Technology is dominated by two types of people: those who
understand what they do not manage, and those who manage what they
do not understand.
Putt's Law (www.quotationspage.com)
The skills and resources to innovate, develop and exploit new technologies are not always available within an individual company. Working together with an external company, either a competitor or a company in a different line of business, can produce new ideas and ultimately new products that would not have been possible "in-house".
Collaborations between two or more parties in the field of research & development can take a number of forms. At its simplest, a collaboration may involve buying in research services in the same way as any other service is purchased. The more typical notion of a joint venture, however, involves each party carrying out a part of the research and agreeing to share the results. Alternatively, the parties may decide to set up a new company to carry out research and exploit the results. The collaborators may contribute financing and/or staff to the joint venture company. Each will then want a say in how the company is managed and run.
It is where both parties contribute IP and other resources to a research project that the most interesting issues arise and so the focus here is principally on such joint collaborations. The various stages in a technology development collaboration – from the very first steps towards a research partnership through to the commercial exploitation of the results – are discussed below. At each stage it is particularly important to agree who owns and who has the right to use the "background" and "foreground" intellectual property rights contributed to and created during the collaboration. These intellectual property rights may have enormous value but if the issues of ownership, licenses and protection are not considered, the worth of those rights may remain unrealised or be lost altogether.
II. First Steps
A. Finding a Collaborator and Looking for Funding
Once a lack in resources has been identified, or it has been decided that external collaboration is "a good thing", a collaborating partner needs to be found. In many instances, the choice of collaborator will be obvious. In other cases, some investigation will be needed to identify the best partner. Many companies use their contacts in the industry or with customers, suppliers or advisers in order to find a collaborator. Others may make use of on-line technology exchanges such as those hosted by OSEC Business Network Switzerland (www.osec.ch) or The Technology Exchange (Once a lack in resources has been identified, or it has been decided that external collaboration is "a good thing", a collaborating partner needs to be found. In many instances, the choice of collaborator will be obvious. In other cases, some investigation will be needed to identify the best partner. Many companies use their contacts in the industry or with customers, suppliers or advisers in order to find a collaborator. Others may make use of on-line technology exchanges such as those hosted by OSEC Business Network Switzerland (www.osec.ch) or The Technology Exchange (www.uktech.net) to advertise their willingness to collaborate and to publicise the technology that they can bring to a research project. Of course, the possible ways to identify and approach a potential joint venture partner are limitless.
One of the parties may be involved for the sole purpose of providing funding. Even so, the funding party will almost certainly want to get involved in the contract negotiations and, unless their sole business is providing finance, they may want some right to the IP generated either by way of ownership or access licenses.
B. Confidentiality Agreements
One of the most important steps that should be taken before discussions on any collaboration begin is the signing of a confidentiality agreement, often called a non-disclosure agreement (or NDA).
Some information can only be protected by confidentiality obligations, either because it does not meet the criteria for patenting or because its value would be lost if it were to be published. For this type of information, a confidentiality agreement is crucial. However, it is advisable to enter into a confidentiality agreement in any situation where sensitive information will be or is likely to be discussed. For example, if information is to be disclosed about inventions for which no patent application has been filed, a confidentiality agreement can be crucial. If there is no agreement in place, any information that is disclosed may be considered public information. Once sufficient information about an invention is public, the invention is no longer novel. As novelty is an essential precondition for obtaining a patent, once information about the invention has been disclosed the invention may no longer be patentable, at least in the vast majority of countries. One major exception to this rule is the USA, where inventors have one year from first disclosure or publication of their invention within which to file a patent application with the US Patent Office. But filing in the USA will not cure the lack of novelty in the eyes of other national patent registries.
Obligations of confidentiality may arise automatically in certain situations, without the need for a written confidentiality agreement. For example, under Swiss law an employee owes a duty of confidentiality to his employer in respect of sensitive information that he receives in the course of his employment. However, such implied obligations of confidentiality may not exist in every country. Furthermore, a written confidentiality agreement can be much more detailed and gives much stronger protection than an implied obligation. It also makes the signatory aware of the confidential nature of the information he is receiving and so the risk of an unintended breach of confidentiality is reduced.
Confidentiality agreements can be one-way or mutual. If the agreement is one-way, only one party (the recipient) has an obligation not to disclose information. If the agreement is mutual, both parties are bound to the same obligations and have the same rights. For convenience, the parties are referred to here as "recipient" and "disclosing party" without distinction between one-way and mutual agreements. It should be borne in mind however that, if an agreement is mutual, the same party may be both a recipient and a disclosing party under the agreement.
