Big Beast Wants It All
Sometimes it isn’t “let the buyer beware.”
Everybody was eager to sign the contracts and get started on the research project. It would produce a new product for which there is a compelling need. It would advance technologies that are greatly needed.
The subcontractor has intellectual property that is the starting point, plus know-how to take it further. They asked to see the terms and conditions the very large end customer would impose on the contractor, because those Ts & Cs would apply to the subcontractor too.
Everybody read through the document quickly, saw what they wanted to see and charged merrily ahead with drafting a proposal. The big customer might claim ownership of new inventions made during the work they pay for, but surely they would pay license fees for using background IP. The contractor thought if they made maximum use of existing IP (which is called background IP) and did the project with as little new invention as possible, it would be okay.
Then the subcontractor asked me to take a look at the Ts & Cs. I work with them from time to time.
I’m not a lawyer, but I’ve become at least halfway decent at understanding what contracts say. Paying attention in English class turned out to be priceless in business. Very large companies often take unfair advantage of small companies. The first sign of it is frequently in the contract.
Here is how the Ts & Cs translate into plain language. I’ll call the big customer Big Beast, and the small contractor and their subcontractor Worker Bees:
Big Beast keeps their background IP. Worker Bees are obligated not to reverse engineer their IP.
Worker Bees keep their background IP. There is no mention of Big Beast being obligated not to reverse engineer it.
Big Beast gets ownership of all IP that Worker Bees develop in the course of the project, plus the irrevocable right to use Worker Bees’s background IP in perpetuity worldwide, including any derivative works.
Worker Bees agrees to not only hand over all the information, but also to create and file whatever is necessary to make Big Beast’s ownership of what Worker Bees develops formal and legal.
There would be no license deal about any advances Worker Bees make in the project; Big Beast would own the advances.
There is no mention of willingness to pay for the right to use Worker Bees’ background IP.
It didn’t matter which Worker Bees intellectual property already existed and which got invented for the project. Big Beast would take it all one way or another (either outright ownership or an unfettered royalty-free right to use), plus anything derived from it. They could use it any way they wanted, make as much money from it as they wanted, and never pay license fees for any of it. The only cost to Big Beast would be paying for materials and labor in the project.
They would pay a few tens of thousands and walk away with millions.
The Worker Bees subcontractor would be rendered worthless because its most valuable assets (its intellectual property) would be siphoned off into Big Beast. It isn’t just that nobody would buy the company whenever the owners want to retire. Hardly anyone would buy anything from them any more. Big Beast marketing would drown out Worker Bees. Even when someone found Worker Bees, why buy one small package of cleverness from them when Big Beast can bundle it with other things? Why rely on a small company when you could turn to a big one that is a household name?
I am sorry to say none of that is an exaggeration.
I am even more sorry to say this type of situation is not at all unusual. Small companies often don’t realize it until too late to stop it. This time at least it was recognized before the contract was signed.
Big Beast will proclaim loudly that the Ts & Cs are standard, accepted by all of their vendors. They may even say the Ts & Cs cannot be modified. It isn’t true. If what you supply is truly needed by them and truly valuable to them, you have leverage. You can get the Ts & Cs changed. I’ve done it more than once when I was working with a business like Worker Bees, even when the little business couldn’t claim to be the only source in the world for what they offer.
It takes nerve to stand firm against such bad contract terms. You feel like that juicy contract is going to slip through your fingers the whole time you’re politely digging in your heels and refusing to sign such a lopsided agreement. Once in a while the juicy contract does dry up for you and goes to some other business that doesn’t read the fine print as well as you do. But when you’re Worker Bees, you have to do it. You have to gather your nerve and insist on fair clauses. If you don’t, Big Beast will take everything you’ve worked so hard to build. The library of software you wrote, the gadget you built, the catalyst you developed in your lab, whatever you’ve poured your blood, sweat and tears into can all disappear into a Big Beast pocket with one careless signature.
In this case Worker Bees can do something nobody else in the world can do. Either Big Beast will have to adjust their Ts & Cs or their project won’t fly.
But if Worker Bees had been too quick to sign the contract, they would be cheerfully working to give away everything for a small fraction of what it’s worth.
Let the seller beware.