March 31, 2021 Feature

Best Practices in Negotiating IP Transactions

Kirk Goodwin, Susan McGahan, Elizabeth Peters, and Justin Sage

©2021. Published in Landslide, Vol. 13, No. 4, March/April 2021, by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association or the copyright holder.

A company’s intellectual property (IP) can be among its most valuable assets. Whether it’s in-house or outside counsel dealing with an agreement negotiation or corporate transaction, IP terms should be carefully considered. This article contains tips and best practices to help legal counsel streamline the agreement negotiation processes, issue spot for risks in accepting certain IP terms, and strategically negotiate to ensure the business goals are met.

What Impact Can Legal Counsel Have on Negotiations?

In a word: a major impact. Although the actual terms of the agreement can depend on the business structure (for example, the negotiations may be driven by a dedicated procurement team in one business or a solo inventor in another), having the legal counsel’s advice on the risks of agreeing to certain provisions during the negotiations can make or break the opportunities for the client in both the short and long term.

Depending on multiple factors, including the extent of daily risks the business faces and the company’s finances, the company may have a team of in-house practitioners specializing in areas of the most legal risk to the company. A main reason why a company will hire in-house legal counsel is to have a legal mind within its walls 24/7, as opposed to directing company resources toward another type of employee and instead retaining outside counsel to be called upon when needed. But an even better reason to hire in-house counsel is to have another business team member who can apply a legal “lens” to business outcomes.

On average, the business client does not want to be told what it cannot do—it can consult a rulebook for that itself. The role of the legal counsel in agreement negotiations is to help the business come up with ways to accomplish its business goals in a legal and ethical manner. The primary benefit of in-house counsel (or outside counsel with a deep understanding of the business and its goals) is the counsel’s ability to advise on an acceptable path forward that will pose the least risks to the business while providing the greatest return. In order to both gain that deep understanding of the business’s goals and ensure the counsel’s advice is taken into sincere consideration, the legal counsel must have a proverbial “seat at the table.”

How Do You Earn That “Seat at the Table”?

Trust is key to strengthening any relationship. In the legal world, earning and maintaining that trust can be challenging, particularly when you, as the legal counsel, are the one who often has to be the “downer” on certain plans of action (e.g., when an approach is too legally risky when compared to the rewards, or worse yet, is unknowingly illegal to begin with). But the truly valuable legal counsel is the one who can not only advise against plans of action that bring on more risks than rewards but also keep the goals in mind to inform creative ways of meeting those goals. The business’s legal counsel who is most trusted is usually the one who is most successful in assisting with business decisions while keeping legalities and legal risks at the forefront.

Can a Legal Department’s Structure Play a Role in the Analysis?

It can in some cases, but it depends on the business. In a typical large corporation, the in-house counsel will report up to the general counsel, who may report up to the CEO. In such a scenario, the in-house counsel may appear more part of the “legal team” as opposed to having a direct connection to the business. In such a case, the in-house counsel may have to work harder to earn that seat at the table by taking greater interest in the plans, functions, and team members of the business unit(s) the counsel is supporting. In a smaller company or startup, the in-house counsel may be the entire legal department, or at least the main contact for that business unit or legal function (e.g., patent law or IP law).

What If Outside Counsel Is Involved?

If an outside counsel is involved, it may be even harder to connect with the business, because often the business will only call upon the counsel on an as-needed basis. Without that direct line of communication and access to counsel, the outside counsel may find it that much more difficult to gain cooperation from the business when conveying legal advice that may not fit with the business’s intended plan of action. So again, earning that trust through regular touch-bases and showing sincere interest in meeting the business’s goals can help immensely in bridging that gap. Additionally, consistent monitoring of the client’s industry to keep abreast of the latest issues—for example, through any online monitoring services—can be highly effective.

How Can Legal Counsel Help Manage Agreement Negotiations?

Whether a large or small company, and irrespective of the presence of in-house versus outside counsel, there are usually far fewer legal minds than issues to be resolved. In addition, most business transactions and negotiations are not driven by the legal counsel, but rather by the business team members. So in many instances, for the sake of efficiency, it may make sense to arm the business team with proper training on basic issue spotting when it comes to negotiations on certain key terms.

