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AG-LEGAL lawyers told in their material how to save your IT business from unscrupulous freelancers, not to screw up contracts with employees and protect your own intellectual property.
The content of the article
Intellectual Property Audit. Explained in Simple Terms
Why build an IS management system
Important points
conclusions
Nikolay Rukhtin
Lawyer AG-LEGAL
Situation: you have been creating and growing your IT startup for a long time and persistently. You found potential investors, reached the negotiation stage, they assessed your company and… refused to invest in your business. Sounds very sad!
Why did this happen? I think we can play Vanga: you worked with freelancers, did not conclude the correct contracts with designers, developers, and now you cannot even confirm the rights to everything that was created. In order not to repeat this sad story in practice, read our article, in which AG-LEGAL lawyers tell you how to prevent this!
1. Intellectual property audit. Explained on the fingers
First, let's define what it is Intellectual property audit. This is a comprehensive analysis of how the company structures its intellectual property (hereinafter IP). As part of such an audit, it is determined who created the intellectual property objects, how the company's relations with the authors were formalized, and what restrictions and encumbrances exist.
Let's put it simply: an IP audit is something similar to a check of the legal purity of an intellectual property object. The only difference is that a check of legal purity is carried out in relation to one specific asset, while an IP audit involves checking the legal purity of all such assets of the company. We also add here a check of how the company manages its intellectual rights.
We've sorted out the concept. Let's figure out who should conduct an IP audit. It's logical that the most important feature will be earnings on intellectual property. That is, IT companies, engineering organizations, creative firms (publishers, designers, music labels, bloggers, etc.).
Thus, a well-organized intellectual property management system will be useful to all those who intend to earn money from the results of creative and intellectual work.
2. Why build an IS management system
Perhaps the first thing you would like to know about IP management is why it is needed?
An intellectual property audit allows you to confirm that the rights to all sorts of developments and other intellectual products are correctly registered. Let's look at the cases when you may need to gain such confidence.
In your plans working with large customers – large corporations have adopted compliance checks (checking for compliance with requirements) and due diligence when concluding contracts with new counterparties, so that claims from third parties do not affect their interests and do not disrupt established business processes.
We strongly recommend that you conduct an IS audit if you intend to attract investment into your business. Or you have decided to sell your company. Remember: investors are always interested in how securely the assets of the company are secured, in which they are going to invest rubles and more.
Are you taking out a loan secured by intellectual property? Conduct an IS audit urgently! Banks are obliged to conduct legal purity checks of the collateral with special care. In this regard, we strongly recommend that you check your company yourself before applying for a loan.
Your entrepreneurial spirit requires you to entering new markets? In this case, it is simply vital to conduct an IP audit, because in the markets of other countries you can get into a situation where local competitors will try to challenge your company's ownership of your developments.
Franchising. Are you planning to grow your business through such partnership? Just protect yourself from potential disputes with third parties that can harm your business.
A little about the risks
The absence of a clear system for managing intellectual property in an organization can lead to specific unpleasant consequences, both material and reputational.
Financial risks
They anticipate legal ones and consist of the need to compensate the discovered “violation” to the “real” copyright holder. In particular, the “real” copyright holder has the right to demand compensation:
in the amount of twice the cost of the software license for each “illegally” sold license;
or in the amount of 10,000 to 5,000,000 rubles for each of the identified “violations” (for example, for each advertising banner).
Let's give another example: employees were not paid their due remuneration on time, which is why it will be paid with penalties and in court.
Legal risks
You can simply lose your assets when the company suddenly discovers that its developments do not actually belong to it, and it has no rights to use them. Why can this happen? For example, a clause was included in the contract with the contractor-developer that the rights to the developments remain with the contractor. Or due to the fact that the company did not correctly formalize relations with employees, which led to the fact that the employee personally, and not the company, remained the copyright holder of the developments.
Reputation
Problems with online stores can affect the reputation of a business, especially if the success of your company is connected with the trust of clients. Legal disputes, administrative and criminal proceedings on the topic of “who stole from whom” will definitely not be able to become a positive background for the reputation of your company.
3. Important points
Intellectual property may be produced by the following persons:
a) a full-time employee (worker);
b) by an engaged contractor.
This division has a practical nature: if the IS is created by an employee, then one set of documents will be required to retain the rights to it for the company, if the IS is produced by a contractor, then a completely different one. Let's look at these two options in more detail.
3.1 Intellectual property created by full-time employees
When an employee works in a company related to intellectual property, he creates official results of intellectual activity (hereinafter referred to as official RIA)
Official intellectual property is the result of an employee’s intellectual activity, created within the scope of his/her job responsibilities; this includes software, databases, websites and interfaces, mobile applications, computer games, texts, design, music, video, photographs, etc.
Why is it important to issue official RIDs?
Exclusive rights (property) to official RIAs belong to the employer, unless otherwise provided by the agreement between him and the employee.
At the same time, there is a risk that the employee will appropriate the rights to the work if the employer’s documentation is prepared incorrectly.
Let's give an example. In business an employment contract is concluded between the employer and the employee, but the work duties did not include the creation of software, there was no service or technical assignment, there were no acceptance certificates, and no separate remuneration for official works. On this basis, the courts decided that the rights to the application belong to the employee, not the employer. In another matter The plaintiff tried to protect his exclusive right to the photographs, but the courts concluded that the content of the photographer's employment contract did not indicate that the exclusive rights to the photographs belonged to the company, and therefore the claim was dismissed.
Result: The employer needs to properly organize the document flow with official RID so that the official RID is the property of the employer, and the employee cannot appropriate it.
