Intellectual Property and Contracts

Many contracts have implications for your intellectual property—or for whether you'll be on the hook in somebody else's infringement suit.
Intellectual Property and Contracts

Gregory Brown is an associate general counsel for the University of Minnesota in the Twin Cities. He works mainly for the university’s Office of Technology Commercialization, which seeks to generate revenue from patents granted to the university. That sometimes means licensing the university’s bleeding-edge intellectual property (IP) to start-up companies that will take it to further stages of development.

Brown’s challenge in these cases is to help craft a licensing agreement that is likely to make money for the university without squelching the partner company’s ability to thrive—because only by thriving can the company make a lot more money for the university down the road.

The balancing act can be delicate. “Licensors can ask for royalty structures that will kill the product, where money that should go into development is going to the licensor instead,” Brown says. “I’ve seen promising new technologies killed that way.”

Hildy Bowbeer is assistant chief intellectual property counsel for 3M, the venerable St. Paul company that holds more than 23,000 patents worldwide. As a litigator, she spends most of her time overseeing enforcement of 3M’s patents in infringement actions against other companies. Sometimes she is on the opposite side of an action, defending 3M against an infringement claim by someone else.

“Regardless of which side of the charge we’re on,” Bowbeer says, “when we look at resolving IP-infringement litigation, [a major goal] is to minimize the chances of repeat litigation.” That means she doesn’t just want to win the case. She wants to emerge with an agreement “sufficiently clear and definitive that we won’t find ourselves back in court six months or six years later, arguing again about the same issues.”

Brown and Bowbeer obviously come at the issue of intellectual property from different angles, with different goals. The common thread, however, is that both are concerned in the end with agreements—contracts—that genuinely serve their intended purposes.

Contracts pertaining to IP come in many forms. While crafting them is the province of attorneys, it behooves businesspeople to understand the basic goals of certain types of IP contracts and some of the pitfalls they can help their businesses avoid.

Employment Contracts
The employment agreements that organizations require some or all employees to sign address intellectual property issues in different ways. But the basic goal can be stated simply, says Paul Mussell, senior counsel for intellectual property at Wells Fargo & Company in Minneapolis.

In practically any organization, Mussell says, “you have a lot of stuff being created and developed.” The creating is done by employees, and the stuff can be mechanical devices, procedures, software, pieces of writing—you name it. “Things will come out of that activity that are potentially valuable to the company,” he says. The question that employment contracts address is: “How can you deal with this on the front end, before you know what those valuable things will be?”

There are four formal types of intellectual property: patents, copyrights, trademarks, and trade secrets. An employment contract should cover those bases by specifying company ownership and by requiring employees to “assign all newly created IP to the company,” Mussell says.

But employees also will be exposed to confidential information. That is, “information that doesn’t rise to the trade-secret level and isn’t necessarily protectable under IP law, but that can be protected by agreement,” Mussell says. The nondisclosure clauses and noncompete provisions included in employment contracts often have more to do with protecting confidential information than with protecting legally defined trade secrets.

10 THINGS TO
REMEMBER ABOUT IP

1. Your employees’ good ideas can be patented. Their writing is copyrightable. Trademarks and trade secrets give you a competitive advantage—but only if you protect them before, not after, they are taken.

2. Employees and contractors can take your IP if you don’t act. Carefully craft employment agreements and assignment provisions for contractors.

3. Don’t step on competitors’ IP by hiring people subject to noncompete agreements. Do clearances for all trademarks, patents, and copyrights.

4. Bankruptcy of a patent or copyright owner usually has little effect on companies that license the IP. But if you license a trademark from an owner that goes bankrupt, the license usually terminates.

5. Never buy or license IP without determining who owns it. A quick check of a patent’s summary information on the website of the U.S. Patent and Trademark Office won’t cut the mustard. Pull the actual assignment.

6. When buying or licensing IP, understand what it covers and exactly what you are allowed to do. Inventions are defined by the patent, not by the seller’s representations.

7. IP owners can sue; licensees can’t. Even if you are an exclusive licensee, only the patent owner can sue a competitor for infringement.

8. Computer software can contain all four types of IP: Software can be patented and connected with a trademark, its code copyrighted, and its source code a trade secret.

