What is an Assignment of an Agreement of Purchase and sale?
At its essence, an Assignment of an Agreement of Purchase and Sale – informally known as “flipping a home” – is a simple concept:A buyer of a new home allows someone else to take over the purchase contract, which allows that person to buy that same home him or herself.
More specifically, the original buyer enters into a formal Agreement of Purchase and Sale with a Builder, and then allows another person – who we will call the “new buyer” – to step into his or her shoes through what is legally known as an “Assignment” of that original Agreement or Offer to buy.The new buyer pays the original buyer a higher price than what was set out in that original Agreement, with the difference begin the original buyer’s profit. All of this takes place after the original buyer has agreed to buy from the Builder, but before the deal closes; the original buyer never takes title to the property.
This arises primarily with homes: For newly-built homes with typically long closing dates (e.g. often 18 months or more), an Assignment is particularly attractive in situations where the Builder has already sold all of the units in the development early on, but where there is still demand for soon-to-be-completed homes and new condominium units in the development.The assignment of a new condominium unit is also interesting for similar reasons, although the time frame may be significantly longer depending on when the assignment occurs.This puts the original buyer in position to make a profit by inflating the new price well above what he or she agreed to pay the Builder in the first place.
And what is the benefit to the new buyer?There can be several:
- The new buyer may be able to buy into a desirable neighbourhood at a time when there are no more units available to be purchased directly from the Builder;
- Even taking the original buyer’s profit into account, the assignment may give the new buyer a price advantage over other properties that are currently on the market; and
- Depending on the timing of the assignment, the new buyer may be position to choose finishes and make minor changes to the yet-to-be-built home.
Whatever the respective motivations of the original and new buyer, the assignment of an Agreement of Purchase and Sale has many specific features – and just as many potential pitfalls.What follows is a discussion of some of the key points.
When Can An Agreement of Purchase and Sale Be Assigned?
Unlike the standard Toronto Real Estate Board (TREB) or Ontario Real Estate Association (OREA) agreements, many Builders’ own (i.e. customized) Agreements of Purchase and Sale contain a clause that generally prohibits the assignment of the contract outright – or else allows it only certain very strict conditions and in exchange for a significant fee payable to the Builder.
In fact, the vast majority of new home or condominium-purchase agreements do not allow the original buyer to assign the contract to someone else and stipulate that any attempt by the buyer to do so, or to list the home for sale on the Multiple Listing Service (MLS) or otherwise, or else list the property for rent, will put the original buyer in breach of the Agreement. This triggers the Builder’s right, with notice, to terminate the original Agreement, keep the original buyer’s deposit, and seek additional damages from him or her.(And in most cases, the original buyer’s Agreement is “dead”; i.e. he or she cannot go back and try to complete the transaction as if no assignment had taken place).
All of this means that anyone who has agreed to purchase a home from a Builder should give careful consideration to, and should seek legal advice prior to signing the Agreement, or in the case of condominium units during the 10-day cooling-off period in order to determine whether it’s possible to assign the Agreement in the first place.
This in turn involves a careful review of the clauses in that Agreement.
Typical (and Not-So-Typical) Provisions
As a practical matter, there are as many variations in these types of provisions as there are Builders.
Many Agreements of Purchase and Sale will include a largely-standard “No Assignment” clause, which disentitles the original buyer from “directly or indirectly” taking any steps to “lease, list for sale, advertise for sale, assign, convey, sell, transfer or otherwise dispose of” the property or any interest in it.
A potential exception – and this is important – arises if the Builder gives prior written consent, although in the more draconian version of these kinds of contract, that consent may be “unreasonably and arbitrarily withheld” by the Builder, essentially on its whim. In other words, the buyer is not allowed to deal with the property, unless the Builder pre-approves it in writing, but in many cases the Builder has no obligation to give that approval and may withhold it for any reason whatsoever, including unreasonable and arbitrary ones.
