What’s the point of template agreements?

A recent debate between two lawyers on Twitter had IP Draughts thinking about the purpose of template agreements, such as a company’s standard conditions of sale or purchase. The debate was prompted by Ken Adams kindly mentioning an old article on this blog, on the subject of insurance obligations in contracts.

One lawyer was arguing that the main purpose of an agreement is to enable a client to remove risk, and therefore detailed insurance obligations might well be appropriate. It shouldn’t matter whether these obligations added to the length of the agreement.

The other lawyer was arguing that the main purpose is often to set out clearly the terms of the deal, and to enable efficient processing of transactions. Detailed insurance obligations were often unnecessary, added to the length of the terms, and potentially slowed down negotiations.

To which, a neutral observer might say: it all depends. It depends on the situation, and on the client’s understanding of risk.

Every client is different. Some carefully analyse risk. Others work on instinct. Some want protective contract terms, even if this slows down or reduces deal flow. Others are focused mainly on the next month’s sales figures.

Some want a clean file, where they can demonstrate that they tried to achieve protective terms, even if they were ultimately unsuccessful in negotiations. Some just want “middle of the road” contract terms that should be mainstream and easy to agree.

Some are influenced by whether they have had a contract dispute in which the contract terms were important. This isn’t necessarily a good influence; the chances of a litigated dispute are low, and one event may not carry statistical significance. But it is a human characteristic (some would say a human weakness) to rely on the lived experience.

Ultimately, it is for the client to take commercial decisions, including what level of risk to accept in their contracts. Liability and insurance clauses in standard terms of business may help to reduce risk. But they are only one factor. Other practical considerations include how careful the client is to incorporate the standard terms into the contract. In IP Draughts’ experience, some clients are pretty hopeless at this.

Another factor is whether the client sticks with those terms in negotiations, or is willing to concede them in the interests of getting the deal done. And whether the client would be willing to litigate if the terms are breached.

Even if the terms are insisted on, are they actually followed up? Does the client check the insurance cover of the other party? Does it check its own insurance, to ensure there are no gaps in coverage in relation to the contract?

And has the client done any strategic analysis of its contractual relationships, that might help it to decide whether to ditch categories of client on the grounds of risk? If the answer to some of the above questions is no, this may provide some clues that the client doesn’t prioritise, or isn’t prepared to devote resources to, protecting itself against contractual risk.

IP Draughts prefers to work for clients where he can discuss their requirements with them, including their attitude to risk, before putting his metaphorical pen to paper.

Our practitioner law books

One of IP Draughts’ current tasks is to review the final text of each chapter of Macdonald (see image above) as his colleague Victor Warner completes it. It is now almost done, and our production editor has been in touch about timing of the final stages before publication. Bloomsbury’s website indicates a publication date of March 2022, which sounds about right.

This book is something of a departure for us, as it is the first time we have taken on somebody else’s book and written a new edition. A clue on the original author’s name is given by the book’s title! It has proved more time-consuming to write this edition than we anticipated; it is perhaps obvious (though it wasn’t to us) that updating and revising your own text is much easier than updating and revising someone else’s.

No matter, the work has helped us to improve our understanding of the subject, which is useful for our other publications.

For several years, we have had a programme of writing projects that stretches over the following two years. Coming up is a project to update the Encyclopedia of Forms and Precedents’ title on Joint Ventures, and IP Draughts has just agreed the terms for writing the fourth edition of our book, Execution of Documents, published by the Law Society.

Our books are mostly on the subject of IP and commercial contracts. A list of our main books can be found on a separate page of this blog here.

IP practice in warm weather

IP Draughts is looking out of his window at strong winds and rain, which has been occasionally turning to snow. The external temperature is 3 degrees centigrade. His thoughts turn to working somewhere warmer.

IP Draughts’ partner, AnnMarie Humphries, designed this blog when she was a trainee, over 10 years ago. She monitors new subscribers. Apparently, there has been a recent flurry of subscribers from Australia, several of them from the same law firm.

This fits with the viewing statistics on the blog. The lion’s share of readers in 2021 are from the UK and USA. Then there is a batch of readers from four countries: Australia, Canada, India and Singapore.

IP Draughts remembers fondly the month he spent in Australia and New Zealand in 2015. CSIRO kindly commissioned him to give two one-day talks on IP licensing, which helped to pay for his travel costs.

Would anyone out there in a warm country be interested in commissioning IP Draughts to provide some training on IP transactions, university contracts, life science agreements, or similar? Or consultancy on the development of standards and procedures for the efficient management of contracts?

