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Background Check: Protecting Existing IP in Collaborations and Services Agreements
Practical Law Legal Update 0-586-1206 (Approx. 5 pages)
Background Check: Protecting Existing IP in Collaborations and Services Agreements
by Practical Law Intellectual Property & Technology
| Published on 04 Nov 2014 • USA (National/Federal) |
A discussion of key considerations relating to ownership and use of background intellectual property (IP) in collaborations and commercial transactions. This Update discusses protection and licensing of background IP in addition to derivatives of and improvements to background IP.
In a variety of transactions, a party may use the intellectual property (IP) it owns before entering into the agreement (background IP) when performing its obligations. For example:
- In a joint development agreement or other collaboration, both parties may use their background IP in developing or commercializing a new product or technology.
- In a variety of commercial or professional services agreements ranging from manufacturing to specialty consulting, the service provider may use its background IP in performing services and creating deliverables for the customer.
While allocation of ownership of and the right to exploit developments, deliverables and other new IP can be a key point of negotiation in these types of transactions, in some cases the background IP that a party brings to the table is of equal value to any new IP being developed and provides that party with a competitive advantage. In drafting and negotiating assignment and license provisions relating to new IP, the parties should consider the potential impact of these provisions on background IP, especially where:
- Background IP is incorporated in the deliverables or other results of the collaboration or services.
- One or more parties make improvements, modifications or new works derived from their own or the other party's background IP.
Relying on default rules or failing to address potential ambiguity regarding ownership and exploitation of background IP could lead to disputes and unintended adverse practical consequences.
Identifying the Background IP
Unless there is an express assignment, both parties entering into a collaboration or services agreement typically expect to retain ownership of the IP that they own as of the effective date of the agreement. To minimize any ambiguity and the risk of potential dispute, the agreement should:
- Identify the background IP that a party intends to use or share in connection with the collaboration or services.
- Include an acknowledgment that ownership of the background IP remains with the current owner.
- Expressly carve out background IP from any assignment of IP rights in deliverables or other results of the collaboration or services to the other party.
In addition to pre-existing IP, a party may try to expand the definition of background IP and related ownership provisions to include IP:
- Developed by the party while the agreement is in effect but outside the scope of the project or services.
- Developed by the party when performing the project or services but with generic applicability.
- Derived from or relating to the background IP, which derived IP may be developed solely by a party or jointly by both parties.
For a sample definition of background intellectual property and a discussion of considerations in tailoring the definition, see Standard Document, Joint Development Agreement: Drafting Note: Tailoring the Definition.
Out-of-scope IP
If during the term of the collaboration or services agreement, a party develops IP in the conduct of its business outside the scope of the specific collaboration or engagement, the developing party typically tries to treat these independent developments as background IP and exclude them from any assignment and license provisions relating to new IP.
In this scenario, the developing party should try to clearly and narrowly define the subject matter or purpose of the collaboration or services engagement to minimize ambiguity over whether a development falls within the scope of the agreement, for example, by reference to:
- A development plan or specifications for a specific product.
- A detailed description of a research program.
- A detailed description of services or list of specific deliverables in a statement of work.
For a discussion of considerations in defining the scope of the development agreement, see Standard Document, Software Development Agreement (Pro-developer): Drafting Notes: Deliverables and Services.
Generally Applicable IP
A party may develop IP in the course of a collaboration or in performing services for a customer that is within the scope of the agreement, but has potential applicability to other products, services or customers. For example:
- A consulting services company may refine its background proprietary analytical model in the course of a client engagement, but the refinements are not specific to the client business or data.
- A manufacturing company may improve on its background manufacturing process in connection with manufacturing a custom product per customer specifications, but the process improvements are not specific to the customizations.
In this scenario, the developing party may need to retain the right to use this IP:
- For internal business purposes.
- To perform similar services for other customers or collaboration partners.
The developing party should try to carve out from any assignment of developments or deliverables to the development partner or customer any IP not specifically or exclusively related to the subject matter or purpose of the collaboration or services agreement.
For a discussion of circumstances where a developer may retain ownership of generally applicable developments including deliverables, see Standard Document, Software Development Agreement (Pro-developer): Drafting Note: Work Product.
Derivatives or Improvements
Where a party has licensed or disclosed its background IP to the other party for use in performing obligations under a collaboration or services agreement, the other party may develop improvements to, modify or create derivative works based on the background IP. The background IP owner should consider that if it does not control the other party's use or exploitation of the improvement or derivative work, this IP may:
- Impair the value or competitive advantage provided by the background IP.
- Raise a risk of potential infringement of the improvement patent by the background IP owner's own subsequent developments.
To address this concern, the background IP owner may:
- Expressly exclude from any copyright license the right to make derivative works of the background IP.
- Obligate the licensee to license to the background IP owner any improvements or modifications to or derivative works based on the background IP.
Grantback provisions relating to licensee improvements to background IP may raise antitrust issues in certain circumstances (see Practice Note, Intellectual Property Rights: The Key Issues: Antitrust Considerations).
Licensing the Background IP
In a collaboration or services agreement, a party may grant a license to the other party, or the parties may grant cross-licenses, to use background IP, including where background IP is:
- Necessary to perform a party's obligations under the agreement.
- Incorporated in or otherwise necessary to use or exploit a deliverable, product or other result of the collaboration or services.
To protect the value of the background IP, depending on the nature of the background IP and the licensee's intended use, the licensor should try to limit the scope of the license and otherwise restrict the use of the background IP, for example, by:
- Limiting the permitted use of the background IP solely to the extent necessary to exercise a party's rights or perform its obligations under the agreement.
- Limiting the permitted use of the deliverable or other result incorporating background IP to "internal business purposes" only. However, this restriction would not apply where:
- the licensee is a service provider and the conduct of its business requires use of the deliverable or other result in connection with performing services for its customers; or
- the licensee has the right to commercialize a development product that incorporates or is an improvement to the background IP.
- Expressly prohibiting reverse engineering or decompiling of the deliverable or other result to derive or gain access to the background IP (for example, the source code of proprietary software).
- Restricting sublicensing of the background IP, for example, solely to affiliates or third-party contractors performing services for the licensee's benefit.
For a discussion of other issues concerning background IP licenses in the context of a collaboration, see Practice Note, Joint Development Agreements: Licenses to Background Intellectual Property and Standard Document, Joint Development Agreement: Drafting Note: Background Intellectual Property Cross-licenses.