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Do I own what I bought?

By Michael T. Hess, Janell M. Kurtz and Wayne Wells

Executive summary
Many traditional employer-employee relationships have moved into the realm of independent contractors, freelancers and temporary workers. Although this can help an organization’s flexibility and cost structure, it could lead to copyright questions for vital products such as training manuals, software, advertising material, drawings and designs. Businesses should protect their copyrights at the beginning of any contractor relationship.

With the uncertain economy, many managers are turning to independent contractors, freelancers and temporary workers to fill their departmental needs. While these workers can offer greater flexibility at lower cost, employers need to take steps to ensure that their copyrights are protected. Many business creations such as engineering drawings, manuals, software and websites are covered by copyrights.Under the law, an employer owns the copyright to a work authored by an employee. If an independent contractor creates a work, however, the copyright is owned by the independent contractor unless the employer has taken further steps to protect its interest. In other words, payment for the independent contractor’s services does not secure automatic ownership in copyright works.

Types of work protected

Copyright protection extends far beyond the subject matter traditionally thought of in the context of copyright. Indeed, much of the material prepared in the ordinary course of business is protected by copyright law. Examples of work covered by copyright include the following:

  • Software
  • Drawings and designs
  • Photographs, illustrations and artwork
  • Websites
  • Newsletters
  • Promotional materials
  • Informational brochures
  • Business reports
  • Audiovisual presentations
  • Training materials
  • Product packaging and labels
  • Advertising materials

Further, this work is protected immediately upon its creation. There is no action needed, beyond authoring the work, for copyright protection. While including a notice of copyright by using “© 2011 Owner Name” or “Copyright, 2011, Owner Name,” is sensible, it is not legally required.

Work must be in a tangible form for copyright protection. Ideas are not protected by copyright law. Consider, for example, a group brainstorming session to encourage original ideas for a new product. The session and ideas are not recorded. The ideas discussed are not protected by copyright law. When the ideas are developed into concept boards – put in a tangible form – they would receive copyright protection.

Ownership

Copyright works authored by employees acting within the scope of their employment belong to the employer. Contract workers, however, are not employees. With work created by contractors, the general rule of law is that unless there is a written agreement pertaining to copyright, the author-contractor owns the copyright. Thus, even though the business paid a freelancer to create the material, the freelancer owns the copyright.

In determining whether a worker is an employee or independent contractor, the key inquiry is the hiring party’s right to direct and control the manner and means of how the work is accomplished. The courts follow what is referred to as the common law test, which takes a number of factors into account, including the following:

  1. Whether the one employed is engaged in a distinct occupation or business
  2. The kind of occupation, with reference to whether the work usually is done under the direction of the employer or by a specialist without supervision
  3. The skill required in the particular occupation
  4. Whether the employer or the worker supplies the instrumentalities and tools
  5. The place of work
  6. The length of time for which the person is employed
  7. The method of payment, whether by the time or by the job
  8. Whether the work is a part of the regular business of the employer
  9. Whether the parties believe they are creating the relation of employer and employee
  10. The hired party’s discretion over when and how long to work
  11. Whether the hired worker receives employee benefits
  12. The tax treatment of the worker

This analysis is substantially similar to that used by the Internal Revenue Service for classifying workers for tax purposes. Classifying the worker as an employee or independent contractor is based on the totality of the relationship, with no one factor being determinative.

The case of JustMed Inc. v. Byce illustrates the importance of determining a worker’s status. A dispute arose over ownership of a software program between JustMed, a small technology startup company, and Byce, the source code’s author. There was no written agreement concerning the copyright. Consequently, if Byce was an independent contractor, he would own the copyright; alternatively if Byce was an employee, the copyright would be JustMed’s property.

To determine the parties’ relationship, the court balanced the various factors. See Figure 1 for the court’s breakdown. As can be seen, the factors do not definitively point to a conclusion. In ruling that Byce was an employee, the court emphasized that JustMed was a startup company and that Byce’s work was integral to JustMed’s regular business. The court recognized that small startup companies conduct business more informally than established ones, and while not excusing JustMed’s failure to comply with employment and tax laws, the court decided that these failings should not determine ownership of the intellectual property. Of consequence as well was the importance of the copyright to JustMed; JustMed’s sole product relied upon the software at issue.

The inherent uncertainty in the common law analysis is illustrated by the decision in Kirk v. Harter. In Kirk, the facts were substantially similar to those in JustMed. Iowa Pedigree (Pedigree) is in the business of helping dog breeders and brokers comply with the American Kennel Club and United States Department of Agriculture licensing and registration requirements. Pedigree hired Harter to develop computer software to aid its customers in conforming to these regulations. The various common law factors are categorized in Figure 2.

