From time to time, BLAZE IP is consulted regarding the intellectual property (IP) clauses in an agreement. When one or both parties contribute pre-existing IP to a deliverable, questions often arise about the licensing and ownership of IP rights in the deliverable. When a new IP is jointly developed, questions arise about the various options: (i) joint ownership; (ii) sole ownership; (iii) licensing; or (iv) a combination. When a new IP is developed solely by one party to provide services to the other party, questions arise about whether the receiving party is entitled to any proprietary interest in the IP. In all instances, it is critical that the subject matter be properly defined to correspond with how that category of IP is assigned and/or licensed to the respective parties later in the agreement.

Compilations & Composite Works

Before diving into the definitions, it is important to understand that new technology is often developed by combining elements from different sources into an original compilation or composite work.

A composite work combines separate, independent creative works by different authors into a new unified whole. Common examples include newspapers, catalogues, encyclopedias, social media and software. The author of the composite work owns copyright in its selection, arrangement and presentation, but requires a license or permission to use any third-party content incorporated into the composite that is not yet in the public domain.

Today, software developers have vast libraries of source code from which they select components to arrange into unique composite works that each perform specific functions. Some of the material contributed to the composite work will be licensed to the developer by a third party, such as Microsoft, or downloaded from open-source software repositories.

Similarly, lawyers draw on vast libraries of precedent materials to prepare unique composite works, such as agreements, pleadings, and written arguments, each of which performs specific functions. For lawyers, there is an implied license to the reader to use precedent material for the purpose for which it has been published. I would expect the practices of expert consultants in other fields to be similar.

The client for whom a deliverable is created needs the title to the IP in the composite work. On the other hand, software developers, lawyers and consultants need to retain title to the IP in their libraries to serve future clients.

In practice, this results in agreements that assign title to any new composite work to the client but only grant the client a license for the elements incorporated into the composite work from third-party sources. Those elements derived from third-party sources are routinely identified in agreements as “background” technology.

Defining Your Terms

The term “background IP” is common in commercial agreements and has a fairly standard definition, as discussed above. The terms “foreground IP”, “resulting IP” and “arising IP” are increasingly common. However, the definitions of each term are not yet standardized. In some cases, these terms are used interchangeably. In other cases, they each define distinct subject matter. For this reason, the terms need to be mutually agreed upon and defined in the agreement.

My preferred definitions for each category are set out below:

“Background IP” of a party means all Intellectual Property that is owned or licensed by such party and in existence in electronic or written form on or prior to the Effective Date which is either: (a) used by such party to perform Services; or (b) contributed by that party to become part of any Deliverable or the Resulting IP.

“Foreground IP” of a party means all Intellectual Property that is independently discovered, made or conceived by such party after the Effective Date which is either: (a) used by such party to perform Services; or (b) contributed by that party to become part of any Deliverable or the Resulting IP.

“Resulting IP” means all Intellectual Property that is discovered, made or conceived by either party after the Effective Date which is: (a) the result of work jointly carried out by the parties under this Agreement; or (b) the result of the combination of Foreground IP or Background IP from each party to this Agreement; or (c) the result of the combination of Foreground IP or Background IP from one party with the result of work jointly carried out by the parties under this Agreement.

Typically,

1. each party retains title to their respective Background IP and Foreground IP and only licenses it to the other party when it is contributed to become part of any Deliverable and the Resulting IP; and

2. the parties assign title in the Resulting IP to the party acquiring the related Deliverable.

In some cases, the parties may agree to assign title in the Foreground IP as well and/or agree to joint ownership of the Resulting IP.

In some cases, the Resulting IP may be assigned to the party acquiring the related Deliverable with a limited license back to the developing party. The limitations may relate to a term, a jurisdiction, a field of use or other criteria.

Obviously, the definitions correspond to how that category of IP is assigned and/or licensed to the respective parties later in the agreement. In some cases, a novel definition identifying a unique category of IP may need to be developed for a particular agreement so that title to that category can be managed differently later in the agreement.

 A Note about the Co-ownership of IP

Although co-ownership of a jointly developed work may seem fair, it is fraught with challenges, making it commercially inconvenient. First, the law relating to co-ownership varies depending on the nature of the IP. For instance, the legal restrictions governing co-ownership of trademarks differ significantly from those governing co-ownership of patents and copyright. Second, the rights of co-owners can vary widely from country to country, making them challenging to manage internationally. Finally, it can be challenging for the parties to agree in advance on how to manage and enforce jointly owned intellectual property rights, given the many options and the associated legal costs.

In sum, the consequences of joint ownership for different forms of IP need to be understood and, where feasible, addressed in the terms of the agreement. For instance, the agreement may expressly stipulate that the Resulting IP is jointly owned by the parties, but each party has no obligation to account to the others for its exploitation. However, such a term may invalidate a trademark and significantly dilute the monopoly granted by any copyright or patent, thereby depreciating their value.

A Note about IP Rights in Deliverables & Registrations

A related issue in commercial agreements is a common tendency to confuse the intellectual property rights in certain subject matter with either:

1. the subject matter or deliverable itself; or

2. any related registration recorded at an intellectual property office.

At all points in any agreement, it is important to remember that IP rights are intangible and independent of any related deliverable or record.

First, intellectual property may be embodied in a physical object, such as a painting, a book, a cell phone, a motor vehicle or a thumb drive, but the IP exists independently of the physical object. Title to a physical object and title to its related IP may be assigned to two different parties. If assigning title to a physical object and its related IP, it is important to identify each and not to conflate them into a single property or confuse one with the other. It is for this reason that the definitions above identify both the deliverable and the Resulting IP.

Second, intellectual property registrations may record certain exclusive rights in the subject IP, but the IP exists independently of the registration. Exclusive rights in trademarks and copyrighted works exist independent of any registration. (Registration confers enhanced rights.) For this reason, terms assigning trademarks and copyrighted works should refer to the marks, the works and any related registrations.

Similarly, a patent grants exclusive rights in an invention and will eventually expire, but the subject invention exists independently of the patent and does not ‘expire’. For this reason, a proposed license to a patented invention needs to be read with care to ensure that the obligation to pay royalties relates to the ‘patent’ and will terminate when the ‘patent’ expires. A license in which the obligation to pay royalties relates to the ‘invention’ may require the licensee to continue to pay royalties after the patent has expired and competitors are free to use the same invention at no charge.

Conclusion

The term Background Technology and its typical operation in a commercial agreement may be well understood. But the terms Foreground Technology, Resulting Technology, and Arising Technology remain uncertain and require mutual agreement and definition. In particular, they need to be properly defined to correspond with how that category of IP is assigned and/or licensed to the respective parties in the agreement. In this regard, it is important to appreciate and account for the legitimate and sometimes competing interests of the parties in the contents of a composite work when drafting such agreements.