On Your Mark….Get Set…GO!

With a swift stroke of his pen, President Obama signed the America Invents Act last week that will completely overhaul the U.S. patent system.

And what should be of interest to startups and entrepreneurs everywhere is the transition of U.S. patent law to a “first-to-file” system.

Currently, the U.S. is the only developed country on this planet to grant patents to the “first-to-invent.”  Under the first-to-invent system, there are several procedures within both the Patent Office and the Federal Courts that allow an inventor to assert prior rights due to prior invention over patents that have an earlier filing date than theirs.

For example, today, I may file a patent application on my invention for dog food that is completely 100% metabolized and therefore never comes out the other end of my dog (“Zero Emission Dog Food”).  Five months before today, Purina may have filed a patent application disclosing and claiming my exact formula for Zero Emission Dog Food.  Under a first-to-invent patent system, upon my proving my dates of invention predate those of Purina, the Patent Office would be persuaded to grant the patent for Zero Emission Dog Food to me rather than the earlier to file Purina.

After the new legislation takes effect (in about 1 year) I will no longer have recourse if I lose the “race to the patent office.”  It won’t matter how many days or years ahead of Purina I am in development, if I don’t get my application on file first – I lose.

Obama’s stated motivation for transitioning the U.S. patent system to first-to-file is to “encourage the entrepreneurial spirit” by “cut[ting] away the red tape that slows down or inventors and entrepreneurs.”

[What a load of dog crap. Jill's comment.]

Startup advocates everywhere have mixed opinions about whether the change will truly help entrepreneurs and small to midsize startups, citing the startup’s lack of financial resources.

Many feel the “first-to-file” system gives Big Companies an unfair advantage, allowing them to use their money and power to monopolize the creative intelligence of the universe by beating small to mid-size companies to the patent office.

David Kappos, director of the USPTO, had a different take on the situation.  He pointed out before a House committee that first-to-file may actually level the playing field.  The first-to-file system is far less subjective than the first-to-invent system, (can’t argue with that), and some very interesting statistics suggest the transition may not be as dire as Chicken Little makes it out to be.  Kappos rebutted the “first-to-file gives Big Companies an economic advantage” argument (e.g., they can afford to file patent applications at whim), by citing the cost to inventors of proving their first inventor status — $400,000-$500,000 at the low end.  Kappos continued with a second interesting statistic, “In the past seven years, of over three million applications filed, only 25 patents were granted to small entities that were the second inventor to file but were able to prove they were the first to invent.”

What does this mean for startups?

Don’t wait around to file your patent application!

If your invention is a good one, one on which you have already staked your house, marriage, retirement fund, or shoe budget, FIND the money to have a good application drafted and filed.  Make sure you work with a patent attorney who can draft a robust detailed application; taking into consideration the directions your company may go in the future.  A robust application will make it less likely that a competitor will be the “first to file” a patent application covering an improvement you neglected to cover in your first application.

[A big risk to startups is a crappy, hastily filed application. Jill's comment. See the post on hasty applications.]

The moral of the story: the early bird gets the worm, and the first-to-file gets the patent.

Heather N. Schafer is a patent attorney who helps startups draft robust patent applications.

For Happy Business Marriage Part 1: The Background Check

Although the Secret Third-party Infiltrator is a huge threat, the individuals to a collaboration have several other things to iron out before dancing through the daisies hand in hand.  To review – under both the patent and the copyright laws:

If there is more than one inventor or creator – each inventor or creator owns an equal and undivided interest in the whole invention or creation.  This means that each of the co-inventors or co-creators can exercise any of the rights that patents or copyrights bestow. 

More importantly, each of the co-inventors or co-creators may exploit those rights without the consent of and without sharing the profits to the other co-inventors or co-creators!

