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You are not partners anymore. What happens with your IP now?

Posted by Giselle Ayala | Nov 12, 2020 | 0 Comments

At the of a business relationship, everyone wants to take his part of the deal and walkway. From the start to the end of a business relationship it is important to put things in writing so that each party knows its rights and responsibilities. The document describing such a business relationship should be drafted to address, among others, what will happen with the assets and liabilities of the business. If the document was complete enough the possibility of a conflict is less. 

Defining the terms applicable to your ending relationship

The first step before we know what is going to happen with the intellectual property of the business is to understand the terms applicable to your ending relationship. Here it is important to know whether the business relationship resulted in the incorporation of a legal entity such as a corporation or an LLC, or whether you were under another form of business organization. 

If you formed a corporation. If you and the other shareholders have decided to dissolve the corporation, you must appoint a fiduciary (a director, an officer, a shareholder, or another) in charge of winding up the corporation. First, liabilities must be paid with the corporation assets, if the assets of the corporation include intellectual property assets, such as trademarks, works of authorship, or patents, they may be used to pay the debts of the corporation. If there are any assets left, then, the fiduciary must distribute the assets of the corporation according to the interest owned by each shareholder. It is important to keep in mind that, unless otherwise agreed to in the articles of incorporation or the by-laws, no shareholder is entitled to receive the same specific asset contributed at the beginning. That said, if your business relationship ended because you are selling you shares to another, unless otherwise agreed to, you have no specific right in any of the corporate assets, including the intellectual property. 

If you form an LLC. Similar to a corporation, an LLC must be dissolved if the LLC member so decided. In this case, a fiduciary will be in charge of the process of dissolution, the LLC debts are paid with the LLC assets and if something is left, those assets are distributed according to the interest of each member. Again, unless otherwise agreed to, no member has a specific right in any of the LLC assets, including the intellectual property.

If you did not incorporate the business.

In this case, the situation is much more complex, it is necessary to review the written agreements between the business partners to figure out what the deal was. If there is nothing in writing you and your partner probably formed a partnership. A partnership is a form of business organization where two or more individuals or legal entities, carry on a business as co-owners and share equally losses and profits. In this scenario, each partner is responsible for any and each of the debts incurred by the partners in furtherance of the business. Here, it is important to understand that all partners are equally responsible. Accordingly, their independent and joint intellectual property assets can be reached by the creditors. Considering this, once a partnership is finished both partners should sit to organize their debts, agree on how to deal with them, and inform all interested third-parties about the end of the partnership. Additionally, partners should make a document settling who owns the assets created during and as a result of the partnership. 

Is that enough? Do we know who owns what?

We have already discussed in general terms what happens when a business relationship ends. However, that is the ideal scenario, where everyone knows who is the owner of the intellectual property created before, during, and after the business relationship existed. The ideal scenario far from reality. The problem with intellectual property is that creators and entrepreneurs usually do not put things in writing, then, ownership becomes an issue. If business partners incorporated a legal entity and contributed intellectual property assets, those assets receive a monetary valuation. Then, it is settled that the legal entity owns the intellectual property contributed, and the shareholders or the members of the LLC, have an economic interest in whatever is left at the end. Here, it is also important to know if the owners of the legal entity worked for the business as contractors or employees. This will determine who is the owner of the intellectual property assets created after the legal entity was formed. If the business partners did not incorporate a legal entity and did not sign any kind of agreement, the situation is again more complex. Here, it is necessary to figure out who is the owner of the intellectual property created after the partnership started. In this case, we're dealing with issues of ownership and co-authorship. 

Ownership and co-authorship in intellectual property 

When it comes to ownership and co-authorship in intellectual property, first, we need to know what kind of intellectual property we are dealing with. There are basically four forms of intellectual property: trademarks, copyright, patents, and trade secrets. 

Trademarks. 

A trademark is a symbol or logo that differentiates products and services in the market. Unless otherwise agreed to, a trademark can be owned by one or people if it is used in commerce by them, jointly, at the same time, and in the same business. If a trademark is registered, the person or entity listed in the registration is presumed to be the owner of the trademark. In the case of a partnership, the common law rights over the trademark (rights by use) are presumably owned by the two partners. 

Copyright. 

Copyright speaks of the interest vested in the author of a work of authorship. If a work of authorship is the result of the efforts of several people, and those efforts cannot be distinguished, the work is jointly owned by them, who are considered co-authors. In this case, they all share the same undivided interest in the work of authorship. 

Patents. 

Patents can also be owned by one or more individuals. The rights over a patent are subject to the terms of the patent registration. 

Trade secrets. 

This is a very broad concept that refers to private protectable information of commercial value which is known only by a few. I business relationship comes to an end and there is nothing in writing ownership of such information depends on the evidence provided by each interested party.  

Once we know what kinds of intellectual property exist, what is the takeaway?

Well, each form of intellectual property is owned by its creator or that person on behalf of whom it is created if there is evidence of an employment or a work for hire relationship. When there is nothing in writing, the law makes no presumptions of assignment. Accordingly, if two business partners joined efforts to come up with a great trademark, a literary work, a musical composition, to file together a patent application, or to protect some commercial information, and there is nothing in writing saying otherwise, both partners are equally entitled to own such intellectual property.  Thus, at the end of the relationship, they must agree on how to assign those rights or they will have to resolve the issues involving a third-party. 

 So… You are not partners anymore. What happens with your IP now?

Intellectual Property assets like the other kinds of assets involved in the development of a business are owned by the partners unless otherwise agreed to. If the partners have an agreement in place, the agreement should make reference to the distribution or assignment of any rights of intellectual property. However, if the partners are silent, and they do not come to an agreement as to how to end their relationship and distribute those rights, they will end up in litigation subject to the judgment of a third-party. In conclusion, at the end of any business relationship losses are distributed, and if there is anything else to take, it will be distributed according to the agreement of the parties or the decision of third-party. 

About the Author

Giselle Ayala

Giselle Ayala Mateus is a NY attorney with comprehensive experience in transactional law, creative agreements, business formation, and immigration law. She is also the founder of Focus Juridico a not-for-profit project focused on supporting Latin American entrepreneurs and artists.

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