Intellectual property can be among the most important assets that a family business can own. Making sure that the family business actually owns, and can protect, the rights in intellectual property, however, requires an understanding of the different types of intellectual property and how rights are acquired or transferred. Failure to do so can leave the family business at the mercy of third parties or without the ability to defend against competitors.
The general rule for ownership of a copyright in a work is that it belongs to the creator of that work. The notable exception to this rule is that works created in the normal course of employment are considered to be authored and owned by the employer – not the employee. This employment exception, however, only applies to actual employees, not third parties hired by a family business to create works on behalf of the business.
Confusion arises because there is a limited copyright doctrine known as the “Work-For-Hire” doctrine that does apply to non-employees creating works on behalf of a business. As the name implies, if the doctrine is applicable, then, as in the situation of a work created by an employee, the work created by the third party is considered to be authored and owned by the business.
The complication is that the “Work-For-Hire” doctrine applies only rarely because it is limited to nine statutory types of works (e.g., a translation, compilation or test), and generally falls outside of most works created for use by businesses. Any work falling outside of these nine statutory types of works will not be considered a “Work-For-Hire,” regardless of the language used in any agreement between the parties. It is therefore almost always necessary to obtain an assignment from the creator of the work if the business wants to own the rights in that work.
Unlike copyrights, patent rights in the United States initially vest to the individual inventor(s) who came up with the invention; a family business cannot be a named inventor and is therefore not entitled to any patent rights absent an assignment of those rights. It is therefore necessary for a family business to obtain assignments from each of the inventors who contributed to the invention.
However, without some sort of agreement with the inventors, the business may not be able to compel assignment, even from employees. The easiest way to obligate employees to assign patents to the family business is to set out clear expectations in an employment or nondisclosure agreement, acknowledged and signed by the employee.
If the family business contracts with a third party in developing patentable ideas, the contractor agreement should also have clear language whereby the contractor assigns all rights in all patents to the family business.
Failure to obtain the proper ownership rights from the inventors can lead to severe consequences. Notably, each patent owner, initially the inventors, is entitled to exploit the subject matter of the patent without needing to seek approval of any other inventor nor share the proceeds of said exploitation. This means that an inventor may be able to start a competing business or make otherwise proprietary technology freely available to everyone. Another significant hurdle is that all owners must jointly file to enforce patent rights, meaning that if there is one non cooperating inventor, it may preclude the enforcement of patent rights against third parties.
Generally, trademarks are owned by the entity that uses the trademark to identify the source of its goods or services, regardless of who originally came up with the mark. This means, for the most part, a family business will own its trademarks regardless of whether they were created by an employee, outside consulting firm, or any other outside third party.
As always there are complicating factors, the most notable of which is for trademarks including significant design elements. In the case of a significant design element, the trademark rights would still be owned by the family business, but the separate copyright in the design element itself could still be owned by the creator.
Unless the family business has also acquired the appropriate rights to use the copyrighted materials, either through an assignment or an appropriate license, the business could find itself in the strange position of owning a trademark that it cannot use because it is prevented from doing so by the design copyright owner.
As the name implies, trade secrets are protectable as intellectual property only to the extent that they are secret. Family businesses should have appropriate non-disclosure agreements in place with employees and third parties needing to know the information. Failure to take appropriate steps to safeguard trade secrets can result in their being distributed without the business having any recourse.
If you take nothing else away from this blog post, remember assignments, non-disclosure agreements, and handbooks:
- Assignments protect the business in acquiring copyright and trademark rights from all non-employees creating intellectual property on behalf of your family business;
- Non-disclosure agreements prevent employees and third parties working for your family business from disclosing its trade secrets; and
- Employee handbooks provide guidelines for ownership and disclosure of intellectual property for employees (and are not binding).