As I discussed in a previous blog, under copyright law, the author who creates an “original work of authorship” owns the copyright to that work. An “original work of authorship” includes designs, specifications, software, documentation, photographs, website development, artwork, or multimedia work.
This means that when your company outsources the design or development of any work, your company will not automatically own the copyright to the work created by the supplier/ independent contractor/ customer even when you’ve paid them for it. In order to acquire ownership, your company must obtain a written assignment (transfer) of copyright ownership signed by the author of the work.
The “Works for Hire” doctrine is an exception to the above general rule. However, those items considered “works for hire” are very limited and likely do not cover many of the projects companies typically outsource.
THE BUYER’S POSITION
Buyers assume that if they pay for the development of the work, design, software, services they should own the intellectual property rights to such development. At first blush, that position seems logical: The Buyer pays for it, the Buyer should own it. The Buyer may also want the ability to be able to incorporate the work into other products, or modify the original work. Additionally, the Buyer is concerned that the Supplier might sell or license the work to the Buyer’s competitors.
THE SUPPLIER’S POSITION
Most frequently, the Supplier’s pre-existing intellectual property will be used in the development of the deliverable. The Supplier has likely spent many years and significant money developing its IP. If the Supplier transfers ownership to the Buyer of the entire work, the Supplier will end up giving up far more than it actually realized or intended: The Supplier may lose its rights to its pre-existing/ background technology and, therefore, the assets to its business.
ISSUES TO CONSIDER
Many Buyer proposed IP assignment clauses are very broadly written to say that the Supplier will assign to the Buyer ownership to all IP contained in the entire deliverable/ work product. The problem with these clauses is that the Buyer is requesting ownership to IP not only for which it paid but for the Supplier’s pre-existing IP as well.
- CARVE OUT SUPPLIER’S PRE-EXISTING TECHNOLOGY
A key step to resolution is to take the Supplier’s pre-existing technology “off the table” in terms of ownership. The Supplier will want to retain all ownership rights to its background IP and that’s certainly not unreasonable since the Buyer typically has not paid for the development of that background IP.
Supplier should prepare a separate exhibit to the contract that identifies in as much detail as possible the pre-existing technology to be included as part of the deliverable. It often is not possible to identify all the items of the Supplier’s background technology that will be used, so the contract should allow for additional items to be added later.
If the Buyer is having the Supplier semi-customize a standard product or software, the Buyer often insists on ownership rights to the customized portion without giving thought to the underlying reasons. Generally speaking, the ownership of the code or design applicable to the customization will not be of much value.
Perhaps the Buyer is concerned that the Supplier will use the customized portion (paid for the Buyer) in product the Supplier sells to the Buyer’s competitors. If that were the case, a narrowly written restriction against performing the same sort of customization for Buyer’s direct competitors would be more to the point. (CAVEAT: Work with your lawyer in writing these “restrictive covenant” clauses because they must be carefully worded.)
Perhaps the Buyer wishes to include the technology in other products. In this case, the Buyer will want to discuss the possibility of acquiring a nonexclusive license to use the pre-existing technology with an exclusive license for the IP developed.
SEVERAL APPROACHES TO RESOLUTION
ALTERNATIVE 1: Ownership by Supplier with Exclusive License to Buyer
One option is for the Supplier to retain ownership of the work (defined to exclude pre-existing technology) but give the Buyer the exclusive license to use it. If an exclusive license gives the Buyer the right to use the work in every possible context at every possible location, it would be the functional equivalent of ownership. In practice, however, the parties usually agree to limit the Buyer’s use rights. For example, the Buyer’s right to use the work may be limited as to duration, area (worldwide or domestic), or market. The Supplier has the exclusive right to modify the work and may sell or license it to others outside the Buyer’s area of exclusivity.
This arrangement often benefits both the Buyer and Supplier. The Buyer is assured that the Supplier will not sell or license the work to competitors during the term of the exclusive license. At the same time, the Supplier retains control over the work and will have the opportunity to earn income by licensing/ selling to others outside the area of the Buyer’s exclusivity and/ or after the exclusive license expires.
ALTERNATIVE 2: Ownership by Supplier with Non-Exclusive License to Buyer
The most favorable ownership arrangement for the Supplier may be for the Buyer to be given only a nonexclusive license to use the work (defined to exclude pre-existing technology). This means that the Supplier is free to license/ sell the work to anyone else; including the Buyer’s competitors. This type of ownership arrangement should result in the lowest possible price to the Buyer, because the Supplier may earn additional income by licensing the work to others.
In nonexclusive license arrangements, it is not uncommon for the Supplier to agree to pay the Buyer a royalty for each license it sells to third parties. This often seems fair because the Buyer paid to have the work created in the first place. The total cumulative royalty is usually limited to the total price the Buyer paid the Supplier for the work. The royalty can be a percentage of the total price paid for each license or a set dollar amount. While this is a common solution, there are no industry guidelines for the amount of such royalties.
The Buyer may object to licensing of custom modifications for which it has paid to competing companies. One solution is hybrid: the Supplier agrees to a one or two year exclusive license to the Buyer for the particular modifications before those modifications are made available to other users.
ALTERNATIVE 3: Joint Ownership
Yet another option is for the Buyer and Supplier to jointly own the work. Under a joint ownership arrangement, each party is free to use the work or grant nonexclusive licenses to third parties without the other’s consent (unless they agree to restrict this right). Normally, joint owners must account for and share with each other any monies they earn from granting such licenses. However, in most circumstances, it is not practical or desirable in the Buyer/ Supplier situation.