Intellectual Property: the hottest topic in MOD contracting?

For technology companies, IP assets make up a great deal of the value of the business and in many cases can be more valuable than physical assets. Whether the IP in question relates to physical products, software, technical reports or know-how, companies actively seek to protect their IP rights through patenting, design registration and effective copyright and confidential information policies. Protecting such IP when engaging with third parties is crucial and requires consideration of who is entitled to use the IP, for what purposes and for how long, as well as the status of newly generated IP. These matters must be approached with care when setting up complex development or production companies sometimes involving multiple parties. In addition, when sharing this IP through licensing, royalties may be an important revenue stream either in addition to, or in place of, production revenue streams.

What is the MOD's current approach to IP?

The MOD takes a reasonable approach to IP rights in general: where a contractor brings IP to a development (often referred to as 'background IP'), the standard position is that the contractor continues to own it. Even where IP is developed during the work (often referred to as 'foreground IP'), ownership is not the real issue, at least not between MOD and the contractor.

Where issues do tend to arise are in relation to the exploitation of the IP and the extent to which the MOD can use it (including, importantly, providing IP rights to third parties and competitors) or the rights between different contractors (where multiple contractors are involved).

Certainly, the MOD is in a unique position compared to other customers (even other government customers) because of its mission to protect the national interest and carry out sensitive and technically complex duties. It is most often not sufficient for the MOD to simply purchase hardware: it has a need to train, maintain, repair and enhance that hardware on a through-life basis. In order to do that, it is necessary for the MOD to have the right to use the associated IP and, if necessary, to provide it to third parties in pursuit of its overarching objectives.

The MOD's IP policy

The MOD's IP policy is set out in the Intellectual Property - Statement of MOD Policy (the 'MOD Policy') which is contained within the MOD's Commercial Toolkit.

As set out in the MOD Policy, the MOD is conscious of the needs to "strike a balance between MOD's need to deliver military capability and industry's commercial interests as a consequence of their private venture investment". In implementing its policy, the MOD sets out nine principles (the 'Principles') which describe, in broad terms, the MOD's approach to accessing and using IP. The Principles are then followed by eight policies (the 'Policies') which set out in more detail how this approach to IP is implemented by the MOD.

Principles at a glance

The Principles recognise both the value of IP to business contracting with the MOD and the MOD's need to use business' IP to further its unique objectives. We consider below two of the key Principles and the implications for contractors:

• Principle 3 acknowledges that the ownership of foreground IP generated by contractors under MOD contracts will normally lie with the contractor, with the condition that MOD receives the necessary rights to use that IP for government purposes. Principle 3 also gives some indication of the MOD's attitude to a multi-contractor scenario, with its express reference to the IP "vest[ing] in the contractor generating the IP", although this point should be addressed clearly in any contract where it may be relevant.

• Principle 7 recognises that the utility and value of IP generated in a defence environment may go beyond its immediately intended defence application. Principle 7 indicates the MOD's desire to see a positive impact of defence-funded IP on the wider economy, suggesting that defence contractors are encouraged to exploit their IP outside defence contexts (assuming that such non-defence exploitation would not impact on the MOD's overarching objectives).

Although in many respects the Principles offer comfort to contractors – in particular the acknowledgement of their rights in Principle 3 and the comments about the need to balance MOD's needs and the suppliers' interests in their IP – a couple of the Principles envisage the MOD making use of contractors' IP without the contractor's permission in some circumstances. Thus, Principle 6 states that MOD's rights to and use of the IP will be limited to that which is "reasonably necessary to meet [MOD's] business needs" and Principle 9 records that "MOD will not normally disclose commercially valuable information unless…". While "reasonably" in Principle 6 implies a level of objective justification, the statement that information will "not normally" be disclosed in Principle 9 does not imply any such particular standard (although see comments on Policy 1, below).

Policies at a glance

The Policies provide more detailed explanation to contractors about the MOD's approach to IP:

• Policy 1 effectively recites Principle 3 but goes on to identify seven exceptions in which IP will instead "normally be vested in the Secretary of State for Defence", with a provision potentially permitting the contractor to use the "skills and expertise developed in carrying out such work" without fee for certain internal purposes. Note, however, that this is not the same as permission to use the IP (e.g. if it is embodied in a patent) and the limitation to "internal" purposes is significant.

• Policy 2 sets out the wide extent of its use of information generated in MOD funded projects, but states that the depth of disclosure will depend on the level of funding. This also has to be read in the light of Policy 5 (see below) from which it is clear that MOD will properly safeguard suppliers' IP. Policy 2 also reflects Principle 7, ensuring that suppliers exploit MOD funded IP as fully as possible.

