What are IP Contracts?
Intellectual property contracts are crucial in defining the rights and obligations of parties in relation to their intellectual property after entering into a contract with each other. Such contracts may either be standalone agreements or be contained within other agreements such as general business contracts, including co-ownership agreements, joint venture agreements and franchise agreements. A sound intellectual property contract helps the parties to ensure that they protect themselves and have clarity about their rights, in the event that the relationship with the other party ceases to be a comfortable one.
Intellectual property contracts are agreements covering licensed intellectual property rights, the right to use or exploit copyrighted material, the right to prohibit others from using or exploiting intellectual property rights, the right to receive royalties, the right to use a brand name, the right to use a registered or unregistered design, the right to register and use a trademark, the right to receive income from intellectual property rights, etc . Intellectual property contracts may also include general clauses, which regulate the relationship between the parties, and therefore govern broader obligations not related to specific intellectual property rights.
Intellectual property contracts may be general or more specialised, in relation to a particular type of intellectual property. For example, franchise agreements are often considered specialised intellectual property contracts, given that they regulate specialised rights and obligations. Other more specialised intellectual property contracts cover the copyright trade secrets, such as a non-disclosure agreement, technology transfer agreements, service level agreements, software licensing agreements, and consultancy agreements.
Crucial Elements of IP Contracts
When entering into an intellectual property contract, it is important to ensure that certain essential components are included to protect the legal rights of all parties involved. The following are some of the critical components that should be considered when drafting or reviewing IP-related agreements.
Confidentiality Clauses: Most IP-related contracts will appropriately contain a confidentiality clause, also known as a non-disclosure agreement ( NDA). This clause describes the confidential nature of the terms of the contract, as well as the information provided by and to the parties. Clearly specifying what information is confidential and what information is excluded from confidentiality obligations can be extremely useful in the event of a breach. As a rule in IP-related contracts, ( NDA) Confidentiality agreements are strongly enforced by courts; provided that they are reasonable and not overly expansive, such as those which prohibit the recipient from ever using any information owned by the disclosing party that doesn’t happen to be very current. Left undefined, non-currently used information could mean that the recipient is prohibited from using any information ever again, even if it is a reasonable use of the information and sales are critical to business.
Scope of Use: The scope of use clause in an IP-related contract provides the parameters for how information or an intellectual property asset can be used. For example, is a product being licensed for internal use only, or can the licensee sell to Bob the land surveyor across the street? Without a clear scope of use section, it is now open to interpretation whether Bob can get a copy of the program you developed for a land surveying firm.
Ownership Rights: This is more of a catch-all provision that encompasses many of the protections discussed above. In essence, this component of an IP-related contract provides information about what rights each party is granting the other (such as limited rights or otherwise), what restrictions exist with regard to the use of the IP, and what ownership rights exist, and how those rights can be transferred, is so desired.
Types of IP Contracts
Licensing agreements are contracts that confer to the licensee the right to use the licensor’s intellectual property, usually in exchange for royalties or other forms of consideration. The license can be limited or unlimited, exclusive or non-exclusive, or territorial, depending on the intent of the parties. For example, a photographer licensing the use of their photographs to a magazine publisher to publish an article will want to limit "publication rights" to their photographs to only the publication of that particular magazine and only for the particular issue covering the article in which the photographs will be used.
Assignment agreements transfer legal title to the asset from the assignor to the assignee. They are normally used when dealing with patents, copyrights, trademarks, and trade secrets. A patent assignment agreement or a copyright assignment agreement transfers the right to the patent or copyright either outright (like a sale) or for a period of time. Inventors may wish to assign their patent rights to their employer, for example. Trademarks and trade secrets (such as confidential information) can also be transferred from one party to another by assignment.
Any contract between two parties involving intellectual property that requires confidentiality or that prevents one party from revealing certain information is known as a Non-disclosure agreement, or a "NDA". A NDA may be used in various contexts, such as when an inventor discloses their invention to a potential investor or when a new employee is given access to confidential company information. NDAs may employ inverse-burden clauses where an employee is entrusted with a company’s confidential information but is required to prove that they obtained the information lawfully, if the company believes it has been illegally obtained. NDAs are used quite frequently in many industries where confidential information is commonplace.
