Checkpoints for Reviewing Intellectual Property Ownership Clauses: Sorting Out Deliverables, Pre-Existing Assets and AI Use

Hello, I'm Noriaki Asato, Representative Attorney at LegalAgent.

In contract review practice, if you skim over the intellectual property ownership clause as a formality, the development of the business can be constrained later. Proceeding on assumptions such as "the rights are ours because the deliverables were delivered to us," "all the rights transfer because we paid the full fee," or "we made it together, so each of us can use it freely" leads to a large gap with the actual wording of the contract.

In software development, design work and AI-related services, new deliverables, the service provider's pre-existing assets and training data become intricately mixed. If you do not make clear in advance how much belongs to the client and what remains with the service provider, defects in the chain of rights may be pointed out after the service launches or in legal due diligence for a future M&A transaction.

Distinguishing Ownership of Rights From Licenses

An intellectual property ownership clause sets out who holds which rights in the deliverables and information created, improved or invented in the course of the contracted work. The main subjects are copyrights, the right to obtain a patent, trade secrets and technical know-how. However, exclusive rights do not arise in all data and know-how. Consider statutory protection separately from the conditions of use and management set by contract.

What to keep in mind first in practice is to treat ownership of rights and licenses separately. Even if the rights themselves remain with the counterparty, there are cases in which there is no obstacle to the business as long as the scope of use your company needs is licensed. On the other hand, if the scope of the license is too narrow, use by group companies, the transfer of the business in a future M&A transaction and sublicensing to third parties will be restricted. Decide, in line with your actual business plans, whether to aim for a full assignment of the rights or to settle for a broad license that includes sublicensing and succession. Also take care not to confuse ownership of the physical medium with intellectual property rights, which are intangible property. Receiving the medium of materials or the deliverables does not automatically transfer the copyright or the right of use.

Drawing the Line Between Deliverables and Pre-Existing Assets

What tends to give rise to disputes in practice is drawing the line between individual deliverables and the service provider's pre-existing assets. Provisions that transfer even templates, development frameworks and general-purpose libraries the service provider already had to the client threaten the service provider's business foundation. Conversely, if the contract lets the service provider freely reuse in other clients' projects deliverables that the client had created using its own proprietary know-how and at great expense, the client's competitive interests may be harmed.

Even if the body of the contract broadly provides for "all deliverables arising from the services," the scope described in the specifications attached as a schedule or in the list of deliverables may be narrower, so check consistency between the body and the schedules. The client should confirm that it has obtained a license for the pre-existing assets that are a prerequisite for running the deliverables, and the service provider should confirm that its own proprietary know-how and general-purpose components have not been swept into the scope of the assignment.

Designing Rights for Copyrights, Patents and Joint Development

For copyrights, check not only the scope of the assignment and the conditions of the license, but also the scope of the covenant not to exercise moral rights. Moral rights of the author cannot be transferred (Article 59 of the Copyright Act), and an agreement not to exercise them is a separate matter from the transfer of the copyright. When assigning a copyright, also note that unless the rights under Articles 27 and 28 are specifically mentioned as being assigned, they are presumed to be reserved by the assignor (Article 61, Paragraph 2 of the same Act). If the client anticipates future modification, reproduction or provision to third parties, check whether the scope of the transfer of rights under the Copyright Act and the agreement not to exercise moral rights are addressed in the provisions.

In the field of patents and technology development, check the identification of the inventors, the employee invention rules and the chain of succession to the right to obtain a patent. In joint research and joint development, simply writing "the results shall be jointly owned by Party A and Party B" is insufficient. With jointly owned patents, unless otherwise agreed, each co-owner can work the invention itself, but licensing to third parties or assigning a share requires the consent of the other co-owners. By contrast, a jointly owned copyright is, as a rule, exercised by agreement of all the co-owners. Based on the differences between types of rights, set out who is responsible for patent applications, licensing to third parties and the treatment of improvements.

Third-Party Materials and the Use of AI and Data

Also check the handling of third-party materials such as open source software (OSS), fonts and external APIs. Determine whether the license conditions of the third-party materials used have been violated, and whether restrictions such as limits on commercial use or obligations to disclose source code will affect the client's business.

In transactions that use data and AI, sort out the treatment of input data, training data, generated output and use for improving trained models. A party providing its own data needs to limit the extent to which the counterparty can divert it to training its own models or to services for other customers. With respect to the output of generative AI, whether a copyright arises at all and whether the output infringes third-party rights require separate consideration, so assess the risks separately from ordinary deliverables.

Continued Use After Termination and Responding to Infringement

Arrangements after the contract ends are also an issue that cannot be overlooked. Check whether the deliverables can continue to be used after the service agreement ends, whether the license for pre-existing assets survives, and whether this is consistent with obligations to return or delete confidential information. If a clause requiring the return of all related materials coexists with a clause allowing continued use of the deliverables, and it is unclear which materials must be returned, this can lead to a dispute over interpretation at termination.

Also set out the allocation of responsibility if a third party claims infringement of intellectual property rights. It is necessary to agree on who will act as the point of contact, defend the lawsuit and bear the costs, and how use will be suspended or a substitute provided if infringement is found. Consider the intellectual property ownership clause together with the limitation of liability clause and the indemnity clause.

Using generative AI, routine issues such as the non-exercise of moral rights and the exclusion of pre-existing assets can be extracted quickly. However, because AI follows only the words of the contract, it cannot know the realities of the development work, such as which parts are the new development for this project and which are general-purpose assets. It is indispensable for a person to compare the proposal and the list of deliverables with the contract and determine whether they are consistent with the actual workflow. Also check the rights to use pre-existing assets needed for future maintenance or a change of vendor. Whether the AI's draft leans toward a blanket assignment that takes away the service provider's general-purpose assets, or conversely narrows the license so much that it hinders the client's use, is judged in light of the business purpose.