OWNERSHIP OF IP CREATED BY EMPLOYEES AND COLLABORATING OR COMMISSIONED THIRD PARTIES
By Lawrence Hoffman
In Parts I and II, we discussed ownership of employee inventions and other IP. We found that, absent an agreement that provides otherwise, the creator of IP often owns the rights to the creation rather than an employer.
We also found that the opposite is generally true, however, with respect to employment related or service inventions, works made for hire and trademarks. These belong to the employer.
In contrast, IP created by a third party from whom it has been commissioned or to whom work has been outsourced, is generally owned by the creator, absent a contract that provides otherwise. An agreement that addresses ownership issues is therefore essential to reduce the chance of a dispute or an unwelcome surprise.
In the case of IP resulting from collaboration, the general rules still apply, but when an invention or copyrightable work is created through the joint efforts of both parties, things often become complicated.
Outsourcing Fabrication and/or Assembly to a Third Party:
Say an employee of the third party (let’s call the third party “T” for convenience) invents an improvement to the product or optimizes some step of the manufacturing process. In the first case, you want to have absolute ownership. In the second case, if the improvement is applicable uniquely or mainly to manufacturing your product, you also want absolute ownership. In these cases, no rights should be left to T or its employee. The outsourcing agreement must therefore include a provision by which T agrees to assign to you all rights to product improvements and manufacturing process improvements, etc. If advance assignment is permitted, a “I hereby assign…’or a (‘I agree to assign, and hereby assign’) clause should be used. If advance assignment isn’t legal, you will use an ‘I agree to assign’ clause. In any event, the outsourcing agreement should require T to take all necessary steps (at its own expense) to secure any necessary written assignments.
There might be a problem if the third party does not have in place employment agreements under which it owns service inventions and other IP created by employees in the course of their employment. You therefore should not outsource to such a third party.
If there is no practical alternative, a possible alternative might be to include in the outsourcing agreement a requirement that any employee assigned to your work must agree in advance (using a “I agree to assign, and hereby assign” clause to assign to you all rights in service inventions other IP created in the course of that work. Again, the outsourcing agreement should require the employer to take all necessary steps (at its own expense) to secure any necessary written assignments.
In any event, the third party must agree to treat any information relating to improvements to your products of processes as trade secrets to the extent possible, to protect the confidentiality of the information, to use it only in execution of the contract with you, and to take all necessary steps to assure that its employees do so as well. The same kind of confidentiality clause you use in your employment agreements can be used here, perhaps with minor modification, and must specify that the confidentiality obligation will apply even after your contract with the third party concludes or is terminated.
If, however, a process improvement is of more general applicability, you can be a bit more flexible. Depending on the specific facts, you might be willing to grant the third party a non-exclusive license (at an agreed royalty or royalty-free if you want to be generous) to use the improvement for purposes other than in manufacturing competitive products. If the improvement is not of particular importance, you might consider allowing T to retain ownership subject to a non-exclusive, royalty-free, perpetual license to you.
Commissioning A Third Party to Develop and/or Design or Improve a Product:
As in the first two situations discussed above, you need to own all the rights, and T must have employment agreements to assure its ability to secure these rights for you. T must also agree to treat all information related to the project as a trade secret and to assure that its employees do so as well.
Commissioning T to Create A Work Subject to Copyright Protection:
This can include advertising copy, a website, or other computer application, or some other work subject to copyright. Much has been written about court decisions interpreting the law in the absence of a contract. Candidly, reading the decisions or commentary about the decisions is itself an aggravation since the dispute could easily have been avoided by a properly drafted contract that assures ownership by the commissioning party.
For a work other than software, there aren’t many problems since contractual interpretation is generally straightforward. However, the laws in some places specify that in the case of photographs and related materials, and other graphic works, the author retains ownership.
In the case of software, Website designs, and other software implemented applications, things can be a bit more complex. 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.
In most places, the default rule is that the author/creator owns the code he or she creates. However, the commissioning party and the developer are free to make whatever contractual arrangements they agree on.
In China, this is provided for in Regulations on Computer Software Protection which provides that the copyright in a piece of software belongs to its developer, “but others may enjoy the ownership on a commissioned or an occupational basis”. Where ownership of commissioned software is provided for by agreement, it is governed by the general principles of contract law.
