What is an Agreement for the Transfer of Intellectual Property?
An IP Transfer Agreement is on its most basic level a contract to specifically transfer the rights to a particular intellectual property asset from a person or legal entity to another. These agreements are important in that they quite literally transfer not only the rights to the IP, but also any benefits or liabilities attributable to the transferred IP. Because of this, it is necessary that these agreements be drafted and negotiated with an eye towards the broader transaction in mind . With the right safeguards, however, IP law transfer agreements can be used to effectively segregate a valuable IP asset from the group of liabilities that do not need to go along for the ride.
The basic purpose of an IP transfer agreement should be clear. They are used to effectuate the sale, transfer, alienation, or disposal of IP rights and title to IP, or to license IP rights. These agreements often come into play in larger transactions involving larger entities. In fact, some agreements may be drafted in such a way that the buyer of the IP assigns all liabilities concerning the IP back to the seller.
Types of Intellectual Property Subject to an IP Assignment
The range of intellectual property (IP) covered by a transfer agreement can be extensive. For example, an inventor may obtain a patent for a new hybrid vegetable. The transferor might agree to let the transferee produce, use, offer for sale or sell the new hybrid vegetable. The transfer agreement will cover this type of intellectual property to the extent it is sold, offered for sale, or sold in a jurisdiction in which the patent is granted.
Patents are one form of IP that is exchanged, as the association with innovations like our example, the new hybrid vegetable, is often close. A patent gives the holder the right to exclude others from making, using, selling, or importing the patented invention. In most circumstances, patents last for a maximum of 20 years from the date of filing. The holder of a patent can assign or license the patent rights to others.
Copyrights are another form of IP and help protect creative works. A copyright allows the holder to license the rights to the work. Copyrights protect both published and unpublished works; however, as with patents, there is a time limit of copyright protection which is often measured from the date of publication. There are several exemptions and exceptions to copyright protection such as fair use, that allow use of copyrighted works without consent.
Trademarks help distinguish the goods or wares of one source from another. The right to exclude others from using a mark may be perpetual as long as the mark is in use in commerce and the registration remains in effect. A trademark owner may assign or license a mark and any goodwill connected with the mark. A license to a trademark may also allow the licensee to perform related acts without falling within the exclusive rights of the trademark holders. For example, a license may allow use of the trademark on a particular territory, be co-branded or allow the licensee to sell products associated with the trademark holder.
Trade secrets are another form of IP that may be exchanged. Trade secrets are a type of confidential information including data, practices, knowledge, formulas, recipes, customer lists or code that a business or person keeps secret for its use in business against competition and potential economic disadvantage. Unlike other types of intellectual property, trade secret information is considered a form of intellectual property that means the advantage of the subject matter can be maintained indefinitely as long as the secret is kept confidential.
Hallmarks of a Proper IP Assignment
The key elements of an intellectual property transfer agreement include the parties to the contract, the scope of the transfer of rights in the intellectual property, warranties and representations, and payment terms. The parties to the agreement may be individuals or businesses, both national and international. The use of individuals as parties to agreements in the business context is common in some Middle Eastern and Asian countries.
The scope of the agreement is stated explicitly with regard to the transfer of rights. The agreement should list all of the intellectual property that is affected by the transfer. Sectioning the intellectual property into categories makes it easier to follow in the future. The agreement should also disclose the purpose for the transfer of rights. It is clear from the Cruz case that unless the parties make clear the purpose for the transfer to the united states it may be subject to examination from the ITA office.
Warranties and representations are two important concepts that must be included in all transfer agreements. Warranties refer to any statement or fact that indicates that a party stand behind its word and take responsibility for the truth of the statement. Representations are promises made by one party to another that a certain fact exists. A breach of warranty occurs when a party to a contract holds information that he did not reveal to the other party. A breach of representation occurs when one party provides a false promise.
Regulatory Issues and IP Assignments
The transfer of intellectual property often goes through legal channels. A company must consult with legal and regulatory agencies to ascertain its options for transferring rights if the technology has been developed or created through government-funded programs or industry regulations. In these situations, compliance with the law may dictate whether a third party IP transfer is even permissible. For U.S. companies, the U.S. Department of Commerce International Trade Administration states that the Export Control Classification Number assigned by the Commerce Department Bureau of Industry and Security determines whether an IP transfer complies with Export Administration Regulations. It also indicates whether the potential recipient requires an export license to receive the technology. Additionally, if public sector funding is used to develop the technology, provisions in the Bayh-Dole Act are applicable. In Canada, restrictions under foreign investment regimes and associated foreign investment promotion and protection agreements (FIPA) should be considered to determine the extent of the restrictions and the review regime for a transaction involving a Canadian business that is engaged in a cultural business. In countries such as India and Korea, various laws may affect IP transactions including the Foreign Contribution (Regulation) Act of 2010, Industrial Policy of 2009, and National Broadcasting Policy 2005. On a European continent, territorial considerations may complicate matters and ample knowledge of the country’s local laws is required to mitigate risks.
