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Who Owns Your Small Business’ Intellectual Property? The Answer May (unpleasantly) Surprise You

Written by Zana Tomich on June 22, 2022 Category: General Counsel and Advice, Startup Law
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Almost every small business, no matter how small, has some form of intellectual property to protect. It might be a trademark (e.g., a logo), a copyright (e.g., a user manual), a patent or other form of IP it owns.

Or, at least, thinks it owns.

In some cases, due to an error or omission, often based on a bad assumption, businesses don’t actually own the IP they thought they did. Because they don’t take the steps necessary to protect their IP, an unfortunate number of small businesses come to find that one of their most valuable assets—their IP—belongs to someone else.

In this article, we’ll discuss what IP is, some of the most common ways small businesses lose their grip on IP, and how to prevent that from happening.

What is Intellectual Property?

The term “intellectual property” encapsulates several different forms of property rights that, as the name suggests, derive from creative works of the mind. A book (copyright) is an example of IP. So is an invention (patent). There are four primary categories of IP: (1) copyrights, (2) trademarks, (3) patents and (4) trade secrets.

In my experience, many small business owners assume that IP is only something that high-flying Silicon Valley technology startups need to worry about. But the truth is that every business owner needs to focus on it—because every business deals with IP of one variety or another.

What’s not always clear, however, is who owns that IP. Just because a small business is using and/or selling IP assets, such as a logo, patented product or trade secret, it doesn’t mean the business owns the IP.

In general, the rule of thumb for IP ownership is that the creator of property owns the property. Ownership rights can be anticipatorily or retroactively assigned by contract to the business. However, small businesses often run into trouble when making bad assumptions about IP ownership rights.

Here are some common examples illustrating IP mistakes small businesses make.

  • Two co-founders start a business selling a software product based on code written by one of the founders prior to starting the business. Without any additional steps by the small business to acquire IP ownership, there’s a high likelihood that the founder/creator of the software owns it, not the business itself.
  • A business hires an independent contractor to handle some of the overflow work its full-time employees can’t get to. Under U.S. Copyright law, an employer is deemed the owner of copyrights in works created by an employee. However, in general, independent contractors own the IP they create, even if it’s created at the business’ workplace and in furtherance of an independent contractor agreement with the company.
  • A business owner decides to rebrand and hires a design agency to develop a new logo. Similar to the situation above, even after the business pays for the agency’s services and begins using the logo, without taking additional steps the copyright to the logo may still reside with the designer who created it.
  • One business buys all the assets of another, including, it presumes, the IP. However, because the purchaser never did its own due diligence on IP ownership, it failed to discover until it was too late that the seller never actually acquired the IP rights to the technology incorporated into its product.

How to Avoid Problems with IP Ownership

In all of the situations described above, and others like them, problems can be avoided by proactively identifying important IP assets and addressing ownership issues related to them in relevant contractual agreements.

For example, in the case of the first example above, where one founder created IP that both founders intended to be owned by the business, that issue can be dealt with as part of an operating agreement between the parties.

Similarly, in a situation where a business is hiring an independent consultant or outside agency to create work for it, it should require written agreements that (1) provide that such engagements are “work for hire” agreements, and (2) require the independent contractor or agency to specifically assign all intellectual property in the work they create pursuant to the engagement.

And there’s one thing small businesses should avoid doing when it comes to protecting their IP: adopting a do-it-yourself approach. Almost every small business tries to cut at least some corners, such as by using form agreements they find on the Internet, in order to save money on legal fees. But when it comes to IP, the consequences of getting it wrong can be severe. It’s not an issue to leave to chance.

A bit of prevention goes a long way toward protecting a business’ most important IP assets.

 

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The business and employment attorneys of Dalton & Tomich take your business just as seriously as you do. Attorneys Zana Tomich and Noel Sterett are trusted by closely held family businesses and others across Michigan and Northern Illinois as invaluable partners and counselors. We guarantee all your calls and emails will be returned within one business day so you can focus on what you do best: running your business.