Thomas Edison famously remarked that “the value of an idea lies in the using of it.” But who gets to exploit the idea? It depends on what is specified in the contract—and the details matter.
This post breaks down the details of who gets to use ideas—namely three buckets of intellectual property (IP). Specifically, we look at the difference between background and foreground IP and how licenses affect usage rights of the contract parties’ respective ideas.
- Background IP. Background IP is what each party brings to a deal. If you are hired to operate a restaurant and already have your own recipes, those recipes are your background IP. If the restaurant owner already has proprietary technology for managing orders, that technology is the restaurant owner’s background IP. Most agreements specify that background IP is retained by its original owner.
- Foreground IP. Foreground IP is what is created through collaboration of the parties. Using our restaurant example above, if you develop new techniques with other restaurant personnel while working there, that would be foreground IP—intellectual property created under the contract. Ownership of foreground IP is trickier and can usually be sub-divided contractually in one of three ways:
- Ownership by the party making the contribution. Applying this model to the above example, you would own the recipes if you made the contribution. This method seems fair, but is difficult to implement. Almost by definition, contributions made under an agreement are collaborative. Dividing up the contributions is difficult and requires significant time and effort.
- Joint Ownership. The second way of dividing foreground IP is through joint ownership. Because foreground IP is developed collaboratively, the parties jointly own any IP rights created under the agreement. While simpler, it comes with an obvious drawback: the parties may not agree on how to utilize their IP rights. Using our restaurant example, one party may want to license its rights to a competing restaurant or sell the rights. In this case, joint ownership could result in paralysis.
- Sole Ownership. By far the most common disposition of foreground IP rights is sole ownership. But which party gets sole ownership? Generally, it comes down to leverage. If one side is bigger or more essential in its industry, it will be in a better position to dictate terms. Certain industries also follow work-made-for-hire norms. Others allow for sole ownership of individual contributions or R&D reimbursements. While fairness can play a role—one party genuinely providing the know-how and absorbing R&D costs—leverage is usually dispositive.
- Licensed IP Rights. The final bucket of IP in any deal is license rights. Unlike the first two buckets—which concern ownership of what each party brings and what each party creates—licenses cut across both buckets. If you are reading this on an electronic device, chances are you have a number of software licenses. Licenses allow a party to retain ownership of IP, but grant usage rights on specific terms. Aside from pure works-made-for-hire, most deals involve granting the counterparty usage rights in one’s own IP, subject to restrictions on: (1) term; (2) use case; (3) geography; (4) royalty or fee payment; and (5) revocability. Well-drafted agreements cover license rights in detail, including any sub-licensed rights of third parties.
Putting It All Together
Every deal involves three buckets of IP: (1) what each party brings to the deal; (2) what gets created under the deal; and (3) what each party lets the other party use under the deal. A well-drafted agreement should cover each of these points with specificity. To paraphrase Edison, an idea only has value if it can be used. A good contract tells you how.
Disclaimer: This blog is for informational purposes only and does not constitute legal advice. Reading or interacting with this content does not create an attorney–client relationship. You should consult a qualified attorney for advice regarding your specific situation. Mehaffy, PLLC disclaims all liability for actions taken or not taken based on this blog.