What Every Startup Needs To Know: IP Pitfalls- Poorly Written Or No Agreements- Part Nine

By Debby Winters

Using poorly written agreements or no agreements at all can be a disaster for the startup. Not only is the valuation of a startup based on the IP that it owns, but also on the agreements with IP clauses. Examples are not just limited to things you typically think of as IP agreements but can include employment, consulting, funding, collaboration, settlement, licensing, research, and material transfer agreements. Thus, poorly drafted or non-existent IP-related agreements can be problematic for a startup.

Because of a lack of sufficient funding, many startups attempt to save legal expenses by using template IP-related agreements from a variety of non-professional sources, including the internet. However, such agreements can fail to include clauses that adequately protect the startup’s interest and in many cases, can include clauses that jeopardize a startup’s IP. Thus, when using IP-related agreement templates, the startups should have such agreements at the very least vetted by IP professionals. Startups can also do themselves a disservice by using an attorney who is not familiar with the nuances of IP law.

Many IP-related agreements, particularly research agreements, generally include confidentiality, publication, and IP clauses. The startup should review confidentiality and publication clauses to ensure that confidential information, including trade secret information, is protected from disclosure and that the startup has the right to review manuscripts and other materials containing confidential information before publication. With respect to the IP clauses, the startup should make sure the language allows for retaining its own IP and for protecting jointly developed IP.

Furthermore, with respect to patent license agreements involving a third-party licensor, startups need to make sure that the license agreement provides all the rights needed to commercialize the licensed technology, includes future improvements to the technology, and retains the right to sublicense the technology. The agreement should also have a sufficient termination clause in the event the startup needs to opt-out of the agreement.  The agreement should also specify the relevant field of use and possibly other fields for future expansion. Importantly, the startup should review patents to ensure that the commercialized product materials, methods, and tools are properly claimed with patent life remaining. This should be drafted and reviewed by an experienced IP attorney.

In conclusion to the series of blog posts dealing with common IP pitfalls for a startup, the process of bringing a new startup business to life and in launching new products to the marketplace can be an exciting time. However, many startups are so focused on bringing a new product or service to market that they fail to take the necessary steps to protect the associated IP. Failure to put an IP plan in place can cripple valuation and expose the startup to potential third-party infringement risk. In contrast, startups can protect and exploit their IP assets to build value and revenue by developing an IP plan as part of their conception, creating an action plan to protect IP assets including protection of confidential information, securing ownership rights to the IP, conducting freedom-to-operate searches, and ensuring properly drafted IP-related agreements are in place.

If you need help with your IP or with protecting it, let me know.

IP Provisions in Consulting Contracts- Part 5

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 consultant’s viewpoint, the contract can limit their ability to bid for and perform future work. In my last two blogs on this subject,  we looked at ownership of the work product and confidentiality provisions. This time, let’s look at the legal departments that large companies have and explore ways to deal with them.

Business People vs. Legal Department

As our final part on IP provisions in consulting contracts, we will talk about dealing with large entities and the competing factions within them.

When negotiating consulting contracts with large companies, the roadblocks that arise in the IP provisions are often driven by an in-house legal department that insists that certain provisions are “standard practice” or (if the lawyers are being honest) “that [big company] always gets this language” because of its inherent leverage over the consultants.

The business people at the customer who your client knows will often have a more nuanced view of the issues because they understand better than the lawyers (1) that the consultant landed the project because of its prior experience in the industry and (2) in most cases, the consultant’s services will be an adapted version of what has already been provided to competitors in the industry and not entirely newly created materials.

Whether to make an end-run around the in-house lawyers by having your client plead its case to the businesspeople is a judgment call. Depending on the corporate culture at the customer, the lawyers may have the last word on the IP issues or will instead be expected to take direction from the businesspeople. Try to get a sense of that culture before using your client to resolve disputed contract provisions, because a perceived breach of protocol may ruin your working relationship with the in-house lawyers.

On a related topic, you should counsel your consultant clients not to engage in the classic magical thinking about onerous, one-sided contract provisions as a way to shortcut the negotiations-  namely, that the customer businesspeople they know would never enforce the provision against them. If the contract clause is worth fighting about, your client should raise it with the customer and then assume that whatever version ends up in the final agreement can, and will. be enforced against them.

IP issues in consulting contracts are complicated and almost never one-size-fits-all. The range of what provisions will ultimately be acceptable to the parties will always depend on the specific context in which the negotiation is taking place, for example how competitive was the RFP process? How much profit is inherent in the pricing? How crucial are the services to the customer? How badly does the consultant need the work? The topics outlined ?above are not an exhaustive list, but they ?do represent the most common examples ?of the contentious IP issues that consultants and customers fight about in their negotiations.

Good luck with your IP provisions in your future consulting agreements!

