Inventors and authors are often surprised to learn that they have “assigned” all intellectual property rights in everything that they have created or contributed to an employer or a client during the course of the employment or independent contractor relationship. If the creator, author, inventor or developer desires to retain ownership in his or her creation, work, invention or development, it is important to read that contract carefully. Conversely, businesses often incorrectly assume that it they pay for work by an independent contractor, they automatically own the work and all copyright in it. This Article discusses the idea ownership issue in the context of employment and independent contractor relationships.
Many businesses and individuals do not understand or appreciate the fine distinctions between the types of intellectual property at issue in the typical employment and independent contractor relationships, which affect ownership rights. For example, all authors presumptively own the copyright in works that they author.2 “Works” of authorship include software development as well as more traditional publications such as books and articles. Many businesses and individuals incorrectly assume that if the company pays for the work of authorship, then the company automatically owns it. But even if the company pays for the work, that does not affect the independent contractor’s ownership of the copyright, unless there is an express provision in the independent contractor agreement assigning such copyright to the company. Thus, if a company wants to own the copyright in the independent contractor’s contributions, the company must include language in the contract that alters the default ownership rule and effectively transfers the copyright to the company.
The familiar doctrine of “work for hire” or “work made for hire” derives from copyright law; it ordinarily gives an employer ownership of the copyright in works of authorship prepared by an employee. But the doctrine operates differently depending on whether the author is an employee or an independent contractor. Under the United States Copyright Act of 1976, a “work made for hire” means: (1) a work prepared by an employee within the scope of his or her employment; or (2) a work specially ordered or commissioned for use as a contribution to a collective work, as a part of a motion picture or other audiovisual work, as a translation, as a supplementary work, as a compilation, as an instructional text, as a test, as answer material for a test, or as an atlas, if the parties expressly agree in a written instrument signed by them that the work shall be considered a work made for hire. 17 U.S.C. § 101.
The determination of whether an individual is an employee for the purposes of the work made for hire doctrine is determined under the common law of agency, in which a court looks to numerous factors to determine whether an employment relationship exists. In the U.S. Supreme Court case affirming that the common law of agency should be used to distinguish employers from independent contractors in the work for hire context,3 the Court listed some of these factors:
In determining whether a hired party is an employee under the general common law of agency, we consider the hiring party’s right to control the manner and means by which the product is accomplished. Among the other factors relevant to this inquiry are the skill required; the source of the instrumentalities and tools; the location of the work; the duration of the relationship between the parties; whether the hiring party has the right to assign additional projects to the hired party; the extent of the hired party’s discretion over when and how long to work; the method of payment; the hired party’s role in hiring and paying assistants; whether the hiring party is in business; the provision of employee benefits; and the tax treatment of the hired party. See Restatement § 220(2) (setting forth a non-exhaustive list of factors relevant to determining whether a hired party is an employee).
The consequences of an independent contractor relationship can be devastating to the company when it comes to ownership of copyright.4 If an independent contractor or “freelancer,” instead of an employee, created the work, a court will consider the work one made for hire only if the company satisfies all of the following conditions:
Similar confusion over ownership of intellectual property abounds in the “trade secrets” and patents contexts. A trade secret is generally a formula, practice, process, design, instrument, pattern, or compilation of information that is not generally known or reasonably ascertainable, by which a business can obtain an economic advantage over competitors or customers. A patent is an exclusive right granted by the government to make, market or sell an invention. Like copyright, trade secrets and patents are generally assignable, even by independent contractors.
Implied Rights; “Shop Rights”: An employer has the right to use trade secrets developed by employees using the employer’s resources. This concept has been extended to independent contractors: “Trade secrets developed by an independent contractor belong to the one who hired the independent contractor unless the terms of the independent contractor agreement provide otherwise.” Alexander, Lisa E., et. al., Trade Secrets Practice in California, Continuing Education of the Bar – California (2d ed. 2002). Computer Assoc. Int’l, Inc. v. American Fundware, Inc., 831 F. Supp. 1516, 1524 (D.Colo. 1993) (explaining that the distinction between employee and independent contractor is irrelevant to determining ownership of a trade secret); see also Lamb Weston, Inc. v. McCain Foods, Ltd., 941 F.2d 970, 972-73 (9th Cir. 1993) (affirming grant of preliminary injunction to manufacturer asserting rights in trade secret developed by an independent contractor).
