How to manage IP contracts effectively

Out-Law Guide | 06 Aug 2020 | 2:57 pm | 6 min. read

The effective management of intellectual property (IP) contracts is vital to maximise value and avoid problems arising.

There are important actions for businesses to take throughout the life of a contract, including in relation to the management of registered IP rights and tracking of licences, to address potential risks.

Action at the start of the contract

Whilst the natural impulse after a lengthy negotiation is to put the contract away and never think of it again, it is really useful to prepare a summary of its core features while they are still fresh. This summary should be kept short and succinct – a single sheet if possible, to be attached to the cover page of the signed contract for the benefit of future reviewers, including future you. Focus on the ongoing obligations and important dates, for example:

  • reporting dates - submitting or receiving;
  • notice periods for extensions, renewals or termination;
  • payment points;
  • submitting any proposed publications in advance.

The type of contracts which would generally have a material IP element might include IP, technology or brand licences, joint venture agreements, research and development agreements, contracts for services and collaboration agreements. Once important dates are identified in the contract summary, we would recommend that these be diarised in electronic calendars so that they are not inadvertently missed.

Good examples here would be dates for reporting and payment of royalties, renewal dates for registered IP, which can be as infrequently as every 10 years for trade marks through to annually for patents, and the particularly crucial date of a suitable time period – say between six and 12 months prior to contract expiry date – to start effective preparation for the renewal or renegotiation of the contract or to efficiently manage a wind-down or transition.

Management of registered rights

Where the contract deals with registered IP rights such as patents, registered designs, registered trade marks and, to some extent, domain names, then it would be expected that the contract would include provisions to cover the management of such rights. For example, there is a need to address:

  • who will be responsible for filing new applications, such as extending a trade mark portfolio into new territories, and;
  • who will be responsible for maintaining the registered rights, such as the payment of renewal fees or progressing current applications through to grant. 

Rather than viewing IP under a contract as fixed and immutable, a good contract would give the parties the ability to manage the IP portfolio actively – for example if a licensed patent is no longer used in a particular territory or is otherwise no longer commercially justifiable to maintain then there should be a mechanism whereby the party responsible for maintenance can inform the other that it no longer wishes to do so and  offer the counterparty the opportunity to take over the maintenance and/or have the registered right assigned to it.

It is recommended to keep any portfolio under regular review and exercise these rights appropriately since maintenance costs of a large or international portfolio can be substantial. Businesses should ask themselves whether they are still using an IP right at all or in a specific territory and whether patented technologies are now out of date or even obsolete. Saving unnecessary cost in renewing outdated or little-used IP rights frees resources to be used for new developments

It can also be beneficial to keep an IP portfolio under review from a litigation perspective and exercise contractual rights to transfer ownership where this may shift risk. In one such case we acted for a government client who was a joint owner of various patents in a sensitive area of biotechnology. Litigation threatened in the US and our client opted to exercise its contractual option to transfer its share of ownership to its commercial partners since they were better able to deal with any pending litigation. The potential liability of our client was substantially reduced as a result.

Tracking licences granted

Where an organisation is granting licences of IP it is crucial to ensure that a clear record is kept of any such licences granted.

One of the great features of IP licensing is that the licence can be sliced many ways – for example licences granted by territories, fields of use and on an exclusive, sole or non-exclusive basis. 

However, this inherently risks the same right being licensed more than once in a manner which breaches licences already granted – for example if an exclusive or sole licence in a particular territory and field is granted to more than one party. 

Where multiple licences have been, or are likely to be, granted it is necessary to keep a single record of this. Often a visual form can be helpful – as simple as literally colouring in a map to indicate territories where licences have been granted.

Management of IP revenue streams

It is not unusual for clients to approach us as they suspect that their licensees are not making full payments of royalties, milestones or other sums due under contract.

A decent contract should include:

  • a requirement for the licensee to keep appropriate records of usage or sales and royalty calculations and to provide this information to the licensor, and;
  • a right for the licensor or its representative to audit records and assess compliance with payment obligations.

Underpayment is not unusual. Invotex carry out royalty audits and a report of their findings over a 20 year period showed a whopping 86% of audited licensees underreporting royalties, though this figure should be seen in the context of Invotex tending to be called in where underreporting is suspected. Underpayment may be deliberate, but it is often due to non-malicious miscalculation by finance staff who do not properly apply the contractual provisions on how payments should be calculated and what deductions allowable or excluded.

There is therefore benefits to keeping a close eye on payment reporting and to actively exercise rights of audit where underreporting is suspected. Forensic accountants are specialists in IP royalty reporting, analysis and audit and will be able to assess whether there has been underreporting and/or underpayment and help in claiming back the shortfall.

In cases where your organisation is the party making payments, contract negotiators should work with their accounts and finance teams to ensure that they fully understand the payment provisions of the contract and are kept updated of any variations.

Avoiding inadvertent breach of IP contract obligations

Contracts may contain a variety of IP-related specific requirements, for example an obligation to expressly credit a collaborator or funder in publications; to obtain clearance from the counterparty before issuing marketing materials or to use specific patent or trade mark marking or copyright notices or acknowledgements, such as "X is a registered trade mark of Y and is used under licence". 

Making and regularly referring to the contract features summary document will help to ensure that such obligations are not forgotten and missed. It is also beneficial to remain actively aware of the scope of licences-in of third party IP and be cautious to remain within such scope. Teams can think "we have a licence to that IP" without considering that the licence may only be within a specific territory, field or purpose.

Managing exits and transitions

IP provisions are particularly crucial at contract end, whether the relationship between the parties at that stage is amicable or contentious. Areas to consider include:

  • where IP is licenced, whether the expiry or termination of the contract represents an absolute cut-off or if there is a wind-down period within which, for instance, stock can be sold or branding removed. Whether the licensor or licensee, you should monitor and ensure the requirements are complied with;
  • where there is a return of registered IP which has been under management by the counterparty then this should be actively managed and all relevant information returned in order to take over management of such rights. If necessary, amend proprietorship registers and cancel registrations of licences at intellectual property offices;
  • where IP has been used by your organisation under licence, check whether you will be able to continue to use this. For example, check whether the licence is perpetual and irrevocable or whether it will end on expiry or termination of the contract. Outgoing suppliers will often seek to leverage this to extend or renew the contract or to seek payment for a continued right of use of IP. This may require negotiation.

It is vital to start thinking about expiry or termination as far as possible in advance of the due expiry date – that is where your contract features summary document and diary entries will come in useful.