Do you really own your IP? Or you think you do?

Every business starts with an idea that took shape in someone’s mind and made its way to the market.

But are the ideas protected? The Idea and concepts do not have protection. Only the expression of idea is protected. The Idea must be expressed in a tangible format to be protected under the IP Laws.

Many a times IP is created or developed even before the company is incorporated. It is crucial for the Company to own the Intellectual property. A company must own or have license for what it makes, use, sell, license, or distribute otherwise it is potentially breaching someone else’s intellectual property rights.

What happens if your company breaches someone else’s intellectual property? What happen if your company does not own or control all its IP?

  1. If the Company commits breach of any IP owned by third party, it may lead to potentially expensive legal dispute often resulting the breaching company to pay hefty amount as damages and alter their product or the process or enter into expensive licensing agreement with the IP Owner; or
  2. Where the IP is developed by the Consultant and in absence of any agreement/ documents to effect the transfer of IP from the Consultant to the Company, the Company will be forced to pay over-the-odds for IP that it should have owned in the first place. (This typically occurs where a disgruntled Consultant leaves and is unwilling to transfer the IP, except for a hefty fee); or
  3. The company will be unable to prevent competitors or counterfeiters from using IP rights that it does not own; or
  4. One of the founders may leave the company and sets up a competing business that makes use of the IP that the founder created; or
  5. Failure to secure necessary IP rights may also undermine the value of the company and its assets. Potential investors / acquirers will expect your company to have full and unencumbered ownership and control over the IP that it requires to conduct its business. If a potential investor / acquirer discovers that your company does not own the IP that it should, then your company may suddenly become less attractive; or the transaction may collapse; or if the transaction does not collapse, then there will be unavoidable delay to the transaction until the issue is resolved. This can be particularly troublesome if the company is in desperate need of financing and increases costs, fees, and expenses.
  6. The position may be worse still if an investor / acquirer discovers an issue after the completion of the transaction as the Founders will typically have provided warranties and indemnities in their personal capacity that the company has full IP ownership. You may therefore find yourself the subject of a legal claim for the investors’ / acquirer’s damages.

Therefore, it is absolute necessary for the Company to own or control all its IP. Subject to any agreement in contrary, the company will generally own the IP in whatever produced by its employees during their employment. However, there are number of situation where the work is not carried on by its employees makes the actual position complicated. Imagine you have spent crores of rupees in Research and Developing the product, advertisement and marketing etc.. and you realise you do not own the IP at all.

Below are few scenario for your better understanding:

  1. Typically, Founders create, develop and/or register IP before the incorporation of the company. For instance, it may be a trademark, a domain name, brand name, algorithm, develop website, prototype Web application etc. Any IP created by the founders prior to the incorporation of the company will be owned by the founders and not the Company.
  2. Mostly as the work begins before the company is incorporated, so the people working on are not the employees of the company. They would be your friends or Freelancers working on a specific project, as consultant. When the Consultant creates a work, they normally retain the IP in that work, unless there is an agreement in contrary.
  3. One unusual situation is when the employees are not made to sign these pre-assignment and IP assignment agreements.
  4. The situation is more complicated when a third party is involved. Companies (Client) engage the vendors (Vendors) to develop a Software by executing the “Development Agreement” between them. Most of the Companies use a standard template of Development Agreement, which typically state that (i) all IP developed by the Vendor’s employees and contractors under the agreement will be assigned to and owned by the Client; or (ii) the Vendor “hereby assigns” (and in some cases, agrees to assign), to the Client, the IP developed under the Development Agreement. Such Development Agreement contain only an undertaking for the transfer of IP right and does not provide specific deeds of assignment of IP or other documentation to effect the transfer of IP by the Vendor to the Client, that are mandated by the law.

One should understand that in India, the IP ownership varies under different IP laws.

  1. Section 17 of the Copyright Act 1957 specifically assigns the copyright to the employer if made in the course of employment (unless there is a contract to the contrary).
  2. However, there is no explicit provision in the Indian Patent Act 1970 that clarifies the ownership of the patent invented by the employee under the aegis of the employer. Under the Act, an inventor will be the first owner.
  3. As regards assignment of designs, the Designs Act, 2000, mandates a procedure like patent assignments.

How do we deal with this? How to ensure Your Company owns its IP?

Following steps will help you identify the issues and tackle the same.

  1. Make sure the sooner the Company is incorporated, the Founders assigns their IP rights to the Company by executing and registering IP Assignment Agreement.
  2. Maintain a written record of when and who created or who helped to create the IP for the business and have relevant contracts in place for each of them.
    •  ensure that all employees have signed an employment contract that: (i) assigns or agrees to execute deeds of assignment of IP to the company immediately on creation; (ii) waives all moral rights to the fullest extent permitted by law; and (iii) in case of Invention and Designs, execute and register Patent or Design Assignment Agreement and all necessary documentation to effect the transfer of IP by the Employee to the Employer.
    • ensure that all consultants have signed a consultancy agreement that: (i) assigns all IP to the company (ideally with “full title guarantee”); and (ii) waives all moral rights to the fullest extent permitted by law. If not, enter into a written IP assignment or moral rights waiver with the consultant;
    • check that all third-party companies that have developed products / services for you: (i) have assigned all IP to the company (ideally with “full title guarantee”); and (ii) provided a warranty that all moral rights have been waived to the fullest extent permitted by law. If not, an IP assignment and/or moral rights waiver will be needed; It is suggested that a format of the deed of assignment must be agreed upon and preferably a draft should be annexed to the Development Agreement, broadly identifying the development work to be carried out by the Vendor. This will act as prima facie proof of the nature of IP rights that may be developed and that the parties have validly agreed that the Client will own such Vendor’s developed IP.
  3. Create awareness about the importance of IP among your employees and have an IP policy in place.

This article contains general information only. It does not constitute legal advice. You should consult a suitably qualified lawyer on any specific legal matter or issue.