Therefore, prudent collaborators iron out their relationship ahead of time and address, in writing, such issues as:

1. How are we going to protect the Intellectual Property in the Work we create?
   • If you are going to seek patent or copyright protection for the product of the collaboration, it is important to get everyone on the same page.  There will be expenses involved, but more importantly there will be duties involved – for example, you have to agree ahead of time to keep good notes and not publish or otherwise disclose the invention before a patent application is on file.
   • Case in point – three fantastic scientists, each from a different continent, get together at a Research Institution to collaborate for a few weeks.  They create an amazing application that allows doctors to examine and diagnose patients remotely.  When the collaboration party is over, each of the collaborators goes back to her home country.  One of them submits an invention disclosure to the Research Institution.  One of them just goes back to playing the guitar on her porch in north Georgia.  However, before the other two have even stepped off the airplane, the third collaborator has fully disclosed the invention on her blog.  While the Research Institution would like to protect and commercialize the resulting product (and shoot some money back to the three collaborators) the publication has destroyed novelty in several countries, which prevents patent protection in those countries
2. How are we going to exploit the work that we create?  Are we going to exploit jointly or are we all going to go our separate ways and exploit it in competition with one another?
   • Unless the collaborators have an advanced agreement, each of them can exploit the entire work (regardless of their respective contribution to the work) in competition with the others.
   • It is important agree in advance that, for example, all of the collaborators must agree on how the invention is exploited.  This type of agreement give confidence to potential investors that a “wild man” co-inventor won’t go out selling the invention to competitors, thereby destroying it’s valuHow are we going to split the profits from the collaboration?
3. In the absence of an agreement, there is no duty to split profits. If you are a co-inventor with a Behemoth due to a collaborator’s employment agreement – Behemoth has no duty to give you a cut of its profits.

These are just a few considerations to be aware of when you are beginning your collaborative relationship.  There are many others.

The take home message is to get a written agreement while you are still in love, don’t wait until the million dollar baby is born and you are fighting over who gets the arms and who gets the legs.  The patent and copyright laws won’t be as generous as King Solomon – they won’t split the baby in equal parts.  Rather, its every collaborator for herself – may the best exploiter win!

Heather N. Schafer is an intellectual property attorney who hates to break bad news to inventors with soured co-inventor relationships.

The creative endeavor is one of the most beautiful relationships that two or more people can enter into together.  Creative ventures thrive on collaboration and there is no law against how many can join the venture.  However, it is important to know a sobering effect of joint works and inventions under both the patent and the copyright laws:

If there is more than one inventor or creator – each inventor or creator owns an equal and undivided interest in the whole invention or creation.

This means that each of the co-inventors or co-creators can exercise any of the rights that patents or copyrights bestow (e.g., making, using, selling, and importing patentable inventions and reproducing, distributing, performing, and making derivative works of copyrightable inventions).

More importantly, each of the co-inventors or co-creators may exploit those rights without the consent of and without sharing the profits to the other co-inventors or co-creators!

Therefore, in the honeymoon bliss that occurs at the genesis of a creative project, it is important to get a few things straight up front.  Such as:

For each party to the collaboration – what kind of contracts might we have entered that would give a third party ownership interest in our creations, be they patentable or copyrightable?

1. Think – employment agreements, independent contractor agreements, our spouse (especially if one party has a pending divorce), University policies (if the parties are graduate students or faculty).  We can refer to these as STI’s (Secret Third-party Interests).
2. If one of your collaborators is subject to, say an employment agreement or University IP policy, all of a sudden your database expert, Jane, is no longer at the table – instead you are a co-owner with her Behemoth employer or her University.  These entities may have very different ideas about how to exploit the work and may make exploitation of the work complicated if not impossible.
3. Case in point – two engineers get together to work out a novel method of cleaning up oil spills.  Each engineer works for a different company.  One works for a small local company that provides the skilled ground crew to clean up the oil spill.  The other engineer works for an international Behemoth company that manufacturers oil remediation equipment.  The engineers, being at the bottom of the totem pole, envision leaving their companies and starting their own venture around the method – one in which they merely buy equipment from the Behemoth and then set out to save the world and receive 100% of the market share.  However, Behemoth has a different idea – it owns the rights to the invention through its employee agreement with the co-inventor engineer.  Even though the Behemoth cannot stop the small co-inventor from practicing the invention, it can practice the resulting invention in competition with the small co-inventor.  With its international distributors everywhere on earth, it quickly dominates the market for the method and leaves the two inventing engineers empty handed.

The importance of a Background Check (firmly scrutinizing your future collaborator’s existing agreements to identify STI’s) is lost on many in the first blush of love.  The important problems that can be raised by unrevealed third party interests will be further explored in the next post.

Until then – the take home message is to (1) keep copies of your contracts and policies, (2) if you don’t have copies, go ask for them, (3) ask to see the paperwork showing that your collaborators are clean of STI’s before things get hot and heavy.

Heather N. Schafer is an intellectual property attorney who helps entrepreneurs keep their IP interests straight.

