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Does Your Company Own its Intellectual Property Rights? Avoid this Common Misunderstanding | FFS Insights

by Mark B. Mizrahi

As attorneys, we oftentimes come across a certain fatal mistake, even among the most promising startups with the smartest and talented entrepreneurs.  This intellectual property error is so egregious that it can completely and permanently derail the fledgling business. And yet it is so easily avoidable — simple precautions can prevent it.

What is the error? Not taking the steps to own all the intellectual property in key areas of your business. If you’re not careful, you may be in the advanced stages of developing an entire company around intellectual property that doesn’t belong to you!

It All Starts with Contractors

Typically, startups have to scurry in the beginning to get everything put together. Entrepreneurs have to hire all manner of contractors to get a business going: a graphic artist for the logo, a developer for the website, a computer programmer, perhaps an engineer…the list goes on and on. But just because you pay for products or services from an independent contractor doesn’t mean you automatically own the fruits of their labor.

Let us repeat that: payment for services rendered to contractors does not necessarily legally transfer ownership of intellectual property to you.

There are Many Ways it Can Go Wrong

It can go wrong in so many ways…

As part of your business, you may offer a service or product that has been licensed to you from a third party. But that license doesn’t mean you own that service or product. The license can be revoked at any time, or worse, the third party could issue that license to your competitor.

Or let’s suppose you have an idea for a product or service that requires other people to build it. You may have hatched the idea, but it takes others to do the drawings, the prototype, the programming, the coding, the labor, the testing…etc. Without agreements in place, anyone along the line can claim ownership of a part or the whole of the product—even if it was your idea.

This problem is everywhere. Even if you are just designing a website or internal materials for a product you do own, you may run into complications without agreements. All the pieces you think you own might be written, engineered, or designed by someone else, including:

  • the core product of your business
  • website design
  • graphic design
  • your logo
  • essence of your identity
  • the look and feel of your brochure
  • written content on your website
  • internal or customer manuals

The default rule is this: the creator of content or inventor of the invention is the presumptive owner unless there is an agreement or special circumstances that demonstrate that the arrangement was otherwise. Even if you hire someone to write your own biography, if you don’t secure those rights ahead of time, you won’t own the story of your own life, at least in the way it was expressed by that author.  One scenario that comes up again and again is the software developer hired by a company.  In certain circumstances, the software developer may own the computer code, with the company only having a right to use it.  This means that the software developer may be able to limit the company’s use or further development of the software and, at the same time, license the same software to a competitor.

You may have a successful business for years without agreements in place, and then once you start to expand, people will start making claims of ownership. People will look for a way to exploit this confusion. And if that happens and you’ve left yourself unprotected, you’ll have nobody to blame but yourself.

Protect Yourself with Ironclad Agreements

In most cases, transfers of intellectual property rights must be in writing. That goes for everything – from fabric patterns to manuals and everything in between. Typically, you will need a combination of a non-disclosure agreement (NDA) and/or an independent contractor/work-for-hire agreement. Sometimes you may need something more. You need to specify that the company, not the contractor, owns the fruits of the contractor’s labor on this project.

Consulting an intellectual property lawyer could be a critical step towards avoiding intellectual property ownership disputes.  Not doing so could be fatal for your company.

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This article is made available for educational purposes and to provide general information on current legal topics, not to provide specific legal advice. The publication of this article does not create any attorney-client relationship and should not be used as a substitute for competent legal advice from a licensed professional attorney.

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