Intellectual Property For Small Businesses: Key Questions Answered

Protecting intellectual property is often overlooked by SMEs.

When you think about intellectual property, you probably think it doesn’t apply to small business. It’s easy to think that intellectual property is something that only applies to large businesses. Well, that’s not the case.

We chatted with Gemma Nugent from Sound Legal about Intellectual Property highlighting important key questions and answers small business owners need to be aware off.

What Is Intellectual Property?

Historically, the notion of ”property rights” applied to tangible, physical things. Things you could touch, like land, livestock or jewellery. It was easy to work out who owned something like that because it was a matter of possession.

As the world became more sophisticated, humans started coming up with creative works and other inventions they wanted to commercialise. However, knowledge and ideas are intangible.

Physical possession can’t be used to establish ownership or to buy and sell ideas, so conventional property rights weren’t a good fit.

But as far back as the 18^th century, lawmakers, philosophers and entrepreneurs started to think about whether there could be property in ideas. That’s when the notion of intellectual property (“IP” for short) came about. Over time, IP has become an umbrella term that broadly refers to proprietary rights in knowledge, ideas and other creations of the human mind.

In Australia, IP ownership is dealt with in a few ways:

• by course of conduct (e.g., by a business using the same logo for an extended period);
• by the owner registering the rights (as is done for patents, trademarks and designs) so that their ownership is protected as a matter of record;
• by legislation (such as for copyright in artistic works); and
• by owners and prospective owners making a contract to manage the rights.

How Do Contracts Deal With Intellectual Property?

Now more than ever, modern work involves knowledge and idea creation. It might come in the form of designing a building, developing an app, writing a blog post, drawing a company logo, or myriad other ways.

Commercial contracts for these projects have provisions to confirm where IP rights will “vest”. The term “vest” tells us which party will end up owning the rights brought into or created in a commercial relationship.

Where a party is paying for knowledge to be created, that party will generally want to own IP rights connected with the knowledge. In that case, the IP clause in the contract will say that the ownership of all IP vests in the buyer from the moment of its creation.

The creator will be required to do whatever is necessary to confirm ownership, including transferring or assigning relevant rights and securing consent from any third parties whose IP has found its way into the new IP created under the contract.

Usually, the creator is also required to promise that it will cover any losses the buyer suffers if the created IP infringes on anyone else’s IP rights. This promise is typically in the form of an “indemnity”.

As the IP vests in the buyer from creation, the non-owner or creator party may need permission to use the IP rights to complete its contractual obligations. This can be done with a clause that causes the buyer to grant a “licence” to the non-owner.

A licence is a limited proprietary right that allows the licensee to use the property for a limited purpose.

If I Create Or Own IP, How Can I Protect It?

For businesses that are paid to create knowledge and ideas, the value of their service is fundamentally linked to the IP. They may want to retain ownership of the IP so they can use it freely in future projects.

These businesses should reverse the position in the IP clause so that the creator retains ownership of all IP rights created under the contract and licences those rights to the client so that the client can enjoy the benefits of the contract.

If the client insists on owning the IP rights, the creator can reinforce its position by making the vesting of IP ownership conditional on full payment of the creator’s fee rather than passing on creation.

What If I Have An Ongoing Relationship With My Client?

Sometimes the creator will have ongoing obligations connected with the IP. An example might be maintaining the technology or software required to operate a piece of machinery. Ownership of the IP may therefore be sensitive and require special treatment.

In this situation, the parties might consider entering into a separate IP licence agreement that supports the main contract so that changes to IP rights can be managed without renegotiating other aspects of the commercial relationship.

In transactions involving complex computer programs, the parties may engage a special agent called an “escrow agent” to hold onto IP like source code during the term of the relationship.

This means that the creator can protect the value in the IP, but if anything happens to that creator (such as insolvency), the client can access the code to keep using the products of the relationship.

What If I Already Had Some IP That I Brought Into The Project?

One or more parties will typically bring some IP into the commercial relationship. This is often called “background IP”.

Usually, the contract will allow both parties to retain ownership of their background IP but require the owner to grant a licence to the other party to use the background IP to the extent needed to achieve the contract’s objectives.

What About When I’m Discussing An Exciting Opportunity With A Potential Client, And I Don’t Want Them To Steal My Ideas?

This is when you want to enter into a non-disclosure agreement, specifying that no IP will be transferred during the discussions and restraining the other party from using any of the IP or confidential information for its commercial purposes.

This Sounds Too Complex For Me – Where Can I Get Help?

“IP Australia” is the Australian Government agency that manages the registers for patents, trademarks and other registrable IP interests. It publishes plenty of plain English resources that explain options for protecting and commercialising IP on its website.

If you enter straightforward or high-level discussions with a potential commercial partner, you may find that you can download or buy a suitable non-disclosure agreement online. OneNDA provides a free simple NDA template that is used by businesses around the world.

Suppose your business is involved in knowledge creation. In that case, it’s best to engage a commercial lawyer to draft or review the IP clauses of your business contracts or to prepare a comprehensive non-disclosure agreement.

If your IP becomes more sensitive or exceptionally high value, you might think about instructing a specialised IP lawyer (called a “patent attorney”) to advise you on IP protection strategies.

SoundLegal is here to help, you can get in touch with Gemma here.