What to Do When a Former Employee Claims Ownership of Company IP
An unexpected demand letter just arrived on your desk. A former designer insists she owns the artwork that anchors your flagship product and threatens an injunction unless you pay. Investors grow nervous, launch dates slip, and the clock ticks. This article explains how California businesses can respond with confidence when a former employee asserts ownership of company intellectual property, moving from legal foundations through concrete action—without slipping into panic.
Core Problem: How Post-Employment IP Conflicts Emerge
Employment may end, but creative output lingers in source-code repositories, shared drives, and pitch decks. Disputes often begin because assignment language in offer letters or employment or contractor agreements lacks precision. Remote work widened this gap: side projects (“moonlighting”) blurred into day jobs, and personal devices held drafts of proprietary code, among other risks.
Under the Copyright Act, for example, original copyrightable works “fixed in a tangible medium of expression” default to the author(s) of the work unless the author is an employee or has signed a valid work-made-for-hire agreement or assignment of copyright, which would shift title to the work, as set out in 17 U.S.C. § 201(a) & (b). Failing to document that shift leaves fertile ground for later claims.
Trade-secret ownership faces similar stress. The federal Defend Trade Secrets Act and various state analogs permit a civil action for misappropriation that “occurs on or after” the statute’s 2016 effective date. Congress clarified damages in the 2023 amendments to [18 U.S.C. § 1836(b)], expanding courts’ power to grant royalties for a defendant’s ongoing use of a trade secret. California’s Uniform Trade Secrets Act overlays state remedies, yet recent remote-work scenarios have complicated efforts to prove “reasonable measures” to keep information secret once employees disperse.
Misclassification compounds risk. A freelancer who meets the strict “ABC” test adopted in California in 2020 may retroactively be considered an employee. If that person wrote code outside a valid work-for-hire contract, ownership may default back to the coder. Founders accustomed to handshake deals now face statutory and judicial scrutiny that did not exist a decade ago.
Legal Landscape in 2025: What Federal and California Law Says
Work-Made-for-Hire and Assignment Statutes
Federal copyright law presumes the author of a copyrighted work owns the work. To flip ownership, companies rely on either the employment status of a worker or the nine-category work-made-for-hire definition or a signed assignment “executed before the work is created,” for independent contractors. Courts apply a fact-driven approach.
Trade Secret Protections Under Federal and State Law
The Defend Trade Secrets Act provides federal jurisdiction and damages measured by unjust enrichment or a reasonable royalty. California’s statute mirrors those remedies, and also provides for the potential award of “exemplary” damages but provides for them only where “willful and malicious” conduct has occurred.
Copyright, Trademark, and Patent Considerations
Copyright registration within three months (90 days) of publication still offers statutory-damage eligibility and eligibility for an award of a plaintiff’s attorney’s fees—two important remedies in copyright litigation. In Google LLC v. Oracle America, Inc., 593 U.S. 1, 21 (2021), Justice Breyer observed that computer programs differ from other copyrightable works, which has prompted companies to document ownership and infringement risk associated with copyright with even greater care. Trademark disputes turn on priority and use in commerce of marks; sudden rebranding by a former marketing chief can sow consumer confusion, exposing both sides to Lanham Act suits. Patent rights hinge on correct listing of inventors on applications—a misstep that a disgruntled engineer could leverage during prosecution.
Recent Precedent and Agency Guidance
Ninth Circuit Court of Appeals and Central District of California Cases
Federal appellate courts have recently clarified standing to sue on copyright claims. the Ninth Circuit revived an ex-artist’s claim in Unicolors Inc. v. H&M Hennes & Mauritz, 52 F.4th 1054 (2022), holding that errors made during registration of the plaintiff’s copyright did not invalidate its registration certificate, expanding the pool of plaintiffs able to appear in federal court. There the appellate court held that a party seeking to invalidate a copyright registration must demonstrate that the registrant submitted a registration application containing inaccuracies, the registrant knew its application did not comply with the requisite legal requirements, and the inaccuracies in question were material to the registration decision by the U.S. Register of Copyrights IP ownership fights can reach trial if documentation wavers.
USPTO and Copyright Office Policy Shifts
On 4 May 2023, USPTO Director Kathi Vidal instructed examiners to scrutinize assignment recordation dates that trail filing dates, noting in a public memorandum that “delayed recordation invites costly title challenges.” The Copyright Office followed with Circular 61A (2024), urging companies to list corporate authors before publication. These policies incentivize early paperwork, shrinking an adversary’s room to argue latent title claims.