(With that said, the “No Assignment” clause in some Agreements will allow for express exceptions or situations where the Builder will not withhold consent, for example:a) Assignments made to a member of the original buyer’s immediate family; or b) where the Builder has determined that a sufficient and satisfactory percentage of the available units have already been sold).
The bottom line is that the basic clause in an Agreement of Purchase and Sale may or may not allow for the assignment of the Agreement to a new buyer, and if it is allowed, it will be subject to specified conditions such as obtaining the Builder’s written consent.Most Agreements will embellish this basic clause by adding further written stipulations such as:
- Having both the original buyer and the new buyer sign an Assignment Agreement that has been drafted by the Builder;
- Mandating the original buyer will not assign the Agreement until the Builder has managed to sell a certain percentage of the units in the overall development (e.g. 85 or 90%), and even then it must be with the Builder’s written consent as usual;
- Requiring the original buyer to pay a fee to the Builder of (for example) $5,000 plus taxes as part of obtaining the Builder’s consent to the assignment;
- Requiring the original buyer to pay another fee plus taxes to the Builder’s lawyer (ostensibly as a sort of “legal processing fee”);
- Getting the pre-approval of any lending institution or mortgagee that is providing funding to the Builder for construction or otherwise;
- Assuming the Builder agrees to the assignment in the first place, prohibiting any further assignments of the offer by the new buyer to any subsequent party;
- Confirming that the breach of any of the original buyer’s promises in relation to how and when an assignment can occur will be considered a breach of the whole agreement (and one that cannot be remedied); and
- Requiring the original buyer to confirm in writing that the property is not being purchased for short-term speculative purposes.
- Note that even if the Agreement of Purchase and Sale does not expressly allow or provide for it in writing, some Builders will permit an original buyer to make an assignment nonetheless.This is because it is always in the Builder’s discretion to give up (usually for a fee) its right to technically insist on the purchase going ahead with the original buyer.
Getting the Builder’s Consent
It’s important to remember that, initially, the original buyer and the Builder had a valid legal contract in place that obliged the buyer to purchase a home or condominium unit from the Builder.That original buyer, for whatever reason – whether it’s a change of circumstances (such as a change in a marital situation, job transfer to another city, province or country; birth of children resulting in a home/condominium unit being too small for the buyer), cold feet, or simply the desire to make a profit – has subsequently decided to “sell” that right to buy to the new buyer.
To protect the Builder, the Assignment will contain clauses that are designed to safeguard the Builder’s rights.The most important one is that, as discussed, the Builder must give its written consent to the Assignment.This will often involve specific Builder-imposed requirements, fees and forms which must be completed.
Once consent has been obtained, there may be additional restrictions on the manner in which the original owner can market the property.For example, some Builders will insist that the property is not to be listed on MLS (where it may be competing with the Builder’s own listings for still-unsold home and units in the same development); if the original owner does so nonetheless, it will be tantamount to a breach of the Agreement of Purchase and Sale which could entitle the Builder to damages, or rescission of the Agreement of the Purchase and Sale while retaining the deposits paid, as well as the monies paid for extras.
However, aside from any marketing / advertising restrictions that may be imposed, the original buyer must clearly indicate in any listing that it is an assignment of an Agreement of Purchase and Sale, not merely an ostensible sale from the original buyer.
Continuing Liability After Assignment
One key provisions in the Agreement of Purchase and Sale – and one that is easy to overlook – may significantly impact whether an original buyer will want to assign his or her agreement at all.
Even though the original buyer has essentially transferred his or her right to buy the property to the new buyer, the original buyer is not fully off-the-hook.Rather, under the terms of the Assignment document, the original buyer can remain liable to go through with the contract if the new buyer does not complete the transaction with the Builder.
This written obligation appears in the original buyer’s Agreement of Purchase and Sale, and is couched in phrases that give the buyer continuing liability for the “covenants, agreements, and obligations” contained the original agreement.But the net effect is that the original buyer remains fully liable should the agreement between the Builder and the new buyer collapse.The Agreement may also stipulate that the assignee, meaning the person receiving the benefit of the assignment (i.e. the new buyer) must sign an “assumption covenant” which creates a binding contract between the new buyer and the Builder.
