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Agreements Copyrights Patents Q&A Trade Secrets

Who Owns the IP for Things a Vendor Creates?

Introduction — Why This Matters

Businesses often hire vendors to develop things for them, perhaps due to a lack of expertise in some particular area or just a lack of capacity.  The vendor might be another firm, an individual independent freelancer, a temporary contractor working on-site, or some other type of consultant. This is often referred to as outsourcing. But who owns the intellectual property (IP) for things the vendor creates? This question should be asked at the beginning of a vendor relationship. Ideally, it should be answered before hiring the vendor.

All too often businesses ignore ownership of IP rights until there is infringement or a big business deal long after the vendor was hired. But cutting corners or forgetting to put IP ownership in writing at the beginning of a vendor relationship can potentially have huge (if avoidable) consequences later on. Businesses do come to regret such oversights later on. For instance, when selling a business, a prospective buyer might raise questions about lack of IP ownership due to vendor or outside contractor involvement, which might present barriers to completing the sale or might lower the purchase price. Or, when there is infringement, a business lacking ownership will not have standing to sue the infringer while the vendor (who still owns the IP) may be unconcerned and disinterested.

A common mistake is to wrongly assume that merely paying a vendor automatically transfers IP ownership or that receiving physical copies (even the sole original) transfers IP ownership. Vendors, for their part, may also be ignorant or misinformed about IP rights. Anyone hiring a vendor should not assume that the vendor understands potential IP issues or that the vendor’s standard agreement (sometimes called a master services agreement) will adequately or satisfactorily address and allocate IP ownership.

Type of IPDefault Owner (Subject to Exceptions)
PatentsInventor(s)
CopyrightsAuthor(s)
TrademarksUser of mark (to designate source)
Trade SecretsRightful owner
Table Summarizing Who Typically Owns IP Initially (In the Absence of an Agreement or Local Law to the Contrary)

Seeking to obtain IP rights from a vendor after the end of the relationship can be difficult. You may find yourself without leverage to insist upon vendor cooperation or the vendor may no longer exist (or be deceased).  And vendors may opportunistically seek windfalls to assign over IP rights after-the-fact.  In worst-case scenarios, the vendor may own the IP and be able to freely commercialize it to your disadvantage, as well as to potentially block further independent development by you.

From the vendor’s perspective, an assignment of IP rights might be undesirable. But this is a question of leverage (bargaining power) and whether the vendor is willing and able to turn down potential new work. Though a common compromise is to provide a license-back to a vendor, allowing certain uses by the vendor while still transferring IP ownership to the vendor’s client. An example is a portfolio license allowing the vendor to show examples of past work to potential clients. What makes sense in any particular situation will vary, of course.

Patents and Copyrights

For patents and copyrights, the general rule in the United States is that whoever creates the IP is the owner.  In the absence of a written agreement to the contrary, this means that a vendor will generally own any patent rights or copyrights stemming from the vendor’s own efforts by default, even if the customer paid the vendor for it.  But there are exceptions.  And it is possible to agree in advance who will own the IP — that generally needs to be in writing. 

“For patents and copyrights, the general rule in the United States is that whoever creates the IP is the owner.”

By statute, transfer of ownership of patents (or a patentable invention) and copyrights must be in writing — though copyright law allows the copyright owner’s duly authorized agent to sign an assignment. Any written document, including purely electronic materials, could include or constitute an assignment if it shows intent to presently transfer ownership rights. The written document should use words like “assigns”, “hereby assigns”, “hereby conveys, transfers, and assigns”, etc. to create a present transfer of ownership. Oral assurances will not transfer ownership of an invention (patent) or copyright; although limited implied non-exclusive licenses or equitable rights (e.g., shop rights) might still arise without being in writing. 

Agreements that constitute merely an obligation to assign — typically phrased in the future tense such as with “will own” or “shall assign” language — do not effectuate an assignment of IP. Rather, obligations to assign require later execution of a separate written assignment. But ambiguous language relating to possible future agreements (such as “shall be owned as agreed upon”) may not even create an obligation to assign.

An important exception under U.S. copyright law involves oft-misunderstood “work made for hire” provisions.  A copyrightable work prepared by an employee within the scope of his or her employment is deemed authored by and thus automatically owned from the outset by the employer.  But vendors and even “internal” independent contractors do not fall within that definition.  Parties without an employee/employer relationship can also agree in writing that a work will be a “work made for hire” but only for nine types of works enumerated in 17 U.S.C. § 101, which may not apply—parties cannot contractually expand those statutory types of works. 

