Monthly Archives: September 2014

Contracts

Technology Agreements: License Grants

DEFINING USERS
A Licensee (one who pays for the right to use, access and benefit from some type of technology) should ensure that the license grant is broad enough to allow all necessary members of the Licensee’s organization to use, access and benefit from (“Use”) the technology licensed. This group of users should be determined early in the process to ensure that the license negotiated and paid for is broad enough to include all contemplated users.

DANGERS OF A NARROW DEFINITION
Failure to have a broad enough license grant is the number one reason Licensees get sued by Licensors.

Mistakes made in this early evaluation of who the potential users are can also be very expensive. Often, the Licensee determines after the agreement is signed that some of its necessary users were left out and now need to be added in to the agreement. Such additions cannot be accomplished by just buying more “seats” or “users” if the definition of who can be a user does not include the right people. Therefore, broadening who are authorized users becomes very expensive after the agreement is signed.

DON’T FORGET AFFILIATES
One thing for a Licensee to consider is whether the organization is owned by a parent company or has subsidiaries commonly called Affiliates. A license grant that is “to Company X” is not sufficient if Company X has Affiliates that will need to Use the technology licensed.

NON-EMPLOYEES AS USERS
Additionally, the Licensee should ensure that all types of workers, not just its employees can Use, the technology licensed. A license grant to “Company X and its Affiliate’s and their employees” is not broad enough if Company X has contingent or contract employees, consultants, suppliers, vendors, third party sales networks, or customers (commonly defined collectively as End Users) who need to Use the technology licensed.

LOCATION, LOCATION, LOCATION
Furthermore, the Licensee should ensure that its End Users can Use the technology licensed wherever the company has locations. A license grant to “Company X and its Affiliate’s and their End Users located in the United States” will not be broad enough to allow End Users located outside the United States to Use, the technology licensed.

Additionally, the Licensee should be careful that the license grant is broad enough to accommodate how the Licensee’s End Users currently work and how that may change in the future. Does the Licensee have End Users who travel, or work remotely, that will need to Use, the technology licensed? If so, a license grant to “Company X and its Affiliate’s and their End Users located at any of Licensee’s or its Affiliates worldwide locations” will be too narrow to allow employees to have remote access while traveling or working from home.

TERM AND LICENSE KEY
Finally, the Licensee should ensure that the term of the license granted, and any license keys received, are sufficient to cover the time period contemplated and paid for. License keys are a device used by software vendors to activate licensed software for a set period of time. If the Licensee has negotiated and paid for a perpetual license, the license grant and any keys issued should be perpetual. If the Licensee has negotiated and paid for a five year license, the license grant and any license keys issued should be good for five years to avoid any issues around not receiving a new or updated license or license keys.

RECOMMENDED GRANT LANGUAGE
For a Licensee, good language in a perpetual license grant would be “to Company X and its Affiliate’s and all of their End Users a perpetual, worldwide, fully paid up license to use, access and benefit from the technology licensed” provided “Affiliates” and “End Users” are defined broadly enough to encompass the Licensee’s intended use. A license grant like this provides the Licensee the best chance to avoid litigation, or threats of litigation, from the Licensor.

ABOUT OUR LAW FIRM AND WORKSHOPS
Leslie Marell is a business and commercial law attorney with over 25 years of experience in business contracts, purchasing and sales law, technology law & day to day business legal matters. She heads her own Los Angeles firm which specializes in providing legal services to the manufacturing, industrial and high technology industries. For more information about the firm, click here. If you’d like a complimentary consultation, call Leslie at 310.372.8663.

Leslie’s workshops are a blend of lecture, dynamic coaching, and audience participation. She brings her contract knowledge to the corporate classroom in lively and valuable workshops, translating “legal mumbo jumbo” into understandable, useful concepts in an entertaining way.

Contracts

Independent Contractor or Employee?

