Best Practices for IP Ownership Issues in Technology Transactions

April 24, 2008

“We paid for it, we own it!” shouts the corporate executive.

“We built it, we own it!” shouts the technology provider.

Bridging these two sharply conflicting perspectives is an everyday challenge for all technology dealmakers and the lawyers who support them. With technology being not only critical to the daily operations of most businesses, but often a key component in creating a competitive advantage, resolving these two opposite views is often a major hurdle encountered during contract negotiations involving software development, e-commerce systems, online data and online content matters for the corporate enterprise.

Customers often demand ownership of the intellectual property because they are footing the bill for its development. Service providers, on the other hand, often view ownership of the developments as part of their compensation, arguing that the customer is receiving the benefit of the provider’s experience and pre-existing intellectual property developed in connection with other clients or independently. But more often than not, both sides seek ownership as a default precaution. Unsure of what rights their company actually needs, now or in the future, negotiators frequently seek to have it all.

The legal tools for resolving this issue are well known: co-ownership solutions or licensing techniques allow multiple parties to have the rights and restrictions they need without standing in the way of the rights and restrictions needed by the other party. But even with those tools, negotiations often find their way to a stalemate that must be bridged. Many people feel outside of their comfort zone in talking about intellectual property rights. While a license can provide many of the same rights and privileges as ownership of the intellectual property, it will only do so if the license has been crafted with care and precision.

Here are several best practices to facilitate these discussions:

1. Make sure everyone is speaking the same language: Ownership of intellectual property has a fairly precise meaning to an IP lawyer. However, non-lawyers may be using the term “own” more loosely. For example, it may be a short-hand reference for simply a right for one party to use the intellectual property however it wants, but with no regard to whether others should be precluded from also using the intellectual property. Alternatively, the term may be shorthand for business accountability, as in, “you own that problem.”

A useful technique to help identify what is important about the intellectual property is to encourage all concerned parties to speak in terms of its uses and not ownership. Focus on what uses the customer should be permitted and what uses the customer is comfortable being denied. Similarly, examine what uses of the intellectual property the customer is willing to permit the service provider and the uses of the intellectual property that the service provider must be prevented from making. This approach will help identify whether a license is a viable alternative to ownership and what elements (e.g., scope of use, exclusivity, and royalties) need to be included in the license.

2. Look at layers: Sometimes the stalemate is caused by taking a “one size fits all” approach to the question. The classic parable of splitting a single supply of oranges into juice for drinking and pulp for baking frequently has application to business intellectual property dealmaking. For example, consider a technology solution that includes both a custom user interface and underlying industry-specific data management algorithms. It may be possible that an agreement could be cast around the customer’s ownership of the user interface and the service provider’s ownership of the data management system. Parties should identify the distinct layers or components of the intellectual property being developed and determine whether the “use” analysis recommended above produces different answers depending on the layer or component being examined.

3. Not everything can be solved with a license: Lawyers are right to remind their clients that many of the rights and privileges of ownership they desire can be just as easily accomplished through a well-crafted set of licenses and covenants. However, there are limits. Chief among them is the question of enforcement. Licensees often lack standing to bring claims of copyright or patent infringement as they are not recognized as the owner of the copyright or the “effective patentee” of the invention. Therefore, the decision as to whether the customer or the service provider should end up with the ownership (versus the license) of the intellectual property should also take into account the likelihood of third parties committing infringing acts and a judgment as to whether the customer or service provider is better equipped and more motivated to pursue enforcement actions.

4. Underlying legal concepts matter: Just as one size does not fit all for business solutions, the arcane and complex world of intellectual property legal regimes requires different solutions depending on the nature of the underlying subject matter. Different rules apply to copyright, patent, trade secrets and trademarks; some items, such as online transactional data don’t fit neatly into any of these legal categories and other common business items cross several of these lines. Among the issues that can affect transactional structure are the following:

  • Patents require an extensive issuance process with the patent office and require the individual inventor’s cooperation
  • Trade secrets require diligent confidentiality protections
  • Trademark licenses require protections for quality control

Sorting out what type of intellectual property is involved in a given transaction and seeing to it that the necessary legal rules are respected should inform every technology negotiation.

Best practice strategies for negotiating technology transactions is one of the areas supported by the McGuireWoods Technology Transactions Practice Group. This practice group is part of the firm's integrated Technology & Business Department, which provides legal services for business transactions driven by technology. These service areas are led by Department Co-Chair Steve Gold and Group Leader Janet Peyton (Intellectual Property). Our technology team also draws on the full resources of McGuireWoods for other specialized areas, such as the firm’s Patent/IP Litigation Department, led by Department Chair Brian Riopelle. For further information about this or any related topics, please contact us.

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