Intellectual property is a critical asset in many startups, especially technology startups, and often provides the foundations for the value proposition of the business. As a result, it’s very important to ensure that this intellectual property belongs to the company and not to various founders, employees, contractors, or any other contributors.
There are numerous potential negative consequences that can occur when intellectual property isn’t adequately protected. For example, situations can arise where an individual informally yet intimately involved in the company leaves without ever transferring the intellectual property he or she has contributed. Even where an individual’s relationship with the company was formal and agreed upon in written contracts, if intellectual property is not properly assigned, the company may not own it. Both situations, along with a myriad of other possible scenarios, can result in costly litigation. Long, expensive legal battles over intellectual property can easily destroy a young company that often can afford neither the actual cost nor the corresponding damage to the company’s reputation, especially because relationships are so often critical to a startup’s success. There is also always the possibility that the company will ultimately lose in litigation, and the loss of critical intellectual property components can seriously damage a company’s value.
While it’s important to engage legal counsel to aid in protecting your company’s intellectual property, it’s still valuable to understand the basics as an entrepreneur. This post will describe a few of the basic notions central to the protection of intellectual property protection:
- Intellectual property assignment
- Proprietary information and inventions agreement (“PIIA”)
- Works made for hire
- Shop rights
Intellectual Property Assignment:
A first step is often ensuring that all intellectual property created prior to these measures is affirmatively assigned to the company. Here, it’s important to think critically about who may have contributed any type of intellectual property. Beyond standard technology, consider anyone who might have contributed to the development of trade secrets, a designer who helped with a logo, or even someone who came up with the company name or slogan. If all the people involved in creating any form of intellectual property do not sign an assignment, then there are already gaps in your company’s foundation.
Once you determine who needs to sign an assignment, it’s important to make sure that the scope of the assignment includes the specific variety of intellectual property that you want assigned and that the correct legal words are utilized to make the assignment valid. These are points you should always be sure to confirm with legal counsel.
It’s also important to ensure that any intellectual property developed forward is retained within the company, and PIIAs can often help meet this goal. PIIAs include language constituting a nondisclosure agreement and provisions assigning intellectual property created during a specified term (commonly the term of employment) to the company. The breadth of the intellectual property that a PIIA covers is typically up to the drafter, and it will be important to discuss with counsel what you intend to accomplish with any PIIAs that you request. Some PIIAs can even assign ideas conceived by individuals during the term of their employment.
Works Made for Hire:
Some specific types of intellectual property are protected by the works made for hire doctrine under copyright law. This is a complicated doctrine, and is often less useful than anticipated by entrepreneurs. It only protects works that are created in a “fixed form,” and only applies to specific items. Moreover, it only applies to works created by employees or works specially commissioned and only in very specific circumstances. Because intellectual property protection under this doctrine is so scant, it’s best not to rely on it and to have other protection mechanisms in place.
Shop rights occur when intellectual property is created by an employee and applies to inventions or patents. This right is not codified in law, but is an equitable judge-made solution for instances where an employee utilized an employer’s resources in creating an invention but never assigned ownership to the employer. This right is similar to a non-exclusive, no-cost license; the company can use the invention without paying any fee to the former employee, but has no ownership rights and cannot prevent anyone else from using the invention. While shop rights can somewhat protect your business model because you are not at risk of losing a critical invention, they cannot protect you from competitors.
Licenses can also be a useful tool to gain access to more intellectual property that was not created within the company. There is often open source code available for use in software, and using these usually entails some type of license agreement. Licenses are also useful in obtaining freedom to operate if your company’s invention is not useful without utilizing the invention of another entity.
In general, it’s important to establish measures to protect your intellectual property early. Many founders don’t like to spend time on this because it doesn’t typically have an effect in early day-to-day operations of the company, but it can make an enormous difference down the line if this framework is or isn’t in place in the event of a dispute. More importantly, it is very difficult if not impossible to remedy weak intellectual property protection once a dispute has already arisen.