2 Comments

A ROSE BY ANY OTHER NAME……..
Just because a company calls a worker an independent contractor does not make him or her so. For clarification purposes, I’m using “independent contractor” as a synonym for the terms “consultant”, “contractor” and any individual your company retains whom you don’t consider an employee.

If your company classifies a worker as an independent contractor, the company does not have to withhold or pay state or federal payroll taxes such as including Social Security, Medicare, disability, unemployment, and income taxes.

However, if that person is an employee, the company must withhold and pay these taxes. Thus, it’s often in a company’s financial interest to call a worker an independent contractor.

SHOW ME THE MONEY
Misclassification results in lost payroll taxes and tax revenues to both the state and federal governments.

A 2009 report prepared by the U.S. Government Accountability Office concluded that worker misclassification is a “significant problem” with “adverse consequences” because it reduces tax revenues flowing to the government. The report estimates that the misclassification will cost the Treasury Department more than $7 billion in lost payroll tax revenue over 10 years. And, it is estimated that states lose about $198 million each year in unemployment insurance funds.

EXPENSIVE MISTAKE
It’s no wonder that the states and feds view the independent contractor status with a critical eye.

The misclassification can be expensive: the imposition on your company of fines, penalties, and back taxes by both the state and IRS.

IT’S EVERYONE’S CONCERN
Employers and workers are both interested in proper worker classification.

Workers want to ensure they are paid as required by law, and are protected under federal and state employment laws (eg: Fair Labor Standards Act, Age Discrimination in Employment Act, and laws prohibiting discrimination in the workplace). These law don’t apply to independent contractors. Workers also want to preserve their eligibility for social security and receive employer benefits (health insurance and 401K contributions).

Employers need to ensure they are properly paying payroll taxes and complying with the minimum wage or overtime, and other wage-and-hour law requirements such as providing meal periods and rest breaks.

THE TYPICAL SCENARIO
This is how it often begins: Company engages the services of an independent contractor, subsequently terminates those services, and the independent contractor files a claim for unemployment insurance benefits. The company responds to the unemployment insurance claim by stating that the individual is not entitled to benefits because he or she is an independent contractor.

The state unemployment insurance division begins an investigation into the claim and, often, commences a full audit into the company’s payments to all independent contractors.

Another way in which a classification may be challenged is when the independent contractor fails to pay the double rate of social security taxes due as a result of the “self-employed” status.

That’s what happened in a case decided by the federal tax court. In that case, the individual taxpayer was responsible for managing a group home for adults. The company issued him a Form 1099 reporting the compensation, which the taxpayer filed with his tax returns. On audit, the IRS determined there was a deficiency because the taxpayer did not remit the self-employment taxes.
The “independent contractor” challenged the classification. The tax court found that he should have been properly classified as an employee, and therefore was not responsible for the (double) self-employment taxes.

CRITERIA ESTABLISHING INDEPENDENT CONTRACTOR STATUS
According to the IRS, the question of whether an individual is an independent contractor or an employee is determined upon both: a) consideration of the facts and b) application of the law and regulations (both state and federal) in a particular case.

Previously, IRS Revenue Ruling 87-41, more commonly known as the IRS Twenty Factor Test, was often used to determine what type of relationship existed. Although this ruling remains valid, the IRS has grouped the more relevant factors into three main categories:
1. Behavioral: An employer-employee relationship exists when the employer has the right to control and direct the worker not only as to the results to be accomplished but also as to the details and means by which the result is accomplished. The three indicators of financial control include financial investment of the contractor, opportunity for profit or loss, and method of payment. This includes factors such as a) when and where to do the work; b) what tools or equipment to use, c) degree of instruction; d) type of evaluation system; e) whether there is on-the-job training or ongoing training,
2. Financial: The three indicators of financial control include financial investment of the worker, opportunity for profit or loss, and method of payment. Are the business aspects of the worker’s job controlled by the company? These include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.
3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue for a long term, and is the work performed a key aspect of the business?

