Bringing to market an exciting and unique cosmetic formulation is the dream of many entrepreneurs and in many instances the assistance of an expert formulator and/or manufacturer (hereafter simply referred to as a ‘manufacturer’) will be required.

Although experience and track record are obvious things to consider when selecting a formulator, there are less obvious things to consider as well. Some of those less obvious things have to do with intellectual property (IP).

Discussion: formulations

Entrepreneurs, before switching-off because you believe IP is of no relevance to you or belongs in the too-hard basket, please bear with me and consider these what if and what the…?! scenarios:

• You pay a manufacturer to develop a unique formulation based on your new idea, only to discover that the manufacturer begins selling the same or near identical formulation to others. It turns out that there is nothing barring the manufacturer from engaging in this kind of activity because there was no agreement on that point. In fact, it was never discussed, just assumed that the manufacturer could not do this. This is devastating. Your point of difference in the marketplace has just dissipated.
• You pay a manufacturer to come up with a unique formulation for you and subsequently discover that the formulation infringes the patent rights of a third party and so cannot be sold in the marketplace. This might take place several years after product launch, result in the recall of all infringing product, incur high legal fees and so cripple your business. You might wonder, should manufacturer not have known about this or have warned you of this possibility? But again, there was no agreement on that point. In fact, the scenario was never even contemplated.
• You wish to shift your business from a manufacturer, only to then discover that the manufacturer will not release the recipe and, in fact, owns the recipe. Ownership was never discussed, just assumed because you paid the manufacturer for its services. But which services? So there may not be anything you can do about it apart from starting again or attempting to reverse engineer the formulation.

I am not suggesting for one moment that manufacturers engage in unscrupulous activities. It ultimately comes down to the nature of the deal initially struck between the entrepreneur and manufacturer. The entrepreneur will have expectations, as will the manufacturer. Where things go wrong is where those expectations are not aired and, more importantly, not recorded in a written agreement. To complicate things, few manufacturers and entrepreneurs have a good understanding of the potential range of IP issues at play when entering into an agreement and commercialising a formulation, so they tend to get overlooked. It is usually when the relationship becomes strained that the entrepreneur discovers what rights he or she has or does not have. By then it is usually too late for change.

Based on my experience in this industry, you would be wrong to think that all manufacturers utilise written agreements. They do not. You would also be wrong to think that those who do have written agreements utilise a sort of standard universal written agreement. There is no such thing. Most agreements differ. Some have good points, some have bad points. However, having said this, I have seen many excellent comprehensive agreements that clearly explain the rights of the entrepreneur and manufacturer (I suspect these are the businesses that have survived disputes and so have learnt the hard way.)

So what types of IP-related issues should be discussed and potentially appear in an agreement or should at least be agreed upon if relying on a verbal agreement (which I do not recommend)? Ten suggestions follow:

What is the scope of the service?

When engaging a manufacturer it is of paramount importance to document the scope of the service that is to be provided. Is the scope of the service to develop a specific formulation (and process for making it) for a particular purpose, such as a formulation having specific ingredients and specific quantities of those ingredients (eg. a single recipe)? Or is the scope of the service to develop a broader formulation for that particular purpose that would encompass not only the single recipe but potentially many other like recipes?

It is natural to expect that the formulator will want to sell (and will be asked to sell) the same or similar formulation to other customers if at all possible, particularly if the formulation is ground-breaking or has wide public appeal.

Who will own the recipe, formulation and process of manufacture that is developed?

At the very outset it should be agreed upon who will own any ‘developed IP’ (eg. recipe, general formulation, process of manufacture etc). Will it be the entrepreneur, manufacturer, or both the entrepreneur and manufacturer? Presumably the entrepreneur will want or expect to own the developed IP, but often it is the case that the manufacturer will only surrender ownership of the developed IP for a higher price.

The entrepreneur should not assume that he or she will own the developed IP even if he or she has paid good money for it. The entrepreneur may simply be paying for supply of the formulated product, not for the secret sauce – ie. neither the actual recipe nor process of manufacture

In the absence of an agreement to the contrary, the actual innovator or innovators of the developed IP will own that IP. It could be that both the entrepreneur and manufacturer own the developed IP, having both contributed to its development.

To avoid all doubt, the agreement could list all developed IP to be owned by the entrepreneur or manufacturer. The agreement could also list any pre-existing background IP that is contributed by the entrepreneur, so as to clearly distinguish it from any developed IP or any pre-existing background IP owned by the manufacturer.

Is the developed IP or some aspect thereof to be kept confidential by either the entrepreneur or manufacturer?

If at all possible, you do not want competitors to obtain a helpful leg-up from all of your hard work and investment. Therefore, it is in your interest to keep aspects of the developed IP, such as the formulation process or secret sauce etc, secret for as long as possible.

If some aspects are to be kept confidential, then what aspects? For what period of time? Even after termination of the agreement between the entrepreneur and the formulator? These can be documented in the agreement.

To avoid all doubt the agreement could list all entrepreneur IP and developed IP considered to be confidential.

Note that the requirement for confidentiality will usually cease when made publicly known through no breach of confidence. Note that some aspects could remain trade secrets, even though used commercially.