It’s big news:  Google is paying $12.5 billion to take over Motorola Mobility, the maker of mobile handsets.

And Google really wanted the company for its patents.

It’s trying to beef up it’s paltry portfolio. Google also recently bought 1,000 patents from IBM.

In July a group of companies including Apple and Microsoft spent $4.5 billion for the patents of bankrupt telecom company Nortel.

Companies are trying to beef up their defensive and offensive positions in an all out patent litigation and licensing duke-out over mobile phone applications. There are billions at stake and patents are providing the leverage.

You may be thinking, sure that’s great for the big boys who can afford patents but:

What’s the value of a good patent to a little startup?

1.  Patents can help you stop competitors from making, using, or selling an infringing device or service covered by the patent claims.

Even for a tiny startup, a good patent on your core technology, service or distribution method can give you an amazing competitive advantage. The mere fact that you have a patent can make potential competitors think twice before competing with you.  The threat of patent litigation is very serious and expensive. Potential investors of an infringing company would likely run for the hills. The patent isn’t making you any money per se but is providing a key barrier to competitors. A patent gives you a limited, legal monopoly.

A patent is like a big sign that says, “Keep Out of My Territory.”

For example, eLance, who provides a service for hiring workers on-line has a patent on its method of hooking up workers with companies.

See U.S. Patent No. 7,069,242, Method and apparatus for an electronic marketplace for services having a collaborative workspace.

The claims of the patent set out the boundaries of what is covered. Each claim has a slightly different scope. If a company does the method covered by the claim, it is guilty of patent infringement. Here is one claim of the eLance patent.

1. A computer implemented method, comprising:

accepting a posting on a website of a project that a buyer wants completed;

providing a database containing all registered sellers;

receiving a bid on the project from any seller, where all registered sellers are qualified to bid on postings in all categories;

allowing the buyer to accept the received bid from the seller; and

allowing the buyer and the seller to work on the project in a collaborative workspace accessible by only the buyer and the seller, where the seller develops and delivers the project in the collaborative workspace and the buyer can track the project in the collaborative workspace before it is complete.

This claim is pretty broad and a real coup for eLance. It will help them stay ahead of the website job placement pack.

2.  Patents can make your startup more attractive to investors.

Startup company valuations are often based primarily on the value of the intellectual property that protects the key technology or business method. A granted patent increases that value.

Before they invest in your company, Angels and VCs want to know how you are going to have an advantage in the marketplace.  A patent or even a patent application shows investors that you take intellectual property protection seriously and that you are trying to get a strong competitive advantage by using the law.

3.  Patents can give your startup leverage in negotiation with a big company.

I’ve represented little software companies in negotiation with big companies.  Startups with key patents had far more bargaining strength and were able to enter into cross-licensing deals on much better terms.

4.  Patents can also generate licensing revenue.

In some circumstances, a patent can also generate money for your company through licensing deals with others. It’s called patent monitization and even small companies with important patents can play the game.

(Although patents can also generate revenue though settlements and damages awards through litigation, patent litigation isn’t really practical for a startup unless you can find a litigator who will take your case on contingency for a chunk of the final recovery.)

A patent can do wonders for your startup and it’s worth serious consideration when you are developing your IP strategy.

But make sure you don’t inadvertently blow possible patent protection. See the related post.

Jill Hubbard Bowman is an intellectual property attorney who helps startups and emerging companies gain a competitive advantage.

All patents are not created equal. Indeed, there is a world of difference between a strong patent and a crappy one.

The strength of a patent lies in its claims.

Some inventors mistakenly think that the details disclosed in the patent’s specification define the scope of their legal rights.

Not so.

The key part of a patent is the claims at the end, which set out the “metes and bounds” of the patent similar to a description in a deed for land.

Strong patents are expensive and difficult to draft.  They have broad claims that stop others from making, using or selling inventions within the claim scope and yet don’t capture invalidating prior art. Strong claims tend to be simple and elegant, without extraneous details that create infringement loopholes.

In contrast, crappy patents are usually, but not always, cheap and have narrow, detailed claims that barely cover the described invention. It can be difficult if not impossible to prove infringement of crappy patents. There are lots of ways to get around narrow claims much to the chagrin of inventors who try to enforce or sell their patent.

In the world of patent law, you tend to get what you pay for. If you use a patent application generation program or pay some guy in India $500 to draft your patent, your patent is unlikely to be worth the filing fees or even the paper it is written on.

