5 Essential Tips for Drafting Robust Intellectual Property Clauses in Service Agreements

Entering into services agreements, whether as the service provider or the client, creates a set of legal concerns regarding ownership of the materials created under the services agreement which can have complex implications on the business if not drafted and negotiated properly.

How to Better Protect Intellectual Property in a Services Agreements

In an ever-evolving digital age, intellectual property is more than just a concept, it is a strategic imperative that creates successful businesses. The intellectual property provision determines who will own the deliverables, under what conditions or circumstances the work product may be used, and whether there are any affirmative obligations on either party to obtain licenses for third-party materials used by the service provider.

Let’s walk through some of the most important aspects of the to  understand how a well-drafted provision will set expectations for the parties in the agreement and create a clear ownership structure after contract signing.

5 Lesser Known IP Clauses That Can Help Better Safeguard Your Intellectual Property In Service Agreement Negotiations:

1. Know How

The definition of IP in a client services agreement should be comprehensive so there is no ambiguity as to who owns what, the exact ways to use IP, and any restrictions on its use. Unlike copyrights, the practical knowledge that the service provider brings to the table is not IP that can be officially protected through copyright or patent registrations. It’s closer to trade secrets, although not quite within the definition. The intellectual property provision in the contract should be clear on what is considered existing “know-how”.  Know-how is the experience and skillset that service providers or suppliers use to provide their expertise to clients. That’s why service providers will want to ensure that there is a comprehensive definition of “know how” to protect their proprietary information and skillset so that their client cannot claim it is part of the deliverables which opens the service provider up to an infringement claim.

2. Intellectual Property Representation and Warranties

Standard, boilerplate language in intellectual property provisions distributes ownership rights amongst the parties, but the  larger implications of such standard provisions can have a very costly impact on the business if the service provider agrees to represent and warrant that there is no IP infringement in the deliverables they provide.

For example, if the services agreement is between a client and a marketing agency wherein the marketing agency is hired to develop a website and produce campaigns – the agency needs to either ensure it has full rights to the IP or disclaim liability for any third-party infringement. Legal counsel representing the client will want the IP clause in a such a services agreement to have representations and warranties by the agency that the materials they produce are completely original and will not will infringe on any third-party’s IP rights. The issue for the service provider is that it’s representing that its employees or contractors who create the IP are not infringing. This becomes particularly tricky when third-party programs are used in creating  the deliverables and now the service provider  vouched for the third party’s IP rights.

3. Droit Morale

Unlike economic rights, which refer to the commercial exploitation of the materials created under the agreement, the moral rights in the intellectual property provision refer to the non-economic and personal rights of creators of those materials. This ties into the representations and warranties section.  The creator of the deliverables will be an employee or contractor of the service provider. Employees may not have rights to the materials for commercial purposes due to the IP assignment provision in their employment agreement, but they may still hold the rights of attribution and integrity. The client’s counsel should make sure the hiring party has rights in the underlying materials, and that the service provider on behalf of itself and its employees waive droit morale or moral rights.

4. Feedback

The feedback clause in a services agreement provides the party who receives feedback (typically the service provider) ownership or license rights to comments, know-how, ideas, enhancements, or recommendations (“feedback”) they get from the other party to the agreement.

The feedback clause is most often found in software licensing or SaaS Master Services Agreements. It is there to protect the recipient from IP claims related to improvements of the service provider’s services or products based on feedback. In other words, the concern for the service provider is to make sure the discloser of feedback does not claim the enhanced product or service is really their IP (at least partially).

To protect against that, a reasonable feedback clause either grants a license or assigns feedback to the recipient. A license clause for feedback should include worldwide, nonexclusive, perpetual, irrevocable, royalty-free rights to the service provider to use any suggestions, improvements, and ideas provided by way of client feedback. The client should protect itself by not making any representations of warranties regarding the feedback.

Even better for the service provider in the services agreement is to get all ownership rights to feedback assigned to them which should allow the service provider to create derivative works. That said, the way the feedback clause is drafted can have larger scale implications on the business so it’s important to counsel business teams on the nuances of a feedback clause.

