Out-Law Guide | 02 Nov 2020 | 5:00 pm | 6 min. read
Businesses must put in place processes to ensure they own the intellectual property (IP) being created by or for the business. Failure to do so will result in losing control of the IP, and being unable to exploit its full revenue generating potential.
Most IP is created for a business by its employees. In the UK, IP developed in the course of an employee's employment will automatically belong to the employer, unless agreed otherwise. As this is the default legal position, it is not strictly necessary for contracts of employment to make express provision around this. However, best practice is to confirm the position contractually.
The increased prevalence of homeworking during the Covid-19 lockdown has brought a renewed focus to the issue of employer IP ownership. The line between work and home has blurred and this is likely to lead to more disputes around whether the employee created the IP in the course of employment.
Robust IP ownership terms in contracts of employment are likely to become increasingly important as the fundamental shifts in working practices that we have seen become permanent.
Care needs to be taken in relation to the drafting. Clauses that go much wider than the default statutory provisions could be problematic.
For example, a clause in which the employer purports to own all IP created by the employee relating to the employer's business – whether created in the course of the employee's employment or not – may be unenforceable. Useful additional clauses around ownership, such as moral rights waivers and further assurance provisions, should be included in the employment contract too.
Context will be key in determining the scope of IP ownership clauses in employment contracts. In some sectors, ownership of the IP by the employer will not usually be standard. For example, in the higher education sector, it is common for university academics to retain rights in their academic works, even if created as part of their employment.
However, in general, exceptions from IP ownership by the employer should be treated with some caution. They are likely to raise a red flag when potential investors in, or purchasers of, a business are undertaking due diligence.
The position on employer ownership of IP differs between jurisdictions. Local law advice should be taken in relation to IP created by employees based outside the UK.
The founders of the business, its directors and shareholders may not be employees as such, but they could have an impact on the ownership by the business of some critical IP. Their contracts should include appropriate IP ownership provisions, particularly if their employment status is unclear.
In the case of new start-up companies, the founders of the business will commonly have generated IP in anticipation of the company forming. All IP they have developed should be assigned, or at least licensed, to the company. Buyers or investors will want to see a clear chain of title.
IP can sometimes be registered in the name of an individual involved in the business rather than the company itself. This is most commonly the case for domain names where an administration email is required and so the individual sending that is mistakenly registered as the owner. If the individual has the relevant access details, problems could arise after the employee has left the company, particularly if they part on bad terms.
All registered IP, including domain names, should be in the name of the company and assignments should be put in place where this is not the case. The registration should be in the current company name. If the company has recently had a change of name or acquired some registered IP, it is good practice to review your IP portfolio to check everything is held in the correct and current name.
A common misconception is that if a business pays a third party to create IP – for example, building a website or writing software – then the business will own the IP. The opposite is actually the case. The IP will remain with the third-party developer unless the parties contractually agree otherwise.
Care needs to be taken around the contractual wording used to ensure that it is effective to transfer the IP from third party developer to the business. For example, language such as "on payment, the consultant shall assign to the customer all IP in the deliverables" will not in and of itself assign the IP to the business because it is merely a promise to assign. An additional step would be needed in the shape of an actual assignment to transfer the IP once payment is made.
If the agreement with the consultant is silent on IP ownership, or the drafting used does not work properly to vest the IP in the business, then it is possible for the business to argue that it has an implied licence to use the relevant materials or IP for the purpose for which it was developed.
However, implied licences are very limited and are unlikely to allow additional uses, development or assignment of the IP. Implied licences increase uncertainty around who can do what with the IP, making disputes more likely. An implied licence is also likely to be much more limited than an ownership right, and should only be relied on as a last resort.
If your contracts do not properly transfer or licence the relevant rights to your business, then the solution is to put in place an assignment or licence as soon as possible. This is usually easier to do if there is an ongoing relationship with the consultant but can be more tricky, or impossible, if the relationship has already ended or broken down, or the developer has become insolvent or otherwise disappeared. This underlines the importance of ensuring that the contract works to assign the IP to the business from the outset.
It is also important to check what the contract says around the licensing of pre-existing IP included in the deliverables. It is rare for deliverables to be created from scratch, and is likely to include some of the developer's pre-existing or background IP.
For example, a website designer may use some pre-existing code or templates to develop the website. If this background IP is not licensed to the business, its use of the website will be severely restricted.
Consideration should also be given to whether any third-party IP rights are relevant to the arrangement between the business and the consultant. If so, is the consultant responsible for procuring those rights and how will be rights be licensed to the business?
It is common for group companies to share and use each other's IP without any formal IP licences in place. While it is unlikely that group companies will take infringement action against the others, intra-group sharing of IP can have tax consequences. These can be mitigated by proper tax planning, and documentation of development and ownership of IP and licences.
In addition, IP assets being held in the wrong place in a group structure can cause difficulties in a corporate transaction. This can require IP to be moved around pre-transaction adding time, complexity and cost to the deal.
The critical issue here is to make sure that you do not give away IP to your customers unless you intend to. Your standard terms should be drafted to ensure your rights are retained.
However, care needs to be taken if you find yourself contracting on your customer's standard terms, which are likely to assign the IP to the customer. You may be prepared to agree that the customer owns the IP specifically developed for them under the contract, for example you may do some particular customisation of your software. This is fine, provided you are willing to accept that you cannot use this IP in the future for any other customers.
Where newly developed IP can be more universally used across your customer base then you may want to try to resist assigning it to the customer.
Care needs to be taken around the definition of IP being assigned to the customer. It should be limited to that specifically developed for the customer. You should check, in particular, that the definition of the IP being assigned could not be construed to include your pre-existing or background IP or systems.
The issues around ownership of IP were discussed by IP law experts at Pinsent Masons, the law firm behind Out-Law, in a recent webinar, 'Solutions for Getting Your IP House in Order', which is available to download.
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