Negotiating Intellectual Property Clauses in Teaming Agreements

For many federal contractors, success in the marketplace depends to a considerable extent on their ability to develop and maintain proprietary software, processes and technologies that distinguish them from other companies. Although developing and producing such technologies under federal contracts often requires relinquishment of certain technical data rights to the United States government, proprietary rights frequently remain with the contractor. Therefore, in the context of teaming arrangements to perform federal contracts involving the development or delivery of technology or software, it becomes particularly important to negotiate a favorable intellectual property rights provision. Given their complexity, the assistance of legal counsel is recommended on these issues.

At the outset, it must be recognized that many federal contracts do not involve the development, delivery or usage of proprietary intellectual property to any significant extent. In such situations, the negotiation of appropriate teaming or subcontract agreement clauses on this subject becomes less importance. Unfortunately, however, many firms unknowingly overlook the importance of such clauses in situations where, in fact, they are critically important. The threshold question to be answered, therefore, is to what extent the contract will involve the development or delivery of technology, software or other intellectual property. To make this determination, the solicitation and the statement of work should be carefully reviewed.

Regardless of whether it is determined that technical data or intellectual property rights will be at issue in contract performance, teaming partners should execute, prior to disclosure of any processes, software, or other technologies outside of the company, a written confidentiality agreement restricting disclosure of, and access to, the information by third parties, and requiring its return upon termination of the relationship.

Once negotiations begin, the teaming partner slated to perform as the subcontractor should be wary of the boilerplate intellectual property clause that grants and assigns all intellectual property rights in technologies and software “developed, used or produced in furtherance of the agreement” to the prime contractor. In an effort to justify such an over-reaching clause, a prime may argue that it is entitled to such rights because the subcontractor will be performing services for them for valuable consideration. Too often, the proposed subcontractor will blindly agree, only to learn during performance that the prime is claiming ownership to a derivative software program developed and assembled entirely by the subcontractor, a fact which may have been unanticipated at the time the clause was negotiated. The potential for this type of problem underscores the need to examine at the very outset of negotiations the nature of the work from an intellectual property rights viewpoint, and moreover, to avoid all-encompassing assignment of rights provisions.

The negotiation of intellectual property rights clauses often boils down to an issue of leverage. Small businesses are often so focused on the anticipated revenue to be realized from the contracting opportunity that they feel unwilling (and perhaps unable) to “rock the boat” by questioning a prime’s suggested intellectual property clause. It is indeed a reality that, for small businesses, lucrative contracting opportunities can justify moving forward notwithstanding unfavorable contract clauses. However, the pitfall in proceeding in this fashion is that intellectual property rights clauses are often quite broad, and therefore, do not specify what technologies may be developed during performance. Therefore, if an unexpected “rights in data” issue arises during performance, the subcontractor can find itself in a very difficult situation.

Set forth below are several basic suggestions that may assist teaming partners in negotiating intellectual property rights clauses in teaming agreements and subcontracts:

1. Research and understand the role (if any) that software, technologies and intellectual property will play in the performance of the work and/or deliverables.
2. If the teaming partner’s role will be as prime contractor: (a) a broad assignment of rights clause is to its advantage (however, proposing a blatantly one-sided or onerous clause may disrupt or delay negotiations); and (b) ensure that the clause is consistent with the prime contract’s intellectual property provisions.
3. If the teaming partner’s role will be as subcontractor, seek to retain all ownership rights to software and other technologies that are either pre-existing or that the firm may develop on its own during performance (subject to the rights of the U.S. Government). Only to the extent necessary, license those technologies to the prime, and restrict the prime’s right to use them to develop derivative products or services.
4. If performing as a subcontractor, avoid “works for hire” and assignment of rights provisions.
5. Ensure that technology and software belonging to the teaming partner is adequately marked with an appropriate proprietary legend, and that the prime commits to properly identify the owner of the technology in all deliverables to the customer.

Intellectual property clauses raise challenging issues for federal contractors. To avoid unintended and unfavorable consequences, federal contractors are well-advised to understand and negotiate these issues at the very outset of the teaming relationship.