Chapter 8: ENSURING PRECISE CONTRACTUAL PROTECTION OF IP RIGHTS

CHAPTER 8

Ensuring Precise Contractual Protection of IP Rights

TO THE EXTENT POSSIBLE , you should protect your IP rights through clear and concise contract provisions. Regardless of whether you are the IP owner or the IP user (consumer, licensee, assignee, franchisee, or otherwise), the best means of ensuring that your intent is carried out is by specifically stating your intentions within an agreement. Do not rely on statutory or judicial implications and interpretations because these will not necessarily reflect your will. In any agreement, it is impossible to cover every possible contingency that might arise. Nevertheless, you should try to draft contract provisions that are clear and that anticipate as many situations as possible. The more definitive the terms, the fewer the disputes will arise and the less expense you will incur in resolving conflicts. Use precise language and avoid legalistic terminology whenever possible, particularly if some of the parties do not speak your language fluently. The following contract clauses are from a software license. They are not intended to fit your particular IP situation, but rather to give you practice in finding ambiguities and tightening up phrases. Many of the concepts mentioned relative to the software publisher (licensor) and the consumer (licensee) can be taken in a more general context. It is essential to prepare a contract within the circumstances of your own IP situation and not to rely on standard forms or clauses. The following clauses should serve to clarify some of the points your attorney may make and to suggest why your attorney has included certain standard provisions in your agreement.

Provisions of License Agreement (Computer Software)

FORMATION OF THE CONTRACT

■ POOR PROVISION:

[Company Name] is licensing (not selling) [Software Name] (“Software”) to you. ANALYSIS : A contract is formed when each party clearly manifests intent to be bound by the terms that are mutually understood. Typically, this intent is shown by both parties signing the contract. However, a license agreement for a consumer product, such as software, is not likely to be signed by both parties because of the nature of the transaction. Instead, the contract is considered formed when one party (the company) offers the product to the other party (the consumer), who accepts by taking unilateral action (opening the software package).

The provision here states the offer by the company, but it leaves the acceptance to implication. Does the mere purchase of the software imply acceptance of the license terms? Is there an acceptance of the contract terms even if the consumer

has not read the terms? If a dispute arises, will a court imply acceptance merely because the consumer used the product? To ensure that both parties understand the importance of their actions—one in making an offer to license, and one in opening the envelope—the provision that follows clearly sets forth the results intended by their actions.

■ BETTER PROVISION:

[COMPANY NAME] IS WILLING TO LICENSE THE SOFTWARE [SOFTWARE NAME] (“SOFTWARE”) TO YOU ONLY ON THE CONDITION THAT YOU ACCEPT ALL OF THE TERMS OF THIS LICENSE AGREEMENT. BEFORE YOU OPEN THE ENVELOPE CONTAINING THE SOFTWARE, PLEASE READ CAREFULLY ALL OF THE TERMS OF THIS LICENSE. BY OPENING THE ENVELOPE, YOU ACCEPT THE TERMS AND CONDITIONS OF THIS LICENSE.

IF YOU DO NOT AGREE TO THESE TERMS AND CONDITIONS, [COMPANY NAME] IS NOT WILLING TO LICENSE THE SOFTWARE TO YOU AND YOU MUST RETURN THE UNOPENED ENVELOPE TO THE PLACE WHERE YOU PURCHASED IT, IN WHICH CASE YOUR MONEY WILL BE REFUNDED.

EXCHANGE OF MUTUAL CONSIDERATION

■ POOR PROVISION:

[Company Name] GRANTS TO YOU A NONEXCLUSIVE RIGHT TO USE THIS COPY OF THE SOFTWARE.

ANALYSIS: A contract is supported by the exchange of consideration—that is something of value—between the parties. This provision suggests that the company’s consideration is in the form of a grant of the right to use its property (the software). For purposes of legal interpretation, the consideration given by the consumer need not be expressed. It is assumed that the consumer has paid a price for the software. However, for practical purposes, it may be useful to remind the consumer that a license fee is included in the price of the software. This should underscore to the consumer the fact that the price of the software consists of a minimal amount for the hard medium on which the software is recorded and the written materials are printed plus a license fee for use of the software and written text itself.

