When outsourcing critical services to a supplier, the treatment of intellectual property rights is both complicated and necessary if the parties are to maintain the appropriate rights to the IP assets provided and created during their relationship. Before negotiating an outsourcing agreement with a supplier, counsel should be aware of the potential IP issues that may arise in each stage of the outsourcing relationship, which include:

1. Rights to deliverables provided during the transition

An outsourcing agreement should describe any deliverables to be provided by the supplier during the transition of the services from the company to the supplier, and address the ownership and other applicable rights of the parties to those deliverables.

2. Rights to materials owned by the parties

The agreement should address the licenses granted by both parties relating to the intellectual capital each provides during the relationship. The company should grant the supplier a limited license to any company-owned materials for the sole purpose of providing the services. Any additional rights required by the supplier must be negotiated.

In contrast, the supplier should grant the company a broad license to supplier-owned materials to:

  • Receive the full benefit of the services
  • Perform services or functions that are ancillary to, but not part of, the services provided by the supplier
  • Allow third parties to perform services or functions previously performed by the supplier even when the services or functions in question have not been terminated or removed from the scope of services. The parties will need to agree on both the breadth of supplier licenses and the use of the supplier-owned materials by the company’s third-party contractors.

3. Ownership of developed materials

In addition to issues involving materials owned or licensed by the parties, the outsourcing agreement should address ownership of materials that are developed for the company by the supplier.

For derivative works of company-owned materials, the company typically owns the IP rights to these materials and the supplier is granted a limited license to use them. The supplier should be required to obtain the company’s consent to use the derivative works for their other clients. When creating derivative works, it may be appropriate for the supplier to provide (or escrow) both the source and object code to the company along with documentation. For derivative works of supplier-owned materials, the supplier should grant the company a license as broad as the one granted for the original supplier-owned materials.

If a supplier creates derivative works of third party-owned materials, the company will need a license to such materials; however, the parties should also acknowledge that the company’s rights to these materials may be subject to or limited by the terms of the agreement with the owner of the materials. The supplier should be required to notify the company in advance if the terms of the third-party agreement will preclude or limit the company’s ownership or license rights. In addition, depending on the circumstances, the supplier may also need to obtain the company’s consent before developing the derivative works. If there are company-provided third-party materials that the supplier requires in order to perform the services, consent may be required from the third-party licensors, and the agreement must address who is responsible for obtaining and paying for these consents.

Finally, a supplier may develop original materials that the parties may seek to designate as derivative works of their own pre-existing materials. As a compromise, the parties may agree to the company’s ownership of the copyright and joint ownership of patent rights (with no accounting to the other party) in the developed materials.

4. Embedded supplier-owned materials

At times, supplier-owned materials may be embedded in developed materials. Companies will likely need a broad license to these materials, with the right to sublicense, provided that these supplier-owned materials remain embedded and are not commercially exploited separately. Under some circumstances, a company may also need the supplier to provide upgrades, maintenance, support and other services for a period of time after termination until these embedded materials are no longer required or the company can maintain them.

5. License and rights of use on termination

The outsourcing agreement should address the parties’ obligations and rights after the end of the relationship. The supplier should return all company-owned materials and immediately cease use.

For supplier-owned materials that are commercially available, the supplier should grant the company a standard commercial term license to continue use (with or without a license fee depending on the commercial basis on which the materials were originally provided). In the case of materials that are not commercially available, a license must also be granted to the company to continue use of the materials in performance of the services contemplated by the agreement. The company should also consider how it will continue to maintain and support these materials after the agreement terminates.

For third-party materials provided by the supplier, the company should seek a sublicense offering the same rights and warranties on the same terms and conditions. Additionally, this license should be granted without any additional fees beyond those that the supplier would have been obligated to pay had it continued to hold the license.

6. Residual rights

Residual rights are the least tangible (and perhaps the most confusing) form of IP that an outsourcing agreement should address. A common form of a “residuals” clause provides that “each party may during and after the term of this agreement use in its business any ideas, know-how and techniques retained in the unaided memories of its personnel who have access to the confidential information of the other party during the term of the agreement.”

The supplier and company are likely to have very different views about residual rights. Suppliers typically prefer residual rights notwithstanding confidentiality obligations, while companies usually request residual rights subject to confidentiality obligations. Additionally, a company will prefer that “unaided” excludes anything intentionally memorized, that further disclosure is still prohibited, and that residual information specifically excludes company data or personal information.

Where the parties end up on residual rights will likely depend on the nature of the services being outsourced and magnitude of the parties’ respective bargaining power, but the issue is nevertheless an important one for counsel to consider.


Ensuring continued success

It is important for parties to negotiate the terms addressing IP rights early in outsourcing contract negotiations so there will not be any grey areas during the critical period when services are terminated. By carefully addressing the parties’ respective IP rights in the outsourcing agreement, both can ensure their continuing success during – and after – the outsourcing relationship.