Where does your Intellectual Property come from?

A crucial issue to consider before an organisation licenses its IP is the need to check the organisation’s actual right to license the IP. Does the organisation actually own the IP? If the organisation’s product uses IP provided by a third party, has the third party entered into a licence agreement with the organisation?

Of vital importance, does that licence agreement allow the organisation to bundle the third party’s IP into the organisation’s own product and on-licence it?
The importance of this can hardly be overstated, and this is an issue frequently overlooked in any licensing transaction. The reason for its importance is two-fold:

• if the organisation (party A) licenses to a licensee (party B) IP which A itself obtained from a third party (party X), A needs to be certain that it is permitted to on-license in this way. If such on-licensing is prohibited under the terms of A’s agreement with X, or imposes terms on how X’s IP must be sub-licensed, A will be in breach of the agreement with X to the extent that it on-licenses X’s IP or fails to fulfil the conditions imposed by X on the on-licensing. In such a situation, X will be able to sue A for damages caused by the breach of contract.

• secondly, party B may negotiate terms with A which require A to warrant that it has all necessary consents to allow B to use the licensed IP, including X’s IP. B may also require a specific indemnity from A so that A agrees to compensate B for any losses suffered as a result of a legal claim that A has no right to license the IP it is providing to B.

In this situation, party A is in serious trouble if it does not have the necessary permissions from X to provide X’s IP to B. It will be in breach of warranty to B, and liable to the indemnity being triggered if B suffers a loss as a result of A’s failure to obtain the necessary permissions from X.

In this example, party A needs to take extreme care to “back-to-back” its obligations to party B with the benefits it receives from party X. A can only allow B the scope of use of X’s IP which the agreement with X allows it to on-license. Equally importantly, the extent to which A agrees to be liable to B needs to back-to-back with the extent of liability offered by X to A. For example, if X agrees to be liable up to a financial cap of £1 million for failure of its technology to work, A would be extremely unwise to offer a £5 million cap to B in relation to X’s technology. If X’s technology failed and B claimed losses of £4 million from A, A would only recoup £1 million from X.

A typical area where IP licensors overlook the terms on which they themselves have licensed IP is in the software licensing world, in particular in relation to Open Source software. This is software the source code of which is made available to the end user for free: it is therefore attractive to many developers.

Users of Open Source software frequently overlook the fact that while it may be provided for free, this does not mean that the Open Source organisations do not impose restrictions on the use of the software. For example, Open Source licences frequently require that the Open Source organisation is given some form of credit in any on-licensing by an Open Source user; alternatively, the Open Source user may be required to document any changes made to the base Open Source product. Occasionally, the libertarian ethos underpinning Open Source has encouraged users to believe that there are no restrictions on use. The trend of recent court cases, however, is to protect the interests of the Open Source organisations: in Jacobsen v Katzer (August 13th 2008, US Court of Appeals) a court not only upheld the credit and change documentation restrictions as enforceable, but added that the user’s failure to comply with them was not simply a breach of contract, but also a breach of copyright. This allowed the supplier the extra remedy of suing for copyright infringement. Licensors who use Open Source code should therefore take care that they comply with any restrictions relating to how the code should be used and on-licensed to the licensor’s licensees.