■ BETTER PROVISION:

IN CONSIDERATION OF YOUR PAYMENT OF THE LICENSE FEE, WHICH YOU PAID TOGETHER WITH THE SALES PRICE WHEN YOU OBTAINED THIS COPY OF THE SOFTWARE, [Company Name] GRANTS TO YOU A NONEXCLUSIVE RIGHT TO USE AND DISPLAY THIS SAME COPY OF THE SOFTWARE WITHIN THE TERMS AND CONDITIONS OF THIS LICENSE.

OWNERSHIP RIGHTS OF THE PARTIES

■ POOR PROVISION:

THE SOFTWARE AND ALL PACKAGING AND WRITTEN MATERIALS PROVIDED WITH IT ARE PROTECTED AS THE INTELLECTUAL PROPERTY OF [Company Name], EXCEPT THAT SOME COMPONENTS ARE THE PROTECTED PROPERTY OF OTHER OWNERS AS NOTED SPECIFICALLY IN THE MATERIALS.

ANALYSIS : Clear expression of the ownership rights is extremely important, but this provision is often shortened because of space restrictions. The above provision

states only the ownership rights of the company, leaving out what the consumer has purchased. To underscore exactly what the consumer owns, it is probably wise to give an express explanation here. The purpose of this clause is to deter infringement, and it should therefore be emphasized, not reduced.

■ BETTER PROVISION:

THE TOTAL PRICE YOU HAVE PAID FOR THIS SOFTWARE PACKAGE CONSISTS IS THE SUM OF THE SALES PRICE AND THE LICENSE FEE. WHEN YOU PAID THE SALES PRICE, YOU BECAME THE OWNER OF THE MAGNETIC OR OTHER PHYSICAL MEDIA (SUCH AS A DISK) ON WHICH THE SOFTWARE IS RECORDED OR OTHERWISE FIXED. WHEN YOU PAID THE LICENSE FEE, YOU BECAME AUTHORIZED TO USE THE SOFTWARE, BUT YOU DID NOT ACQUIRE OWNERSHIP RIGHTS TO IT. THIS LICENSE FOR THE SOFTWARE IS NOT A LICENSE FOR ANY OTHER SOFTWARE PRODUCT MADE BY [Company Name], AND THIS LICENSE DOES NOT ENTITLE YOU TO USE ANY OTHER SOFTWARE OWNED BY [Company Name]. WITH THE EXCEPTIONS STATED IN THIS PARAGRAPH, [Company Name] RETAINS ALL TITLE AND OWNERSHIP RIGHTS TO THE COPYRIGHTS, DESIGNS, PATENTS, TRADEMARKS, AND OTHER INTELLECTUAL PROPERTY RIGHTS OF THE SOFTWARE, ALL COPIES OF THE SOFTWARE, ALL DERIVATIVE WORKS, AND ALL MANUALS AND WRITTEN MATERIALS PROVIDED WITH THE SOFTWARE, REGARDLESS OF THE FORM OR MEDIA IN OR ON WHICH THE ORIGINAL AND OTHER COPIES MAY EXIST. THIS PRODUCT CONTAINS OTHER PROPERTIES THAT ARE OWNED AND LICENSED TO YOU BY THIRD PARTIES. USE OF THESE OTHER PROPERTIES IS SUBJECT TO THE TERMS AND CONDITIONS OF THE ADDITIONAL LICENSE AGREEMENTS ENCLOSED WITH THIS PRODUCT. [Trademark Name] IS A TRADEMARK OF [Another Company Name], [Trademark Name] IS A TRADEMARK OF [Another Company Name], AND [Trademark Name]

IS A TRADEMARK OF [Another Company Name].

