What is a “work made for hire” and why should that concept matter to you as a founder?
The work-for-hire idea is a technical legal concept that affects your startup in practical ways. You need to understand enough about it to spot the practical issues and to handle them properly.
So here goes.
Copyright laws protect creative works. That includes any IP you might develop as a founder. When you develop such IP for others, the work-for-hire idea affects who owns that IP.
Here are the basic guidelines:
- You develop IP for your startup which is employing you – it belongs to your employer. Pretty basic. This is a classic work for hire. There are some gray areas but, if you create the IP while doing your duties for which you are paid, there is no ambiguity. All IP relating to such work automatically belongs to your employer, whether or not you signed any agreement relating to it.
- You develop IP for your startup as a consultant and are paid for that work, but have no agreement in place relating to the IP rights – shockingly, you might think, the IP in that case belongs to you and not to your startup.
Why? Because the default rule under the copyright laws is that the creator of a work owns the copyright unless it is done as a work for hire or it is expressly assigned under a contract to the other party.
In the contractor situation, your work qualifies as a work for hire only if there is an agreement in place identifying it as such and, in addition, the work falls within certain specified categories of types of work that qualify as works made for hire.
Thus, no contract, no work for hire.
In addition, no contract, no express assignment of rights.
Thus, in the case just cited, with no contract specifying that it is a work for hire and with no express assignment, the default rule kicks in to provide that you own the copyright to the IP you created even if you were paid for your work.
- You develop IP for your startup as a contractor and are paid and have a work-for-hire agreement that contains no express assignment provisions in it – again, perhaps shockingly, you still would own that IP if it involved a software development effort.
Why? Because software development does not fall within the specified categories that would allow it to qualify as a work made for hire.
I cite this case, not because you will ever find such an agreement but because it explains why you will routinely find language in work-for-hire agreements that says, in effect, “this is a work made for hire but, just in case it isn’t, the contractor agrees to assign all copyright rights anyway.”
- Which brings us to our logically to our last case, that of the contractor who develops IP for a startup, gets paid, and does the work under a work-for-hire agreement that characterizes the work as one made for hire and that assigns all IP rights to the startup – in that case, the startup owns the copyright rights free and clear and you retain no rights to the IP.
How might these principles play out in practice for you as a founder?
Let’s illustrate.
You and your buddies are developing IP for a startup you hope to launch. There is entity. Ergo, there is employment relationship and there is no contract between you and entity (nor, typically, between you or any other person) relating to your development work.
Quick quiz: who owns the IP rights to your work?
Yes, you do.
No employment. No work-for-hire agreement. No assignment. Hence, the default rule applies and the person who created the work keeps all rights to it.
Let’s assume your buddies paid you for work in the case just cited.
Second quiz: who owns the IP now?
Answer: you do.
The mere fact of payment changes nothing. For the rights to transfer, it needs to be either a work made for hire or the IP rights need to be expressly assigned. Without any form of agreement causing either of these things to happen, the ownership rights stay with you as the developer – even if you got paid for the work.
Now let’s take the same case and assume you are a developer working offshore, say in India. You have a written agreement with a startup in the U.S. That agreement has a statement of work, defines deliverables, a development timetable, and a price. You comply with all this and deliver the work to the startup. The agreement is silent on all other points.
Third quiz: who owns the IP in that case?
Yes, that’s right, the offshore developer does. Payment or no payment, if it is not done as a work for hire, and if the IP rights are not expressly assigned, the startup is screwed.
Let’s shift a little.
You and your co-founders form your startup. You assign all IP rights into the company. Then, in the spirit of keeping things loose, you continue to work on the IP development after company formation without contracts of any kind and without setting up an employment relationship between the company and its co-founders.
Fourth quiz: who owns the IP rights to the post-formation development work?
Yes, the founders do, individually that is. So if one of you bolts, the company may have a problem with its IP or may need to do a workaround.
Why so? Well, no employment relationship. No work-for-hire agreement. No assignment. Default rule kicks in and the rest follows.
Let’s take one more surprise case and wind it up.
This one is from the perspective of your company doing contracting work for its customers. Your startup has core IP that it uses in all its consulting projects. It contracts with Big Company X to do some custom development work. It signs the customer’s standard form. That form says, “this is a work made for hire and, by the way, if it isn’t, the customer still owns all IP rights relating to the deliverables.”
Anything wrong with that?
Yes, there is plenty wrong, at least if you don’t want to compromise your startup’s rights to its core IP.
In such cases, the boilerplate language intended to pick up anything that does not otherwise qualify as a work-for-hire, and thereby assign it to the customer who is paying for the work, may have an unintended consequence: it potentially sweeps in, along with what is intended by the parties, the core IP that your startup uses for all its projects.
Oops.
As a founder, you need to be alert to the effect of such language. A simple carve-out solves the problem, assuming you catch it up front.
This rundown gives you a good glimpse of the areas in which founders tend to bump into problems in dealing with the work-for-hire idea (or in failing to deal with it). Don’t be slack in this area. Your IP may be at stake.
A final caution: work with a good business lawyer in these situations. General guidelines will help you spot potential problem areas but do not allow you to deal adequately with a complex area of law in which you fundamentally do not know what you are doing. When it comes to your IP, work with a good lawyer to do it right.