Does Your Startup Own Its Intellectual Property? The Answer Is Frequently Not as Clear as It Seems

Intellectual property can be among the most important assets that a startup owns, especially as the startup begins to distinguish itself or seek investment. Making sure that the startup actually owns and can protect its rights to the intellectual property at issue, however, requires an understanding of the different types of intellectual property and how the rights for each type are acquired or transferred.

If a startup doesn't properly understand whether or not it actually owns intellectual property, the startup might be at the mercy of third parties or rendered unable to defend against competitors its use of intellectual property. Moreover, not taking steps to ensure it owns the rights to certain intellectual property can be a roadblock to raising capital because investors (and their counsel) will, as part of due diligence, be sure to ascertain a startup's rights to intellectual property.

In General, Startups Own the Copyrights to Works Created by Employees

In general, the creator of a work owns the copyright to that work. The notable exception to this rule is that the rights to works created over a normal course of employment are considered to be authored and owned by the employer – not the employee. This employment exception, however, applies only to actual employees, not third parties such as independent contractors or third-party vendors hired to create works on behalf of the startup.

Confusion arises because there is a limited copyright doctrine known as the "Work-For-Hire" doctrine that can apply to non-employees creating works on behalf of a startup. The "Work-For-Hire" doctrine applies only rarely because it is limited to nine statutory types of works that generally fall outside of most works created for use by startups. These statutory types of works are:

• 1. a contribution to a collective work,
• 2. a contribution to a motion picture or other audiovisual work,
• 3. a translation,
• 4. a collection of preexisting materials,
• 5. a supplementary addition to another work,
• 6. an instructional text,
• 7. a test,
• 8. answer material for a test, or
• 9. an atlas.

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.

Therefore, if a startup wants to own the rights to a work created by a non-employee, it is almost always necessary for the startup to obtain an assignment from the non-employee creator of the work. This is especially important for essential assets such as a website design, a logo, or marketing materials.

Patents Usually Must Be Assigned to Startups

Unlike copyrights, patent rights in the United States initially vest to the individual inventor(s) who came up with the invention; a startup itself cannot be a named an inventor and is therefore not entitled to any patent rights absent an assignment of those rights. It is therefore necessary for a startup to obtain an assignment of the rights to an invention from each of the inventors who contributed to it.

However, without some sort of agreement with the inventors, a startup might not be able to compel the assignment of a patent, even from employees. The easiest way to obligate employees to assign patents to the startup is to have each employee sign a proprietary information and inventions assignment and confidentiality agreement (PIIA) and to set out clear guidelines in an employee handbook or other type of employment agreement that the employee has acknowledged and signed.

If a startup is contracting with a third party as part of developing patentable ideas, the startup's agreements with those third parties should also clearly state that the third party will assign to the startup all rights they may have in the patent the third party helped to create.

Failing to obtain proper ownership rights from the inventors can lead to severe consequences. Notably, each owner of the patent, initially the inventors, is entitled to exploit the subject matter of the patent without needing approval from any of the other inventors of the patented subject matter or having to share the proceeds of said exploitation. This means that an inventor could start a competing startup or make otherwise proprietary technology freely available to everyone. For this reason, before making any investment, investors and their counsel, as part of due diligence, frequently ask for a list of employees and third-party vendors to confirm that the startup has an agreement with each party concerning assignment of intellectual property.

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.

A Trademark Is Generally Owned by the First Party That Uses It

Generally, trademarks are owned by a startup 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 startup 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 that include significant design elements. In the case of a significant design element, the trademark rights would still be owned by the startup, but the creator of the design element itself could own the copyright to the design element.

Unless the startup has also acquired the appropriate rights to use the copyrighted materials, either through an assignment or an appropriate license, the startup could find itself in the strange position of owning a trademark that it cannot use because it is prevented from doing so by the owner of the design copyright.

Trade Secrets Are Only Protectable If They Are Secret

As the name implies, trade secrets are protectable as intellectual property only to the extent that they are secret. Startups should have appropriate non-disclosure agreements in place with both employees, typically through a Proprietary Information and Inventions Assignment Agreement (PIIA) or employee handbook, 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 startup having any recourse.

Take-Away: Make Sure Your IP Is Yours!

If you take nothing else away from this post, remember handbooks, assignments and non-disclosure agreements: P IIAs and employee handbooks provide employees with guidelines for the ownership and disclosure of intellectual property; assignments are necessary to acquire copyright and trademark rights from all non-employees creating intellectual property on behalf of your startup; and non-disclosure agreements prevent employees and third parties providing services to your startup from disclosing its trade secrets.