All companies require certainty as to the ownership of the intellectual property created by their employees and consultants. Understanding the intellectual property portfolio of a company is critical for any board.

This is because the effective management and use of company intellectual property will be an integral part of the business strategy of most organisations. Knowledge of intellectual property creation and ownership is particularly relevant to those businesses which develop new products and processes. It is also important for software developers and those businesses which operate in the creative industries and innovation sectors: from communications and retail businesses to manufacturing and technology companies.

Remind me - what is intellectual property?

Intellectual property (IP) refers to the collection of rights which protect creations of the mind, for example inventions, literary and artistic works, designs, names, music and images. They are broadly divided into the following categories: patents for inventions, trade marks for names, registered and unregistered design rights for industrial designs; and copyright which covers artistic and literary works (including software) films, music, and ancillary rights including performance and rental rights.

First ownership - the general rule

The general rule in relation to IP created by an employee during the course of their employment is that, in the absence of agreement to the contrary, the first owner is the employer.

This position arises pursuant to the relevant statutes governing that particular area of intellectual property. For example, in the case of inventive products and processes, the Patents Act 1977 confers first ownership of an invention created by an employee to the employer. In relation to copyright works and registered and unregistered design rights (copyright works being literary, musical, dramatic and artistic works), the Copyright Designs and Patents Act 1988, the Registered Designs Act 1949 and the Regulation on Community Designs (6/2002/EC) all operate to confer ownership of copyright works and UK and EU designs created by an employee to the employer. Similarly, the first owner of database rights in a database will be the employer pursuant to the Copyright, Rights in Databases Regulations 1997.

If the employer owns all intellectual property rights automatically be virtue of statutes do I still need intellectual property provisions in my contracts of employment?

Yes, whilst first ownership of the invention, copyright work, design or database will usually vest in the employer, the statutes do not expressly deal with non-economic rights such as, in the case of copyright, moral rights which are personal to the employee.

Moral rights exist pursuant to the Copyright Designs and Patents Act and sit alongside copyright. They protect the integrity and ownership of the work. Unlike the economic rights which exist in copyright protection (for example, the right of reproduction, distribution, rental and licensing, public performance, communication to the public and adaptation) moral rights cannot be transferred. Moral rights include the right to be recognised as the author of the work (paternity right), the right to object to the derogatory treatment of the work (this would broadly include any unauthorised editing and adaptation of the work), the right to object to false attribution of the work, and the right not to be identified or named as the author of a work which they did not create.

In a commercial context, if these moral rights are not waived (usually in appropriately drafted clauses in the contract of employment), then the employee may have the right to be named as author on all copies of the work, and crucially, the right to object to any editing or adaptation of the work. The potential implications for an employer if the employee were to successfully enforce such moral rights could be significant as the employee could prevent the employer from effectively dealing with those rights.

Has the employee created the work during the course of their employment?

In order for the intellectual property to vest in the employer, generally the creator must be an employee i.e. 'must be engaged under a contract of employment' and the work must have been created 'during the course of that employment.' Therefore, it very important to clearly define the scope of the employee's engagement and the terms of their employment in their contract to avoid any potential dispute concerning whether a work was created during the course of the employment. Clarity can be achieved by expressly setting out the scope of their job description in their contract of employment. For example, stating that their job description includes inventing and/or improving on products and processes or producing certain designs, text or plans.

Furthermore, the terms of the intellectual property clauses in employment contracts should also include an obligation to disclose any intellectual property including inventions to the employer immediately upon creation so that the employer is aware of what intellectual property has been created and by whom in order to be able to effectively protect and commercially exploit the same.

It is also important to deal with the assignment of future rights as far as the relevant legislation permits. For example in an employer/employee relationship, a present assignment of future copyright is permissible however a present assignment of future inventions is not(contrast with the position under a consultancy agreement which would enable a present assignment of a future inventions).

Work created during the course of employment - a question of fact

Most IP disputes which arise between an employer and an employee hinge on whether the intellectual property in question has been created 'during the course of employment'. This is determined by a number of factors including whether the work falls within the job description of the employee, whether the work was created during working hours, whether the employee could have reasonably been expected to create the work and whether any agreement exists relating to the work between the employer and the employee. However, it is useful to note that just because a work is created during working hours does not necessarily mean that the intellectual property in that work is owned by the employer (though this may give rise to a disciplinary procedures for misuse of company time, computer equipment etc). Similarly, if work is produced outside working hours but falls squarely within the job description of the employee then it may be that the first owner of that intellectual property in the product of that work is the employer, notwithstanding the fact that the work was created, for example, in the evening.

Employers should also be aware that under the provisions of the Patents Act, they may be obliged to pay additional compensation for inventions created by employees which have an "outstanding benefit" to the employer provided that payment of such compensation would be 'just'. Outstanding benefit is defined as more than a benefit which is substantial, significant or good. 'Benefit' is something in addition to that which the employer would usually expect to arise from the employee's duties.

First ownership - consultants

As a consultant is an independent party then unless otherwise agreed, all IP created by a consultant will be owned by them and not the company engaging the consultant.

Therefore, it is important that companies ensure that an appropriate consultancy agreement is entered into between the company and the consultant. The agreement should clearly state the terms of the engagement including key terms such as: remuneration, timeframes, project scope, appropriate indemnities, services and deliverables and a provision which expressly states that the intellectual property in the deliverables and the services will transfer to the company immediately upon creation.

A written agreement is particularly important as whilst an assignment or licence of intellectual property created by a consultant may be implied when 'it is reasonable, equitable and necessary for business efficacy' and 'the terms are obvious and capable of clear expression and do not contradict any express terms', such assignments and licences are rare. Hence the preference for written agreements and specific terms relating to IP ownership.

Intellectual property is an important asset of any company. Given the instances of employees embarking on second jobs or projects outside their employment (particularly in the case of software developers, digital and creative professionals,) the necessity to clearly define job descriptions and terms of employment is increasingly important to effectively police, protect and effectively valuable intellectual property produced for the business.