification
by the individual of your company for his or her infringement
on others IP rights.
Applying the Lessons - Who Owns a Founder's IP?
Founders
usually start with a job (that pays the bills) and an idea,
like the next great software product. They may write code themselves
at night, after work. Since no one is sure the code can even
be written, the founder is still not sure the idea can grow
into a business.
Click Image
to Enlarge
Chances
are, no one is thinking about a nondisclosure and invention
assignment agreement at this stage. There is probably not even
a company. The founder toils away on his or her home PC at night
(not his or her job's PC) and writes some code there, and slowly
the prototype takes shape. Initial capital likely comes from
the founder's credit cards and home equity line.
The idea begins to morph into a business. The prototype works.
Potential customers are clamoring for a product they can buy.
The founder decides to form a company.
Virtually all of the IP that the founder intends to build the
company around was generated before the company's formation.
Assuming the founder properly respected the boundaries of his
employer's IP policies, the founder owns the code, its copyright,
and any trade secrets he or she may have developed in the course
of working on the code. For the new company to own this IP,
the founder will have to assign all of his or her rights in
the IP to the company for consideration, like stock or cash.
On a going forward basis, the founder will need to be sure the
company promptly puts into place IP legal infrastructure to
ensure that any new IP created by the founder or any future
employees or independent contractors is properly owned by the
company. Then, the company could say, "I paid for it, so
I own it."
Gavin G. Galimi is an experienced technology attorney
who works extensively with software and technology companies
across all industries, including software, internet, information
technology, search, healthcare, and biotechnology. Gavin enjoys
helping entrepreneurs of large, middle market, and emerging
companies achieve their business objectives. He can be reached
in the Los Angeles office of Katten
Muchin Zavis Rosenman, an AmLaw 100 firm recently recognized
as a Top 30 Client Service Law Firm, 2029 Century Park East,
Suite 2600, Los Angeles, California 90067. His telephone number
and email are : 310-788-4732 · gavin.galimi@kmzr.com.