A “work made for hire” is-

(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 [i] as a contribution to a collective work, [ii] as a part of a motion picture or other audiovisual work, [iii] as a translation, [iv] as a supplementary work [see definition below], [v] as a compilation, [vi] as an instructional text, [vii] as a test, [viii] as answer material for a test, or [ix] 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. For the purpose of the foregoing sentence, a “supplementary work” is a work prepared for publication as a secondary adjunct to a work by another author for the purpose of introducing, concluding, illustrating, explaining, revising, commenting upon, or assisting in the use of the other work, such as forewords, afterwords, pictorial illustrations, maps, charts, tables, editorial notes, musical arrangements, answer material for tests, bibliographies, appendixes, and indexes, and an “instructional text” is a literary, pictorial, or graphic work prepared for publication and with the purpose of use in systematic instructional activities.

Definition of copyright “work made for hire” from 17 U.S.C. § 101

The “work made for hire” doctrine is frequently misunderstood. In practice, it might even be single the most misapplied and confusing provision in all IP law. Simply because you pay someone to make or provide something copyrightable is not enough. And even having a contract that purports to establish something a work made for hire may not actually achieve that goal. It is fairly common for contracts to include language about work made for hire that does not apply and has no legal effect. Only things that meet the statutory definition of “work made for hire” are legally effective.

Joint development may also result in joint ownership.  If the vendor and your business collaborate to jointly develop IP, by default they are each the owner of an equal and undivided interest in the entire IP right(s).  Under the patent laws, in the absence of an agreement, co-owners can each independently exploit the invention without an accounting to the other (though all co-owners must join a lawsuit to have standing to sue an accused infringer).  Under copyright case law, an accounting is due to the other co-owner(s) for profits arising from the jointly-owned work to prevent unjust enrichment.  Joint development agreements or the like can set forth various ownership rights in advance and can also govern the handling of relevant pre-existing “background” IP.

All the above concerns also apply to vendors themselves.  For patents, an invention by a vendor’s employee is generally not automatically owned by the vendor.  And if a vendor retains a subcontractor or non-employee then copyright ownership would likely initially vest in the subcontractor/non-employee creating a given work in the absence of an assignment or valid work made for hire agreement.  Therefore, in the absence of a warranty relating to the vendor’s ownership of IP and/or a no-subcontracting contractual provision, or intimate knowledge of the circumstances involved in the creation of the IP, there is no assurance that an assignment from the vendor (alone) will transfer all IP ownership to you. 

Some jurisdictions have different default rules about IP ownership. At least one U.S. state, Nevada, may vest initial ownership of patent rights with the inventor’s employer rather than the inventor by statute. Under common law, a “hired to invent” doctrine may affect patent ownership too, in limited scenarios. Some other countries also have laws that place ownership of an invention in the hands of the employer rather than the inventor. Though sometimes these laws establish only an obligation to assign. It is important to consider the location of the vendor, the location(s) of the individuals involved, and the location(s) were relevant activities took place to determine which jurisdiction’s laws will apply.

Trade Secrets

The rightful owner of trade secret rights will be the party that develops the trade secret information, by default. This means technical know-how, etc. developed independently by a vendor will normally belong to the vendor.  It may be unclear whether relevant trade secrets were part of “background” IP that pre-dated a relationship with the vendor or not, which can potentially become a point of dispute later on.  But a written agreement can be used to establish intended trade secret ownership from the outset. 

On the other hand, confidential information developed by a vendor might lose trade secret status if shared with a client business (or others) without reasonable measures to maintain secrecy. 

Trademarks

U.S. trademark rights accrue to the party actually using a mark in connection with commercial activity to designate the source of goods and/or services.  For instance, a marketing firm creating a brand strategy and identifying a proposed mark for a client would not obtain U.S. trademark rights because only the client business would use (or intend to use) the resultant mark in commerce.  But many other countries have first-to-register systems, which might allow a vendor to register your mark. Ownership of non-trademark rights, such as copyright, in graphical logos intended to be used as trademarks might be a little more complicated and might raise other issues too.

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Articles

Copyright Pitfalls: Ways to Avoid Copyright Infringement and Ownership Disputes

A version of this article appeared in AIPLA’s Innovate Magazine in October 2021.


Mark Twain observed that “[o]nly one thing is impossible for God: to find any sense in any copyright law on the planet.”[i]  From the standpoint of individuals and small businesses, Twain’s observation might ring true.  Not only do some people have difficulty distinguishing between what they feel copyright law ought to entail and what it actually does entail, there are many genuinely ambiguous and confusing copyright issues that arise from everyday practices.  What follows is a collection of observations about a few common copyright infringement pitfalls, meant as a practical reference for those who wish to avoid finding themselves embroiled in an avoidable copyright dispute.

