The Top 4 Intellectual Property Traps to Avoid in Agreements

The Top 4 Intellectual Property Traps to Avoid in Agreements
  • Intellectual property (IP) clauses in contract agreements always require further scrutiny.
  • Check that you’re not unintentionally handing over IP rights during the contract because you failed to specify IP ownership.
  • Be careful with using a third party’s IP and always get consent from employees who are creators of content.

Picture this common scenario:  

You’ve been given an exciting opportunity to provide your services to a large company as “the Supplier”. You’ve discussed price. You have discussed quantity. You have a commencement date. All you need to do is read through this large commercial agreement given to you by “the Customer” and sign on the dotted line. 

The agreement that they have handed you is large. Forty-three pages to be exact. It’s a little extreme given you’re a small business but you know that you won’t get the deal unless you sign it. You scan some of the “important provisions”, such as the amount the customer intends to pay you as their supplier, and the time in which they say they will do so. It looks to be what was agreed. 

You look at the indemnity clauses because you remembered that your lawyer once told you that it was an important part of any agreement. You make sure you have the necessary insurance too. You don’t want anything bad to happen down the track. You want to cover your bases. 

You get to the intellectual property clauses, but you’ve never paid much attention to it because, if you’re to be completely honest with yourself, you have no idea what intellectual property is about. 

So, you happily sign the agreement and begin work.

Intellectual property is, at times, a difficult concept to understand because it is property that you can’t see. It is an “intangible property”, meaning that it is not something that you can physically hold. However, ignoring intellectual property rights in contracts or failing to discuss them in detail during negotiations, may lead to intellectual property litigation down the track. That litigation can be incredibly complex, expensive and, more often than not, will require specialist legal representation.

Accordingly, I always encourage parties to overcome their fear of this topic and develop an intellectual property strategy as part of their sales or service pitch. These strategies should then be reflected in the terms of an agreement with any customer.

Intellectual property is defined by the Australian government as “the property of your mind or proprietary knowledge. It is a productive new idea you create”.[1] This can take shape in the form of an invention, trademark, design, brand or even the application of your idea, which is referred to as copyright.

For service agreements, it often deals with the application of your ideas, or the material that contains that “idea”. For the purposes of this article, we will speak of intellectual property in this context. However, if you do have designs, patents, and trademarks, it is important to remember that general intellectual property clauses may incorporate the transfer of these intellectual property rights. In this regard, I strongly advise that you obtain specific legal advice from a lawyer.

This article does not intend to outline the law relating to each of these legal concepts. Rather, it is designed to assist you in understanding some of the common traps you may find in service agreements – and by signing up to them, you may land in a messy intellectual property litigation later.

 

Trap #1: The customer may get more than what they’re paying for.

If you fail to properly define the scope of your services, you may find yourself charging your customer “too little for quite a lot”. This most definitely applies when it comes to passing over intellectual property.

You may have quoted the customer on the provision of a service or product, but they may have the expectation that they will own all the content that is created during the contractual relationship going forward. They may be able to “on-sell” that service or product and financially benefit from all the work you put in creating that product or service.

I am sure that, had you known that would be the case, you would have offered a much higher price for that product or service. Often, losing ownership of your intellectual property can limit your ability to go and sell that product or service to another customer. Unless of course, your contract allows you to do so by licensing it back from the customer you handed it to.

 

Trap #2: You hand over complete ownership of everything.

This is a common trap and one that you will find happens when you fail to pay attention to your intellectual property clauses in the contracts with your customers. When reviewing intellectual property clauses in agreements, you want to ensure that there is a distinction between “Pre-existing Material” and “Customer-owned New Material”. In other words, you want to distinguish the difference between content that you are bringing into the relationship, and the content that you will be creating as part of your relationship with the customer.

Ideally, you want to ensure that you keep ownership of the material that you created prior to the relationship and only hand over the material you create during the relationship. You may even want to negotiate the ownership of the content, and merely “licensing” the use of that material by the customer. You should then guarantee that the contract clearly states that.

Also, if you want to use the work that you create for the customer later, ensure that your contract sees the customer granting you a license to use that material for other purposes. Otherwise, you could find yourself in breach of their intellectual property rights.
 

Trap #3: You hand over work that isn’t yours.

As stated above, blanket clauses which pass ownership of intellectual property over from the supplier to the customer should be avoided at all costs - unless you, as the individual supplier, are entering into a contract to create brand new intellectual property specifically for the sole use of the customer (ie. a software developer engaged to develop a software program specifically for that customer). If you are not creating original content for the customer, you may find yourself handing over material that is in fact owned by a third party.

If you have, for example, developed your services prior to engagement with the customer, and have done so with the help of content created by other people, you may find yourself agreeing to hand over ownership of someone else’s intellectual property.

Our best advice is to first look at the definition of “Material” in the contract to see whether it has captured content that is not yours, but another’s. You then need to assess if there are provisions that discuss “Third Party Material” and check whether you need to obtain permission from that third party for the customer to use the material. You are most likely being asked to “procure the granting of a license to use” that material. Accordingly, it’s best to make sure you obtain permission from that third party before providing the services.

 

Trap #4: You hand over the moral rights of your employees without consent.

Moral rights clauses are often contained within the intellectual property sections in Services Agreements. Moral rights are the rights that an employee of your organisation may have as creators of content. Moral rights include the right for their name to be attributed to the work that they created, for their work to not be falsely attributed, and to have their work respected and not subject to derogatory treatment.[2]

These rights remain with the employee regardless of whether work is sold or transferred by their employer. These legal rights cannot be assigned. Accordingly, the contracting party to the service agreement may expect you to deal with the issue of moral rights at your end, rather than face legal action by that individual. If you don’t deal with the issue, you may face action either by the employee or the other party to the contract down the track.

If your agreement requires you to seek permission from your employee for those moral rights to be waived, then you must do so. You may have already done so in your contract of employment or within your employment policies. However, if you have not obtained the consent or waiver of rights prior to the use of the material, then both the employer and the other party to the contract risk legal action by that employee.

In this regard, we suggest that you adjust your contracts of employment to include consent from the employee, on an individual or general basis, to activities which would otherwise infringe their moral rights. We recommend the contract of employment address consent given in advance, except instances where you require that consent “in arrears”.

Simply ignoring these intellectual property clauses in your contracts and hoping they never become a problem is not the safest legal strategy, especially when the intellectual property of your business is your “bread and butter”.

The more you practice reviewing these clauses, the more comfortable you will get in the negotiation of them. By understanding intellectual property, you are not only protecting yourself from litigation, but you will ensure that the price of your product or service that you are charging reflects what the customer is in fact receiving. This may help improve the profitability of your product or service.

___________

This article was last updated on 5 July 2019.

[1] https://www.ipaustralia.gov.au/understanding-ip/getting-started-ip/ip-explained

[2] Copyright Amendment (Moral Rights) Act 2000 (Cth)


Kathryn Hallett

Principal Lawyer at

I am admitted as a Legal Practitioner of the Supreme Court of New South Wales as well as South Australia. I hold a B Comm/LLB (Hons I) and a Graduate Diploma of Legal Practice from the College of Law Sydney. I specialise in corporate, commercial and employment/industrial relations law, having held positions as Legal Counsel, AU/NZ and Legal Counsel, APAC, for a global recruitment companies. I now provide expert commercial and employment law advice to SME's at an affordable price.

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