Rights, Titles and Interests to Product Improvements (United States)

This Wisdom of the Crowd (ACC member discussion) addresses  how companies should handle Non-Disclosure Agreements regarding improvements to their products, including whether there are alternatives to forfeiting ownership, under US law. 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 eGroup Comments in this Wisdom of the Crowd resource.)

Question:

We are an industrial equipment manufacturer. One of our customers claims they have come up with some ideas about improving the machine that we had previously sold them. They have proposed a meeting to divulge these improvements, but first insist on an NDA (Non-Disclosure Agreement). There is one paragraph in the otherwise standard mutual NDA that causes us concern:

• "Vendor acknowledges and agrees that Customer has independently made certain improvements, inventions and/or developments ("Customer Improvements") to the machine previously delivered by Vendor to Customer (the "Prior Equipment"), pursuant to that certain PO attached hereto as Exhibit A (the "Purchase Order"). Vendor acknowledges that, as between Vendor and Customer, all right, title and interest to the Customer Improvements, embodied in the Prior Equipment after the date of final invoice for the Prior Equipment under the Purchase Order, which occurred on June 16, 2014, is and shall remain the sole property of Customer."

My initial reaction is to strike this entire language as not belonging in an NDA, but this Customer is adamant that they will not talk to us absent some version of this verbiage in place. There is also the suggestion that they will order a number of units if we implement their improvements, so I am facing pressure from our Sales Department to come up with some language agreeable to both sides, that will allow the discussion to move forward.

As a general matter, does Vendor or Customer generally own product improvement IP? If Customer owns that IP by default, then perhaps we don't have anything to lose from having this language in the NDA (though I'd still insist on an exception for ideas that we have developed on our own). Alternatively, if this language would give Customer ownership to IP that they otherwise are not entitled to, then we'd have some heartburn over it.

The reason Customer is insisting on this language is to prevent us from selling the product improvement to their competitors. I wonder if there is some way to address their concern without giving up ownership, such as by putting a restriction on use (e.g., we cannot implement said improvement in machines that we sell to competitors of this Customer).

Wisdom of the Crowd:

• Response #1: Look first to your own sales terms -  Maybe you provided an answer for this question in there. Many sellers do provide for such concepts in their terms of sale. (Or maybe now you can suggest they've voided their warranty?) Barring any luck there, generally speaking the inventor of an improvement owns the improvement. But of course, if the improvement may only be practiced by also practicing the underlying inventions, there's going to be a reckoning between the parties at some point. If that's the case then maybe the NDA won't be the issue. Maybe other side realizes that and now wants to cut a deal, as maybe their IP has no value (outside of their own use) until you participate. (You don't say why they want to talk to you in the first place, and you probably should not divulge that on a public forum, but that was the first question that popped into my head: "Why?")

• All that said, I generally shy away from contracting as to what facts are true or not (at least as respects facts that may well be in controversy). In this case, the clause is trying to do just that. I'd reframe it as "if in fact you own something, then I agree that you'd still own it," but avoid language that contractually deems the facts to be one thing or another.ⁱ

• Response #2: Without an agreement to the contrary, whoever invents owns.

• If you do not include that paragraph in your NDA, I would make sure to highlight that it is still pursuant to the paragraph that lists exceptions to confidential information. In other words, if your team already developed the improvement independently, you don't want to be precluded from using it.

• As a good practice, it would be good to have your team documents all improvements known to date, prior to the meeting, so you have record of independent development.

• I would also think about creating additional exclusions to the paragraph. For example, maybe exclude improvements that are routine or minimal. You may want to limit the paragraph to only customer improvements that become part of a patent application and ultimately result in a patent. Otherwise you may be precluded via contract from implementing the improvement when all of your competitors can implement them (assuming the improvements are put into the public domain through the product you make for this customer, and the improvements can be reverse engineered).ⁱⁱ

• Response #3: Unless there's some pre-existing contract that assigns improvement rights to your company, the person who comes up with the "improvement" generally owns the IP inherent in that improvement, if there is any.

• From an IP perspective, the ownership is fairly narrow. Generally speaking, if your company has a patent on the underlying product (and if manufacturing, selling, or using the improvement requires your product), your customer likely can't just sell the improvement without getting a patent license. But if there's no patent on the underlying product, there's probably not much you can do.

• Either way, if you're unfamiliar with IP law, it's probably worth a couple hundred bucks to talk to an experienced IP lawyer who'll be able to give you specific directions.ⁱⁱⁱ

• Response #4: In general, the customer would [own] anything it develops, unless there is an agreement to the contrary (and software licenses sometimes have these kind of terms). The main effect of the NDA clause you quote is to restate this and get your agreement to it (if you keep it in the NDA, that is).

