Who Owns the Prompt? Modifying Employee IP Assignment Clauses for the GenAI Era

Most Indian employment agreements assign to the employer everything an employee creates, develops, or invents during employment. That clause was drafted for a world where an employee wrote the code, designed the deck, or drew the artwork directly. It was not drafted for a world where an employee types a prompt, an AI model produces a first draft, and the employee edits it for ten minutes before shipping it. That gap is not theoretical. It shows up the moment a departing employee claims the AI generated the core logic and not them, or an investor’s diligence team asks who owns the half of the codebase that an AI coding assistant wrote. This article sets out what breaks in a standard clause, what Indian law currently says about AI-assisted work, and the specific language to add.

Why a standard IP assignment clause does not automatically cover AI output

A standard clause assigning to the employer all work created, developed, or invented in the course of employment does not automatically extend to AI-generated output, because Indian copyright law was built around a human author and Indian courts have not settled whether an employee who prompts a tool is the author of what the tool produces. The clause assumes the employee is the creator. With GenAI, the employee is often the director of a process, not the hand that made the mark, and that distinction matters more in India than in most jurisdictions because Indian copyright law requires a human author to exist before an employer’s ownership claim can attach at all.

Section 17(c) of the Copyright Act, 1957 makes the employer the first owner of copyright in a work created by an employee in the course of employment, unless the contract says otherwise. That rule has always done the heavy lifting in Indian employment agreements. But Section 17(c) presupposes that a copyrightable work with an identifiable human author exists. If a court or the Copyright Office treats a substantially AI-generated output as lacking sufficient human authorship, there may be no copyright for Section 17(c) to vest in the employer in the first place. The company is not fighting the employee for ownership. It is fighting the absence of any ownership to claim.

What Indian law currently says about AI-assisted work

Indian copyright law currently draws its authorship line at human creativity, and two live disputes testing that line point toward stricter scrutiny of AI involvement rather than looser recognition of it. Section 2(d)(vi) of the Copyright Act defines the author of a computer-generated work as the person who causes the work to be created, a provision drafted decades before generative AI existed but the closest statutory hook available today. Section 17(c) then makes the employer the first owner where that authorial employee acted in the course of employment.

One matter tested this directly. An artist sought copyright registration for an image created using an AI art generation tool, arguing he was the author because he directed the creative process. The Copyright Office initially registered the work, then issued a withdrawal notice on the basis that Indian copyright registration requires a human author, not an AI-assisted process where the human’s precise contribution is unclear. The registration is still formally listed while the withdrawal is contested, so the position remains unresolved rather than closed. Separately, another pending Indian dispute is testing the opposite end of the pipeline: whether an AI company can lawfully train on Indian copyrighted news content without a licence, a question that will shape how much AI-generated output can be safely commercialised regardless of who inside a company is deemed to own it.

Separately from the litigation, the Department for Promotion of Industry and Internal Trade constituted an eight-member expert committee in 2025 specifically to examine whether the Copyright Act, 1957 adequately addresses generative AI, including the question of authorship and ownership of AI-assisted works. The committee’s review is ongoing and no amendment or final recommendation has been notified to date. Companies should treat the current statutory position, Section 17(c) read with Section 2(d)(vi), as the operative law for now, while expecting that a legislative or judicial clarification could shift the analysis within the next few years. This is precisely why a contract-based fix, rather than reliance on the statute alone, is the safer near-term position for any employer.

