Beware of “Free” if it Involves IP

Imagine spending years of your life developing that product which will be your ticket to business success and finally the financial rewards for all of your hard work, only to find that because of a loophole, the designs to your product have been “taken & sold” by the outfit who provided you with “free design work” as part of a manufacturing package. 

The Entrepreneur and the Asparagus Sorter

This situation unfortunately happened recently to an asparagus grower.  The entrepreneur involved had spent considerable time developing a working prototype of a machine capable of sorting asparagus.  By its nature asparagus is a delicate and difficult vegetable to work with and until the development of this machine, sorting had been necessarily and laboriously done by hand.

The entrepreneur approached a design and manufacturer to undertake the work necessary to produce the machines ready for commercialisation.  The company he approached offered a special deal to its customers.  That deal was free design work if the resulting manufacturing work was also undertaken by them.  The entrepreneur jumped at the opportunity and the work began.  It was successful and the machine hit the market.

It was only some time later when another company largely reproduced his machine that he found the manufacturing company had sold his designs to the rival company.   However when he challenged them he found he had no legal options against them.  How could this be so?  The answer unfortunately lies in the fact that the entrepreneur did not pay for the design work.

Why could the company legally sell the drawings?

In New Zealand, under copyright legislation, ownership of copyright in original material, like design drawings, resides with the artist.  This is because copyright protection attaches to the recorded expression of an idea, rather than to the idea itself. 

Therefore, in the case of the entrepreneur, although it was he who had the idea, the manufacturing company recorded his idea in an original way which generated a copyright work in and of itself.  That is, the design drawings themselves became copyright works.  The company then owned those drawings, and could deal with them in any way they saw fit, including selling them to a third party. 

Interestingly, if the entrepreneur had paid for the design drawings they would have been caught by what is commonly referred to as the “commissioning rule.” The commissioning rule, in the case of drawings, is a law that gives ownership to who pays for the original work. Accepting the design work for “free” ended up costing the entrepreneur dearly!

What else could our entrepreneur have done to protect himself?

This situation may not have arisen if our entrepreneur had himself transposed his idea into detailed drawings.  If he had done so, the company’s drawings might have been viewed as “substantially similar” and therefore not separate copyright works worthy of separate ownership.  However, this is often easier said than done.   Not all entrepreneurs are experts at drawing and so usually rely on design companies to record their ideas for them.  As already explained, this is usually fine where payment is made for the drawings. 

But, I hear you ask, there must be some way to accept an offer of something “free” when it involves IP, mustn’t there?  Well, yes there is. 

Parties can contract out of the effects of the legislation.  This means that if our entrepreneur had requested the company to sign documentation accepting that ownership of the free drawings would be retained by him, he would not have been powerless when the company on-sold his design.

What else could he have done? 

As soon as our entrepreneur developed his idea he could have consulted a professional advisor.  If he had, he would have been aware of where and how intellectual property and intellectual property laws could impact the success (or not) of commercialising his idea.  Although engaging an advisor at that start would require an investment on his part, that investment would have safeguarded his position and profits and prevented the huge costs and lost opportunities he suffered further down the track.