(Incidentally, in contrast some Builder’s agreements quite conveniently allow the Builder itself to freely assign the agreement to any other Builder registered with Tarion, which assignment completely releases the Builder from its obligations.)
The original buyer’s continuing liability under the Assignment Agreement is a major drawback in these types of arrangements. The original buyer always has to balance the risks and rewards inherent in this scenario.
Documenting the Transaction
Assuming that the assignment of an offer is even permitted by the Builder, then (as with all contracts) it must be documented to reflect and protect the legal right of the parties.
The technical aspects of an assignment require more than simply taking the original buyer’s Agreement of Purchase and Sale with the Builder, scratching out his or her name, and replacing it with the new buyer. (Although, in some cases people do try to “squeeze in” assignment-of-offer terminology into a new Agreement of Purchase and Sale made out in the new buyer’s name – but this is definitely NOT recommended).
Rather, a properly-documented transaction makes reference to the Agreement of Purchase and Sale between the original buyer and the Builder, but adds a separate document called an “Assignment of Agreement of Purchase and Sale.”The Ontario Real Estate Association (OREA) provides a standard form that can be used, although in many cases those Builders who permit Assignments will insist that the original buyer and the new buyer use the Builder’s customized assignment forms, rather than the OREA standardized version.
The Specifics of the Deal –Who Pays What?
Recouping the Original Buyer’s Costs
At the point where the Assignment is being negotiated, the original buyer has typically paid a deposit to the Builder, may have pre-paid for certain upgrades and extras, and has a large balance owing.This means that in the course of striking a deal to achieve the assignment, the original buyer should give some serious thought to the various costs, fees, pre-paid deposits, and tax repercussions of the deal, and how these should be reflected in the price that he or she will want the new buyer to pay under the Assignment Agreement. The timing of the payment(s) will also be a consideration.
For both original buyer and new buyer who are considering an assignment arrangement, here are some of the questions to ask:
- Does the price to be paid by the new buyer include any fee that the Builder is charging in exchange for the original buyer’s right to assign the Agreement of Purchase and Sale?
- Does it include any deposits paid by the original buyer to the Builder, after the Agreement was signed?Does it include any interest that has been earned on those deposits?
- Does it clearly state that the new buyer will take over the entire contract, including the adjustments that are to be paid to the Builder on closing?Or are those adjustments to be split between new and original buyer?
- Does the price include money paid by the original buyer for extras and upgrades?
- Are there any additional deposits that are still owing to the Builder, under the original agreement?
- Who is responsible to pay the additional fee (i.e. the Builder-imposed fee) in exchange for the Builder giving consent?Usually, this will be the original buyer, but the parties may negotiate otherwise.
- Does the new buyer agree to take on responsibility under the original Agreement for making additional deposit payments until the final closing date (which may still be months or even years away)?
- Does the new buyer have a full understanding of the amount of all the adjustments that must be paid to the Builder pursuant to the original Agreement?
- If the original buyer has negotiated any special financial incentives into the Agreement of Purchase and Sale that has been reached with the Builder, have these been addressed in terms of whether the new buyer will receive the benefit of them?
In any case, the final purchase price payable from the new buyer to the original buyer will typically be made up of:
- The outstanding balance owed to the Builder by the original buyer, that will now be payable by the new buyer;
- The total deposits already paid by the original buyer to the Builder;
- The total payments already paid by the original buyer to the Builder for any upgrades, extras, etc.; and
- The profit that the original buyer stands to make in the deal.
Deposits, and Interest on Deposits
The treatment of deposits, and the interest they may have earned, merits a brief separate discussion.
Under virtually all Agreements of Purchase and Sale with Builders, the original buyer will be required to pay a series of deposits to the Builder, starting with the initial deposit paid when the Agreement is signed, and on a set payment schedule thereafter. The total of those deposits can be significant.
