The next topic in our clause guide is ‘Intellectual Property Rights’.
In a contract, the intellectual property (IP) clause can cover a variety of topics, including IP ownership, transfer of IP, licensing of IP, restrictions on use, infringement indemnification, and more.
In this guide, we are focusing on ownership and licensing:
Ownership
Intellectual property is one of the most valuable assets of a business, so it is important to ensure that IP is protected when entering into contracts. The owner of IP has the right to use, exploit, license and sell the IP, as well as enforce it against others that may try to infringe such IP, and could compromise that ability if it unwittingly gives IP away or restricts itself from using its IP freely.
IP clauses within contracts are there to clearly define each party’s IP to avoid any uncertainty regarding ownership. Also, where new IP is being created under the contract (e.g. a new piece of software is being developed), the contract should specify who owns that newly created IP.
From a supplier’s perspective, the key thing is not to give up any pre-existing IP, as this is likely to be a critical part of the supplier’s business, used within products and/or services across its customer base. Some customer-drafted terms can include standard clauses that say the customer owns everything done / delivered by the supplier, so IP clauses in customer terms should be reviewed carefully.
A supplier may be more open to transferring new IP to a customer. For example, if creating a bespoke design for a customer, or manufacturing a product to the customer’s design, the supplier is unlikely to have any use for that IP and it is fair that the customer owns it, since they have paid for it. However, this is not always the case. For example, if the supplier is customising its existing software to suit a customer, it may not be appropriate for that customer to own the customisations, even if they have paid for it.
From a customer’s perspective, the key considerations will be: (1) that the customer retains rights to its own input materials and designs, if it is providing those to the supplier under the contract; and (2) that the ownership vs licensing position is clear, so the customer knows what it is getting for its money; and (3) that any transfer of the IP is effective and made with full title guarantee.
Licensing
An IP licence grants permission to a licensee to use and exploit IP owned by a third party.
Types. The types of licence which can be granted are broadly categorised into sole, exclusive or non-exclusive. A sole licence provides the licensor with the ability to continue to use and exploit the IP but restricts them from granting any further licences. An exclusive licence prevents the licensor using the IP themselves or permitting anyone else to do so. Conversely, a non-exclusive licence enables the licensor to use and exploit the IP themselves and grant additional licences to third parties. In a commercial contract, a non-exclusive licence would typically be granted, so the parties can freely use the IP in other contexts, though customers will sometimes seek exclusivity – even if for a limited period of time – particularly for customisations that are bespoke for them or give them some advantage over competitors.
Key factors in an IP licence. When looking at IP licence, it is important to consider the following factors: (1) whether the licence is sole, exclusive, or non-exclusive; (2) the scope of usage permitted, e.g. is it for internal use or can it redistributed / incorporated into another product or service; (3) the duration, for example is it subscription based and time limited, or is it a one-off perpetual licence? (4) how the usage of the licence will be monitored and if necessary enforced; and (5) whether the licence is personal to the licensee or transferrable and/or able to be sublicensed to a third party.
Get in touch with the team if we can help with your contract queries.