Crafting Solid IP Contracts
A best practice for negotiating an IP contract is to ensure that there is a clear definition of the subject matter each party is bringing to the relationship. This will help avoid disputes down the line, as well as the need for further agreements that govern the use and protection of IP that gets created during the life of the agreement. It is also worth spending some time considering whether there are any areas that should not be subject to an IP agreement (e.g., should a particular software program be excluded from the agreement). The parties should also consider whether they want to set out any limitations on the disclosure of confidential information, for example in order for the recipient of confidential information to disclose confidential information to its employees, agents or advisors. Parties may consider having separate non-disclosure agreements to cover more specific, shorter term arrangements or discussions than those which are usually subject to a broader understanding.
Companies and their lawyers should take care when assessing whether to apply international IP laws, such as UK or European Union ones to a particular transaction. For example, the law relating to copyright in the UK has some specific provisions that lawyers should be aware of when drafting an IP agreement. Where IP rights in the UK are registered there will be an explicit UK register of these rights. Correspondingly, this is not the case with regard to IP rights which exist by registration in the U.S., as there is no corresponding U.S. "register" for rights, for example.
Issues to Avoid with IP Contracts
When it comes to the law of contracts, there are two things that are generally required: Offer and acceptance. While other elements are necessary for a contract to be enforceable (such as consideration), those are the primary elements. And, when it comes to the offer and acceptance of intellectual property rights, the same basic elements are required, with a couple of additional intricate details involved.
One of the most common mistakes made in the offer and acceptance of intellectual property is when one party believes that they own or have exclusive rights to certain intellectual property when they don’t actually, yet the other party believes the first party does. It is vitally important to make every detail of any intellectual property contract explicit and clear. This includes ensuring that it is clearly stated who will own the rights, who will own the patents or trademarks, who the publisher will be, etc. It needs to be spelled out, even if it seems redundant or trivial. When there is any vague area, the interpretation of that clause can be the basis for a dispute when the two parties disagree. Clearly laying it all out, in detail, is the key to avoiding this pitfall.
The following are a couple of examples of areas where careful attention to detail in an IP agreement can allow for a clear understanding of interpretation:
An artist, for example, creates a work of art. Usually, when a piece of art is created, the artist is given exclusive ownership of that creation and the right to keep others from making copies of that work . However, sometimes, when an artist is commissioned to create a piece of art, the commissioning party wants to own exclusive rights to the art. The commission agreement should always specify that the commissioning party may own the rights to the art, but that the artist retains the right to reproduce that work. Without such a provision, once the commissioning party takes possession of the work, they may have exclusive rights to it.
Some agreements will also require a distinction between Proprietary Information and Trade Secrets. While these terms are sometimes used interchangeably, they are actually different concepts. An agreement should be clear on which types of information are protected, and under what circumstances.
Many disputes over IP contracts arise when one party believed they would gain some benefit from the IP, while the other party also believed they would gain that benefit…but both sides thought the other was the one who should be providing that benefit. If it is not spelled out in the agreement, each could easily interpret the agreement differently, which can be disastrous. For example, in the case of a band where the lead singer is not a founding member of the band. If the band is copied or tributed by others, who is entitled to receive those royalties? Spelling it out in the agreement, once again, and being as clear and unambiguous as possible is critical to avoiding misunderstandings.
