(a) General concepts in intellectual property law

‘Creator is the owner’. The general principle in IP law is: the creator of intellectual property is considered to be the owner of it. The effect of this principle can be significant: unless the commissioner and the creator of a work or invention agreed otherwise in writing, the author or inventor can prohibit all use of it. Accordingly, a service provider who developed a technology can prevent that the customer uses such technology for purposes other than (expressly) permitted.

IP created by service providers. The default principle that the creator of intellectual property becomes the owner of that IP has an important consequence. If no contract clause on IP-ownership is included in the services agreement, the created IP will be owned by the service provider and not by the customer. In most cases, this is not problematic. For example, IP-ownership disputes hardly ever arise if the provided services do not result in a ‘work of authorship’, if a created work is not replicated or distributed as part of a product, or if the customer is the only user of the results of the service.

This may be different if the customer resells the result of a service in the conduct of its business or product portfolio. Whilst this is often overlooked, in a strict sense, the service provider could require its customer to pay a royalty over the customer’s sales to third parties in addition to the service fees. To avoid this often-unanticipated effect, the customer should contractually stipulate that it will own all of the IP. Alternatively, the services agreement could stipulate that the customer does not have to pay any additional fees, and is free “to use and have used” the services and solutions created by the service provider (with a right to grant sub-licences).

Employees. Since the creator is the owner of the creation, it is important to realize that employees should agree in their employment agreement that instead, the employer (and not the creator-employee) will be the owner of all works created in the context of the employment relationship or the fulfilment of the employee’s work (regardless whether or not the work was performed during normal business hours).

In many jurisdictions the law provides that, by default, the employer owns any creations made by an employee in the day-to-day course of the employment. To avoid abuse by the employees, it typically also includes anything that may reasonably be expected to have been made pursuant to the employment relationship. In other words, the employee is not permitted the easy escape that a certain invention or work was created outside working hours.

This default ownership-allocation is different in the US, Canada and Australia. In these jurisdictions, the employer should explicitly stipulate in the employment agreement that the employer becomes the owner of all intellectual property rights created in the context of the employment relation. If it is not addressed in the employment conditions, it may well result in the employer lawfully being required to pay a royalty to the employee.

Moral rights. The individual who created a copyrighted work has several personal rights: the right that his or her name is mentioned, the right to have the work published anonymously or under pseudonym, and the right to the integrity of the work. The ‘integrity of a work’ means that the work may not be modified, distorted or mutilated. Moral rights are distinct from the IP ownership and licensing rights: even if the copyright in a work has been transferred, the creator may still enforce the moral rights in the work. Therefore, if permitted under the applicable law, employees should also be required to waive their moral rights under works created as part of their day-to-day employment.

Derivative works. The owner of intellectual property is entitled to ‘control’ the use of it. In particular, if the owner has not expressly provided otherwise, nobody is entitled to modify, translate or transform the created work or to create a work that builds on the original creation without its permission. Such a modification, addition or translation is called a ‘derivative work’. Accordingly, a licensee is usually prohibited to modify the created work, unless the owner has permitted the modifications. In other words:

Derivative Works means any work or creation based on existing Intellectual Property Rights, such as a modification, improvement, reconfiguration, expansion, compilation or translation.

‘Background’ and ‘foreground IP’. It rarely occurs that merely one person creates technology at one moment in time. Technology is typically a result of several combined technological developments, test results and components. If a company wishes to improve the technology or to add functionalities to its products, it might engage an external consultant, who usually builds on existing technology.

Whilst the customer is willing to pay for the development costs, the expert might want to charge more for using its already existing technology. The customer may want to be the owner of the technology, but such ownership allocation is probably impossible in respect of the consultant’s pre-existing technology (which might be owned by or licensed to third parties as well). Such pre-existing technology may be acquired from a third party who is entitled to royalties each time the technology is used or applied. It works the same way with respect to spare parts, components or half products used in end-products.

Many contracts distinguish between pre-existing technology and new technology developed in the context of the contracted project. The terms used are ‘background IP’ for pre-existing technology and ‘foreground IP’ for the technology developed in the framework of the commissioned work (or background know-how, background patents and their counterparts). They can be defined as follows:

Background IPR means, by reference to a Party, all intellectual property rights, excluding Foreground IPR, (a) owned by such Party or any of its Affiliates, or (b) licensed or made available by a third party to such Party and under which that Party is authorised to grant licences.

Foreground IPR means, by reference to a Party, all intellectual property rights which arise as a result of, or in the context of, any activity pursuant to this Agreement.

Distinguish fields of business. The provisions of a contract involving the development or use of IP should address the owners of the specific IP rights and designate which party must grant a licence to the other party. It might also be necessary to obtain a licence from a third party. It is not uncommon to come to a compromise that if the customer becomes the owner of any foreground IPR, the service provider is licensed to use (and to grant sub-licences under) foreground IPR in fields of business outside the scope for which the customer uses the same technology. Such licence for a particular field of business could be exclusive.

Joint development and joint ownership. If parties work together on and contribute to the development of intellectual property, they co-create a solution. Like tangible goods, intellectual property rights can be co-owned by two or more persons or legal entities. This could happen in an alliance or a joint development agreement, where the parties collaborate and merge their contributions into inseparable or interdependent parts of a unitary whole. For co-ownership to come into existence, it is not necessary that the parties’ contributions are equal in effort or nature, or that they be made simultaneously, as long as the parties were collaborating. It is also not necessary that both parties contributed to every aspect of the resulting work or invention.

In view of the complications of joint ownership, registration and exploitation of the IPR, it is important that the parties agree on the specific rights and obligations of the parties in respect of the developed IPR. In many cases, the contracting parties’ respective fields of activity are so different that joint inventions or joint know-how are relatively easy to avoid and unlikely to be problematic. Generally, IP arrangements therefore permit each contributing party to act as the sole owner of the IPR related to its own core-business. Alternatively, the parties could leave certain joint-IP-ownership aspects unaddressed, whilst focusing on the exploitation of the (background and) foreground IPR.

Nonetheless, if the parties are active in the same field of business and undertake to jointly develop a solution, they should agree on a number of contractual mechanisms, preferably in advance:

  • Determination of joint IPR:
    • whether and to which extent any joint IP has indeed been developed;
    • dispute resolution mechanism to avoid lengthy discussions (e.g. escalation to senior managers or directors);
  • Registration:
    • description of the IPR;
    • specify in which jurisdictions the IPR will be registered;
    • decision making on discontinuation of a registration;
    • mutual rights in case of no registration;
  • Exploitation of the IPR:
    • in case of joint exploitation, the parties’ obligations regarding commercialising and licensing;
    • sub-licensing rights (including to affiliated companies);
    • infringement by third parties of the joint IPR;
    • infringement by the parties of the IPR of a third party (joint defence, decision-making on settlements, mutual indemnity, joint and several liability);
    • entitlement to proceeds (i.e. royalties or recovered damages).

As the above list shows, it is often more efficient to agree on a clear separation of IP-rights (and allow one party to use the other party’s foreground IP) than to establish the elaborate framework required in case of jointly owned IPR.