What’s The Big Idea? Protecting Employer-Owned Intellectual Property

by Pepper Hamilton LLP

A version of this article was originally published in the December 2012 issue of The HR Specialist. It is reprinted here with permission.

With the year-end holidays fast approaching, many businesses are in the midst of assessing their 2012 performance and planning for 2013. If those plans do not include a review of employment agreements and policies that seek to protect the intellectual property assets of the business, perhaps they should. This year provided two examples of the problems caused by employees whose employment agreements seemingly provided the employer contractual ownership of its copyrights. In this season of gift giving, it seems fitting that the toy and game industry provides the setting for valuable lessons that all employers who seek to protect their intellectual property assets can learn.

This year saw the settlement of high-stakes litigation between the creators of the highly successful “Call of Duty” video game franchise and Activision, the game’s manufacturer. Activision employed the game’s creators, Jason West and Vince Zampella, under a series of employment agreements beginning in 2003. The “Call of Duty” games generated an estimated $7 billion in revenue since the first release in 2003, yet the working relationship between Activision and the “Call of Duty” creators turned contentious. In 2010, after learning that West and Zampella were communicating with rival game manufacturer Electronic Arts, Activision terminated their employment, took the position that West and Zampella breached their fiduciary duties, and refused to pay them bonuses and royalty payments. In response, West and Zampella sued for wrongful termination and sought more than $36 million in damages. Thereafter, Activision filed a countersuit that sought $400 million in damages. The terms of the settlement were not disclosed, but creative control and the intellectual property rights, and the lucrative royalty stream associated with those rights, were key elements of a case that arose out of an employment contract.

The year also saw what should be the final round of the longstanding copyright infringement battle over the “Bratz” doll. Eight years after the lawsuit was initially filed in 2004, toy manufacturers Mattel and MGA Entertainment continued to litigate the intellectual property assignment provisions of a former Mattel employee’s employment agreement. Carter Bryant, a former Mattel employee, first began working on a design for a new doll when he was employed by Mattel. Bryant’s employment agreement included an assignment to Mattel of all inventions (which included other intellectual property rights including copyright) that he conceived at any time during his employment with the company. After Mattel secured a $10 million award in its favor, the Ninth Circuit vacated the award. The Ninth Circuit reasoned that the definition of the word “inventions” in Bryant’s employment agreement did not specifically include the assignment of his “ideas.” Similarly, the Ninth Circuit determined that the phrase “at any time during my employment” in Bryant’s employment agreement was ambiguous and could have referred to the entire time – including nights and weekends – during Bryant’s employment, or it could have only referred to the time that he was working. In the hands of the jury, these seemingly unambiguous terms cost Mattel millions of dollars.

The jury in the second trial found in favor of MGA Entertainment and awarded it a $310 million verdict. In early 2012, Mattel gave up the fight over the copyright infringement issue, but appealed the amount of the $310 million verdict, which included an award of $172 million for misappropriation of MGA’s trade secrets and $137 million in attorneys’ fees and costs. The issues raised by these cases extend beyond the toy and game industry and beyond those employees who are hired to create copyrightable or patentable products. Whether it’s the circumstances surrounding a “for cause” termination, or the scope of the phrase “at any time during my employment,” both the “Call of Duty” and “Bratz” cases demonstrate the importance of protecting intellectual property rights and financial resources with contracts that are clear and specific to the business interests that are intended to be protected. Many employers forego written agreements that assign copyrights to the business and rely upon the Copyright Act’s “work for hire” provision to protect their copyrightable assets. Generally, a “work for hire” establishes the copyright ownership with the employer, rather than the employee. The Copyright Act, however, limits the types of works that are covered. Furthermore, the “work for hire” doctrine does not apply to independent contractors who perform services for a business. Establishing contractual rights, in addition to those set forth in the Copyright Act, to protect company intellectual property rights is a practical step for all employers.

Employment agreements are an appropriate first step in analyzing the strength of an employer’s contractual intellectual property asset protection. The analysis, however, should not end there. Other contracts that are likely to, or should, embody intellectual property rights protection include independent contractor agreements, confidentiality agreements, restrictive covenant agreements, licensing, technology development agreements and technology transfer agreements. So before the next big idea walks out the front door, prudent businesses should invest the time to analyze the strength of their contractual intellectual property rights and implement agreements that could be the difference between recouping or losing millions.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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