Owners of businesses enter into contracts with others for various reasons. However, they may not always be aware of or fully appreciate the legal implications on the company’s valuable Intellectual Property (IP) assets, such as trademarks, copyright, patents, and trade secrets. These intangible property rights and interests are of substantial value to the company either at present or in the future. Therefore, the business contract of a company must address the issue of ownership of the IP in question clearly and concisely. The company must ensure that the contract contains a clearly expressed provision that identifies the IP that is subject to the agreement and also that ownership of the IP remains with the company. Therefore, it is vital to understand how Intellectual Property Rights (IPRs) should be dealt with effectively in contracts.
Defining IP in Contracts
IP is generally understood to include patents, trademarks, copyright, and trade secrets; however, a definition of IP in a contract may also include confidential or proprietary information. It may include registered as well as non-registered IP, domestic as well as foreign IP; however, this may not always be the case. Hence, it is crucial to start with how IP needs to be defined in a given contract so that the parties are on the same page as to what is being covered and what is excluded.
Contracts typically include a definition of IP. The parties usually desire for this definition to be as broad as possible, specifically concerning a definition that may be included in confidentiality or non-disclosure agreements. The definition should avoid being limited to a registered IP, as this might unintentionally exclude trade secrets or confidential information from being addressed. There also may be instances where IP may be defined as only those items that are reduced to writing or specifically identified by the parties, but this can be dangerous, such as in instances where ‘know-how’ may be considered as IP.
There also may be instances, such as in the case of an IP license or assignment, where one or more specific items of IP should be specifically identified in the contract. For example, if a party is granted the right to use a specific trademark – but not other trademarks, then that specific trademark should be defined in the contract. In another example, the contract may be geographically restricted. These separate definitions of certain IPs may be included in a definition section of a contract, and they may be incorporated into the general IP definition.
Types of IP Contracts
- IP Assignment Agreement
The agreement to assign the IPR transfers the same completely or partially from the original creator to another person or organization for consideration. By this kind of agreement, the original owner transfers his right to develop or sell the said IP to another person or legal entity.
- Non-Disclosure Agreement
To protect the information falling under the branch of IP, which is also dynamic for the functioning of the company, like trade secrets, business plans or business structures, technologies or codes, companies enter into NDAs while contemplating business relationships.
- Technology Licensing or Technology Transfer Agreements
Through this agreement, the owner of the IP authorizes another person or company to use such rights of the technology developed by the owner for a considerable amount as agreed between the parties. It is a way to transfer knowledge of technology. The same helps small companies grow as they acquire such technology licenses from the bigger companies for the production and promotion of a product.
- Trademark Licensing and Franchising Agreement
Through licensing or franchising agreement, the goodwill gained by a mark is shared by another entity that helps promote the business or carry on a business with the same mark and maintains the same standard of the business and its goods and service.
- Copyright Licensing Agreement
Through this agreement, the owner of the copyright can grant other people or companies the ‘license’ to monetarily exploit the copyright, such as by creating a reprint or reproducing or distributing the original works on the terms and conditions of the owner. The license can be very limited in scope, time, or territory. In exchange for such a right, the owner is paid a royalty or an amount of consideration as agreed upon by the parties. It does not permanently transfer the right of copyright to another person; it is only licensed for some duration.
- Inventions Assignment Agreement
This contract gives the employer the rights over the creations of his employee during the period of his employment. Usually, the employment agreement contains a clause whereby all the creations of an employee are the product of the employer’s business. Furthermore, these kinds of agreements and clauses also protect the confidential information of the company. The IPRs, in an employer-employee relationship, are by default assigned to the employer in case of copyright, but the same is not the case in respect of trademarks and patents. Hence, executing a separate inventions assignment agreement is necessary for this purpose.
- Music Licensing Agreement
A music license agreement is a contract between the creator of the music and a third party to exchange his composition for consideration, which gives a right to the third party to publish or distribute the music in various forms.
- Research and Development Agreement
Such agreements are entered between a company with any individual or organization for conduction research and development of an idea, goods, or services. The company or the university includes assignment clauses to assign any IP developed to itself.
Important Elements in IP Contracts
Contractual clauses should always be considered very carefully, but most contracts generally share the following important clauses (although the content of the clauses differs):
- Duration of agreement
- Services and commitments
- Payment terms
- Default events
- Termination of the contract
- Disclosure of information and data
- Warranties and/or indemnities
Talking about IP contracts, in particular, the most important clauses to be included as best practices are:
- Confidentiality and Non-Disclosure Provisions
Most contracts include at least one confidentiality or non-disclosure provision, and these provisions can be crucial to Intellectual Property Protection. Sometimes confidential information is defined as part of the definition of IP; however, in many cases, confidential information is separately defined in these provisions and can include all or a portion of what is covered in the definition of IP. If the scope of what is to be covered as confidential information is different than what is defined as IP, it may result in different obligations depending on the other terms of the contract. Another consideration is whether the confidentiality or non-disclosure provisions are one-way or two-way. If it is one-way, this means that only one party is disclosing the confidential information to be protected, while a two-way provision contemplates that all parties to the contract may be disclosing the confidential information to be protected.
The scope of the non-disclosure obligation may differ from contract to contract, and it is vital to define it so that the parties know when a disclosure constitutes a breach and whether a breach can be cured. In most non-disclosure provisions, there are exceptions for independent (or prior) knowledge as well as the information that is public or later becomes public outside of the disclosures made according to the contract.
IP indemnification can be a way of holding a seller responsible for breaches of IP representations and warranties. These types of breaches may not be the only matters for which indemnification may apply in a contract as in contracts where IP may not be the main focus – the IP-related indemnification provisions sometimes can be overlooked in the negotiations, which can be problematic if a claim later arises. Negotiations related to IP indemnification should include addressing the scope and survival of indemnification.
- Ownership of IP
The contract must be clear in indicating who shall be the owner of the IP, which is being used or continuously created throughout the relationship.
- Documentation and Record of Intellectual Property
Sophisticated contracts may specify a mechanism to record the IP that is created throughout the relationship so that it is specifically identifiable. The same facilitates better valuation of the IP in the future and also expands the opportunities to monetize such property.