Insurance · 19 February 2018

My business partner set up a rival firm but has claimed ownership of our shared material

Intellectual property
If you use materials without permission and get caught, you could be guilty of copyright infringement

Business Advice expert, and Grid Law founder, David Walker responds to a concerned reader whose business partner set up a rival company but has since claimed shared ownership of all existing intellectual property.

Question

Please would you be able to advise on who owns the IP rights on material that was developed in a limited company where there are two directors, both whom have a 50/50 share. Some of the work was authored by one of us but all the ideas were developed jointly.

We did not assign the IP rights to anyone when we set up the company neither do we have a contract.

I have just found out that my business partner has set up a rival firm whilst as a director in our company, and is now claiming that he retains ownership and copyright over all the materials he has authored and developed whilst in our business.

I would really appreciate your advice.

Answer

Thank you for your question.

When you say “materials”, I’m assuming that we’re talking about written materials such as a training manual, which would be protected by copyright.

Copyright protection arises automatically when the written work is produced. Until then, while it’s just an idea, there’s almost no protection for it.

Copyright law says that the owner of the work is the person who created it. So, in the case of written materials, this would be the author. However, there’s an exception to this rule in the case of employees of a limited company. If an employee of a company creates the work in the course of their normal duties, then the company will automatically be the owner of the work.

“Employee” is defined in the Copyright, Designs and Patents Act 1988 as someone who is working under a contract of service or an apprenticeship. So, a director may or may not be covered by this definition because directors are not always employees.

If a director is an employee, it’s clear that the work they authored will be owned by the company. If a director is not an employee, they will own the work personally, but will hold it on trust for the company. This gives the company the right to use it.

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Intellectual property rights: Our legal expert answers your questions

As a small business owner, it is vital to your company’s health that you understand the ways in which you can defend intellectual property rights.

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A director is under a legal duty to promote the success of the company. So, setting up a rival company and using the materials for the benefit of their new company would be a breach of this duty. This gives the original company the right to take legal action against the director and claim compensation.

The trouble is, it’s often difficult to put a value on the damage the director has done or the value of the materials that they want to take.

For most small business owners, this means that taking a pragmatic view is often the best option. You need to find a solution and settlement that works for both you.

Start by taking a realistic look at the materials in question. I imagine that training materials will need to be regularly updated. So, for example, you may agree that you can both use the current version, but the leaving director must rebrand them so that there appears to be no connection with your company.

In exchange for allowing the director to use these materials, you may require them to give up their shares in the company for free.

Then, as the materials become out of date, you will both update them in your own way and over time, there will be less and less similarities between them.

Hindsight is always a wonderful thing, but it’s to prevent situations like this that I always advise business owners to enter into a shareholders’ agreement when they start a company.

The terms of a shareholders’ agreement can make it clear who owns any intellectual property produced and what happens to it if one of the shareholders leaves the company.

I hope this answers your question. If I can help any further, please feel free to email me at editors@businessadvice.co.uk.

Take a look at our webinar where we explain how intellectual property can give your company a competitive edge

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ABOUT THE EXPERT

David Walker is the founder of Grid Law, a firm which first targeted the motorsport industry – advising on sponsorship deals, new contracts and building of personal brands. He has now expanded his remit to include entrepreneurs, aiding with contract law, dispute resolution and protecting and defending intellectual property rights.

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