Finding Capital in the Crowd
May 31, 2014
New Illinois Law Restricts Inquiry Into A Job Applicant’s Criminal History
November 21, 2014

Whose Idea Is It Anyway? Protecting Start-Up IP

Starting a new business is a tricky path dotted with hidden pitfalls. Starting a new business based on intellectual property is even trickier. Without the right IP protections, a start-up business can find itself without ownership of the very assets necessary to create value for the business. Many start-up businesses operate by the cash clause – if I pay for it, I own it. Operating in such a manner, however, ignores the legal landscape regarding inventions, creative expression and other intellectual property. Expending the effort and time to develop basic intellectual property safeguards, such as a company-wide work-for-hire agreement or project-specific intellectual property assignment, can pay for itself many times over.

Start-up businesses should protect their intellectual property from the starting gate by ensuring the creation of their technology and the subsequent ownership of it is protected by a work-for-hire agreement, which specifically provides for assignment of any related intellectual property created to the start-up business. Otherwise, the product’s creator can retain outright ownership of the product with the business receiving only a license to use the product for certain purposes or only with the product creator’s permission. Perhaps worse, a start-up business can end up in litigation later in life or be forced to pay dearly down the road for intellectual property that the business has already paid for.

Work-for-hire agreements originate from the US Copyright Act of 1976, but have since been expanded in use to many forms of intellectual property. Basic work-for-hire agreements provide that the product of an employee or independent contractor’s labor for a start-up business is the business’s property. Work-for-hire agreements are often incorporated into employment agreements to protect against an employee creating a derivative work using the start-up business’s capital and competing with the business for market share and venture capital investments. To ensure that an employee work-for-hire agreement is effective, the Copyright Act requires that the invention is created within the scope of employment. However, to ensure that an independent contractor’s work-for-hire agreement is effective, the invention must be written, specially commissioned by the start-up business, and within one of the nine categories enumerated in the Act, such as a part of a motion picture or other audiovisual work. To protect against the situation where a work-for-hire agreement doesn’t fall within one of the nine categories listed in the Copyright Act, it is recommended that start-up businesses obtain a full assignment of any copyrights or other intellectual property that are related to the work or invention being created. Many start-up businesses should also utilize confidentiality agreements to protect against employee disclosure of business plans and data, expressed but unexplored ideas, and trade or company secrets.

In Illinois, a statute called the Illinois Employee Patent Act, 765 ILCS 1060/2, protects the intellectual property rights of employees as to inventions which are created under certain circumstances. Businesses in Illinois cannot require assignment of any employee invention to the business if the employee invention was created without the use of any of the business’s equipment, supplies, facilities, unless the employee invention relates to the business, the business’s anticipated development, or from any other work performed by the employee for the employer. Businesses which require employees to assign invention rights as part of their employment agreement must include a provision stating the employee’s rights under the Employee Patent Act. Employees bear the burden of proving that their invention falls under the protections of the Act to retain the ownership rights to those inventions.

In the rush to develop and launch a product, establishing protections for the business can fall by the wayside. However, negotiating a written work-for-hire agreement with an absolute intellectual property assignment can go a long way toward ensuring that a business owns the intellectual property it commissioned and paid for.

To protect its intellectual property, a start-up business should:

  • Ensure that a written agreement is entered into with the employee, inventor, or developer specifically spelling out the ownership and use rights of both the start-up business and the developer.
  • Ensure the written agreement includes absolute assignment language to protect against a situation where the copyright isn’t owned from creation by the start-up business.
  • Ensure that however the intellectual property is created and stored that it is done so in a manner that the code, platform, files, or specifications can later be transported to either the start-up business’s employees for further development or to a new developer for completion.

Seek intellectual property registration and protection at the earliest opportunity.