“Free” Materials

“Free” photo and clipart websites and similar archives are used at your own risk.  Unless provided with full indemnity, which usually is not provided, ordinary users are liable for infringement if the “free” image website did not actually have permission to use and distribute the image(s) in question.  Put another way, just because a web site claims to grant free use of images that appear on the site does not mean that the site operators actually have the authority to grant such permission for a given image—the site operator or whoever uploaded an image to the site might be an infringer.  In some instances, there may even be reason to suspect that the alleged owner is aware of the presence of materials in a “free” repository—or was even responsible for placing the materials there—and seeks settlements in bad faith or through outright fraud.[ii]  

Will an “innocent infringer” defense help in these situations?  Not against liability.   Though it potentially limits statutory damages.[iii]  How much it might limit statutory damages is discretionary, it may not limit actual damages,[iv] and it will not prevent an injunction.  In pragmatic terms, innocent infringement defenses do very little in the face of nuisance settlement demands from copyright owners engaged in troll-like enforcement activities. 

“Creative Commons” (CC) licenses are another area where materials turn out to be less usable than believed.  There are different types of CC licenses and a given work subject to one kind of CC license may not permit your intended use, especially if your use is “commercial” in nature.  And, as discussed below, removal of copyright management information (CMI) from CC works is still a potential source of liability.

Moreover, even where a copyright owner freely grants use of a particular image, if it is an image of a person or derivative of another work—like a photo of a sculpture, painting/mural, clothing design, etc.—then separate authorization or release of a right of publicity/privacy (a so-called model release) for the depicted person or copyright authorization for the depicted work may still be required.  Very likely any such additional authorization(s) must be sought from a different person or entity. 

Licensing Stock Images

Many stock image providers offer what seem like intentionally confusing licenses.  “Royalty free” images (and music) are not actually free but rather are usually subject to lump sum license payments—advertisements about the provider’s license terms may be confusing if not outright misleading.  Many stock image providers also offer different types of licenses that are difficult to differentiate.  For instance, the least expensive types of stock image licenses often do not cover use for “merchandising”, use on more than a specified number of hard copies, use with video production budgets over a certain threshold, etc.  Understanding which type of license addresses your particular intended use may not be simple.  Yet, if you purchase an incorrect license you may find yourself in the position of having made an unlicensed use. 

Lastly, stock image providers may not offer indemnity or, if they do, it might be provided at levels well below statutory damage maximums.[v]   Therefore, if you license an image only to later discover that the image provider was not authorized to license that image you could find yourself in a lawsuit with a monetary exposure that may exceed your apparent culpability.  

Outside Contractors and Ownership

You need a written assignment to own copyright in outside contractors’ work.  This holds even when an outside contractor was specifically hired to create copyrightable works, such as advertising copy, software code, photos, videos, etc.  While “works made for hire” are initially owned by the employer, absent a written agreement to the contrary,[vi] that ownership provision only applies when the work is created by an employee within the scope of his or her job duties or if there is a written work-made-for-hire agreement and the work falls within nine statutory categories of works (and, chances are, it probably does not fall in one of those categories).[vii]  In single-member LLCs and similar small businesses where the owner’s status as an “employee” may be in doubt under agency law, and there is no employment or other applicable agreement in place to clarify, then the ownership of copyrights created by such a person may be subject to dispute at some point. 

Outside vendors, like marketing companies, will sometimes have service agreements with their customers stating that the customer will own all of the work product, but such language may be phrased in the future tense, which is generally not sufficient to constitute an assignment of copyright—in such cases only a contractual obligation to assign has been established and an additional written assignment is required for the customer to actually obtain ownership of particular copyrights, though this may vary under state law.[viii] 

Failure to own a copyright prevents enforcement against infringers.  So, if a business hires an outside photographer to take photos for the business’ web site, if a competitor copies any of them the business may find that it does not own the copyrights in the photos and therefore cannot assert infringement until ownership is secured. 

DMCA Takedowns

The Digital Millennium Copyright Act (DMCA) includes a “safe harbor” notice-and-takedown provision in 17 U.S.C. § 512.[ix]  Takedowns can be powerful tools against online piracy but can also be abused or misused.  There are also known scams involving infringers of a copyright using takedown notices to seek nuisance settlements from third parties (who may be protected by fair use) and allegations of usage to silence critics

CMI, Circumvention, and Repair Issues

Liability for knowing removal or alteration of copyright management information (CMI) is set forth under 17 U.S.C. § 1202.  CMI includes the title, author or copyright owner names, and terms and conditions for use.  While the law requires removal to be knowing, rather than unwitting or unintentional, and further requires knowing or having reasonable grounds to know that doing so will induce, enable, facilitate, or conceal an infringement, copyright owners sometimes broadly assert CMI removal to seek additional damages or as a fallback position when substantive infringement claims are unavailable.[x] 

Section § 1201 limits “circumvention” of a technological measure that effectively controls access to a copyrighted work, unless the Library of Congress grants an exception.  Product/repair manuals, error code outputs generated by diagnostic tools, and/or diagnostic tools themselves may be subject to anti-circumvention restrictions stemming from copyright, which can impact the ability to repair a purchased item.  Aside from Section 1201 anti-circumvention exemptions, state right to repair law may provide some counterbalance.  