Here’s the IRS link for further explanation: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-Self-Employed-or-Employee

The criteria in these categories are many, nuanced and dependent on the specific fact situation. They are often difficult to apply. It’s advisable to consult with a knowledgeable labor/ employment attorney if you have any doubt about whether the individual is an employee or independent contractor.

ABOUT OUR LAW FIRM AND WORKSHOPS

Leslie Marell is a business and commercial law attorney with over 25 years of experience in business contracts, purchasing and sales law, technology law & day to day business legal matters. She heads her own Los Angeles firm which specializes in providing legal services to the manufacturing, industrial and high technology industries. For more information about the firm, click onto https://www.marell-lawfirm.com. If you’d like a complimentary consultation, call Leslie at 310.372.8663

In addition to her legal practice, Leslie has presented contracting and business law seminars and workshops throughout the country since 1990 to thousands of sales, marketing, and purchasing professionals. She has given in-house presentations to companies such as Applied Materials, Eastman Chemical, FMC, Goodrich, Hanes, Hewlett Packard, Hitachi Data Systems, John Deere, Northrop, Texaco, Unum Insurance, University of California, 3M, Unocal, and Verizon. She is a frequent speaker at the Institute of Supply Management International Conference, the Electronics’ Independent Sales Representative’s Association, Manufacturer Agents’ National Association (MANA), and local purchasing and sales trade associations.

Leslie’s workshops are a blend of lecture, dynamic coaching, and audience participation.  She brings her contract knowledge to the corporate classroom in lively and valuable workshops, translating “legal mumbo jumbo” into understandable, useful concepts in an entertaining way.

Leslie’s workshops will enhance your purchasing and sales organizations contracting and negotiating skills and ensure more effective contracts.

Contracts, Uncategorized

Importing & Free Trade Agreements: What You Should Know

IMPORTING FROM A FOREIGN SUPPLIER

You are buying a product from a foreign supplier and will be importing the product into the US. You learn that the US has a free trade agreement (FTA) with that country. Under the FTA you can import the article free of duty. Properly done, your company can save money. However, what concerns should you address?

KNOW THE APPLICABLE FREE TRADE AGREEMENT (FTA)

The US has free trade agreements with many countries. The best known FTA is the North American Free Trade Agreement (NAFTA) with Canada and Mexico. There are other agreements in place with countries including Korea, Australia, Singapore, Israel and many other countries. All FTAs provide duty free entry for qualifying imports. However, all of the agreements also have many rules and requirements associated with imports and exports.

Example: A US company wants to import a product from Canada. The product would ordinarily take a duty of 5%. If it qualifies for NAFTA benefits the product is duty free. Should the US company pursue NAFTA benefits? If so, how do they determine whether the product qualifies?

Each FTA has its own rules, but there are many similarities between them. Most call for the importer to either obtain a certificate of origin from the producer or exporter (as with NAFTA), or provide a certification signed the importer that the article meets the rules of origin (as with the Australia and Korea FTAs). In the example above, the importer would need to require that their Canadian supplier provide a NAFTA Certificate of Origin. The importer would need to keep the certificate for 5 years and present it to US Customs on request.

CONSEQUENCES OF NON-COMPLIANCE 

US Customs & Border Protection (US Customs) takes a strict enforcement view of FTA claims. If an importer cannot produce the required certificate or certification on request it will – at a minimum – be subject to paying additional duties and fees. If the importer makes repetitive unsupported claims, it may be subject to stricter enforcement actions, such as an audit or assessment of a penalty for gross negligence. Under most FTAs US Customs also has the right to audit the foreign supplier that provided the certificate of origin or certification.

