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