New Year’s Resolution: Get a Handle on Intellectual Property

Every business relies on intellectual property, whether it is created by the business or licensed from third parties. It is embodied in software, branding, marketing content, proprietary processes and the everyday work generated by employees.

Many companies overlook a critical question: Do you own the intellectual property you use and generate every day? Missteps can lead to costly disputes and loss of essential assets.

Copyright

Copyright protects original works of authorship fixed in a tangible medium. By default, the individual creator owns the work. Under the “work made for hire” doctrine, employers own works created by employees within the scope of employment. The work performed by independent contractors are generally owned by the independent contractor, unless the work is within one of the nine categories enumerated in the Copyright Act and the subject of an express agreement in writing. If the work is not a work made for hire, a proper assignment is required for the employer to own the copyright to the work. Courts apply common law agency factors to determine the applicability of the work made for hire doctrine, making clear agreements ideal to avoid ambiguity and litigation.

With regard to works created through the use of artificial intelligence (AI), courts require human authorship for copyright protection to attach. AI-assisted works may qualify for copyright protection if human contributions are original and expressive as required by the Copyright Act.

Trade Secrets and Patents

A company’s trade secrets derive value from being secret and require reasonable measures to maintain confidentiality. Generally, employers own information created by an employee as part of the employee’s assigned duties. This includes not only patentable inventions, but also to customer lists and other valuable business information. In the state of Nevada, all trade secrets and patentable inventions “developed by … [an] employee during the course and scope of the employment that relates directly to work performed during the course and scope of the employment” belong to the employer. In contrast, the state of California does not have legislation providing for automatic ownership in the employer, but, rather, has legislation that limits the effect of a broad assignment of invention clauses in employment agreements.

Generally, individual inventors are the initial owners of patentable inventions. Employers should obtain written assignments to secure rights to patentable art conceived of and reduced to practice by employees. Doctrines such as “hired-to-invent” and “shop right” may grant employers certain rights without proper assignments, but these doctrines are limited and fact-specific.

Clear contractual language in enforceable employment agreements—especially regarding future inventions and trade secrets—is ideal.

Trademarks

Trademark rights arise from use in commerce. Problems can occur because of missteps during formation of a business enterprise, registration of trademarks with the U.S. Patent and Trademark Office and at the time of dissolution of entities. To avoid problems, parties should agree upfront on trademark ownership and disposition if the enterprise ends, and be diligent in managing trademark rights.

Right of Publicity

State laws govern the right of publicity, which protects an individual’s name, image, voice and likeness. Commercial use, like in an advertisement, requires consent. Businesses should obtain consent to use one’s name, image and likeness to prevent disputes.

Examples of How Things Can Go Wrong

When a company starts out, generally one or more of the founders of the company will organize the fictitious entity, create content for the website, brochures, designs for a trademark logo, develop goods or software, take photographs, etc. Then, a dispute arises whether the entity owns the intellectual property or if the individual does. To avoid the ambiguity that may arise, it is best for startup companies to utilize “work made for hire” agreements, containing appropriate assignment provisions, an assignment of previously created material or a license agreement clearly stating who owns what.

In Woods v. Resnick, 725 F.Supp.2d 809 (W.D. Wisconsin 2010), friends Woods and Resnick teamed up to create financing software. Resnick had the idea and developed a “working prototype” of the idea but needed someone skilled in computer programing to create the financing software. He turned to his friend Woods because of Woods’ skills in computer programing. They began working together using the trade name “F & I Source.” Woods worked full time out of his home to develop the financing software and Resnick continued to work full time at another job.

When the software was completed and ready to be sold, Resnick and Woods formed F & I Source, LLC to develop, maintain and license the financing software. They were co-presidents and 50-50 members of the limited liability company. The relationship soured. Woods and Resnick disputed who owned the copyright to the software. There was no “work made for hire” agreement. The district court concluded that Woods was not an employee of F & I Source, LLC because various facts did not establish him as an employee and Woods completed the source code before F & I Source, LLC was formed. See also Billy-Bob Teeth, Inc v. Novelty, Inc., 329 F.3d 586, 591 (7th Cir. 2003) (corporation failed to establish ownership under “work made for hire” theory because the entity did not exist when the author created the work).

In JustMed, Inc. v. Byce, 600 F.3d 1118 (9th Cir. 2010), brothers-in-law Just and Byce came up with an idea and together secured a patent. Later, Just formed JustMed, Inc., and Byce became a shareholder. After an employee of JustMed stopped working on source code necessary for the product, Byce took over the development of the source code. Among other facts:

[a]t trial, Just testified that Byce was hired as an employee to replace Liebler, who was also an employee, and that Byce agreed to be paid a salary in shares of stock. Byce, on the other hand, testified that while he expected to be adequately compensated in shares upon transferring ownership of the source code, he never understood himself to be an employee and had no “explicit knowledge” that he was accruing shares as compensation.

JustMed, Inc, 600 F.3d at 1121.

The Ninth Circuit agreed with the district court’s analysis that Byce was an employee when he wrote the source code and that JustMed owned the copyright as a work made for hire. Id. at 1128.

Takeaways

Use written agreements (work for hire, assignment, licenses) at the start of every relationship. Conduct thorough due diligence into ownership and proper licensure of intellectual property assets when acquiring assets from third parties or merging with other entities. Review employee agreements, handbooks and state laws for intellectual property policies. Obtain consent for commercial use of all rights of publicity.

Arthur Zorio aggressively represents clients in litigation of intellectual property and business disputes in addition to providing advice regarding protection and management of intellectual property assets. He is licensed in Nevada and California and has litigated disputes in several additional states.