A confidentiality agreement obliges the recipient of information not to disclose that information or make it available to any third party. If the recipient will need to disclose information to its employees or group companies, this should be specifically covered in the agreement. The disclosing party will then want to be sure that the employees and group companies are also obliged to keep the information confidential.
Many confidentiality agreements contain restrictions on use as well as disclosure. In these instances, use is allowed for a specific purpose only, e.g. to determine the feasibility of the collaboration. The recipient should check carefully that the defined purpose is wide enough to enable him to make proper use of the information. The disclosing party, on the other hand, will want to be sure that the purpose is not too wide.
The agreement should make clear which pieces of information are confidential and must not be disclosed or used outside the agreed purpose. It may be that all information disclosed in the course of discussions or negotiations on a particular project is to be kept confidential, or the obligations of confidentiality may be limited to information specifically marked or identified in writing as being confidential. In the latter case, the parties usually have a period of time, e.g. 30 days, after disclosing confidential information verbally to provide the recipient with a summary of the information in writing. Limiting protection to information marked as confidential makes it very clear for the recipient which pieces of information it is obliged to keep confidential. However, from the disclosing party's point of view, if only information identified as confidential is to be protected, all employees who will be disclosing information under the agreement must be made aware of the need to identify that information as confidential.
Even if confidential information is widely defined, the agreement should provide for exceptional circumstances where information does not need to be kept confidential, e.g. information that the recipient already possessed before it was disclosed to him under the agreement or which he received from a third party under no obligation of confidentiality, information in the public domain, independently developed information or information which has to be disclosed as a matter of law are usually not covered by confidentiality obligations. Where the confidentiality agreement is interlinked with other confidentiality agreements, then these exceptions to confidentiality need to be thought through very carefully. As an example of the problems that can arise, imagine two collaborating parties (A and B) who have employed the services of a third party (X) to develop technology that both A and B will subsequently use. A and B enter into separate confidentiality agreements with X. X then misuses the information supplied under the confidentiality agreements. Both agreements state that the confidentiality obligations do not apply to information already in X's possession. This means that information first supplied by A is not covered by B's confidentiality agreement and information first supplied by B is not covered by A's confidentiality agreement. Only the party that first disclosed a piece of information can claim for a breach of confidentiality of that information. If A and B have disclosed similar information to X and then wish to take action against X for breach of confidentiality, they will first have to look very closely at what was disclosed by whom and in what order. This situation can be avoided if the exceptions to the confidentiality obligations are carefully worded. For example, the exception could be amended to read "information already in X's possession that X is free to disclose to third parties without any breach of a confidentiality undertaking". Alternatively, all parties (A, B and X) could sign just one agreement so that disclosures by both A and B would be covered by the same agreement.
C. Due Diligence
The parties may agree on a formal exchange of information with written questions and answers or they may prefer a more informal approach to due diligence. In any event, the information that is provided by the parties to each other prior to entering into the collaboration needs to be examined carefully. Each party will want to make sure that the other is a suitable collaborator and is able to contribute to the project what is expected of it in terms of IP and other resources. The work that is done at this early stage in analysing the collaboration's chances of success can save a lot of time, money and effort later on.
Perhaps the most important point to verify is that the parties are able to use the relevant IP in the collaboration. This involves checking the ownership and license terms of the IP.
Ownership of IP can be particularly problematic if the IP was commissioned from a third party, created by an employee or academic or has changed hands since its creation. Although there are exceptions, in most cases where work is commissioned, the IP in the work belongs to the creator and the commissioner only has limited rights of use. In the absence of an agreement to transfer IP ownership from creator to commissioner, the commissioner may not be able to use the IP for the purposes of the collaboration. IP commissions conjure images of paintings or musical works but may equally well involve software development or contract research.
With regard to employee creations, the employer will usually own any IP rights created by his employees in the course of their employment activity. However, the law on employee inventions varies greatly from country to country. For example, under German law employees always own their inventions. The employer has four months from notice of an invention by one of his employees within which to make a claim to the invention. The employer is then obliged to pay compensation to the employee inventor for use of the invention. This compensation is paid in addition to the employee's salary. In the USA, inventions are always owned first by the inventor. If the inventor is an employee, any patent application must be filed in the name of the employee. The patent application can only be assigned to the employer once it has been filed. If this assignment has not taken place, the employer will not be the owner but may still have a royalty free license to use the patented invention.