In the EU, the Directive on Legal Protection of Computer Programs states that the employer shall exclusively be entitled to exercise all economic rights in an employee’s computer program, where a program is created in the execution of the employee’s duties or where the employee is following instructions given by the employer.
There are no community-wide rules governing contractual relations with non-employees.
In the U.S., § 201(b) of the Copyright Act states that “[I]n the case of a work made for hire, the employer or other person for whom the work was prepared is considered the author for purposes of this title, and, unless the parties have expressly agreed otherwise in a written instrument signed by them, owns all of the rights comprised in the copyright”.
- 101 defines ‘works made for hire’ as:
(1) a work prepared by an employee within the scope of his or her employment; or
(2) a work specially ordered or commissioned for use as (a) a contribution to a collective work, (b) a part of a motion picture or (c) other audiovisual work, (d) a translation, (e) a supplementary work, (f) a compilation, (g) an instructional text, (h) a test, (i) answer material for a test, or (j) an atlas.
Software is not explicitly listed though it can be involved in almost any of the categories. Obviously, the commissioning agreement should specify that software implementing or comprising a part of any of such work shall be deemed to be part of the work and subject to § 201.
COLLABORATION AGREEMENTS AND JOINT OWNERSHIP ISSUES:
Implications of Joint Ownership:
Before we consider issues that can arise, let’s take a brief look at the rights of joint inventors or joint authors.
Joint inventors, also referred to as ‘co-inventors’, contribute input to an invention as a whole. Their contributions don’t have to be equal, nor do they actually have to work together. Courts generally treat those who participated in the mental process of conception, i.e., embodiment of an idea in some defined form as co-inventors. Those who only participate in reducing the invention to practice, e.g., building or testing the conceived embodiment, are not regarded as co-inventors.
Co-inventors who have not assigned their rights to a single person or entity have the right to exploit the invention completely independently of each other. In the U.S., that right is virtually unlimited. In most other countries, the right of exploitation is the same, except one co-inventor cannot grant a license without consent of the other co-inventors. In France and China, a co-inventor can grant a license unilaterally, but must share any royalties received with the other co-inventor(s).
Co-authors likewise contribute expression of ideas by actually working together or by working separately on parts of what they intend to be an integrated unitary whole. As in the case of co-inventors, co-authors jointly own the copyright to the joint work but the ownership interest is divided equally rather than undivided. Also, as in the case of co-inventorship, one co-author has the right to exploit the work independently of the others.
When the authors each create parts that are separable, such a chapters of a book or illustrations and text, or even software modules that are completely separate but are used together, they are not co-authors and each separately owns the copyright for his, or her, part of the work.
What is a Collaboration Agreement?
For our purposes here, a ‘collaboration agreement’ is one in which it is contemplated that employees of two separate organizations A and B will work together on a project. A collaboration agreement could also be between an individual and an organization or between two or more individuals. Our concern here will be mostly on agreements between organizations or between an individual and an organization.
A collaboration agreement might be commissioned and funded by party A with the work to be done primarily by party B with input from A’s employees. Alternatively, the project will involve individuals or teams of both A and B working together.
In the first case, where co-inventors or co-authors both work for A as a commissioning party, the situation does not differ from one not involving collaboration. We considered how this should be handled in Part IV.
Where the inventors or authors both work for B, as a commissioned party, the agreement needs to specify that B’s team members have all agreed that service inventions and other IP created during performance of the project are (or will be) owned by B. At the same time, B must agree that it has assigned (or will assign) all such employment related inventions to A.
Problem Areas in Relation to Co-inventors:
Independent Exploitation: Because co-inventors and co-authors can largely exploit their respective ownership rights independently of each other, it is essential that the possibility of separation of these rights be avoided. Failure to do this can be disastrous in several situations that could easily occur. Consider, for example, a situation in which the contribution of a co-inventor I1 employed by A is a service invention and is therefore the property of A. If the contribution of co-inventor I2, whether he or she is an employee of A or B, is not a service invention, I2 will be a joint owner with A.
