Can Bespoke and Generic Software Dance at the Same Software Party?

One of those "better not asked" questions is how to deal with the issue of ownership of bespoke software that relies on the generic platform of the developer. Stated otherwise, consider the situation where Party A commissions Party B to develop a piece of software. Party B is delighted to do so, but in fact the commissioned software relies in some way on non-bespoke, reusable software that also belongs to Party B, for which Party A will need a right of use. The parties reach the moment at which they need to settle on a contract that sets out their relationship.

The initial thought, at least of the commissioning party, is to demand that ownership in the bespoke software be assigned to it. At the most basic level, the typical thinking goes something like this: "I paid for it, so it should be mine", or, "It is my policy to own all of my software." Such a position makes some sense. It is true that ownership of the bespoke software itself, without more, will not enable the commissioning party to make use of it (see below). At the least, however, ownership will enable to commissioning party to dispose of it more easily in the event of a sale or acquisition. Whatever the reason, it would be an unusual circumstance in which the commissioning party would allow the developer to continue to own the bespoke software.

That is fair enough. But how does the commissioning party deal with the generic portion of the software that is necessary for the bespoke software to run? From the developer's point of view, unless the commissioning party is willing to simply buy him out--hook, line and sinker--he will will insist that ownership of the generic software remain with him. If so, that means that the commissioning party will likely receive a non-exclusive license to use the generic software.

Under that arrangement, the commissioning party should take special care to protect itself against the insolvency of the developer, especially if insolvency could lead to termination of the licence in bankruptcy. As well, provisions for escrow deposit of the source code with appropriate release instructions should be included. Moreover, a free right of assignability of the license is essential if the commissioning party is able to dispose of the bespoke software in a way that makes commercial sense. Whether all such clauses can be successfully drafted from the position of the commissioning party is far from certain.

Then there is the issue of overlap between the bespoke and generic software. While it is rhetorically easy to describe the situation in simple dichotomous terms, the reality may well be more complicated. Try as it may, the developer may not be able to completely separate the bespoke portion that belongs to the commissioning party and the generic portion that remains with the developer.

Finally, there is a related issue in connection with trade secrets. If the developer is required to disclose to the commissioning party proprietary knowledge related to the software--either bespoke or generic--how does the developer ensure that such trade secrets are not disclosed in an unauthorized fashion? Disclosure might not be critical if it is tied specifically to the bespoke software but, if the trade secret straddles the bespoke/generic divide, then the developer must be especially careful to protect its interests in this regard.

The upshot is that, in these circumstances, there is a degree of uncertainty that seems to be built-in. How readers have dealt with this uncertainty would be most edifying.

IP Finance welcomes Anne Fairpo

The IP Finance team is delighted to welcome Anne Fairpo, who joins the weblog with immediate effect. Anne is a pupil barrister at Atlas Chambers, having previously been a solicitor for more years than she cares to recall, where she is a corporate tax advocate and adviser, specialising in technology-based business and international tax planning and transactions.

Anne is the author of the IP Tax blog, as well as Tottel's Taxation of Intellectual Property and contributes a chapter on the topic to Tolley's Tax Planning (annual editions). She lectures regularly on taxation of IP, as well as more general corporate tax topics, and is a member of the Council of the Chartered Institute of Taxation.

Trade secrets, a seminar and a chance to say "hello"

"Protection of trade and other secrets: a property right, equitable right or contractual obligation? Does it matter?" That's the title of the forthcoming IP Finance weblog seminar, which will be conducted by Neil Wilkof (Herzog Fox & Neeman, Tel Aviv) and Robert Anderson (Lovells LLP, London).

This seminar will be well worth attending. IP Finance team member Neil -- in the course of a series of posts on this weblog on IP-based business strategies in a changing world -- has asked questions about the juridical nature of the trade secret and its role in modern business. He and Robert Anderson will engage in what should prove a most enlightening debate.

The seminar (which should last for about 45 minutes) will start at 1pm on Monday 14 December 2009. Lovells has kindly agreed to host the event in its London office: that's Atlantic House, 50 Holborn Viaduct, London EC1A 2FG (nearest tubes are St Paul's, Farringdon or Chancery Lane). The seminar will be followed by some appropriately tasty light refreshments and a golden opportunity for some prime networking.

If you're coming, there's nothing to pay. Just email Sarah Turner here. Good news if you're in practice and could do with CDP points: Lovells are arranging for them.

Convergence survey lifts lid on device-users' attitudes to paying for IP content

The 2009 Convergence Survey, launched this morning, represents a combination of field research and interviews conducted by London-based law firm Olswang LLP and YouGov into the use of computers, smartphones, e-books and other devices by more than 1,500 consumers. The 96-page report covers a wide variety of aspects of access to IP content by four categories of device-user: the vanguard, second-wave purchasers, the mainstream and the laggards, also dividing them by age.

Of particular interest to readers of this weblog is the annex, which contains some 172 pages of data derived from the survey, addressing issues such as the extent (if any) to which device users are prepared to contemplate payment for content in terms of existing and future functionality and their attitudes towards micropayments. The difference in spending habits between users of the Apple iPhone and other groups of consumers is quite noticeable. You can access the annex here.