Key Issues to Consider and How to Avoid Them
In addition to the potential for tax disputes and audit risk, a client should consider whether there is any historical or intended future benefit associated with an asset in order to avoid an asset transfer being recharacterized as a disguised dividend. The fact that the underlying asset may have current value based on historical performance of the business does not mean it does or will have future value, which is what the IRS needs to support its position. The transferee should also consider whether the transferor may be required to recognize a gain (excluding goodwill). A gain on the sale of assets may be recognized in the year prior to the transfer. Further, after the transfer takes place, the income generated from the underlying IP may still be taxable to the transferor. If the client desires to manage such potential income, the parties may want to consider using a joint venture structure or an earnout mechanism at the time of transfer.
As previously mentioned, clients should also consider whether the transfer would result in any relief from foreign reporting obligations. Historically, many countries have had different foreign reporting obligations and tax treaty obligations than the U.S., making a comprehensive analysis of the position of all affected territories and a departure from the U.S. legal and accounting advice as normal.
As with any type of contractual provision , intellectual property (IP) transfer agreements can present a number of common pitfalls. In general, it can be difficult for trademark licensing or assignment agreements to provide for complete protection for the parties. For example, one common challenge is valuation disputes, or what the appropriate fair market value is for the IP. Because the high (usually subjective) value of trademarks to the business might be hard to prove, the parties to a dispute over the value of a trademark might negotiate a payment plan, whereby the licensee or assignor pays the licensee or assignor the full or partial value of the trademark over a set period of time.
Another common challenge that can arise is breach of contract. While many trademark licensing or assignment agreements contain clauses that would allow a court to award damages for breach, damages awards may not be sufficient to compensate the injured party. In those cases, traditional remedies like injunctive relief and specific performance may be needed to compensate the injured party. The use of such remedies is becoming more common in trademark licensing or assignment agreements.
Because both the trademark licensing and assignment processes are very fact specific, the parties to such transactions must anticipate certain issues and set out solutions in advance in order to address any potential problems.
Steps to Drafting an Effective IP Assignment and Consult a Lawyer
Every business that creates or otherwise acquires intellectual property assets requires a strong and thorough transfer agreement to protect those assets. While each agreement must be tailored to both the IP and the transaction at hand, there is a definitive set of steps to ensure a comprehensive and enforceable agreement.
First and foremost, the right language must be chosen. While specific language used in transfer agreements may be different from state to state or jurisdiction to jurisdiction, it is vital to make sure the language is reviewed by professionals who can ensure the agreement is legally valid. Second, the agreement must clearly describe with specificity the IP being transferred. Too often, elements and parts of that IP are left out or not explained clearly enough in the agreement, leading to confusion and misunderstanding. This also results in the risk that whatever IP is untaken or unclear is therefore left with the creator or originator, creating future disputes.
Third, all of the necessary parties must sign the transfer agreement. When a transfer is being made between two entities, care must be taken to ensure that all owners of the IP sign the agreement along with the recipient. A lack of proper signatures on the agreement can also result in the risk that not all IP is transferred.
Further, the agreement must expressly warrant that the transfer includes every aspect of the IP. For example, if a patent is being transferred, the seller needs to warrant that it is transferring every right and title pertaining to the patent, such as its trademarks, trade secrets, etc. It’s not enough to just use the word "patent".
Lastly, and this is an obvious one, the agreement must be signed. Nothing invalidates an agreement like a failure to sign it properly. Even electronic signatures must be accepted based on the circumstances and other signatures in order to avoid problems later on.
These are but a few of the steps that need to be taken during the drafting process to ensure that a transfer agreement is complete and valid.
Sample IP Assignments and Transfers
To illustrate the differences and nuances of intellectual property transfer agreements, here are a few examples of IP transfer situations and how the transfers were handled:
Sony and Universal Music
In 2011, Sony Music Entertainment acquired Universal’s EMI Music, including billions of dollars’ worth of digital music catalogs, for $1.9 billion. This was the largest acquisition of music-publishing in the recorded history of the industry and included a host of complex agreements, transferring the rights to the reproduced, distributed and sold recordings to Sony Music, and all trademark rights as well as the related brand names such as "Chrysalis." Universal Music required that Sony Music agree to pay fees on songs in their catalog that had been created before the acquisition of EMI was finalized, but had not been fully paid for prior to the acquisition. Additionally, an employee who transferred during the acquisition, and subsequently was laid off by Sony Music, sued for copyright infringement on artist work. The suit was dismissed because the judge rejected the plaintiff’s argument that as an employee of sonymusic.com, the artist’s work was released-to-public and thus it should have been registered with the Copyright Office per the Copyright Registration Office circular 76 . However, by transferring the employee during the acquisition and into a different department, it is possible that the work could be classified as a "work for hire" in the new department. The major players in the EMI acquisition and lawsuit are Sony Corp. (the acquiring corporation, with real and intellectual assets) and Universal Music Group (the acquired corporation with real and intellectual assets).
Apple Itunes + EMI
In 2003 Apple signed a licensing agreement to sell songs online through its iTunes platform. This is an example of a successful transfer of intellectual property between two corporations.
BMW and Microsoft
BMW and Microsoft went into an agreement in 2006 that allowed BMW to use Microsoft’s products and systems in their offices. In exchange, BMW gave Microsoft the unlimited non-exclusive royalty-free use of any intellectual property arising from the agreement.
Apple and Cisco
In 2008, Apple and Cisco entered into an agreement regarding the use of a phone name, among other things, with Cisco getting the rights to the name "iPhone." Apple paid Cisco $850 million for an undisclosed number of signed licensing agreements.