What every business should know about IP ownership

Wednesday, 03 December 2008 01:07 Noric Dilanchian

The legal ownership of intellectual property ("IP") may be unclear if one party uses IP created by another but has no clear legally binding contract, preferably written. Stop reading if that point is understood with respect to employment and independent contractor agreements. What follows is detail.

Various types of contract can avoid numerous IP risks, issues and problems.

Two types discussed here are contracts for employees and contracts for independent contractors. For different perspectives on the subject see Consultant or contractor intellectual property and Employee or independent contractor?

To identify whether there is any IP needing treatment see the reading list at the end of this post.

If there is no clear contract then a legal advisor must read the legal tea leaves. The advisor should first collect the leaves by asking for: (1) a detailed chronology of events, (2) a list of documents, (3) copies of all evidence, including those documents. This work is mentally demanding and time consuming, hence costly.

In the absence of a clear written contract the required advice or judgment call is about this legal question -

Without a clear contract the answer to that question may be - yes, no, maybe - or something else.

IP law regarding IP ownership is easily summarised. Just because one business pays money for creative or intellectual work to be done, and a person or other business performs and delivers the work, does not mean that IP rights (eg under copyright law and patent law) are sold to the first mentioned party.

To illustrate, a business may be left with no IP ownership even if it engages and pays an individual to write software or to do marketing work resulting in the creation of delivered files with text, photos, videos or other content.

This employee or contractor IP ownership question is a common trap for new businesses and start-ups. More so than established businesses they fall into dispute by avoiding or overlooking use of customised written contracts with collaborators. The management term, "collaborator", can include entities working in a collaborative arrangement, eg employees, independent contractors, volunteers, partners, and joint venturers.

Reading legal tea leaves is costly

In legal disputes the transition from "issue" to "problem" is crystallised by letters of demand. In IP ownership disputes they typically end with demands and threats about injunctions.

In a fully blown dispute with many facts and documents to be assessed, it can easily cost A$1,200 to have a lawyer prepare a decent letter of demand. "Decent" means a letter which at least: (1) sets out key facts supported ideally by documentary evidence, (2) lists the legal consequences under specific areas of law, and (3) sets out clear demands and a deadline.

To save legal costs by avoiding a written contract is a decision to make with good counsel. This is because of the complexity of considerations. Here's two aspects to the complexity.

• The answer to the question of whether a person worked as an employee or as an independent contract can vary between areas of law. The laws to consider include employment law, occupational health and safety law, workers compensation, income taxation, and general common law (ie law made by courts). The common law does not have a clear and unequivocal definition of "employee". Instead, the courts look at the whole of the relationship, weigh up all relevant factors together, and then make a judgment about whether the overall relationship is one of employer and employee.
• Further, the answer can vary between the states and territories of Australia when you have to consider workers compensation law or other state-specific legislation. This is one of those crazy realities in modern day law.

These complexities lurk when there is no clear contract. If a dispute arises for legal tea leaf examination the many questions to be examined include those below.

• Was work done for only one employer versus work for several clients?
• Was work supervised versus work being self-supervised or subject to contractually stipulated service or quality standards?
• Were work hours fixed (eg 9am to 5pm) versus work hours being self-determined or having to be completed by a particular deadline?
• Was workers compensation paid versus being independently contracted and paid?
• Was insurance (eg public liability or professional indemnity insurance) paid versus being look after independently?
• Was income tax withdrawn (ie PAYG) and a group certificate issued versus taxation being looked after independently?
• Was superannuation paid [under the Superannuation Guarantee (Administration) Act 1992 (Cth)] versus not paid?
• Were on-costs paid (eg holiday pay, sick pay and long service leave) versus being not paid?

For each bullet point the first option is suggestive of an employer-employee legal relationship.

Prepare a contract and avoid lawyers reading tea leaves

To avoid uncertainty, complexity, mess and costs, a contract solution is almost always readily available.

One or more parties should commission a lawyer to prepare a customised written contract. This is because unlike IP law, with contract law no short summary can be given for the type of required contract and its wording. With contracts there are simply too many variables - legal, managerial, operational and economic. Given the variables often it helps greatly if the lawyer has experience with the relevant industry.

The costs of preparation of a contract vary between situations. It may cost as little as $1,200 to prepare an appropriate contact between collaborators, eg a services agreement with assignment of all IP rights or a software development agreement with an exclusive IP licence of rights, eg for a specific party, territory, duration and subject matter.

The bottom line is that contract preparation legal costs are almost always a lot less than disputes.

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