9. If you are considering cloud computing, don’t just click “yes” to your provider’s service agreement.

10. Under the Uniform Commercial Code, you automatically warrant that what you sell won’t infringe anyone else’s IP. And you indemnify the buyer (i.e., you pay) for court costs and damages in a lawsuit.

Adapted from a list prepared by David Allgeyer and Mark Privratsky of Lindquist & Vennum.

The basic idea may be simple, but in practice things quickly become complex. For starters, federal law treats the issue of patent ownership very differently from that of copyright ownership.

The default federal law that generally applies to copyrights (in the absence of any contracts that address the subject) says that the copyright to materials created by employees in the course of their jobs belongs to the employer, says Barbara Jean D’Aquila, head of litigation and partner with the Fulbright & Jaworski, LLP, law firm in Minneapolis.

But patents are granted to people, not companies. “The owner of a patent, under federal law, is the inventor,” D’Aquila says. “There are some doctrines that help the employer in the absence of an agreement, but they are imperfect.”

Patrick Gallagher, an IP attorney and partner with Fulbright & Jaworski, elaborates: “With patents, the default provision is that it belongs to the employee who created it, even [one working] within the scope of employment, using the employer’s resources and facilities. That’s why ‘pre-invention assignment clauses’ are so important.”

When an assignment clause is included in an employment contract, the employee agrees to assign to the company ownership of any patents granted for inventions created as part of the employee’s work for the company.

If disputes arise over whether an invention was developed during the inventor’s employment, they can be tried in court. D’Aquila says that Minnesota and most states protect “garage inventors” by refusing to enforce assignment clauses that are too broad or over-reaching.

For instance, she says, a chemical engineer working for a medical company probably could invent a bicycle gear-shifting device in his garage, using his own resources, and keep ownership of the patent regardless of how his employment contract with the medical company was written.

The same principles of reason and fairness apply to other sections of employment contracts, such as noncompete clauses. “You can strong-arm employees into signing anything, but what’s enforceable is different,” Mussell says. “When it comes to restricting people’s future employment, the restrictions have to be reasonable and related to legitimate business interests.”

Who Indemnifies Whom?
What is the most overlooked IP issue in commercial contracts? It might be indemnification, says Mark Privratsky, who chairs the intellectual property department at Lindquist & Vennum, PLLP, law firm in Minneapolis.

Suppose that Privratsky is a manufacturer and you are a retailer. “If I make a product and sell it to you, and we have a written contract, we can agree on whatever terms we want,” he says. “But if we have no contract, or the language in our contract fails to cover [the issue of] indemnification, then the Uniform Commercial Code applies.”

 

What the UCC says is that “when I sell you something, I have to indemnify you in case a third party claims that my product infringes their IP.” That means manufacturer Privratsky may be on the hook for your legal expenses and for any damages a court awards to the third-party IP owner.

Creating a contract that overrides the UCC is a tricky proposition, Privratsky says. On the one hand, why would you buy anything from a manufacturer who won’t guarantee that his product will not infringe on anyone else’s IP rights? “If I tell you on the front end that I won’t make any warranties to you about violating someone else’s IP, you should turn and run,” he says.

On the other hand, if you are a giant, deep-pocketed retailer such as Target or Wal-Mart, and Privratsky is a mom-and-pop manufacturer, he might promptly go bankrupt just trying to pay your legal fees, never mind a damage award. In that case, the UCC’s protection isn’t really worth much to retailer, he says.

Conversely, suppose you are mom-and-pop retailer and Privratsky is a major manufacturer. The UCC actually says that he must indemnify you against “rightful” claims of IP infringement. Suppose he refuses to pay any of your legal costs until and unless you lose the case, meaning that a court has declared the infringement claim rightful? You could be bankrupt before the decision comes down.

There is no one-size-fits-all rule for writing contracts with IP-indemnification clauses that ensure the best outcomes. But the issue deserves thought, Privratsky says—far more thought than it typically gets.
 

Maybe Not Cloud 9
Cloud computing is an increasingly popular arrangement in which an organization moves its data and applications off its own servers and onto someone else’s. But when your company no longer owns or controls the computers on which its data reside or the software with which employees create, change, and manipulate that data, certain IP issues arise.

