This article has been written by Srijita Adak, pursuing a Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho. This article has been edited by Prashant Baviskar (Associate, Lawsikho) and Ruchika Mohapatra (Associate, Lawsikho).
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Intellectual property is a fuel that can empower economic growth, has the ability to harness, develop, protect and commercialise collective and collaborative innovation. Our nation now is shifting gradually from an industrial economy to one that is increasingly reliant upon knowledge and information. Corporate valuation has shifted from one that’s reliant on the physical property to one that’s reliant on intellectual property. Intellectual property in many instances is more valuable than physical property and much more difficult to protect against theft and misuse. So, we must protect the IP of our creation.
In any professional service agreement, the effect of IP clauses is immense. The reason behind it is the person who has put in the original effort must be rewarded. This clause helps to protect and reward the original work and creativity under the agreement. So, we must put adequate legal mechanisms in place to reward the original thinkers and innovators and punish those who try to benefit illegally from the effort of others. The parties of the agreement must act aggressively to protect their valuable assets from infringement or misuse of IP by having a proper IP clause in their agreement.
What is intellectual property (IP)?
Intellectual property (IP) is intangible and it cannot be defined or identified by its own physical appearance. It refers to the creation of the human mind like inventions, literary and artistic works, symbols, names, images, and designs used in business. Eventually, its scope is expanding. The following types of intellectual property rights are recognised in India: copyright, trademark, geographical indication, patent, design, plant variety, semiconductor integrated circuit layout design, traditional knowledge. intellectual-property progresses society and human development. Intellectual Property Rights (IPR) allows innovative entrepreneurs to protect their inventions. It also gives an edge over competitors.
Challenges of IP
The pace with which information can be communicated through the internet has led to increasing challenges in the field of IP. IP systems have been developed in order to promote innovation and creativity and to make sure we have more of it. The protection they offer and the exclusive rights they give are only the tools to get to that point. It makes a distinction between imitation and innovation. In reality, anybody who has ever created anything knows that any innovation starts with and consists largely of a lot of imitation and most imitation leads to innovation. So, we need both of them to work together. They are part of the same continuum but the IP system does not agree with that. It says when you look at innovation and imitation, you have to make a sharp separation. One of them is good, which is innovation and one of them is bad, which is imitation. We have a culture and we have built it by sharing information and ideas. Thus, it has become an essential characteristic of humans. The IP system tells us that this is wrong and we should own ideas, we should charge for them and we should protect them. But we need the freedom to share to acquire the freedom to innovate.
Importance of safeguarding IP
Your ideas might be secrets, so you need to keep them under wraps until you can figure them out. Company values projects values, invention values are the intellectual property of the companies. For instance, Coca-Cola’s market value is almost 90 billion dollars but then if we look at their actual hard assets on their balance sheet what they actually have paid for that is about 40 billion dollars. That difference is their brand, trademarks, and goodwill.
IP is very valuable and that’s why we need to figure out what intellectual property is and make sure that we safeguard it. If one employee signs an employment contract for company X then whatever he or she invents, the owner of that will be company X. Thus, people lose their intellectual property if they don’t understand what it is. We should not lose something that we have worked on for a couple of years. On the other hand, we need to know what intellectual property is because we might be accidentally infringing on someone else’s intellectual property. For example, you create a crowdfunding campaign, you go out and you grab a song off the internet and you’ve put it in the background of your video. But if that video has a copyright, then you will be charged for copyright violation.
What is a professional service agreement?
A professional services agreement is created between an individual or company and a contractor that provides certain services. Professional services include lawyers, electricians, carpenters, financial advisors, legal consultants, architects and much more. Those that provide a professional service must hold a specialized license or certificate required by their state for their respective trade.
A good professional agreement helps to answer questions, hold each party responsible and prevent misunderstandings further into the business relationship. The contract should at a minimum include names of the parties, date of signing, exact services to be provided, payment and frequency, start and end dates, signatures and any other applicable terms. Since those that provide professional services are contractors or subcontractors, they’re responsible for paying their own taxes.
IP clause in any professional service agreement
The first question that comes into the picture in the case of an IP clause is that it will be transferred or licensed. Ownership and licensing are the two competing ways that intellectual properties should change hands under the terms of a professional agreement. The ownership of IP is when you assign the ownership of IP, commonly referred to as work for hire. If you give ownership of any content that you created to the other party, you no longer have any rights or control of that particular content and you relinquish all of that to that other party. A license is where permission is given to use the IP of a particular material or content in a limited capacity for a limited time and purpose. But the owner of the IP can actually maintain the right to revoke that license because the ownership of it has not been given over to someone. So, it is like letting people borrow the IP of any creative work.
For example, photos in articles or blogs that were licensed for use in that article or blog but the photographer still owns that photo and they can license it to others as well. Whereas assigning ownership typically can be seen in wedding photography contracts. Here if you want the ownership of your wedding photos then the photographer will give the ownership of your photos which means the photographer will not have any rights to those photos.
Sometimes it might be difficult to understand with the words like perpetual, revocable, non-revocable, paid and whether it is a license or it is ownership being assigned but it is tremendously important not only for a creative professional but also the other party who is receiving the license or ownership of IP. In a professional agreement, we need to make sure that the IP clause is spelt out correctly and provides either the license or the ownership as the parties agree to. Because if it doesn’t then the parties can be in a problematic scenario.
