For nearly all companies, but particularly companies in the technology sector, the intellectual property ("IP") they create are the crown jewels of the business. Without the IP, the company has nothing to sell. Of course, the IP does not form out of thin air—someone has to create it. That “someone” is the company’s founders, as well as employees and contractors hired by the company. Accordingly, companies should have an approved form of Proprietary Information and Inventions Assignment Agreement (often referred to as a “PIIA” or an “IP Assignment Agreement”) executed by each of its founders on formation, and each future employee and contractor upon hiring or engagement.
The PIIA is a contract that ensures that any work created by an employee or contractor while working for the company is assigned to and owned by the company and not the employee or contractor. Without an express assignment to the company, the company risks not having a clear chain of title to the work created and the opportunity for employees or contractors to claim individual rights in such IP. While in the U.S., copyrights are considered work made for hire and automatically owned by the employer, this is not the case for patents and other IP rights.
Further, even if a company believes that it has a strong claim to IP ownership in the absence of a PIIA, most sophisticated acquirors will require a company to represent and warrant in a sale transaction that all current and former employees and contractors have executed a PIIA. Buyers can have a number of reasons for wanting to purchase a company, but a target’s IP is often a driving force, particularly in the technology space. As with any company, personnel changes constantly. If ex-employees or ex-contractors did not sign PIIAs, it is not unusual for a buyer to require as a condition to closing the acquisition that the company tracks down former service providers and have them sign a PIIA, which may require the payment of additional cash consideration to the former employee or contractor.
While we have seen buyers waive the PIIA requirement for former administrative or sales employees or contractors who had little to no involvement in the development of the company's products, the same cannot be said for a key developer or someone else integral to the creation of company IP. In that case, the buyer is unlikely to overlook missing PIIAs, and there's a substantial risk of a deduction in the purchase price, a special indemnification provision, or even the deal falling through.
The best time to plant a tree was ten years ago, but the second best time is today. If your company does not have PIIAs in place, it's recommended you consult your attorney to get them in place with prior and current employees and contractors. You'll be glad you did.