The two biggest concerns are data ownership and data privacy, says attorney Daniel Tysver, a partner in the Minneapolis-based Beck & Tysver, PLLC, law firm, who specializes in technology-related IP issues. “When the data your company generates is on someone else’s servers, you need to make sure you still own it,” Tysver says. In contractual terms, that much usually is pretty straightforward, he says.

But what about information surrounding your data, “like how often you create certain kinds of documents, or how many people access them, or at what times of day?” he asks. Web-service companies often want to monitor your usage. To some extent, they need to monitor your activity in order to service your account. “Maybe they can use that data to sell some other products or services,” he says. “Well, do you want them to have the power to do whatever they want?” And do you want them to have the right to share your data with subcontractors they might hire?

As for the safety and privacy of your data, “cloud providers are usually good about protecting data,” Tysver says. “But agreements can be vague about where your data might end up.” If you have certain government contracts and a cloud provider stores your data in India, for example, you might find yourself in trouble, he says. U.S. patent-application information—prior to being filed—is an example of data that may not be sent to servers overseas.

 

If you have any data subject to the security rules of, say, the Health Insurance Portability and Accountability Act (HIPAA) or the Gramm-Leach-Bliley Act, he says, you can farm out the servers but you can’t offload the accountability for ensuring that the service provider follows all the privacy rules.

The thing to remember is that you need to pay close attention to the rights and responsibilities you are giving to a cloud service provider. And you may need to negotiate. “Don’t just click ‘yes’ to the agreement on the screen,” Tysver says.

Making Licensing Work
The University of Minnesota is a major licensor of intellectual property. It licenses everything from tried-and-tested online college courses to fledgling medical technologies that might require years of refining and development.

Like many IP licensors, the university has varying degrees of involvement with licensees. At one extreme, says attorney Gregory Brown, the IP owner can just license someone the right to make a product or conduct a course, walk away, and say, “Send me my check.”

But Brown often finds himself at the other extreme, with the university acting as a quasi–business partner of a start-up company that will try to “monetize” a fledgling technology. He will want to know all about the management, the capitalization, and the business plans of the licensee. He will try to negotiate sensible “performance milestones” that the licensee must reach in order to retain its rights to the IP.

In any licensing situation, but especially when developmental technologies are involved, Brown says that the contract must answer five questions, as clearly and insightfully as possible:

    1. What is the licensee permitted to do with the IP?
    2. What is the licensee required to do? (What are the performance milestones?)
    3. What will prove that the licensee has performed as required?
    4. How much will the licensee pay?
    5. Who will protect the IP (against infringement by others)?

Get those five things right, Brown says, and you probably have a good licensing agreement.

After the Lawsuit
Sometimes patent litigation ends in an unambiguous result. A lot of 3M’s litigation settles with agreements that attorney Hildy Bowbeer summarizes this way: “Effective on X date, you won’t sell the infringing product anymore, and you’ll pay us an agreed amount for what you sold before.”

In such cases, there is no ongoing relationship between the two parties. But sometimes IP litigation settles with the two parties agreeing to a licensing deal or some other business arrangement. The agreement will say, as Bowbeer puts it: “In exchange for what I agree is sufficient compensation, I release you from liability for X.”

The question becomes: What, exactly, is X? “If we wanted to play ‘gotcha,’ we could try to slip in narrower language [about] the release. So you thought you were getting a release from a set of problems yea big, but in fact we could come back and sue you again for something very similar,” she says. “Some people negotiate that way.”

But litigation is expensive, and 3M has more than 23,000 patents to enforce. The last thing Bowbeer wants is additional infringement suits. Her goal, therefore, is to craft an agreement that is as clear as possible. “We try to avoid language that is vague or fuzzy about which IP is at issue or what the scope of the release is,” she says. “Are we just talking about U.S. patents or also all foreign patents related to them? Are we just talking about patents already issued or patents that may be issued later?”

Bowbeer wants such issues nailed down plainly. “We don’t want to walk away saying, ‘Boy, it’s a good thing they didn’t read the agreement carefully,’” she says. “We want everyone to walk away from the table not happy, necessarily, but clear.”