In Part 1 of this three-part series, we discussed how intellectual property ownership is determined in the U.S. if no agreement is in place. In this second part, we discuss the typical ways that parties can use contracts to determine intellectual property ownership.

In the context of negotiating an agreement where intellectual property rights are addressed, most parties will readily agree that those intellectual property rights owned by a party before the effective date of the agreement or developed outside of the agreement (commonly referred to as background rights) should be owned by that party.

Foreground Intellectual Property Rights

Unlike background rights, ownership of intellectual property developed under the agreement (commonly referred to as foreground rights) are often highly negotiated. When negotiating the ownership of foreground intellectual property rights, some questions the parties should consider are as follows:

  • Does the party that developed the intellectual property own it?
  • What happens if the other party is paying?
  • What if the intellectual property developed by one party is an improvement to the intellectual property owned by the other party?
  • What if both parties develop the intellectual property jointly?

Common Allocations of Foreground Intellectual Property Rights

One of the simplest methods of allocating foreground intellectual property rights is to effectively follow the default laws of intellectual property ownership and state that each party owns the intellectual property that it solely creates under an agreement. However, this allocation may be problematic if one party develops an improvement to the other party’s intellectual property. This allocation also does not allocate intellectual property rights to a single party if joint intellectual property is developed.

Another common way to allocate foreground intellectual property rights is to state that the party that pays for the development of the intellectual property owns the intellectual property, regardless of who created the intellectual property or whether it was jointly created. This allocation may be fine if the agreement is a simple “work for hire” consulting agreement. The negotiation usually becomes far more difficult if the party paying for the work is paying for custom or other special development of features for a product owned by the party doing the development. A company will want to own any improvements to its key intellectual property, regardless of who pays. Possible compromises include giving the paying party a discount or some type of exclusivity. However, exclusivity is often highly negotiated and can be contentious.

In other situations, the parties might allocate foreground intellectual property rights by stating that improvements to a party’s background intellectual property is owned by that party regardless of who developed the improvement or whether the improvement was jointly developed. This type of allocation tends to be most common in joint development agreements.

Many agreements will use more than one of the above methods to allocate intellectual property ownership. For example, the agreement may state that each party owns any intellectual property that it solely creates under the agreement, unless that intellectual property is an improvement to the other party’s background rights. Instead, the improvement to the background rights is owned by the other party. Regardless, before entering into a business deal where intellectual property rights are implicated, it is usually better for the parties to spell out ownership rather than leave intellectual property ownership to be allocated by default laws.