A variety of situations can trigger a “business divorce” between business partners. One common cause is a fundamental disagreement over the direction or vision of the business, where partners have conflicting ideas about growth strategies, product development, or market focus. Financial disputes can also contribute to a split, especially if there is a perceived imbalance in contributions or disagreements over profit distribution. Personal conflicts are known to cause fissures in business relations, as well as external pressures and life changes. These or other issues can leave business partners with the difficult decision to dissolve or restructure the partnership.
One of the most contentious issues in such separations is the ownership of intellectual property (IP). The importance of IP cannot be understated as it often serves as the foundation of the business. It is important that business leaders who find themselves contemplating a business divorce understand how to determine ownership interests in IP. The following will provide a broad overview to help begin navigating this issue.
Preventative drafting advice
The old saying about an ounce of prevention being worth a pound of cure holds true when it comes to business matters such as these. Preventative measures including clear and comprehensive agreements drafted at the outset of a business relationship can significantly reduce disputes over IP ownership in the event of a business divorce.
Use of IP clauses in shareholder agreements can also help. When drafted wisely, these provisions can clearly define ownership and rights to IP, mitigating the risk of misunderstandings and disputes later. It is important to note the need to regularly review these documents. As the business evolves, it is important to make updates to reflect changes in IP development and ownership.
Legal tools can help answer ownership questions
Whether these tools are in place or not, when a business partnership ends, determining who owns the intellectual property can become a point of contention. IP developed during the course of the business is generally owned by the business and often holds significant value. Trade secrets, for example, are often critical to a company’s competitive edge. This form of IP can include formulas, practices, processes, designs, instruments, or patterns. Those going through a business divorce must carefully consider the allocation of trade secrets while also taking steps to help ensure they remain protected during and after the separation process. Legal tools that can help protect trade secrets and other forms of IP include the following:
- Assignment agreements: These agreements specify the ownership of IP created by employees or partners. If a clear assignment agreement exists, it can help determine who retains ownership of the IP after a split.
- Work-for-hire principles: Under these principles, IP created by an employee within the scope of their employment typically belongs to the employer. However, the specifics can vary based on jurisdiction and the exact terms of employment contracts.
It is also helpful to have non-disclosure agreements and careful documentation of what constitutes IP in place.
Strategies for dividing or licensing intellectual property
When business owners separate, they must decide how to divide or license the intellectual property. This process requires strategic planning and negotiation to help better ensure fair distribution and continued business viability. Licensing agreements are one option and can allow both parties to continue using the IP. Licensing can be exclusive or non-exclusive, depending on the needs and future plans of the separating parties. Another option involves one party choosing to buy out the other’s interest in the IP. This option can provide a clean break and clear ownership lines.
Business divorces can be challenging, particularly when it comes to intellectual property. By understanding the legal principles surrounding these issues, business owners can navigate the situation more effectively.
Subscribe To This Blog’s Feed