RECOMMENDATIONS

Our advice to importers contemplating claiming benefits under FTAs is:

  • Educate yourself on FTA eligibility and requirements. Many of these are found at the US Customs website: cbp.gov
  • Make it a purchase order requirement that the non-US supplier provide a certification or certificate of origin, depending on the FTA being claimed, and additional supporting documents as required.
  • Do not allow customs brokers to make automatic FTA claims (e.g., if a shipment comes from Canada or Mexico they automatically claim NAFTA benefits). Instead require that the customs broker may only claim FTA benefits if sufficient documentation is available to support the claim.
  • Keep all certificates or origin, certifications and other documents supporting FTA claims for five years from the date of import so they may be provided to US Customs on request.

Claiming FTA benefits is an easy way to save money, but it is also an easy way to get in trouble.

ABOUT OUR LAW FIRM AND WORKSHOPS

Leslie Marell is a business and commercial law attorney with over 25 years of experience in business contracts, purchasing and sales law, technology law & day to day business legal matters. She heads her own Los Angeles firm which specializes in providing legal services to the manufacturing, industrial and high technology industries. For more information about the firm, click onto https://www.marell-lawfirm.com. If you’d like a complimentary consultation, call Leslie at 310.372.8663

In addition to her legal practice, Leslie has presented contracting and business law seminars and workshops throughout the country since 1990 to thousands of sales, marketing, and purchasing professionals. She has given in-house presentations to companies such as Applied Materials, Eastman Chemical, FMC, Goodrich, Hanes, Hewlett Packard, Hitachi Data Systems, John Deere, Northrop, Texaco, Unum Insurance, University of California, 3M, Unocal, and Verizon. She is a frequent speaker at the Institute of Supply Management International Conference, the Electronics’ Independent Sales Representative’s Association, Manufacturer Agents’ National Association (MANA), and local purchasing and sales trade associations.

Leslie’s workshops are a blend of lecture, dynamic coaching, and audience participation.  She brings her contract knowledge to the corporate classroom in lively and valuable workshops, translating “legal mumbo jumbo” into understandable, useful concepts in an entertaining way.

Leslie’s workshops will enhance your purchasing and sales organizations contracting and negotiating skills and ensure more effective contracts.

 

Contracts

Understanding Intellectual Property Indemnity

INTELLECTUAL PROPERTY INDEMNIFICATION – A LICENSEE’S PERSPECTIVE

One provision that a customer, or Licensee, should look for in technology agreements is the intellectual property indemnification clause.  This is true whether obtaining a license for software or hardware, or professional services to create a product or process.

What is the purpose of IP Indemnity?  If a company (Licensee) acquires a license for a supplier’s (Licensor’s) intellectual property, like software for example, and a third party claims that the software infringes its copyright or patent, that third party will likely name the company as a defendant in a lawsuit.  This can be true even though the company merely obtained a license to the software and had no involvement in the design or development of it.

If a company is sued merely because it obtained a license to intellectual property, it is reasonable for the company to expect to be reimbursed by the Licensor for the cost of defending the suit and any damages awarded.  This is commonly referred to as intellectual property indemnification (IP Indemnity).

DEFINE AUTHORIZED USERS

A Licensee should look for IP Indemnity to provide protection against claims of infringement for anyone authorized to use the intellectual property, usually defined as Authorized Users.  The Licensee should consider who in the organization needs to use, access or benefit from the intellectual property and that the definition of Authorized User includes all potential users.  Does the Licensee’s organization include affiliated companies?  Does the organization use consultants?  If the IP Indemnity only provides protection to the “employees of Licensee,” the Licensor could refuse to cover claims involving such parties.  The Licensee should always ensure the definition of Authorized Users is: (1) broad enough to cover all potential users and, (2) that all Authorized Users are covered by IP Indemnity.

LOCATION OF AUTHORIZED USERS IS IMPORTANT

The language should provide for IP Indemnity wherever an Authorized User is licensed to use, access or benefit from the intellectual property.  In other words, if a Licensee has Authorized Users in multiple countries, then the IP Indemnity should cover more than just “Authorized Users located in the United States.”  If not, the Licensor may refuse to cover a claim of infringement in the country where the Licensee’s Authorized Users are located.  The Licensee should always request IP Indemnity at least as broad in geographic terms as the license granted.

