TECHNOLOGY, OUTSOURCING, AND COMMERCIAL TRANSACTIONS
NEWS FOR LAWYERS AND SOURCING PROFESSIONALS

Picking up where we left off last week, we continue our refresher on common issues to consider when entering into a transaction that will include royalties. Today’s entry focuses on timing and reporting considerations for the calculation and payment of royalties.

Part 1 of this three-part series discusses intellectual property ownership rights in the absence of another agreement. Part 2 addresses some of the common ways that parties can allocate the ownership of intellectual property in a contract. This third part covers a few best practices that will help ensure that a company owns its intellectual property.

Discussions with third parties about future business relationships and hiring of employees and consultants are routine business activities that can have detrimental effects on a company’s intellectual property if not managed properly. Appropriate non-disclosure agreements, employee confidential/proprietary information and invention assignment agreements, and consulting agreements are an important part of a company’s business operations.

Non-Disclosure Agreements

Before providing any confidential information to a potential business partner, companies should enter into a written non-disclosure agreement (NDA). An NDA will define the bounds of what is considered confidential information and provide limitations on what each party can do with the confidential information of the other party. The essence of the definition of “Confidential Information” is that it is the non-public information of a company. Under a typical mutual NDA, the party that receives the information is generally only allowed to use the disclosing party’s confidential information for purposes of evaluating a further potential business relationship between the parties. In addition to providing for a potential remedy against unauthorized disclosure of confidential information, NDAs are an important means of showing that a company is using reasonable efforts to protect its trade secrets.

In Part 1 of this three-part series, we discussed how intellectual property ownership is determined in the U.S. if no agreement is in place. In this second part, we discuss the typical ways that parties can use contracts to determine intellectual property ownership.

In the context of negotiating an agreement where intellectual property rights are addressed, most parties will readily agree that those intellectual property rights owned by a party before the effective date of the agreement or developed outside of the agreement (commonly referred to as background rights) should be owned by that party.

Foreground Intellectual Property Rights

Unlike background rights, ownership of intellectual property developed under the agreement (commonly referred to as foreground rights) are often highly negotiated. When negotiating the ownership of foreground intellectual property rights, some questions the parties should consider are as follows:

  • Does the party that developed the intellectual property own it?
  • What happens if the other party is paying?
  • What if the intellectual property developed by one party is an improvement to the intellectual property owned by the other party?
  • What if both parties develop the intellectual property jointly?

Protecting intellectual property rights is a critical component to the success of a technology company. In order for a tech company to determine how to protect its intellectual property, the company should understand how the key intellectual property rights work. In this Part 1 of a three-part series, we discuss how patent, copyright, and trade secret ownership works in the United States if there is no agreement in place to allocate these rights.

Patents

Patents are a right to exclude others from using a technology for a limited period of time. In exchange for these rights, the patent holder must disclose the invention in the patent. Without an agreement in place to state the ownership of an invention that is patented, the following applies:

  • Sole Ownership. In general, the inventor owns the right to patent the invention, regardless of the type of technology. This is the case even when the inventor is an employee who created an invention within the scope of employment
  • Joint Ownership. Occurs when there is more than one inventor (employee from Company A and employee from Company B, for example) or rights have been assigned to more than one person or entity. Even a small percentage ownership or minor contribution results in joint ownership right in the patent. Any owner may exploit a patent either by licensing to a third party or practicing the patent without permission of or accounting of profits to any other owner
  • Enforcement. All owners must participate in an enforcement claim. Therefore, if a company jointly owns a patent and wants to file an infringement claim against a third party, all other owners must also agree to file the claim

It is easy to skim over your contracts’ insurance provisions or simply defer to risk experts, but here are a few questions you might want to consider the next time you review the insurance section of a contract.

  1. How do your indemnification and other risk allocation provisions interact with your insurance provisions? The proper allocation of risk in your contract is the first step. Indemnities, warranties, and similar provisions contractually allocate liability between the parties. That liability will exist regardless of whether the other party maintains insurance. If a contractually-allocated liability arises, the next question is whether the liable party has the financial wherewithal to fulfill its obligations. That is where the assets of the liable party and its insurance come into play. Requiring insurance helps to ensure the liable party will have the money to deliver on its contractual promise to satisfy the liabilities allocated to it in the contract. Watch as the other side may try to limit its obligation to indemnify you to the extent that its insurance policies cover the incident or costs in question. You may want to push back as this could unfairly limit your protection or cause a delay in receiving payment even if the insurance policy ends up covering such costs. The other side may also seek to limit its liability to amounts actually recovered from its insurance company. This should be rejected as the other side is maintaining insurance to help it satisfy its contractual liabilities, not to put a limit on them.

It is important to periodically review form agreements to ensure that the provisions that were favorable or represented your company’s position in the past continue to accurately protect your company’s interests.

At the Tech & Sourcing @ Morgan Lewis blog, we have given tips on drafting nondisclosure agreements (NDAs) in the past. In this post, we revisit some of those key considerations and expand upon additional items to bear in mind as you review your company’s NDAs.

Everybody does it. We may say that we only use the “customer’s paper” when contracting, but we know that is often not the case when entering into licenses for commercially available, off-the-shelf (COTS) software products. Maybe if the licensed software is a strategic product or the customer has significant leverage, we are able to work from the customer’s paper, but for ordinary course software licensing, it is common to use the vendor’s paper.

So what then? Using the vendor’s paper does not mean that the contract shouldn’t be reviewed and negotiated to ensure that key issues are addressed. Set forth below is the first part of a quick checklist of issues customers should be mindful of in any software licensing agreement. Today’s items focus on issues that are more business or operational in nature, while the forthcoming post with Part 2 of the checklist will include more traditional legal issues.

As 2017 comes to a close, we have once again compiled all the links to our Contract Corner blog posts, a regular feature of Tech & Sourcing @ Morgan Lewis. In these posts, members of our global technology, outsourcing, and commercial transactions practice highlight particular contract provisions, review the issues, and propose negotiating and drafting tips. If you don’t see a topic you are interested in below, please let us know, and we may feature it in a future Contract Corner. These posts cover many different provisions and aspects of drafting commercial, outsourcing, and technology contracts:

Assignment
Assignment and Delegation

An assignment and delegation provision is the clause that specifies a party’s ability to assign its rights or delegate its duties under an agreement. It is a provision that is often placed in the “miscellaneous” or “general” sections of commercial contracts, but it should not be thought of as standard “boilerplate” language that never changes.

Contracting parties should carefully consider the potential situations where an assignment would be desired or required, and should carefully draft the clause to address issues of transferability. Below is an overview of some of the key issues that should be considered when drafting an assignment provision for commercial and technology agreements. Note that, technically, a party assigns its rights and delegates its duties. This overview generally refers to assignments for shorthand.

A liquidated damages clause can be a useful tool in a contract to reduce uncertainty and the time and resources spent on potential disputes. Liquidated damages clauses specify the amount of damages to be paid by the breaching party in the event of certain types of breaches as defined in the contract by the parties. The amount of liquidated damages represents the contracting parties’ best guess as to the amount of anticipated or actual damages that would be incurred by the non-breaching party in the event of a specified breach of the contract by the other party.

There are steps you can take in determining the liquidated damages amount and drafting your contract to make sure courts uphold the liquidated damages provision. Of course, while this post discusses liquidated damages clauses generally, you should also research how the jurisdiction applicable to your contract treats liquidated damages.