Growing a business is always tough and sustaining an acceptable level of growth can, at times, seem impossible. In an attempt to acquire or maintain market share value, small to medium sized businesses often participate in joint ventures or collaborative engagements. Such business arrangements can be formal or informal, for a single set project or period, or it can be relational (ongoing). The parties can agree to terms in writing (recommended) or based on a handshake.
Whatever the circumstance, mode or scope of such an engagement, there is always one commonality – any form of collaboration or joint venture relationship gives rise to a sharing of either funds, assets, talent or knowledge. Business synergy and leveraging each entity’s tools is the driving force behind such associations. As such, there is always some level of interconnectedness.
Using and sharing resources between organisations provides the parties with increased capabilities they would not have had as a stand-alone entity. There are, however, inherent risks, associated with prematurely entering into such agreements without first understanding its effects. We see this typically in circumstances where organisations come together and share or exploit each other’s intellectual property or create intellectual property through collaboration.
In these cases, questions inevitably arise as to who owns the intellectual property, how can parties use the intellectual property and what happens to the intellectual property once the business arrangement ends. To avoid costly misunderstandings, it’s then critical to know what constitutes intellectual property, the difference between background intellectual property and project-based intellectual property, transfer mechanisms and available avenues to limit each parties’ liability. We set these out below.
What is Intellectual Property?
Intellectual property can include all present and future rights to a range of intellectual and industrial property including:
- Circuit layouts
- Trade names
- Trade secrets
- Secret processes
- Business names
- Internet domain names; and
- Confidential information.
An owner of intellectual property has the following rights:
- Use the intellectual property;
- Commercialise the intellectual property (be this by way of a sale, licence or otherwise);
- Prevent others from making use of the intellectual property; and
- Bring enforcement proceedings against those individuals and entities that infringe the owner’s intellectual property rights.
What is the Difference Between Background Intellectual Property and Project Specific Intellectual Property?
‘Background intellectual property’ is intellectual property that is made available to the collaborating parties (as opposed to being created by the collaborating parties) during the term of the project or throughout the length of the engagement. Background intellectual property can consist of the following:
- Intellectual property an entity has created before the date of the collaboration or joint venture relationship;
- Intellectual property that a party has created separately and independently of the collaboration or joint venture after the date of the engagement; and
- Intellectual property that an independent party has created after the date of the engagement, which is made available to the collaborating parties for the purpose of undertaking the project or throughout the term of the engagement.
‘Project-specific intellectual property’ is intellectual property that parties create during the project or the term of the engagement.
It is important to distinguish between background intellectual property and project intellectual property when entering into collaborative or joint venture agreements. Parties should confirm that background intellectual property remains the property of the contributing party to the exclusion of all others, including the other collaborators/joint venturers. On the other hand, it is standard for intellectual property that parties jointly own project intellectual property.
Parties can elect to amend the standard positions outlined above. When speaking about intellectual property, there are two transfer mechanisms, although one does not actually amount to a transfer. To affect how parties hold the intellectual property, they can either assign or license it to others.
An assignment is essentially a sale and transfer of the intellectual property from the owner to a third party purchaser. Upon an effective assignment of intellectual property, the former owner will give up all their rights, obligations and claims to the intellectual property, with the same rights vesting in the new owner to the exclusion of all others. An assignment is effected by the parties entering into what is commonly referred to as a written Intellectual Property Assignment Agreement.
A license, on the other hand, is something short of a sale. Via a license, An intellectual property owner can allow another to use and commercialise the intellectual property through a license for a limited purpose or time in exchange for consideration. A license does not effect a transfer of the property and the owner can still issue enforcement proceedings against licensors who breach the terms of the license. Similar to an assignment, a license is effected by way of an Intellectual Property License Agreement.
It may seem obvious, but when effecting any transfer, it is important to ensure that the assignor or licensor, is the actual owner/licensor of the intellectual property. Noting the incorrect party on the agreement will mean that there has been no effective assignment or license. I know what you are thinking, “absent of fraud or misrepresentation, how can the purported owner/licensor of the intellectual property not own it or have a right to sublicense it to others?”.
For example, when a party moves from a sole proprietorship model to an incorporated structure model, an automatic transfer of the intellectual property does not occur. That is, intellectual property that the sole trader owned does not automatically become the newly formed company’s property. For that to happen, the sole trader (the intellectual property owner) would need to execute an Intellectual Property Assignment Agreement between it and the newly formed company. So, trying to obtain an assignment from a corporate entity that doesn’t own the intellectual property would be pointless – a company can’t sell something it doesn’t own.
Ultimately, whether an assignment or a license is the most appropriate method of transfer depends on the circumstances of each collaboration or joint venture. It will be a commercial matter for the contracting parties to decide between themselves.
Limiting Liability in Collaborative and Joint Venture Arrangements
When sharing intellectual property under a collaboration or joint venture agreement, it is important to limit your liability. The common types of disclaimers, warranties and limitations of liability included in a formal agreement or contract will vary depending on the nature, scope and purpose of the relationship. It is important to ensure that:
- Any background intellectual property is the original work of the contributing party and does not infringe the intellectual property rights of third parties; and
- If the background intellectual property is made available under a license, the contributing party has a valid license to use the background intellectual property in the manner intended under the collaboration/joint venture.
When entering into business relationships or joint ventures, it is important to be aware of the status of your intellectual property and what rights you have in respect of them. You should decide how you plan to share your intellectual property with your business partners, and ensure that you clearly set this out in any written agreements or contracts you sign.
If you have any questions about protecting your intellectual property, or require assistance drafting an Intellectual Property Assignment Agreement or Intellectual Property License Agreement, get in touch with our IP lawyers on 1300 544 755.