Introduction
Intellectual property assets (patents, copyrights, trade secrets, and trademarks) can be sold, assigned, or licensed by the IP’s owner. For companies, IP ownership issues may arise where steps are not taken to ensure that any IP created by or developed by an employee or independent contractor will belong to the company or hiring party. Such issues could have a devastating effect on the company under a variety of scenarios as discussed below. As such, every employee of a company should be required to sign a confidentiality and IP assignment agreement as a condition for employment. Such an agreement obligates the employee to keep confidential the proprietary information of the business, both during employment and after the employment ends. The agreement also ensures that any inventions, ideas, creations, business plans, logos, brands, trade secrets, copyrightable works, or services developed within the scope of his/her employment during the term of employment belong to the company and not the employee.
Similarly, all independent contractors should be required to sign a confidentiality/non-disclosure agreement. If their efforts on the company’s behalf could result in an IP asset(s), the independent contractor should also be required to sign an IP assignment of rights agreement. Examples of IP-related works often developed by independent contractors are: APPs, software programs, prototypes, formulations, websites and logos.
Of all the four types of IP, ownership issues involving copyrights are arguably the most misunderstood as the result of the copyright law’s work made for hire doctrine as defined in 17 U.S.C. § 101.
Copyright Ownership as the Result of a Work Made For Hire
Copyright law may seem deceptively simple compared to patent and trademark law especially with regards to the registration process. Where copyright law can get particularly complicated for the unwary, however, is in the area of copyright ownership. Under U.S. law, the creator or author of the work is the owner of the copyright. But what happens if the work was created by and employee in the scope of his/her employment or by an independent contractor who was hired or commissioned to create the work?
Regarding an employer-employee relationship, the work is generally treated as a work made for hire wherein the employer (and not the employee) is deemed the author and owner of the work. The forms for federal registration of a copyrightable work include a section addressing ownership secured on the basis of a work made for hire.
Regarding an independent contractor relationship, the work may qualify as a work made for hire providing two conditions are met pursuant to the Copyright Act (Act). First, the work must fall into one of the nine enumerated types of works specified in the Act. Second, the independent contractor and the hiring party must have also both signed an agreement agreeing that the work to be created is a work made for hire. If both of these two requirements are met, the hiring party is deemed as the owner of the work created by the independent contractor.
Note the difference between works made for hire by an employee versus those made by an independent contractor. In the latter case, the type of works qualifying as work made for hire are limited by statute and a written assignment agreement is required for all such “statutorily” defined works made for hire.
What happens if the work created by the independent contractor does not fall into one of the nine enumerated types of works in the Act? An assignment of rights agreement executed by the independent contractor will be required for the hiring party to “honestly” claim copyright ownership as the claimant in a copyright registration application.
Why the Distinction Between and Employee and an Independent Contractor Is Important
Take the scenario of software developers who are often hired as independent contractors by startup companies. Software can be copyrighted, but software is not one of the enumerated types of works qualifying as a work made for hire work by Independent Contractors. Therefore, even with a written agreement stating that the software is a work made for hire, the hiring company will not actually own the copyright to the developed software under the Act even though the software developer (independent contractor) was paid to create the software. That is, the software developer may well still be the owner of the software despite the work made for hire agreement. On the other hand software development companies such as Microsoft Corporation that have employees dedicated to developing software are the owners/authors of any copyright-related rights in the software under the work made for hire doctrine. See the U.S. Copyright Office Records for Microsoft Corporation’s registered copyrights where Microsoft is listed as the author of the work as the result of an employer work made for hire.
Copyright ownership issues as they relate to independent contractors may remain hidden and then arise: 1) when a business is being sold and the sale involves intellectual property (IP) assets such as copyrights; 2) in a copyright infringement lawsuit; 3) or a business is being evaluated by venture capitalists or other investors or is involved in an M&A transaction. The buyer of IP assets will want assurance that the IP assets are indeed owned by the seller so that they may be effectively assigned to the buyer by a written instrument signed by the seller and the buyer. A deal could fall through if the seller cannot prove to the buyer’s satisfaction that it – the seller – is the owner of the copyrights and therefore has the right to transfer ownership to the buyer.
As for a copyright infringement lawsuit, standing is a requirement for bringing a lawsuit, namely that the plaintiff is the true copyright owner. A defendant in a copyright infringement lawsuit may be able to use “lack of ownership” as a defense if the work was created by an independent contractor and the work does not qualify as a work made for hire under the Copyright Act. That is, ownership remains vested in the independent contractor and plaintiff does not own the copyright it claims is being infringed under the law. The author of this blog has successfully used lack of ownership of the registered work as grounds for dismissing a copyright infringement lawsuit.
As for scenario #3, the buyer’s due diligence team will also be looking for these agreements with employees and/or independent contractors to ensure that the copyrights (and all of the company’s IP) is owned by the company.
Ensuring the Legally Sufficient Transfer of a Copyright by an Independent Contractor
What steps can be taken to ensure the proper transfer of copyright-related rights from an independent contractor? Where the work(s) to be created clearly fall into one of the nine enumerated classifications specified within the copyright statute, the hiring company should require the independent contractor to sign an agreement wherein the work(s) to be created is designated as a work made for hire with all associated copyright-related rights belonging to the hiring party. This agreement should be executed by both the company and the independent contractor before work on the project commences.
Copyright ownership can also be transferred by an assignment of rights. For her clients, the author includes an assignment of rights provision within all work made for hire agreements with independent contractors as a precaution to cover the situation where the created work may be found to not qualify as a work made for hire after all. Thus, if for whatever reason the work should not qualify as a work made for hire because, e.g., it does not fall into one of the nine enumerated categories, the hiring party would still own the copyright as the result of the independent contractor’s assignment of rights to the hiring party. 17 U.S.C. § 201(d)(1). Any such assignment needs to be clear as to the rights being conveyed and the nature of the underlying works. For a good discussion of how important an assignment of rights provision may be where the work made for hire conveyance by an independent contractor fails, see Capital Concepts, Inc. v. Mountain Technology Corp., et al., WL 6761880 (W.D. Va. 2012). In our software development example, the assignment agreement should also state that the independent contractor is assigning any and all patent and trade secret rights to the company since software may also qualify for these types of IP protection. That is, the company/individual hiring an independent contractor needs to ensure that it is the owner of all potential IP rights emanating from the independent contractor’s work.
We are proud of the legal services we provide to our business and entrepreneurial clients on all matters related to intellectual property law including trademark law. Contact us at 305-279-4740 to discuss any questions related to IP including ownership questions.
Troy & Schwartz, LLC
Attorneys-at-Law
Miami, Florida (305) 279-4740
Where Legal Meets Entrepreneurship™
This blog is for informational purposes only and does not constitute legal advice.
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