[EP 010] Who owns IP relating to your contracts and your organization

I regularly receive questions about who is the actual owner of intellectual property in items created by employees, contractors and suppliers – and often the answer isnt quite what people expect! So in this episode I provide an overview of intellectual property ownership, I explain underlying issues and some of the hidden traps to be aware of, and I highlight tips about how businesses can protect themselves.


Episode Highlights

00:54 What is Intellectual Property

01:50 Ideas vs Expression

02:58 Types of Intellectual Property

03:23 Who owns the underlying rights to intellectual property

05:03 Employment Agreements

06:59 Contractor and Supply agreements

08:26 Making sense of the legal jargon

10:21 Consequences of not having the right agreements at the beginning

13:42 Action Steps

15:31 IP ownership for existing contracts

17:00 Background IP vs Project IP

19:28 Note to Suppliers


This area is an area that I'm asked about regularly in relation to who owns the intellectual property in things created by employees or created by contractors or created by suppliers in providing things like training or design or website development or advertising materials. So given I'm asked about this area all of the time I thought maybe it would be appropriate today to give a bit of an overview of the area and what you can do to protect yourself in relation to this area.

What is Intellectual Property?

Let's start with what is intellectual property. Intellectual property is property of the mind as distinct from real property like for example a table. If a table is stolen, we'll know because the table isn't there anymore. But intellectual property is a little bit more complicated because obviously if intellectual property is stolen it might still be in the original spot but also copied in other places as well. And the issues with intellectual property are not just in identifying whether or not material has been stolen or copied or used without your consent or the consent of the owner of the intellectual property. But there can also be a more confusing element in relation to who indeed owns the underlying intellectual property rights to that intellectual property in the first place.

Idea vs Expression

One of the myths that we should really deal with right upfront is this concept of ideas vs. implementation or expression. It's really important for us to remember that ideas themselves are not protectable. The only thing that we can protect with intellectual property rights are the expression of those ideas. That's one really important thing to bear in mind if what you're trying to do is protect ideas rather than the actual expression of those ideas. What you really need to think about is having the right confidentiality agreement in place because that is the document in many forms that will help you to protect discussion of ideas that you might have in certain contexts. If that's something you're interested in we'll talk about that in another episode. But for today we're talking about intellectual property rights that are capable of protection. We're talking about the expression of those ideas.

Types of Intellectual Property

What type of intellectual property can we have? We can have intellectual property that's created by our employees. We can have intellectual property that's created by contractors or by suppliers. And I guess the question becomes how is it that you can protect yourself in the area depending on who it is that's creating this intellectual property.

Who Owns the Underlying Rights to Intellectual Property

First we'll go back to the general propositions of who is it that owns the underlying rights to intellectual property in each of these areas. If there's no written contract specifying the contrary, intellectual property created by employees of an organisation is usually owned by that organisation, so by the employer, as long as the intellectual property has been created in the course of the employment. Examples of this might be a piece of software, an article, a logo, a product or process, a business plan, advertising material - all of those sorts of things.

In Australia, as I said, the employer owns intellectual property created by an employee. If it's related to the employer's business, unless we have any contractual means for changing that initial position. For employees, this means if they are creating things outside of the business you want to be very careful about ensuring that that is clearly something that you're doing outside of the business not on company time, not using company resources. And if you're an employer and something that your employees are creating has high importance to you, you should ensure that you're protecting yourself properly in the employment contracts that you were using within your organisation.

Employment Agreements

What are the sorts of things that we can have in these employment contracts? We should be clear about the intellectual property belonging to the employer. That means we need to have clauses within these employment agreements that are clear about intellectual property ownership and the bounds of that intellectual property ownership. We should also have moral rights clearance clauses if required and these sorts of clauses will be relevant for some types of employees say for example employees who are creating things like designs that might be then used within your own organisation or indeed provided to your organisation's clients or customers as part of your services. You should have the appropriate confidentiality clauses within the agreement and you should also often have restraints or non-competition clauses if these clauses are appropriate to the situation.

I'm quite often asked whether or not restraints and non-competition clauses can actually be upheld in the area of employment agreements. Once again I'll talk about this in detail in another podcast because it's a really interesting area. But the important thing to remember is yes indeed these sorts of clauses can be enforceable but only if they are appropriate for the circumstances that they're used in. Like a lot of things in the area of law, it's very important that when you have these agreements you're drafting them in the right way so that you're not overshooting or trying to get more than would be reasonable in the circumstances because by doing so you're risking the position that these clauses might be seen as invalid. It's about having the appropriate clauses in these sorts of agreements.

