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Protecting Intellectual Property When Using Independent Contractors

You need to schedule your rooms, track assets, direct people, meet increasingly onerous record-keeping protocols, and exchange data across legacy systems. You need the hardware; you need the platforms, but building and integrating these systems is not what your clinic, outpatient center, pharmaceutical, or other healthcare business does. As a general rule, no matter how good you are at vein access, dialysis, or anything else, you should not even try to write your own code, design your own network, or move into another technical sphere. You can and should hire outside software developers, IT configuration specialists, and other independent contractors to help.

You have to, but there is extreme danger in this reliance. If you do not have the right agreement with your outside developers, you do not own what they have created.

This is a critically important point, in part because it runs counter to common assumptions. If you pay an independent contractor (a non-employee) to create something for your business, you do not own it. Repeat: You do not own it. You paid for it. It may be derivative of your own work. It may be essential to your business plan. It may have been created by your wife’s cousin or you may have paid a good deal for it, but you do not own it. When this lack of ownership is discovered, the market will punish your business severely, if not kill it, depending on the importance of the lapse.

How is this possible?

Understanding ownership in independent contractor relationships requires knowledge of trade secret, copyright and patent law, and how different agreements are adapted to deal with those legal concerns.

The Essential but Insufficient NDA

Many high-level managers in the healthcare industry have internalized the importance of Non-Disclosure Agreements. NDAs are tossed across the table or emailed over and typically executed with little scrutiny. The parties can silently congratulate themselves for their sophistication and move ahead with their work, knowing that they are “covered.” Not quite.

NDAs deal primarily with matters of trade secret protection. A trade secret can be just about any information that derives independent economic value because it is not generally known. It could be the shape of the implosion chamber of a thermonuclear device or your mom’s spaghetti recipe, any information that has potential value because it is not widely known. So, how can you possibly talk with investors, vendors, technical contractors, and other essential players in your healthcare enterprise without spilling the beans — an NDA. No NDA, no obligation to keep information secret, no trade secret protection in the disclosed information. Simple. Trade secret law respects and protects secrets. Something is only a secret if the people who know it are bound to maintain its secrecy.

Executing a good NDA is generally a very good thing. (There are of course innumerable complexities and risks attendant to both disclosing and receiving another party’s secrets, including neutering your business in the field, but that is a topic for another article.) The problem is the error in logic that leaps from the internalized (even if not understood) truth that NDAs are very important, particularly to healthcare enterprises that often must place critical data and process management on third-party platforms, to the conclusion that an NDA is the right document for all seasons. A good NDA does precisely what it was drafted to do: protect the confidentiality of proprietary information. It does not deal with ownership of new information and intellectual property.

If you are just disclosing information with no discussion or development of new information, an NDA may be enough. If you are engaging the other party to develop something new for your business, whether it is code, a prototype, new graphics, marketing text, or anything else, an NDA is inadequate.

Beyond Secrecy: Content, Code and Inventions

So, how can it be that you can pay someone to create something for you and not own the work product? In a nutshell, the law favors inventors and authors, vesting patent rights and copyrights, respectively, in those whose creativity gave rise to the subject matter.

Copyright

Simply put, copyright protects original works of authorship of any sort — text, images, video, code — any original expression that can be fixed in a tangible medium.1 If someone is creating your Web site or the architecture of your database, your promotional video or your application, you are in the realm of copyright protection. If a work is not created by an employee within the scope of his or her employment, the copyright vests in the author — the videographer or that grad student intern helping out two days a week. What you get by default is a non-exclusive license to the code or other work. Congratulations, you have just financed your first potential competitor. Your contractor is free to resell or use the work for himself.

Patent

Patent law is much the same. A patent is the strongest form of intellectual property protection, and your patent position will certainly be among the most important factors in maintaining a competitive advantage in almost any healthcare vertical. It may be the strongest private monopoly the state grants, and it can cover any invention — process, device, chemical compound, drug, plant, organism, just about anything — so long as it is novel, useful, and non-obvious.2 Unless the inventor, employee or not, has expressly assigned his rights in an invention, the inventor owns any patent interest in the invention at issue. The law is particularly jealous of the individual’s right to invent, and some states, most notably California, have right-to-invent statutes that go beyond federal law in giving employees broad rights to invent and own their work.3 If your independent contractor comes up with something, even if it is merely an improvement to your own work, they own it. It is theirs to protect. If they apply for and receive a patent for their invention, it is theirs. (If they liked working for you, perhaps their licensing terms will be reasonable.) As with copyright, you, at best, end up with a nonexclusive license, a “shop right” to use the invention due to the role of your funds and equipment in the process.4