End user license agreements (EULAs) also bridge copyright law and contract law and attempt to circumvent the first sale doctrine (more generally, exhaustion of rights).  They may limit or prevent the use of unauthorized repair sources or transfer/resale, even if the enforceability of such EULA terms might be questioned in some jurisdictions. 

Predatory Contracts

Finally, buyers sometimes request products from vendors while specifying product requirements (e.g., a fabric pattern or decorative image, included text or video) for which the buyer may not have rights.  That is, the buyer may be requesting an infringing knock-off product without explicitly saying so—and possibly without realizing that copyright infringement is being requested.  All liability for copyright infringement may nonetheless be placed on the vendor by a purchase agreement, including a buyer indemnification that overrides the Uniform Commercial Code (UCC).[xi]  Such agreements might be called predatory contracts where they give the appearance of an opportunity for the vendor when, at bottom, they are really vendor liabilities and the buyer is shifting a greater risk to the vendor than the value of the contract. 

Photo of Austen Zuege

Austen Zuege is an attorney at law and registered U.S. patent attorney in Minneapolis whose practice encompasses patents, trademarks, copyrights, domain name cybersquatting, IP agreements and licensing, freedom-to-operate studies, client counseling, and IP litigation. If you have patent, trademark, or other IP issues, he can help.


Endnotes:

[i] Mark Twain, Mark Twain’s Notebook (A.B. Paine, ed., 1935) quote reprinted at <http://www.twainquotes.com/Copyright.html>.

[ii] See also U.S. v. Hansmeier, No. 19-2386 (8th Cir., Feb. 10, 2021); Jason Mazzone, “Copyfraud,” 81 N.Y.U.L.R. 1026 (2006).

[iii] 17 U.S.C. § 504(c)(2).

[iv] Actual damages may be low or difficult to establish.  See, e.g., On Davis v. The Gap, Inc., 246 F.3d 152, 165 (2d Cir. 2001); Gregerson v. Vilana Fin., Inc., No. 0:06-cv-01164, 2008 U.S. Dist. LEXIS 11727, *14-15 (D. Minn., Feb. 15, 2008).

[v] General business insurance polices may cover non-willful copyright infringement, such as under “advertising injury” provisions. See, generally, David A Gauntlett, IP Attorney’s Handbook for Insurance Coverage in Intellectual Property Disputes (2nd ed., ABA 2014).

[vi] 17 U.S.C. § 201(b).

[vii] 17 U.S.C. § 101; see also Z. Peter Sawicki et al., “Copyright Ownership: A Mere Handshake Isn’t Good Enough” AIPLA Innovate (Sept. 24, 2018).

[viii] E.g., TD Bank N.A. v. Hill, 928 F.3d 259, 274 (3d Cir. 2019); cf. IpVenture, Inc. v. Prostar Computer, Inc., 503 F.3d 1324, 1327 (Fed. Cir. 2007) (interpreting “agree to assign” as requiring subsequent written instrument to effectuate assignment of patent rights).

[ix] See also U.S. Copyright Office, “Section 512 of Title 17: A Report of the Register of Copyrights” (May 2020).

[x] See, e.g., Philpot v. WOS, Inc., No. 1:18-cv-00339, 2019 WL 1767208 (W.D. Tex. April 22, 2019); Mango v. BuzzFeed, Inc., 970 F. 3d 167, 171 (2d Cir. 2020) (A plaintiff must prove the following: (1) the existence of CMI in connection with a copyrighted work; and (2) that a defendant distributed works or copies of works; (3) while knowing that CMI has been removed or altered without authority of the copyright owner or the law; and (4) while knowing, or having reasonable grounds to know that such distribution will induce, enable, facilitate, or conceal an infringement.); Stevens v. Corelogic, Inc., 899 F.3d 666, 673-75 (9th Cir. 2018) (there are two scienter requirements and for the second the copyright owner “must provide evidence from which one can infer that future infringement is likely, albeit not certain, to occur as a result of the removal or alteration of CMI” “such as by demonstrating a past ‘pattern of conduct’ or ‘modus operandi’, that the defendant was aware or had reasonable grounds to be aware of the probable future impact of its actions.”). 

[xi] UCC § 2-312(3) (2002) (“a buyer who furnishes specifications to the seller must hold the seller harmless against any such [infringement] claim which arises out of compliance with the specifications”).