Once the Agreement has been assigned to the new buyer, how those deposits are treated will form part of the negotiations.Typically, the original buyer will get those deposits back from the new buyer as part of the overall purchase price of the assignment transaction; he or she will usually receive them at the time the assignment agreement is entered into and the Builder has consented to the assignment.
The potential problem with an Assignment Agreement is financing. The original buyer will want his deposit funds returned before closing, but if the new buyer does not have funds on-hand, he or she may find that financing is very difficult to obtain because banks do not advance mortgage funds at the time an Assignment Agreement is entered into; rather, the financial institution will provide funds only on final closing.This can serve as a roadblock to the new buyer’s ability to repay the deposits and potentially to embark on the transaction at all.
The question of who is entitled to the Interest on any deposits pre-paid to the Builder is also a topic for the original and new buyers to discuss.In many cases, the interest will be only a small amount (if any) and may be credited to the new buyer, rather than the original one.However, in cases where the original buyer has paid significant deposits over time, and where larger interest amounts have accrued, the parties may want to negotiate a different outcome.
Land Transfer Tax
Land Transfer Tax is also an important consideration in Assignment Agreement arrangements.
When negotiating the deal, the original buyer and the new buyer must discuss the structure of the deal between them, to ascertain the exact selling price on which the Land Transfer Tax (and any Municipal Land Transfer Tax) should be payable i.e. whether it is the original buyer’s price with the Builder (net of HST and the HST New Housing Rebate, which is discussed below), or whether it’s the newly-inflated price being paid by the new buyer under the Assignment.
Generally speaking, it will be the latter, although in some assignment arrangements the parties have attempted to structure it so that they pay the Land Transfer Tax based on the lower initial price asked by the Builder, while taking the position that difference between that and the increased price is merely the “fee” paid to acquire the original Agreement of Purchase and Sale entered into with the Builder (thus avoiding having the tax calculated on the higher sale price).
In any case, once the Assignment Agreement is reached, it will be the new buyer who is obliged to pay Land Transfer Tax and any Municipal Land Transfer Tax on closing, not the original buyer.
HST and the HST New Housing Rebate
The issue of how HST is to be treated in an assignment scenario is a crucial one, but is fraught with pitfalls.
The first issue is how HST on the transaction should be calculated. Because the new buyer’s price will inevitably be higher than the one the original buyer agreed to pay to the Builder, there is an important issue as to whether the difference – meaning the original buyer’s profit – should be subject to HST (and if so, who will pay it in the transaction).
This determination hinges on whether the assignment is a “taxable supply” under the tax legislation, and on whether the original buyer can be considered or deemed a so-called “builder” of the home for HST purposes.This, in turn, involves a number of complex legal concepts and factual findings – including the intentions of the original buyer as to whether the home is going to be a primary residence.
Next, there is the issue of the HST New Housing Rebate. In a typical scenario, the original buyer may have been entitled to the HST New Housing Rebate, based on meeting numerous qualifying requirements and stipulations. However, once he or she assigns the Agreement, that eligibility is obviously lost because he or she is no longer taking title to the home on closing. Only one HST New Housing Rebate application per dwelling can be filed.
But once there has been an assignment, it is the new buyer’s circumstances that will determine whether the opportunity for an HST Rebate exists. He or she will have to meet the stipulated legislated requirements, and may either apply directly to the Canada Revenue Agency (CRA), or arrange with the Builder to have the rebate amount credited right at closing.
(Note that the new buyer may want to take steps to protect his or her position in this regard.For example, when negotiating the Assignment Agreement, the new buyer should make the agreement conditional on receiving written confirmation from the Builder that any HST New Housing Rebate will be credited to him or her on closing (assuming that the qualifying requirements are otherwise met).Otherwise, if this commitment is not in writing then the Builder, being entitled to exercise its discretion on whether to credit the buyer with the rebate amount on Final Closing, can withhold it and force the new buyer to apply to CRA directly after closing.Obtaining this commitment in writing is especially important given the likely lack of prior dealing between the Builder and the new buyer.