Only strong patents are worth owning.

The surprised and dejected look on clients’ faces when we tell them their invention is no longer eligible for patent protection is not one a patent attorney likes to experience.  The look morphs between a huge exhale to fuming red face with fists pounding the table and screams of “This can not be so, you must be wrong!”  Each time I see this scene I want to rent a blimp and have it travel the skies streaming information about the Top Five Ways to Blow Possible Patent Protection.  Since I cannot afford a blimp, here it is, plain and simple.

Here are the Top Five Ways to Blow Patent Protection:

1. Not knowing that U.S. and foreign patent systems have “statutory bars” to patenting.

A “statutory bar” is a rule that says – if your invention is already “public” you cannot have a patent for it.  In the U.S., if the invention is public for one year before you file your patent application – your invention is disqualified from patent protection.  In many countries, the very minute that your invention becomes public – your invention is disqualified.  The next few points illuminate the nature of “public.”

2.           Before filing a patent application – publishing a journal article, magazine article, or giving a talk at a conference.

Academic inventors and companies both make this mistake.  They publish details about their invention in an academic or trade journal before filing a patent application.  Prior publications that predate the application by more than one year destroy novelty and render the invention unpatentable in the U.S. In many foreign countries, the inventor loses patent rights immediately, the moment the article is published or the invention is discussed or demonstrated at a public event.  It doesn’t even matter if no one read the article or if not a soul showed up to your talk!

3.         Before filing a patent application – offering to sell the invention to someone.

Offering to sell the invention before filing a patent application is a common mistake.  Inventors need money to get their invention off the ground, and they may try to find someone to “buy the idea” or they may make a few models and sell them on eBay to test the market.  Once you have offered to sell the invention, you have one year to file a patent application in the U.S.  In many foreign countries, you immediately lose the right to file.

4.         Before filing a patent application – publicly using the invention.

When you have invented a cool new device, of course you want to show it off, but the minute you pull it out during a house party, show it at your aunt’s wedding, send it to class with your kid for show and tell, or make a YouTube infomercial – the clock starts ticking.  One year to file a U.S. application.  Many foreign countries – rights lost immediately!

5.         Before filing the patent application – advertising and launching the product on the Internet.

This category is redundant, but too many times patentability is blown when the patent examiners find material on a company’s website that predates the filing date by more than one year.  If you haven’t filed a patent application, you should NOT launch your invention online.  You should not post pictures of it (if it is tangible), or descriptions of it, or video demos, or articles about it; you should not blog about it (in any descriptive manner); take pre-orders; or anything else that publicly exposes your invention.  If you are launching a beta web application, you should first talk to your patent attorney about how to ensure you do not destroy novelty.

At the end of the day, some people do “do it right.”  Recently, I went to visit one of our new clients.  The clients are a family start up, a mother, father, and son who invented a novel device.  The device is over 5 feet tall when fully assembled.  The family worked on the device in their basement, and each night they completely disassembled it, put it in a brown box, and stored it under their bed.  They didn’t tell a soul – they didn’t even show it to their daughter who lived across the street!  They read somewhere (thank goodness) that public disclosure was a bar to patentability.  Once the patent was on file, they threw a huge party – invited the whole neighborhood – and got lots of great YouTube footage.

As much as we hate to see the sadness when our clients do it wrong, we love the joy when they do it right.  If you have an invention you want to build a future on, file your patent before you tell people about it, use it outside, sell it, offer to sell it, or publish it anywhere

If you have an invention you want to build a future on, file your patent before you tell people about it, use it outside, sell it, offer to sell it, or publish it anywhere.

Nearly every business model has a core technology.  Your core technology may be a consumer item such as a back scrubber for the elderly, or it may be an online game, a smart phone or web application, or new plant variety, a pharmaceutical, or a better bra.  Whatever your core technology, the first thing you should do before you drop tens of thousands of dollars on web servers, manufacturers, SEO, and t-shirts or mugs with your company logo, is to file a good patent application.  This is especially true if you have already spent $10,000 plus paying people to help you develop it (which brings up all kinds of complicated issues with independent contractors).

Mean things happen in the real world.  Every day we hear variations of these rude awakening scenarios:

• Companies taking their invention to a Chinese manufacturer and then seeing it in Home Depot five weeks later under someone else’s brand;
• Inventors showing the invention to their best friend, and then discovering best friend selling it online; or
• Entrepreneurs spending tens of thousands of dollars on a web application and then seeing the same application idea launched by a company in the same building who overheard the idea at a bar and beat them to the punch.

