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QLD Is this Intellectual Property Clause in Contract Too Onerous?

Discussion in 'Intellectual Property Law Forum' started by beesknees, 23 May 2016.

  1. beesknees

    beesknees Active Member

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    I was asked a question about the terms of this contract by a friend. Not entirely sure why as I am not a lawyer, but thought I would ask here on his behalf. We are concerned about section 12, regarding intellectual property law:

    12 INTELLECTUAL PROPERTY

    12.1 Subject to the terms and conditions of this clause 12, a party’s Background IP remains vested in that Party.

    12.2 The Contractor grants the Company a non-exclusive, perpetual, royalty-free, irrevocable, transferable licence (with the right to assign and sub-license) to use the Contractor’s Background IP to the extent necessary to use the Goods and/or Services, and assigns to the Company all Project IP upon the creation of that Project IP.

    12.3 The Company grants the Contractor a non-exclusive, royalty-free, revocable, nontransferable licence to use the Project IP and the Company’s Background IP to the extent required to perform the Contractor’s obligations under this Purchase Order.​

    Background IP / Project IP is defined as:

    Background IP means any intellectual property owned or licensed by a party which that party makes available, contributes, brings to or uses in connection with this Purchase Order.

    Project IP means all intellectual property (present or future) created, discovered or coming into existence as a result of, for the purpose of, or in connection with the performance of this Purchase Order​


    My friend provides consulting services but is also a software vendor. It is common for the consulting services provided to make use of the software for sale. This would be analogous to, for example, an accountant who sells audit software but also performs audits (often using his own audit software).

    I read the agreement as quite onerous. If he were to agree to this contract and his software were used, would he then have to grant a non-exclusive, perpetual, royalty-free, irrevocable, transferable license, on the grounds that his software is background IP which was used in conjunction with the services provided?

    In fact on reading this, does that not also apply for any software used? For example my friend has an Excel/Office licence (which is intellectual property licenced by himself) which will almost certainly be used in connection with the work. Would he be then obligated to grant the company a licence of Excel/Office?

    And finally, if modifications to his software are made during this contract, would these changes constitute Project IP (i.e., is it intellectual property that is created or comes into existence in connection with the contract) and hence have to be assigned to the Company?
     
  2. Victoria S

    Victoria S Well-Known Member

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    Hi,

    Does your friend create his own software? Or does he simply use and sell software that is created by someone else? If it's the latter case, he will not own the copyright in that software or a licence to use the software. He will only have licence to use the products themselves which you obtain when you purchase the program.

    If he did create software which he will use in providing services to the company and which would be defined as Background IP, this would include:

    1. Patents: if your software qualifies as an invention, i.e. some algorithm in the software is patented then that algorithm or method is protected.
    2. Copyright law protects any original written words appearing on the interface as well as the actual source and object code script.
    3. Trade Secrets: any formula, pattern, compound, device, process, tool, or mechanism that is not generally known or discoverable by others, and is maintained in secrecy by the owner, and gives him or her a competitive advantage can be protected as a trade secret.

    As you have stated a perpetual irrevocable licence to use and sub-licence all of this would be granted to the company under the contract. However, the contract does restrict the use of this IP by the company to "the extent necessary to use the Goods and/or Services". Therefore theoretically the company has a perpetual licence to use the IP however only for the stated purpose. I would also check how broadly Goods and/or Services is defined in the agreement.

    As for any Project IP that is created, that appears to be completely assigned to the company - so it would appear your friend would technically not be able to use anything he has created during the course of the project outside of that project - for example under another contract of works for a different company.

    If he is not comfortable with this he should negotiate the contract before signing it. If he can understand what the company is trying to protect with that clause they may be able to come up with a better way to express those protections that are not so encroaching on his rights to his intellectual property.
     
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  3. beesknees

    beesknees Active Member

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    Hi Victoria, thanks for your response.

    To answer your question - he does create his own software.

    I appreciate that the IP use would be restricted to the stated purpose. And as you say it is probably necessary to check the definitions. (in practice I would be skeptical how this could be enforced. To bring up the Excel analogy it would be like providing a copy of Excel and saying that it is allowed to open only a single spreadsheet to do a budget for a given financial year. But I appreciate this is out of the scope of this forum)

    The company is probably attempting to avoid being put in a situation where they e.g. pay someone to develop an Excel spreadsheet and then find they must pay further money to continue to use that spreadsheet. Similarly my friend is attempting to avoid being put in a situation where he is e.g. paid to develop an Excel spreadsheet and then finds he must provide a copy of Excel. I wonder if the agreement as it stands ever anticipated a situation where the Contractor owned the IP to the software (in the example, Excel) in this case as well as creating further IP that said software uses (in the example, an Excel spreadsheet).

    While I can see both sides, whether a renegotiation is practical remains to be seen - it seems like it would be quite painful to write legalese that separates these out (although I am not a lawyer).

    Thank you again for your input.
     
  4. Victoria S

    Victoria S Well-Known Member

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    In any event, its best that both parties talk about what scenarios they specifically want covered and then try to spell that out to the best of their ability in any agreement. Its the knowing where you stand before you enter into a contract that prevents litigation later.
     
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  5. beesknees

    beesknees Active Member

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    Sounds great in theory. Unfortunately in the practical context of a small-to-medium business operator, these contracts are usually boilerplate and offered in a take-it-or-leave it scenario with little room for negotiation. Even if it was possible, often the potential cost of such negotiations is a sufficiently large relative to the actual value of the contract (sometimes exceeding it) that it is rarely worth it.

    But that's life. You were able to clarify what was suspected and I think that is sufficient to not agree to the terms in their current form.

    By the by, as a token of thanks I was going to offer you some beer/wine money via a private message but could not figure out how to send private messages on this forum. Quite odd.
     
  6. Rod

    Rod Well-Known Member

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    With software development 3 things normally happen:

    1. Company requesting work owns IP. Standard practice for large companies particularly where they define the problem and undertake extensive testing and fitting into their core systems.

    2. Contractor doing work owns IP. Mainly applies where contractor is developing software using his own ideas and software is standalone.

    3. Undefined IP rights, sometimes leads to litigation.
     
  7. Victoria S

    Victoria S Well-Known Member

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    Yes I realise that in some cases you don't have much wiggle room in these contracts, but yes glad you clarified where you stand. ;)
     
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  8. beesknees

    beesknees Active Member

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    Makes sense for software development; as mentioned previously I am skeptical whether the work my friend would be doing would be constitute software development (ala creating an Excel spreadsheet vs creating Excel). Appreciate it is a somewhat murky area (after all, Excel sheets can contain formulas, macros and other UDFs) and makes an interesting legal question, ultimately but not sure if he's that keen on contesting the point in a court of law against a FTSE100 company.
     
  9. Rod

    Rod Well-Known Member

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    Not much to contest if he has signed the contract. The contract is clear on his IP rights (he has none). The only wriggle room he has is if he used pre-existing code, then it was not "created, discovered or coming into existence as a result of, for the purpose of, or in connection with the performance of this Purchase Order"

    Time to argue the point is before signing the contract.
     
  10. beesknees

    beesknees Active Member

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    Yep - he has not signed the contract. Instead asked me and I asked here in order to confirm we were reading it correctly, because frankly it sounded quite excessive. The reason I wanted to check here is because It was hard to believe such a clause exists in a standard contract and that others are willing to sign it. But I suppose it is a parity issue and one shoots for the moon in these things.

    Also agree on time to argue point - I have discussed the practicality of arguing the point in a prior post.
     

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