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Know your Intellectual Property - or gift trade secrets to your competitor

Published: 28 Sep 2015 Average Rating: 3.8 / 5 Print
 
This article appeared in Contracting Excellence magazine on 28 Sep 2015 view edition
 

Author: Anumoni Joshi, Patent Attorney, India

Scouting for potential partnership with a competitor? Think twice before believing confidentiality promises - or you may find they've beaten you to the patent register. But what if you don't know - or even recognize - your intellectual property (IP) and what it's worth? In this article Anumoni Joshi steps through the IP basics and reveals the risks.

Trade secrets and vital information can be easily lost while dealing with potential partners, customers or suppliers if not protected by a signed confidentiality or non-disclosure agreement (NDA). Beware of potential partners who procrastinate when asked to execute the NDA, because “the main contract will include a confidentiality clause anyway.” Do not be fooled by this kind of statement!

Practically speaking, your organization may not reach the deal stage, but in the process you may part with your organization's vital information and valuable ideas and find them already patented by your competitors.

Know your valuable information or risk gifting it to your competitor

Intellectual property rights take center stage in most corporate transactions. IP assets are the most valued of any organization or industry, be it information technology (IT), manufacturing, educational institutions, fashion or service industries. IP protection allows creators/innovators to share the benefits of their innovation or creative activity, encouraging research and development, innovation – and commercial gains.

To protect your information, it's vital that you're able to identify it so you can build in appropriate clauses and future-proof your contract. Would you know the difference between background IP and forward IP for instance?

First, know your IP terminology

It's important to know what constitutes intellectual property rights (IPR) and the IP terminologies that are used in a commercial contract:

  • Forward IP - refers to any and all IP that may be conceived, developed, or reduced to practice by the contracting parties in the course of fulfilling the obligations under the contract, and that is possible to patent or protect by statute.

  • Background IP - refers to existing IP that is owned by the contracting parties or a third party and is already in use or may be used in the deliverables by either party in the contract.

  • Third party IP - refers to existing IP that is not owned by the contracting parties but is owned by someone else (third party) and is used or may be used in the deliverables by either party in the contract.

  • Trade secrets - refers to any confidential business information that gives an enterprise a competitive edge. This can include things like formulae, patterns, programs, compilations, sales methods, distribution methods, consumer profiles, advertising strategies, lists of suppliers, clients or manufacturing processes etc.

Know your Intellectual Property

It goes without saying that it is essential to define and explain the ownership and use of all IP assets used in a contract, such as background IP. In particular:

  • Ensure all third party IP used in the contract is under a valid licencse and all licenses relating to its use are included. In most cases this would be a licensed IP.
  • Read the fine print of the any licensed agreement to establish whether this is for exclusive or non-exclusive use, worldwide or restricted, royalty free or on a royalty basis, or even securitized.
  • Ensure all third party IP used in the contract has been legally procured and the owner of the forward IP created in the contract is known.

Article 39 of the TRIPS agreement1 (Trade Related Aspects of Intellectual Property Rights) clearly outlines the availability, scope and use of IPR.

Build your IP clause arsenal

In a commercial contract it is imperative to clarify what you are referring to, whether this is IP protection or commercial exploitation of the IP assets. At times it may be both.

Which party will own the forward IP?  

While fulfilling the obligations of any commercial contract, the contracting parties may create an IP knowingly or unknowingly. It's important that the contract has a provision to deal with this situation, stating clearly which of the contracting parties would own the forward IP. Generally in commercial contracts forward IP vests with the party hiring the services in the contract rather than the party creating the intellectual property. If the contracting parties have agreed to joint ownership of the forward IP then the contract must specify which party will bear the costs of protect/registration and commercialization, and also which expenses will be incurred jointly.

Protect the innocent party

Another important consideration is how IP assets will be used in fulfilling the contract obligations: often these will be third party IP assets. As mentioned above, use of any third party IP should be under a valid license or agreement to protect the contracting parties from any potential third party infringement litigation. A clause should be carved out in the contract so that, in the event either party uses any third party IP unknowingly, the potential threat of third party infringement litigation will be dealt with by the party using the infringed IP, thus protecting the innocent party in the contract.

Make sure all attributes of IPR are covered

While negotiating the contract the contract attorney must always remember all the attributes of IPR, such as exclusivity, restrictions, overlapping, transferability, territorial and volatility. Depending on the nature of deliverables, protection should be extended to all that apply.

License or assignment?

Yet another anomaly often found in the IP clauses of commercial contracts is the way IPR is treated in cases of license and assignment. License and assignment are two different aspects in legal parlance; therefore these words per se cannot be used interchangeably, at least for the existing Intellectual Property assets. Assignment is not licensing, it involves transferring or selling the IPR.

Warranty or indemnity?

In almost all commercial contracts, IPR clauses are considered boilerplate, however you should avoid using boilerplate clauses if you want to minimize your risk of infringement.

Usually no indemnity is given to IP infringement in corporate agreements but only warranties, and these warranties are limited to awareness only. Therefore there is no complete transfer of risk. However the rules of indemnity are slightly flexible in the commercial contracts. This works in two ways depending upon whether you are negotiating the contract on behalf of a customer or supplier. For instance, if you are a supplier then you are required to limit the risk by excluding the indemnity from the modifications made by the customer.

The indemnity should be restricted to the territory, in the event the customer expands its business at a later stage. The indemnity should be reasonable and practical. In some instances you will find some of the IP assets are unregistered, and in such circumstances the warranties play a great role in verifying the ownership of such IP as there is no other way to confirm it.

It is important to have the warranties as well as the representation clauses in the contract to protect the best interests of the contracting parties. In my experience I have observed that IP representation and warranties clauses are the most negotiated clauses in a contract, since these have a direct bearing on termination or value of the contract. Upon misrepresentation, the non-breaching party to the contract can void the contract and upon breach of warranties, recover damages.

Avoid treating warranties and representations as alternatives to each other at contract construction phase, and adequately provision each clause as per the requirement, depending upon the nature of transaction for which the contract is drawn.

Audit to minimize risk

Last but not the least, another way to minimize the risk of IP infringement action is by conducting an audit, particularly a software audit. It is reasonable to have a software audit clause in a commercial contract if it envisages that either party will use multiple software, including any third party or open source software. The scope of such an audit should include the ability to analyze the presence of any open source software.

END NOTE

1. Article 39 of the TRIPS agreement (TRIPS agreement defined)

Further reading

  • The Role of Intellectual Property Rights in Technology Transfer and Economic Growth: Theory and Evidence, UNIDO, 2006
  • Securitization of Intellectual Property, Stanford Law School, 2002

ABOUT THE AUTHOR

Anumoni Joshi spent 10 years as an in-house counsel. Her career path spans many industries including IT, manufacturing and law firms. Her credentials: Management and law graduate from Symbiosis Institute of Management and Pune University; MDP-IPR & Strategy from the Indian Institute of Management Ahmedabad; and Diploma in Special Corporate Laws and Consumer Protection Laws; a Patent Attorney (India) and recipient of Patent Expert Scholarship by Government of Japan. In pursuit of a higher interest, she is currently a full-time Masters Program student in International Development in an Australian University.

 
 
 

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