ENSURE COVERAGE OF ALL TYPES OF IP

A Licensee should also ensure that the language provides protection for any claims of infringement of any type of intellectual property that the Licensee might encounter.  Does the technology contain something that may be patented, copyrighted, trademarked or that the Licensor considers a trade secret?  If the IP Indemnity only protects against a claim “of infringement of any patent” and the Licensee is facing a claim that its use of the intellectual property constitutes copyright infringement or trade secret misappropriation, the Licensee may be stuck paying the bill.  The Licensee should request IP Indemnity for all types of IP.

ENSURE REIMBURSEMENT OF ALL DAMAGES

A Licensee should also ensure that the language protects against all types of damages that occur due to claims of infringement.  Damages should include not just the damages awarded to the intellectual property owner, but the costs paid to the court or to the attorneys to defend such a claim.  If the Licensor’s language provides only for “indemnification from any damages finally awarded” some of the biggest costs, the attorney fees, are left out, leaving the Licensee to pay.

THERE SHOULD NOT BE A DOLLAR CAP

A Licensee should ensure that damages for any intellectual property indemnification claim are uncapped, meaning unlimited in dollar amount.  Frequently, the parties agree to a limitation of the Licensor’s liabilities that sets a cap at the value of the agreement, or some fraction or multiple of that.  This can create a problem for the Licensee if the amount paid for the license is a few thousand dollars, and the Licensee receives a claim of patent infringement.  Considering that the typical cost to defend a claim of infringement on a single patent is approximately five million dollars, the Licensee would find itself paying most of the defense cost.  There should be no cap on damages in the IP indemnity language itself.  If there is a Limitation of Liability clause, that clause should be written to exclude applicability to the IP indemnity clause.

INDEMNITY IS ONLY AS VALUABLE AS THE COMPANY STANDING BEHIND IT

The Licensee should always consider the Licensor’s ability to pay an infringement claim.  What if the Licensor is a small startup with little capital and barely enough cash flows to meet its payroll?  If the Licensor has insurance to cover such claims, then the Licensee has assurances that the Licensor will be financially able to stand behind its IP Indemnity obligation.  If not, the Licensee may find itself footing the bill.  The Licensee should always request insurance.

FINAL NOTE

It is appropriate for a Licensee to expect protection for any intellectual property that it licenses. However, it is unrealistic to expect IP Indemnity for any modifications, or combinations, the Licensee makes to, or with, the licensed intellectual property.  Licensors will usually refuse to cover such modifications or combinations of their intellectual property with that of others.  One caveat, however:  No technology exists, or can be effective, in complete isolation.  Therefore, a Licensee should request that such combinations or modifications still be covered by the IP Indemnity clause if such modifications or combinations: i) are described in the Licensor’s documentation or ii) have been discussed and approved by the Licensor.

About Our Law Firm and Contracting Workshops

Leslie Marell is a business and commercial law attorney with over 25 years of experience in business contracts, purchasing and sales law, technology law & day to day business legal matters. She heads her own Los Angeles firm which specializes in providing legal services to the manufacturing, industrial and high technology industries.

In addition to her legal practice, Leslie has presented contracting and business law seminars and workshops throughout the country since 1990 to thousands of sales, marketing, and purchasing professionals. She has given in-house presentations to companies such as Applied Materials, Eastman Chemical, FMC, Goodrich, Hanes, Hewlett Packard, Hitachi Data Systems, John Deere, Northrop, Texaco, Unum Insurance, University of California, 3M, Unocal, and Verizon. She is a frequent speaker at the Institute of Supply Management International Conference, the Electronics’ Independent Sales Representative’s Association, Manufacturer Agents’ National Association (MANA), and local purchasing and sales trade associations.

