Using Outside Help to Develop Products is Risky Business
Require a co-development agreement to ensure your rights are protected.
I recently worked with a client who’s outsourcing some of their product development. This is becoming a trend. The days of “not invented here” are largely behind us. Businesses frequently enlist outside experts to help create new products. These experts can be from other companies, teams, or individuals.
Many business owners think they own the results because they’ve hired and paid someone to assist in developing a product. They believe that because it was their idea, they own everything. Another common belief is that only their team needs to be named an inventor because it was their idea.
There are also situations where the parties decide to own what is developed equally. The thought is that we are both developing the project and, therefore, should both own it. This creates problems with patents because joint ownership is never a good idea. With both patents and copyrights, issues arise if there is an infringement of the IP. Who can sue, and who pays?
Numerous issues must be considered and agreed to in writing when using outside help. These include but aren’t limited to:
Who Owns the Intellectual Property?
The issues that typically arise from these projects involve copyrights and patents. The author of any copyrightable project is the owner, unless a written agreement assigns the rights. The law is clear on this. I had a client who had an outside developer create software for the business. Years later, when the company was being sold, the buyer wanted proof we owned the copyright. Since there was no assignment agreement, we didn’t. We had to pay the developer an additional $250,000.00 to get the assignment and close the deal.
When it comes to patents, all of the inventors involved own an equal, undivided interest. This means that they can do whatever they want with the patent rights. So to control the patent, all the inventors involved must assign their rights to the business.
In 1989, Ethicon, a manufacturer of surgical instruments, filed a patent infringement lawsuit against a competitor, United States Surgical, over U.S. Patent No. 4,535,773. The inventor listed on the patent was Dr. Inbae Yoon, who granted Ethicon an exclusive license to use his invention.
The patent included 55 claims, but only two claims were asserted against U.S. Surgical: claims 34 and 50.
During the lawsuit, U.S. Surgical learned of a co-inventor named Young Jae Choi. Choi was an electronics technician who had collaborated with Dr. Yoon for 18 months, so US Surgical asked the court to add Choi as an inventor. The court agreed, finding that Choi had co-invented claims 33 and 47; two claims that were not even involved in the lawsuit.
The court found that there was corroborating evidence that supported Choi’s assertions that he was an inventor. The evidence was Choi’s dated notes and drawings and his technical abilities as an electronics technician.
The court dismissed Ethicon’s lawsuit because Choi had granted U.S. Surgical a retroactive license to the patent. OUCH!
Who Can Help with the Project?
You must know who is working on the project. You need everyone to assign their rights. For example, if the outside developer hires someone to assist them, you can have the same problems discussed above with ownership. Every contributor must be identified to determine their rights and ensure they are correctly assigned.
Who Are the Inventors of Any Patents?
Owning a patent is different than being an inventor. An owner doesn’t have to be an inventor, but an inventor can be an owner. Owning a patent allows the owner to enjoy the patent’s value and prevent others from infringing. Ownership is acquired from the inventors, typically by assigning their rights. An assignment is a legal document transferring the rights of the inventors (assignors) to the owner (assignee).
Initially, every inventor owns an equal right to the patent, even if they only contributed to one of the patent claims. This means that each inventor can do what they want with the patent. They can sell it, license it, make and sell the product or process covered by the invention, all without the permission of any other inventors. They can also frustrate any lawsuits, since all owners have to be joined in a lawsuit.
To prevent each inventor from doing what they want, the rights are assigned to a single person or entity. Once assigned, that person or entity owns all rights.
However, even with an assignment, if you miss an inventor, you may find that someone else owns the same rights in the patent that you do. Each inventor owns an undivided interest in the entire patent, no matter their respective contributions. A joint inventor of just one claim is presumed to own the whole patent. So, an inventor of just one dependent claim can own the patent equally to the inventor of 99% of the patent.
Who Can Sell the Product and Where?
The agreement should specify who’s authorized to sell the product and where it can be sold. Ideally, you want to be the only one selling the product. But, if the parties agree that they can both sell, you must negotiate the terms. You don’t want to be competing with your co-developer. Generally, the agreement will specify where each party can sell product. For example, it may specify regions or industries where each company can, or cannot, sell the product.?
Who is Responsible for Any Litigation??
If the IP is jointly owned, the agreement must provide that all owners will join in a lawsuit. That’s one reason that joint ownership is never a good choice. If the IP is jointly owned, who pays for the litigation? Further, how are decisions going to be made? What if one owner wants to settle, but the others don’t? How will this be handled? The potential issues are numerous.?
The Takeaway
Negotiate a joint development agreement before work begins to eliminate the hassle and uncertainty. The simple path is for one company to own the IP and license the other. The Joint Development Agreement provides this structure and clearly states each party’s rights.
To help you identify your intellectual property, I’ve created a Guide and Checklist. Click the button below to download a free copy.?
About the Author:
Bill Honaker, “The IP Guy” is a former USPTO Examiner, a partner with Dickinson-Wright, and author of the new book, Invisible Assets – How to Maximize the Hidden Value in Your Business.
To get answers to your questions schedule a time to talk, you can access my calendar by clicking here, email [email protected], or call me at 248-433-7381.