“I am about to partner with an engineer to manufacture and sell his product. I am looking for the designer to “own” the design liability and my company will “own” the manufacturing liability. How do I do that?”
It was a short question but there was something about the wording that made me think a long answer was needed. I felt I needed to clear up this matter of “design liability” and “manufacturing” liability. Here’s my response:
You suggest that there is a difference between “design liability” and “manufacturing liability” and that the difference affects who will be the target in an infringement suit. That’s not really the case.
Keeping in mind that I’m not an attorney and don’t give legal advice (my lawyer makes me say this), infringement is the act of making, using, selling, etc. a patented device without permission. Technically I don’t believe designing a device, per se, is infringement.
Of course, very few people design a device and stop there. Once a designer of an infringing device lets someone make one, the designer may be liable for contributory infringement or perhaps inducing infringement while the builder is liable for direct infringment.
Now, let’s get to the business end. The patent law doesn’t really care about licensing (i.e., renting IP). Typically, in your situation, somewhere in your license agreement (which is just a contract between two parties) there will be an explanation of how any IP issues will be handled. It is important to have it there since when the Sxxx hits the fan nobody wants to own the problem.
In situations like yours, the designer usually starts off “owning” the liability since he should have checked out the IP territory before doing the design. By collecting money from you for use of his design he is selling something and should be willing to stand behind his work – you expect General Motors to warantee your car, right. The mechanism to get him to own the liability is a term in the license contract saying he will indemnify you for any infringement suit.
Of course, in many cases there is the up front recognition that the designer can’t shoulder all the liability, particularly since he is not garnering all the profits. Share the profits = share the liability. Again, how that cost is shared is to be included in the licensing agreement.
In other cases, where a small design house does work for a large, manufacturing partner, the larger partner may totally indemnify the small design house based on the financial realities AND the fact that the design house was only doing the design in the first place as an outsourced R&D function for the large partner.
So, bottom line, whether you pay for the use of the design on a flat fee basis (a license in your terminology) or on a per part built basis (royalty in your terminology) has zero bearing on who’s going to get sued. You will be sued for making and selling, the designer will be suited for contributory infringement, you both may be sued for inducing infringement in your customers, and, at least in theory, your customers can be sued for using. This last bit is typically only mentioned in large OEM sales, not in consumer sales, for all the obvious reasons.
What you need to care about is how you and the designer are going to split up the costs, and that split can be anything you two decide. Since damages are calculated on lost profits or a reasonable royalty basis, I expect you were thinking something along the lines of you “owning” the part of the damages that scales with the number of units made and your partner basically having a fixed liability. That is certainly reasonable if you are not paying him a per part royalty.
Good luck…and consult with an attorney to draw up the licensing agreement!