Consider also creating a template agreement for the most common transactions for your client’s business (e.g., nondisclosure agreements, development agreements, licensing agreements, etc.). Before sharing the appropriate template agreement with the other party, require the business team to approach the other party in negotiations by first filling out a term sheet containing the most important provisions (e.g., confidentiality obligations, IP ownership, representations and warranties, and big data management). Once the details of the term sheet are ironed out, those terms can then be plugged into the larger template agreement. This approach helps cultivate a business-ownership mindset and drive consensus early in the negotiation process.

In addition, given that the negotiations process often involves many revisions of terms, and the revisions (which may be applied as part of the negotiation process) are seen fairly regularly, keeping a “playbook” of acceptable carve-outs or fallbacks may also come in handy.

Finally, having an up-front risk review may aid in determining which types and sizes of agreements need legal review and which may only need use of a playbook by the business.

Which “Key” Agreement Terms Should IP Counsel Consider?

The short answer is “all of them,” but for the purposes of this article, there are a few terms that stick out: confidentiality terms; IP ownership terms; terms relating to IP risk mitigation, such as representations and warranties as well as indemnities; and what we are calling “big data” terms. Whether negotiating a nondisclosure agreement, development agreement, or supply agreement, the terms the parties agree to can impact how and if your client’s end goals can be met both during the agreement term and after the agreement term ends.

Confidentiality

When sharing information with a third party, expectations of confidentiality are key. But which aspects of confidentiality terms are most important? For example:

  • Who has the confidentiality obligations (e.g., the party disclosing or the party receiving the information)?
  • How are trade secrets treated (e.g., do they need to be identified by the disclosing party in order for heightened care requirements for that confidential information to be observed)?
  • Is identification or scope of residuals addressed (e.g., does “residual” include confidential information that was retained by unaided memory only, or any information retained involuntarily without any intent to steal)?
  • What is the term of confidentiality obligations (e.g., how long will confidentiality obligations survive after the agreement terminates)?
  • Are there any restriction scope issues (e.g., should you enumerate the uses that are allowed for your confidential information or simply apply a general restriction)?
  • What counts (or doesn’t count) as confidential information (e.g., does confidential information exclude information that was independently arrived at or made public without the use of your confidential information)?
  • How are feedback and recommendations made by the third party treated (e.g., is there a limited license to use any feedback and recommendations for purposes other than the aim of the agreement)?
  • Are there situations where you disclaim any expectation of confidentiality (e.g., in the case of receiving unsolicited ideas from submitters wishing for your company to hear their new product or service ideas)?

Once again, the importance of these individual aspects depends on the particular situation, and being keyed into the business’s short-term and long-term goals concerning the relationship with the third party will play heavily into the risk tolerance for any of these confidentiality provisions within the agreement. Below are some sample confidentiality terms that showcase one potential opening position your business team can take when approaching a third party in negotiations.

RESTRICTION SCOPE: Receiving Party agrees that it will not disclose any received Information to a third party for a period of [X time] after this agreement’s effective date. Receiving Party further agrees that it [will not use any Confidential Information for any purpose not authorized in writing by Disclosing Party] or [will not use or rely on the Confidential Information for purposes outside of the Purpose of this Agreement or for pursuit of its own Intellectual Property rights].

COVERED INFORMATION: This Agreement covers only Confidential Information disclosed during the period beginning on the Effective Date and ending [Y time] later. Receiving Party’s obligations hereunder shall apply only to Confidential Information that is (a) disclosed in writing and marked confidential; (b) disclosed in any other manner and indicated to be confidential at the time of disclosure; or (c) listed herein. This Agreement imposes no obligation on Receiving Party with respect to Confidential Information that: (a) was in Receiving Party’s possession before its receipt from Disclosing Party; (b) is or becomes publicly available through no fault of Receiving Party; (c) is received from a third party through no fault of Receiving Party; (d) Disclosing Party subsequently discloses to a third party who has no obligation of confidentiality to Disclosing Party; or (e) is independently developed by Receiving Party.