Two other statutory provisions matter for the clause itself:

Provision	What it does	Why it matters for GenAI clauses
Section 17(c), Copyright Act 1957	Employer is first owner of copyright in employee works made in the course of employment, absent contrary agreement	Only operates if a copyrightable, human-authored work exists in the first place
Section 2(d)(vi), Copyright Act 1957	Author of a computer-generated work is the person who causes it to be created	The only statutory hook connecting a human “operator” to an AI output, but never tested for GenAI specifically
Section 57, Copyright Act 1957	Author retains moral rights (attribution and integrity) even after assignment	An employee who “caused” an AI output to be created may retain a moral rights claim the standard waiver clause does not address
Section 6, Patents Act 1970	Patent is granted to the true and first inventor or their assignee	No AI-specific provision exists; an AI-assisted invention still needs a human inventor named, or the application fails

Where standard Indian IP assignment clauses fall silent on GenAI

The gap in most employment agreements is not that they fail to assign IP. It is that they assign IP created by the employee, without addressing IP the employee caused an AI tool to create, disclosed to a third-party model, or produced using a personal AI account on a personal device. Four gaps recur across the employment agreements Treelife reviews:

• No obligation to disclose which deliverables involved material AI assistance, so the company cannot even identify where the authorship question arises until a dispute forces the issue
• No clause addressing what happens when the employee used a personal account on a public AI tool rather than a company-licensed, enterprise-tier tool with no-retention terms, which raises both an ownership question and a confidentiality one
• No moral rights waiver drafted with AI-assisted work in mind, leaving open whether an employee who “caused” a computer-generated work to be created under Section 2(d)(vi) can later assert an attribution right over it
• No clause addressing the AI vendor’s own terms of service, which may reserve rights to inputs, outputs, or both, layered on top of whatever the employee-employer agreement says

None of these gaps are fixed by a general clause reading “all intellectual property, howsoever created.” That language was written before the phrase “howsoever created” had to account for a third party, the AI provider, sitting between the employee’s intent and the final output.

Does a standard IP assignment clause already cover AI-generated work?

No, a standard clause covering work “created, developed, or invented” by the employee does not clearly cover AI-generated output, because the clause is drafted around the employee being the creator and AI-generated work introduces a question of whether sufficient human authorship exists at all. Courts have not ruled on this specific fact pattern in India. Until they do, or until the Copyright Office issues guidance, relying on the old clause language is a bet, not a position. The safer approach is to draft the clause to capture AI-assisted and AI-generated work explicitly, so the assignment does not depend on how a future court resolves the authorship question.

A well-drafted modification does three things: it assigns whatever rights do exist, whether human-authored or AI-assisted; it requires the employee to document and disclose the AI tools used on material deliverables; and it obtains, in advance, whatever waiver or consent the employee can validly give over any authorship or moral rights claim connected to that output.

What a modified GenAI IP assignment clause should cover

A GenAI-ready IP assignment clause needs five components beyond the standard employee IP clause: an expanded definition of covered work, a disclosure obligation, a present-tense assignment (not a promise to assign later), a moral rights waiver scoped to AI-assisted work, and a tools-and-vendor acknowledgment.

1. Expanded definition of covered work. The clause should define “work product” to explicitly include output created wholly or partly using AI tools, whether the employee’s role was direct creation, prompting, curation, editing, or review. This closes the gap where an employee argues a specific deliverable falls outside “created by the employee” because an AI tool did the drafting.

2. Disclosure obligation. The employee should be contractually required to identify, on request, which deliverables involved material AI assistance and which tools were used. Without this, the company only discovers the gap during a dispute, when it is too late to fix cleanly.

3. Present assignment, not a future promise. Indian courts and standard drafting practice both favour “Employee hereby assigns” over “Employee agrees to assign.” The distinction matters more for AI-assisted work, not less, because if a court later finds that an employee has an authorship claim over an AI-caused output, a future promise to assign requires the company to sue for performance, while a present assignment already transferred whatever rights exist at the moment of creation.

4. Moral rights waiver scoped to AI-assisted work. Section 57 keeps moral rights with the author despite an assignment of copyright, and an outright assignment of moral rights is not legally permissible in India, only a waiver is. The waiver clause in most Indian employment agreements was drafted for traditionally authored work. It should be redrafted to specifically extend to any authorship claim the employee may have under Section 2(d)(vi) as the person who caused an AI-generated work to be created.