IP Contract Enforcement Around the World
Enforcement of IP contracts, similar to contract enforcement generally, is at the core of any commercial activity. Parties enter into contracts and expect that the other party will perform in accordance with the terms of the agreement. When performance does not occur, the parties struggle through attempting to work out the problem on a business level. There are times, however, when it is necessary to enforce IP rights at law or equity. The issue, though, is that IP rights are territorial in nature. For instance, a licensee of U.S. patent rights may not have the same rights as that licensee with respect to the same patent right in Mexico as the rights do in the United States. Channeling the enforcement of IP license rights across borders can be challenging, and depending on the circumstances, the ability to seek enforcement may not be possible. Comity is a traditional legal doctrine where one government will recognize the acts and judicial decisions of another government as having the same status as an act of its own, although there are limitations to this practice. Certainly, no government will recognize and enforce anegligence decision of a foreign court. At the same time, however, foreign judgments and awards may enjoy comity and be enforceable. Region-specific treaties exist which may provide a basis for enforcing rights. One of the more common global enforcement of rights treaty is the Hague Convention on Choice of Court Agreements, which was implemented in the United States in 2016. This treaty establishes unified rules for the recognition and enforcement of foreign judgments in civil and commercial matters in international and national legal systems. The application of this treaty is generally limited to party choice of jurisdiction as opposed to jurisdiction based on some connection to the activity. Much like the United States’ Uniform Commercial Code Article 2, the treaty can be used to assist in enforcing remedies for wrongful interference with an IP contract, such as misappropriation or non-competition cases. Other treaties apply as well. For instance, in European countries, it is quite common for the award of an injunction to be used to prevent the enforcement of certain IP rights which may be interpreted as overriding a public interest. This is known as the "prohibition on an act" (Verbotenstellung) is governed by section 9 of the German patent law. Recognition and enforcement varies widely, as can be seen in the awarding damages. This can create disparity in the ability to enforce contracts and the degree of that enforcement.
Case Analyses of IP Contract Disputes
Cases of contract disputes are abundant, and while many cases are never publicly disclosed, some have caught the eye of legal scholars and the public at large. These disputes usually occur in one of two forms: when a party seeks to enforce the contract against an intellectual property owner, and when a party to an intellectual property agreement seeks to invalidate the contract in question. Because courts prefer to uphold agreements voluntarily entered into by parties, some courts have gone so far as to deem the contract as sacred, and enforce its terms despite the fact that had the agreement been specific, e.g., specifying which intellectual property was subject to the agreement, the issue would have likely never arisen in the first place.
One such case that was deemed as sacred is a recent decision by the U.S. Court of Appeals for the First Circuit to enforce a non-competition agreement. In the unanimous agreement, the court held that non-competition agreements are valid and enforceable under Puerto Rican law, even if they are overly broad. If the agreement is overly broad but was the product of negotiation between sophisticated parties, the court may enforce the agreement as-is or "blue pencil" it, where the court will not redraft the entire agreement but will instead modify narrow portions of the agreement to make it enforceable. In this instance, the plaintiff sought to enjoin the defendant from utilizing trade secrets obtained during the employment relationship, and the court sided with the defendant, holding that a non-competition agreement that was negotiated as part of an employment relationship was not yet enforceable.
Another case that highlights the importance of contracts, specifically assignment of intellectual property agreements, illustrates the difference between those contracts that do survive scrutiny and those that do not. In ECF Mgmt. Corp., the court found that when a manager or employee assigns patents developed during their employment to their employer, the employer is under an obligation to compensate or due a share of royalties and licensing revenue. At the same time , however, the court held that those rights are also subject to the terms of any conflicting agreement to the contrary, and are revocable, either specifically or generally, pursuant to the relevant written documentation. What was at issue here was whether a software support and maintenance agreement executed by a company owning the disputed rights conflicted with an earlier agreement that granted certain rights to an individual. The court concluded that when two agreements or contracts are consistent, those that are prepared later expressly incorporate or make reference to those that were made earlier, and that those agreements do not conflict, they are subject to the interpretation written into either document. In this instance, it was not only the entire written agreement, but specifically Section 8.1, which specifically mentioned the parties’ intent to exchange royalties.
Another example of how IP contracts may be litigated is illustrated in CGI Technologies & Solutions Inc. v. Rose, a case in the U.S. District Court for the Southern District of New York. In this instance, the plaintiff, who was the Chief Technology Officer of a computer services company, was accused of violating employment agreements in connection with his development of a business to provide computer services to the health-care sector. As a result, the plaintiff was found to have violated a pre-existing agreement not to solicit clients, and not to disclose confidential information. However, the court also determined after an evidentiary hearing that the plaintiff also had a reasonable likelihood of success on the merits of his claim that the agreements were invalid and unenforceable under New York law, and that the restrictions imposed by the agreements were unreasonable in time, scope, and geographic territory because they were not tied to the work the plaintiff performed. Further, the court also briefly addressed the issue of the damages plaintiff incurred as a result of the wrongful termination, but determined that there was an issue of fact that precluded a determination at the motion stage.