Why Declaratory Actions Matter in California
Federal judges in the Central District of California have favored rapid declaratory relief filings to quiet title and stabilize financing. Uncertainty over ownership chills lawful exploitation and deters investors. Swift court intervention can preserve market momentum. Companies that move first can frame the narrative and select a convenient venue rather than defending in an ex-employee’s preferred forum.
Our intellectual property litigation team routinely deploys this strategy to keep product launches on schedule.
Immediate Action Plan for At-Risk Companies
Evidence Preservation and Privilege-Protected Review
Once a claim surfaces, direct your IT department to create read-only images of repositories, design files, and communication logs. Courts often draw adverse inferences if evidence disappears. Next, conduct a privilege-shielded contract audit. Outside counsel can identify missing assignment clauses without exposing strategy to discovery. This review should cover offer letters, employee proprietary-information agreements, board resolutions approving equity grants, and any side-project approvals granted during employment.
Strategic Response Options
An early, fact-rich reply often diffuses tension. Attach signed agreements, registration certificates, and access-log reports that contradict the ex-employee’s narrative. If negotiation stalls, consider mediation under the Central District of California’s ADR program to trim discovery costs. Where product launches face imminent threat, file a declaratory judgment action along with a request for a temporary restraining order. Judges expect applicants to show diligence; waiting even thirty days after a demand letter may erode credibility.
Founders should also update cap-table disclosures. Securities regulators have signaled interest when IP ownership clouds valuation. A crisp explanation in investor materials that counsel has filed to confirm title assures stakeholders and reduces transaction friction. For deeper support, explore our [Intellectual Property Litigation] practice page for aligned strategies at every procedural stage.
Consequences of Delay
Financial Exposure
Courts may award statutory damages up to $150,000 per infringed copyrighted work upon proof of willfulness. Attorneys’ fees are often allowed for prevailing parties in copyright cases, converting extended litigation into an unpredictable liability.
Operational and Reputational Harm
Temporary restraining orders can halt marketing campaigns within days, freezing purchase orders and straining cash flow. Venture capital term sheets frequently include a “no material IP disputes” warranty; a pending lawsuit may trigger withdrawal. Beyond dollars, press coverage around IP theft allegations dents recruitment and customer trust, particularly in creative industries that prize originality.
Frequently Asked Questions
How strong is a work-made-for-hire clause under California law?
California law generally respects the federal test for the work made for hire doctrine as applied to copyrighted works. Courts still ask if the contract’s language covers the disputed material and if the creation occurred within the scope of duties. A precise clause combined with prompt assignment execution offers solid footing, yet companies must still prove that the employee acted within job boundaries during creation.
Can an ex-employee sue even after signing an invention-assignment agreement?
Yes. A signed agreement creates powerful defenses, but does not bar every claim. Plaintiffs may allege the contract is void for lack of consideration or that the invention falls outside the agreement’s scope. Courts examine contemporaneous evidence—emails, project tickets, payment records—to decide if the agreement truly covers the disputed IP. Early presentation of that evidence often persuades judges to grant summary judgment.
What evidence best proves our company owns source code or artwork?
Chain-of-title documentation begins with the employment contract and continues through version-control logs, timestamped design files, and witness testimony about creative meetings. Registration certificates from the Copyright Office or USPTO strengthen the record. Courts in the Ninth Circuit put weight on consistent internal labeling of proprietary material, so verify that metadata and file headers reflect company ownership before litigation commences.
Do freelancer invoices automatically transfer IP rights?
No. Payment alone rarely moves title. Under 17 U.S.C. § 204(a), a written instrument signed by the author is required for a valid transfer of copyright. Some companies attach a copyright assignment to each invoice; others embed assignment language in master services agreements. Without that writing, the freelancer may still hold copyright and license the work elsewhere, unsettling exclusivity.
How quickly should we file a declaratory judgment action in federal court?
Courts value promptness once an actual controversy exists. Filing soon after receiving a credible threat signals diligence and helps secure a forum convenient to your business. Delay may let the former employee sue first in a less favorable jurisdiction, forcing costly venue fights.
What first steps should we take before contacting the former employee?
Isolate communications to counsel between the parties, preserve all evidence, and run a privileged internal review to determine the claim’s strength. Avoid informal phone calls that could be construed as admissions. Once facts are clear, a concise, lawyer-drafted letter can assert ownership, invite dialogue, or announce imminent litigation, setting a professional tone from the outset.
Disclaimer: This article is for informational purposes only and does not constitute legal advice. Consult a qualified U.S. attorney about your specific situation.
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