The honest truth is, unless there is a huge barrier to entry into your market (e.g., you are the only person on earth who can make it) – you need to create a barrier, and the best way to create a barrier is to file a patent application.  Remember, you are not creating a barrier for yourself alone.

Investors looking at your company want to see you’ve done what you could to put a fence around your farm before they give you their money to buy new cows.

Recently, one of my clients avoided a rude awaking and rather, had a late night epiphany:

“Last night I realized, I have spent over $25,000 and two years developing this product and some bloody jerk could just walk away with it tomorrow, after I did all of the work figuring out how to make it function.  I am basically giving someone a nice, packaged, figured out idea!”

Sometimes late night epiphanies and rude awakenings speak louder than the patent attorney in the ear saying, “When are we going to file the patent application?”

The point is, figure out your core technology, and then talk to a few good attorneys about how you might protect that technology.  You’d be shocked to know what is patentable from quirky games to three-legged pantyhose.  Find someone who is competent and will draft a robust patent that will serve your company’s needs.

After you pay for the patent, go crazy with the logo goods, launch parties, SEO, and websites knowing that you’ve given market protection the boy scout try.

Heather N. Schafer is a patent attorney who helps startups protect their farms.

The patent filing process — in the US and foreign countries — is beyond complicated.

An inventor choosing to protect her invention finds herself in a hailstorm of peculiar terms and almost undecipherable timing deadlines.

The aim of the next few posts is to give you the 101 utility patent types, a few important dates, and a little savvy on how to protect your invention abroad. The following posts apply only to Utility patent applications. (Design patent applications will be covered in a separate series.)

The Terms

US Provisional Patent Application (the placeholder)

A provisional patent application is used to establish priority of invention.

Essentially, you establish that you invented first.

When you file a provisional patent application with the US Patent and Trademark Office (“USPTO”), the USPTO issues to you a filing date for your invention disclosure.  A provisional patent application is not examined by the PTO and never matures into a patent.  The provisional patent application is merely a placeholder – a method used by an inventor to demonstrate that she was the first to invent.  To maintain the filing date of the provisional patent application, an applicant is required to file a non-provisional patent application within 12 months.

The filing date of the provisional patent application confers a few benefits:

(1) a USPTO patent examiner can’t cite against your later filed non-provisional patent application any references (such as patents, products on the market, or journal articles) that appeared after the filing date of the provisional application that could prevent you from obtaining a patent;

(2) if someone else invents the same thing after your filing date, that person can not get a patent on the same invention.

For more about provisional patent applications, take a look at our previous posts explaining why you shouldn’t file a quick and dirty provisional patent application that you draft yourself.

US Non-Provisional Patent Application (what may lead to a patent)

A non-provisional patent application is examined by the USPTO.  If the non-provisional patent application claims patentable subject matter, the USPTO will grant the inventor a patent on the invention as claimed in the patent application.  A non-provisional patent application may claim the benefit of the filing date of a provisional patent application filed less than 12 months prior, a non-provisional patent application filed at any time if the prior filed non-provisional patent application still pending, or a foreign patent application if the foreign patent application was filed less than 12 months prior.

Essentially, you want that early date of the provisional patent application to increase your odds that you can obtain a patent before someone else.

PCT Patent Application

The PCT application does not provide for the grant of an “International Patent.”  As of today – there is no such thing as an “International Patent.”  Rather, a PCT patent application simplifies the process of filing patent applications in foreign countries.  By using a PCT application, an inventor can file a single patent application in one language with one patent office in order to simultaneously seek protection for an invention in over one hundred PCT member-countries around the world.  (For a complete list of PCT countries, check out information on the WIPO site.

A PCT (Patent Cooporation Treaty), is a patent application filed under the Patent Cooporation Treaty.  The PCT patent application must be filed within 12 months of the earliest priority date.

For example – if an inventor filed a provisional patent application on Jan. 1, 2010, she must file a PCT patent application before Jan. 1, 2011.  If an inventor never filed a provisional patent application, rather, filed a non-provisional patent application on Jan. 1, 2010, the inventor must file a PCT application before Jan. 1, 2011.  Finally, say an inventor filed a provisional patent application on Jan. 1, 2010, and then filed a non-provisional patent application (claiming priority to the provisional patent application) on July 17, 2010.  That inventor must file a PCT application by Jan. 1, 2011 (12 months from the earliest priority date).

