Commentaries from founder Kenan Sahin

June 6, 2017

IP Ownership: Truthfulness vs. The Truth

Intellectual Property (IP) has become even more central to the success of companies and particularly so for technology companies. Faced with the importance of early revenue or funding agreements, often these companies succumb to the GREAT IP LIE. At the risk of offending lawyers, let me point a finger at them and state that no matter which law school they go to, they all go to the same "finishing" school where they learn the GREAT IP LIE: “we’re paying for it, and therefore we own it (i.e., the IP generated).” On the surface, this concept appears to make sense, so many really smart founders or entrepreneurs just accept this argument.

I first encountered the GREAT IP LIE years ago, having started a company while an academic, which had trained me to critically examine statements made. This start-up of mine was commissioned for a small project for a big New York company, and the size did not apparently merit their legal department getting involved.  So, I wrote up a short contract which retained the platform rights for my company and gave the client the usage rights for the application.

Midway through, the project became very strategic for the client, and now I was pulled in front of their very impatient and very rude general counsel, who immediately threw the GREAT IP LIE at me: what is it that you do not understand Dr. Sahin, we are paying you, so we obviously own the IP.  I countered by saying that I liked his shirt and wondered if he paid for it. He angrily said that of course he paid for his shirt and that he had no time for such idle talk, reminding me that our conversation, which was taking place in front of the executive who had commissioned the project, was very serious.  I responded by saying that I also was very serious and my time also was very precious and then informed him that I wanted to buy the pattern for his shirt.  At this point, he got even angrier but before he could confront me, I told him that since he had paid for his shirt and since he had given me the GREAT IP LIE, namely "we’re paying for it, therefore, we own it," he surely must own the pattern for his shirt since he “paid for it.”  Having gotten his full attention at this point, I then had to inform him, a lawyer no less, that ownership rights are a matter of negotiation and mutual agreement, as codified in a contract.  Paying or not paying is secondary. Then I said if his executive wanted to buy the platform rights, I would be happy to sell, but why would he want something like that since he really just wanted to use the software, and I had already agreed to provide that right.  At that point, the executive agreed with me - the lawyer glared at him with absolute dismay but had to give in. 

Indeed, companies engage in a multitude of transactions where they pay for particular goods and services, but somehow want to reach well beyond what they are actually paying for.  These companies want to view these goods and services as having been “commissioned” or as “works for hire,” and this is where the GREAT IP LIE kicks in. One must push back and negotiate. The truth is, payment entitles one to a bundle of rights.  What those rights are is a matter of negotiation and mutual agreement. For example, paying for a hotel room for a night entitles one only to the right of staying there for that night. Or leasing a house for a month is just that.  There is no ownership that is automatically granted. However, if the parties so negotiate and agree, that month’s rent could count towards a purchase price, if there is a subsequent acquisition. Another domain is car buying.  No IP ownership comes with the title to the car. Or if it is a lease, the rights are capped (e.g. to miles), as well as the period of time. There are numerous examples of a payment leading to a negotiated or renegotiated bundle of rights.  Complete ownership is not automatically granted: while there is no doubt that I own my car when I buy it, my ownership rights do not extend to owning the IP embedded in the car. I have the right to use my car and the IP in it, but I don’t have the right to practice the patents covering that IP beyond such use.  Somehow in the IP domain the truthiness of “I pay I own” is asserted as though it is obviously so and worse, many Source Companies (see below) mistakenly agree, which can lead to tremendous loss of value and freedom to operate.

If there is pushback to the GREAT IP LIE, many times the proposed “compromise” is joint ownership.  Even that could be a huge obstacle for a technology or IP source company (Source Company) but without equivalent benefits to the client. So, there is a great opportunity, and room for give and take with many IP constructs.

My company grew, and I ended up negotiating hundreds of contracts, often encountering the GREAT IP LIE, often telling the shirt story and often winning the argument, but not always. To have this winning record I had to put on the table other supportive arguments. Here are some of them:

Pay versus Finance: In one case, the lawyer simply would not budge from saying that they were paying for it, and therefore they owned it, period. I pointed out that they were really financing the project since there were all kinds of contingencies along the way with milestone payments which meant I would be bearing big risks.  I knew his client really wanted the project.  With that in mind, I proposed that they not pay, and wait until the end and then decide whether they would want to “buy” the deliverables just like any other purchase transaction. He was very confused but had to go along.  At the end, we sold them only usage rights.

After having made this argument, if one accepts payment, its financing nature becomes clear and shifts the ground for negotiation as there are many competing sources of financing.

Ownership, Cost, and Risk: Another approach to counter the GREAT IP LIE is to point out the risks and costs of IP ownership.  If a company is commissioning the project, or asking for an adaptation or customization of an existing platform, or is asking for the development of derivatives, wanting to own the resultant IP goes hand in hand with being responsible for infringement, which can be a very expensive legal battle if it happens. Even more complicated is if some other entity infringes, or outright steals the IP: the “owner” which, in this case would be the client, must sue that entity, or at least enter into cross-licensing arrangements, all of which would result in indeterminate costs. There is also a cost element that relates to the underlying licensing in that, in effect, the Source Company is licensing the underlying IP derivatives for which it is entitled to ask a higher price.

In my numerous negotiations when I point out these costs or liabilities, many executives become willing to consider other ways of reaching their objectives.

Why have ownership: I have found that starting with business objectives and examining the desire to own IP from that perspective can be very productive. When asked why they wish to own the IP, many executives say it is for keeping their competitors out.  This is probably the greatest driver, and it is almost instinctual: keep competition out or, at worst, at bay. One can then provide counter-arguments. If the project will result in deliverables that will be a component of the client’s product portfolio, one can point to marketing, pricing and rest of the portfolio being the real barriers to competition.  Furthermore, competitions are no laggards.  In due time, probably sooner than later, they will develop or adopt similar features or products, if they are proven successful in the marketplace.

Exclusivity: If ownership or joint ownership of IP is not the way, often the client wants exclusivity for the emergent IP. This is a treacherous position for the Source Company.  Exclusivity is in effect a sale, but at a much lower price, and with all the risks of ownership, such as infringement, still remaining with the Source Company. I have found that pointing out the de facto sale nature of exclusivity and that therefore the license price should be a multiple of the non-exclusive license, at least puts the business reality on the table. Even more powerful is looking at milder forms of exclusivity, such as excluding licenses to direct competitors of the client for a period of time, geographic exclusivity, and much more reasonable for both sides, giving feature exclusivity for a period of time.

CONCLUSION
Beware the truthiness of the GREAT IP LIE: “we are paying for it so therefore we own it (or at least have our claws into it).” Succumbing to the “apparent” reasonableness of this argument could spell big trouble for the Source Company that is aiming to grow and expand. It is a specious argument that should be rejected. The negotiation should start with mutual business objectives and end with a bundle of rights that suit those objectives.

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