You might assume your business automatically holds the rights to everything your team creates. Whether it is a trademark, copyright, patent, or a valuable trade secret, the ultimate financial value of your intellectual property (IP) rests entirely on your legal ownership of it. Without airtight agreements in place, the employees or independent contractors who researched and developed these assets might legally claim them as their own.
Many business owners only discover this harsh reality at the worst possible times. They might engage a business valuation professional to prepare for a company sale, only to find out they lack the rights to their core products. In other cases, a key employee resigns and takes critical IP with them to a competitor.
To prevent unexpected ownership disputes and protect your company's profitability, you need to take proactive steps. This guide explains how the law views IP creation and what you can do to secure your business assets right now.
Federal copyright law and the laws of most states mandate that workers who invent products, write materials, and develop software may actually be the legal owners of those IP rights. In some states, employers might only be granted a limited license to use the inventions created by their staff. Surprisingly, this can apply even if the employee invented the asset while "on the clock" or by using company resources and equipment.
Fortunately, you can prevent these costly disputes and avoid litigation by putting the right paperwork in place. All states permit businesses to require their workers to sign copyright, IP, and invention assignment agreements, subject to applicable legal limitations.
You should work closely with an attorney who specializes in intellectual property to draft a standard agreement based on your specific state’s laws. This document must explicitly require the employee or contractor to turn over, or legally "assign," all IP rights to your business. Additionally, the agreement should mandate that the worker assist your company’s legal counsel in securing and enforcing these rights if a dispute arises.
Having the paperwork is only the first step. You must apply these agreements consistently across your workforce and enforce them in practice. Inconsistent use can severely weaken your legal position during disputes and create major hurdles during merger and acquisition due diligence.
When you bring new workers on board and require them to sign an agreement, make sure you ask them to identify any pre-existing inventions. These should be explicitly excluded from your new agreement. A new hire might have already patented their own inventions or created trademarks for previous employers, and documenting this prevents messy overlap.
Once that baseline is established, request that they give up claims to any new inventions related to your business activities. This applies even if they develop these related inventions during their nonworking hours.
Let’s say your company develops 3D printing software. Your employment agreement should strictly prohibit your code writers from creating related design tools at home and subsequently selling them to your competitors.
However, if an employee working on her own time and with her own resources develops a completely different software platform that has nothing to do with your business, that IP likely belongs to her. Certain states, such as California, legally prevent employers from claiming such unrelated IP or asking employees to sign away their rights to it.
Safeguarding your intellectual property requires foresight, structure, and legal precision. While an attorney’s guidance is critical for drafting the right documents, financial advisors play an equally important role in this process.
At SD Mayer, we specialize in helping business owners address IP ownership issues long before a potential sale or before a key worker leaves the company. We cut through the complexity to help you identify the precise financial and tax considerations attached to your intellectual property. If you want to protect your assets and optimize your business valuation, contact us today to get started.