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Intellectual Property: What is it? Why is it important to you


Leslie S. Marell, Esq.
Leslie S. Marell, Esq., Law Office of Leslie S. Marell, Hermosa Beach, CA 90254, 310-372-8663,

84th Annual International Conference Proceedings - 1999 

WHAT IS INTELLECTUAL PROPERTY? "Intellectual Property" is a generic term used to describe products of the human intellect that have economic value. Computer software is one of the many forms of intellectual property. Other examples include books, music, movies, artwork, designs and other works of authorship, names, logos, as well as certain inventions.

Intellectual property is "property" because a body of laws has been created that gives owners of such works legal rights similar in some respects to those given to owners of real estate or tangible personal property (such as cars). Intellectual property may be owned and bought and sold the same as other types of property. But in many important respects, ownership of intellectual property is very different from ownership of a house or a car.

DEFINITIONS. Basic definitions are required before we can deal with the real business world issues involving intellectual property law. The principal types of intellectual property legal protection are listed and defined below:

Trade Secret
Trademark and Trade Name

  1. Patent. Patent law protects inventions. Patent protection is available for any new and useful process, machine, method of manufacture, composition of matter, or any new, useful improvement. By filing for and obtaining a patent from the U.S. Patent and Trademark Office, an inventor is granted a monopoly on the use and commercial exploitation of an invention, for 20 years from the date of filing the application.

    In the U.S. patents are awarded to the first to invent. When multiple inventors file applications to patent the same invention, the U.S. Patent Office must decide who was the first inventor. Therefore, it is important that the engineers maintain development records establishing the events surrounding the invention process in order to prove the date of invention. Invention records may also be useful to challenge the validity of another's patent.

  2. Copyright. A copyright provides protection for a limited time to authors for their "original works of authorship fixed in any tangible medium of expression." Copyrights extend only to the expression of creations of the mind, not to the ideas themselves. The Federal law governing copyrights expressly excludes from copyright protection "any idea, procedure, process, system, method of operation, concept, principle or discovery." In other words, a pure idea, such as a plan to create an innovative software program, cannot be copyrighted, no matter how original or creative it is.

    Copyright protection begins when the work is created. This means that there does not have to be a copyright notice, publication of the work or registration to secure the copyright. It is, of course, advisable to take these measures.

    1. Ownership of Copyright. As a general rule, the creator of a work owns the copyright. The person who owns the copyright also automatically owns the exclusive rights to it and the rights to prevent others from copying, distributing, or preparing works based on the copyrighted materials.

    2. Works for Hire: Employees and Independent Contractors. Works for Hire are an important exception to the general rule that a person owns the copyright in a work he or she has created. If a work was created by an employee as part of his or her job, the law considers the product a work for hire, and the employer will own the copyright.

      If the creator is an independent contractor, the works will be considered works for hire only if: (1) the parties have signed a written agreement stating that the work will be a work for hire; and (2) the work is commissioned as a contribution to a collective work, a supplementary work, an instructional text, answer material for a test, an atlas, motion picture, or an audiovisual work. Thus, unless there is a contractual agreement to the contrary, and the work fits within one of the above categories the independent contractor owns the copyright.

    3. Creations by an Independent Contractor. The copyright developed by an independent contractor is owned by the independent contractor unless the contractor has signed an agreement to the contrary. The contract must state that the contractor conveys the copyright ownership in all works created under the contract to the engaging party.
  3. Trade Secret. All that is necessary for something to be protectable as a trade secret is that (1) it gives the owner a competitive advantage; (2) it is treated as a secret by the owner; and (3) it is not generally known in the industry or business.

    A trade secret may be lost if the owner fails to identify it or take reasonable steps to protect it. Otherwise, trade secret protection is perpetual.

    The fundamental question of trade secret law is, what is protectable? Clear examples are discoveries, ideas, designs, and specifications. However, even the way you use knowledge and information or the assembly of information itself may be a trade secret even if everything you consider important for your secret is publicly available information. An example of this is supplier and customer lists.