PERMITTED USE

■ POOR PROVISION:

YOU MAY USE AND DISPLAY THE SOFTWARE ON ONE (1) COMPUTER AT ONE (1) LOCATION TO PRODUCE DOCUMENTS FOR YOUR OWN USE, YOUR EMPLOYER’S USE, OR YOUR CLIENT’S USE. ANALYSIS : If permitted use is too narrow, the consumer will not bother to use the software, but if it is too broad, the value of the license is lost. The above paragraph appears to be limiting use of the software, but it is too vague given the technological practices and advances of the past decade. It is unclear because it is silent with respect to the use of multiple computers by a single user (such as users who have offices at home and work), use of a single computer by multiple users, or use of the software over a network. Although it is impossible to anticipate every situation in which the software might be used, the consumer should be given better parameters by which to judge compliance with the use rights granted.

■ BETTER PROVISION:

THE LICENSE GRANTED IN THIS AGREEMENT IS FOR USE AND DISPLAY OF THE SOFTWARE ON A SINGLE COMPUTER HAVING A SINGLE PROCESSING UNIT (CPU) AT A SINGLE LOCATION. IF YOU USE SAID COMPUTER MORE THAN 80 PERCENT OF THE TIME (MEANING YOU ARE THE PRIMARY USER OF THE COMPUTER), YOU MAY ALSO USE THE SOFTWARE ON A LAPTOP OR OTHER PORTABLE COMPUTER AND ON ONE OTHER COMPUTER AT A DIFFERENT LOCATION, SUCH AS AT A HOME OR BUSINESS OFFICE. YOU MAY USE THE SOFTWARE TO PRODUCE A DOCUMENT, A PUBLICATION, OR PRESENTATION MATERIAL FOR YOURSELF, AN

EMPLOYER, OR A SINGLE CLIENT AT A TIME. YOU MAY ACCESS THE SOFTWARE FROM A HARD DISK, OVER A NETWORK, OR ANY OTHER METHOD YOU CHOOSE, SO LONG AS YOU OTHERWISE COMPLY WITH THIS LICENSE. IF A SINGLE COMPUTER IS PART OF A MULTI-USER SYSTEM, THIS LICENSE COVERS ALL USERS ON THE SYSTEM WHO ARE WORKING TOGETHER ON A SINGLE PROJECT.

PROHIBITED USE

■ POOR PROVISION:

[Company Name] RESERVES ALL RIGHTS NOT EXPRESSLY GRANTED TO YOU IN THIS LICENSE AGREEMENT. YOU ARE NOT PERMITTED TO COPY, MODIFY, MERGE, OR OTHERWISE ALTER THE SOFTWARE. YOU MAY NOT DISASSEMBLE, DECOMPILE OR REVERSE ENGINEER IT. FAILURE TO COMPLY WITH THIS LICENSE WILL VOID ALL WARRANTIES AND TERMINATE THIS LICENSE. VIOLATORS WILL BE PROSECUTED.

ANALYSIS : With a bit more detail, this clause can be strengthened and tightened to ensure that consumers completely understand the consequences of noncompliance with the license terms. It should also recognize the legal concept of “fair use,” which allows a consumer to make a copy for purposes of back-up or archive unless expressly prohibited by the License. There is also no express prohibition against using the Software in a public manner, such as for visual support at a seminar. It is important to consider potential public uses of products that have been licensed for personal home or business use. If the software is broadcast or otherwise used in a public presentation, a republication occurs, which is a separate right that belongs to the IP owner and can be exercised only with the IP owner’s consent.

■ BETTER PROVISION:

[Company Name] RESERVES ALL RIGHTS NOT EXPRESSLY GRANTED TO YOU IN THIS LICENSE AGREEMENT. YOU MAY BE HELD LEGALLY RESPONSIBLE FOR ANY COPYRIGHT INFRINGEMENT THAT IS CAUSED OR ENCOURAGED BY YOUR FAILURE TO ABIDE BY THE TERMS OF THIS LICENSE. YOU ARE STRICTLY PROHIBITED FROM EXERCISING ALL SUCH RIGHTS INCLUSIVE OF THE FOLLOWING, ALTHOUGH THIS LIST IS NOT EXCLUSIVE: 1. COPYING THE SOFTWARE, INCLUDING ANY COPY OF THE SOFTWARE THAT HAS BEEN MODIFIED, MERGED, OR INCLUDED WITH OTHER SOFTWARE, WITH THE SINGLE EXCEPTION THAT YOU MAY MAKE AS “FAIR USE” ONE (1) COPY OF THE SOFTWARE SOLELY FOR BACK-UP OR ARCHIVAL PURPOSES, PROVIDED THAT COPY IS MARKED WITH THE SAME PROPRIETARY AND COPYRIGHT NOTICES AS WERE AFFIXED TO THE ORIGINAL.