Other Things To Consider
Who is Responsible for the Documentation?
In addition to ascertaining whether the original buyer or the new buyer will pay for certain items, it is also important to determine – in advance – which of them will take care of arranging the documentation.The questions to ask:
- Who will prepare the documents needed to achieve the Assignment?And who will bear the cost?
- Will the Builder’s lawyer prepare the Builder’s needed consent to the Assignment?
- Since the new buyer cannot renegotiate any of the provisions of the Agreement that the original buyer entered into with the Builder, are any of those terms objectionable, and if so, how will they be resolved and who will bear the cost?
As discussed, the Assignment Agreement will be conditional on the Builder giving its consent.From the new buyer’s standpoint, it should also be made conditional on him or her giving close review to the original Agreement of Purchase and Sale (as signed by the original buyer), the Assignment Agreement, as well as any amendments, waivers, notices (and for condominium purchases, the Disclosure Statement) etc.If for no other reason, it will give the new buyer a chance to consider the specific list of adjustments for which he or she will be responsible to pay on closing.Needless to say, this review should be undertaken with the guidance of an experienced lawyer.
Once the terms of the assignment are settled and the Builder’s written consent has been obtained, the Assignment Agreement must be drafted and is attached to the original Agreement of Purchase and Sale that the original buyer entered into with the Builder.
Incidentally, the Builder may have certain requirements that must be incorporated into the process and accommodated as well.For example, the Builder will require the new buyer to provide I.D., and will need confirmation that he or she has the financing required to close in place.
When negotiating the assignment arrangement, the original and new buyers must be aware of the impact of the New Home Warranty Program as administered by Tarion, particularly if the home being “flipped” is a condominium unit.
There may be financial issues for the new buyer to work out before the deal can go ahead.
As usual, the transaction may be conditional on financing, which will be arranged on the higher price that the new buyer has agreed to pay. However, since some mortgage brokers may be unfamiliar with financing an assignment transaction, getting approval for the new buyer’s purchase may be challenging. This is something that needs to be investigated long before the original buyer and the new buyer start their negotiations in earnest.
A final issue to be negotiated is who is paying the commission with respect to the Assignment Agreement transaction.This includes consideration of the specific commission rate, together with the details on how and when the commission gets paid.
While an Assignment Agreement can be beneficial to both the original and the new buyer – and even to the Builder (in extra fees) there are many issues to be addressed and negotiate.
As an agent, make sure your client obtains legal advice prior to finalizing any agreement to assign the original Agreement of Purchase and Sale.
Be careful… be aware… and think!”
Intellectual property rights can arise through various situations that are typically covered by written agreements, including: (1) employee developments, (2) consultant services, (3) joint development arrangements, and (4) acquisitions, such as licenses of third party IP. When negotiating and drafting such agreements, care should be taken to ensure that rights are properly identified and secured for the client (Company). Because IP may be developed directly for Company by its employees, by outside parties retained by Company, or through joint efforts with a third party (with the resulting work product from each of these being the “developed IP”), consideration must be given to IP ownership issues. Company’s ability to use and exploit the developed IP is a central concern for any IP agreement.
Effective IP agreements require careful thought and a good degree of precision in crafting definitions and various other provisions. Every technology transfer agreement affords the opportunity to legal counsel to creatively draft terms and conditions to meet the goals of the parties to the agreement and address the circumstances unique to each situation. This article highlights some of the more important considerations and agreement terms to help protect Company’s rights in the developed IP.
OWNERSHIP AND EMPLOYEE ASSIGNMENTS
In the United States, ownership of IP, such as patent and trade secret rights, does not automatically rest with the employer but instead initially rests with the inventor. 1 The inventor must execute an appropriate assignment document in order to transfer ownership of the invention to Company. Ownership will allow Company to seek protection for the invention, for example, through patent applications, and to enforce the rights against others. Without an assignment of the inventor’s rights, the inventor retains ownership in the invention, and Company may have limited 2 or no rights in the invention. Although U.S. Patent and Trademark Office procedures allow Company to pursue a patent application under certain circumstances even if the inventor’s signed declaration cannot be obtained, 3 these procedures do not resolve all ownership issues. Consequently, although Company may obtain a patent on the invention, the uncooperative inventor who has not assigned his rights to Company will remain free to separately exploit any granted patent, and Company’s competitors could even gain rights from the inventor to practice the patented invention. This, of course, is not a desirable situation for Company.
