Ownership Language in IP Contracts (United States)

This Wisdom of the Crowd (ACC member discussion) addresses Member feedback on IP contract provisions regarding the ownership rights to both Background and Foreground IP. This resource was compiled from questions and responses posted on the forum of the Intellectual Property and Small Law Department ACC Networks.*

*(Permission was received from the ACC members quoted below prior to publishing their forum Comments in this Wisdom of the Crowd resource.)

Question:

We are a developer and manufacturer of sophisticated technology in accordance with customer specifications. The innovative technological solution is always based on 50 years worth of pre-existing intellectual property (IP), which we modify to arrive to meet customer requirements. We occasionally charge customers for document preparation and/or testing fees. During the course of development efforts, we may identify errors in customer specifications, which result in a new spec revision. My company's goal is to identify that both Background and Foreground IP developed by my company is owned by us.

Most customer-proposed IP language starts out as a "work made for hire," which I reject. Instead I re-write, identifying the Background and Foreground IP developed solely by a party is owned by that party. In the contract I am currently negotiating, we are trying a new approach and I would like to see what others think regarding the language. Does it adequately address my goals?

1. Intellectual Property ("IP"). IP means inventions, discoveries and improvements; know-how; technical data, drawings, specifications, process information, reports and documented information; and computer software. IP includes all worldwide common law and statutory rights to the foregoing, including but not limited to, patents, industrial designs, trade secrets, copyrights, mask work registrations, and the like. "Background IP" shall mean the IP rights (i) owned or controlled by either party prior to this Contract entering into force; or (ii) generated or acquired by either party at any time independently from the performance of this Contract; or (iii) licensed to either party by third parties, and which are required for the full and proper performance of this Contract. "Foreground IP" shall mean any IP developed, conceived or generated by a party in the performance of this Contract. Background IP. Seller shall retain ownership of all IP owned or developed by Seller prior to the effective date of or outside the scope of this Contract ("Seller's Background IP"). Seller grants to Buyer an irrevocable, nonexclusive, sublicensable, perpetual, paid-up, royalty-free, worldwide license (i) to use, reproduce, distribute, modify, and prepare derivative works of such Seller's Background IP and (ii) to use, offer for sale, sell, distribute and import products and services that incorporate or embody such Background IP, in each case solely as necessary for the purpose of exploiting Buyer's rights in the Goods or Foreground IP. Seller grants to Buyer such license rights for the sole purpose of fulfilling Buyer's obligations under Buyer's contract with its customer. Each Party's Background and Foreground IP is and shall remain the exclusive property of the respective Party. Seller shall not use Buyer's Background IP and Foreground IP for any other purpose than the performance of the Seller's obligations under this Contract. Except as otherwise stated in this Contract, neither Party transfers to the other Party any patent, trade secret, trademark, copyright or other intellectual property owned by the other Party. Foreground IP. Without regard to the contributing party and during the term of this Agreement, all Foreground IP, including (i) Buyer's products; and (ii) corresponding Buyer's design requirement documentation, including Buyer's Source Control Drawings and specifications used to define Seller's Goods sold hereunder, shall be the exclusive property of Buyer.Without regard to the contributing party and during the term of this Agreement, all Foreground IP conceived, developed, or first reduced to practice by, for, or with Seller, either alone or with others, in performance of this Contract that is directed to the detailed design of Seller's Good sold hereunder shall be the exclusive property of Seller. Seller hereby grants to Buyer an irrevocable, non-exclusive, sub-licensable, perpetual, paid-up, royalty-free, worldwide license to use, sell, offer for sale, have sold, reproduce, distribute and import such Foreground IP as necessary for Buyer's enjoyment of the Product incorporating such Seller's Foreground IP.

Wisdom of the Crowd:

• Response #1: I did something pretty similar at a prior position when I was on your side of the table. So what you have looks pretty good to me.

• However, I found the last two paragraphs confusing, as they seemed somewhat contradictory. The next to last paragraph speaks of all Foreground IP, but the last paragraph seems to provide an exception. I think you need to redo those two paragraphs a bit.

• One thing you might add is some sort of reservation of the right to re-use what you create for your customer. You don't want to do it for a competitor of your customer, but you might want to use a piece of it here and another piece there. And you should clarify that that may happen.ⁱ

• Response #2: I agree with [Response #1]. If you do "X" for Customer 1 and then a Customer 2 wants something similar to "X", how do you prove you didn't violate your agreement with Customer 1 when the "Foreground IP" of both parties ends up looking similar or doing the same thing? A memory retention right would be great but I imagine you'd have some difficulty with your customers. Sometimes I've used an acknowledgement regarding converging technology or performing similar services for other customers, etc. in an attempt to keep the burden on the customer to actually prove the Customer deliverables violated the agreement vs. allowing the simple showing that Deliverable 2 is similar to Deliverable 1 and requiring you to prove you didn't appropriately use Deliverable 1.ⁱⁱ

• Response #3: So, with the "I'm not an IP lawyer" disclaimer, the grant to make modifications or derivative works to your Background IP is interesting. Do you care if a customer claims a copyright to such modification? I'd worry that this might erode the value of your most important asset.ⁱⁱⁱ

• Response #4: As a licensing lawyer in the biotech/pharma (pharmaceutical) industry, the structure/approach that you have proposed here, is quite standard.

• One item that you might want to consider is the operation of sub (ii) of the "Background IP" definition, in the context of an M&A. As drafted, you run the risk of the IP of a potential acquirer (of your company) being swept into the definition of Background IP, and thus (post-acquisition) licensed to the Buyer on a perpetual, paid-up, royalty-free, basis. If your acquirer owns valuable IP that would otherwise be necessary for the Buyer to license from that other entity, this could be a deal-killer for your M&A.

• In biotech/pharma, where M&A activity is rampant, this would be a key consideration when drafting this clause. I always draft-in wording that carves-out from such license clauses, the IP of an acquirer in a change of control event. If M&As are not commonplace in your industry (or something that your company would never consider) this consideration may however be irrelevant.^iv

• Response #5: Seller is granting rights to Buyer "fulfilling Buyer's obligations under Buyer's contract with its customer." How does Seller know what rights Buyer granted to its customer? What if Buyer granted some outlandish rights in Seller's Background far beyond anything Seller might have anticipated it was now giving away?^v

• Response #6: To respond to the issue raised, suppose the sentence were changed to read:

• Seller grants to Buyer such license rights only to the extent required for Buyer to fulfill its obligations under its contract with its customer.

• That way, you are not assuming any obligation under Buyer's contract, just an obligation to license the IP Buyer needs. The license granted is only what is contained in the preceding material.^vi