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IP Tug of War

Author(s):

John R. Trentacosta
John R. Trentacosta is a partner in the law firm of Foley & Lardner LLP in Detroit.

Jason D. Menges
Jason D. Menges is a partner in the law firm of Foley & Lardner LLP in Detroit.

May 2011, Inside Supply Management^® Vol. 22, No. 4, page 14

Tapping Into ... Supply Management Issues and Trends
Procurement organizations and suppliers often have divergent interests in IP, but there are ways to protect both parties and build relationships.

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Some of the most important provisions in supply contracts today relate to the parties' respective rights to intellectual property (IP) in the product being supplied. These contract provisions are critical because suppliers and supply management organizations have strong, but often divergent, interests in IP. Suppliers play significant, and sometimes exclusive, roles in the design and development of the products sold to their customers. As a result, suppliers have an interest in protecting and retaining as much IP as possible to protect their investment and the value of their expertise. In many cases, the products being supplied are custom-made and are not available on the open market.

On the other hand, supply management organizations also want to obtain as much of the IP as possible so their organizations can either manufacture the product or have the product manufactured by a third party if the relationship with the original supplier dissolves. One way to merge these two divergent interests is the trend toward a joint development relationship. In a joint development relationship, both the supply management organization and the supplier make significant contributions to IP development while sharing in the costs and burdens associated with that development. In such a relationship, both parties can make legitimate claims to the intellectual property.

Clarify IP Rights Upfront

When dealing with new product development, the typical transaction process that takes place in many manufacturing scenarios may actually be ill-suited for the complex world of IP. Most supply contracts are formed when a supplier provides a quotation and the supply management organization issues a purchase order with respect to a specific product. However, if the IP provisions in the supplier's quotation do not mirror the provisions in the purchase order, then a battle-of-the-forms issue arises and it may become an issue of whose IP provisions are part of the contract.

The lack of clarity regarding this issue may not appear to be significant at the beginning of a commercial relationship when the parties tend to be more cooperative, but it becomes critically important if the relationship deteriorates because of a breach of the contract or the financial instability of either party. To minimize the risks associated with IP issues at the end of a supply relationship, supply management professionals should take affirmative steps to protect and clarify IP rights upfront.

Enter into signed agreements. Enter into signed IP agreements, including wherever possible invention assignment agreements and confidentiality agreements with suppliers. The most important provision in an invention assignment agreement is one that identifies the ownership rights and the license rights to the relevant IP. It is important to negotiate specific provisions that define the parties' respective IP rights and obligations under a variety of potential termination scenarios. A supplier may be willing to grant more comprehensive IP transfers (or, at a minimum, licenses) in the event of the supplier's termination for breach or insolvency than the supplier would be willing to grant in the event of a termination for convenience.

Negotiate a broad license. When suppliers are unwilling to grant intellectual property ownership to the supply management organization, negotiate a broad license to the supplier's necessary background IP. Necessary background IP is intellectual property owned by the other party that may not have been developed in the course of the work between the parties, but that might be infringed upon if the IP developed between the parties is later put into commercial use. This license to the supplier's necessary background allows the organization to manufacture the product itself, or have the product manufactured, without infringing on the supplier's IP. This may require payment of a royalty, but it will ensure a trouble-free supply chain.

Revise purchase order terms. If it is not feasible to negotiate signed IP agreements, review and revise the purchase order terms and conditions to make sure they minimize battle-of-the-forms issues and sufficiently protect the IP in the product, including improvements, modifications and derivatives. Many companies use terms and conditions that have not been updated to address recent developments in the law concerning IP issues. For example, recent court cases have granted significant IP rights to customers, to the detriment of suppliers, because the customers had more aggressive language in their form agreements.

Explore alternatives. It is important to determine the boundaries of IP protection related to the product and explore if viable alternatives or substitutes exist for the product. If such alternatives or substitutes are readily available, they will provide significant protection in the event the supplier refuses to supply the product.

Consider relevant patents. Be sure to include a specific list of relevant patents or pending patent applications with clear and concise statements on IP as a schedule to any supply agreements that include meaningful product development obligations. This step will lessen the likelihood of confusion and future disputes concerning the specific IP involved in the transaction. Such a document should specifically address situations where the supply management organization or another party has a license to incorporate supplier products into other products, but not to purchase similar products from another supplier.

Enter into a joint development agreement. A best practice approach is to enter into a joint development agreement that defines the parties' obligations related to development of new technologies. In the case of joint inventions, specify ownership and responsibility for pursuing patent applications, paying maintenance fees, enforcing IP rights and sharing royalties.

Define IP rights. A supply management organization should seek to define the parties' rights — either through licenses or otherwise — with respect to the IP that each party brings to the relationship. It is also important to consider the desirability of a license to the supplier's background IP. As previously discussed, the supplier's IP background and the right to use the same may be necessary in the manufacturing process.

Understand all provisions. Carefully review and understand the implications of contractual provisions purporting to grant exclusive rights to inventions, improvements and derivative works, such as supplying products to other customers containing similar IP. Thoroughly understanding the contract will allow a supply manager to protect against a supplier taking improvements and derivative works developed at the expense and with the expertise of the procurement organization and selling the improved product to a competitor.

Seek broad protection. Supply management should take the lead in reviewing the corporate IP portfolio to determine if broader or different coverage may hedge against potential second-sourcing. For example, consider pursuing protection for not only the specific product but also broader assemblies that include the product, methods of manufacturing and distribution.

An aggressive approach is needed when supply management professionals try to obtain sufficient IP rights for purchased products. It is important to realize that the IP rights should be obtained at the beginning of the relationship and that the typical quotation-purchase order basis for forming supply contracts is not enough in today's business climate.

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