Intellectual property (IP) rights can often be the most valuable assets a business owns. As an IP owner, you can explore several different ways to commercialise and exploit your IP. For example, by selling your IP or granting third parties a licence to use it.
Depending on your business industry, you will likely need to enter into different types of commercial agreements. For example, freelancer contracts, contracts for services or manufacturing agreements.
IP is a common consideration across a range of different commercial agreements and contracts can be used to protect IP and commercialise it. However, it is vital that you protect your commercial interests when entering contracts involving IP. It is important that contracts with an IP element are fit for purpose, carefully drafted and robust – to avoid risks and potential disputes.
In this guide, we explore some of the key IP issues relevant in commercial agreements. We will cover some of the main risk areas to consider regarding IP and strategies you can follow to protect IP via your commercial contracts.
Contents:
- Why is intellectual property relevant in commercial agreements?
- What are examples of contracts including intellectual property clauses?
- What are some common examples of intellectual property rights clauses?
- Who owns the IP and what rules apply when using IP?
- What risks should you be aware of when negotiating intellectual property clauses?
- Conclusion
Why is intellectual property relevant in commercial agreements?
There is often an IP element in most commercial projects and transactions. This is because most commercial relationships or projects tend to involve some sharing or use of the IP rights of one or more parties.
Utilising IP rights in commercial projects can help you achieve business competitiveness and growth. For example, licensing your IP to third parties under commercial agreements could generate a profitable revenue stream.
There are several ways in which IP can become relevant in a commercial project.
For example, as a business which owns IP, you could:
- Sell your IP to third parties for a sum of money.
- Licence third parties the rights to use your IP – for example, licensing the right to use your software under a software licence agreement.
- Collaborate with third parties, sharing your IP and know-how for a joint purpose. For example, by entering into a joint venture or collaboration agreement involving combining ideas and IP.
In all these circumstances, IP considerations will be a critical part of your commercial discussions and agreements. You will need to ensure that you have strong IP terms in place to protect your interests in different scenarios, depending on how and why you wish to use IP.
Some key issues to consider regarding IP in commercial agreements include:
- Clarity around who owns IP and how it can be used. Your contract needs to make clear who owns the relevant IP and what permissions the other party has to use it, including any rules to follow.
- In projects involving the creation of IP, the contract should set out who owns ‘pre-existing IP’ which existed before the contract was entered into, and who will own any IP rights created during the project.
- How to stop IP from being misused, for example how to prevent a counterparty from selling your IP to a competitor or using it for themselves.
- How to protect your brand. For example, by including rules around how third parties can use and publish your logo.
- Ensuring that you own the IP in any ‘deliverables’ under a services agreement, to the extent that you are paying for and wish to take ownership of the deliverables.
Before a new contract is entered, you need to fully understand how IP will play a role and be managed under the agreement.
It is crucial to consider whether the IP provisions in a contract are fit for purpose and meet your expectations around the use of IP.
What are examples of contracts including intellectual property clauses?
There are several types of common commercial agreements which involve the use of IP.
Here are some examples of such agreements:
- Business growth agreements – Where you are seeking to grow your business, you may want to collaborate with other businesses. For example, you may want to work with a sales agent or distributor to sell your products or services. Alternatively, a franchise agreement may allow you to licence the use of your brand to a third party, enabling you to enter new markets quickly. In each case, the licencing of your IP and parameters around its use will be a key part of your commercial agreement.
- Manufacturing and supply agreements – You may want to work with an external manufacturer, to help produce your products. In this case, the manufacturer would need to have access to your know-how and certain IP rights to produce products to meet your specifications. For example, products manufactured for you may feature your business logo or trademarks. In addition to various commercial terms around the services required, IP provisions would need to be included to ensure that your IP is protected (for example, to stop the manufacturer from using your IP for their own benefit).
- Confidentiality agreements – When entering confidential discussions with third parties, you may need to share certain sensitive information including information about your business know-how and IP. By using a confidentiality agreement, you can set rules to protect your IP, by making clear that the counterparty can only use your information for specific purposes.
- Software licence agreements – If your business owns valuable software, licencing it can be an effective way to commercialise your asset. However, licencing comes with risks including loss of control over your IP – for example, a third party may copy or misuse your software. As such, stringent restrictions are required to set rules and protect IP in any software licensing agreement.
