In the case of the ownership of intellectual property (IP) developed by a supplier as part of a service agreement with a customer, should the traditional position that the customer should own all developed IP always be the position agreed upon by the parties?
Traditional IP Ownership Structure
An example of a traditional IP ownership structure under a service agreement is as follows:
- Supplier owns (as between the parties):
- The supplier’s background IP (IP owned, licensed, or developed by the supplier prior to the effective date of the service agreement or independently of the service agreement)
- The supplier’s software and any third-party software provided by the supplier
- Data/content provided by the supplier
- Developer tools (certain generic and reusable templates, tools, processes, methodologies, or materials developed by the supplier prior to and without the use of the customer’s proprietary information and which have been or will be used by the supplier for itself or other customers.
- Customer owns (as between the parties):
- The customer’s background IP (IP owned, licensed, or developed by the customer prior to the effective date of the service agreement or independently of the service agreement)
- The customer’s software and any third-party software provided by the customer for use by the supplier
- Customer’s data
- Foreground IP (IP developed by the supplier while providing services to the customer)
- Project-specific/bespoke IP (IP developed by supplier on specific request from customer)
This blog post focuses on foreground IP and project-specific/bespoke IP (Developed IP).
Challenging the Status Quo
The general justification for the customer owning the Developed IP is that the customer is paying for the services in connection with which the IP has been developed, or the customer is specifically paying for IP to be developed.
On its face, this is a fair and sensible position; however, considering what this actually means in practice and what benefits the parties could obtain by exploring other ownership structures may lead to a different conclusion.
To that end, the parties may wish to consider the following when deciding on the appropriate ownership structure for Developed IP:
1. Is the Developed IP truly bespoke to the customer (i.e., it could not be repurposed for use by third parties or by the supplier in other categories)?
If it is truly bespoke, it may make sense for the customer to own the Developed IP, as there is no other use for it (provided any such ownership rights exclude supplier background IP, third-party IP, or developer tools for which the customer would only need a license in connection with its use of the Developed IP).
If the Developed IP could be used by the supplier elsewhere and potentially commercialized, the parties may be able to agree for the Developed IP to be provided at a significantly reduced rate if the supplier retains ownership of the Developed IP or has a very broad license to the IP, allowing the supplier to commercialize the Developed IP and recoup some or all of its development costs.
2. Does the customer have the ability to maintain and support the Developed IP itself or could a third party be engaged to do so on the customer’s behalf if the service provider could no longer so do or the relationship ended?
For customers with limited to no in-house IT support and/or development functions, ownership of the Developed IP may be irrelevant, as the customer would not be able to support or maintain the Developed IP without the supplier. In such circumstances, it may make sense for the supplier to retain ownership and for the customer to obtain a commercial benefit, such as a reduction in the development fee or a full waiver of the development fee.
However, if the Developed IP is mission-critical or would be difficult to replace, the customer should ensure that it has the rights to access the Developed IP (in a form it can easily use and/or transfer) to support use of the Developed IP should the supplier cease to provide such support.
Where, notwithstanding this issue, the customer does want to own the Developed IP, it should ensure that the Developed IP is developed to be widely compatible and easily transferable to enable another supplier to take over the support, maintenance, and further development of the Developed IP.
3. How much is the customer paying for the developed IP?
Where the customer is paying a significant amount for the Developed IP, there may be more of an expectation that the customer will own it or at least recover the fees paid if the supplier is permitted to commercialize the Developed IP.
Conversely, if the supplier is providing the Developed IP for a heavily discounted fee or for no fee, the quid pro quo may be that the supplier retains ownership and provides the necessary rights on a licensed basis to the customer.
4. What rights will each party have to the Developed IP?
While the parties may agree that one party is to own the Developed IP, that agreement may be subject to the non-owning party receiving a very wide license in respect of the Developed IP (e.g., the customer owns the Developed IP but grants the supplier a perpetual and irrevocable license to use, develop, and commercialize the Developed IP (subject to certain category restrictions if applicable), or the supplier owns Developed IP but grants the customer a license to use the Developed IP in certain desired instances or categories).
This allocation of rights may also have an impact on the applicable fees for the Developed IP.
Conclusion
A customer’s ownership of all Developed IP may or may not make sense given the specific circumstances. In any event, it is sensible for both the supplier and the customer to consider what would be the best practical and commercial outcome for each party and to develop an ownership structure that is beneficial to both parties.