Delay no bar to an account of profits, rules Hefty court

IP Finance thanks John Smith for drawing the attention of this weblog to the recent ruling in Intellectual Property Development Corporation Pty Ltd and Hefty NZ Ltd v Primary Distributors New Zealand Ltd, D. J. Graham and R. J. Jones [2009] NZCA 429, Appeal Court of New Zealand, 23 September 2009 (IP Finance previously reported on the trial decision here). In this trade mark infringement case the Court -- which had a good deal to say about the the remedy of an account of profits -- held that mere delay in seeking relief is not in itself a ground for refusing an account of profits. You can read this decision in full here.

A full and very helpful account of this decision -- which also reflects on issues relating to the receivership and liquidation of the trade mark proprietor -- can be found on the IP Now blog here.

"Tips for minimizing dispute settlement costs": can you help?

In a moment of inspiration or folly some weeks ago, I suggested the following title, "Keep it cheap: ten tips for minimizing dispute settlement costs everywhere", for a short article in an forthcoming issue of the WIPO Magazine which will focus on the cost of resolving intellectual property disputes. This suggestion was accepted.

My deadline is only ten days away and inspiration has yet to knock on my door. If any reader is possessed of one or more absolute truth with regard to keeping the cost of settling an IP dispute down, I'll be delighted to hear it (please post your suggestions below or email me here). All decent suggestions will be acknowledged on this weblog when the article is published.

The current online issue of the WIPO Magazine is available here.

Trade mark licences: beware of the unconventional

While practitioners certainly like to preach against uncertainty in the terms of a licensing agreement, we know how difficult this is to achieve, especially when it comes to provisions relating to termination. The uncertainty may arise from the inevitable elusiveness of achieving drafting perfection, compromises reached during negotiations, or the intention of the parties to leave the issue ambiguous. Whatever the reason, the result is that the parties may find themselves fighting over the meaning of the provision giving rise to the claim of termination.

This lesson was brought home in my favourite trade mark licensing case of the decade, the Australian case of Pacific Brands Sports & Leisure Pty. Ltd v Underworks Ptd. Ltd [2006] FCAFC 40 (for anyone who wants to confront a wide-ranging judicial debate on the meaning trademark assignments and licences, this is the case for you). While the issue of termination was strictly relevant to the disposition of the case, the court could not reach a single view on the proper construction of the licensee/sublicensee's obligations under an unusual form of grant clause. The resulting difference of opinion by the court on the meaning of the provision is instructive about the risks entailed in drafting such a clause.

The licence agreement provided that the licensee was authorized to use the licensed trade marks in connection with specified goods. The issue arose with the addition to the clause that the licensee undertake to “exploit the Products within the Territory to the best advantage of the parties.” The licensee had not succeeded in selling, under the licensed mark, some of the specified goods included within the defined term “Products”. The licensor alleged that since the licensee had not done so, the licensee was in breach of the provision.

What is unusual about this provision? At least two issues come to mind. The first is the use of the term “exploit” (a term more typically found in connection a patent licence) regarding the licensee’s undertaking, as opposed to a term such as “use”. This is especially so, since the term “use” appears elsewhere in the same clause. Does “exploit” mean something other than “use”; if so, what is the difference in meaning between the two terms?

The second issue is the reference to the requirement that the "exploitation be for the “best advantage of the parties.” There is extensive case law and commentary on terms such as “best efforts”, “best endeavours”, “reasonable efforts”, “reasonable endeavours”, and the like, as a self-contained undertaking in a licensing agreement. It is unusual, however, to speak of the “best advantage of the parties”.

To cut to the chase: What is the significance of linking the obligation to “exploit” the mark with a performance criterion defined as the "best advantage of the parties", especially when the meaning of the first term is uncertain and the use of the second term is unusual to an extreme? It is no surprise therefore that the court could not agree on the meaning of the provision.

The majority view of the court of appeal reasoned that no breach had occurred. The licensee was not obliged to use the licensed marks in the event that no market exists for some goods, or that there was no profit to be made with respect to such goods. The majority also rejected the claim that use is required to protect the mark against a claim of non-use of the trade mark. There were other ways within the scope of the agreement to avoid a non-use claim. As well, reference was made to the opinion of the trial court, most notably the original parties to the agreement had recognized the risk that the products might not find a market and that there was a separate right of termination for failure to meet minimum sales (as opposed to termination for no sales with respect to a given product category).

The minority view took a different approach. It focused on the meaning of the word ”exploit”, which it construed as requiring something more extensive than mere “use” of the marks. The requirement that “exploitation” be for “the best advantage of the parties” did not detract from this undertaking, since selling the goods would clearly be to the advantage of both parties. The failure of the licensee to do so was a breach of this undertaking.

Trademark Licenses Can Be Quixotic Too

When confronted with these incompatible constructions of the meaning of the clause, two points come to mind.

First, stick to conventional words and terms when drafting. Within the context of a trademark license, a term such as “use” may cause less difficulty in construction than the the term “exploit”. Even better, provide for a specific description of the intended uses of the mark. The admonition is even stronger when a starkly unconventional term as “best advantage of the parties” is relied upon. Here, as well, specific standards of performance are preferable.

Second, pay close attention to the structure of the license agreement. The terms of the grant, and the measure of the licensee’s performance, are separate and distinct issues. First set out the permitted kinds activities; secondly (and separately), define the performance standards. As was graphically brought home in the Pacific Brands case, conflation of the two provisions only result in uncertainty, if not worse.