Does your startup own its intellectual property? The answer is often not as clear as it seems | Davis Wright Tremaine LLP

Intellectual property can be one of a startup’s most important assets, especially when it starts to differentiate itself or seek investment. However, ensuring that the startup owns and can protect its rights to the intellectual property in question requires an understanding of the different types of intellectual property and how the rights of each type are acquired or transferred.

If a startup does not properly understand whether or not it owns the IP, it may be at the mercy of third parties or unable to defend its use of the IP against competitors. In addition, failure to take steps to ensure that it owns the rights to certain intellectual properties can be a barrier to raising capital, as investors (and their advisers) will ensure, as part of due diligence reasonable, to verify the intellectual property rights of a startup.

In general, startups own the copyright to works created by employees

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

The confusion arises because there is a limited copyright doctrine known as the “work for hire” doctrine that may apply to non-employees creating works on behalf of a startup. The “Work-For-Hire” doctrine only rarely applies because it is limited to nine statutory types of works that are generally not part of most works created for use by startups. These types of statutory work 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 pre-existing materials,
  • 5. a complementary addition to another work,
  • 6. an instruction text,
  • 7. a trial,
  • 8. answer material for a test, or
  • 9. an atlas.

Any work that falls outside of these nine types of statutory work will not be considered “work for hire”, regardless of the language used in any agreement between the parties.

Thus, if a startup wants to hold 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, logo, or marketing materials.

Patents should generally be awarded to startups

Unlike copyrights, patent rights in the United States vest first in the individual inventor or inventors who invented the invention; a startup itself cannot be named an inventor and therefore is not entitled to any patent rights in the absence of 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 have contributed to it.

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

If a startup contracts with a third party in connection with the development of patentable ideas, the startup’s agreements with those third parties must also clearly state that the third party will assign to the startup any rights it may have to the patent that the third helped to create .

Failure to obtain proper property rights from inventors can lead to serious consequences. In particular, each owner of the patent, initially the inventors, has the right to exploit the subject matter of the patent without needing the approval of any of the other inventors of the patented subject matter or having to share the product 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 advisors, as part of due diligence, frequently request a list of employees and third-party vendors to confirm that the startup has an agreement with each party regarding the disposal of Intellectual property.

Another significant hurdle is that all owners must file jointly to enforce patent rights, which means that if there is a non-cooperating inventor, it can prevent patent rights from being enforced against third parties.

A mark is usually owned by the first party to use it

Typically, trademarks are owned by a startup that uses the trademark to identify the source of its products or services, regardless of who owns the trademark. This means, for the most part, that a startup will own its brands, whether they were created by an employee, an outside consulting firm, or any other outside third party.

As always, there are complicating factors, the most notable of which are brands that include significant design elements. In the case of a significant design element, the trademark rights would still belong to the startup, but the creator of the design element themselves might own the copyright in the design element.

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

Trade secrets can only be protected if they are secret

As their name suggests, trade secrets can only be protected as intellectual property to the extent that they are secret. Startups must have appropriate nondisclosure agreements in place with employees, typically through a Proprietary Information and Inventions Assignment Agreement (PIIA) or employee handbook, and third parties who need to know the information. Failure to take appropriate steps to protect trade secrets may result in them being released without the startup having any recourse.

Takeaway: Make sure your IP belongs to you!

If you take nothing else out of this post, remember Handbooks, Assignments, and Non-Disclosure Agreements: IIAs and employee handbooks provide employees with guidelines on intellectual property ownership and disclosure; assignments are necessary to acquire copyright and trademark rights from all non-employees creating intellectual property on behalf of your startup; and nondisclosure agreements prevent employees and third parties providing services to your startup from divulging its trade secrets.

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