A trap that often snares startup companies is not obtaining all necessary intellectual property rights for new products. This most often occurs when a startup engages a consultant to assist the company in developing a new product or the company enters into a collaborative effort with another company.

If a company does not obtain the necessary intellectual property rights to commercialize its new products and protect its business, the results can be disastrous and range from loss of exclusive rights to new inventions, to failure to obtain financing and ultimately bankruptcy.

Whether strategic partners or outside consultants are engaged for product development services, each party needs to clearly understand how intellectual property rights are allocated with respect to any newly created product, idea or invention. Furthermore, this allocation of rights needs to be agreed upon in writing prior to commencing any work.

Described below are the two most common situations when a company looks to external sources to assist the company in its product development efforts and the steps to be taken by the company to protect its intellectual property rights.

The Strategic Partner

While using a strategic partner to develop products and services is similar in many ways to using an outside consultant, the one significant difference is that the strategic partner will expect to own some of the IP created through the strategic partnership with the company. For this reason, a written agreement allocating ownership rights is critical.

In addition to the legal terms described above, an agreement with a strategic partner should also include a detailed description of any work product to be developed by a party or jointly by both parties, the party that will own all work product whether developed separately or jointly and any licenses that might be granted with respect to work product owned by a party.

For example, a company may have an informal understanding with a strategic partner that each party will own intellectual property related to its specific business. Absent an agreement to the contrary, each party will own all intellectual property created by it and the parties will share ownership of jointly created intellectual property.

Joint ownership rights mean that neither party has exclusive rights, which are more valuable than nonexclusive rights. Lack of such exclusivity can cause problems when raising money, commercializing products, or engaging in licensing activities.

The Outside Consultant

Many companies hire outside consultants to assist the company in developing products. Independent programmers commonly assist in software development, PR agencies often are engaged to develop graphic designs, and independent laboratories may assist in new product development and testing.

Because startup companies often are cash poor, many of these engagements are concluded with a handshake or with a short form of agreement provided by the service provider, which does not include the necessary assignment of intellectual property rights. Doing business of these terms can be disastrous.

The general rule is that absent a written agreement to the contrary, an outside consultant will own intellectual property created by the consultant for the company.

For this reason, it is critical that each outside consultant engaged to provide services for the company enter into a written agreement in which the consultant assigns to the company all rights in and to any work product developed by the consultant.

In addition, in the written agreement, the consultant should (1) provide a representation and warranty that all such work product is original, created by the consultant for the company, and does not infringe on the rights of any third party; and (2) indemnify and hold harmless the company against any damages or losses related to any claims of intellectual property infringement by the work product. These types of representations, warranties and indemnification clauses are very common in consulting agreements and can be customized by an attorney to fit a particular situation.

In conclusion, always use a written agreement when working without outside consultants and strategic partners to develop new products or services, which includes, among other things, the proper assignment of invention terms, representations and warranties, and indemnification provisions. Make sure that the allocation of intellectual property rights is clearly understood by each party and that the company has exclusive rights to all intellectual property that is important to its business.

If necessary speak with an attorney and obtain a form of agreement that is suitable for the company’s particular purpose. A company should always do what it can to acquire sole rights to its intellectual property

© 2006 John M. Fuscoe. All rights reserved.