Development Agreement

First let me clarify what I mean by the term development agreement. A development agreement is a document used when what you are purchasing does not exist and needs to be created. It is an agreement in which the Supplier, as a condition of performing the development is requiring either the payment of some or all of the development costs or is requiring some form of firm commitment which is equivalent to an investment in the development.  It would also include the rights each party has with respect to any inventions that may occur and what the rights of the parties are with respect to the developed product or service.  Paying development costs or making firm purchase commitments is the equivalent of making an investment in the development and the development agreement is where you want to ensure that you get a return on that investment. If a Supplier on their own goes off and develops something that they think the Buyer will want to need and is not requiring the Buyer to fund or purchase firm quantities of what they develop, that’s probably not a situation requiring a development agreement.

There are no standard rules about when to negotiate a development agreement that includes Intellectual Property ownership or licensing rights and every company operates a little differently. There are some simple questions you can ask to help decide whether a development agreement is needed.

1. Does the Supplier want to be paid for the development or do the want a firm commitment to purchase the developed item? If they do, you may want Intellectual Property rights or licensing rights to developed item.
2. Will the Buyer’s employees be participating in the activity? If they are you probably want intellectual property rights.
3. Will the Buyer be providing any technology for the development? If you are, a licensing agreement or development agreement is needed.
4. Does the Buyer have any use for the development? Is the Buyer in a Business that could use it? Would the Buyer use it? Is it something that the Buyer could potentially license to third parties to help pay off the cost of the development or provide revenue? The greater the potential future value to the Buyer, the more you need a development agreement.
5. Will the Supplier get additional value from the Development? If they will, you probably want a development agreement where you can recover some of your investment when they use what’s developed elsewhere.
6. Will the Buyer will want or need to make derivative works of what gets developed? If the Buyer does, as a minimum you need to get a license but you may want a development agreement.
7. Does the Buyer want or need to have any control over where or how it may be used by the Supplier in the future? If you are paying some or all of the cost to develop it and are contributing to its success, you probably don’t want the Supplier to be able to sell it to a competitor that will compete with you, especially if you paid the cost of the development.  There are a number of forms of control that can be used over future use of what’s developed. It could restrict sales to specific competitors; restrict use in specific markets, geographical or regions. It could also have the restriction be tied to a time frame during which other sales cannot be made. The goal in restrictions is to ensure that you get the needed return on the investment you made in the development.  For example, you don’t want to create a situation where you are committed to purchase a specific volume only to have the Supplier sell to a competitor where the competition could impact your meeting the volume commitment. 

The last questions I would ask are:

1.     Will the development directly or effectively lock you into using the Supplier?

2.     How difficult, timely and costly would it be to get an alternative source?

3.     How financially stable is the Supplier?

For higher risk Suppliers, you probably need intellectual rights in the developed product. For example, if it was a hardware product that was developed you may want a manufacturing escrow and license as protection against them not performing. If it was software you would want an escrow and a license that would be broad enough so that you could use, license and support the software to ensure the return on your investment.

For example using this thought process:

• If they did the development on their own, and
• If you didn't want to own the IP, and
• You had no desire or need to do derivative works, and
• You didn't care about who used it, and
• You were dealing with a strong supplier, you may not need anything that protects IP or gets you IP or licensing rights.

The other thing you also need to take into consideration is reliance.  If you will need the product or service and are not working on an alternative source you are dependent upon them to complete the work.  The issue then is do you use good faith and rely on them to do the work, or do you need a firm commitment.  If there is big potential impact if they failed to perform, you need a firm commitment that obligates the Supplier to complete the development and deliver the product. Without a firm commitment the Supplier could simply abandon the development and you would not have another solution available when needed.