5. AI tools and vendor acknowledgment. The clause should require the employee to use only company-approved, enterprise-tier AI tools for work deliverables, and to acknowledge that any output produced through a personal or unauthorised account may carry vendor-side rights or confidentiality exposure the company did not consent to.

Sample clause language for each component

The language below is illustrative drafting, not a finished template. Every company should have it reviewed against its own employment agreement structure and, for distributed teams, against each employee’s home jurisdiction before use.

Expanded definition of covered work

“Work Product” means any invention, work of authorship, design, code, content, data, or other material conceived, created, developed, or reduced to practice by the Employee, whether alone or with others, and whether created directly by the Employee or wholly or partly through the use of any artificial intelligence tool, including where the Employee’s contribution consisted of prompting, directing, curating, editing, or reviewing output generated by such tool.

Disclosure obligation

The Employee shall, on the Company’s request, identify which Work Product was created using any artificial intelligence tool, and shall specify the tool used, the extent of its contribution, and whether the tool was a Company-approved tool or a personal account or subscription.

Present assignment (not a future promise)

The Employee hereby irrevocably assigns to the Company, and agrees to assign, all right, title, and interest, worldwide and in perpetuity, in and to all Work Product, including all copyright, patent, trade secret, and other intellectual property rights therein, whether now known or hereafter recognised, and whether or not such Work Product would, absent this assignment, vest in the Company under Section 17(c) of the Copyright Act, 1957 or otherwise.

Moral rights waiver scoped to AI-assisted work

The Employee waives, to the fullest extent permitted under Section 57 of the Copyright Act, 1957, all moral rights in the Work Product, including any right of attribution or claim to authorship that may arise from the Employee having caused any Work Product to be created using an artificial intelligence tool, whether under Section 2(d)(vi) of the Copyright Act, 1957 or otherwise.

AI tools and vendor acknowledgment

The Employee shall use only artificial intelligence tools approved in writing by the Company for the creation of Work Product, and acknowledges that use of any unapproved or personal account may result in the Work Product being subject to third-party terms of service outside the Company’s control, for which the Employee shall bear responsibility to the extent caused by unauthorised use.

Does it matter if the GenAI provider’s own terms also claim ownership?

Yes, an AI vendor’s terms of service sit on top of, not underneath, the employee-employer assignment, and a badly negotiated vendor agreement can undercut a well-drafted employee clause entirely. Most major GenAI providers, in their consumer and API terms, either assign output rights to the user or claim no ownership interest, but the enterprise contract a company actually signs with the vendor is what controls data retention, training use, and any residual claim the vendor makes. An employee IP assignment clause has no power to override what the company’s own vendor agreement grants or withholds. This is why the disclosure and approved-tools obligation in the employee contract has to be paired with a vendor agreement review, ideally before, not after, the tool is rolled out to a full team.

Common mistakes companies make when patching contracts for AI

Assuming the existing clause already covers it. The most common mistake is treating “all IP created by the employee” as broad enough to sweep in AI-assisted output without redrafting. It may hold up. It may not. There is no Indian ruling either way, and betting the company’s core product on an untested reading is an avoidable risk.

Banning AI use instead of governing it. Some companies respond to the ownership uncertainty by prohibiting GenAI tools outright in employment policy. This does not solve the problem, it hides it. Employees use personal accounts anyway, the company loses visibility into which deliverables involve AI assistance, and the confidentiality exposure of pasting company data into an unapproved tool gets worse, not better.

Treating the vendor agreement and the employee agreement as unrelated. A company can have a watertight employee IP clause and still lose the argument if its enterprise agreement with the AI vendor reserves broad rights to outputs or retains inputs for training. Both documents need to be reviewed together, not separately.