An executed assignment typically is the most straightforward proof of ownership in IP rights. Assignments should be obtained from all inventors as soon as possible to avoid potential issues, such as departed inventors who can be difficult to locate or may no longer be cooperative. Employment agreements with relevant provisions can be a safeguard in situations where Company does not have current contact with a former employee or a former employee refuses to execute an assignment to an invention developed in the course of his employment. A standard employment agreement that includes language stating that the employee assigns to Company all inventions developed during her employment will help support a claim that the employee at least had an obligation to assign and therefore Company rightfully owns all rights in the invention. For example, including a provision such as “[employee] agrees to assign, and hereby assigns, all inventions made during the course of my employment…” in the employment agreement can effectively transfer ownership rights to Company without any further assignment from the inventor. Similarly, with respect to copyrights, the agreement could include a clause that “the parties agree that the work product shall be a ‘work made for hire’ but, if not, then employee hereby assigns to Company the copyright of the work product.”
EXPRESS ASSIGNMENT LANGUAGE
Express language such as “hereby assigns,” rather than merely “agrees to assign” or “shall assign,” should be used in an agreement to effectively assign the applicable rights. “Hereby assigns” is viewed as a present assignment of all applicable future rights in an invention, 4 and no further assignment is necessary to transfer ownership of the rights (although a confirming assignment document for a specific patent application later may be obtained so that it can be recorded with the U.S. Patent and Trademark Office).
CONSULTING OR DEVELOPMENT AGREEMENTS - A NDA IS NOT ENOUGH
When developing new technology, Company may seek assistance from outside parties. Even if Company is paying a consultant or contributing to joint efforts undertaken with another party, Company’s rights can be compromised if the proper agreement is not in place before work begins.
Although research and development (R&D) personnel may enter into a non-disclosure agreement (NDA) with an outside party before initiating discussions about developing new technology, a NDA alone will not protect Company’s interests in future IP rights. In most cases, terms on IP rights and responsibilities— other than confidentiality and use restrictions—preferably are not included in the NDA, and the parties will need to enter into a subsequent, more comprehensive agreement following initial discussions. However, having a NDA in place may give R&D personnel a false sense of security if they lose sight of the limitations of the NDA and the need to enter into a further agreement at the appropriate time. Company can lose leverage in negotiations or, more significantly, the ability to control and/or practice the IP rights, if the parties have not entered into an agreement before development activities commence.
Any consulting or development agreement should include as much detail as possible regarding rights, responsibilities and other terms of the relationship, rather than relying on a separate addendum or a Statement of Work (SOW) to define key terms. Although reference may be made in the agreement to the format for the SOW, a template of which often is attached to the agreement as an exhibit, it will be incumbent on the parties to follow up later with an executed SOW. Additional issues may arise if R&D negotiates the SOW but an attorney does not have the opportunity to review the SOW to ensure that no terms conflict with the original agreement or that any SOW terms unintentionally supersede the prior agreement terms. To guard against this, the consulting or development agreement should include all terms and should specify that those agreement terms will control over terms in a subsequent SOW. Certain exceptions may be warranted, for example, if there is a later-developed invention that the parties agree to treat differently such that it is necessary to have the SOW or an amending agreement override terms of the original agreement. In such situations, the SOW or amending agreement should clearly specify the particular subject matter that will be governed by the new terms and confirm which original terms continue to govern the original subject matter.
