Companies are making ever-greater use of third-party contractors to assist in the development of proprietary technology and processes. By using third-party contractors rather than employees, companies hope to save money, gain flexibility in managing resources and spend more time on core business operations. In most cases, a company engaging contractors wishes to own the work product those contractors create. Yet enterprises need to take certain precise steps to ensure that they obtain the desired intellectual property rights in such work product.
Generally speaking, copyrights, patents and trade secrets are the three principle types of intellectual property rights that companies are most often concerned about when engaging third-party contractors for technology and process developments. There are differences in each of these rights, and companies may need to take different steps to convey ownership in such rights.
In the U.S., copyright is a creature of federal law. The U.S. Copyright Act grants copyright protection in “original works of authorship fixed in any tangible medium of expression.” Software is an example of technology that qualifies for copyright protection.
As a general rule, the author of a work owns the copyright in a work. There is an exception to this rule for “works made for hire.” Works made for hire essentially fit into two categories:
- Works prepared by an employee (which are owned by an employer)
- Works “specially ordered or commissioned” by the engaging party and that meet certain statutorily defined characteristics (which are owned by the engaging party)
In many cases, technology deliverables that contractors create will not fit within the definition of “works made for hire.”
Fortunately, even if the contractor-created work is not a work made for hire, the copyright in such work can still be transferred by a written assignment document that the copyright holder signs.
A few things should be noted though in connection with copyright assignment documents:
- Use clear descriptions. The engaging party should not simply describe contractor-created works as “works made for hire.” Recent case law has shown that such a description is not sufficient to convey ownership if the deliverable that the contractor created does not fit within the statutory definition of a “work made for hire.”
- Contractors can cancel assignments. If an item is not a work made for hire, the author of the work (such as an individual contractor) can, in certain instances, cancel any copyright assignments of such works within a five-year window of time that can commence as early as the 35th year after the copyright assignment.
- Employees/contractors of contractor. Companies should ensure that their contracting and consulting firms have proper copyright assignment contracts and processes in place for their own contractors and employees.
Subject to certain qualifications, under U.S. patent law inventors can obtain patents on any “new and useful process, machine, manufacture, compositions of matter … or improvement.” Generally speaking, the patent right initially belongs to the inventor (i.e., the natural person who developed the invention). Inventors can assign their patent rights provided they execute a clear written assignment instrument.
If a company engages a contractor to develop an invention, the company should ensure that it has a written agreement with the contractor in which the contractor:
- Is required to promptly disclose any inventions
- Assigns all the patent rights in such inventions
- Agrees to cooperate with the company in connection with the registration and perfection of patent rights
Trade Secrets are a type of intellectual property that state law protects. Under the Uniform Trade Secrets Act, which most states have adopted, a trade secret is “information”—including a formula, program, method, technique or process—that is valuable because it is not generally known and is maintained in secret. A company should ensure that its contractor agreements require the contractor to both convey any trade secret rights the contractor may have in his work and not disclose any of the company’s proprietary information, inventions and processes to third parties.
Given the increasing use of foreign-based contractors to provide critical technology development services for U.S. business, a company should also take reasonable steps to ensure that foreign-based contractors are complying with local legal requirements when conveying ownership in technology and other deliverables.