  4. Trademark. Patent, copyright and trade secret laws do not protect names, titles or phrases. A trademark is any word, name, logo or other symbol adopted and used by a person, manufacturer or merchant group that identifies and distinguishes its goods from those manufactured or sold by others.

  5. License vs. Sale. A license is an agreement between the owner of the intellectual property (the licensor) and a third party (the licensee) which gives permission to the licensee to use the technology in a manner that would otherwise be reserved exclusively to the licensor, as owner. For example, the licensor of the software program will convey a right to the licensee to use the program and reproduce the program under certain defined circumstances. The licensee is restricted in his or her use of the program and does not receive any ownership rights to the software.

By contrast, a sale involves the transfer of an ownership interest in the property.

In the case of mass marketed shrink wrap software, the buyer is purchasing a copy of the copyrighted program. However, the buyer is not purchasing an ownership interest in the intellectual property itself. The buyer is restricted by copyright law from reproducing the software (except for backup copies) or making derivative works.

PRACTICAL APPLICATIONS. With basic definitions in place, let us turn to some practical issues that arise in business with frequency and involve intellectual property law.

  1. Independent Contractors: Who Owns the Intellectual Property? Many companies turn to outside consultants to develop software, etc whether alone or in combination with company employees. From a technical and business standpoint, this may be the most practical approach. But is can raise the important legal issue of who owns the intellectual property rights to the work created?

    Since an independent contractor is not an employee, the copyright in the software created by the independent contractor does not automatically belong to the company, as it likely would under the "work for hire" principles applicable to employees. Instead of owning the copyright, the company would probably only be authorized to use a copy of the software and to modify it as necessary for operating its own business.

    If your company expects to obtain ownership of the copyright to the software, it is imperative to have the consultant sign an agreement stating that all intellectual property rights in the software and related documentation he or she creates for the company belong to the company, either as a work made for hire or, alternatively, by assignment to the company under the agreement.

  2. Contract Manufacturing: Outsourcing the Design or Manufacture of the Product

    1. Outsourcing the Design. Outsourcing is becoming a more common way of doing business as companies streamline their operations and cut costs. If your company is outsourcing the design of a product, the discussion above relating to independent contractors is applicable. Your contract should clearly specify that the outsourcer will assign all its rights in the design to your company and your company will be the sole owner. If you do not have such a provision, the outsourcer will likely be the owner of the information it developed.

    2. Manufacturing to Your Specifications. If the contract manufacturer will be building product to your company's specifications, your company will be handing over large amounts of confidential information and data to its supplier. This information may be in the form of software, databases, specifications, bills of material, statistics and memos and will all constitute trade secrets of the company. In order to protect the trade secret status of the information, it is imperative that two steps be taken: (1) The information be clearly marked that it is Confidential or Proprietary to the company; and (2) The supplier sign a non-disclosure agreement which requires the supplier to hold the information in confidence.

    Keep in mind that in order for trade secrets to maintain their confidential status, the owner must take steps necessary to keep the information secret. Failure to identify the information as secret and to require a written agreement to maintain secrecy endangers the confidential information.

  3. I.T. Outsourcers and Software Licenses. As companies increasingly rely on outsourcing vendors to perform computer-related functions, these outsourcers often require access to software licensed to their customers by third-party software licensors. Most software licenses restrict assignment (transfer) of the software to a third party without the consent of the licensor. The practical effect of this clause is to prevent giving outsourcers access to the licensed software. As a result, licensee must obtain consent from software licensors to allow outsourcers to use the software.

    Licensors may be unwilling to provide consent and have, in some cases, insisted on payment of additional license fees.

    To avoid such situations, it is advisable to include a clause in any new license agreement which extends the scope of permissible uses of the software to allow outsourcers to use the licensed software in the performance of outsourcing functions.

