Early Stage Business Considerations: Prioritizing Intellectual Property Protection

Emerging company founders and small business owners have no shortage of issues to think through and solve. Prioritizing intellectual property rights and protection doesn’t often top the priority list.

Most time and energy is rightly focused on building the business, developing products, hiring a team, and finding customers. With these all-consuming matters, it’s easy to ignore or delay addressing legal issues that aren’t screaming for immediate attention.

For every business, there is a laundry list of legal issues that could be addressed – though not every issue is urgent or critical. Delaying action on some of these items may cause additional expense at some point in the future, but would not likely be fatal for a business.

Legal issues relating to intellectual property should be approached differently. Intellectual property is one of the most important assets for most companies. It might be an essential invention that creates a competitive advantage for a company, a software platform created with significant investment in time and capital, or even the designs and logos that set a company apart.

Failure to properly secure intellectual property rights can be catastrophic for a company, and could be the mistake that prevents the company from getting off the ground, raising outside capital, or being acquired. Bringing on legal counsel early to help prioritize intellectual property ownership and protection can help you avoid complex, and potentially expensive conversations later.

What is Intellectual Property?

Intellectual property describes a diverse set of intangible property rights that are protected by state, federal, and international law. Intellectual property rights generally falls into four categories: copyright, patent, trademarks, and trade secrets.

Copyrights protect “original works of authorship” such as website content, designs, and software code, along with the items more typically associated with copyrights, such as books and music. Patents typically protect novel inventions. Trademarks include names, logos, designs, and brand elements that identify the source of certain goods and services. Trade secrets are non-public information that provide a company with a competitive advantage from the information not being generally known.

Securing Your Intellectual Property Rights

The most important step that every business should take with respect to intellectual property protection is to ensure that the company actually owns what it considers to be its own intellectual property — and all intellectual property rights for such intellectual property.

To do this properly, it is essential to understand that, generally speaking, and in the absence of a contract stating otherwise, the creator or inventor of intellectual property is the default owner of the rights to that intellectual property. There are different approaches to securing intellectual property rights depending on whether the creator or inventor is a founder, employee, or contractor.

Protecting Intellectual Property Created by Founders

In most emerging businesses, founders begin working on the company well before the company is formed. It may be a side project they are working on during nights and weekends, or they may have simply been delayed in formally establishing their company. In any case, all of the intellectual property developed by the founder is owned by the founder – not the company.

This is not a critical issue so long as the founder remains involved with the company, but if the founder leaves before the company secures the applicable intellectual property rights, the founder may have the right to take the intellectual property with him or her.

To address this, it is typical for founders to assign all of their preexisting intellectual property relating to the business to the company in exchange for their equity interest in the business. These are typical components of any company formation documents.

Protecting Intellectual Property Created by Employees

Intellectual property created by an employee does not necessarily mean that the employer will own the intellectual property rights, even if it was created within the scope of employment. While state laws may vest intellectual property rights in the intellectual property to the employer, these should not be relied on to protect these essential assets.

To secure intellectual property created by employees, companies should require that the employee enter into a contract at the time they accept employment that specifies that all intellectual property created by the employee during the course of employment, and the rights to such intellectual property, is owned by the business.

These intellectual property assignment agreements may require specific language based on the state where the employee resides. For example, some states will prohibit a company from requiring assignment of intellectual property that is created by an employee during the employment but outside the scope of employment.

Timing really matters for employee intellectual property assignment agreements. In many states, entering into an employee intellectual property assignment agreement after employment has commenced may not effectively assign intellectual property created before the agreement unless the company provides some additional consideration (typically payment) – and ongoing employment may not be sufficient. The best practice is to secure intellectual property assignments prior to commencement of employment.

Protecting Intellectual Property Created by Independent Contractors

Issues with ownership of intellectual property created by independent contractors are the most common. Companies often assume that because they are engaging a contractor or vendor to create specific work, that the company will own that work. But ownership generally follows the inventor or creator. In the absence of a written agreement stating otherwise, the contractor likely owns the intellectual property the contractor created, for example a company’s website, the design of its logo, or its software.

In addition to stating that the company owns the intellectual property, the specific assignment language matters. A contract assigning intellectual property must include a “present assignment,” meaning the contract itself must assign the intellectual property and associated rights, rather than serving as a promise to assign the intellectual property in the future.

For example, a statement that “Contractor will assign to Company…” is generally insufficient because this language is not presently assigning the intellectual property to the company. The following is an example of a present assignment: “Contractor hereby assigns to Company.” While this issue frequently comes up with independent contractors, it applies to all intellectual property assignments.

Looking Ahead: Protecting Your Intellectual Property

Engaging legal counsel in the early stages of building your business can help emerging company founders and small businesses understand what is considered intellectual property, what intellectual property needs to be explicitly protected in contracts, and to whom the intellectual property and associated rights should be assigned.

Instead of worrying about if specific intellectual property needs protecting or is already being protected, engaging with legal counsel to prioritize an intellectual property protection strategy can make the process manageable and scalable.

Efforts to secure a company’s intellectual property are extremely common and faced by most companies. However, it is an area where there can be costly traps for the unwary, which are sometimes impossible to cure. Working with counsel that can advise on these matters is a valuable investment – so that you can continue to grow your business knowing that your most critical assets are secure.

—

Dan Fredrickson is a commercial partner at Koenig, Oelsner, Taylor, Schoenfeld & Gaddis PC (KO Law Firm), an innovative corporate and commercial law firm with a team of experienced lawyers and a practical, efficient, business-focused approach. KO is one of the only law firms in the nation with a dedicated commercial contracts team comprised of attorneys and contracts managers. Reach Dan at [email protected].