Contractor and Supply Agreements

So we've talked now about employment agreements, how about we moved to contractor and supply agreements. And essentially the issues are similar but the underlying contractual position or position before a contract is slightly different.

Intellectual property that's created by contractors - so that can include any type of supplier to your business or staff that you may be engaged in a contracting type arrangement. This might include advisors or consultants that work on a performance basis. Contractors are often engaged to create a wide variety of materials for an organisation so that can include advertising materials design materials and all sorts of range of materials for an organisation. What is very important to understand is that without a contractual obligation for the contractor to assign the intellectual property to your organisation the underlying position is that that contractor may indeed retain the rights to that intellectual property, with the organisation effectively just having a license to the use of the intellectual property for the purposes for which it was created.

Making Sense of the Legal Jargon

What does all of that mean without all of the jargon? Essentially it means that if you engage a contractor or a supplier to create anything that has intellectual property and it's something that you want to own the underlying intellectual property rights for or your organisation wants to own that underlying intellectual property rights for, then you need to ensure that your contract adequately deals with intellectual property and how that transfers to your organisation. We need to make sure an agreement is in place and that the agreement is in place before work has commenced.

I'll talk in a second about what we do if we have a situation where work has commenced before an agreement is in place. But talking about the ideal situation here. We want the contract in place before the works under the agreement commence. We want to be clear about who owns the IP and when that IP transfers if there is a transfer. Once again, it might be appropriate for us to have moral rights clearance clauses if needed. And confidentiality clauses are another type of clause that are really important to consider including in the agreement.

As with employment agreements, restraints and non-competition clauses can also be a really useful type of clause to enter into these sorts of agreements. They're not always appropriate. And so it's really about working out when these sorts of restraints or non-competition clauses might be appropriate. But certainly in some cases they might be. It's one of those things you should keep in your checklist to ensure that you're considering in each contract or relationship you're engaging in intellectual property is being created.

Consequences of Not Having the Right Agreements at the Start

What are the consequences of not having the right agreements in place at the beginning?

Confusion Over Ownership

The first consequence is that there can be great confusion over who it is that owns the underlying intellectual property rights. This might mean that you can't use the intellectual property in the ways that you had intended. It might mean that once you finish with working together with a particular employee or supplier or contractor who has created these intellectual property rights an argument then arises as to who has the ongoing rights to the use of this intellectual property. It might be that a supplier that has done work for you is now going and using this type of work for a competitor of yours. And if that's something that you wouldn't want then it's important that you're clear in your agreement right from the beginning about the bounds of the intellectual property rights and therefore the restriction on them in using that intellectual property with someone else who might be a competitor of yours.

Impact on Business Sale

This can also impact if your organisation ever looks to sell the business itself or any of the assets of the business because in a sale environment if you can't prove the chain of ownership of intellectual property that is important and underlies the value of the business then you can be eroding the value of the business as it is.

Businesses Engaged in Providing Goods or Services

And finally if you're engaged in the type of services or provision of goods where intellectual property that you have is part of what you are providing to customers or clients, then it's extremely important that it's clear that you own intellectual property to do that. Otherwise you could be on the end of some adverse action from your end customer or client if they find that they don't have the intellectual property rights that they had thought they had. And for example this might play out in the employee or the ex-employee, the supplier or the contractor taking an action against you or your customers or clients for breach of intellectual property rights if this issue isn't sorted out. So it's extremely important to get this clear right from the beginning.

And if you're in the position where you're already engaged in a contract either with an employee or a contractor or supplier where intellectual property is being created or has been created, but you can now identify that there has been some issues in the contracts that have underpinned this arrangement then it's not necessarily too late. You can go after the fact and organise for an assignment of that intellectual property but it's very important that you jump on this as quickly as possible because the more value that is attributed to the intellectual property the more likely it will be difficult to fix this up later and perhaps more costly to fix this up after the issue has arisen.

Action Steps

What are the action steps that we can take moving forward out of everything we've talked about today?

Identify and Understand

The first thing is to identify and understand what intellectual property is relating to your business so make yourself aware of what intellectual property is in your business. Make sure you're asking questions when you're entering into new relationships with suppliers as to whether or not what they are doing for you has some sort of intellectual property basis or issue to consider as part of that.


