One of the key issues an investor or buyer will look at is whether a company owns the intellectual property rights used in the course of its business. Securing this right at the beginning will save you money and time in the long run but may be more complicated than you might suppose.

Why is this important?

Ownership of work product is absolutely crucial for most companies. A company must own or have a licence for what it makes, uses, sells, distributes or licences, otherwise it is potentially breaching someone else’s intellectual property rights. Breach of any intellectual property rights owned by a third party can give rise to a potentially expensive dispute often resulting in the breaching company having to pay damages and alter its products or procedures or enter into an expensive licence agreement with the third party. Failure to secure the necessary intellectual property rights may also undermine the intrinsic value of the company and its assets.

Why is this complicated?

A common misconception is that, if someone is working for your company, the company owns their work product. The actual position is more complicated. Subject to any agreement to the contrary, the company will generally automatically own the intellectual property rights in whatever is produced by its employees (as opposed to consultants) during the course of their employment. However, there are a number of situations when work is not carried out by employees. For example, when a company is starting out, work often begins before a company structure is put in place so those carrying out the work may not be employees. In addition, people tend to come and go on a project; there may be a number of people who contribute to a project on a consultancy basis or even more casually. Where a consultant (as opposed to an employee) creates work, they normally retain the intellectual property rights in that work unless there is an agreement to the contrary.

What should ring alarm bells?

You need to think about who has worked on things which you consider to be owned by or necessary for the company and whether or not they were employed by the company at the time of work.

Situations which could cause problems include:

  • where the founders started work before the company was officially set up;
  • where someone worked on the project but was never an employee of the company;
  • where work was done on company product by people who were, at the time, employed by a third party;
  • where consultants have been used; and
  • where open source software has been used (see article on Making the most of open source software)

How do we deal with this?

If any intellectual property rights in what you consider as company product are retained by third parties, even if those third parties are now company employees, you need to get an assignment of those intellectual property rights from the individual to the company. An assignment (which must be in writing) is a relatively straightforward legal document but care must be taken to describe exactly what rights are being transferred. If you obtain a written assignment, anything covered by it should then be owned solely by the company.

In an ideal world, the assignment will be a formality. For example, if the founders started working on company products before they became employees, they will be unlikely to have an issue with giving an assignment. Where people often run into problems is in cases where there has been a personal falling out. You can find that someone who was involved in the company but never employed by it, now wants to set up a similar business or feels that they should be paid for assigning their rights.

In some cases, you may not be able to negotiate an assignment on acceptable terms. If this happens, you need a licence to use what you don’t own or you will have to stop using it. Again, the terms of the licence will need to cover exactly what is being licensed and be generous enough to allow you to use the licensed materials as required. You may find that the proposed licence is too costly or not wide enough.

If you do find that a third party owns the intellectual property rights in something which is crucial to your business and you are unable to arrange transfer or a licence of those rights, you may have to think about re-developing those aspects which you do not own. This may be achievable if you are talking about a piece of software code but will be much more problematic if it is a major part of your business proposition. Do not just sit back and hope the issue will go away. If you do not resolve it, you could become embroiled in a costly dispute and you could have trouble operating your business or attracting investors and/or potential buyers.

What should you do from now on?

Make sure that anyone who works for you does so either as an employee of the company (and ideally with a clear intellectual property provision in their contract) or under a consultancy contract or other agreement which makes it clear that the intellectual property rights in any work done for the company, are owned by the company.

What are the main intellectual property rights you should consider?

In the UK, intellectual property is protected by a complex, sometimes overlapping, set of laws that are derived from both UK and European law, as well as some international treaties. The existing framework may be further complicated subject to the outcome of the Brexit negotiations. For more detailed information on intellectual property rights, please visit TechFocus

Patents protect inventions. In order for a patent to be valid there must, on the priority date, be an invention that is:

  • novel (not "anticipated by the prior art");
  • inventive (not "obvious to a person skilled in the art");
  • capable of industrial application; and
  • not excluded from patentability (crucially schemes, rules or methods for performing mental acts, playing games or doing business, and computer programs as such are excluded).

A Patent may be secured for the UK either through the UK Intellectual Property Office (UKIPO) or the European Patent Office (EPO), with the additional possibility of entering either system by means of an international application under the Patent Co-operation Treaty (PCT). If granted, a patent confers an exclusive and absolute right to prevent others exploiting what is covered by the patent and can give 20 years protection provided it is renewed every 5 years. This period of protection may be extended for medicinal and "plant protection products" by applying for a Supplementary Protection Certificate.

A UK or EP (UK) patent can be infringed by doing certain acts in the UK without the patentee's consent.

A company's trading names, brand names and logos (among other things) can all be protected as registered trade marks (subject to certain registrability rules). Where not registered, they might be protected by the common law action of passing-off (the mechanism for enforcing unregistered marks). Logos might also be protected by copyright and design rights.

Registration of a trade mark is not compulsory. However, an action for infringement of a registered trade mark is much simpler than an action for passing-off.

Registered and unregistered design rights

Designs are elements of appearance in products.

We do not have utility models in the UK. We do have design rights. The law relating to them is somewhat confused by the number of rights available in the UK. These are (currently):

  • European Community registered designs (CRD);
  • UK registered designs (UKRD);
  • European Community unregistered designs (UCD); and
  • UK unregistered designs (UKUD).

RDs protect the appearance of a whole product including its lines, contours, colours, shape, material and texture. In order to qualify for a RD there must broadly be a design (as defined) that is:

  • new and has individual character; and
  • not dictated by the technical function of the product (as defined).

RDs last for a period of 5 years and can be renewed for successive 5 year periods up to a maximum of 25 years.

For industries where design changes very fast, for instance the fashion industry, the RD system may be too slow and cumbersome. For these industries there is also the UCD. It protects the same designs as RDs but arises automatically , providing some short-term protection for designs without the process of registration. However, it only protects against copying by third parties. The UCD should not be confused with the UKUD (which protects the shape and configuration of products).

Copyright protects the expression of ideas, not the ideas themselves. It gives a bundle of rights to creators to prevent other people from copying, using or exploiting their original works without their consent. It is the most pervasive of all intellectual property rights, which can potentially subsist in anything from menial pieces of text to great works of art, literature and music. To attract copyright, an eligible work basically has to be original (a relatively low threshold in the UK) and not copied from other works.

UK copyright comes into existence automatically when the relevant work is created. This can make it a powerful right, because not only are no formal steps needed before it can be relied on but (in the case of literary, music, dramatic and artistic works) it generally lasts for 70 years after the death of the creator. (There are other types of work with a shorter copyright life).

Domain names must be registered via a registrar. Domain name jurisdiction, unlike other forms of intellectual property, is typically determined not by where the business or creator seeking protection is based, but by the top level domain ("TLD") – ".eu" TLDs are an exception. There are now numerous top level domain names available and the list is growing all the time, in addition to country names such as .fr.

Domain main protection mechanisms are overseen by ICANN (the Internet Corporation for Assigned Names and Numbers) which sets rules over issues such as registration, ownership and disputes for popular generic TLDs (such as .com) or delegates this function to local organisation for lesser-known (typically country-specific) TLDs (such as .uk domains, which are overseen by an entity called Nominet).

Confidential information and trade secrets

The law of confidential information is not, strictly speaking, an intellectual property right, but an ancillary right used to protect commercially sensitive, valuable and private information which is not protected by other intellectual property rights. The recent Trade Secrets Directive has provided a formal EU-wide definition of what constitutes a trade secret and how trade secrets are protected.