Who owns the IP in your business?

Why is this important?

Ownership of work product is absolutely crucial for most companies. A company must own or have a licence for what it makes, uses, sells, distributes or licences, otherwise it is potentially breaching someone else’s intellectual property rights. Breach of any intellectual property rights owned by a third party can give rise to a potentially expensive dispute often resulting in the breaching company having to pay damages and alter its products or entering into an expensive licence agreement with the third party. Failure to secure the necessary intellectual property rights may also undermine the intrinsic value of the company and its assets.

One of the key issues an investor or buyer will look at is whether a company owns the intellectual property rights used in the course of its business.  Securing this right at the beginning will save you money and time in the long run but may be more complicated than you might suppose.

Why is this complicated?

A common misconception is that, if someone is working for your company, the company owns their work product. The actual position is more complicated. Subject to any agreement to the contrary, the company will generally automatically own the intellectual property rights in whatever is produced by employees (as opposed to consultants) during the course of their employment. However, there are a number of situations when work is not carried out by employees. For example, when a company is starting out, work often begins before a company structure is put in place . Those undertaking the work won't have been an employee of the company at the relevant time. In addition, people tend to come and go on a project; there may be a number of people who contribute to a project on a consultancy basis or even more casually. Where a person who is not an employee (or not yet an employee) creates work, they normally retain the intellectual property rights in that work unless there is an agreement to the contrary.

What should ring alarm bells?

You need to think about who has worked on things which you consider to be owned by the company and whether or not they were employed by the company at the time of work. Situations which could cause problems include:

  • where the founders started work before the company was officially set up;
  • where someone initially worked on the project but was never an employee of the company;
  • where work was done on company product by people who were, at the time, employed by a third party;
  • where consultants have been used; and
  • where open source software has been used (see section on Open Source Software).

How do we deal with this?

If any intellectual property rights in what you consider to be company product are retained by third parties, even if those third parties are now company employees, you need to get an assignment of those rights from the individual to the company. An assignment (which must be in writing) is a relatively straightforward legal document but care must be taken to describe exactly what rights are being transferred. If a written assignment is obtained, anything covered by it should then be owned by the company.

In an ideal world, the assignment will be a formality. For example, if the founders started work on company products before they became employees, they are usually happy to enter into an assignment. However, problems often arise where there has been a personal falling out. You can find that someone who was involved in the company but never employed by it, now wants to set up a similar business or feels that they should be paid for assigning their rights.

In some cases, you may not be able to negotiate an assignment on acceptable terms. If this happens, you will need a licence to use what you don’t own or you will have to stop using it. Again, the terms of the licence will need to cover exactly what is being licensed and be generous enough to allow you to use the licensed materials as required. You may find that the proposed licence is too costly or not wide enough.

If you do find that a third party owns the intellectual property rights in something which is crucial to your business and you are unable to arrange an assignment or a licence of those rights, you may have to think about re-developing those aspects which you do not own. This may be achievable if you are talking about a piece of software code but will be much more problematic if it is a major part of your business proposition. Do not just sit back and hope the issue will go away. If you do not resolve it, you could become embroiled in costly litigation and have trouble operating your business or attracting investors and/or potential buyers.

What should you do from now on?

Make sure that anyone who works for you does so either as an employee of the company (and ideally with a clear IP provision in their employment contract) or under a consultancy contract or other agreement which makes clear that the intellectual property rights in any work undertaken for the company, are owned by the company.