BACKGROUND OR PRE-EXISTING IP
Typically, each party will retain ownership of its pre-existing IP that it brings to the relationship. If pre-existing, or background, IP is potentially relevant to the joint efforts and may be utilized in the developed IP, the agreement should clearly define each party’s pre-existing IP and require that a party notify the other party if pre-existing IP is incorporated into the developed IP. Also including in the agreement a license grant to the pre-existing IP will ensure that Company is able to practice the developed IP, both during and after the development activities. The terms of the license (e.g., exclusivity, royalties, field of use, etc.) can be negotiated along with the terms of the joint development agreement and tailored to address the expected needs of Company after the conclusion of the development activities.
During the term of the agreement, a party may independently develop IP that is not related to the scope of work under the agreement. The party who develops that IP most often will retain the ownership rights in the IP, and the agreement will typically exclude such IP from any grant of rights to the other party. This is particularly important if Company has internal R&D operations in related technology areas and does not wish to share with the other party any developments from those separate R&D operations.
DEVELOPED IP – CONSULTANTS
When Company hires an outside consultant to develop technology, Company usually will seek to own and control all developed IP, even if developed solely by the outside consultant, without any further payments to the consultant and without granting any ownership or commercialization rights to the consultant. If the consultant is another company, rather than an individual, the agreement should specify that the consultant will ensure that each of the consultant’s employees performing work on the project agrees in writing to assign all IP rights.
The consultant must be responsible for obtaining all executed assignments and other documents from its employees. In the event that an inventor’s assignment is needed, the burden should be on the consultant to obtain the assignment, and Company will have a cause of action against the consultant if it fails to obtain the assignment. The “hereby assigns” language can be included in the agreement as further evidence that the consultant has agreed that it will not retain any rights in the developed IP.
DEVELOPED IP – JOINT DEVELOPMENT
Unless one party will make a greater contribution of resources to the joint activities or has a stronger position in negotiations, ownership rights under joint development agreements often follow inventorship of the developed IP. Thus, if both parties have employees who have contributed to the invention, the parties will jointly own, and each have an undivided, equal interest in, the developed IP in accordance with 35 USC § 262. Of course, the right to commercially exploit the developed IP need not track ownership rights, and the parties have flexibility in allocating ownership of the IP (with corresponding assignment obligations between the parties) and/or carving out commercialization rights in the developed IP generally however they desire. For example, they may choose to grant sole ownership of certain types of developments (e.g., manufacturing processes to one party or compositions to the other party) or give each party exclusive rights in particular fields of use, all of which can be set forth in the agreement. The parties also may allocate rights differently in view of other considerations that arise in the context of joint development efforts. For example, joint ownership presents unique issues regarding patent rights, (e.g., prior art status, enforcement of the rights, etc.) that should be carefully evaluated when drafting a joint development agreement to ensure that the parties recognize the maximum benefits from their joint efforts and avoid unanticipated situations.
In addition to dividing up ownership rights, the agreement can provide for contingent rights. Company may seek a right of first refusal to purchase or license the other party’s interest in the pre-existing IP or developed IP if that party is no longer interested in the IP. This will help prevent an unintended transfer of rights to a competitor or other third party by the other joint owner.
PROTECTION AND ENFORCEMENT
The agreement ideally will include terms addressing how the parties desire to handle on-going responsibilities with respect to the rights, as well as disposition of the rights after the relationship ends. Providing as much detail as possible in the agreement regarding prosecution responsibilities can help avoid misunderstandings later on. Relevant terms include how the parties will decide whether and where to file new or continuing patent applications, who will control prosecution decisions and the level of input each party will have, whether to maintain an application or patent in a particular country, whether to enforce a patent, and how the costs will be apportioned in each of these situations.
Drafting technology development agreements to address as many issues as possible regarding IP ownership, rights and responsibilities, while also anticipating the needs of Company during the course of the relationship and later during commercialization of the developed IP, can mitigate easily avoidable pitfalls and subsequent disputes. Careful consideration of the various issues can help prevent inadvertent loss of rights and other unintended consequences so that Company can enjoy the full extent of rights in the developed IP.