I Paid For It, Don't I Own It?

My expert on Internet telecom is unavailable until later this week.  As a result, the promised article on VOIP systems will be delayed by a couple of days.  In the mean time, let's discuss ownership of intellectual property.


In the last fifteen years or so, "intellectual property" has become one of the favorite buzz words in industry.  Everyone wants to have it, protect it and, most of all, exploit it.  Which begs the question, what IS intellectual property?

As the name suggests, intellectual property ("IP") is ideas, in particular ideas that are both new and useful.  A car engine that would remove greenhouse gases from the atmosphere would be an example of particularly valuable IP asset.

IP is covered by different sets of laws:

Utility patents protect tangible inventions or discoveries, things you can hold in your hand or which perform a useful function.  The light bulb is the classic example.

Design patents protect the look or styling of a product.  Think of the distinctive shape of a Coca Cola bottle, or the racy lines of your favorite motorcycle.  A design patent can help prevent a competitor from copying these "looks" too closely.

Copyrights protect "works of authorship," such as books, music and computer software.  (Just to add to the confusion, software can also be patented.)

Trade secrets protect information that is valuable, but not publicly known.  Col. Sander's fabled "eleven herbs and spices," is a famous example.  Reportedly only a handful of senior executives know the recipe.

Trademarks and service marks protect company logos, such as the Nike "swoop," the yellow Kodak film box, and even the name "Kodak."  If I tried to exploit Kodak's good name by bringing out a film product named "Coldack," the good people in Rochester would probably be able to shut me down, claiming that my name is too similar to the name they have used for years. 

For today, however, I'd like to focus on patents and copyrights, as they seem to generate the bulk of confusion regarding ownership and use rights.

The default rule in American law is that the person who creates or discovers an IP asset owns it.  Or, to put it another way, the law automatically sees the discoverer or creator as the owner, unless he or she has made an agreement that gives ownership to someone else.  The legal term for such an agreement is an "assignment" and the new owner is generally referred to as the "assignee."

There is an exception to the default rule, called the "works for hire" rule.  It provides that, in certain conditions, assets created by employees in the course of their employment belong to the employer, not the employee.  The rule is not as clear as it might be, and employers are encouraged to include assignment language in their personnel handbooks.  In addition, if an employee is being hired to do research and development, she or he should be asked to sign an individual agreement, assigning rights to any assets created in the course of employment.  "Better safe than sorry."

The default rule can be particularly troublesome when work is outsourced to a contractor.  It would seem logical to assume that "I paid for it; I own it."  Logical, but contrary to the default rule.  You may recall that ten or fifteen years ago, when the Web began to boom, companies discovered that they did not own their Web sites, because they had not secured proper assignment of the page design from the Web developer.  The same, or worse, can happen if the "developer" is a third party programmer who  happens to create the key part of the new application that will help you dominate your industry.  Without proper assignments, you may not have this vital new asset under lock and key.  Rather, the third party might be in a position to charge you outrageous support fees, prevent you from modifying "her" product or even market it to  your competitors.  Any of those would be difficult to explain to the boss.

For all that, one does not always need, or perhaps want, to own all rights to every bit of software one pays to develop.  One may front the cost of vendor's development of THEIR new killer application, in return for a great deal on maintenance and upgrades.  Or one may pay for the development, and allow re-sale of the new product, provided, it is not sold to your direct competitors and provided you get a cut of the profits.  I once effectively owned a major software vendor for several days because no one told me my client was funding vendor's new flagship product.  I therefore provided that my client would own all rights to the new product.  Their attorneys did not see the problem until after the contract had been signed and delivered. 

The lesson is that American law protects the person who creates the IP asset, not necessarily the person who pays for the creation.  Care, and often good legal counsel, are needed to ensure that  your company secures the rights it wants and needs product it is paying for.  But do not stop your analysis with "We paid for it, we want to own it."  Ask, rather "What rights do we need to secure the competitive advantage this product offers?" and then "After we've secured our competitive advantage, can we make additional money off the new product?"

If you can transform Project X from an expensive sunk cost into a competitive advantage AND a revenue stream, that would be something to tell the boss.