5. Artificial Intelligence (“AI”) – IP Ownership Rights to Deliverables Using Generative AI (GenAI) Output

IP ownership rights over the Generative AI outputs is something all services agreements should address to some extent. Given how swiftly AI technology is evolving, and with it IP law, it’s crucial that service providers and clients adjust their agreements to be able to utilize AI tools without taking on legal risk.

Let’s take an example – a service provider uses a generative AI tool to create deliverables for a client, let’s say the GenAI tool helps the service provider write code. The client likely expects that they will have IP ownership rights to the AI-generated outputs. The service provider will, on the other hand, put in a disclaimer that the GenAI output may not be considered original IP nor work for hire under intellectual property law, therefore it cannot be under any IP warranties the service provider makes. The different positions should be addressed in a well-drafted services agreement to manage the parties’ expectations and start the relationship on the right foot. Many services agreement templates lack the appropriate language to capture the use and ownership of GenAI used in service offerings and deliverables.

Important Language for Handling IP When Generative AI Is Used Under Services Agreement:

• The agreement needs to identify the source of the AI tool.
• The agreement needs to include the ownership of the data that the service provider plans to utilize with the GenAI tool.
• The agreement should specify whether the GenAI output includes any personal information.
• The agreement should specify whether the GenAI data used is owned or licensed by the service provider or otherwise publicly available.
• The services agreement should also state whether the client will have ownership rights in the IP that might be encompassed in the GenAI output. In other words, the agreement should be explicit in who owns the output from the GenAI tool.
• The agreement should also specify and/or disclaim warranties or licenses that the service provider may grant to the client. The clause should deal with who is accountable for IP infringement or privacy breaches due to the usage of the GenAI tool or the GenAI outputs.
• The agreement should be clear on the restrictions of the parties as regarding the use and output of the GenAI tool.

How the Intellectual Property Clause Impacts Other Clauses in a Services Agreement

Intellectual Property and the Confidentiality Clause

While the intellectual property provision will provide the overarching rules surrounding IP ownership, it will also tie into other provisions that should be negotiated in a services agreement. One of which is the all-important confidentiality provision.

To align IP and confidentiality obligations, both parties need to be subject to confidentiality obligations relating to the materials created under the agreement. Often, the IP developed under the services agreement will be considered confidential information and will be subject to those disclosure restrictions in the confidentiality section. Both provisions should ensure that the confidentiality obligations and the ownership obligations are consistent to avoid a situation where the owner of the materials is still required to keep parts of them confidential.

Intellectual Property and the Indemnification Clause

One of the biggest and most expensive risks faced by clients is the potential that the deliverables infringe on a third party’s IP, resulting in a lawsuit. It is extremely important that the client services agreement include a third-party intellectual property indemnification clause whereby the service provider takes on any liability related to a third-party claim that is made against the client regarding intellectual property infringement. The client is relying on the service provider to have the right to use the products and clients will want the service provider to stand behind their deliverables if a third party sues them for IP infringement.

But this is nuanced for a service provider as they would take on a major business risk, which is why the IP infringement indemnity is such a hot topic of negotiation between lawyers.  Are there exclusions or carve-outs to service provider’s indemnity obligations? What damages and costs does the provision cover? Which specific parties are covered? The answers should be covered in the IP infringement indemnity.

Speak to an Experienced Intellectual Property Lawyer to Help You Negotiate Services Agreements So They Work in Your Favor.

Are you looking for an experienced IP lawyer to help you navigate the complexities of intellectual property law? Gouchev Law can help. When you are entering into a services agreement, intellectual property provisions are the most important element in protecting valuable assets, clarifying ownership rights, and mitigating large scale business risks.

Our IP lawyers can give you the advice and guidance you need to create a client services agreement that best protects your business. With decades of industry experience, Gouchev Law’s commercial contracts lawyers are dedicated to helping you understand and protect your intellectual property rights. Schedule an exploratory meeting today.

Disclaimer: The information in this article is for general information purposes only. Nothing in this article should be taken as legal advice for any individual case or situation. This information is not intended to create and viewing it does not constitute an attorney-client relationship.

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