By clearly stating the IP clause, we can avoid some disputes and it correctly reflects the desire to have an agreement. Also, if someone has a license of an IP, they cannot give the ownership of that IP to someone else as they just have the license, not the ownership of it. The registration of a trademark, a copyright, or a patent is subject to the agreement. If someone only receives a license and they go to register a trademark or a copyright or a patent, they can’t because they didn’t have the right to register that. So, IP ownership and licensing IP are the two main ones to know before going into a professional agreement and the agreement must accurately reflect it to avoid disputes.
Key clauses of a professional service agreement to consider as a client
The section that defines the payment terms is important and should include how much, when, and how the provider will receive compensation. Typically, the provider will require a deposit to secure the services and include a balloon payment or series of payments over the course of the service. Make note of the payment schedule, otherwise, you will likely owe late fees or be in violation of the agreement. For best practices and to ensure you receive all services requested, ask for an itemized statement that explains the total cost. This itemized statement should be included as an exhibit to the service agreement.
Scope of services
The scope of services section defines what services your company will receive. For example, if an apparel provider is creating swag for your startup, you will want this section to include an itemized list of products, any additional services (i.e., warehouse storage, delivery costs, etc. This section should be detailed and precise.
The amendment section includes how the parties can change the agreement if the circumstances (i.e. scope of services) change over the course of the relationship. Typically, written consent of both parties is required to amend the agreement.
This section describes how the parties can terminate the relationship and who is responsible in such an incident. For example, if either party commits any illegal act, that act can constitute a breach of the agreement or if the service provider does not fully execute the promised services, it may come in breach of the agreement. Also, if the client does not pay for the services provided, then the client will be in breach of the agreement.
This provision will typically require both parties to obtain a minimum amount of liability insurance. It is important to weigh the cost of insuring at the minimum requirement versus receiving the services. If the cost is too high, you might decide to shop for a different service provider or try to negotiate the minimum down to something more reasonable.
This section protects trade secrets and any confidential information obtained during the course of the contractual relationship and beyond.
This provision outlines who owns the Intellectual Property (IP) created from the service. Typically, the parties keep any IP that they contribute. For example, the service provider keeps the IP to its process, and the client keeps its IP used to complete the service (i.e. company’s logo used to make t-shirts). Also, the client typically gets an exclusive revocable license to use/sell the IP during the term of the relationship. It is important to ensure that your company doesn’t transfer any IP to the service provider by accident.
Governing law and dispute resolution
In the event of a dispute, this clause tells us how the dispute will get resolved and what law applies. Typically, the parties will keep it close to home (i.e. in the service provider’s state). This creates a benefit for doing business with local service providers. The most common types of dispute resolution include arbitration, mediation, and the use of common law courts.
Key concerns to be kept in mind when drafting an IP clause in any professional service agreement
IP clauses will dictate which party will have ownership over an IP when it is being created or transferred. All the IP laws allow parties to assign or to determine the ownership of the IP.
In this kind of agreement, we must define the services for which the IP is given. By doing this we can get appropriate IP clauses where we can just describe the ownership of the IP in a crisp manner. It should include all the rights of the assignee clearly in order to know the scope of the usage of the IP.
In the case of licensing, we must include whether the IP is exclusive or non-exclusive. It should include whether it can be transferred further through sub-licensing or not. Like the assignment of IP, it also includes the rights of the licensor in terms of the usage of the IP.
Term and termination
For how long the assignment or license of IP will be given and whether it is revocable or irrevocable is another thing to not miss adding. Termination clause includes situations where agreement can be terminated for non-payment or material breach etc. After termination of the agreement how the IP will be returned back should be included.
We must mention the area in which the IP is allowed to be used. Whether it can be used in the entire country or a particular area of a country.
Representation and warranties
There are certain representations and warranties for both parties. It lays down the assignor’s liabilities and specifies the aspects upon which the assignee can terminate the agreement. The assignor must represent and warrant that the IP, which is going to be transferred, is solely possessed by him; thereby eliminating any chances of infringement.
If a professional service agreement has an IP clause, then we can expect less litigation or no litigation at all related to disputes of an IP. It is basically giving ownership of IP to someone else in exchange for money or some consideration in the agreement. By including this clause, the agreement gains flexibility. The quality of being adaptable is the hallmark of this clause. We can explain the scope, payment method and bring other factors which will be an overarching deal that works for both sides. The IP clause can affect the payment clause of the agreement directly. The price or any consideration of IP of the work product is highly negotiable as the price varies on whether the availability of the work product in the market is high or not. If the work product is rarely available in the market, then the owner can get a satisfactory amount for licensing or assigning the IP of that product. In the case of licensing of IP, the price can be determined through the exclusivity or non-exclusivity, permanency, or non-permanency of it.
We should give attention to every detail of the scope and duration of the rights as a single comma can be the reason for losing an argument of a dispute. We must make sure everything negotiated related to this is present in the clause. So, having a straightforward and clear IP clause in the agreement can make the professional service agreement more efficient and approachable.
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