In balancing the factors, the court decided that Harter’s high skill level together with the handling of taxes and benefits tipped the scale in favor of finding an independent contractor relationship. Interestingly, neither the type of business nor the software’s importance to the business was discussed. Since the court determined that Harter was an independent contractor, the copyright to the software was owned by Harter.

Comparing the JustMed case to the decision in Harter, it is easy to agree with the Second Circuit’s observation that this balancing “test can be easily misapplied, since it consists merely of a list of possible considerations that may or may not be relevant in a given case.”

Strategies for protecting copyrights

In view of the uncertainty surrounding whether an individual is an employee or independent contractor, organizations need to be proactive in protecting their copyright interests. Copyright ownership issues should be realized before making a hiring decision and addressed at the time of hire. Specifically, a written and signed agreement transferring all copyrights to the hiring entity should be entered into upon hiring and before the creation of any copyrighted work. Transferring rights in a copyright is accomplished generally through the following techniques: use of the “made for hire” doctrine; use of a written and signed transfer agreement; or a combination of the above.

Work made for hire

Under the law, works “made for hire” arise in two situations. The first category includes works created by an employee within the scope of employment, and the second concerns certain works created by an independent contractor. In a work “made for hire,” the copyright owner is either the employer or the entity that requested the work. It is important to recognize that the phrase “made for hire” is a term of art.

When an employee within the scope of his or her employment creates a copyrightable work, the work is a work “made for hire” and belongs to the employer. Indeed, the employer is considered the author of the copyrightable work created by the employee.

In an example, Jane is a software developer for Major Computer Corp. LLC, which specializes in developing applications for First Cellular’s smartphone operating system. During Jane’s most recent 40-hour workweek, she developed a new application to run on First Cellular’s smartphone operating system. Because Jane developed her application within the scope of her employment, during regular working hours and in line with her employer’s main business and her job, Major Computer Corp. LLC is the author and owner of the copyright in Jane’s new application.

Significantly, when the worker is an employee, the work is only “made for hire” if the copyrighted work was developed by the worker within the scope of employment. Thus, the employer will own works created by employees in the scope of employment. If there is any doubt as to the status of the worker, a signed written agreement to assign all copyrights to the employer should be executed. Such agreements are discussed below.

Except in limited instances, a work created by independent contractors is not a “work for hire.” The “made for hire” doctrine applies to works created by an independent contractor only when there is a written and signed agreement indicating the work is to be a work made for hire, and the work is specially ordered or commissioned and falls under one of nine categories. The categories are: a contribution to a collective work, a part of motion picture or other audiovisual work, a translation, a supplementary work, a compilation, an instructional text, a test, answer material for a test or an atlas.

When both of the above conditions are met, the author and owner of the copyright is the entity requesting the work, not the person who created the work.

The signed written agreement under the independent contractor prong of the work-made-for-hire doctrine may be an agreement solely addressing a specifically requested work. More frequently, however, a clause indicating a requested work is to be a work made for hire is included in a larger agreement discussing the terms of work to be performed by the independent contractor. This larger agreement is often termed an “independent contractor’s agreement.” The following is an example of a work-made-for-hire clause that may be included in a general independent contractor’s agreement:

“Works that Contractor is creating have been specially commissioned by Principal. The works shall be considered a ‘work for hire’ (as defined in Title 17 of U.S.C. § 101), and Principal will own the copyright in the Works and in the materials used to create the Works.”

The clause may take on other forms or use differing terms, but all work-made-for-hire clauses will indicate the requested work is “specially ordered or commissioned” and that the work is a “work for hire” or a “work made for hire.”

In an example where a requested work likely would be a work made for hire, John is an independent product analyst. One day an editor at Big Time Products Quarterly, a magazine, approaches John about researching and writing an article for its next quarterly issue. John and the magazine editor initially agree to terms over the phone, but prior to starting work on the project, the editor has John sign an independent contractor’s agreement referencing that Big Time Products Quarterly is specifically commissioning the article as a contribution to a collective work for its next quarterly issue and that such article is to be a work made for hire.

Under this situation, there is a signed written agreement indicating that the article is to be a “work made for hire,” and the work would be classified under one of the nine statutory categories. In this case, the article is a contribution to the collective work of the magazine in which it appears. Thus, John’s article will be considered a “work made for hire,” and the magazine will be the author and owner of the article for copyright purposes.

Despite the uncertainty of the application of the doctrine, a work made for hire is desirable and has advantages over other copyright transfers. One advantage is that there is no transfer at all. That is, the authorship of a work made for hire, for copyright purposes, initially is vested in the employer or entity requesting the work.