The PCT application delays the expenses associated with applying for patent protection in other countries for up to an additional 18 months.  In other words, if an inventor does not go through the PCT application process, she is required to file her patent application in the desired foreign countries within 12 months of the earliest priority date.  By filing a PCT application, the inventor can delay filing in individual foreign countries for up to an additional 10-18 months (depending on the country).

Filing a PCT application allows the inventor more time to assess the commercial viability of her invention and also allows her to determine which countries are worth filing in.

The following is an example of time line summary for filing patent applications:

January 1, 2010   Earliest filing date = priority date = date applicant files Provisional Patent Application or Non-Provisional Patent Application Claiming Invention

January 1, 2011   Priority Date + 12 months deadline for filing Non-Provisional Patent Application claiming priority to a Provisional Patent Application AND deadline for filing PCT patent application OR foreign patent filing directly into desired foreign countries

Jill’s note:  Filing and prosecuting patents to obtain the strongest protection in key countries is complicated.  It takes an experienced patent attorney to get it right.  To find out more information about the patent process, stay tuned for more posts by our contributing editor and patent prosecuting attorney Heather N. Schafer.

The following post is by our enthusiastic contributing editor, Heather N. Schafer!!! Heather is an experienced intellectual property attorney who helps inventors protect their inventions and emerging growth companies increase their value through strategic IP protection.

Congratulations!  Your startup has employees!  The Founder’s have shifted tasks – they are no longer burning the midnight oil generating company IP.  Now they are up all night assessing hair loss as they fuss over business plans, funding schemes, and meeting increasing demand!  If the company has done things right – there will be no hair lost over Whether the Startup Owns the IP Rights in Employee-generated IP!

If you are a quick study – you will anticipate that our suggestions involve Contracts!  In this case, your employee Contracts.   First, we will dispel a few misconceptions.

MISCONCEPTIONS ABOUT EMPLOYEE IP

(1)  The Company Owns all Employee-Generated Patentable Inventions

1. Not Necessarily!

(2)  The Company Owns all Employee-Generated Copyrightable Expression

1. Not Necessarily!

(3)  The Company Owns all Employee-Generated Trade Secrets

1. Only if it KNOWS about them
2. Only if they REMAIN SECRET

THE STRAIGHT STORY ABOUT EMPLOYEE IP

(1)  The Company will have CLEAR TITLE to Employee Generated Patentable Inventions only if the Company has a WRITTEN AGREEMENT with the employee.

(2)  WITHOUT a WRITTEN AGREEMENT, the Company has only a “Shop Right.”  A “Shop Right” is a royalty-free license to use the employee’s patentable invention or trade secret!  A Shop Right is not transferrable, meaning that the Company cannot sell or license it – and of greatest importance to a scaling startup dreaming of acquisition by Microsoft or Genentech – the Shop Right ceases the moment the company ceases!!!  Yep!  Cinderella turns back into a pumpkin the minute the prince kisses her!  All the beauty and charm that attracted Microsoft dissipates the minute the parties go from waltzing to marriage.

(3)  The Company owns all Employee-Generated Copyrightable Expression that is created within the scope of employment.  Sounds simple, right?  Not So!  How about the following – oh so common startup occurrences:

1. The cell culture technologist who designed and maintains the company website – hmmm?
2. The assembly line worker who throws together an awesome, witty, cartoon that becomes the basis of the company’s most successful marketing campaign?

Each of these cases, without written agreements, fall right into the Grey Zone of IP Law.  The Grey Zone is no place for a start-up.

Written Contracts put you in the Black and White zone – and this is where the savvy startup Lives.

(4)    In most circumstances, any trade secrets developed by an employee in a position of “trust and confidence” is owned by the Company, independent of a written contract.  HOWEVER, (1) lower level employees (not in a “position of trust”) are too often the developers of your key IP, (2) without a policy in place, the company may never obtain a proper working disclosure of the trade secret, and (3) without educating your employees, they may have no idea how to protect the value of the trade secret!  Take for example the following circumstances:

1. The receptionist who “accidentally” invented the company’s best selling product, by just making a few suggestions while taking notes at a team brain storming meeting.
2. The assembly line worker who proposes a workflow solution that increases efficiency and cost, making the company twice as competitive.