Leslie’s workshops are a blend of lecture, dynamic coaching, and audience participation.  She brings her contract knowledge to the corporate classroom in lively and valuable workshops, translating “legal mumbo jumbo” into understandable, useful concepts in an entertaining way.

Leslie’s workshops will enhance your purchasing and sales organizations contracting and negotiating skills and ensure more effective contracts.

 

Uncategorized

Getting to “Yes” with your Lawyer: It’s not an oxymoron!

Many business people are frustrated by how long it takes their lawyer to review / finalize a contract.

The typical complaint:  It took my lawyer (choose one: weeks/ months / years) to finally get the (choose one or several: indemnity, warranty, limitation of liability, IP) clause resolved.Sound familiar?  If so, I want to give you some suggestions on how to greatly reduce this review process.But, before I do, I need to let you in on a little secret:
Your lawyer is just as frustrated about this process as you are!

What do I mean?  Let me share with you a typical email from a client:

Leslie,
            Please review the attached contract and provide us with the major legal issues. The company is
            coming in next week and we want to be ready to finalize the contract.            John Client
When you read this email, do you know what the deal is about…or what John and the other company agreed to….or John’s issues….or what areas are more important than others?

Did you answer “NO” to these questions?

I’ll let you in on another secret:  I DON’T KNOW THE ANSWERS TO THESE QUESTIONS EITHER!

These answers are important because I can’t analyze a contract in any meaningful way without understanding:

  • The deal
  • Your issues/ concerns about the deal
  • The other sides’ issues/ concerns

Like me, your attorney probably has an inbox full of these emails. If I review the contract without my client’s input, I know I’ll waste a lot of time. I also know that getting the details from my client is going to be like pulling teeth. What could have been a straightforward matter has now turned into a more time consuming, frustrating project…..for both of us!

(By the way:  I’ve talked to dozens of in-house lawyers and they all tell me they share the same experiences and frustrations!)

Believe it or not……we attorneys are looking for direction from you, our client!

To explain what I mean, here’s a story “Jim”, one of my seminar attendees, told me:

“I received a supplier’s objections to our contract. I’d been with the company for a short
time and asked a colleague to refer me to the attorney who needed to review the
changes.

            “He said: Don’t expect to hear from him any time soon. We call him the “black hole”. Things go 
            in but they never come out.”

            I wrote a memo to the attorney explaining the deal, what we’d agreed to, and what problems I 
            had (and didn’t have) with the changes. I asked to set up an appointment.

            I sent the email in the morning.  That afternoon, I received a reply from the attorney who 
            gave me language suggestions and some ideas on how to respond.

            No one could believe that I’d received such a quick response. Someone even suggested I must 
            have bribed him.” 

While Jim’s department may have been surprised, I wasn’t. Jim’s lawyer is inundated with requests from other clients who mostly never explain the deal.

Jim’s lawyer is thinking: “Finally, a client who gives me the necessary background, has read the contract, tried to make sure the contract language lines up with the deal, and helps focus my attention.”

Jim helped make the lawyer’s job easier and saved the lawyer time!

TIPS TO EXPEDITE THE LEGAL REVIEW

  1. Discuss the major issues with your supplier/ customer before negotiating the contract.
  2. Make sure the contract includes the deal points you’ve agreed upon.
  3. If you don’t agree with/ understand a clause, ask for an explanation.
    – Don’t be reluctant to ask questions: What problems do you have with our clause? Can you give me
    some specific examples?
    – Your questions will lead to information about your supplier’s/ customer’s concerns. 
  4. Discuss the business aspects of all clauses.. even the “legal” clauses.
    – The limitation of liability clause boils down to “who pays the money”.
    – Example:  In the sale of equipment, discuss limitation of liability in exchange for providing no or low
    fee monthly preventative maintenance. Talk in real world terms with real world approaches to
    address your issues.
  5. Before you send the contract to your lawyer, make sure it reflects your agreements.
  6. Don’t just “hand off” the contract to your lawyer. Stay involved.
    – Provide your lawyer with a “term sheet” explaining the deal.
    – Set up an appointment to discuss these issues with your lawyer.