The Fix

The fix is relatively simple: Use the right agreement for the job. Copyright law permits two bites at the apple. Thanks to a provision in the Copyright Act, inserted to permit the continued use of independent contractors in the creation of studio movies, if the content at issue is a “work made for hire,” copyright ownership vests initially in the hiring party.5 There is no such thing as an implied or de facto work made for hire. The statute requires a signed writing that designates the product as a “work made for hire.” In addition, the work must fall within one of seven enumerated categories which may or may not apply to you. In short, you must have an executed agreement with a work made for hire provision, most likely using the statutory magic words (“work made for hire”), if you want to claim copyright ownership from the time pen hits paper or key stroke generates character.

If you are not in one of the seven categories or you fail to get such an agreement signed, copyrights may be assigned, though here, too, the statute requires a signed writing — an executed agreement.6 (Assignments are also subject to termination after 35 years if that matters for your purposes.7) Likewise, patent rights may be assigned via a signed writing, and both the Patent Office and the Copyright Office permit the recordation of assignments to provide notice of your ownership to the world.

What is the Big Deal?

So, why the diatribe when everything can be fixed with a simple assignment? Why worry if the person doing the work is a long-standing vendor who would never try to leverage your mistake for their own gain? If you never have a serious transaction, you may be fine. Perhaps nobody will ever know. However, if it is ever in someone’s interest to scrutinize the assets of your business, you will pay a price. Obviously, the time to get someone to sign a document is at the outset. If they want the job, they will sign. The later it is in the game, the closer to a financing event or sale, the more expensive getting an assignment of the rights in the intellectual property you are using may become. That one person who did not sign a solid developer agreement will have power similar to a hold-out homeowner stalling a big construction project. If the invention or work at issue is material to your business, it could be a deal killer. At a minimum, expect a severe haircut on valuation. The interns from ten years ago, your cousin who made your logo when you started — all of it — will be examined in due diligence, and the holes you inadvertently left will be filled by money out of your pocket.

Use a Good Agreement

If you are engaging a developer of any sort, or even just someone who is adding marketing or other brain power to the business, use an agreement that has:

  • confidentiality provisions — You still have trade secrets to protect, and you need to keep your inventions and critical business data under wraps to preclude the devastation of an unplanned use or disclosure (yet another topic);
  • a work made for hire provision for copyright-protected matter;
  • a back-up assignment of copyright-protected matter;
  • an assignment of inventions;
  • an identification of any existing intellectual property the developer claims as his, to ensure there are no fights over what he brought to the table and what he created for you; and
  • a further assurances clause requiring the contractor to sign any additional short-form assignments or other documents as may be useful for effecting and recording the assignments.

Protection ownership is not rocket science. You simply need a good agreement, and you need to use it. If the market tells you that your business does not work, so be it. To prevail in the market but lose on a technicality is an avoidable tragedy.


[i] 17 U.S.C. § 102.

[ii] 35 U.S.C. § 101.

[iii] Cal. Labor Code § 2870.

[iv] See e.g. Allegheny Steel & Brass Corp. v. Elting, 141 F. 2d148, 149 (7th Cir. 1944).

[v] 17 U.S.C. §§ 101 and 201(b).

[vi] 17 U.S.C. § 204.

[vii] 17 U.S.C. § 203.

Finis

Citations

  1. 17 U.S.C. § 102. Jump back to footnote 1 in the text
  2. 35 U.S.C. § 101. Jump back to footnote 2 in the text
  3. Cal. Labor Code § 2870. Jump back to footnote 3 in the text
  4. See e.g. Allegheny Steel & Brass Corp. v. Elting, 141 F. 2d148, 149 (7th Cir. 1944). Jump back to footnote 4 in the text
  5. 17 U.S.C. §§ 101 and 201(b). Jump back to footnote 5 in the text
  6. 17 U.S.C. § 204. Jump back to footnote 6 in the text
  7. 17 U.S.C. § 203. Jump back to footnote 7 in the text