In the United States, ownership of intellectual property (IP) rights defaults to the inventor. In order for any transfer of rights to be effective, a clear written assignment must be made between the parties. Even the work for hire doctrine will not overcome this requirement in the case of copyrighted works. For this reason, it is important to review any independent contractor agreements or consultant agreements when an M&A target has IP assets created wholly or partially by contractors or consultants.

This due diligence activity seeks to establish the nature and basis of the contractual relationship between the outside party and the target company, whether the applicable contracts address creation, ownership, and transfer of IP rights to any works created by the outside party, and the actual ownership status of any such works. The goal is to identify the strength of the target’s ownership claim over any IP assets produced for it by third parties, and thus the value of those assets to the acquiring company.

Several questions must be answered in order to adequately address intellectual property produced by third party contractors. The first is whether there is a written agreement in place between the contractor and the target company. If so, a standard analysis of the validity and enforcement of the agreement must be undertaken. If the agreement is valid and enforceable, the next point of examination is whether there are separate statements of work (SOW) attached to the agreement, or similar schedules that address the details of the relationship on a project level.

The SOW document helps to establish that creation and ownership of a particular work was specifically contemplated by the parties and therefore included within the reach of the broader contractual relationship. Returning to the main agreement, another material point of inquiry is whether the agreement has an effective assignment of IP rights, including patent, copyright, or other rights as applicable. If there has been an effective assignment, it becomes necessary to identify any exceptions or carve-outs, including for example, foundational technology.

The work basis of the created works is also salient, along with whether the agreement includes licensing of ancillary rights necessary to commercially exploit the work produced by the contractor or consultant. Ideally, the agreement and schedules or statements of work should indicate that all work is original and no prior owner or employer’s property is included in any work delivered pursuant to the agreement. Finally, the inquiry with perhaps the most profound consequences is whether the contractor is affiliated with an academic institution and if the institution has any rights over the contractor’s inventions. If this question is answered affirmatively, an extensive set of separate research tasks must be completed in order to determine ownership of the works at issue.

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