Does the manufacturer warrant, to its best knowledge and belief, that it is not using the confidential information of a previous customer to provide service to the entrepreneur?

You do not want to be in the situation where the manufacturer has used the secret sauce of an earlier customer, which could cause problems down the track when manufacturing and selling the formulation.

The agreement could include a statement that the formulator believes that he or she is not using the confidential information of a previous customer to provide service to the entrepreneur.

Does the manufacturer warrant that any confidential information of the entrepreneur or in connection with the developed IP will not be used by the manufacturer in the provision of services to other customers?

You do not want to be in the situation where the manufacturer has used your secret sauce for another customer.

To avoid all doubt the agreement could list all entrepreneur IP and developed IP considered to be confidential, and not for use with other customers.

Does the manufacturer warrant that the developed IP will not be used commercially by the manufacturer nor provided to another customer?

This follows on from the previous point. The agreement could include an assurance that the formulator will not use the developed IP to compete with the entrepreneur nor enable others to do so. But does this assurance cease after a certain period of time? After confidentiality no longer applies? After the relationship has ended?

Whether or not the developed IP can be used by the manufacturer in the development of similar products and processes for other customer will usually depend on the broad or narrow scope of the service initially agreed upon, and whether the developed IP is to remain the confidential information of the customer.

To avoid all doubt, the agreement should clearly specify the scope of the service, including the scope of the developed IP, and anything that is to remain confidential.

Does the manufacturer warrant to the entrepreneur that, to its best knowledge and belief, there is no obstacle to using the IP commercially in any region?

Although clearly it is in the manufacturer’s interest to manufacture large quantities of a successful formulation, there nevertheless may be potential obstacles to commercialisation, including the issues touched on above. Potential obstacles to commercialisation include third party patent rights and potentially other types of third party intellectual property rights.

The manufacturer may not be willing to warrant that the developed IP is available for commercial use by the entrepreneur, in which case the entrepreneur would be well advised to carry out its own freedom to operate searches to see whether there are any third party IP barriers. Ideally, a patent attorney would be engaged to carry out those searches for the entrepreneur.

Manufacturers are highly unlikely to carry out any kind of patent freedom to operate search as part of their service to a customer.

Is the developed IP to be protected by way of a patent?

A granted patent can provide protection for the formulation for up to 20 years. If so, who is to own the patent? Again, in the absence of an agreement to the contrary, the actual innovator or innovators of the developed IP will own that IP and will be entitled to patent it.

The entrepreneur may wish to patent the developed IP as a safeguard so as to exclude the manufacturer and its future customers from doing what falls within the scope of the patent (as well as everybody else).

The manufacturer may insist on the entrepreneur obtaining protection of the developed IP (if possible) so as it also can enjoy a measure of exclusivity – i.e. ensure that competing products can be kept out of the marketplace by the entrepreneur.

Also, following on from this, who is to enforce rights in the patent if infringed by a third party? Who is to pay the legal costs? Presumably the owner of the IP.

Does the manufacturer agree to assist the entrepreneur in obtaining protection for any developed IP, should it choose to (or vice versa)?

The agreement may include a co-operation clause whereby the manufacturer agrees to assist the entrepreneur in obtaining protection for any developed IP of the entrepreneur’s choosing (usually at the entrepreneur’s expense), including formally assigning rights in the developed IP to the entrepreneur and assisting with the filing and prosecution of patent applications. Of course, it could be the other way around if the entrepreneur is agreeable to the manufacturer owning the developed IP.

This co-operation clause could be particularly important if the entrepreneurmanufacturer relationship becomes strained or is damaged beyond repair.

If the manufacturer or entrepreneur is sued for infringement of third party IP rights, who is to take defensive action and pay legal costs?

From time to time a manufacturer and/or entrepreneur is sued for infringing a granted patent that is owned by a third party. The patent could be for a formulation, a manufacturing process or method of using the formulation.

In view of this, the agreement could include a statement regarding what would happen in such a situation.

Conclusion: Formulations

Entrepreneurs, it is self-evident that there may be little point in developing a formulation or manufacturing process that you (1) will not own, (2) cannot use commercially, and (3) cannot use exclusively without others copying it. Manufacturers, attempt to avoid disputes with customers by including in your agreements clear and comprehensive IP clauses. If you do not have a written agreement, prepare one.

Branding and packaging

Issues similar to those raised above apply when seeking the assistance of a graphic designer, brand developer and/or packager (hereafter simply referred to as a ‘consultant’).

Discussion

Entrepreneurs, please consider these what if and what the…?! scenarios:

• You pay a consultant to develop unique branding and/or packaging based on your new idea, only to discover that the consultant begins selling or licensing thesame or near identical branding and/or packaging to others. It turns out that there is nothing barring the consultant from engaging in this kind of activity because there was no agreement on that point. The branding and packaging has become very important to your business but now there are others using it.
• You pay a consultant to come up with unique branding and/or packaging for you and subsequently discover that the branding and/or packaging infringes the IP rights of a third party and so can’t be used in the marketplace. This might take place several years after product launch, result in the recall of all infringing product, incur high legal fees and so cripple your business

Again, I am not suggesting that consultants engage in unscrupulous activities, but ultimately it comes down to the nature of the deal initially struck between the entrepreneur and consultant. Based on my experience, not all consultants utilise written agreements, nor is there such a thing as a sort of standard universal written agreement that everyone signs. Each agreement will probably have some good points and bad points.

