Dissecting Intellectual Property in Service Agreements

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Table of Contents

• Defining ‘Intellectual Property’
• Protecting Intellectual Property With Laws
• Creating Intellectual Property
• Using Intellectual Property
• Tips For Reading Intellectual Property Clauses
• Key Takeaways

Intellectual property (IP) clauses protect your ideas from being stolen. Such clauses are essential if your primary asset lies in the creation of IP. Different types of agreements, such as those between you and your customers, will typically have IP clauses. This article will describe how service agreements address intellectual property and explore key questions you should ask when creating IP as a service provider. 

Defining ‘Intellectual Property’

IP broadly refers to ownership of the ideas a human mind creates. It can include trade marks, patents, copyright or trade secrets. Often contracts contain a definition for IP that specifies what the agreement considers as IP.  When reviewing or drafting a contract, you should clearly define what you consider as IP in the IP clause. You can then refer to the clause and the contract definition to determine your rights to create and use IP.

Protecting Intellectual Property With Laws

There are various laws that protect you as an IP creator. You may want to review them or understand their objectives so that you are aware of how the law protects your IP. Some of these laws are the: 

• Copyright Act 1968;
• Circuit Layouts Act 1989; 
• Patents Act 1990;
• Trade Marks Act 1995;
• Designs Act 2003; and
• Competition and Consumer Act 2010.

In general, these IP protection laws in Australia are designed to encourage innovation, safeguard the rights of creators, and encourage fair competition in the market.

Creating Intellectual Property

Most businesses create IP. For example, consultants, writers, programmers or designers regularly create IP within a business. If you are a service provider creating IP for your clients, you need to determine whether you will:

• transfer ownership of IP to your clients; or
• only allow them to use the IP that you create.

If you transfer ownership of your IP (also known as assigning your IP), you need to view it as an asset and ensure that you are paid a fair price for the transfer of the IP. It is crucial to think about whether you will want to use the IP again in the future and how you might want to use it. Some scenarios where these questions are important include if you:

• develop a web application and are considering eventually using the source code again to create other web applications; or
• provide copywriting or design services to a business and want to use examples of such IP in your portfolio.

If you are creating IP but only allowing your client to use it under specific terms (through a licence), you need to determine why your IP is being used and what the client will be allowed to do with it. This will depend on the type of clients you have and your bargaining position. Some relevant considerations include whether: 

• you will allow the client to use the IP to develop other commercial products;
• the client will only be able to use the IP for a specific amount of time; and
• you will be able to terminate the licence you provide to your client.

Ensure that any IP clauses in your contract are reasonable so potential clients will not hesitate to accept your proposal. It is important to consult with a lawyer to get specific advice on how to handle IP ownership in your business.

Using Intellectual Property

When you are a service provider hired to create IP for a business, it is essential to consider how you want your client to use the IP. This gives you a direction when developing the IP clauses so they reflect your requirements. One key question is whether you will transfer your IP so that it is no longer your property, or if you only license it to others for more restricted use.  

Some key questions that you should ask yourself include:

• What IP am I creating? This includes a clear definition of what is considered IP under the agreement.
• Will I own the IP? If so, you will have the right to use it however you want.
• If I am only licensing the IP, what are the terms of the license? This includes factors like the duration of the licence, the location where you can use the IP and whether you can sub-license the IP to others.
• Will I allow the IP to be modified in any way? If so, who will be responsible for any modifications? And who will be responsible should any damages arise?
• Are there limitations on the client’s use of the IP? This could include things like the purpose for which they can use the IP, the number of people who can use it, the area where it can be used and the period of use.

If your main purpose as a service provider is to keep ownership of and exploit the IP, ensure that the IP clauses thoroughly reflect your requirements. Remember that terms are negotiable, and the agreement should be consistent with your overall business goals.

Tips For Reading Intellectual Property Clauses

Contracts often include IP clauses that can be difficult to understand. Below are some tips for reading IP clauses to equip you with the right questions to ask the other party.

• IP clauses may refer to the infringement of third-party IP rights. For example, if you are a creative agency hired to develop a marketing campaign, you want to make sure that you have full rights to the IP and that your client will not infringe on the IP rights of others. This may include your employees or contractors who created the IP in the first place.
• There are commonly references relating to indemnities. An indemnity refers to a party’s obligation to pay the other for losses. For example, if you use a third party’s IP without their permission to create a marketing campaign for a client, you should check if you are liable to pay for the losses or if you will indemnify your client (cause them to pay for losses).
• IP clauses may also include royalty payments to the IP owner as a fee for using the IP. This typically happens when the IP is licensed. However, some clauses state that the provision of IP is royalty-free.

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Key Takeaways

If you use and create IP, IP clauses are an important asset. They can appear in agreements such as:

• client or services agreements: these are agreements between a business and its customers; and
• contractor agreements: these are agreements between a business and someone who provides services to the business.

You should consider how you plan on using the IP in the future and whether you will assign or license it.  Although IP clauses form part of an agreement, they must be drafted to reflect your business needs. This may involve including relevant information on infringement, indemnities and royalty payments.

If you have any questions about IP clauses in service agreements or need assistance with an  IP clause, contact LegalVision’s intellectual property lawyers as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.