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IP considerations in consulting/services agreements

Anthony Butler
6 min read

As a result of Vision 2030, there is a tremendous amount of innovation occurring across every dimension of Saudi Arabia: from the digital transformation of government, the development of the gigaprojects (such as NEOM), or the vast efforts of the Public Investment Fund to accelerate the growth of the non-oil sector as a driver of Saudi GDP growth. In many cases, this innovation is leading to the invention of new ideas, new approaches, and new technologies or solutions; whilst this is delivering immediate value in its original context, these innovations also have potential to deliver global value and become an important contributor to future growth and competitive advantage for the Kingdom.

As such, a key consideration must be intellectual property: ensuring that the knowledge that is being created every day across these dimensions is captured in a form that it can be utilised. In some cases, this might be to create a new public good or make the innovation available more broadly to the society; and, in other cases, it might be to monetise the intellectual property through the creation of new companies, products, or services. Indeed, the Saudi Arabian IP Authority (SAIP) lays out a detailed national strategy for IP in the country that serves to underscore the importance of IP to economic growth.

Having negotiated and led many complex contracts over the years (albeit from the vendor side of the table!), I was recently asked to share some thoughts or advice on what companies and/or agencies should consider when entering into a contract with a consultancy or services firm to ensure that any IP that is created is appropriately captured.  This applies whether the intent is to monetise it or whether the intent is to ensure that other Saudi firms and entities can fully benefit from it.

  1. The vendor/consultancy will bring what is termed “background IP”.  This is pre-existing intellectual property that they bring to a contractual relationship, such as assets that might be used in a software development project or tools that might be used in a paper-based consultancy engagement.  The consultant should explicitly disclose what constitutes background IP in a given engagement -- ideally in the contract.   A “continuous disclosure” requirement should also be considered wherein, as a consultancy engagement progresses, the consultant is notifying the client of background IP that will be leveraged.
  2. There will be IP that is created through the engagement that may or may not build on or extend the background IP.  This is the “foreground IP”. One can think of this as the "deliverable" but also, as part of a deliverable, there may be inventions that arise which might not necessarily be the core work product but a consequence of it.
  3. The entity should ensure that the consultant assigns them a complete, irrevocable, worldwide, exclusive, and royalty-free assignment of all rights and interest in any foreground IP that was developed by the consultant for the client. 
  4. Often, consultants will include a “license back” clause where they license back the foreground IP they develop for their client.  In other words, they would be granted a fully irrevocable worldwide license to do as they wish with it. This may seem harmless or may not even be noticed but it can materially weaken a client’s ability to monetise the IP exclusively or introduce other issues such as if this IP is reused/sold to competitors.  As such, these clauses should be considered carefully in the context of the client’s broader business goals. 
  5. There may be background IP embedded in the deliverable so consideration should also be given to ensure the unencumbered use of this.  For example, the use of proprietary tools, technologies, assets, or libraries may be used by a consultant to accelerate delivery or achieve other benefits.  Rights to continue to use, modify, and even assign to others should be considered based on the business requirements; as should careful examination of whether, as a result of continuing to use background IP after the departure of a consultant, there is a requirement to pay royalties and/or use services.
  6. The client should ensure that any third-party IP embedded within the consultant's background IP, or otherwise utilized in the project, is free of liens, encumbrances, or restrictions. This ensures the IP can be used, extended, and monetized in line with business objectives.
  7. Additionally, the consultant should indemnify the client against any third-party claims resulting from future IP infringements. This could be in relation to the work that the consultant themselves produce or it could be in relation to subcontracted or embedded components in their deliverables.  
  8. It may be useful to incorporate provisions that requires the consultant to both assist in the recording and registration of the IP rights and/or to provide assistance in the future to confirm the exclusive ownership of the IP if required. For example, if there is a need to file patent disclosures, then the consultant will provide input into this documentation.
  9. The consultant should be obligated to notify the client in case they become aware of any IP infringement claim or potential conflict related to the deliverables.  This should not be time-limited to the contract duration.
  10. If the client wants to maximise optionality for the use of the IP, the contract should include a sub-licensing clause that gives the client the right to sublicense or assign any foreground and/or background IP to third parties.
  11. The term “residuals” pertains to knowledge and insights that consultants retain from the project (in their memories).  Their knowledge, skills, and experience can be applied in ways that might not be acceptable and therefore an agreement could introduce limitations to prevent the consultant form applying or exploiting this knowledge in specific fields, domains, or regions. 
  12. This can be strengthened through the use of confidentiality and non-compete agreements, if justified, where the individual consultant’s engagements with competitors or others, such as customers and employees, can be contractually restricted. 
  13. As consultants may inadvertently establish “prior art” in the public domain by describing aspects of their work or ideas that may have arisen from their work, this can limit the ability of the client to register certain forms of IP rights, such as patents.  Consideration should be given in the contract to protecting against inadvertent leakage of information through public statements or publications – even if obfuscated or not directly attributable to the specific engagement. 
  14. Some consultants may use subject matter experts that are contracted from outside their firm or they may use subcontractors.  The agreements should require that the IP requirements cascade down to these firms and individuals.
  15. When the consultancy involves the use of proprietary software or specialized tools constituting background IP, clients may consider entering into an escrow agreement. This would involve depositing the software's source code with a neutral third party. In events such as the consultant's insolvency or failure to provide necessary updates/support, the client can access the source code, ensuring continuity and beneficial ownership of the IP. The trigger events for access to escrowed source code should be wide enough to reflect the full spectrum of risks that might prevent future beneficial use of the software. This would likely extend beyond just financial insolvency matters but also sanctions or boycotts.
  16. In the case of a breach of contract and termination, consideration should be given to the reversion of rights.  For example, in the case of termination for convenience or cause, the IP rights would be with the client. This reversion could be full or partial; but should nonetheless be considered particularly in the case of software development or phased consultancy projects. It is also important to consider that, depending on the methodology used, the discovery of novel ideas or inventions may happen early in the project (well before anything is actually built).
  17. Sometimes consultants may attempt to limit to copyright whilst not transferring the broader set of IP rights to the client, such as patents.  For example, a consultant could do work for a client, discover some novel solution to a problem, and, by only transferring copyright on the actual deliverable, retain the rights to create a product based on the invention and monetise it independently.
  18. The use of certain open-source components may introduce complexity if the licensing requirements of those components requires, for example, derivative works to also be open sourced.   
  19. There may be geographic constraints placed on an agreement such as agreeing to exclusivity within a country or region.  This needs to be considered in the context of the business objectives.  Similarly, some agreements may be time-bound and not perpetual so this also requires similar consideration because of the limitations it can place on the usage of the IP.
  20. With the growing use of generative AI, it is possible that data provided by a client will be used directly or indirectly to train/enhance/enable AI models that are used by a consultant to deliver a service.  This needs to be carefully considered.

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Anthony is a Senior Advisor to a G20 Central Bank on emerging technologies and applied research. He was previously Chief Technology Officer for IBM, Middle East and Africa. Lives in Saudi Arabia.