BY LAWRENCE HOFFMAN
PART II – IP OWNERSHIP ISSUES
In Part I of this three-part series, we introduced you to the many kinds of intellectual property in a computer game and to different kinds of protection that may be available. You saw the different kinds of creativity involved in game development, e.g., storytelling, graphic arts, computer programming, and perhaps even a composer/lyricist.
If your talents cover all of these, you are surely a rare individual. More likely, you will need help in at least one of these areas.
Help can come in the form of a joint venture with one or more others having the skills you lack. Or you can form your own business and hire people to work for you, either as employees in the traditional sense or as independent contractors. In the case of a joint venture, there will be an agreement defining the business relationship and will most likely provide that all IP will be owned by the business.
If you decide to go it alone, you must make sure that the work created by the people you hire will belong to your company. That will, of course, also apply to the joint venture option when the time comes for it to add employees. As we will demonstrate below, the basic rules are different for employees and independent contractors and from country to country. There are default rules that apply in the absence of a contract, and even when there is an employment agreement, there will be limitations as to what can go in it. There are also different rules for different kinds of IP. You will need to take into account all these issues.
It is not our purpose to make you an expert on these issues. You have enough on your plate just developing the game itself and running the business. What we want to do, is to alert you to the issues so you won’t fall into any traps. You are definitely going to consult with a labor law expert to help you deal with the universe of issues that exist, and with an IP expert to deal with the issues we discussed Part I. We just want to make sure you know when it’s time to seek legal help.
If, you wish to delve further into the details of this subject, you will a six-part series on ownership of IP entitled Ownership Of IP Created By Employees And Collaborating Or Commissioned Third Parties (referred to below as the “Article”) on our website. Listed below are the several parts of that article and links for access:
Part I: Who Owns Employee Created IP
Part II: Employment Contract Provision Concepts
Part III: Compensating Employees for Their Inventions
Part IV: Protecting Trade Secrets During and After Employment
Part V: Non-Competition Agreements
Part VI: Agreements With Third Party Contractors And Collaborators
Issues That Will Come Up:
In the rest of this part, we will introduce you to the following issues:
- rules that apply to ownership of IP created by employees (Article, Part I);
- compensating employees for their inventions (Article, Part III);
- protecting trade secrets during and after employment (Article, Part IV);
- post-employment non-competition agreements (Article, Part V); and
- agreements with third party contractors and collaborators (Article, Part VI).
We will also provide a checklist of common types of provisions related to IP ownership often used in employment agreements.
General Rules as to Ownership of Employee IP:
Before we get into the details, you need to keep in mind three guiding principles you need to follow:
- Always have written employment agreements and agreements with independent contractors;
- Always include provisions dealing with IP ownership; and
- Writing the agreements in not a do-it-yourself activity.
Following these principles will go a long way toward avoiding ownership disputes and nasty surprises.
For those of you who will have employees in the U.S., you should be aware that some practitioners counsel against following the first of these guidelines because of concerns that an agreement may be interpreted by a court to prevent terminating an employee for cause. A well-drafted agreement should minimize these problems and will avoid uncertainty in other areas, so on balance, a written agreement is still a good idea. But even if you don’t have a written agreement covering general employment conditions, an agreement regarding IP ownership is a must.
Who is an Employee:
You would think that if there are written laws that govern ownership of employee-created IP, the laws would tell you to whom they apply. In fact, they generally don’t. Instead, they are structured to correlate ownership with the nature of the activities performed by persons assumed to be employees. Let me give you a simple example from Israel’s copyright law: “[T]he employer is the first owner of copyright in a work made by an employee in the course of his service and during the period of his service, unless otherwise agreed”. Laws in many other countries follow a similar pattern in assuming an employment relationship and focusing on the employee’s duties.
So, does it really matter if the person is an employee? Yes, it does because the law as to ownership of IP created by independent contractors are usually very different from that which applies to employees and the scope of possible relationships is less regulated. As we will see in Part III, it can also matter when employers try to enforce copyrights in Country A that they own based on the laws of their home Country B, and find that they are not the owners under the laws of Country A.
In broad terms, though, the traditional common view of the nature of employment is a reasonable place to start, and will be sufficient for our purposes. Thus, persons to whom you pay a regular salary and provide legally required benefits, who work for you full time, who use your company’s facilities and equipment, and whose activities you direct and control, are likely to be considered as employees.
With that in mind, you can concentrate on spelling out in you employment agreements the duties of your employees, the foreseeable types of IP that may result from their work, and the ownership of that IP. Don’t forget, however, that labor and employment laws cover a wide range of issues not related to IP ownership, e.g., related to employee rights, work conditions, etc. that must be taken into account.