IP Provisions in Consulting Contracts – Part 4

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 consultant’s viewpoint, the contract can limit their ability to bid for and perform future work. In my last two blogs on this subject,  we looked at ownership of the work product and confidentiality provisions. This time, let’s look at the non-solicitation provisions in consulting contracts and suggests some possible approaches for workarounds.

Non-Solicitation of Employees and Contractors

Always keep in mind that much of the intellectual property used by a consulting firm resides in the brains of its personnel. Many standard services contracts prepared by large entities will contain provisions prohibiting the consultant from soliciting and hiring the employees and other contractors who work for the customer. If you think about it, this isn’t an unfair request, because your consultant client will probably be interacting with hard-to-replace, specialized customer personnel. But the same rules should apply to the consultant’s personnel, as good people are hard to find, particularly in certain specialized consulting fields, and your client’s employees and contractors should not be raided by the customer.  If the form contract contains a one-sided non-solicitation clause, propose a mutual one. If the contract lacks a non-solicitation provision, be sure to add one in favor of the consultant.

Next time we will talk about dealing with large entities that may have legal departments that you have to deal with.

 

IP Provisions in Consulting Contracts- Part 3

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 consultant’s viewpoint, the contract can limit their ability to bid for and perform future work. In my last two blogs on this subject,  we looked at ownership of the work product and confidentiality provisions. This time, let’s look at the non-compete or exclusivity provisions in consulting contracts and suggests some possible approaches for workarounds.

NonCompetition/Exclusivity

Another less direct method by which customers attempt to secure rights in intellectual property developed by consultants is through a provision on exclusivity.  If your consultant client’s new customer is Fortune 500-sized or one of the leading companies in its industry, you will often see a provision in the services contract that prohibits your client from performing similar consulting work for the customer’s competitors in the industry. Sometimes specific competitors are named, but more common are the prohibitions against working in the customer’s industry are just broadly defined.  This situation is usually both ironic (the consultant was often successful in the RFP process because it has other current and prior clients in the new customer’s industry) and problematic (the consultant was hoping to leverage the new project into winning work from other companies in the industry).

Putting aside the possible antitrust implications of these provisions, the obvious ideal result is to convince the customer to drop its exclusivity demands.  If that is not possible, given the competitive importance of the project to the customer or the consultant’s desire not to fight the issue and risk losing the work, some possible fallback strategies are to limit the exclusivity to (1) a relatively short time period (e.g., six months after project completion) and/or (2) a very specifically defined set of services and/or (3) a very specifically defined market niche.

Next time we will look at non solicitation clauses and how the contractor can limit having these in the contract.

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.

Employment Agreements Should Contain IP Clauses

By Debby Winters

Although most states are employment at will states, many state courts will enforce employment agreements if they have reasonable boundaries within the agreement. For a company that is developing intellectual property, it is advisable to have employment agreements for all employees that include clauses for dealing with intellectual property rights as well as confidentiality. This is especially true for small business start-ups. The agreements should contain clauses for IP disclosure and assignment.  These clauses should require employees to promptly disclose new inventions or other intellectual property to the employer upon conception, and to assign such inventions to the employer at that time.  The agreement should make it clear that the employee has an obligation to assign new inventions to the employer as a part of the employment.

New employees should sign such agreements prior to employment or on the first day of work.  Some states require additional requirements for having an employee sign such an agreement once employment has already commenced or such clauses will not be valid. These additional requirements may include new consideration, such as a raise, for signing the agreement.

Certain words have specific definitions or understandings in patent law.  For example, ambiguity could arise as to whether the employee would “conceive” and “make” an invention.  It is always best to stick with the definitions that are common to patent law.  For example, “conception” refers to “formation in the mind of the inventor, of a definite and permanent idea of the complete and operative invention, as it is thereafter to be applied to practice.”  This is more than just a vague idea; it requires definite plans for how to implement the invention.  “Make” or “reduction to practice” refers to the act of actually making the invention work for its intended purpose.

To avoid a dispute as to whether the employee developed the invention prior to employment, when executing the agreement, give the new employee the opportunity to indicate that he or she developed the invention prior to beginning their employment.  Require that the new employee prove this development by providing sufficient detail that he or she can’t later argue that vague statements constitute conception.  Unless the parties agree otherwise, the employee should retain all rights in inventions that he or she conceived or invented prior to coming to work.

The language used should requires the employee to promptly disclose inventions to the company and to “hereby assign” all future inventions.  The assignment is not required once the employment has ended and you need to chase the employee down and potentially sue him.  Instead, make it effectual as soon as inventions are conceived. Former employees are not always cooperative in the patent process for their former employers.  Therefore, you should include language that grants the employer at least a partial power of attorney to execute documents on behalf of the former employee inventor in cases where that becomes necessary.

It is always advisable to have an attorney familiar with patent law draft these clauses of your employment agreement.  If you need help with employment agreements, let me know.