Transferring IP Rights: Legal Requirements and Pitfalls

What does it mean when we assign Intellectual Property (IP) Rights?

Assigning IP rights means transferring the ownership of those rights, whether they are for existing or newly created, custom-made IP, to another individual or legal entity. Since your company's IP is a crucial asset, the proper transfer of it requires careful attention.

It's surprisingly easy to unintentionally transfer IP rights by mistake. To safeguard your IP, be mindful of these six key areas during the IP rights assignment process.

Licensing vs. Assignment

There's a significant difference between licensing and assigning an IP right.

Licensing

Licensing essentially allows another party to "borrow" an IP right for a certain timeframe.

With licensing, the IP owner retains ownership and continues to possess the proprietary interest. Consequently, they can impose certain restrictions or limitations on how the license is used.

Crucially, a license can also be revoked.

Assignment

Assignment means the ownership of the IP right shifts permanently after its creation.

Assignment signifies a complete surrender of ownership.

Therefore, it is essential to be clear about whether you intend to assign or license your IP rights.

What is 'Background' or 'General' IP, and Why is it Significant?

You should always protect your own IP, or the IP of your company, which is a fundamental part of your business and that is independent of a particular customer, usually categorized as background or general IP. This protects your company from unintentionally assigning your background IP rights. This happens when you've agreed to assign some custom IP to your customer, your background IP, is a crucial USP for your business.

This can occur easily if contract terms are not carefully understood, which means that a strong base of technical skill and relevant knowledge is needed to effectively ringfence your background IP. That's where we come in!

After excluding (aka protecting) your background IP from an assignment, you might need to give your customers a limited license allowing them to utilize the general IP in order to utilize your services or products.

The license can be non-exclusive, not transferable, not assignable, and revocable. There are also possible royalty fees and/or it can be in effect for a limited time. These are commonly heavily contested and negotiated aspects, involving the lawyers of both parties, and are based on their commercial positions and relative bargaining power.

Be Clear About the Rights You're Assigning

Ensure clarity about exactly which rights are assigned within an agreement by making precise references to them.

For example, if you've been hired to design software for a customer, that software should be clearly defined in your assignment clause, either within the definitions section, the body of the contract, or in the schedule. This clarifies that the assignment only covers the IP within that software (typically the copyright of the source code). This makes it easier to safeguard your background IP.

Be Mindful of Employment or Consultancy Terms

If you have hired a consultant to create bespoke IP, or you have employees on your team, your respective consultancy or employment agreements should contain clauses about the transfer of any IP which has been developed for your business or for your customers.

As a general rule, in legal terms, the majority of the IP that an employee creates under an employment contract will automatically transfer to the employer, except for non-economic rights such as moral rights in copyright, which are personal to the employee and won't transfer automatically.

If you don't have either a consultancy agreement or an employment contract in place, or if those contracts do not clarify the ownership of the IP, then an assignment of IP rights agreement must be documented between the correct parties to properly establish who owns the IP.

Without clarity, the consultant could unintentionally own the IP. And you may not even own the IP rights you are seeking to assign.

Warranties: A Potential Drain on Finances

Warranties are another subject that frequently generates debate during the assignment of IP rights.

Consider the scenario where you use the customer's product to provide a service that violates a third party's IP rights, or where a customer's use of your product infringes a third party's IP. For example, you create a custom software for Joe Blogs, but unbeknownst to you, Joe's software may violate Harry’s existing IP, or the software which you create for Joe may be dependent upon IP which is already owned by Harry. In these situations, you will want to be as protected as possible.

Here, warranties shield the innocent user of the IP. A breach of warranty, however, can often be very expensive, and involves substantial liability. Thus, it is crucial to incorporate reasonable, business-focused warranty terms, including liability limits to protect your business. Poor negotiation here can lead to massive financial losses.

Beware of the Paperwork

For a complete and proper assignment of an IP right, like a right that requires registration, customers might have a high threshold for you to execute all the documents, applications, and provide this at an unrealistic level or timeframe. It is vital in those situations to negotiate these terms to ensure they are reasonable, and to secure fair compensation for the time and effort required to perform the required steps.

We hope this guide to potential problems with IP rights assignments has been helpful, providing you with important information on how to navigate them.

Law 365 features a team of specialized lawyers. With an in-depth understanding of these subjects, we are always happy to provide assistance, whether it concerns the assignment of IP rights or any other commercial matter.