Defining intellectual property ownership is a crucial part of any software agreement. Here’s a true story to illustrate why…
The customer of a security software vendor required a solution to scan documents for viruses in an SAP environment. The solution was fairly simple: take a bog standard email scan engine and customise it to scan documents as they are uploaded into SAP. Unfortunately, the hastily agreed terms and conditions defined that the ownership of any new intellectual property developed as part of the collaboration would default to the software vendor.
You can probably guess what happened next… The customer bought a cheap licence for an email scanning and then paid €1,000 per day consultancy rates for all of the development and testing to make the solution work. The customer then did all the testing of the solution, waited while bugs were ironed out, deployed it, struggled while more bugs were ironed out etc. Eventually, the solution worked and the customer was satisfied with the result.
However, a year later when it came time to pay maintenance on the licence for the email scan engine, the software vendor announced that the licence was not valid for the manner in which the scan engine was being used. This virus scanning solution for SAP environments was now a standard, off-the-shelf product and the licence cost was 20 times that of the standard scan engine on which it was based.
Not only had the customer paid all of the development costs for this new product, which was now a significant revenue stream for the software vendor, but they also found themselves being charged an extortionate licence price for a product that they thought they already had a valid licence for.
Lesson to learn
In any relationship where a software vendor might be developing new intellectual property, make sure you define who will have ownership over the newly created IP. Software vendors will often insist that they should own any new intellectual property. You will hear claims like: “We are a software vendor. Our IP is all we have. We must maintain ownership of any and all parts of the product.”
My response to a software vendor on this is always very simple: “you want ownership over the intellectual property, then you must pay for its development”. Too often software vendors want to have their cake and eat it.
Whilst there may be specific circumstances where you might agree to make a payment to encourage the software vendor to develop their product in a certain direction, whilst allowing the vendor to own the resulting IP, that should not be the default position. In such exceptional cases, include in writing in the agreement that you will not be charged licence fees for intellectual property development you have paid for on a time and materials or fixed price project basis.
If The Software Vendor Wants To Own The IP – Negotiate
Do not be intimidated by a software vendor’s demands in this area. Use the software vendor’s desire to own the intellectual property as negotiating leverage to ensure that you pay for none (or as little as possible) of any development costs.