To be sure you don’t have problems in such matters, you should keep handy the phone number of a labor lawyer wherever you will have employees.
Ownership of Copyrights:
Ownership of copyrights is the most complex subject you will need to deal with as a game developer because of the many aspects of video games in which copyrights can arise. It is also the area in there can be the greatest country-to-country variation.
In general terms, works created by employees pursuant to their assigned duties, and related to the business of the employer belong to the employer. Under U.S. law, such works are called “works made for hire”. The copyright statute defines this as “a work prepared by an employee within the scope of his or her employment”. Although this term does not appear in the laws of other countries, the concept is virtually universal. For convenience, we will just use the U.S. term.
Sometimes, employer ownership extends to all works for hire and to all rights comprehended within copyright law. The U.S. is an example of this. So are Israel (per the provision quoted above), Japan and the UK.
In other jurisdictions, there are limits as to the kinds of works that become the employer’s property even if they are effectively works made for hire as defined by the applicable law. Sometimes all works for hire are the property of the employer, but some of the rights afforded under the laws remain with the original author. Germany and France are examples of countries having complex laws of that kind.
Chinese copyright law is a hybrid of all-inclusive and limited rights. In brief, the law provides If the work is completed mainly by using the material and technical resources of the employer and the responsibility for the work is borne by the employer, then the copyright shall be owned by the employer. Such works include the product design drawings, maps and computer software. However, the actual creator of the work retains the “right of authorship”, i.e. the right of attribution.
The copyright in other works created by an employee belongs to the employee. However, though the employer retains the right to use the work for purposes of its business and the employee is not permitted to authorize a third party to exploit the work in the same way as the employer, without the consent of the employer.
Two points to note – (a) the ownership rights noted above can be changed by agreement, and (b) compensation to the creator of a work to which the employer is the copyright owner is optional.
These general rules apply to computer games as well as other works of authorship. However, as noted in Part I, aspects of games other than the software are also generally subject to copyright, and this is true in China as well. Ownership of the entire range of protectable aspects of games should therefore be provided for in the employment agreements.
A comprehensive discussion of the aspects of video games covered by copyright (as well as those covered by other types of IP) appears in Part I of this series.
A trademark belongs to the user or to one who asserts intent to use an adopted mark according to applicable law. (In China, priority of filing for registration alone is sufficient to establish ownership if other requirements are met.) Nevertheless, your employment agreements should list among the possible duties of your employees the creation or development of trademarks and that all rights related to the mark belong to you. Trademark development work in progress should also be acknowledged by the employee as a trade secret while it remains unpublished.
Under U.S. law, as stated by the Supreme Court, if there is no agreement as to IP ownership, inventions made by employees belong to the employee even if the invention was made in the course of employment or where the employee made the invention on his own time using company resources and facilities. In such cases, the employer is given only a non- exclusive, non-transferrable license (“shop right”) to practice the invention. There is one exception for employees specifically “hired to invent”. Inventions by such employees belong the employer.
Unfortunately, that’s not much of an exception as the courts have interpreted it. The idea was first applied by the U.S. Supreme Court in 1870 to persons “specially employed to make experiments with a view to suggest improvements”. Under present U.S. law, the exception applies only to “a person employed to make an invention who succeeds, during his term of service in accomplishing that task”. Otherwise, absent a contract, the inventor is the owner.
In the U.S., there is no nationally applicable statutory law that governs ownership of employee created inventions or other IP in private industry. The U.S. is perhaps the only major country in which this is true. Therefore, if the inventor is working in the U.S., you will need to conform to the law of the state in which he or she works.
Nine states have enacted laws that define the kinds of inventions that do and do not belong to the employer in respect to persons employed in those states. These are typically stated in terms of enforceability of contract provisions. The provision in the law of the state of Washington is typical, and is actually one that can be used as a guide for ownership clauses everywhere in the U.S.
Under Washington law:
A provision in an employment agreement which provides that an employee shall assign or offer to assign any of the employee’s rights in an invention to the employer does not apply to an invention for which no equipment, supplies, facilities, or trade secret information of the employer was used and which was developed entirely on the employee’s own time, unless (a) the invention relates (i) directly to the business of the employer, or (ii) to the employer’s actual or demonstrably anticipated research or development, or (b) the invention results from any work performed by the employee for the employer. Any provision which purports to apply to such an invention is to that extent against the public policy of this state and is to that extent void and unenforceable.