  4. Sole Source Suppliers and Escrow. While a sole/single source alliance can benefit both the buyer and the supplier companies through the creation of a more solid business/ partnering arrangement, the downside occurs if the supplier is unable to deliver.

    In order to understand the full impact of this"downside", just be reminded of any recent problem you have had obtaining product from your sole source supplier.

    What measures can be taken to protect our companies from these downside possibilities? While contracts are limited in their abilities to "solve" a problem, they can be helpful in addressing the issues to facilitate a solution.

    Consider requiring that your supplier establish an escrow account in which the supplier deposits all designs, manufacturing data, processes, etc. necessary to manufacture and support the product. In addition, and if the bill of material for the product includes purchase of certain proprietary products, the supplier would deposit authorization that the buyer be able to purchase these proprietary products from third party suppliers. The contract would grant your company a license to use all the information in the escrow account if the supplier does not perform its contract obligations.

    Keep in mind that in order to be able to effectively use this information, your company might likely first require technical understanding of the products. If that is the case, your contract will want to obligate the supplier to provide access to and training in the understanding and use of the information and data during the actual contract performance.

  5. Employee Issues: Confidentiality; Ownership; Nonsolicitation; Noncompete

    1. Confidentiality. The issue of confidential information and the employee's responsibility is two pronged. The first prong relates to that confidential information which the employee either develops or learns in the course of his or her employment with the company.

      In general, state laws provide that an employee may not, either during or after his employment, divulge or use trade secrets which were developed by him during his employment or divulged to him by his employer, even absent an express agreement. The rationale is that a employee is in a relationship of trust and confidence with the company. In addition, most companies require that their employees sign an agreement which acknowledges that the employee will maintain the confidentiality of the company's trade secret information both during and after employment.

      The problematic aspect of this issue is raised when the employee wants to go to work for a competitor of the employer. The employee should be aware that under appropriate circumstances, the ex-employer may prevent the employee from going to work at a competitor if the following three factors are found to exist:

      (1) The former employee has knowledge of the first employer's trade secrets;

      (2) The employee's new job duties (and the products and technology he is working on) are so similar to those in the former position that it would be extremely difficult for him not to rely on or use the first employer's trade secrets; and

      (3) The former employee and the new employer cannot be depended upon to avoid using the trade secret information.

      The second prong relates to that confidential information provided by a third party to the employee's company.

      In those cases in which the employer signs a non-disclosure agreement to maintain the trade secrets of a third party, the employee -as an agent of the recipient company - is bound to the non-disclosure agreement and must abide by the confidentiality provisions. Failure to do so may subject both the company and the employee to damages.

    2. Ownership of Intellectual Property. If a work was created by an employee as part of his or her job, the law considers the product a work for hire, and the employer will own the intellectual property rights to that work, as explained above. A work for hire is defined as "a work made by an employee within the scope of his or her employment".

      In many instances, the courts have considered the intellectual property rights to a product developed by the employee to belong to the employer when the employee used company resources in developing the product, even if the employee's development was done outside working hours.

    3. Non-Compete and Non-Solicitation Agreements. The non-compete clause prevents the ex-employee from working for a competitor or going into a business which competes with his or her ex-employer. The non-solicitation clause restricts the ex-employee from soliciting the business of the ex-employer's customers or suppliers.

The enforceability of these provisions vary by state. For example, in most employee/employer circumstances, California does not recognize the enforceability of a non-compete clause. Even in those states that do enforce non-compete provisions, the clauses must be narrowly written such that they are reasonable in time and geography limitations. The enforceability of the clause generally revolves around the underlying question of: Is there a legitimate business purpose for such restriction? In the absence of a sound business reason, the courts are reluctant to enforce a non-compete clause.

The non-solicitation clause will come under similar scrutiny in terms of reasonable time period and location, but is more often enforced by courts. A non-solicitation agreement may restrict the ex-employee from doing business with a supplier or customer of the ex-employer for a certain period of time.

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