• Policy 4 addresses the position of MOD Agencies, confirming that the preceding policies and later Policy 7 also apply to MOD Agencies. The Principles also presumably apply, although this is not stated.

• Policy 5, concerning defence capability and infrastructure, builds in part on Principles 3 and 6, ensuring that MOD can use or obtain IP in order to (among other things) maintain, operate and update its defence assets. MOD will normally only seek delivery of information for its reasonably foreseeable needs, but expects its "other reasonable use of information" to be free of charge. MOD will also not normally pay to use IP generated in MOD funded projects. However, MOD recognises that it will need to negotiate the terms of use, including payment, for non-MOD funded IP.

• Policies 6 to 8 in essence contain commitments to deal with IP (including amendment to the MOD Policy) in responsible way, including where MOD might seek to rely on the provisions providing for Crown use of patents and/or the restraint of publication of information contain in patent applications in the interests of national security.

Some of the other Policies do not relate directly to third parties' contracting with the MOD, e.g. Policy 3 which concerns IP derived from MOD or Armed Services personnel.

Applying MOD policy to current trends in technology

Technology is currently experiencing major disruption from at least three sources, namely connectivity, data and AI. These affect defence research and technology (R&T) as much as other areas. These three sources are intimately related and produce particular challenges and considerations when dealing with IP.

In the defence industry, these three disruptions feed into some of the more obvious developments that we have seen in recent years, such as semi-autonomous remote-controlled vehicles and aircraft. However, they also affect everyday R&T work in other ways, e.g. the increasing use of a myriad of connected devices for performing work and the increasingly large data sets produced which give rise to security risks if not handled correctly.

In terms of IP protection, this is reflected in a need to consider further the protection of trade secrets internally and in dealings with third parties, including when contracting solely with MOD or with MOD and others. The value of data itself is ever increasing, as is its portability. Greater attention should be given to how valuable data (and other know-how) may be stored and shared, whether it can be made traceable in case of a breach, and who is permitted to access it and how.

Another aspect of the increasing value of 'soft' assets is that there is greater synergy and cross-fertilisation between defence and other technology-based industries than when dealing with defence hardware. IP concerned with communications, for example, has expanded rapidly in recent decades and problem-solving AI solutions may be re-purposed to or from defence applications. This means that players in defence R&T should look more broadly at whether they need to licence in IP from outside, or whether their own IP may be of value for licensing out in diverse areas. Likewise, the MOD may (in line with Principle 7) look further afield for possible realisation of value from IP generated in defence R&T.

Another important issue deriving from the increasing value of these 'soft' assets is the relative lack of clarity about the ownership and protection of them in law. Although the MOD Policy treats 'IP' as a homogenous concept, it is not. The first owners of new IP in law may differ depending on which legal rights attach to it or, such as in the case of confidential information, there may be no true 'owner' in the traditional sense. It is important, then, to understand at an early stage what kind of IP may actually be produced during a project and tailor the contractual provisions between the contractor and MOD, with any other contractors, and with the contractor's own personnel, consultants or sub-contractors accordingly. Such consideration may also help to avoid the accidental joint ownership of IP (e.g. between multiple contractors), a situation likely to produce unintended difficulties between the parties as to their own exploitation of the IP.

What does this mean for contractors and subcontractors?

What does the MOD's approach to IP mean for a contractor or a subcontractor? A sensible starting point for any business is to ask the following questions with respect to the IP concerned:

1. What is the IP in question and how has it been, or might it be, protected (patent, trademark, design mark, copyright, confidentiality etc.)?
2. What is background IP and what is foreground IP?
3. What does the MOD require the IP for, in what format and for how many years?
4. What is necessary for the MOD to meet its objective?
5. What licensing arrangements will be necessary? Parties, length, royalties, ability to sub license and restrictions?
6. How can confidential information or trade secrets be protected in practice if the MOD may have the right to share it with others?
7. How should third parties' IP or data that must be used for the MOD contract be treated?
8. Are indemnities from the MOD required and how effective will they be?

IP should not be daunting

In conclusion, while the subject can be complex, it shouldn't be daunting. The MOD, through its Principles and Policies concerning IP, does leave scope for discussion, negotiation and ultimately bespoke arrangements to the extent its fundamental objectives can be met. This is where having the advice of an experienced team of legal advisors knowledgeable in IP and defence contracting, becomes essential. They will understand how best to approach the subject with the MOD to develop a pragmatic and commercial solution that meets the objectives of all parties.

To find out more, join our team of subject experts, alongside special guest speakers from MOD, at our forthcoming webinar/seminar 'Intellectual Property: the hottest topic in MOD contracting?' on 21 January 2020.