In our experience, the service provider will always seek to retain:
- the right to re-use the knowledge the service provider gains on the engagement (subject to customer confidentiality); and
- the right to build similar deliverables for itself and others, subject to any non-compete provisions which the service provider may have agreed with the customer. Under such a non-compete provision, the service provider will commit to not developing similar software for any of the customer’s competitors.
In this section, “Deliverable” means the entire deliverable to the customer. A Deliverable has two component parts:
- “Custom Components”, which are the elements newly created on the engagement; and
- “Service provider Background IP” which includes the IP and knowledge capital which the service provider takes into or develops outside of an engagement and any modifications or derivatives of that IP and knowledge capital. In all cases, the customer should get a fully paid, non-exclusive licence to use Service provider Background IP for its internal purposes, as part of the Deliverables.
Approach 1: The service provider owns all newly created IP and then licenses it to the customer for its internal use
The service provider’s “going in” position as regards ownership of Intellectual Property is that it owns the Deliverables, and all IP in them, and will license such IP back to the customer for its internal use.
Approach 2: Joint Ownership
If the customer is unwilling to agree to the service provider’s “going in” position, then the next option the service provider is likely to propose is joint ownership of the Custom Components and all IP rights in them. This is often tied to some restrictions on use, sale and sublicensing.
Joint ownership is often suggested as a compromise between an outright assignment and a simple licence. However, many legal advisers are wary about joint ownership because, although, on the face of it, it appears to represent an ideal solution, it does introduce significant complexities.
Joint ownership can mean various things in various circumstances. It is important to clarify precisely what is meant and specifically what rights each of the parties has to exploit the jointly owned program either independently or whether exploitation can only take place with unanimous agreement. Equally, if either of the joint owners develops certain improvements to the software it should be clear what rights each of the joint owners has in relation to the improvements.
Another drawback of this approach is that, while it generally gives each party the rights of ownership in the Custom Components, there may be difficulties in the event that one party wishes to pursue an infringement action against a third party (or defend an invalidity action by a third party), and the other party does not. The reason for this is that for any such action to be taken it has to be taken by all co-owners.
One should also clarify what rights each of the joint owners has to sell or transfer its share in the ownership. Certain forms of joint ownership are akin to outright ownership which can be passed on freely to a purchaser or assignee. On the other hand, other forms of joint ownership offer significantly less freedom and effectively mean that the rights of the respective owners are linked together until they agree otherwise.
Approach 3: Service provider grants copyright ownership to customer, but retains ownership of patent rights and then licenses customer to use patent rights for its internal business
The benefit of this approach is that the service provider retains patent rights (the rights which protect the ideas) but gives up copyright (the specific implementation of that idea for the customer). The effect of this is that the service provider can reuse the idea for other customers, but cannot copy or “cut and paste” from the specific Custom Components developed under the engagement.
Approach 4: Customer owns all newly created IP, grants the service provider broad use and sublicense rights, possibly subject to reasonable restrictions, to protect customer competitive advantage
The customer is granted ownership of all rights, title and interest in the Custom Components and all IP in them, but grants the service provider a broad licence back. The benefits of this approach are that the customer gets the ownership which it wants, while the service provider has, broadly speaking, more or less the same use rights as if it had retained ownership. The main differences from the service provider’s perspective are:
- The service provider does not have the right to defend the IP and must rely on the customer to do so. However, the service provider may seek a commitment from the customer to do this (seeking this can provide leverage by highlighting to the customer that if the service provider is to consider giving up ownership there is a price to be paid for that to help the service provider protect its market space);
- Unless restrictions are placed on the service provider’s use of the IP, the service provider may find the customer (or other third parties, possibly the service provider’s major competitors, to whom the customer has sold or licensed the IP) competing with the service provider on future opportunities (see Approach 2 above for a discussion on restrictions on customer’s use); and
- The service provider does not have its own “asset” that it can use to leverage additional value. For example, from licensing or contribution to new companies or joint ventures.
Approach 5: “Menu” approach
The menu approach is when the IP clause pulls together and lists all potential options for IP ownership and says that the option which is to apply will be set out in the relevant Appendix. The menu approach has two variations:
- the “standard” menu approach, outlined above; and
- the “type of deliverables” menu approach, where the parties endeavour to add a level of granularity to the standard approach by specifying in the outsourcing contract which types of deliverables (or more accurately, the Custom Components in them) will fall within each category (i.e. “Newly developed Software in source and object code form etc…shall be a Category A Deliverable”).
Approach 6: Customer owns all newly created IP, the service provider retains no rights
The service provider is required to give up all rights title and interest in the Custom Components.
This approach will generally only be acceptable to a service provider when all other options have failed and it is keen to win the work. In negotiating to avoid this position the service provider is likely to stress that it discourages innovation and best thinking as the service provider is unlikely to do work for the customer which cuts the service provider out of a future market.
This approach should be the customer’s preferred position and if it is achieved the customer should be satisfied with the position.