RESIDUAL INFORMATION: Without limiting the obligations hereunder, Receiving Party may use Residual Information provided that Receiving Party maintains the confidentiality of the Confidential Information as provided herein. “Residual Information” means information that is retained in the unaided memory by an employee of Receiving Party, who had access to the Confidential Information, but had no intent on copying or misappropriating such information, without need of further reference to any material which is written or otherwise fixed in a tangible medium. Residual Information shall not include any information relating to business, marketing or advertising information including plans and strategies, financial information, customer information, and personal information relating to the employees of Receiving Party.

IP Ownership

IP ownership often comes with the rights to file for IP protection, or at least a license to the IP rights, covering the ideas that are shared or generated during the term of the agreement. This can impact many downstream value-driving actions that are critical to fulfilling the business team’s goals. In particular, if your business team is engaging in negotiations with a supplier, goals such as securing a sustainable competitive advantage (e.g., through full IP ownership or at least an exclusive license to the relevant IP) and guaranteeing continuity of supply (e.g., through either owning IP to the supplied products or securing a license to the product IP in the event of a need to switch suppliers).

The best approach to negotiating IP ownership, or at least an IP license, is the approach that helps meet the business team’s goals. And there are many ways to make that happen. Consider, for example:

  • Will a license (as opposed to outright ownership) work well enough (e.g., will an exclusive field-of-use license to the product IP for a specified number of years after the agreement terminates suffice)?
  • Is joint versus individually owned IP an option? (While joint ownership may appear fair in principle, in practice, it is often a different story. Initially, creating joint ownership to a product’s IP having equal ownership and ability to license that IP to others may seem fair, but with no requirement to account to the other joint owner, it may not work toward your business’s goals. So consider also including an exclusive field-of-use license to the jointly owned IP.)
  • What if the product IP is the result of “paid-for development” (i.e., your business is paying the third party to develop or codevelop this product)? In such a situation, the third party may be reluctant to give up IP ownership, especially if the third party is also a prospective supplier of that product. So in this case, would an option to exclusively license the product IP suffice?

Below are select sample IP ownership terms that demonstrate the issues presented above:

Ownership of Paid-For Development Rights Use Between a COMPANY and Its SUPPLIER: If any Paid-For Development is contemplated between the Parties, it shall be set forth in a written statement of work that shall, among other terms to be mutually agreed upon, provide or describe (i) the scope and nature of such Paid-For Development for which COMPANY shall be the exclusive owner of all right, title, and interest in and to such Paid-For Development, including, without limitation, all Intellectual Property Rights therein and thereto; (ii) that SUPPLIER shall assign or have assigned to COMPANY all Intellectual Property Rights in and to such Paid-For Development; and (iii) as applicable, license any Excluded Materials as contemplated and defined herein.

“Development Fees” shall mean all costs, charges, and expenses charged by SUPPLIER in connection with any Paid-For Development, whether in the form of development fees, nonrecurring engineering expenses, or otherwise; to the extent developed solely by the SUPPLIER during the Term of this Agreement, provided that any payments by COMPANY to SUPPLIER relating to COMPANY’s purchase or license of [RELEVANT PROJECT DELIVERABLE(s)] under the existing Agreement, shall not be deemed Development Fees.

“Excluded Materials” shall mean: (i) SUPPLIER’s Pre-Existing Materials; (ii) SUPPLIER’s Independently Developed Materials; and (iii) SUPPLIER’s reconfigurations of SUPPLIER’s Pre-Existing Materials, but only to the extent that such reconfiguration is an alteration to Supplier’s Pre-Existing Material in order to enable it to function on COMPANY’s products.

“Paid-For Development” shall mean the development (regardless of being completed) by SUPPLIER of a feature, functionality, or [APPROPRIATE PROJECT DELIVERABLE(s)], which development is (i) requested by COMPANY, (ii) for the portion of the Paid-For Development delivered to COMPANY paid for in full by COMPANY in the form of Development Fees, and (iii) reflected in a written statement of work executed by the Parties that describes the scope and nature of the development and expressly identifies such activities as “Paid-For Development.” However, failure to identify such development shall not prejudice COMPANY’s ownership rights under this Section where it is reasonably obvious, under the circumstances surrounding such development, that it is Paid-For Development. It is expressly acknowledged and agreed by the Parties that any Excluded Materials in the development shall not be deemed Paid-For Development.

