Seriously, did you really assign your IP rights to all members of the group?

How many times have Kat readers encountered, or even been complicit in, the drafting of, an agreement where the licensc or assignment of IP rights purportedly applies to multiple members of the “corporate group” or the like? The impetus for such a provision usually comes from a tax or corporate law source, and it is often found where there is a contribution of technology by one party to the other, such as in the context of an acquisition or an investment. In such a case, the owner of the IP underlying the technology will either license or assign its IP rights to multiple named related entities (this Kat will call them “Named Group”) or, more generally, to the entire “corporate group” (this Kat will call them “Corporate Group”), which is broadly defined and may well span an indeterminate number of entities that are somehow all members of the group. Whatever the reason, such a provision often places the IP lawyer in an awkward situation in attempting to explain to his colleagues the potential problems of such a provision. It is useful to consider further the various circumstances in which such a provision appears and the problems that may arise by virtue of such a clause.

1. The owner licenses the IP to either all members of the Named Group or to Corporate Group—In principle, this arrangement should not pose a problem, since the law contemplates that an IP licence may be either exclusive or non-exclusive. On its face, the licence described here would appear to fall comfortably under the rubric of a “non-exclusive” licence. There are, however, a number of possible pitfalls here.

The agreement can explicitly recite that the licence is “exclusive” (this Kat not discuss here the situation where the licence recites that it is “exclusive” except for the following named entities, and leaves this possibility for perhaps another time). True, one is not bound by the contractual characterization of the licence as “exclusive” or “non-exclusive” and the actual provisions of the licence will prevail. But what happens where the parties draft the licence in terms of an exclusive licence, whereby the only material aspect of the licence that supports the conclusion that it is non-exclusive is the existence of multiple licensees by virtue of their inclusion within either the Named Group or the Corporate Group? If ever put to legal challenge, will the court simply impose the relevant provisions appropriate for a non-exclusive licence, which would effectively require the court to rewrite a portion of the licence as agreed-upon? Or would a court find that the licence provisions are invalid, because they have failed their essential purpose, or have run afoul of a similar contract doctrine?

A second potential problem arises when the licence involves a trade mark and the jurisdiction requires quality control to maintain the validity of the licence. Here, the licensor needs to pay particular attention to which members of the Named Group or Corporate Group (if the licensor can even successfully identify which of them are relevant) are actually using the licensed mark. Even in jurisdictions where there is no formal quality control requirement, the practicality of the situation will place a burden on the licensee to monitor use of the trade mark properly, lest one or more of the licensees is using the mark in a way that does harm to the integrity of the mark, especially when it is part and parcel of the licensor’s brand.

2. The owner assigns the IP to either all members of the Named Group or Corporate Group—This type of provision may pose an even more fundamental problem because transfer (and receipt) of ownership of the IP right is involved. Let’s first take the situation where the grant provision simply provides that the assignor assigns its IP rights to all members of the Named Group or Corporate Group, without further stating the proportional interest granted to each entity. Depending upon the laws of the relevant national jurisdiction, there may be a presumption that the proportional interest received by each assignee is equal. The national jurisdiction may also provide either explicitly or by case law the terms and conditions for the exploitation of the IP right (as well as an accounting to the other assignees for profits obtained) by each of the assignees. Here too the open-ended nature of the entities included within the Corporate Group may pose a difficulty of identification. Also, where the law does not provide an easy way to determine the proportional interest or the right of exploitation for each assignee, uncertainty will prevail and may well require the various assignees to enter into a further agreement to resolve the situation. And did we mention the tax consequences?

Perhaps of more interest is a further clause in the assignment agreement that provides all members of the Named Group or Corporate Group, as assignees, undertake to subsequently designate a single entity from among the relevant group that will be the ultimate owner of the IP rights. A number of possibilities arise. If the assignees do not thereafter designate the ultimate owner of the IP rights, does that invalidate the entire assignment arrangement or does such failure to designate simply mean that each of the assignees as members of the Named Group or Corporate Group becomes the owner of a proportional interest of the IP right? In any event, which part (ies) has a right to seek termination of the assignment for failure to comply fully with its terms, or to the otherwise challenge the assignment?

In a variation, consider that the assignment agreement itself provides the identity of the ultimate owner of the IP rights, while still preserving the initial assignment grant to each of the members of the Named Group or Corporate Group? In such a situation, at least two possible alternatives (there well could be more) suggest themselves to explain the outcome of such a provision: (i) a two-stage assignment arrangement has been created, whereby at the first stage each of the assignees takes ownership, subject to the considerations discussed in the previous paragraph, followed by the later assignment to a single entity; or (ii) the first stage creates a situation where the assignor remains the constructive owner of the IP rights, wherein the members of the Named Group and Corporate Group hold merely a legal right in the IP rights; it is only after the second stage is consummated that beneficial and legal rights are joined in the hands of a single ultimate owner.

For Kat readers who have braved this post until the end, the discussion has been intended to emphasize one overarching point. Absent extremely unusual circumstances, it is advisable to avoid the kind of grants of IP right discussed above, lest uncertainty cloud the outcome of the disposition for all concerned.