Engineers as Consultants Pt. 13: How to Assign IP Ownership in a Contract

At first blush, consulting seems like a ‘work-for-money’ trade. But clients don’t care about the work; they are only interested in the work product. The design, service, or patent that makes up the intellectual property (IP) resulting from an engineer’s work is ultimately the only thing of value. Because the agreement is really an ‘IP-for-money’ trade, a good consulting agreement should broach the topic of who owns the IP that is generated during the course of the relationship.

The value of the IP that results from design work can vary wildly. One project may be based on nothing but reference designs and other publicly available IP, leaving little to protect and only valuable to someone wanting to manufacture the design. But another project could be totally custom and the source of a few patents which may become very valuable. Yet another project may appear to have defensible IP that is suitable for patenting, but has already been invented and/or patented by someone else. It is important for consultants to understand the terms of selling this potentially valuable asset. And equally important that they represent the IP generated in the course of their work as an unknown quantity. It would be very bad to promise patentable IP only to find that someone else files first or a patent cannot be issued.

In my experience I've come across four basic ways to structure the ownership of IP:

1. Client owns everything that was discovered during development. Client gets all design files and is free to change anything as they see fit.
   1. Make sure that if the consultant uses previously-developed IP in the design, the consultant retains ownership and client only gets a non-exclusive license to use that IP.
2. Consultant owns all IP, but the client (company) gets an unlimited exclusive license into perpetuity for their market application. Client gets all design files and is free to change anything as they see fit. Consultant can re-use the design for other non-competing ventures.
3. Consultant owns all IP, and the client gets an exclusive per-unit license to sell products in their market application using the IP. The consultant can setup payment based on unit sales similar to software licenses. The client does not get the design files, and has to request design changes from the consultant.
4. Client is developing an Open-Source project where the design will be published online and available for anyone, including competitors, to utilize the IP.

Putting IP ownership on the negotiation table creates a new set of variables. Some companies are insistent on owning all IP, and are willing to pay the full engineering rates to secure it. These agreements are great because the payoff is immediate and it is easy to manage the black-and-white ownership. Other companies may have a more relaxed view of IP ownership and use it as a way of making a reduction of rates more palatable to the consultant. I nearly had a great project fall through because the client simply didn't have the capital to agree to the rates I quoted. But when I offered a reduction of rates and easier payment terms in exchange for my retaining IP rights, we were able to make it work. The client insisted on negotiating a price in the contract should they find money to buy the full IP rights assuming I haven’t repurposed the design on another project. Getting a decent payout in exchange for signing over rights is a nice thought for me, and I’m sure the client sleeps better knowing that they can own the IP anytime by writing a predefined check.

The per-unit license described above is the most difficult to manage, and I have yet to try it. I am wary because it is impossible for me to know if they are reporting accurate sales numbers and making honest payments. I would probably have to be a middle man for the electronics board assembly and bill them my license fee, and even then they could reverse engineer the product and engage another supplier. It seems like a real hassle, but it could be another way to make working for equity more manageable.

The Open-Source IP ownership is an elegant agreement, and I even offer a discount for Open-Source projects. Not because I have a big interest in sharing the designs, but because it is so darn easy to manage the IP ownership if there is no ownership. I am free to implement that design on any future project. And if there are clients that would like to see an example of my work, I can refer them to the published design files. The simplicity is beautiful.

When writing the contract, be sure to begin any assignment of IP with the phrase, ‘Upon full payment for the consulting services, ...’ It is important to be sure deadbeat clients have an incentive to make their payments. And it would be awful for a client to go bankrupt, not pay their bill, and liquidate the unpaid IP to a patent troll to partially compensate debtors and investors.

Remember to approach professional contracts very differently than software ‘Terms of Use’ agreements that are just red tape that nobody reads. 100% of the deal is in the contract, and being informed makes it easy for everyone to walk away happy.

To see legal language for IP options, download the different options written in the standard IEEE contracts.  USB Key photo credit.

James Benson is writing a series on 'Engineers As Consultants' to educate and encourage salaried engineers to consider if hanging a shingle is right for them. New posts on the first Monday of every month.

Pt. 1: So You Want To Be A Consultant

Pt. 2: How Do Engineers Find Consulting Gigs?

Pt. 3: How To Price Consulting Services?

Pt. 4: How To Keep A Client?

Pt. 5: Finding The Best Client Mix

Pt. 6: How To Turn Down A Client

Pt. 7: How to Write a Client Acceptance Clause

Pt 8: Business Structures

Pt. 9: Taxes, Writeoffs, and Accounting

Pt. 10: When Subcontractors Quit

Pt. 11: When a Client Turns into a Deadbeat

Pt. 12: Getting Paid with Company Stock

Pt. 13: How to Assign IP Ownership in a Contract

Pt. 14: Annual Review

Pt. 15: How to Take Vacation

Pt. 16: How to Engage Peers