Employer and employee ownership of intellectual property: Not as easy as you think

Tina A. Syring and Felicia J. Boyd, Barnes & Thornburg, LLP Companies often hire and invest in employees to develop new products, improve processes, create new technologies and develop new markets. With this investment, it should come as no surprise that employers generally own the intellectual property created by its employees in the course of their employment. However, intellectual property that is created by an employee, other than in the course of employment, is owned by the employee not the employer. These simple principles present challenges for employees and employers alike.

Employers should not rely on assumptions of ownership

Intellectual property created during the course of an employee's employment does not equate to the employer's automatic and exclusive ownership of any and all intellectual property. In fact, employers who mistakenly believe that they own such property automatically can pay an expensive price – monetarily and through the loss of inventions or improvements – for failing to protect such intellectual property or effectively securing the rights from employees. Critical to an employer's ownership of intellectual property is a written agreement with the employee, one which specifically assigns to the company any and all intellectual property created by the employee during the course of his or her employment with the company. Such an agreement is often called an "assignment of inventions" or "ownership of discoveries" agreement. Absent such an agreement, the employee may have ownership rights in the intellectual property he or she created while working for the company, even if the individual was specifically hired to invent a particular product or process. To avoid disputes over whether sufficient consideration exists to support the validity of the agreement, employers should require that the agreement is executed prior to the commencement of the employment relationship, and the agreement should reflect that but for the employee's execution of the agreement, the company would not employ the individual. In the event the agreement was not entered into contemporaneous with the start of employment, the employer will need to provide additional, sufficient consideration to support the agreement. Such consideration can include, for example, a promotion, a one-time bonus, or, for example, a grant of restricted stock options. If entered into after the employment relationship has been established, the consideration must be more than a nominal amount in order to support the agreement. A dollar is not likely to constitute sufficient consideration. Also important to the agreement is the inclusion of an addendum, wherein the individual identifies all intellectual property in which he or she has an ownership interest prior to the commencement of his or her employment with the company. If the agreement is executed after the commencement of employment (and sufficient consideration has been provided as noted above), the employer still should have the employee identify all intellectual property he or she believes to own. In the event the employee identifies and claims ownership of intellectual property that has been created during the course of employment and with company resources, and claims ownership to such property, the company should immediately work to determine if the employee truly owns it or if it is owned by the company. By doing this at the outset of the relationship and/or execution of the agreement, employers are proactively mitigating possible arguments later down the road about who owns what. Employers also should make sure the written agreement complies with applicable state laws. For example, certain states require that the agreement include clear language carving out intellectual property created by the employee (i) entirely on his or her own time, (ii) without the use of any company property (e.g., equipment, supplies, facilities or confidential, trade secret information), (iii) that does not relate directly to the company's business or anticipated research or development, and (iv) does not result from the individual's work performed for the company. Some employers require employees to continually disclose intellectual property created outside the realm of his or her employment relationship. Again, this is done to avoid future arguments as to whether the company actually owns such intellectual property. Next, employers should include language detailing what happens if the employee misappropriates and/or infringes upon the company's ownership of intellectual property. The agreement should contain a remedies and relief provision, which includes the right to seek injunctive relief and the recovery of attorney's fees and costs upon demonstration of the employee's breach. Often times, employers forget to include such language and, as a result, there is no meaningful "teeth" to the agreement, causing some employees to be bold in their self-interested actions. Finally, employers should remember to use similar "assignment of inventions" or "ownership of discoveries" provisions or agreements when working with independent contractors. The independent contractor agreement should clearly state that the independent contractor's work of authorship, finished product, invention, or other intellectual property will be owned exclusively by the company, free of any royalty fee or license. The agreement also should state the independent contractor "hereby assigns" all rights in the intellectual property so to eliminate any issues if and when the company pursues a patent or copyright.

Tips for the employer:

1. Determine if you have a written agreement with your employees and independent contractors. If so, does it include an "assignment of inventions" or "ownership of discoveries" provision? Does that provision clearly state the employee "hereby assigns" all rights and ownership in the intellectual property, trademarks and/or copyrights?
2. Make sure the written agreement is supported by sufficient consideration. Was the agreement executed prior to commencement of employment or later? If later, what additional consideration did the company provide to the employee in exchange for his or her execution of the agreement?
3. Have prospective employees and/or independent contractors clearly identify, in writing, any intellectual property they may own prior to commencing the employment or contractual relationship.
4. Periodically have employees update and identify, in writing, any intellectual property in which they believe they own and make sure such intellectual property was created independent of the company's resources and the employees' duties.
5. Conduct exit interviews with employees and independent contractors, reminding them of their contractual obligations.

Start here to protect your company's IP and you're practically there.
THOMSON REUTERS PRACTICAL LAW CONNECT™ Thomson Reuters
Take a FREE TRIAL >

Opportunities exist for employees to own their ideas

Where there is no employment agreement, policies or written agreements to assign rights to the employer, employers may still successfully assert ownership rights in employee inventions created during the course of the employee's employment. The lynchpin to an ownership analysis is often whether the idea was created "in the course of the employment." It is not sufficient for an employer to point to a paycheck and lay claim to all of an employee's ideas. Rather, the idea at issue must have been created during the course of the employment relationship. Thus, close examination of the relationship may reveal that the employee owns the ideas because they were developed outside of the employment relationship.

A primary focus of this analysis will be the reason for the hire of a particular employee. If the employee was hired to create intellectual property as part of their job, the employer will be the owner of the intellectual property. Thus, examination of the written employment contract and the duties described therein can be determinative of the ownership inquiry. Absent a written agreement, the courts will look to the nature of the position and whether the employer gave directives or set goals for the employee to achieve. Ideas which stem from these directives will generally belong to the employer. Consideration needs to be given to all the circumstances.

