Everyone knows (or SHOULD know) the importance of having a competent attorney look over important legal documents that relate to your business and your intellectual property (IP). But if you are an entrepreneur building a startup, or just someone with a limited legal budget, you may not be able to have a professional look at every contract you’ll need to sign. If you can’t have a lawyer look over a particular document, it can be extremely helpful to have a baseline knowledge of things to keep an eye out for when reviewing a document another party has prepared for you.
Your IP is likely one of the most valuable assets that your organization controls. It can be extremely harmful to the future prospects of your project if you sign away parts of, or rights to, that property without your full knowledge and understanding. There are a number of documents that you as an entrepreneur are likely to have to deal with at some point in the life cycle of your organization. While this is not an attempt to give professional legal advice, here are a few things to watch out for in five of the most common IP-related agreements you may find on your desk.
Nondisclosure Agreements/Confidentiality Agreements
Many nondisclosure agreements are essentially a way to facilitate the exchange of information between two parties, but it’s important to watch out for clauses that may give the other party unintended rights to your IP.
First, it’s important to ask yourself whether the agreement you are looking at provides mutual confidentiality protection, or if it is more one sided. In other words, is it you sharing confidential information, or do you need access to someone else’s confidential information without having to share your information? Then a one-way nondisclosure agreement may be more relevant to your situation. Or do you both have information to share under confidentiality? In that case, a mutual NDA is probably applicable.
Check the specific definition of the “confidential information” that you are agreeing to keep secret. Does the definition clearly delineate confidential information from non-confidential information? Are there marking requirements? How about information shared orally versus in written form? How could you be limited in the ways that you can legally communicate the confidential information in question once you sign the document? Is there a “non-use” clause hiding in the language as well? Will the agreement allow reverse engineering of the products in question, or not?
Another essential thing to scan the document for is any other mentions of language related to IP. If there’s something related to IP that you don’t fully understand, it might be a good idea to flag that for an attorney to review before you sign.
It’s also very important to have any IP that you deem highly valuable fully protected before you go into a document review/signing meeting. While this may seem overly cautious, just consider it a requirement for moving on to this next step of the process.
If your company is engaging an individual or a company on a contract basis, it’s important to protect the IP that you already have, and also any valuable IP that a contractor may create while working for you.
Wording can make a huge difference in this field. You can carefully look over the part of the clause that deals with assigning the rights of anything the employee may create while contracting for you. The difference between a document saying “agrees to assign vs. hereby assigns” can be the difference between having rights to that IP, or allowing the rights in question to remain entirely unassigned, and therefore up for grabs.
Further, even if the contract agreement includes language saying the contracting company owns all work for hire or inventions, how about work product that falls outside of the definition of a work for hire or invention? You may want to include language in the contract that covers this gray area.
Similarly, if you are the party being hired to do the work, make sure you’re clear on who will own the rights to the product you create. How will future products’ use be limited by this agreement? If you as a contractor will be reserving some product rights, make sure you know how the agreement structures future licensing in which you may be interested.
For example, if you’re a software developer, you may want to reserve rights to certain parts of the code you are writing under contract so that you can use the code in other projects. As either a contractor worker or a company hiring contract workers, it’s important to delineate when work must be original, and if it can be reused for other projects, both within and outside of the contract in question.
Watch out for issues arising from open source code use. Will open source code be allowed while a contract employee works for you? If so, is the code clearly identified and its use allowed under the relevant open source license?
Often agreements that confer full employee status tend to be more carefully vetted than contract worker agreements, but it’s important to be diligent all the same. Because employment agreements often become the basis to show chain of IP ownership, it’s important to draw distinctions between what creations of each employee are owned by the employee, and what elements of their work are owned by the employer. “Agrees to assign vs. hereby assigns” is also applicable here, as well as much of the advice from the previous Contractor Agreements section.
Because workers that you intend to hire as full employees are often career oriented, they may have created valuable IP or trade secrets while working for a previous employer. It’s good to iron out issues that may arise from that in your employee agreement.
As an employee, you’ll want to have the agreement limit a new employer’s reach into your past creations, whether they were created for a different company, or whether you built them personally. If you plan to work for other companies or be self-employed while you work for this new organization or even have a side hustle unrelated to your employment, it’s important to make sure the document does not give your new employer rights over IP you may create while not on the clock for them.
Sample Evaluations/Demo Agreements
Often, companies will pay an employee or contractor to do sample, or demo work for them as a part of the evaluation and hiring process. As either an employer or an employee, it’s good to have clear language that clarifies who owns IP created during this period of work. It’s useful to double check that this section includes not just original IP created, but also improvements and to preexisting IP.
Some companies will even require prospective employees to do a demo project for free. While I’m not a fan of this practice, sometimes you gotta do what you gotta do to get the job. In that case, you might also ask what confidentiality or IP assignment obligations you would be under if you were to complete the demo project.
In an agreement where you are buying or selling a license to use IP, it’s important to check over a number of areas where ambiguities could potentially cause conflict down the road. As either a licensor or a licensee, managing the agreement to most accurately suit your use or value for the IP is vital.
As a licensor, you can think about trying to limit the scope of the agreement so that you could be able to make additional deals with other parties to maximize the value from your IP. For example, you probably shouldn’t grant an exclusive license to the first licensee that approaches you. Or, if your IP can be used in a variety of applications, you might limit the scope of each license to specific fields of use.
As a licensee, you might try to expand the scope of the agreement to maximize the use and value that you can get out of the deal. Pushing for legal use of more assets from the licensor, wider possible range of use for the assets in question, or a wider field of application can be a good place to start. Of course, you want to pay as little as you can, so try to cut down on things like initial payments, running royalties, minimum royalty payments, and milestone payments.
Be sure that the language governing the termination process for the contract is solid, and will allow you to get out of the agreement safely, if need be.
Other important things to look for in these types of contracts are: the reporting requirements that you are signing up to follow, whether or not you will be allowed to sublicense the assets in question, and whether this contract or IP is transferable to other parties. Also, make sure that you have a clear understanding of what will be done with any background IP, improvements to IP made during the span of the contract, and any joint IP that may come from it.
The Bottom Line
Although it will always be preferable to have an experienced attorney look over a contract you are considering signing, there are numerous red flags to avoid. If you look at nothing else, be sure to carefully read over
- The entirety of any paragraph mentioning “intellectual property”
- The Purpose section or “whereas” clauses at the start of an agreement
- The entirety of the Terms and Termination clauses
If any of these sections seem fishy, it may save you a lot of money to have a professional look into it further before signing the document.
At Patents Integrated, we aren’t patent attorneys. We’re not business consultants. We’re so much more than that. We’re patent agents who pull from multiple disciplines to help innovators create successful IP strategies that will serve them for years to come. If you’re ready to turn your invention into a reality, we’re here to make it possible. Click here to get started.