Intellectual Property Pitfalls in Consulting Agreements

By Brian J. Hubbard // January 31st, 2014

Consulting relationships are a staple of today’s economy.  Clients appreciate receiving a consultant’s expertise with relatively few strings attached.  Consultants appreciate autonomy and the ability to leverage their experiences to multiple clients.  Intellectual property (“IP”) is important to consulting at a fundamental level, since a consultant’s know-how is usually the reason the client selected them.  At the same time, because a consultant’s business depends on what they know, there are a few IP-related pitfalls to consider when drafting consulting agreements.

First Steps: The first step is defining the relationship in a mutually negotiated consulting agreement.  I have advised both consultants and companies engaging their services (no, not at the same time!), and appreciate that both parties are anxious to roll up their sleeves and get to work on the project.  As in any negotiation, nobody wants to dwell on what might go wrong.  However, it is important that the consulting agreement reflects the parties’ true understanding, and that each side is clear on intentions, limits, and exposure.  The goal is to get an agreement that the parties intend to comply with, and that doesn’t carry disproportionate risk.

Consultants Are Independent Contractors, Not Employees: Client tax, benefits, and liability concerns drive the bedrock principle of the client-consultant dynamic:  consultants are independent contractors, not employees.  As a general rule, an employee grants all IP rights in their creations to their employer.  This makes sense, as employees spend their working hours working only for one company.  Essentially, an employee trades his/her creativity and innovation to the employer in exchange for the security and stability of being an employee.  In contrast, a consultant does not grant any IP rights in their creations to their client, unless they bargain away those rights.  Accordingly, it is ironic that a consulting agreement may adopt an employee-minded approach toward IP ownership and exclusivity of services.

Pitfall #1: Not Carefully Defining IP Ownership

The Concern: Consulting is a fact-intensive endeavor; one size doesn’t fit all.  Yet a client may have a template consulting agreement that fails to take into account the specific nature of the services.  If a template agreement takes the position that the client owns everything consultant creates during performance of (or in connection with) the project, it might not immediately seem an issue.  For example, in designing a brochure, client ownership of a consultant’s work sounds right.  It’s reasonable for client to want to be able to register a copyright in writings consultant creates with the intention of exclusivity (e.g., the final report, the new design, the ad copy).

Unintended Consequences for the Situation: However, standard IP ownership language can cause serious problems.  What if the consultant has a conceptual breakthrough during the project that is not client-specific, and in fact, would benefit all his/her clients?  What if they improve their previous work?  A single client owning the breakthrough hews too close to the default position for an employee, but without a similar supporting rationale.  Or what if a consultant is providing software, which typically involves preexisting IP rights and a strong incentive to work with a number of clients to recapture development costs?

So What’s Next?:  There’s no other option than to take the time to tailor the agreement to the situation.  A fair resolution assures that:

a) The client has control of the work that they paid for.

b) The client is able use the work without being subject to additional unforeseen (“gotcha”-type) charges by the consultant or being stung by work it helped fund or inspire.

c) Yet, the client doesn’t stand to reap a windfall from the consultant’s long-garnered expertise.

For example, further to c), if a client wants to file utility patents on things the consultant develops, the fee ought to be relatively large and background IP defined.  Moreover, the consultant must understand this blocks them from using their own idea going forward (absent a license).

Pitfall #2: Accepting Non-Compete Language

The Concern: No client wants their secrets made available to their competitors, and rightly so.  However, clients that request a non-compete are either incorrectly phrasing their intentions or over-reaching.

Unintended Consequences for the Situation: Employees may be restricted to reasonable non-competition clauses.  However, for consultants, that’s both unreasonable and contrary to their business model.

So What’s Next?:  If exclusivity of services is truly desired, the client should offset the consultant’s foregone opportunities with a larger consulting fee, and limit the “non-compete” to a short time in a very narrowly defined technology area.  A fair resolution assures that:

a) The client receives consultant’s representation that there’s no conflict of interest.

b) The client receives consultant’s obligation to use received confidential information only as directed.

Pitfall #3: Accepting Indemnity Language

The Concern: Sometimes, a client will ask for an indemnity infringement of third party IP rights.  It makes sense that a client (with potentially deep pockets) does not want to buy a lawsuit based on the consultant willfully or knowingly infringing third party IP rights.

Unintended Consequences for the Situation: Generally though, requests for indemnification of the client for IP infringement place the consultant in the position of being client’s insurer.  Considering that even a successful defense of IP infringement may cost over a million dollars, consultants must carefully define when it is equitable for them to foot the bill.  Even with ongoing patent searches and legal opinions, businesses struggle to keep abreast of the constantly shifting landscape of third party IP rights.  Consultants offering blanket IP infringement indemnity for their client’s use of the work are playing Russian roulette.

So What’s Next?:  Limit exposure to acts within a party’s control, but basically, there are few occasions where even a tailored indemnity is appropriate or fair.

In conclusion, having a meaningful dialog about sensible ways to address the above issues will pay off in a deeper relationship, and will prevent either party from being blindsided.



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