- Joint ventures, collaboration agreements, and R&D agreements – There is huge potential for collaboration by using shared resources and know-how. In agreements where parties will collaborate for a project, it is vital to include terms to both maximise the commercial value of IP, but also protect each party’s pre-existing IP.
- Consultancy agreements – If you hire an external consultant who is not an employee, any materials they create for your business must be properly assigned to you. For example, if you engage a freelance graphic designer to create a new logo. In this case, you should ensure that the IP rights in the logo are fully owned by your business, so that you can use the logo as you wish.
What are some common examples of intellectual property rights clauses?
It is important to note that the approach to drafting IP clauses in commercial agreements is not one-size-fits-all.
Your contract should be carefully drafted and tailored to accurately reflect how IP will be used.
IP provisions are often subject to heavy review and negotiation – generic IP clauses which are not fit for purpose give rise to several potential risks.
Before entering into a commercial agreement involving sharing your IP, you will need to consider various factors including:
- Which IP are you willing to share or licence?
- How much control do you need to keep over your IP?
- How do you prevent your IP from misuse or infringement?
- How will IP disputes be resolved?
- On termination of a commercial agreement, what will happen to any IP rights in force?
- What fees or royalties will apply?
- How will you monitor and audit the use of your IP right?
As a customer receiving the right to use, or ownership of, IP further considerations and questions will apply. For example, what happens if the IP you have paid for infringes the rights of a third party and what recourse would you have if so?
Here are some examples of the key IP clauses in commercial agreements:
Who owns the IP and what rules apply when using IP?
It is important to understand the difference between licensing and assigning IP rights.
If your business wants to pass ownership of IP to a third party, it can assign the rights in that IP so that another third party owns it. For example, a website designer may be commissioned to design a website for a brand. The brand would want full ownership of that website, having paid a lot of money for it.
In contrast, a software business may own a piece of software that it can offer to multiple business users. In this case, the business may want to keep ownership of the software but allow third party customers a limited right (a licence) to use the software subject to the following various rules. We discuss this toping in more detail in our guide to licencing your software.
Taking each concept in turn:
IP Licence Clauses
An IP licence is frequently used in business transactions. An owner of IP has the flexibility to choose the terms on which they will licence their IP – although certain formalities apply.
In a commercial agreement, IP licence clauses need to be carefully drafted to reflect several key issues. It is vital that the IP owner’s rights are fully protected.
For example, IP licence clauses need to cover:
- The scope of the license, including whether it will be exclusive or not. Often, IP is licensed on a non-exclusive and non-transferable basis. This is so that the IP owner can give various businesses rights to use the IP and use it themselves. If the IP owner agrees to grant an exclusive license, various extra considerations will apply.
- Any limitations on the geographical territory in which the licence can be used and limits to the number of users.
- The duration of the license and how it can be terminated.
- How the license will be paid for – for example, by way of a licence fee or royalty payments.
IP assignment clauses
In contrast, an assignment is an outright transfer of IP, through which all rights in IP are transferred to a third party. When assigning IP, it is vital to ensure that the IP being assigned is very clearly defined. Various key clauses will be required to protect the party receiving the IP, such as warranties that the relevant IP being assigned does not infringe the rights of any third party (as explored below).
IP warranties
There are certain warranties (contractual promises) an IP owner will be expected to give regarding IP in a commercial agreement. The types of warranties will differ, depending on the particular contract and the risks involved.
A warranty is a contractual assurance given by a party. If it fails to be correct, the party receiving the warranty will have certain legal remedies, such as the right to bring legal proceedings and potentially claim damages.
Common warranties requested in an IP context include:
- A warranty that the party granting IP rights is the sole legal owner of the IP and that the IP is free from encumbrances.
- A warranty that the use of the IP will not infringe the rights of any third party.
It is crucial to carefully review which types of warranties are appropriate to offer in a commercial agreement concerning IP and understand the implications if a warranty turns out to be false.
IP indemnities
Indemnities are often heavily negotiated around IP in a commercial agreement.
An indemnity is a promise by one party to pay the other for certain losses, upon a trigger event. Indemnities are commonly negotiated in contracts to help allocate risk.
For example, a website developer developing a new website for a customer will often be expected to give an indemnity agreeing to compensate the customer for any third-party IP claims regarding IP. For example, if the website infringes the rights of a third party and the customer receives an infringement claim as a result, the customer would want to recover its losses from the website developer.
What risks should you be aware of when negotiating intellectual property clauses?