The last sentence is an example of a provision that categorically forbids requiring an employee to assign inventions that do not fall within the description of (a) and (b). Some of the other state laws do not include this prohibition. Of course, that does not preclude the employee from voluntarily assigning such inventions to the employer in return for suitable compensation.
In other parts of the world, national law determines ownership of employee inventions, Generally, all countries provide that employee inventions (however that term is defined) belong to the employer.
Under § 132(a) of the Israeli Patent Act, for example:
An invention by an employee, arrived at in consequence of his service and during the period of his service (hereafter: service invention) shall, in the absence of an agreement to the contrary between him and his employer, become the employer’s property.
Note that the concept of “service invention” under Israeli law is unusually broad and has been taken to cover even inventions made on the employee’s own time related to the employer’s business. However, it is still essential for the employment contract to specify the employees expected duties, the possibility of additionally assigned tasks and a few other provisions in the Patent Act related to service inventions.
In Europe, the law of the place of employment generally determines invention ownership. You will therefore need to consult a lawyer familiar with the law of any country whose laws may apply to your activities. Just as a relatively simple example of what you might encounter in Europe, in the UK, an employee invention belongs to the employer if “it was made in the course of the normal duties of the employee or in the course of duties falling outside his normal duties, but specifically assigned to him, and the circumstances in either case were such that an invention might reasonably be expected to result from the carrying out of his duties”. An invention by an employee having “a special obligation to further the interests of the employer’s undertaking”, e.g., senior management personnel or directors, also belongs to the employer.
The laws in France and Germany are much more complex. Don’t even think about trying to navigate these without legal guidance.
Under Chinese law, an invention made by a person in execution of the tasks of his or her employer, or made mainly by using the material and technical means of the employer is considered to be a “service invention” and the right to apply for a patent belongs to the employer. An interesting additional feature is that a service invention is explicitly defined as including any invention made within one year after retirement or other termination of employment if it relates to the employee’s duty or the other task entrusted to him by the employer. As we will see later, holdover provisions of this kind are often included in employment agreements, but extending the legal definition of a service invention in this way appears to be unique to Chinese law.
Compensating Employees for their Inventions:
Laws governing compensation for service inventions exist in most industrialized countries, the U.S. being a notable exception. Briefly summarizing:
- Compensation may be specified as a one-time ‘reward’ payment or as ‘remuneration’ based on consideration of multiple factors. In some cases, e.g., in China, both a one-time reward and remuneration based on profit from the invention are provided for.
- Rewards are usually stated as specific amounts while remuneration is based on consideration of a set of specified factors. These are usually stated in very general terms and are often highly subjective.
- Contractual variations from the statutory schemes are usually permitted, in some instances, however, only if they provide benefits more generous than statutory minimums.
- In some countries, the right to compensation can be waived. In others, waivers are not enforceable.
- In some instances, administrative bodies are established to decide the amounts of remuneration. In other instances, the matter is left for judicial determination or for determination by the employer, subject to the requirement that the compensation be ‘reasonable’.
- Some form of appeal is usually provided for.
Outside the U.S., the compensation scheme should be specified in the employment agreement. Even where the agreed compensation can be less than what is specified in the statute, using the statutory minimum (or a more generous provision) may avoid problems during negotiation.
In the U.S., compensation is purely voluntary but is not uncommon. Further details and examples are discussed in Part III of the Article. As a general matter, providing compensation should be considered as it might help attract talented individuals whose services are likely to be in demand in this very active field.
Protecting Trade Secrets During and After Employment:
As in the case of trademarks, ownership of trade secrets is not an issue. Instead, the concern is to assure that employees will maintain the confidentiality of such information. In Part I [insert link] of this series and in part IV of the Article we explain what kinds of information can be a trade secret, and what you, the employer, need to do to keep the information confidential. In the employment agreement, the employee needs to acknowledge his understanding that he or she may become aware of or participate in the creation of trade secrets and other confidential information, and must include the employee’s commitment that such information will not be disclosed to other employees or third parties without express written consent an authorized member of the company’s management team. This commitment must explicitly apply both during the term of employment, and after termination of employment.
Post-Employment Non-competition Agreements:
Non-competition agreements (NCAs) don’t address IP ownership as such, but rather are intended as a backup for other kinds of protection. Their purpose is mainly to minimize the possibility that knowledge of trade secrets and other confidential information gained during employment will be disclosed (intentionally or unconsciously) to a competitor, to prevent contact with customers of the former employer or independent contractors working with the former employer, and poaching of other current employees. Such agreements restrict worker mobility and therefore are quite controversial. The permissible scope is subject to strict regulation almost everywhere. In California, they are permitted only in three specific situations. In North Dakota and Oklahoma, they are categorically illegal.