Applying the employee clause language to freelancers and consultants. Under Indian law, a contractor retains copyright in what they create unless the contract expressly assigns it, a default that runs opposite to the employee position under Section 17(c). Companies frequently reuse their employee IP clause in freelancer and consultant agreements, assuming the “course of employment” language will carry over. It does not, because there is no employment relationship to trigger Section 17(c) in the first place. Every consultant, agency, and freelancer contract needs its own explicit AI-inclusive assignment clause, not a borrowed one.

Skipping the disclosure step because it feels intrusive. Founders sometimes resist adding a disclosure obligation because it feels like surveillance. Without it, the company has no record of which deliverables carry AI-assistance risk, and by the time a dispute arises, whether at an exit, an acquisition, or a funding round, there is no way to reconstruct that history.

Do these obligations apply to interns, consultants and freelancers using AI?

Interns, consultants, and freelancers need their own AI-inclusive assignment clause, because the statutory default that protects employers for employee-created work under Section 17(c) does not extend to non-employees. For interns, the position depends on whether the internship is structured as a contract of service, which pulls in Section 17(c) protection, or a looser arrangement, which does not. The safest approach for any startup is to require an IP assignment agreement, separate from the offer letter or engagement letter, for every category of worker, employee, intern, consultant, or agency, and to make sure each version explicitly addresses AI-assisted work rather than assuming one template covers all four relationships.

Practitioner note

In the AI-and-contracts engagements Treelife has run through 2025 and 2026, the pattern is consistent: the founders who come to us proactively are updating contracts before a dispute, and the ones who come to us reactively are usually mid-way through an exit negotiation or a funding round diligence process where the AI-assistance question has just been raised for the first time. We have seen data rooms held up not because a company lacked IP assignment clauses altogether, but because the clauses predated the team’s adoption of AI coding and writing tools by two years, and the investor’s counsel flagged the gap as an open authorship question rather than a settled one. Under Section 17(c), the fix on paper looks simple: add AI-inclusive language and re-execute. In practice, re-executing a clause with a current employee is straightforward, but retroactively covering work already created before the clause existed requires either a fresh acknowledgment from every affected employee or, where someone has since left, a harder negotiation. We recommend companies treat this the same way they treat any founder IP gap: fix it as a standalone acknowledgment deed covering past work, and build the AI-inclusive clause into every contract executed going forward, rather than waiting for the next funding round to surface the gap.

Case study

Situation: Series B fintech company based in Bengaluru, engineering team of forty, heavy daily use of AI coding assistants across the codebase.

Challenge: During Series C diligence, investor counsel flagged that the company’s employment agreements, last updated before the team adopted AI coding tools, did not address AI-assisted code, and asked for a written position on ownership of AI-generated portions of the core platform.

What Treelife did: Audited the existing employee IP clauses, drafted an AI-inclusive assignment addendum covering disclosure, present assignment, and moral rights waiver, and had it executed by all current engineering staff within a rolling two-week window ahead of the diligence deadline. Reviewed the company’s enterprise agreement with its AI coding vendor in parallel to confirm no conflicting output-rights language existed.

Outcome: The addendum closed the diligence finding without renegotiating valuation. All forty engineering employment agreements were updated within three weeks, and the company adopted the AI-inclusive clause as its new standard template for all future hires.

FAQ’s on Modifying Employee IP Assignment Clauses

Q: Does an employer own code written mostly by an AI coding assistant if the employee only reviewed and merged it?
A: Under a standard Section 17(c) clause, this is untested territory in India. If the AI’s contribution is treated as lacking sufficient human authorship, the review-and-merge step may not be enough to establish the employee as author, which is why the clause itself should assign AI-assisted output explicitly rather than relying on the authorship question resolving in the company’s favour.

Q: What does it cost to update employee IP assignment clauses for AI?
A: Most companies handle this as an addendum rather than a full contract reissue, which keeps cost proportional to headcount and is typically bundled into a broader employment agreement review rather than billed as a standalone exercise.

