Hiring Consultants – Who owns the Intellectual Property?
By Will Elton, Last updated: 2023-01-18 (originally published on 2019-07-16)
The value of intellectual properties goes without saying. In the modern age of information, each and every person walking on the street or scrolling through social media is constantly being bombarded by information and advertisements.
It isn’t easy for a company’s advertisements to stand out amongst the flood of logos and ads, and businesses must devote significant resources to figure out what will capture consumers’ attentions. They may be catchy slogans and names, other times logos, and cool inventions. But with a company’s growth comes difficulties. The CEO of Nike couldn’t possibly design every pair of sneaker himself, and Elon Musk couldn’t design every product under the Tesla name and build all of them himself.
These businesses only function with professional graphics designers, engineers, software developers etc. to perform their roles for the company. As such, it makes sense for businesses to take great care when hiring professionals to generate intellectual property. Otherwise they may find themselves having accidentally funded a developer to create something for themselves, instead of for their own business, as they had intended.
You must first think about who is this professional? Is he an employee, or is he a contractor to whom work is outsourced?
Generally speaking, the work products created by an employee belongs to the employer by default. Section 14 of the Copyright Ordinance (Cap. 528), for instance, expressly stipulates that work subjects “made by an employee in the course of his employment” belong to his/her employer, unless there is any agreement to the contrary.
That being said, a prudent employer should ensure that the employment contract nevertheless expressly addresses the topic of ownership. There should be provisions requiring an employee to endorse documents that are necessary to record and prove the employer’s ownership and title of the IP generated by the employee.
The employer should also be mindful of the “course of employment” requirement: be wary of asking an employee to design or come up with something for the company if this is not expressly stipulated in his or her employment contract, as that would afford room for the employee to argue that his product was not generated in the course of employment. Thus meaning that it belongs to the employee, not the employer.
It follows that the default rule that an employee’s work belongs to his employer is not always a complete assurance, and the employer should still be mindful of how he might accidentally strip himself of the default position’s protection.
The default position for a contractor is the reverse of the position for the employee: absent any express contractual agreements, the works generated by a contractor belong to him or her, not the company. This position means that if the employer has participated in the creation of the IP, this would result in a shared co-ownership of the IP.
What A Business Can Do
If the professional is working as an employee, the employer should pay particular attention to the scope of work as agreed in the employment contract as discussed above. If the professional is a contractor, it becomes necessary to consider how the co-ownership should be managed: what rights are enjoyed by the owner and the non-owner? This should also be accounted for.
Further, businesses should consider whether it should request the contractor to license or assign the IP rights to the business. Being licensed confers upon the employer the rights to use the IP.
A license agreement would set out what the business is entitled to do with the IP, but the ownership of the IP ultimately remains with the creator.
Conversely, an assignment means that the business purchases the rights to and ownership of the IP. The purchase price would be a one-off lump sum, so obviously the consideration paid would be greater. Whether a licensing or an assignment would be more favourable for the business is an entirely commercial decision to be made by the business after weighing the options.
In the course of carrying out their duties, employees and contractors may be exposed to the business’ trade secrets. It would obviously be in the business’ interests to ensure that such secrets remain secrets. This is especially so in cases of contractors, as the work they generate whilst having access to trade secrets are ultimately their own properties.
In order to enhance protection of trade secrets, businesses are recommended to start with the employment contract or consulting agreement. Watertight non-disclosure clauses should be added into the agreement in order to lengthen the period of protection. Of course, the business should also discuss with the employee / consultant the importance of the trade secret to the company, and expressly stipulate that the professional is not allowed to make use of such trade secrets for the benefit of entities aside from the business.
Given the potential value of intellectual properties, it only makes sense for companies to devote proportionate amounts of effort and caution to ensure that they retain what should be theirs.
Companies should be very careful with their employment contracts or other agreements, not only because contra proferentem (the interpretation of an ambiguous contract against the party which proposed or drafted the contract) but also because of the value of what is at stake.
An employment contract, like in many other situations, operates as the business’ most useful tool in defining the ambits of the parties’ rights and obligations, and in this context, it is highly recommended for companies to pay extra attention to the question of IP rights and ownership.
This article does not constitute legal advice.
The opinions expressed in the column above represent the author’s own.