Tech & Sourcing @ Morgan Lewis

Contract Corner

When a company desires to develop technology, it has two options: develop the technology in-house by its employees, or contract with a third-party developer to develop the technology. Any time a company contracts with a third party to develop technology for the company, one of the key issues in the agreement should be allocation of intellectual property ownership.

The first step in allocating intellectual property ownership in a development agreement is to identity the IP “buckets.” IP buckets generally fall into two categories, background IP and foreground IP. Background IP is generally defined as technology and intellectual property rights created, conceived, owned, or developed by or for a party: (a) on or before the effective date of the agreement, or (b) which result from activities that are independent from but concurrent with the agreement. Under most development agreements, each party will own its background IP. Foreground IP is intellectual property created during the course of the development agreement.

The key issue in any development agreement is the allocation of rights in foreground IP. Foreground IP may consist of new technologies created by a party or it may be a derivative of technology owned by a party. Regardless of whether or not the developed IP is new IP or derivative IP, if the intellectual property is developed solely by a party without provisions addressing who owns the IP and a present assignment of IP rights from the developer to the company, the IP is owned by the developer. If the intellectual property is created jointly by the parties and there is no IP allocation for foreground IP in the development agreement, then the default rule is joint ownership.

Although joint ownership may sound fair in theory, it creates a number of complexities. Under US law, each joint owner may fully exploit and license the technology to third parties, without accounting for patent rights, but with accounting for copyrights. This means that at least for patents, joint owners may license each other’s competitor infringers without royalty fees to the other owner. Further, in order to enforce jointly owned IP, both joint owners must join the suit, which may result in an inability for one joint owner to bring the suit. Lastly, generally when a company is paying a third party to develop IP for it, it desires to own such IP, and joint ownership should be an option only in specific circumstances or for IP that is immaterial to the company.

In order to avoid joint ownership issues, the parties should clearly define foreground IP in development agreements and allocate ownership accordingly. In standard consulting or development agreements, where the developer or consultant is specifically hired to develop technology for a company, the company will generally own all intellectual property rights to all technology developed by the developer during the term of the agreement, which relate in any manner to the business of company that the developer may be directed to undertake, investigate or experiment with, or which the developer may become associated with in work, investigation or experimentation in the line of business of the company in performing the services for the company.

This ownership right is generally subject to the developer retaining the rights to its background IP or its generally applicable knowhow. Note that the foregoing company ownership rights are broad and can be drafted more narrowly by limiting foreground IP to technology defined in a statement of work. Companies must be careful when employing this method of allocating foreground IP as any technology left out of the statement of work will not be owned by the company.

Even if the parties have properly allocated ownership of the IP buckets noted above, it is important for the company to obtain a license from the developer for any developer background IP incorporated in the technology developed by the developer, or IP which is necessary for the company to use the developed technology. Generally, a company contracts with a developer to build specific technologies because the developer has existing knowledge and knowhow regarding how to build such technologies. Therefore, a developer may incorporate its own IP or even third party IP into the developed technologies. Without a license to the developer’s background IP, the company would not be free to practice its rights in the developed technology without a potential infringement claim from the developer. As a best practice, we often recommend including provisions in the development agreement that prohibit the developer from incorporating any background IP or third party IP into developed technologies, without the company’s consent and if the developer incorporates such IP, the developer grants to the company a broad license to use such developer IP or third party IP to use or exploit the developed technology.

The foregoing provides a brief analysis of IP allocation in a standard development agreement. Of course, IP allocation in development agreements and particularly in joint development agreements can become complex depending on the specifics of the deal. For any type of IP development deal, we recommend working closely with counsel experienced in IP transactions to avoid IP ownership issues and potential litigation arising from the development deal.