Then secondly review all of your contracts that are on foot at the moment all that relate to intellectual property that has been created in the past and make sure you have these clauses that I'd gone through earlier on to ensure that you have the right intellectual property ownership structure for yourself in place. Make sure the contracts are clear about who owns the intellectual property and at what point or you know under what circumstances intellectual property transfers are dealt with if there are transfers in place.

Collate and Track

And my last tip is to create an IP register where you collate all of your intellectual property and that has been created for you or by your organisation over time. And there, have reference to any contracts that may be relevant to prove the undetected underlying intellectual property rights.

That's I guess the outline today of the major issues underpinning intellectual property relating to an organisation through its contracts with employees and contractors. I just wanted to turn now to a question that I'd received that led me to talk about this topic because I think it raises some further issues that might be relevant to people who are listening in today.

IP Ownership for Existing Contracts

This question was from a business in relation to a contract that they'd been asked to sign. They were concerned about the ownership of the intellectual property once the contract was entered into and what happens to intellectual property that was going to be created by them for them by the supplier if either party ceased the agreement.

Just to make it clear they're entering into an agreement where various marketing items were being created for them to use in their website and they were concerned about clauses that were being used in relation to what would happen if either party ceased the agreement. I won't read the whole paragraph out, but the paragraph was under the title ownership of materials and intellectual property which is a fairly standard sort of place for these terms to be or clauses to be in a contract. Usually, you'll find these clauses in somewhere where there's a relation a reference to ownership and intellectual property. This particular clause talked about background IP and work product.

Background IP vs Project IP

Now one of the things that I want to explain from the outset is what background IP and project IP or foreground IP or work product IP is because it has a fairly specific meaning and these sorts of clauses are fairly common or clauses where we have these sorts of words being used.

Background IP usually relates to the intellectual property that either party or both parties are bringing to the relationship. That's intellectual property that they have created in the past prior to the commencement of this relationship. And usually foreground IP or project IP or work product IP relates to intellectual property rights relating to something that is being created as part of the project.

Usually, what happens when we're using a background IP versus project IP type clause is we have the opportunity to say that each of the parties bring their own background IP and the other party doesn't get ownership of that background IP. But the customer might often get a license to the use of that background IP to the extent that it's required for them to be able to use the IP that's created as part of the project, so the project IP.

In the project IP clause we usually have wording that says something to the effect of the project IP (i.e. that the intellectual property that's created as part of the project that is being undertaken by these parties together) is owned by, and here you insert whoever it is that you intend owns the intellectual property. If you are the customer in this situation, usually you would then at this point say that you own the intellectual property in the project IP if indeed you want to ensure that you have ongoing rights to the use of this intellectual property that aren't impeded by the supplier so that your right to the use of this project IP continues after the termination of your agreement with the supplier.

There's lots of other things to think about in these clauses so you need to be clear about how the license for the background IP actually works and make sure it works for you in whatever situation you're in and clear about the project IP.

Note to Suppliers

Just a note here for people who are using this where they are the supplier. If you are the supplier in this sort of situation and a customer is asking for full ownership of all intellectual property from the project, which you know isn't necessarily uncommon, and if you are prepared to give the customer that intellectual property, then it's important that if the project intellectual property includes a base of something that you use with other clients you must ensure that you have a background IP clause to ensure that it's clear that the underlying rights of whatever the base is that you had created prior to working with this particular client are still able to be used by you with other clients into the future.

I hope that clears up the area of background IP and foreground or project IP also known as work product IP. It's a bit of a confusing area. If you're confused by any of that or by any of the other areas that we've talked about today just pop over to the show notes talkinglaw.com.au and this episode in relation to who owns IP relating to your contracts and your organisation. And we'll have some downloads there for you in relation to all of these areas that I've talked about today. Downloads in relation to a checklist about how to protect yourself moving forward and make sure that you have the right clauses in place in your agreements from the outset.

Well, thanks a lot for listening in. Hopefully you've found that really useful. And once again if you enjoyed what you heard today please pop over to iTunes and leave us a review. And if you're interested in hearing about me talk about the legal implications of an issue that you're thinking about. I'd encourage you also to go to our website and leave us a message at the website with questions that you would like us to cover off in future episodes. Thanks a lot for listening in and see you next time!