What documentation is needed to retain the rights of the employer?
It is important to include the following provisions in the employment contract:
The employee creates the RID;
Procedure for transferring RID;
Payment of royalties.
Another option: to introduce a provision on official works, which would regulate relations on official works between the employee and the employer, and familiarize employees with such a provision.
Create provisions on the creation of RID by an employee in the job description
Functionality of the specialist:
Creates official works and other results of intellectual activity created by the employee in connection with or in the course of performing his/her work duties or a specific assignment from the employer, including, without limitation, technical and commercial information collected or created by the Employee.
Don't forget to assign a job task to an employee so that there is an opportunity to confirm the assignment of this task
We are talking about the task setting system, email, messengers, CRM system, etc.
Draw up an acceptance certificate
The employee transfers the completed RID to the employer.
Pay royalties
In the event that the author's remuneration is not paid, the employer will not lose the exclusive (property) right to the RIA. At the same time, the employee will retain the right to payment of the author's remuneration, which he will be able to collect by force through the court.
To be approved by order of the General Director
Regulation on official RID;
Job descriptions for the positions of employees who produce RIAs;
Task assignment system, emails/messengers, CRM systems and other channels for setting service assignments.
3.2. Intellectual property created under civil law contracts
Exclusive (property) rights to the created intellectual property under civil law contracts belong to the contractor, unless otherwise specified in the contract between him and the customer.
In this regard, it is necessary to include in the contract provisions that regulate the transfer of exclusive (property) rights from the contractor to the customer:
It is necessary to include a section on intellectual property in the contract
In this section you need to write the following:
1.1. Transfer of exclusive rights from the contractor to the customer
Exclusive rights to the results of intellectual activity created during the execution of this Agreement belong to the Customer.
1.2. The moment of transfer of exclusive rights from the performer to the customer
The exclusive right to the result of intellectual activity arises for the Customer at the moment of creation of such result.
1.3. Remuneration for the transfer of exclusive rights:
In contracts for the creation of RIA, it makes sense to indicate that in addition to the cost of the work (services), the contractor also receives remuneration for the alienation of the exclusive right. Moreover, it is not at all necessary that such remuneration should be paid in addition to the cost of the work (services).
We propose the following formulation:
The Contractor's remuneration for the alienation of the exclusive right to the result of intellectual activity amounts to 5% of the contract value, is included in it and is not paid separately.
Add to the contract the contractor's guarantee to the customer regarding legal purity
The contractor is obliged to guarantee that the RID transferred by him will not violate the rights of third parties and that in the event of a breach of such guarantee the contractor will be liable for it.
Example of wording: The Contractor guarantees and assures that the results of the work performed (services rendered) under this agreement will not violate the intellectual rights of third parties, and will not require obtaining any consents (licenses) from third parties. This condition is essential for the customer.
Transfer the RID according to the acceptance certificate
It is important to individualize the RIA in the acceptance certificate, and also to transfer it from the contractor to the customer so that the identification of the RIA does not raise doubts in the event of a dispute. Otherwise, you may end up in a situation where, in the event of a dispute, the court will conclude that the parties have not defined the subject of the contract in sufficient detail, such as, in this case musician versus label.
3.3. OpenSource
OpenSource is components that are open to the public. According to a report by Synopsys (one of the leading developers of software for electronic design and in the field of artificial intelligence), 96% of source code bases contain in itself OpenSource.
OpenSource components are covered by the following licenses:
Permissive: BSD, MIT, Apache, etc.
Copyleft (viral): General Public License (GPL), Lesser GPL, Mozilla Public License, Common Public License, etc.
Permissive (permissive) – the most beneficial for the developer. Such documents do not impose noticeable restrictions on the developer to use the product. They may contain, for example, the obligation to indicate the authors of the OpenSource component or, conversely, when selling software products that contain the OpenSource component, impose a ban on the use of the developer's name.
Copyleft (virus) licenses, on the contrary, imply significant restrictions. They are based on the principle of reciprocity: the developer undertakes to distribute software modifications under the same conditions under which the original program was distributed.
That is, if a component (part of the code) is licensed under the GPL (virus license) – this means that the entire final (new) product must be licensed under the GPL. At the same time, the GPL itself prohibits the production of paid products, and also requires the copyright holder to disclose the source code of the product.
This leads to the fact that the main asset of the company is prohibited from commercial sale of licenses. It is in this connection that it is important to take into account the limitations of copyleft (virus) licenses when developing software.
3.4. IP as an intangible asset
Accounting of intangible assets (IA) also has a significant impact on the intellectual property management system in a company, as it is directly related to the value of the company's assets and its financial performance.
In terms of accounting for intangible assets, it is important for a company to follow the accounting policy and other local regulations, in which it is necessary to pay attention to the definition of programs that are subject to such accounting, the formation of their price, the determination of the useful life, and the procedure for calculating depreciation.
It is also highly recommended to keep an eye on what expenses make up the initial cost of the asset – it is important to note that not all expenses can be attributed. For example, advertising and staff training expenses are not capitalized.
Please note that incorrect formation of the initial cost of an asset entails incorrect calculation of depreciation, and in turn, this may entail additional charges for income tax, fines and penalties.
4. Conclusions
Auditing is necessary for those companies that make money on software, content, and creative teams;
An audit of intellectual property in an organization makes it possible to reduce the risks of loss of company assets;
The risks include potential loss of assets, fines for violating someone else’s intellectual property rights, additional charges for income tax, and the inability to make money on your product;
It is important to remember the possible loss of the company's reputation.
