Intellectual property often sits at the core of a company’s value, but many businesses assume ownership without actually securing it. That assumption breaks down fast during a sale or dispute. If your agreements aren’t airtight, the people creating your IP may legally own it, not you.
To prevent unexpected ownership issues and costly disputes that could create risk and diminish your business’s value, take action now.
Some companies learn they don’t actually own IP assets only when they’ve engaged a business valuation professional in preparation for a sale, or when employees leave and take IP with them.
What the law says
Federal copyright law and the laws of most states mandate that employees and independent contractors who invent products, write materials and develop software may be the owners of the IP rights. In fact, in some states, employers may only have a limited license to inventions created by employees, even if they were invented “on the clock” or using company resources.
Fortunately, you can help prevent ownership disputes, including litigation. All states permit businesses to require workers to sign copyright, IP and invention assignment agreements, subject to applicable legal limitations.
Work with an attorney who specializes in IP to draft a standard agreement based on your state’s laws. It should require the employee or contractor to turn over or legally “assign” IP rights to your business. In addition, it should mandate that the employee or contractor assist your company’s legal counsel in securing and enforcing these rights. It’s also important to apply these agreements consistently and enforce them in practice, because inconsistent use can weaken your position in disputes and merger and acquisition due diligence.
Go a step further
When you hire workers (or when you require them to sign an agreement), make sure you ask them to identify all pre-existing inventions that are to be excluded from the agreement. For example, they may have patented inventions on their own or created trademarks for previous employers. Then request that they give up claims to any new inventions that are related to your business activities, even if the inventions are developed during their nonworking hours.
For example, let’s say your company develops 3D printing software. Your agreement should prohibit your code writers from creating related design tools at home and then selling them to your competitors. If, however, an employee working on her own time and with her own resources develops software that’s unrelated to your business, that IP likely belongs to her. Some states, such as California, prevent employers from claiming such IP or asking employees to sign away their rights to it.
Legal and financial advice
Intellectual property issues often surface at the worst possible time. Taking steps now to formalize ownership and strengthen agreements can help avoid costly disputes and protect business value. If your company is developing or relying on IP, contact your Rudler, PSC advisor to review your current agreements and identify potential gaps.
RUDLER, PSC CPAs and Business Advisors
This week's Rudler Review is presented by Connor Josselyn, Staff Accountant and Brooke Kramer, CPA.
If you would like to discuss your particular situation, contact Connor or Brooke at 859-331-1717.
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