Brrr…

Severable improvements to IP

Severable watermelon corer, apparently

It has become popular to include references to “non-severable improvements” in research contracts. Typically, the contract will state who owns any IP generated under the agreement. But the parties want different ownership rules to apply if the new IP is a “non-severable improvement” to a party’s pre-existing, or “background” IP.

Consider, for example, the following terms in the Brunswick long-form collaboration agreement. Versions of this agreement are often used by UK universities for inter-university collaborations. Clause 8.2 includes the following provision:

All Intellectual Property used in connection with the Project which has been generated prior to or outside the scope of the Project (“Background IP”) shall remain the property of the Party contributing the same. The Parties agree that any improvements or modifications to a Party’s Background IP arising from the Project which are not severable from that Background IP will be deemed to form part of that Party’s Background IP and be owned by that Party.

This is the only place in the agreement that the word “severable” is used, and the term is not defined. So, we must rely on any general understanding of what this term (or its opposite, non-severable) means, when interpreting the provision.

Some universities’ template agreements include a definition. For example, IP Draughts discovered this agreement from the University of Sheffield, when he conducted a quick internet search. The agreement is a licence agreement rather than a research contract, but it is helpful for having this definition:

Non-Severable Improvements: any Improvement which if used or practiced without licence from the Licensor would infringe any Intellectual Property Rights in the Software and/or Information.

In a research contract setting, a severable improvement might be defined as an improvement to a party’s background IP that can be used without infringing that background IP.

It is troubling to IP Draughts that people in the sector are using these terms but sometimes not defining them, as though everyone knows what they mean. But do they? We are dealing with a rather technical, legal point.

IP Draughts first encountered this issue in the context of EU competition laws, and in particular old versions – no longer in force – of the Technology Transfer Block Exemption Regulation. Article 5 of the regulation might be described as a “grey list” – a list of clauses in licence agreements that the European Commission’s Antitrust Division is not happy about, but which are not as bad as the “black listed” or “hardcore” clauses that appear earlier in the regulation. Including hardcore clauses is very likely to be a breach of Article 101 of the EU Treaty, and potentially leads to fines, unenforceability of the agreement, and claims for damages by affected third parties. Including a grey-listed clause runs these risks, but the risks are considered lower than in the case of hardcore clauses, and parties may be able to justify the inclusion of grey clauses in appropriate circumstances.

Article 5 of the regulation includes a provision that “grey lists” obligations on a licensee to assign or exclusively license to the licensor any improvements to the licensed IP made by the licensee. Essentially, the European Commission thinks such provisions may be anticompetitive if they prevent the licensee from competing with the licensor with respect to such improvements.

For several decades, Article 5 distinguished between severable and non-severable improvements. Non-severable improvements are considered to present much less of a competition issue, as they can’t be used without infringing the original IP. For example, the 2004 version of the regulation included the following definition and terms:

Article 1(1)(n): ‘severable improvement’ means an improvement that can be exploited without infringing the licensed technology

Article 5(1)(a): The exemption provided for in Article 2 shall not apply to any of the following obligations contained in technology transfer agreements:
(a) any direct or indirect obligation on the licensee to grant an exclusive licence to the licensor or to a third party designated by the licensor in respect of its own severable improvements to or its own new applications of the licensed technology; [emphasis added]

By the time of the current, 2014 version of the regulation, the European Commission had toughened up its thinking. There is no reference to severable improvements, and Article 5(1)(a) simply reads:

Article 5(1)(a): The exemption provided for in Article 2 shall not apply to any of the following obligations contained in technology transfer agreements:
(a) any direct or indirect obligation on the licensee to grant an exclusive licence or to assign rights, in whole or in part, to the licensor or to a third party designated by the licensor in respect of its own improvements to, or its own new appli­cations of, the licensed technology;

IP Draughts’ working hypothesis is that the concept of severable improvements originated in the Technology Transfer Regulation; he had not come across it outside the regulation, until recently.

It seems strange that the legal concept is no longer used in its original form, but has migrated into the practice of university contracts managers in respect of a different type of contract – research contracts rather than licence agreements. By endorsing and using the Brunswick agreement, the sector appears to consider that the term is so obvious in its meaning that it doesn’t need to be defined.

IP Draughts is troubled by this assumption. Just because an expression has become part of a professional jargon, it doesn’t mean that the meaning is universally understood. Familiarity breeds lazy assumptions. He would prefer to see the term defined, whenever it is used in a contract.

This is not his only reservation about the Brunswick agreement, or about other industry-standard agreements (e.g. the DESCA collaboration agreement, or UK funding terms). He thinks people in the sector should be investing more time and money in getting the wording as good as it can be.