IP Provisions in Consulting Contracts- Part 2

By Debby Winters

Consulting contracts can be for work performed by an outside service provider or consultant, like market research, product design, product development, software implementation, employee benefit plan administration, and the list can go on. The consultant can begin to negotiate the consulting contract once the project proposal is accepted. Many times these contracts, as prepared by in-house counsel, are one-sided with intellectual property provisions that can be a disaster for the consultant with regards to future work. Believe me, I’ve been that in-house counsel drafting these contracts. The goal of in-house counsel is to protect your company but looking at these contracts from the consultants viewpoint, the contract can limit their ability to bid for and perform future work. In my last blog we looked at ownership of the work product. This time, let’s look at the confidentiality provisions in consulting contracts and suggests some possible approaches for workarounds.

Confidentiality

Standard confidentiality clauses in consulting contracts can act as a way to prevent the consultant from using the intellectual property embodied in the project’s work product. Beware of standard confidentiality clauses providing that all project work product are “confidential information” that cannot be disclosed to third parties. These could prevent the consultant from re-using and adapting elements of the project for future clients.

The safest strategy is to strictly limit the “confidential information” concept to (1) proprietary documents and materials provided by the customer to the consultant (subject to the usual exceptions for public domain information and materials independently developed by the consultant) and (2) those specific elements of the project work product that the parties have agreed (in the IP ownership provisions) are to be owned and used exclusively by the customer.

Next time we’ll look at non-compete provisions in consulting agreements.

Ownership of Work Product in Consulting Contracts

By Debby Winters

In today’s world it seems that everything is outsourced.  In addition to call centers in India, various functions that used to be handled in-house are farmed out to consultants.  These include things like market research, product design, product development, software implementation, employee benefit plan administration, and the list goes on. In this process, many times once the project proposal is accepted, the negotiation of the contract begins. Many times these contracts, as prepared by in-house counsel are one-sided with intellectual property provisions that are a disaster for the service provider. This disastrous contract can sometimes limit the service provider’s ability to bid for and perform future work, especially in the new customer’s industry. Let’s look at some of the most common problematic IP provisions in consulting contracts and suggests some possible approaches.

The provisions that govern who owns the intellectual property arising from the customer’s project are usually the most difficult to negotiate. The form contract typically takes the approach of saying that everything tangible, intangible, oral, or written relating to the project, whenever it was created, and whether or not it was created especially for the customer, is work product. With this definition, the intellectual property is owned exclusively by the customer, which means the consultant is barred from using it again or adapting it for other customer.

This is not an irrational initial position for the customer to take. After all, it’s paying good money for the consulting services and expects to get something in return. The problem is that the consultant is almost never working on a completely discrete standalone project that can be totally separated from its other work. It probably won the project because it has provided similar services for other customers.  Oftentimes these other customers are in the same industry. The consultant will most likely be customizing prior work product for the new customer. Likewise, the consultant also expects to use the new customer’s work product as the basis for work product in future projects.

Here are some principles to keep mind when negotiating these provisions:

  • To the greatest extent possible, define work product as including only those materials first developed for the customer as part of the project.
  • To the greatest extent possible, define work product as including only the final versions that are actually delivered to the customer. This way all rights in the concepts and ideas that were brainstormed, developed, but ultimately not used or included as part of the services should remain with the consultant.
  • To the greatest extent possible, exclude from the definitions of work product as any materials developed by the consultant (1) prior to the customer’s project, (2) for the consultant’s own use or (3) for its other customers.
  • To the greatest extent possible, include language specifically excluding from work product and deliverables (1) the general skills and know-how that are used by consultants in your client’s field, (2) general design, aesthetic, or organizational principles and (3) all materials, ideas, and concepts that are not protectable under general principles of intellectual property law.

If these are not completely successful in negotiation, attempt to limit the customer’s ownership and exclusive use rights to its specifically defined industry, to a specifically defined market segment, or to a limited time period. The negotiation process should be just that, negotiation.

One last item to include in the contract would be language that all transfers of ownership is contingent upon payment in full of the consulting fees required under the contract.