So what types of IP-related issues should be discussed and potentially appear in an agreement, or should at least be agreed upon if relying on a verbal agreement (which I do not recommend)? Suggestions follow:

Who will own the branding and/or packaging that is developed?

At the very outset it should be agreed upon who will own any ‘developed IP’ (eg. branding or packaging). Presumably the entrepreneur will want or expect to own the developed IP, but often it is the case that the consultant will only offer ownership of the developed IP for a higher price.

The entrepreneur should not assume that he or she will own the developed IP even if he or she has paid good money for it, although this is normally the case with regard to branding/trade marks. Often branding is merely licenced to the entrepreneur, which can cause problems for the entrepreneur if registering a trade mark.

Regarding packaging, the consultant may own the developed IP but simply sell the entrepreneur packaging/packaged products.

In the absence of an agreement to the contrary, the actual author, designer or innovator of the developed IP will own that IP.

To avoid all doubt, the agreement could list all developed IP to be owned by the entrepreneur or consultant. The agreement could also state that the consultant will formally assign rights in the developed IP to the entrepreneur (including copyright in any artistic work/graphic/logo).

Does the consultant warrant that the developed IP will not be used commercially by the consultant nor provided to another customer?

The agreement could include an assurance that the consultant will not use the developed IP to compete with the entrepreneur nor enable others to do so. But does this assurance cease after a certain period of time? After the relationship has ended?

Does the consultant warrant to the entrepreneur that, to its best knowledge and belief, there is no obstacle to using the IP commercially either in the country of origin (or elsewhere)?

Potential obstacles to commercialisation include third party patent, design and registered trade mark rights as well as potentially other types of intellectual property rights, including copyright and trade mark rights under common law.

Another potential obstacle to commercialisation includes if the consultant has used the confidential information of another customer to arrive at the developed IP.

The consultant may not be willing to warrant that the developed IP is available for commercial use by the entrepreneur, in which case the entrepreneur would be well advised to carry out his or her own freedom to operate searches (ideally using a patent and trade marks attorney.) It is rarely the case that a consultant will carry out a comprehensive freedom to operate search, even for branding/trade marks.

Is the developed IP to be protected by way of a trade mark registration, design registration or patent?

A granted patent can provide protection for packaging for up to 20 years. A registered design can provide protection for packaging for up to 10 years (in Australia). If so, who is to own the patent or registered design? Again, in the absence of an agreement to the contrary, the actual innovator or innovators of the developed IP will own that IP and will be entitled to protect it.

Regarding branding/trade marks, this may be a word, phrase, slogan, graphic, logo, colour or colour combination, aspect of packaging or shape of a product itself, or any combination of these. Registered trade mark rights can last indefinitely.

The entrepreneur may wish to protect the developed IP as a safeguard so as to exclude the consultant and its future customers from doing what falls within the scope of the registered IP (as well as everybody else).

The consultant may insist on the entrepreneur obtaining protection of the developed IP (if possible) so as it also can enjoy a measure of exclusivity – ie. ensure that competing products can be kept out of the marketplace.

Also, following on from this, who is to enforce rights in the patent, design or trade mark if infringed by a third party? Who is to pay the legal costs? Presumably the owner of the IP.

Does the consultant agree to assist the entrepreneur in obtaining protection for any developed IP, should it choose to (or vice versa)?

The agreement may include a co-operation clause whereby the consultant agrees to assist the entrepreneur in obtaining protection for any developed IP of the entrepreneur’s choosing (usually at the entrepreneur’s expense), including formally assigning rights in the developed IP to the entrepreneur and assisting with the filing and prosecution of patent and/or design applications.

If the consultant or entrepreneur is sued for infringement of third party IP rights, who is to take defensive action and pay legal costs?

Regarding packaging, from time to time a consultant and/or entrepreneur may be sued for infringing a granted patent or registered design that is owned by a third party. In view of this, the agreement could include a statement regarding what would happen in such a situation.

Regarding trade marks, the entrepreneur would be wise to carry out freedom to operate/clearance searches to check to see that the trade mark/branding does not conflict with the rights of owners of registered trade marks or unregistered trade marks.

Conclusion: branding and packaging

Entrepreneurs, again, it is self-evident that there may be little point in developing branding and/or packaging that you (1) will not own, (2) cannot use commercially, and (3) cannot use exclusively without others copying it. Consultants, again, attempt to avoid disputes with customers by including in your agreements comprehensive and clear IP clauses, particularly with regard to trade mark ownership and freedom to operate in the marketplace.

This article, written from an Australian standpoint, is intended to provide general information only. The contents should not be relied upon as detailed legal advice for any specific case. While every effort has been made to ensure that the contents are correct at the time of publication, please note, the relevant laws and practice are subject to change. Specific advice should be sought from your legal advisor, particularly a lawyer specialising in contracts.