Why Overlooking Third-Party IP Could Cost You Big Clients

Good day to you all!

I have an interesting story for you guys today.

Last week, I had a chat with a software agency owner on Linkedin.

This guy doesn’t handle everything in-house.

And it makes perfect sense.

Sometimes, using third-party software is necessary and efficient.

But how you use those third-party IPs is important.

Bigger agencies always get client approval first.

But why does this matter?

Let me share with you that today so you can be prepared in advance.

Why Managing Third-Party IP Matters:

Now most agencies I know use third-party software to get things done faster.

For e.g., using libraries, or images in projects that are not made in-house.

But how you use them is important.

Think about it.

If you’re adding external components to a project, the client needs to know.

It’s their project after all.

Bigger agencies never use third-party IP without getting client approval.

Because this keeps clients aware and on board with all external components.

Imagine finishing a project and the client saying, “Wait, I didn’t know you used that software.”

Awkward, right?

Getting approval first avoids this.

There also needs to be proper documentation for this stuff.

Because that's how you avoid the surprise factor.

Or people going back on their words.

Common Issues That Happen

Now many software agencies overlook this.

They ignore it completely.

And bigger clients don't want to take unnecessary risks.

So what happens?

Clients may reject the final product if uninformed about external components.

Not specifying the licensing terms can also result in issues.

Unauthorized use of third-party IP can lead to lawsuits and fines.

Agencies also don't have an indemnification clause.

Without an indemnification clause, liability for third-party IP failures is unclear.

This can lead to disputes over costs and damages.

My Steps To Implement Effective Third-Party IP Management:

Here's what I suggest you to have good clauses for third-party IP

1) Identify and List Third-Party IP:

First, create an appendix listing all third-party IPs to be used.

Obtain written client approval before proceeding.

This ensures everyone is on the same page from the start.

Also, specify that any third-party IP must be identified before use.

Example:

“Any third-party IP must be listed and approved by the client before use.”

This means you make a list of all the external components you plan to use and get the client’s sign-off.

Simple and clear.

2) Specify Licensing Terms:

Clearly mention licensing terms and usage rights.

Also, ensure the client agrees to these terms.

This protects both you and the client legally and sets clear expectations.

For this, detail any licensing terms and usage rights for the third-party IP.

Example:

“All licensing terms for third-party IP must be specified and agreed upon by the client.”

This is important.

You need to outline the rules for using these components. Who owns what? Can they be used commercially?

The client needs to know.

3) Define Indemnification:

The last step is to have a clause specifying who bears the cost if third-party IP fails.

Make sure this clause is clear and agreed upon by both parties.

This way, everyone knows who’s responsible if things go wrong.

From an agency's perspective, it's the client that protects them.

Example:

“The client agrees to indemnify [Your Company] from any costs or damages from third-party IP failure, provided it was approved by the client.”

This protects you if something goes wrong with the third-party IP.

If the software crashes, you’re not left holding the bag.

Final Notes:

The way you manage third-party IP in your contract is important.

If you want to make sure your agency is protected that is.

Because that's how you maintain client trust AND avoid any legal issues.

So focus on clear clauses for approvals, identification, licensing, and indemnification.

Last step is to review your contracts.

Do they address third-party IPs?

If not, it’s time to update them.

Btw if you need help drafting effective clauses, then reach out.

I’m here to help ensure your projects are legally sound and transparent.

Just reply to this email, and let's have a discovery call!

-- Akhil Mishra