Q: How long does it take to roll out an AI-inclusive IP clause across an existing team?
A: For a team under fifty, a rolling execution over two to four weeks is standard, prioritising employees whose work product carries the highest AI-assistance exposure, typically engineering and content teams, before extending to the full company.

Q: What documentation should a company keep to support an AI-assisted work assignment?
A: A disclosure log identifying which material deliverables involved AI tools, the executed IP assignment or addendum for each employee, and the company’s enterprise agreement with each AI vendor in use, so ownership and confidentiality can both be evidenced together.

Q: Does this create issues for global or distributed teams working across jurisdictions?
A: Yes. A clause drafted only around Section 17(c) protects the company in India but may not bind an employee based in a jurisdiction with a different default rule, such as California’s carve-out under Labor Code Section 2870 for work done on personal time and equipment. Distributed teams need the clause checked against each employee’s home jurisdiction, not just Indian law.

Q: How should co-founders handle this differently from regular employees?
A: Co-founders should have the AI-inclusive assignment built into their founder employment or consultancy agreement, not left to a general founders’ agreement, since founders are the most likely to have used personal AI accounts before the company had a formal AI use policy in place.

Q: Does DPIIT-recognised startup status change any of this?
A: No. DPIIT recognition affects tax exemptions and regulatory relaxations, not the underlying Copyright Act or Contract Act position on IP ownership. Every startup, recognised or not, faces the same authorship and assignment questions.

Q: What happens if an employee refuses to sign the updated AI-inclusive clause?
A: Refusal does not retroactively undo assignment of work already covered by a valid existing clause, but it does leave a gap for AI-assisted work going forward. Companies typically handle this through a broader compensation or role discussion rather than treating it as a standalone standoff, since a unilateral variation without consideration can itself be challenged.

Q: How does this affect an acquisition or funding round if the target company never updated its clauses?
A: It surfaces as a diligence finding, similar to any other IP assignment gap, and is usually resolved through a fresh acknowledgment or addendum executed by current employees ahead of closing, with departed employees requiring separate, often slower, negotiation.

Q: What is the edge case risk for an employee who used a personal AI account on a personal device outside work hours? A: This is the hardest fact pattern, since it combines the authorship uncertainty of AI-generated work with the added question of whether the output was created “in the course of employment” at all. The clause should address this directly by tying the assignment to the subject matter of the work rather than the hours or device used, which is the same drafting principle Indian courts already apply to non-AI employee inventions.

Q: Are there separate obligations around confidentiality when employees use AI tools, beyond the IP ownership question?
A: Yes. Pasting proprietary code, client data, or unreleased product details into a public AI tool can breach confidentiality obligations independently of who ends up owning the output, and most companies now address this through a standalone acceptable AI use policy rather than folding it into the IP clause alone.

Q: Does a patent application involving AI assistance need to disclose the AI’s role?
A: The Patents Act, 1970 requires a human inventor to be named, and there is no provision recognising an AI as inventor. Where AI materially assisted the inventive process, the safer practice is to document the human inventor’s directing and evaluative role clearly in the inventor declaration, rather than describing the AI as having independently generated the solution.

Regulatory references

• Copyright Act, 1957, Section 17(c): first ownership of copyright in works created by an employee in the course of employment
• Copyright Act, 1957, Section 2(d)(vi): definition of author for computer-generated works
• Copyright Act, 1957, Section 57: moral rights of the author
• Patents Act, 1970, Section 6: persons entitled to apply for a patent
• Indian Contract Act, 1872, Section 27: restrictions on agreements in restraint of trade, relevant to related non-compete and non-solicitation drafting in the same employment agreement
• Information Technology Act, 2000: provisions relevant to confidentiality of electronic records and information handled through AI tools
• Department for Promotion of Industry and Internal Trade, expert committee constituted 2025 to examine the adequacy of the Copyright Act, 1957 for generative AI: review ongoing, no amendment notified as of the last updated date below

External sources

• India Code: Copyright Act, 1957
• Press Information Bureau, Ministry of Commerce and Industry