Top Ten Tips for ……….. Structuring IPR Provisions

Kit Burden

The protection and exploitation of intellectual property rights (IPR's) may not seem to be a crucial aspect of outsourcing. But, upon closer examination, one can begin to appreciate that issues of usage (both in terms of extent and duration) can in fact be key to the overall commercial deal, and that getting the drafting of the IPR provisions "wrong" can accordingly prove to be a very expensive mistake.

What then are the top ten issues to be aware of when approaching the negotiation and drafting of the IPR provisions in an outsourcing deal?

  1. Pre-existing IPR
    Both parties will have their own IPR to contribute to the project, and neither will want to "lose" any rights to materials they already had. The contract will accordingly need to set out the basis upon which these existing materials will be licensed to the other party.
  2. Continuing licenses
    A customer will ordinarily restrict its supplier licenses to the timeframe specified in the agreement. However, a license is also required that will allow the customer to exploit all services and deliverables provided, both during and after the contract term.
  3. Ownership of newly developed materials
    Even if development work is not the focus of the outsource project, in any long term deal it is inevitable that new materials will be created. Ideally, and at least to the extent that such materials relate directly to its outsourced functions, the customer should seek ownership of such new IPRs.
  4. License rights for supplier-owned materials
    The supplier may have a good case for arguing that it should own any newly developed materials, e.g. if they are predominantly extensions or modifications to existing proprietary products. However, the customer should then ensure that it gets license rights to such new materials. This license should be written to provide rights similar to ownership rather than the more restrictive license terms that may pertain to the supplier’s pre-existing products.
  5. The supplier's continuing rights
    If you are to own the newly developed materials, consider what - if any - continuing rights you expect the supplier to have to them. For many materials, it may be that you will have little concern as to the supplier's use (e.g. if it relates primarily to how they provide their services, rather than your business), but with more complex and "transformational" projects in particular, you may wish to ensure that the fruits of your investments cannot be immediately applied for the potential benefit of your competitors.
  6. Dealing with 3rd party products
    It will usually be the case that outsourced services will involve the use of materials and software provided by third parties, as well as the outsource service provider itself. The customer should be aware of the arrangement and ensure it has full visibility to any specific license terms and restrictions applicable to them.
  7. Source code escrow
    Unfortunately, you cannot guarantee that your licensors and ultimate providers of support services will always be around to provide you with services (whether because you have had to terminate that contract, or because they have simply gone bust). You must therefore ensure that the source code for any business critical applications that was formed as part of the outsourced services has been placed into escrow.
  8. Warranties and indemnities
    You will need the comfort of knowing that the service provider does in fact have the ability to grant you all the rights and licenses that you are expecting to receive. This should be reflected by contractual warranties to this effect, backed by indemnities against any claims that may be made against you by third parties, alleging any kind of infringement in respect of the outsourced services.
  9. Getting your own house in order
    Inevitably, outsourcing allows your service provider to access and utilize equipment, software and other materials that you have habitually used in the conduct of your business. It is essential, however, to check the underlying agreements you have with other third party providers to ensure you actually have the right to do this. A license grant limited to "internal business purposes", for example, may not entitle you to extend usage to your outsource service providers.
  10. Think laterally
    Too often, IPR debates become overly polarized into a question of who should or shouldn't own the relevant rights, on an assumption that the other party would then "lose out". This need not necessarily be so, given the possibility of reserving rights to re-utilize generally applicable "know-how". Also, you can grant relatively wide license rights to the other party, potentially involving additional royalties in future.