• So, what is being said is that "Customer" has developed some improvements, but before they show them to you, they want an NDA in place (typical) and want you to acknowledge their ownership (not typical but not likely to change anything, either). I would expect them to want to discuss further development and compensation for the improvements, possibly for you to incorporate them into your product. It also means that if you start selling their improvement, you will have a somewhat harder time establishing independent development if you do it yourself.^iv

• Response #5: If the customer developed the improvements, the default is that they own the IP. This could be changed by agreement, either before or after the development but would require that an assignment of rights be filed with [the] patent office. You can certainly be creative in negotiating a license to use without obtaining ownership as well.^v

• Response #6: I guess my concern would be that the customer thinks it's done something really inventive and cool, and either it's obvious or something that was on your roadmap already, especially if the "idea" is what they'd be disclosing (add the red/green button), not the actual implementation (here's a piece of tricky firmware that is optimized to operate a red/green button or here's a red/green button made of novel and proprietary materials optimized for this environment). I'd hate to see a dispute arise over ownership of something that you had already developed or decided to develop. I don't know how you solve that, other than (a) make some changes to the NDA so that it only includes novel inventions or improvements not already under development or on your roadmap for development, and (b) have your most paranoid person in the room for the meeting and proceed inch by inch so that you can cut the meeting short if they're about to tell you something you already know you're working on.

• If what they want is for you to make the instrument with their improvement and not offer it to competitors, and the improvement genuinely wasn't on your development roadmap, I'd be tempted both to charge for the NRE and to have a limited period attached to that, such as a year (unless they want to pay you a lot of money).^vi

• Response #7: The quoted sentence has absolutely no business in the NDA. The NDA is to reveal the improvements not to decide ownership. Let's say the customer added a red light / green light to the machine to signify on/off. They would own that technology, but what good would it do them unless they want to get into the business of adding on/off lights to your other customers? If there is value to the modification, you may decide to either buy it outright or license it from them so that you can add it to your machines.

• The purpose of the NDA is to protect them and then have them show you the modification to see if it has value to you. Then you can decide if you want to enter into some kind of license or buy out. You will need to be careful about whom in your organization participates in the meeting. You don't want to have later accusations of trade secret infringement if your chief engineer sees their modifications and then later creates a similar modification.^vii

• Response #8: While I agree with [Response #7], I understand that often the sales department and company may push back, so we sometimes agree to these strange requests.

• In the past, I have had luck restricting it to certain named competitors and/or a certain time frame (generally 1-5 years). This requires additional dialogue with the Customer to determine what and who their REAL concern is, i.e. one particular competitor, but can narrow the exclusivity to allow you to profit from the modifications (mods) through a license to non-competitors.^viii

• Response #9: I just want to add a little perspective from someone who has sent out similar language in NDA agreements.

• I don't view this as any different than the general boilerplate you see about disclosure of information not granting any ownership in the information disclosed. I cannot remember the last time I saw an NDA without this clause in place. We have also added boilerplate to our standard NDA that essentially says everything you develop you own, everything we develop we own, and anything we both develop we both own. This clause is frequently modified when we enter [into] actual development agreements with customers. The language is included because we do a lot of product development and we have run into a situation a handful of times where the other company comes in [and] tries to assert ownership of both things developed and things we brought to the relationship. They were not successful, but it was costly to beat them back. You may be dealing with a situation where the other company has had similar experiences. At any rate, that's the view from the other side of the table.^ix

• Response #10: I agree with the other suggestions in this string (Responses 7-9) but add some propose revisions to their language:

• "Vendor acknowledges and agrees that Customer has independently made certain changes which it considers improvements, inventions and/or developments ("Customer Improvements") to the machine previously delivered by Vendor to Customer (the "Prior Equipment"), pursuant to that certain PO attached hereto as Exhibit A (the "Purchase Order"). Vendor acknowledges that, except to the extent it has already considered such changes and either decided not to implement them or is in the process of implementing them, or has already implemented them on new equipment, as between Vendor and Customer, all right, title and interest to the Customer Improvements, embodied in the Prior Equipment after the date of final invoice for the Prior Equipment under the Purchase Order, which occurred on June 16, 2014, is and shall remain the sole property of Customer."

• Until you've seen their "improvements", you don't know whether they are in fact improvements and original. You don't even know if they interfere with the safety of your machine (although you probably want to suggest that gently to your customer, especially if the customer is or considers itself fairly sophisticated technically).

• Another alternative, though it may not be acceptable, is to treat it as an idea submission and say that the other party will rely for their protection on any granted patent registrations.

• The primary issue here is that until you can see what they have, you should avoid, as much as possible, acknowledging that they have something protectable.^x

• Response #11: Response #10's qualifying language is the best answer here. I would revise it a bit further, like this:

• "Vendor acknowledges that Customer claims it has independently made certain changes to the machine previously delivered by Vendor to Customer (the "Prior Equipment"), pursuant to that certain Purchase Order attached hereto as Exhibit A (the "Purchase Order"), and that Customer considers such changes to constitute its proprietary improvements, inventions, and/or developments ("Customer Improvements"). Vendor acknowledges that, except to the extent it has independently developed such changes prior to the date of Customer's disclosure of the Customer Improvements to Vendor, as between Vendor and Customer, the Customer Improvements, as embodied in the Prior Equipment after the date of final invoice dated June 16, 2014 for the Prior Equipment under the Purchase Order, , is and shall remain the proprietary Confidential Information of Customer."

• With the above revisions, you navigate around the unreasonable statement by your company acknowledging that your customer is the owner of improvements to the machines without ever having seen the alleged improvements. There would be a general definition of "Confidential Information" in the NDA and then your company would be bound by the confidentiality obligations. Those obligations should include the duty to not misappropriate the Confidential Information.^xi