As a general matter, NCAs that meet legitimate needs of the former employer without unreasonably restricting the former employee’s access to future employment will be enforced. In evaluating NCAs, courts consider:
- Geographic scope;
- Definition of future employers for which the ex-employee may not work;
- The nature of the work performed by the former employee.
In broad terms, restrictions of up two years are sometimes permitted, but one year limits are more common. In the UK, the normal limit is six months. Geographic scope has traditionally been important, but in the digital age, with online sales a growing consideration, and in the case of employees whose activities not geographically restricted, it will likely be a secondary factor, certainly in the case of those working in the field of computer game development. Limits on the types of prohibited employers may be extremely important; prohibiting employment by software developers generally or in creative fields ancillary to game development would likely not be permitted. Other things being equal, prohibiting employment in the field of game development is likely to be permitted.
Finally, application to low level employees not involved in development or other creative work or in marketing etc, would likely not be seen as meeting a legitimate business need of the former employer or would be subject to shorter restrictive periods and/or more restrictive geographic limits.
Sometimes, the reason for termination of employment is also considered. Some countries will not enforce NCAs against wrongfully terminated employees although this is the exception rather than the rule. Where it is considered, it is generally given some weight along with the other noted factors.
In some countries, an employee subject to an NCA must receive compensation during the restriction period. An example of this, in the UK, an employee who decides to depart or is terminated is sometimes placed on “gardening leave”: he or she remains employed and receives a salary and benefits, but is required to stay away from the workplace and not to engage in any activity related to the employment, e.g., contacting customers, employees, or independent contractors. This is often keyed to a notice of departure or termination provision in the agreement.
One final thought – a NCA should be in the initial employment agreement. If it is contained in a separate or later agreement there must be separate consideration or it will not be enforced.
Agreements With Third Party Contractors And Collaborators:
Stated simply, absent an agreement to the contrary, IP created by independent contractors or collaborators belong to the creator, or perhaps his or her employer, even though you paid for the work. There are no exceptions to this default rule. That may sound terrible, but the bad implication is illusory since contracts with such parties are governed only by the general law of contracts. You are free to provide by agreement that you will own any IP created pursuant to the agreement.
That’s easy when the third party is an independent contractor, especially in the case of an individual. Where the third party is a company whose employees will be working on your project, you must be sure that third party has agreements in place with its employee(s) providing that it owns the IP created pursuant to the contract with you, and it assigns such rights to you, in advance if possible under applicable law.
A possible complication may arise if the subject of the commissioning agreement is software development. A software developer is going to want to be free to incorporate re-usable code in future projects, and will likely resist your effort to take title to all parts of the commissioned work. While there is a practical justice to this, you, the commissioning party, need to be able to own what you have paid for. You may wish to deal with such an issue by granting the developer limited rights to reusable code for applications other than computer games
Things can get a bit more complicated when IP results from work of employees of the third party with creative or inventive input by your employees, or in the case of a joint venture between your company and the third party. For example, you need to be sure that the employment agreement with your employee includes collaboration with employees of third parties as one of his or her duties and that IP resulting from such collaboration is a service invention or a work for hire. The employment agreements of the third party must contain a corresponding provision.
In a true joint venture, both parties are likely to want to benefit from commercialization of the project. This can be provided for in various ways, for example by establishing a jointly owned marketing and IP ownership company or by comprehensive IP ownership and revenue sharing provisions in the collaboration agreement. Needless to say, employer ownership of IP created by employees of the parties must not be left in doubt.
An Employment Agreement Provision Checklist:
Let’s complete this Part with a brief summary of the kinds of provisions concerning IP ownership often included in employment agreements. Keep in mind, however, that this is not intended as a DYI recipe. The examples are only to clarify the topic headings and may not be suitable, or even legally enforceable, in all places. You can find more detail in Part II of the Article (link provided above), but when all is said and done, a proper agreement can only be prepared by experienced counsel fully aware of your factual situation.
- Consideration – e.g., “In consideration of my employment, and for other good and sufficient consideration, receipt of which I hereby acknowledge, I agree as follows:”
- Description of Duties – e.g., “ I acknowledge that in the course of and within the scope of my employment, and as part of my duties, I will be creating, either alone or in collaboration with other employees or with third parties (hereinafter, for convenience, called IP created by me), one or more kinds of IP related to computer games, including, but not limited to, software, software related inventions, game story lines, game characters, character dialog, melodies, lyrics, graphic images, trademarks, promotional and instructional materials for use in various media, to incorporate or to adapt existing materials in IP created by me or others, to participate in planning business strategy.”
