In today’s world, companies big
and small outsource everything. Not only are their call centers in India, but various functions that used to be handled in-house are farmed out to consultants — whether it be market research, product design and development, software implementation, employee benefit plan administration or any other service you can think of.
If you represent consulting firms or other high-end service providers to the corporate market, a common scenario often plays out: your client is thrilled to win a lucrative project for a big-name customer after an arduous RFP process only to find itself being asked to sign a very one-sided services contract drafted by in-house counsel. The intellectual property provisions are a disaster for your client and could limit its ability to bid for and perform future work — especially in the new customer’s industry. Your job is to help them negotiate those sections so that they treat the consultant fairly or at the very least aren’t harmful to the consultant’s business. This article describes some of the most common problematic IP provisions in consulting contracts and suggests some possible approaches.
Ownership of Project IP/Work Product
The provisions that govern who owns the intellectual property arising from the customer’s project are usually the most difficult to negotiate. The form contract typically takes a maximalist approach — everything tangible, intangible, oral or written relating to the project whenever it was created (and whether or not it was created especially for the customer) is work product and/or deliverables and/or intellectual property owned exclusively by the customer and the consultant is barred from using it again or adapting it for other customers/clients.
This is not an irrational initial position for the customer to take. After all, it’s paying good money for the consulting services and expects to get something in return. The problem is that your consultant client is almost never working on a completely discrete standalone project that can somehow be walled off from its other work. It probably won the project because it has provided similar services for other customers, often in the same industry, and will most likely be adapting and customizing prior work product for the new customer. Just as important, the consultant expects to use the new customer’s work product as the basis for work product in future projects.
Even worse, the broad definitions encompass the kinds of day-to-day, necessary skills and know-how that everyone in the consultant’s field uses or the hard-to-describe, distinctive skill-set that the consultant uses for all of its clients (e.g., the general look and feel of a product design firm’s consumer products; the distinctive way an IT implementation firm simplifies the interface for enterprise software for its customers).
Some principles to keep mind when negotiating these provisions:
• To the greatest extent possible, define work product and deliverables as including only those materials first developed for the customer as part of the project.
• To the greatest extent possible, define work product and deliverables as including only the final versions that are actually delivered to the customer — all rights in the concepts and ideas that were brainstormed, developed (or partially developed) and then ultimately not used or included as part of the services should remain with the consultant.
• To the greatest extent possible, exclude from the definitions of work product and deliverables any materials developed by the consultant (1) prior to the customer’s project, (2) for the consultant’s own use or (3) for its other customers.
• Try to include language specifically excluding from work product and deliverables (1) the general skills and know-how that are used by consultants/contractors in your client’s field, (2) general design, aesthetic or organizational principles and (3) all materials, ideas and concepts that are not protectable under general principles of intellectual property law.
• If these concepts are still too broad for comfort after negotiation, attempt to limit the customer’s ownership and exclusive use rights to its specifically defined industry, to a specifically defined market segment and/or to a limited time period.
• Don’t forget to include language in the contract that all transfers of ownership and use rights are contingent upon payment in full of the consulting fees required under the contract.
Even if the IP ownership provisions end up being resolved in a way that’s acceptable to the consultant, the standard confidentiality clauses in services contracts can act as a backdoor way to prevent the consultant from using the intellectual property embodied in the project’s work product/deliverables. Beware of standard confidentiality clauses providing that all project work product or deliverables are "confidential information" that cannot be disclosed to third parties. These could prevent the consultant from re-using and adapting elements of the project for future clients.
The safest strategy is to strictly limit the "confidential information" concept to (1) proprietary documents and materials provided by the customer to the consultant (subject to the usual exceptions for public domain information and materials independently developed by the consultant) and (2) those specific elements of the project work product and deliverables that the parties have agreed (in the IP ownership provisions) are to be owned and used exclusively by the customer.
Another less direct method by which customers attempt to secure rights in intellectual property developed by consultants is an exclusivity provision. If your consultant client’s new customer is Fortune 500-sized or one of the leading companies in its industry, you will often see a provision in the services contract that prohibits your client from performing similar consulting work for the customer’s competitors in the industry. Sometimes specific competitors are named, but more common are broadly defined prohibitions against working in the customer’s industry. This situation is usually both ironic (the consultant was often successful in the RFP process because it has other current and prior clients in the new customer’s industry) and problematic (the consultant was hoping to leverage the new project into winning work from other companies in the industry).
Putting aside the possible antitrust implications of these provisions, the obvious ideal result is to somehow convince the customer to drop its exclusivity demands. If that’s not possible given the competitive importance of the project to the customer or the consultant’s desire not to fight the issue and risk losing the work, some possible fallback strategies are to limit the exclusivity to (1) a relatively short time period (e.g., six months after project completion) and/or (2) a very specifically defined set of services and/or (3) a very specifically defined market niche.
Non-Solicitation of Employees and Contractors
Always keep in mind that much of the intellectual property used by a consulting firm resides in the brains of its personnel. Many standard services contracts prepared by large entities will contain provisions prohibiting the consultant from soliciting and hiring the employees and other contractors who work for the customer. This isn’t an unfair request, because your consultant client will probably be interacting with hard-to-replace, specialized customer personnel. But the same rules should apply to the consultant’s personnel — good people are hard to find, particularly in certain specialized consulting fields, and your client’s employees and contractors should not be raided by the customer. If the form contract contains a one-sided non-solicitation clause, propose a mutual one. If the contract lacks a non-solicitation provision, be sure to add one in favor of the consultant.
Businesspeople vs. Legal Department
Finally, a note about dealing with large entities and the competing factions within them.
When negotiating consulting contracts with large companies, the roadblocks that arise in the IP provisions are often driven by an in-house legal department that insists that certain provisions are "standard practice" or (if the lawyers are being honest) "that [big company] always gets this language" because of its inherent leverage over the consultants.
The businesspeople at the customer who your client knows will often have a more nuanced view of the issues because they understand better than the lawyers (1) that the consultant landed the project because of its prior experience in the industry and (2) in most cases, the consultant’s services will be an adapted version of what has already been provided to competitors in the industry and not entirely newly created materials.
Whether to make an end-run around the in-house lawyers by having your client plead its case to the businesspeople is a judgment call. Depending on the corporate culture at the customer, the lawyers may have the last word on the IP issues or will instead be expected to take direction from the businesspeople. Try to get a sense of that culture before using your client to resolve disputed contract provisions, because a perceived breach of protocol may ruin your working relationship with the in-house lawyers.
On a related topic, you should counsel your consultant clients not to engage in the classic magical thinking about onerous, one-sided contract provisions as a way to shortcut the negotiations — namely, that the customer businesspeople they know would never enforce the provision against them. If the contract clause is worth fighting about, your client should raise it with the customer and then assume that whatever version ends up in the final agreement can and will be enforced against them.
IP issues in consulting contracts are complicated and almost never one-size-fits-all. The range of what provisions will ultimately be acceptable to the parties will always depend on the specific context in which the negotiation is taking place — e.g., how competitive was the RFP process? How much profit is inherent in the pricing? How crucial are the services to the customer? How badly does the consultant need the work? The topics outlined
above are not an exhaustive list, but they
do represent the most common examples
of the contentious IP issues that consultants and customers fight about in their negotiations. •
Thomas H. Speranza is a partner in Kleinbard Bell & Brecker’s business and finance department. He has more than 20 years of experience handling both corporate and intellectual property transactions offering his clients a valuable perspective in today’s business environment, where technology and IP assets are a crucial element in most deals.