For example, care must be taken when asserting ownership simply because the idea was conceived or developed at home, during non-working hours or using personal equipment. The fact that an employee used the employer's equipment is not enough by itself to show that the employer should own the intellectual property created with the use of that equipment. Similarly, it is not enough for the employee to claim ownership simply because he or she used their personal equipment or conceived the idea at home. The analysis will delve deeply into the role the employee played at the company and whether the idea stemmed from that role. Thus, the employee in the shower at home who suddenly conceives of the long sought after solution he has been working on at his job cannot claim ownership of the idea simply because the idea arose in the shower. Likewise, an employer cannot claim rights to an employee's creation of a computer software game built at home where the employee's work role bears no relationship to game creation, even where the employee took notes during work hours related to his game ideas or tested those ideas on employer-owned computers.

One must also consider whether there is, in fact, an employee-employer relationship. In many cases, the hire is one of an independent contractor. This too is a multi-factor analysis, but one with significant consequences. Independent contractors generally own what they conceive in the absence of written agreements specifically transferring ownership of the same to the contractor. For example, under federal copyright laws, ownership of copyrightable works is generally held by the author (the individual who creates it), with the express of exception of works made by employees during the course of their employment. This exception does not apply to works made by independent contractors. Independent contractors will own the copyright unless: (1) the work falls within one of nine statutorily specified types of works and there is a written "work-for-hire agreement" between the creator of the work and the company who commissioned its creation; or (2) the copyrights are assigned in writing by the contractor. The nine types of works that qualify as works for hire are narrow: a contribution to a collective work, part of a motion picture or other audiovisual work, a translation, a supplementary work, a compilation, an instructional test, a test, answer material for a test, and an atlas. Fall outside these categories and the copyright belongs to the independent contractor.

Patent ownership, like copyright, is presumptively owned by the inventor, i.e. the employee inventor. Employment agreements will usually require assignment of ideas, including patentable ones, to the employer. Even if such an agreement is not in place, employee ownership may not result in exclusivity of use or exploitation of that idea. The employer may still hold "shop rights" in the process or invention whose development it supported. The idea of shop rights simply gives an employer who provided funding, materials, tools, or work time for the project nonexclusive royalty-free rights to use an invention. The employer may not assign or transfer any shop rights to another unless expressly allowed, with the exception of a transfer of the employer's business as part of a business sale.

Contracts will play a role in the ownership of trade secrets as well. Absent a contract, state law will govern ownership. This is a patchwork of laws and decisions which may assist the employee to assert ownership over a trade secret or attack the notion that the idea is a trade secret, where a contract does not exist or is not sufficiently specific with respect to the idea at issue. If the idea is not protected by copyright, patent or trade secret law, the idea is free for any and all to take, regardless of one's current or former employment relationship.

Finally, trademarks and slogans are not typically the subject of ownership disputes. Trademarks belong to those who use them, not those who create them. Thus, the company which uses a mark to promote a service or good will own the mark and the goodwill associated with that mark. Disputes over trademark ownership in an employee-employer relationship would be atypical.

Tips for the employee:

1. Examine your employment agreement. What did you agree to do? Understand what you sign before you sign it and seek legal advice if you are unsure of what rights you have retained.
2. Look at any other agreements executed and determine whether consideration was paid for the execution of those agreements. Agreements signed after you are employed will be open to challenge if additional, or insufficient, consideration was not provided for these new obligations.
3. Keep records documenting the creation of your ideas on your own time, with your funds and your own equipment. Do not rely on memory and do not assume that ideas worked on at home or on your own time belong to you.
4. Review non-compete agreements to assess their enforceability and reasonableness. Certain states will not enforce any non-compete agreements even those agreements which have the effect of hindering the freedom of employee job changes and which are not labeled as "non-compete" agreements.
5. Were you an employee or an independent contractor? The difference matters in determining ownership and should be reviewed by a legal professional.

This Barnes & Thornburg LLP article should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.

About the authors

Tina A. Syring is a partner in Barnes & Thornburg LLP's Minneapolis office and a member of the firm's Labor and Employment Law Department. Ms. Syring counsels clients on a variety of labor and employment issues, drafts and negotiates executive compensation agreements, and works with employers on the impact of social media. Ms. Syring was selected for inclusion in the 2011, 2012, 2013 and 2014 editions of Minnesota Super Lawyers®, and was named a Minnesota Rising Star by Minnesota Law & Politics. In 2013 and 2014, Chambers USA recognized Ms. Syring as an up and coming lawyer in the area of Labor & Employment: Minnesota.

Felicia J. Boyd is a partner at Barnes & Thornburg LLP's Minneapolis office and is co-chair of the firm's Intellectual Property Department. Ms. Boyd focuses her practice on complex intellectual property litigation and has led plaintiff and defense litigation on a large variety of claims related to patents, copyrights, trademarks, and trade dress. Ms. Boyd was recognized by Chambers USA for her IP Litigation practice and has been included in The Best Lawyers in America for the years of 2010-2015 in the field of intellectual property law. In 2013, Minnesota Lawyer named Ms. Boyd as one of its "Attorneys of the Year" and Minnesota Monthly recognized her as one of "Minnesota's Best Lawyers."

Discover How Thomson Reuters Practical Law Connect Helps You Quickly Find Relevant Resources

Experience firsthand how this new integrated offering can save you valuable time by bringing together the legal resources you need to advise, negotiate and structure your business dealings; all from a single solution.