Tuesday, July 3, 2012

Different categories of ownership in negotiating development contracts.

In development ofnew hardware, software etc, there will be three categories of intellectual property rights. There may be supplier owned pre-existing materials and tools. There may be buyer pre-existing materials. Last there will be the new intellectual property that is created under the contract.

When a supplier or consultant has and wants to retain ownership of their pre-existing materials usually the agreement will list those. As the buyer will need to use those, they will be granted a license to use those. There are a number of reasons why you would allow them to retain ownership in those pre-existing materials. The first is it keeps the cost down. You would need to either purchase the right to them, which would add to your cost or you would need to do all new development, which also adds to your cost. A supplier may not be able to give you exclusive rights to those as they may have licensed those previously to others. Most of the time they want to continue to own those for use in future work so they be more competitive. Retaining existing material ownership is a fairly common practice, however if it was for a very sensitive use, the buyer may want only newly developed materials that only they own and can totally control.

Buyer owned materials would usually not be licensed to the supplier although they could be if they weren’t sensitive to the buyer’s operation. If they were licensed, most of the time there would be a restriction against using them with a competitor of the buyer.

That leaves the issue of who owns the new work that gets developed. There are several options here.
1. The Buyer can own it.
2. The Buyer can own it and license its use to the Supplier
3. The Supplier can own it and the buyer is provided with a license

In deciding who should own the new work there is usually two major factors. The first is the sensitivity of the development to the buyer. The second factor is the impact on the development cost. Usually if the buyer funds the full development cost they will want to own it. If it will provide the buyer a competitive edge in the marketplace, they will want to own it. Having a competitive edge only last so long or to protect that competitive edge it may not be an “all or none” decision. To reduce the cost of the development the buyer may agree to license portions of the new work, or license all of it to the supplier with restrictions on use. The most common restrictions would be that it not be used for work with any competitor. Another common restriction is a waiting period before the supplier can use the license with others. A waiting period restriction is used to provide the buyer with exclusive use so they have a competitive edge during that period.

If the end product has significant value to others, the Buyer may allow the supplier to own it and could license buyer owned material to the supplier where the supplier must pay royalties for any reuse of developed materials as compensation for giving up that right of ownership. The collection of those royalties reduces the buyer’s costs in the development. While some people may think it might be better to own and license things yourself, if your goal is to get revenue from that to reduce your investment cost, you always need to ask the question about who would better be able to use, sell and provide customers with additional value added they want. Most of the time that answer isn’t the Buyer.

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