What business sellers get wrong about IP ownership

When a business owner is preparing to sell, attention naturally turns to the assets: stock, plant and equipment, goodwill, receivables and any real property.

Intellectual property, or IP, can often be an afterthought, despite often representing some of the most valuable assets being transferred.

If IP ownership is unclear or undocumented, it can stall a transaction, reduce the sale price, or expose the seller to post-completion claims.

What IP are we talking about?

In this article, we are focusing on “created IP”. That is, IP generated through the business’s own activities, including developed software, written works, databases, designs, processes, methodologies and know-how, whether or not it has been formally registered.

These are often the assets that give a business its competitive edge. In many modern businesses, they can be among the most significant assets being sold.

This differs from registered IP rights, including trademarks, business names or domain names, although these are no less important in a business sale context.

The sort of “created IP” that might be relevant includes:

• a business commissioning a software coder to write software to serve as the digital platform to operate the business, whether to manage or report on service delivery, manage production, or manage projects;
• your business’s “get-up”, including graphics, livery and trade dress that form your business branding and were likely created by a freelance graphic designer; and
• the content of your business’s website. In this instance, we are not considering the actual domain name, but rather the layout, words, images and other content. If non-employees prepared this content, then there is likely an issue to consider.

Created IP ownership

The difficulty with created IP is that ownership does not always follow expectations.

Just because a business paid for something to be created does not automatically mean it owns the resulting IP. This is where many businesses can be caught off guard.

The default position in Australia is that where work has been carried out by an independent contractor or freelancer, the contractor retains ownership of the IP they create, unless there is a written agreement expressly assigning that IP to the business.

A contract that is silent on the point, or that merely licenses the created IP to the business, can leave the business in a precarious position.

If those pieces of IP are central to the business’s operations, a buyer will rightly regard ownership uncertainty as a serious problem.

However, the position is different for employee-created IP.

As a general rule, IP created by an employee in the course of their employment belongs to the employer. However, there are circumstances that can override or blur this default rule.

Where work is carried out outside the scope of an employee’s role, or where the boundaries of employment are hazy, as is common with hybrid working arrangements, side projects, or staff working across multiple entities in a group, the position is less clear.

Relying on the statutory default without supporting documentation is a risk. An employment contract or IP policy should address that point.

The need for an IP register

Businesses that can demonstrate clear, documented ownership of their created IP are far better placed in a sale process.

A well-maintained IP register records what IP the business owns, when it was created, each version in the case of software, the related dates, who created it, and the basis on which ownership vests in the business. For example, it should include a reference to the underlying agreement or employment relationship that supports each ownership claim.

Maintaining such a register is not a legal requirement. However, it is a commercial asset.

It can significantly reduce due diligence timeframes, reduce the scope for buyer price negotiations, and give the business or seller confidence in the warranties it is asked to provide.

Practical steps for an IP register

For any business that engages freelancers, consultants or agencies, contractor agreements should include an express IP assignment clause.

That clause should transfer all IP created in connection with the engagement to the business, with effect from the moment of creation.

A licence is not sufficient.

The assignment should be broad enough to cover all works produced, including preparatory materials and various versions or iterations.

For employees, while not strictly required, it is good practice to include a clear IP ownership clause in employment contracts.

This should confirm that all IP created in the course of employment, defined broadly, belongs to the employer.

This complements the statutory position and reduces potential ambiguity, particularly in complex employment arrangements.

Need advice?

If you would like further specific advice in relation to your business’s created IP position, or help updating your contractor agreements, please contact us.