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Introduction

There are three things you need to consider carefully in every Software Development Master Services Agreement (MSA):

(A) Indemnity;

(B) Liability; and

(C) Ownership of Intellectual Property

 

No one is going to back down without a fight on these three points, but (A) Indemnity, and (B) Liability, can often be resolved easily. These issues are a bit like a numbers game – the question becomes a process of finding a mutually agreeable (and insurable) cap on liability.

 

Issue (C), Ownership of Intellectual Property, is usually a more delicate matter to negotiate. Both the vendor and the client have legitimate concerns about who owns the IP. The vendor wants to finish the engagement knowing that the pre-existing property (i.e., intellectual property that is used during this engagement, but was created by the vendor prior to or independently of the engagement) is protected.

 

Copyright Exclamation Mark
Protection over ownership of intellectual property will be hotly debated in MSAs.

 

A vendor may have spent years creating their own code and intellectual property, and it’s this pre-existing property that gives them their competitive advantage. No matter who the client is, they are going to want to keep their pre-existing property their own – even if this means walking away from the deal.

 

On the other hand, the client’s ownership of intellectual property also needs to be dealt with quite carefully. Clients must be assured that they will own the newly created and customized intellectual property that they have paid the vendor to create, and that they will be free to deal with it and distribute it as they require.

 

These two competing interests can usually be balanced by preserving the vendor’s ownership rights to pre-existing vendor IP, and by granting a simple licence to the client to use that pre-existing IP for the purpose of using the newly created software (often referred to as a ‘deliverable’).

 

The Vendor’s IP

 

The vendor will also want to retain ownership of improvements made to the vendor’s pre-existing IP during the course of the engagement, and will wish to protect all of their IP from reverse-engineering.

 

Note how the following example clause includes these elements:

 

Notwithstanding anything to the contrary, to the extent that any Data or materials provided under this Agreement contain any Data or materials which were developed by Vendor (a) independently of this Agreement or any applicable Statement of Work; or (b) by Vendor prior to the date hereof; and including any improvements or alterations made to such Data or materials during the term of this Agreement (“Vendor’s Proprietary Materials”), such Vendor’s Proprietary Materials shall remain the exclusive property of Vendor and the Client shall have no ownership interest therein, but the Client shall have an irrevocable, nonexclusive, perpetual right to use modify, revise, enhance, update, improve, expand and copy such materials only to the extent embedded in the Deliverables furnished to the Client hereunder, and notwithstanding anything to the contrary, the Client shall not reverse-engineer, sell,  distribute, or use the Vendor’s Proprietary Materials for any reason whatsoever, other than to the extent embedded in the Deliverables.  

 

The Client’s IP

 

From the client’s perspective, the following IP ownership clause is ideal:

 

All right, title and interest in any Deliverable and including, without limitation, all Intellectual Property Rights in a Deliverable, will belong exclusively to the Client;

Vendor shall be deemed to have assigned to the Client all right, title and interest including all Intellectual Property Rights in such Deliverables;

The Deliverable assigned to the client will cease to constitute Vendor Confidential Information, if applicable, and will become Client Confidential Information; and

At any time and from time to time the Vendor agrees, at no additional cost to the Client, to execute and deliver to the Client all such documents as it may reasonably request to evidence the vesting of its rights, title and interest in the Deliverables.

 

It is unlikely that a vendor with sufficient bargaining power will agree to transfer ownership in the newly created software (deliverables) without having been paid, or without requiring the client to otherwise comply with the MSA. As a result, the following caveat is likely to be negotiated as a precondition for the transfer of ownership in the deliverable:

 

Other than for Vendor’s Proprietary Materials, upon payment in full of all amounts due to Vendor under this Agreement or any applicable Statement of Work and subject to the Client’s material breach of this agreement, including without limitation, the reverse-engineering of Vendor’s Proprietary Materials.

Scale Balancing MSA
Balancing the client’s and vendor’s rights is a key factor for closing a deal.

 

Conclusion

Careful drafting can balance both the legitimate interest of the vendor in retaining pre-existing IP rights, and in not transferring ownership of the deliverables until payment has been made; and the client’s interest in free and clear ownership/use of the software they have paid to have developed.

 

Takeaways

  • Vendor will want to retain ownership of any intellectual property that they have created prior to or independent of their engagement with a client
  • A client is usually willing to accept this point so long as they own the rest of the newly created intellectual property and have received a licence to use the vendor’s intellectual property

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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