- Assignment of IP – e.g., “I hereby assign, and agree to assign to the Company, all my rights to IP created by me during my employment to the full extent permitted by applicable law”.
- Moral Rights – e.g. “I hereby waive all moral rights or other rights associated with authorship as to works subject to this agreement to the extent permitted by applicable law.”
- Assignment of “Holdover” lP – e.g., “For the same consideration mentioned above, I also hereby assign, and agree to assign to the Company, all my rights to IP related to computer games or other subject matter related to work I performed in the course of or during my employment created by me during the six month Holdover Period following termination of my employment by the Company to the full extent permitted by applicable law”.
- Burden of Proof – “I agree that I shall have the burden of proof that any IP created by me during my employment or during the Holdover Period is not subject to my assignment or obligation to assign in the event of a dispute with the Company as to ownership of such IP”.
- Notification – “I agree that I will promptly inform the Company of any inventions I make during my employment, and of any other IP that is subject to this agreement created by me during the six months following termination of my employment”.
- Previously Created IP – e.g., “On Annex A to this agreement, I have listed all IP related to computer games created by me prior to commencement of my employment by the Company. I agree that I shall have the burden of proof that any IP not listed in Annex A was created prior to commencement of my employment, in the event of a dispute with the Company as to ownership of such IP.”
- Non–Disclosure – e.g. “I acknowledge that during the course of my employment, I may create or become aware of technical know-how or business information (including IP created by me as it which applications for protection have not yet been made) and which the Company regards as a trade secret or as otherwise confidential. I agree that I will not disclose such confidential information to other employees or to any third party during the period of my employment and thereafter without express written authorization by Company management. I further agree to inform the Company if I learn of any unauthorized disclosure by others and will assist the Company in mitigating any damage to the Company resulting from such disclosure”.
- Non-Disclosure Obligations to Others – e.g., “I hereby acknowledge that I am obligated to honor the terms of a non-disclosure agreement entered into with a former employer. I have complied with that agreement in all my discussions with the Company to date. I agree that I will continue to comply with the requirements of that agreement in the course of my employment and in respect to any post-employment relationship I have with the Company.”
- Compensation for IP Assigned to the Company – e.g.,” I acknowledge that I understand and accept the Company’s policy concerning separate compensation for IP I create that is subject to this agreement as stated in Annex B hereto.”
- Post-Employment Non-Competition –e.g., “In consideration of my employment, other consideration provided to me, which I acknowledge to be good and sufficient, I agree that for a period of one year following termination of my employment by the Company, whether voluntary, for good cause or for any other reason, i will not work as an employee as defined under applicable law, as an independent contractor or consultant or in any other capacity with any other party whose business activity includes development or marketing of computer games or which seeks to hire me for the purpose of entering into such business activity and I will not establish a business, alone or with others, to engage in such business activity. I further agree that during the aforesaid one year period, I will not contact customers of the Company or any third parties with whom the Company has an agreement related to the Company’s business and will refrain from response to any such customer or third party that initiates contact with me, other than a categorical request for no further contact. I further agree that during the aforesaid one year period, I will not solicit any person employed by the Company to leave his or her position with the Company to disclose Company trade secrets or other confidential information to me or to others.”
- Alternative Dispute Resolution (ADR) “I agree that all disputes arising under this agreement (or specifically as to IP ownership and compensation only) shall be submitted for mediation pursuant to (rules or procedures to be specified). I further agree that any dispute not resolved by mediation, shall be submitted for binding arbitration before (arbitration authority and/or rules to be specified) to the extent permitted by applicable law”.
- Applicable Law and Court Venue – e.g., “All disputes arising under this agreement shall be decided according to the laws of (specify jurisdiction). Any litigation arising from such disputes shall be heard by (specify the court).”
About the author: Larry Hoffman has a B.S. in Electrical Engineering and Comp. Sci. from Mass. Inst. of Technology and a J.D. from the George Washington University School of Law. He has been a lawyer since 1965 specializing in IP law and product liability defense. He is registered to practice before the U.S. PTO, the U.S. Court of Appeals for the Federal Circuit and the state and federal courts in New York, Maryland, and the District of Columbia. His work includes preparation and prosecution of patents in countries throughout the world, and counseling on IP and product safety matters. He has been involved in the trial of close to 100 lawsuits of various kinds. You can reach him at Lawrence@ipatent.co.il.