Frequently, healthcare founders and business owners overlook the important step of effectively assigning intellectual property. Missing this can result in questions over intellectual property ownership. It can also expose missing intellectual property ownership rights for the company. This can destroy company value, undermine meaningful opportunities for strategic growth–such as for outside funding, investment, and acquisition–and require extraordinary company efforts at mitigation. Particularly important for health tech startups, medical device companies, and any other healthcare entity that generates significant amounts of intellectual property, healthcare entities should (a) understand fundamental default principles operative with respect to intellectual property ownership, and (b) confirm they own the intellectual property they think they own.
1. W2 Employees.
For W-2 employees, the default rule is that intellectual property created by an employee within the course and scope of their employment is owned by the employer. This principle is known as the ‘work for hire’ doctrine. It applies to all works the employee creates for the company, such as software code, designs, inventions, and written materials created during the employee’s working hours or using company resources.
This automatically gives employers the advantage of obtaining intellectual property generated by the employee without mandatory additional steps. As a matter of prudence, however, an organization should ordinarily include language in each employee’s offer letter or employment contract reminding them that intellectual property they generate within the course and scope of employment will be owned by the organization. This ensures alignment between the employee and the business at the outset—something which can prevent disputes altogether, and provide the company with supporting documentation should one ensue anyway.
2. 1099 Independent Contractors.
In contrast to W-2 employees, the default rule for 1099 independent contractors is that intellectual property generated does not automatically revert to the engaging business. Instead, the independent contractor retains ownership of the intellectual property unless a written agreement exists that effectively and comprehensively assigns the intellectual property to the organization. This means that unless and until a business executes a valid, comprehensive, and effective document with each independent contractor or founder, the business does not own that founder’s or independent contractor’s intellectual property—even if everyone intended for the business to be the owner
3. Why it matters.
Company intellectual property ownership is integral to the organization’s legal foundation. Without it, issues like those enumerated below can arise:
- Lower company valuation. Without a written agreement, the founder(s) or 1099 independent contractor(s) own intellectual property that the company thought was its own. This compromises company value and injects uncertainty over who will finally own intellectual property intended for the company.
- Competition from the IP owner. Unless and until the independent contractor or founder assigns its intellectual property, they may be free to exploit it as they see fit. This may allow them to compete directly with the business they were hired to support.
- Branding issues. Where marketing efforts by an independent contractor center upon design, logo creation, or similar branding items, and that independent contractor withholds assignment, the company may be forced to rebrand or take other significant corrective steps.Acquisition & investor deterrence. Questions regarding intellectual property ownership expose unsophistication in the company to prospective investors, acquirors, and other stakeholders. With risk over critical assets in question, such stakeholders may decide that the company is too risky for meaningful investment.
- Power over the company. If someone else owns the company’s intellectual property, that person(s) holds power over the company. They can do things like withhold assignment of relevant intellectual property unless the company pays an unreasonable amount or complies with outrageous terms and conditions. This happens commonly where an organization is raising outside investment, only to realize that a former independent contractor or founder still holds ownership over intellectual property generated years ago.
4. Action plan.
An example action plan for intellectual property ownership assurance is below:
- Confer with competent healthcare and intellectual property legal counsel. This step is crucial, as one size does not fit all with respect to intellectual property planning. Taking this step will help you confirm whether your organization actually owns its intellectual property.
- Review founding documents. There should be some sort of assigning document that effectively and comprehensively transfers intellectual property from each founder and/or independent contractor to the company itself. Remember, without this step, intellectual property ownership remains with each 1099 independent contractor and/or founder. This can create the situation mentioned above where the independent contractor or founder demands unreasonable payment in exchange for their willingness to hand over intellectual property rights.
- Execute a strong Confidential Information and Invention Assignment Agreement (CIIAA) between the business and each founder and 1099 independent contractor. The CIIAA is a primary way of assigning intellectual property from each founder or independent contractor to the organization. This document may go by different names and often varies in language. With that in mind, reviewing your organization’s CIIAA with competent healthcare and intellectual property legal counsel will ensure it contains what it needs for true protection.
- Audit company records for past 1099 independent contractors or founders who have now departed the company. This involves evaluating whether and to what extent prior founders or owners contributed intellectual property items to the organization. If intellectual property contributions by former founders or independent contractors are present in any meaningful sense, strategizing with healthcare and intellectual property legal counsel is crucial for mitigation planning.
- Audit current vendor services agreements. Each vendor contract should contain language that properly assigns all intellectual property generated pursuant to the contract to the company. Vendors are generally independent contractors of the company. Therefore, the default rules regarding independent contractor intellectual property ownership apply.
5. Conclusion.
Intellectual property is a primary driver of organizational value for many healthcare businesses, including in digital health, healthIT, health tech startups, and even provider organizations experimenting with inventions like healthcare app or software creation. With the consequences discussed throughout this post in mind, confirming who owns the organization’s intellectual property should not be overlooked.