If I2 grants a license to a licensee L, as permitted under U.S. law, co-owner A will not be entitled to share in the licensing revenue. Nor will A be able to grant an exclusive license if it wishes to do so. Even worse, the license will have created an unwelcome competitor for A. Even in France and China where A would be entitled to its share of the licensing revenue, it is not likely that this will provide adequate compensation to A for the resulting competition. Only if the applicable law requires consent of the co-owners to the granting of a license (or permits A to require this), can this problem be avoided.
Double Patenting: Another potential problem can arise if inventors I1 and I2 create separate parts PA and PB of an invention intended to be used together. I1 and I2 could file a joint application claiming the combination PA+PB but claims to PA and PB separately, would likely provoke a non-unity objection, or the equivalent ‘separate and/or distinct inventions’ objection in the U.S. Also, if I1 is not a co-inventor of part PB, and vice versa, claims to parts PA and PB separately would require separate applications in the inventors’ respective names.
Even apart from the separate exploitation problem, the existence of the three applications would create the risk of one or more double patenting rejections during examination of the three applications or a later invalidity defense. Having two patents for the same invention or obvious variations of a single invention is not permitted in U.S. in Europe, for example.
Even a terminal disclaimer which can be used in the U.S. to overcome an obviousness type double patenting rejection, won’t help since the two patents would be unenforceable by virtue of their separate ownership to avoid harassment of an alleged infringer by the different owners.
Loss of Priority: A third problem is illustrated by the UK case of Edwards Lifesciences AG v. Cook Biotech. Here, there were three co-inventors, Joe Obermiller, Francisco Osse, and Patricia Thorpe. Obermiller was an employee of Cook at the time the invention was made. Mr. Osse and Ms Thorpe were not.
The patent in suit was based on a U.S. provisional application filed in the names of all three inventors. Then a PCT application was filed that claimed priority to the U.S. provisional in which Cook was named as the applicant. The court’s opinion does not explain the relationship between Obermiller or Cook and the other two inventors, but when the PCT application was filed, Cook had not yet obtained assignments from Osse and Thorpe of their rights to the invention. Consequently, Cook’s ownership rights to the invention were only those derived from Obermiller when the PCT application was filed.
Cook ultimately received assignments, but not until 21 months after the filing of the PCT application. And that turned out to be 21 months too late.
In time, the PCT application was approved, and validated in the UK.
At that point, Edwards brought an action in the High Court to invalidate the patent based on lack of novelty and obviousness. One of the documents on which Edwards relied was a publication having an effective date after the asserted priority date. According to Article 4 of the Paris Convention, and under the PCT and implementing laws of the UK, only the original applicants or their successors are entitled to claim priority in an application based on an earlier filed application.
Edwards argued that the document was prior art because, when the PCT application was filed, Cook was not yet the successor to the interests of Osse and Thorpe and therefore not entitled to claim priority to the U.S. provisional. In short, Edwards prevailed in the high Court action and Cook’s appeal to Court of Appeals was dismissed. With no priority available, the claims were found to be obvious over the document.
For our purposes here, the legal arguments are not as important as the facts that led to the result: if you don’t have all the ownership loose ends tied off, you don’t get priority.
Problem Areas in Relation to Co-Authors:
For works of authorship, a similar problem exists when a work is created jointly by authors A1 and A2 intending the work to be an inseparable whole. In such a case, A1 and A2 share the rights equally and are free to exploit the work separately. If A1’s contribution is a work made for hire but A2’s contribution is not, the same problem described above in connection with inventions will arise. This could be an especially bad result in the case of software.
The simplest way to reduce the chance of problems such as described above is to make sure that all the “i’s” are dotted and the “t’s” are crossed in the outsourcing or collaboration agreement. If, for some reason, The parties cannot agree that one of them will own the IP arising out of the work performed by T or out of the collaboration (with perhaps a license to the other party), the best alternative may be to create a jointly owned entity whose profits are shared according to some agreed formula and with one or both parties licensed in some manner.
This article is intended only as general information and is not and should not be considered as legal advice. Advice of counsel should be obtained so that necessary agreements can be prepared to take account of specific facts and `applicable laws.
About the author: Larry Hoffman has a B.S. in Electrical Engineering and Comp. Sci. from Massachusetts. Institute 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 has included 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.