Before entering IP negotiations, it is vital to take a step back and look at what you are doing with IP. For example, will you be transferring or retaining ownership in IP, or receiving it? This decision will shape how your contract is drafted. Understanding the structuring of the IP transaction is key, to avoid pitfalls. The wording of the relevant IP clauses must be clear and unambiguous, to avoid the risk of mismatched expectations and disputes.
There are various risk issues to consider when negotiating IP clauses in commercial agreements.
Here are some of the most heavily negotiated terms regarding IP:
Controlling the use of licenced IP
Where IP is licenced or shared with external parties, controlling its use is imperative. There is a risk that sharing your IP may result in it being disclosed or made available publicly if proper safeguards are not put in place. This could also significantly lower the overall value of your IP, which could be damaging for your business.
As an IP owner licencing your IP, you may need to negotiate various controls including:
- control over which parties can use your IP, including control over any sub-licencing of your IP and brand;
- imposing clear rules around how partners (i.e. manufacturers, investors, or suppliers) can use your IP;
- requiring notifications of any potential issues and infringement of your IP; and
- seeking the right to terminate licences in several scenarios, such as on insolvency or a change of control of the counterparty.
As an owner of IP, it is important to carefully consider and negotiate parameters around use over your IP which you are comfortable with.
Allocating risk
Risk allocation is a heavily negotiated topic in commercial agreements – in particular, around warranties, indemnities, and liability. For more information on how to assess the right level of risk for your business, see our article on contract risk management.
As a supplier selling or licencing IP, you may be reluctant to offer an indemnity to a customer receiving your IP (for example, if some of the relevant IP was created by a third party). However, a customer will often push for an indemnity, as it will expect a supplier to be able to give assurances around the IP it is receiving.
As a supplier, you may wish to consider negotiating a middle ground with your customers on these issues. For example, by offering IP indemnities which you are comfortable with rather than outright rejecting them. You could seek to reduce the scope of an indemnity or agree that your liability under the indemnity will be limited to a maximum financial amount.
Liability is itself a key issue in commercial agreements involving IP. For example, IP owners licencing the use of their IP will often request a limitation on their liability so that their liability for breaching their obligations under the agreement is not unlimited. As an example – a software supplier delivering software to a customer could face several potential liabilities if the software they have licenced is faulty. For instance, the customer could claim they have lost significant profit or business opportunities because of the software faults and seek to recover their losses from the supplier.
Whilst IP negotiations can be challenging, it is important to try to be constructive and reach a reasonable middle ground. Otherwise, negotiating too sternly could result in a deadlock and failure to reach an agreement.
Often, negotiations around risk allocation will depend on several factors including the bargaining power of the contractual parties, the project value and the risks involved. If you are unsure about how to reach a resolution on these issues, you can seek legal advice (as explored below).
Taking legal advice where necessary
There are important pitfalls to avoid when negotiating IP clauses in commercial contracts. IP is extremely valuable and contractual omissions could result in costly mistakes in the long run.
If you are unsure about how your commercial agreements should be drafted to protect your interests and IP, you should seek legal advice.
An experienced IP solicitor can support you and add value in several ways, including:
- Ensuring you properly understand the structure of your transaction and whether you will be licensing or assigning IP.
- Advising you on the best approach to commercialise your IP in line with your strategy and guiding you on the appropriate contracts and terms you require.
- Helping make sure that the rules around the scope and use of IP clauses are clear in commercial contracts. If not, there could be misunderstandings around IP which could result in contractual disputes.
It is important to note that if certain required IP clauses are omitted not drafted correctly (or formalities are not complied with), this could invalidate the rights you are granting or being granted. For example, if your contract for services does not include correct IP assignment clauses this could mean you do not own the IP you have paid for. This could lead to disputes over IP ownership, particularly where the relevant IP is high value or business critical. By taking legal advice and working with an experienced IP solicitor, you will have comfort that your agreements are watertight, correctly drafted and legally enforceable.
Conclusion
IP issues often pervade many types of different commercial agreements between businesses – from manufacturing to franchise and freelancer agreements.
IP can be a highly valuable business asset, and you are exposed to risk if you do not have agreements in place with robust IP clauses to protect your interests.
If you require support with protecting or managing your IP rights in a commercial agreement, please contact our team who are here to support you.
In addition to support with drafting and negotiating commercial agreements with an IP element, our team will help you develop an IP strategy which aligns with your business goals, manage your IP portfolio, and assist you in resolving any IP disputes that arise during your business journey.