I guarantee you’ll reduce the time involved in the legal review if you follow these tips!

MORE TIPS:

In order to be effective, you must understand the meaning of your clauses and your customer’s clauses.

That’s where I come in!

I’ve presented seminars throughout the country to thousands of sales, marketing and purchasing professionals on how to read, understand and negotiate contract terms. I use your company’s terms and conditions as well as your customers’ and we discuss the meanings of both sides’ clauses, how to negotiate them, and approaches to resolution.

I would be delighted to discuss the possibility of presenting a workshop for your company.

Buyer

Part One: Do you own the intellectual property to work created by your supplier?

When you retain a supplier to design software, customize its standard product to meet your needs, create engineering specifications, or develop documentation, do you have the right to use it over and over?  Can you re-use it in another application? Does your supplier have the right to re-sell it to another customer?
These questions have, at their heart, the basic principles of copyright, ownership and intellectual property.OWNERSHIP OF COPYRIGHTS Under copyright law, the author who creates an “original work of authorship” owns the copyright to that work.  Among other things, an original work of authorship includes designs, specifications, software, documentation, photographs, website development, artwork, or multimedia work.The author who owns the copyright automatically owns the exclusive rights to it and the rights to prevent others from copying, distributing, or preparing works based on the copyrighted materials.

As counter-intuitive as it may seem, even though your company pays your supplier to develop a work, or customize or modify the supplier’s product to your requirements, your company will not own the copyright to the work created unless it obtains a written assignment of copyright ownership signed by the author/ owner of the work. An assignment is simply a transfer of copyright ownership.

EXCEPTION:  WORKS FOR HIRE DOCTRINE
(Read this carefully:  It’s often misunderstood)

The “Works for Hire” doctrine is an exception to the above general rule.

Employee:
If a work was created by an employee as part of his or her job, the law considers the creation a work for hire, and the employer will own the copyright.

Independent Contractor (defined as any supplier you retain who is not an employee – whether sole proprietor or large company):
If the creator is an independent contractor, the works will be considered works for hire only if:
(1) the parties have signed a written agreement stating that the work will be a work for hire; and
(2) the work is commissioned as a contribution to a collective work, a supplementary work, an instructional text, answer material for a test, an atlas, motion picture, or an audiovisual work.

Note that the above list for independent contractors is very narrow and specific. Outsourcing the development of software, designs, photographs, catalogs and the like are not contained in this list and would not be considered “works for hire”.  

Merely including the “work-made-for-hire” language with your supplier is not enough to ensure that your company obtains ownership to the copyright in most cases.

BOTTOM LINEYou should obtain a written assignment before your supplier starts work. This language should specifically require that the supplier will assign (transfer) all intellectual property rights in the work to the company. Without a clear, written contract, your company may end up with only a limited license (right) to use the work.

A clause that simply says that your company owns the rights but does not specifically assign the rights does not legally transfer the ownership rights.

A simple NDA does not transfer the IP rights. You need an agreement with a specific assignment clause that transfers these rights.

EXAMPLE LANGUAGE

The following is an example of a very simple assignment clause to include in a contract with your independent contractor:

Independent Contractor hereby assigns and agrees to assign to Company, and shall require its subcontractors in writing to assign to Company, all right, title and interest in and to the (name of the work) and all intellectual property rights therein.

NEXT ISSUE 

These concepts are not terribly complicated. So, why all the back and forth negotiations between your company and the supplier?

Next month I’ll discuss the underlying problems by addressing the customer’s perspective of ownership vs. the supplier’s perspective and provide you with possible approaches to resolution.