2. COPYING THE MANUALS AND WRITTEN MATERIALS PROVIDED WITH THE SOFTWARE.

3. SELLING OR DISTRIBUTING THE ORIGINAL OR ANY COPIES OF THE SOFTWARE OR THE ACCOMPANYING MANUAL AND OTHER PRINTED MATERIALS.

4. USING THE SOFTWARE OR ANY OF ITS CONTENTS ENTIRELY OR PARTIALLY FOR THE PRODUCTION OF ANY STOCK FORM DOCUMENTS, PUBLICATIONS, OR PRESENTATION MATERIALS TO BE PROVIDED, SHOWN, OR DISTRIBUTED TO MORE THAN A SINGLE CLIENT OR TO BE TRANSFERRED, SOLD, OR REDISTRIBUTED TO THE PUBLIC, EXCEPT WITH EXPRESS WRITTEN PERMISSION FROM [Company Name].

TRANSFER RESTRICTIONS

■ POOR PROVISION:

YOU MAY NOT TRANSFER, RENT, OR OTHERWISE DISPOSE OF THE SOFTWARE TO ANY OTHER PERSON.

ANALYSIS : The above provision is concise, but it fails to impress on the consumer the effect of a transfer or other transaction with respect to the Software. To fill in the gaps and ensure full understanding, the following paragraph expressly emphasizes that use of the license is personal to the consumer that purchased it.

■ BETTER PROVISION:

THIS SOFTWARE IS LICENSED TO YOU ONLY. IF YOU CHANGE YOUR COMPUTERS, YOU MAY TRANSFER THE SOFTWARE FROM THE INITIAL SINGLE COMPUTER TO A NEW COMPUTER, PROVIDED THAT YOU CONTINUE TO USE THE SOFTWARE ON ONLY ONE (1) COMPUTER AT A TIME. YOU MAY NOT TRANSFER OR DISTRIBUTE COPIES OF THE SOFTWARE OR THE ACCOMPANYING MANUAL AND OTHER PRINTED MATERIALS TO OTHERS WITHOUT THE PRIOR WRITTEN CONSENT OF [Company Name]. ANY SUCH UNAUTHORIZED TRANSFER WILL TERMINATE THIS LICENSE AGREEMENT. EXCEPT AS PROVIDED IN THIS PARAGRAPH, YOU ARE PROHIBITED FROM TRANSFERRING, ASSIGNING, RENTING, LEASING, SELLING OR OTHERWISE DISPOSING OF THE SOFTWARE TEMPORARILY OR PERMANENTLY TO ANY OTHER INDIVIDUAL OR ENTITY.

TERMINATION OF LICENSE

■ POOR PROVISION:

THIS LICENSE TERMINATES AUTOMATICALLY IF YOU DO NOT COMPLY WITH ITS TERMS OR IF YOU TRANSFER THE SOFTWARE.

ANALYSIS : A common practice in contracts is to provide for termination on written notice from one party to the other. Termination can occur automatically, but it is a good practice to indicate specifically that no notice is required for the termination to become effective.

■ BETTER PROVISION:

THIS LICENSE TERMINATES AUTOMATICALLY WITHOUT NOTICE TO YOU IF YOU FAIL TO COMPLY WITH ANY PROVISIONS OF ITS. ON TERMINATION YOU ARE REQUIRED TO DESTROY THE WRITTEN MATERIALS AND ALL COPIES OF THE SOFTWARE, INCLUDING ANY MODIFIED COPIES.