Without employment agreements, expensive ownership disputes over intellectual property will inevitably arise – inventions conceived outside of the workplace relating to the corporation’s core IP, IP generated by employees in non-technical and/or non-creative positions, and etc.  These disputes can spell the END of your lofty endeavor – but they can all be headed off at the pass by a well thought out IP Policy integrated into a well drafted Employment Agreement – signed by EVERY employee from the receptionist to the engineers and scientists.

A good Employment Agreement:

(1)          Provides Consideration – new employment or continued employment and salary/wages

(2)          Identifies classes of IP and confidential information and includes requirement to keep it secret

(3)          Requires the disclosure of developments and inventions to the Company, regardless of whether they are patentable/copyrightable/etc.

(4)          Assigns all developments, creations, and inventions to the Company

(5)          Requires continued assistance with IP protection during and after the period of employment

(6)          Requires return to Company of all employee-generated work product at termination of employment

(7)          Non-compete provisions (within state law limits)

Onward and Upward with Agreements paving your path to success!!!

IP attorney Heather N. Schafer can be reached by email at heathernschafer [at] gmail.com.

Every startup CEO who is growing a scalable company should make sure that her startup owns the IP rights to work created by independent contractors.  Failure to do so could seriously impact the value of the company, jeopardize the possibility of obtaining investment, and lead to legal liability for infringement and horrible embarrassment.

There are a few ownership concepts in intellectual property law that are critical to know.

1)  Under copyright law, when an independent contractor creates an original work of authorship — like a logo or software application — the copyright automatically vests in the author of the work.  There is an exception for works made for hire but it is very narrow and specific.  See my previous post on the subject of the work for hire doctrine.

2) Patent rights are personal.  They vest in the inventor.  Corporations can’t be inventors.

3) Any trade secrets belong to the independent contractor unless specifically transferred.  Potential trade secret protection can be lost if no reasonable measures of protection are taken to keep the information secret, like an NDA.

Consequently, a company must have a signed written agreement with the author/inventor that transfers the IP rights to the company.

An example of a super simple, proper assignment clause:

[NAME OF CONTRACTOR] hereby assigns and agrees to assign to [NAME OF YOUR COMPANY] all right, title and interest in and to the [NAME OF THE WORK] and all intellectual property rights therein.

The red words are critical.  Courts have decreed the proper type of language and your contract should use it.  The description of the work and the associated IP rights may be extensively defined.  Some assignment clauses are fairly long and detailed but the critical words to effectively transfer the rights are in red.

Here are five CEO misbeliefs that I commonly see in my legal practice:

1)  “My company paid for the work and so it owns the IP rights.”

This is the most common false belief that I see in my practice.  The legal truth is counterintuitive.  CEOs need to understand that they must take specific measures to own the IP rights for work that is created by independent contractors.  They must have formal, written contracts if they want the company to own the IP rights.  If the company wants to sell and sublicense the work — like software! — they must either have a full assignment of IP rights or a very broad license.

2) “The contractor says my company will own the IP rights and so my company owns the rights.”

Oral agreements are not sufficient to transfer IP rights.  IP transfers must be in writing signed by the author/inventor.

3) “I have a NDA with the contractor and so my company owns the rights.”

A simple NDA does not transfer IP rights.  You need an agreement with a specific assignment clause that transfers the rights.

4) “My contract says my company owns the rights.”

A clause that says that your company owns the rights but does not assign the rights does not legally transfer the rights.  I see this mistake a lot with contracts drafted by the entrepreneur or pulled off the web.

The following is improper and will not transfer IP rights to your company!

[NAME OF COMPANY] will own all right, title and interest in and to the [NAME OF THE WORK] and all intellectual property rights therein.

5) “It doesn’t matter if my company owns the rights, I have a good relationship with the contractor.”

Frequently in the startup world, relationships fall apart.  I’ve seen partnerships and oral agreements go awry.  I’ve seen independent software developers threaten a startup’s customers with cease and desist notices for infringement because the startups didn’t have IP assignments or licenses for its customers.  If your company is paying for the work, make sure it owns the IP rights by using a formal, written contract with the contractor that specifically assigns the rights.

Other related post:

Does Your Startup Own the IP Rights to Work Created by its Founders?

Jill Hubbard Bowman is an intellectual property lawyer and educator who helps startups protect their intellectual property and avoid legal liability.