“SUPPLIER’s Pre-Existing Materials” shall mean those materials owned or developed by or on behalf of SUPPLIER (or licensed thereto) that existed prior to the date Supplier began any Paid-For Development and developed without use of any COMPANY materials and independently of any Paid-For Development.

“SUPPLIER’s Independently Developed Materials” shall mean those materials that have been developed by or on behalf of SUPPLIER (or licensed thereto) both (i) without use of any COMPANY materials, and (ii) independently of any Paid-For Development.

License Grant to Excluded Materials. To the extent that SUPPLIER incorporates Excluded Materials in the Paid-For Development contemplated under this Section, SUPPLIER promises to grant and have granted to COMPANY a royalty-free, nonexclusive, sublicensable, assignable, transferable, irrevocable, perpetual, worldwide license in and to the Excluded Materials and any applicable Intellectual Property Rights of SUPPLIER to use, copy, modify, distribute, display, perform, import, make, sell, and offer to sell (and have others do any of the foregoing on or for COMPANY’s or any of its customers’ behalf or benefit) the Excluded Materials but only as incorporated in and for the continued use of the Paid-For Development by SUPPLIER.

Indemnities, Representations, and Warranties

Indemnities, representations, and warranties can be extremely risky to a party, and whether it is appropriate to accept these depends on the situation. For example:

  • What if the product IP that was created under the agreement was based on your business team’s specifications or specific design requirements? In such a case, it may be more difficult for the third party to agree to provisions for indemnity, representations, and warranties that place the risk on the third party. There may be opportunities to share the risks or limit the risks to just claims that arise out of your business’s designs alone.
  • Should there be caps on liability or limitations on obligations? For example, is it acceptable to place a limit on the amount of liability or length of time during which the third party is on the hook for liability, or perhaps even limit the liability to only instances of willfully misappropriating third-party IP in arriving at the product deliverable?
  • Is there a due diligence requirement associated with considering a product deliverable complete? For example, should the third party warrant that a freedom-to-operate analysis was completed prior to delivering the product?
  • Are there any unique issues with software or open source licensed software? Is there a preference for or against software that comes with strings attached that will be passed on to your business?
  • In the event of inability to meet volume or quality requirements, are there measures in place to ensure continuity of business supply if a triggering event occurs? This could be in the instance of IP infringement claims or disruption of business or supply issues.

Some sample provisions for representations and warranties embodying the above principles are below:

X.1 Indemnity. SUPPLIER shall defend, indemnify, and hold harmless COMPANY, its Affiliates, and each of their respective directors, officers, employees, and agents, and their respective successors and permitted assigns (collectively, “COMPANY Indemnitees”) from and against any and all claims, actions, causes of action, liabilities, losses, damages, costs, or expenses, including reasonable attorneys’ fees and litigation expenses (collectively, “Claims”) incurred by COMPANY Indemnitees which directly or indirectly arise out of or relate to an assertion that (A) any Product or (B) any process utilized by SUPPLIER to manufacture the Products or (C) a finished device manufactured by COMPANY that incorporates the Product, infringes or misappropriates a copyright, patent, or other intellectual property right of another person or entity; provided, in the event of (C), that the Claim is related to or is based, directly or indirectly, on the incorporation of the Product in the finished device, or on any process utilized by SUPPLIER to manufacture the Product incorporated in the finished device.

X.2 Infringement. Without limiting the SUPPLIER’s obligations set forth in Section X.1 and in addition to any other remedies COMPANY may have, in the event that any Claim under (A), (B), or (C) under Section X.1 results in a final judgment by a court of a competent jurisdiction of infringement of any patent, copyright, trademark, or other intellectual property right, SUPPLIER shall, at its expense and at COMPANY’s discretion, (i) modify (without cost to COMPANY) the Product or process in a manner acceptable to COMPANY to be noninfringing, (ii) obtain (without cost to COMPANY) a license which permits COMPANY to continue using the Product, or (iii) if SUPPLIER fails with respect to both (i) and (ii) above, refund to COMPANY all amounts paid under this Agreement by COMPANY Indemnitees to SUPPLIER and reimburse COMPANY Indemnitees for all costs and expenses incurred by COMPANY Indemnitees as a result of such infringement. SUPPLIER shall have thirty (30) calendar days to complete such remedy under (i), (ii), or (iii) for the infringement.