Compare Copyright: The distinction between employee and independent contractor is crucial in establishing copyright in work made for hire. Employers own copyright in works created by their employees in the course of employment. In contrast, with limited exceptions (e.g., specially commissioned work or work that is an inseparable part of a unitary whole), independent contractors retain copyright in works made for hire, absent an express assignment. Computer Assoc. Int’l, Inc. v. American Fundware, Inc., 831 F. Supp. 1516, 1524 (D. Colo. 1993) (distinguishing between employers rights in copyright and trade secret).
Trade secrets created out of disclosure of confidential information: Some courts have stated that, when disclosures of a confidential nature are made to an employee or to an independent contractor hired to facilitate the development of a product or process, all trade secrets created out of that relationship are the exclusive property of the employer or the contracting party. See, e.g., Inorganic Coatings, Inc. v. Falberg, No. 94-5479, 1996 U.S. Dist. LEXIS 937 (E.D. Penn. Feb. 2, 1996 ) (citing Computer Assoc. Int’l, Inc. v. American Fundware, Inc., 831 F. Supp. 1516, 1524 (D. Colo. 1993)); Mettler-Toledo, Inc. v. Acker, 908 F. Supp. 240, 247 (M.D. Penn. 1995).
Further complicating matters, the law governing ownership of intellectual property varies from state to state. For example, in California, the Labor Code prohibits employers from requiring employees to assign ownership rights in the employee’s own inventions developed on their own time using their own tools:
Cal. Lab. Code § 2870. (a) Any provision in an employment agreement which provides that an employee shall assign, or offer to assign, any of his or her rights in an invention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employer’s equipment, supplies, facilities, or trade secret information except for those inventions that either:
(1) Relate at the time of conception or reduction to practice of the invention to the employer’s business, or actual or demonstrably anticipated research or development of the employer; or
(2) Result from any work performed by the employee for the employer.
(b) To the extent a provision in an employment agreement purports to require an employee to assign an invention otherwise excluded from being required to be assigned under subdivision (a), the provision is against the public policy of this state and is unenforceable.
§ 2871. No employer shall require a provision made void and unenforceable by Section 2870 as a condition of employment or continued employment. Nothing in this article shall be construed to forbid or restrict the right of an employer to provide in contracts of employment for disclosure, provided that any such disclosures be received in confidence, of all of the employee’s inventions made solely or jointly with others during the term of his or her employment, a review process by the employer to determine such issues as may arise, and for full title to certain patents and inventions to be in the United States, as required by contracts between the employer and the United States or any of its agencies.
§ 2872. If an employment agreement entered into after January 1, 1980, contains a provision requiring the employee to assign or offer to assign any of his or her rights in any invention to his or her employer, the employer must also, at the time the agreement is made, provide a written notification to the employee that the agreement does not apply to an invention which qualifies fully under the provisions of Section 2870. In any suit or action arising thereunder, the burden of proof shall be on the employee claiming the benefits of its provisions.
Further, California Labor Code section 3351.5(c)) provides that if a contract designates the independent contractor’s deliverables as “works for hire,” then the hiring company must cover the independent contractor under its workers’ compensation insurance. This increases the risk that a court or an administrative agency might conclude that the putative independent contractor is actually a common law employee, entitling the individual to employment benefits and wages, and exposing the company to substantial statutory penalties. The putative independent contractor could argue that the inclusion of “work for hire” language supports the existence of an employment relationship.
Ownership of intellectual property is obviously very important to businesses and individual authors, inventors and creators. It is surprising, however, how many businesses and individuals jeopardize IP ownership rights by a lack of attention to the details. In clarifying ownership of IP, it is critical both to examine the nature of the relationship between the contracting parties (e.g., employment or independent contractor), and to define very carefully in the parties’ written agreement, and fully understand, the parties’ IP ownership rights.
1 By Tyler M. Paetkau, attorney, Law Offices of Charles J. Smith III, Redwood City, California ([email protected]; 650-260-1066). Mr. Paetkau specializes in employment and labor law and has practiced in California for 20 years. © Law Offices of Charles J. Smith III, all worldwide rights reserved.
2 U.S. Const. art. I, § 8, clause 8 (“The Congress shall have power . . . To . . . secur[e] . . . to Authors . . . the exclusive Right to their respective Writings . . . .”).
3 Community for Creative Non-Violence v. Reid, 490 U.S. 730 (1989).
4 In contrast, employers generally own all rights in intellectual property created or contributed by employees in the course and scope of their employment. See, e.g., California Labor Code section 2860: “Everything which an employee acquires by virtue of his employment, except the compensation which is due to him from his employer, belongs to the employer, whether acquired lawfully or unlawfully, or during or after the expiration of the term of his employment.”
5 U.S. Copyright Office, Circular 9: Work-Made-For-Hire Under the 1976 Copyright Act.