This distinction may seem trivial, but copyright “authorship” is important as the author has a statutory right to terminate transfers for a period of time starting at 35 years from the date of the transfer. That is, Congress has statutorily indicated, as a matter of public policy, that if an author assigns its rights in a copyright, the author or his or her heirs have the ability to revoke the assignment 35 years after entering into the assignment.

Thus, when receiving an assignment of a copyright, the receiving entity should assume the transfer will be terminated after 35 years. Further, the term of the copyright varies depending upon whether the copyright author is the creator of the work or a party that has requested a work falling under the doctrine of work made for hire. That is, a copyright in a work authored by the creator of the work lasts for the life of the author plus 70 years, while a copyright in a work falling under the work-made-for-hire doctrine lasts for 95 years from the first publication of the work or 120 years from the creation of the work, whichever expires first.

Other transfers of ownership

Another method of transferring rights in a copyright is through use of a written and signed transfer agreement. This type of an agreement must be used if the work is not a “work for hire.” Because of the ambiguities in the “work for hire” doctrine, such an agreement might be used in addition to reliance on the doctrine.

The requesting entity can ensure copyright ownership by explicitly providing for a transfer of copyrights in an assignment document or as a clause in a larger employment or independent contractor’s agreement. Regardless of the document used to affect the transfer of copyrights, the instrument of conveyance must be “in writing and signed by the owner of the rights conveyed or such owner’s authorized agent.” The following is an example of an assignment clause in an independent contractor’s agreement:

“Contractor hereby irrevocably assigns to Principal, in perpetuity throughout the universe, the ownership of copyright to the Works to be completed under this Agreement without the necessity of any further consideration, and Principal shall be entitled to obtain and hold in its own name all copyrights developed. Contractor shall perform any acts that may be deemed necessary or desirable by Principal to evidence more fully transfer of ownership of all materials and Works created under this Agreement to the fullest extent possible, including, but not limited to, the making of further written assignments in a form determined by Principal. Contractor hereby gives to Principal a limited Power of Attorney to complete and effectuate any necessary assignments or document on behalf of Principal to evidence or complete ownership in said intellectual properties and copyright Works developed under this Agreement including, but are not limited to, copyrightable artwork and computer works.”

Often, an assignment clause is used in conjunction with a work-made-for-hire clause. Indeed, it is a best practice to use an explicit transfer of copyrights in a requested work even if the requesting entity believes the requested work is or will be covered by the work-made-for-hire doctrine. Such practice ensures the copyrights are owned inevitably by the requesting entity. Further, only one document is needed. The document indicating that a requested work is to be considered a work made for hire also can include an assignment of the copyrights. The assignment will protect the requesting entity in the event the requested work ends up not being legally considered a work made for hire, such as a requested work that does not fit into one of the nine statutory categories.

Combining a work-made-for-hire clause and an assignment clause into a single document is efficient as the requirements are the same: a written, signed instrument. When both clauses are present in a single document, the above quote may begin with the following: “In the event the Works are not a work made for hire …”

Secure your copyrights

To maximize rights in copyrightable work, the employer or requesting entity should record the written and signed agreement. This is done by submitting the copyright or assignment agreement along with a recording fee to the United States Copyright Office. Once the Copyright Office has accepted the signed document accompanied by the fee, it will issue a certificate of recordation to the owner of the copyright.

The major benefit of recordation is that a recorded assignment of ownership of a registered copyrighted work takes priority and prevails over subsequent assignments of the copyrighted work, much like the effect of recording a land deed with a local authority. All businesses should record with the Copyright Office any agreement indicating the assignment of a registered copyright. Note that this is not a registration of the copyright, but simply a recordation of the agreement. Further, if a business is to receive an assignment of a copyright that is not registered already, it should include in the assignment agreement a clause requiring the assignor to sign all documents required for registration and promptly register the copyright.

Don’t be caught thinking that because you paid an independent contractor to create work for you that you own the work. Under copyright law, the general rule is that copyrights are owned by the author, and therefore, the contractor. To protect your copyrights, enter into signed written agreements with all of your independent contractors explicitly covering the ownership of copyrighted works.

Michael T. Hess is an associate with Seager, Tufte and Wickhem. He has a doctoral degree in law from Marquette University Law School, a master’s degree in mechanical engineering from the University of Minnesota and a bachelor’s degree in industrial engineering from the University of Wisconsin-Madison. He is licensed to practice law in Minnesota, California and Wisconsin. He is registered to interact with the U.S. Patent Office on behalf of clients in pursuit of a patent.

Janell M. Kurtz is a professor of business law at St. Cloud State University. She has a J.D. and an MBA from the University of Memphis. She is licensed to practice law in Minnesota and Tennessee.

Wayne Wells is a professor of accounting at St. Cloud State University. He has a Juris Doctor and a Master of Laws (LL.M.) from the University of the Pacific.

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