Big Data

“Big data” does not simply refer to large amounts of data (though to be clear, it can indeed involve large amounts of data). Big data refers to “larger, more complex data sets, especially from new data sources. These data sets are so voluminous that traditional data processing software just can’t manage them. But these massive volumes of data can be used to address business problems you wouldn’t have been able to tackle before.

Imagine the situation where a third party not only is helping your business acquire data, but it is also helping to both interpret that data and use it to improve your current products or services or even create new products or services. Understanding the scope and use of such data when negotiating the relationship with that third party is critical to avoid liabilities and protect your investments.

Some issues to consider with provisions covering big data include:

  • Scope of data: What data will be covered by these provisions? Is it just the data that is collected, or the data as interpreted and developed, or both?
  • Limits on usage: Once the agreement ends or the data is interpreted, can it be used for other purposes?
  • Ownership of data: Once the agreement ends or the data is collected, who owns the data?
  • Access to data: Note that in the case of health care–related companies, HIPAA laws may apply. Data privacy laws may also play into the picture here.

Sample terms involving big data include:

“COMPANY Data” means any data or information (i) of COMPANY or its clients or customers, that is disclosed or provided to SUPPLIER by, or otherwise obtained by SUPPLIER from, COMPANY or any of its clients or customers, including customer information and customer proprietary information, as well as data and information with respect to the businesses, customers, operations, networks, systems, facilities, products, rates, regulatory compliance, competitors, consumer markets, assets, expenditures, mergers, acquisitions, divestitures, billings, collections, revenues, and finances of COMPANY; and (ii) not supplied by COMPANY or any of its customers but created, generated, collected, or harvested by SUPPLIER either (a) in furtherance of this Agreement or an Order hereunder or (b) as a result of SUPPLIER’s having access to COMPANY’s infrastructure, systems, data, hardware, software, or processes.

“COMPANY Derived Data” means any data or information that is a result of any modification, adaption, revision, translation, abridgement, condensation, compilation, evaluation, expansion, or other recasting or processing of the COMPANY Data, for example, as a result of SUPPLIER’s observation, analysis, or visualization of COMPANY Data arising out of the performance of SUPPLIER’s obligations hereunder.

Key Takeaways

Earn your seat at the table. When working with your business clients, ensure that you are not just the lawyer in the room but a member of the team who brings to the table a legal mindset geared toward driving the business toward its goals while mitigating legal risks.

Streamline the process. Consider streamlining your processes by retaining template agreements, providing term sheets for the business team members to refer to in negotiations, and maintaining a playbook for commonly negotiated terms.

Remember to be firm yet flexible when negotiating. In the end, as long as your client’s business goals are met, there are many creative ways to craft the agreement provisions to benefit all parties involved. This both creates lasting business relationships and mitigates risks to your client in the short and long term.

 

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    Kirk Goodwin is assistant general counsel, global patents for Whirlpool Corporation, focusing on delivering product leadership through consumer focus innovation for Whirlpool’s consumers.

    Susan McGahan is assistant vice president and senior legal counsel, intellectual property at AT&T. She handles all IP matters for AT&T, including transactional work, assertion, licensing, patent sales, litigation, trademark enforcement, big data, and FOSS issues.

    Elizabeth Peters is senior legal counsel at Steelcase, based in Grand Rapids, Michigan, where she focuses on mitigating IP risks and protecting Steelcase’s investment in product development through IP acquisition.

    Justin Sage is the head of patents for the IP law department of Roche Diagnostics in Indianapolis, Indiana, and the managing counsel for patents for Roche Diabetes Care, Inc. He focuses his practice on IP generation, transactions, and product freedom-to-operate analyses.