If one of the parties to the collaboration is a university or academic institute, care is also needed. It may not be clear who owns IP which is in the hands of a university. Inventions by university employees do not always automatically belong to the university. And IP created by students is almost always the property of the individual student. The IP may already be licensed exclusively to industrial partners in some fields or tied up in other research projects so that it is not available for use or license into the collaboration.
Where the IP to be contributed to a joint venture is not owned by any of the joint venture partners but is used under license, the actual terms of the license will need to be checked. We have seen instances where the license terms do not allow any use of the IP other than to manufacture products in the ordinary course of the licensee's business. Sub-licensing to third parties, including joint venture partners, is then forbidden. In other instances, licensed IP may be used for research but not for commercial purposes. This can prevent the parties exploiting the results of their collaboration. Restrictions on use are not always fatal to the collaboration, however. In some cases, the IP owner may be willing to extend the terms of the license. Or an alternative technology may be available.
If the IP is of a type that needs to be registered, it is worth verifying that the filing has been properly made and any renewal fees have been paid. However, just because an IP right has been registered does not mean that it will be valid. Not all intellectual property offices carry out a review of the applications that they receive before they register the IP right. In these cases, there is no independent review of the applicant's entitlement to the right. Even where a review and search of existing rights has been carried out, the IP right in question may still be subject to a later challenge. For some crucial pieces of IP, therefore, it may be worth obtaining an expert's opinion on the validity of the right.
A party that is well-prepared for due diligence will create a very good impression towards potential collaborators. Being well-prepared means having records available showing, for example, the IP owned, contracts of employment for employees that have generated IP, license or assignment contracts where IP has been brought in from outside, the status of any patents and patent applications and when any renewal fees are due. If this information is available and is well-presented, it can significantly strengthen the disclosing party's negotiating position when agreeing the terms of the collaboration.
D. Term Sheet
Before signing up to a collaboration or co-operation agreement, the parties may want to set down the broad outline of their agreement in heads of terms.
Heads of terms often provide for a period of exclusive negotiations during which neither party will talk to anyone else about the potential collaboration. Depending on the relative bargaining positions of the parties, one side may be able to insist that the other pays a one-off lump sum for the benefit of this period of exclusivity. Sometimes, but not in every case, these exclusivity provisions are agreed to be binding and enforceable in the event of breach. Obligations of confidentiality in heads of terms are also often binding. Typically the remaining terms of the agreement will not be binding, although they will give rise to expectations in later negotiations and they may create obligations of good faith between the parties which may be recognised by the courts.
If negotiations over heads of terms become protracted and difficult, it is advisable for the parties to move straight on to the main agreement rather than spending time on a non-binding document. In some cases, too many difficult discussions over the details of heads of terms may be an early indication that the collaboration itself will not work. It may be wise at this point to consider whether or not to proceed with such a collaboration partner.
E. Government Funding and Research Projects
Where governments or non-governmental organisations are involved in the collaboration, perhaps as funders or research commissioners, they often prescribe fixed, nonnegotiable terms. These funding terms and conditions should be considered carefully before the funding or research commission is accepted. They may not meet the parties' intentions or they may be impossible to fulfil. In some cases the terms prescribed may be so unacceptable that it is not worth entering into the collaboration at all.
For example, government-funded projects often require the parties to grant each other wide cross-licenses of background and foreground technology. A prime example of this is provided by projects financed under the European Union Framework Programme. This is the European Union's main instrument for funding research. The Fifth Framework Programme is about to give way to the Sixth Framework Programme which will run from 2003 to 2006. The contract terms for the Sixth Framework Programme are, at the time of writing, only in draft form. The draft terms oblige the parties to grant each other "access rights" (or licenses) to "pre-existing know-how" (which approximates to background technology brought to the project by a collaborator) and to "knowledge" (IP created in the course of the project). An IP owner must grant a license to its pre-existing know-how and knowledge to any other party to the project who needs such a license either (I) to carry out its own work under the project or (II) to use the IP that it generates itself in the course of the project. The only way to avoid the obligation to license pre-existing knowhow is to reach agreement with all of the other parties before the main collaboration contract is signed. If the owner wishes to receive royalties for the license of pre-existing know-how needed to carry out work under the project, that must also be agreed on before the main contract is signed. Licenses of pre-existing know-how needed to enable a party to use the IP it generates are to be granted on fair and non-discriminatory terms. Knowledge, or foreground IP, must always be licensed to other collaborators royalty free.
The parties may not be able or willing to give these wide licenses. They may already have granted an exclusive license in the field or may consider the technology to be too valuable to license. If the current drafts are adopted in their present form, the parties will need to anticipate in advance which parts of their existing IP portfolio they wish to exclude from the reach of their fellow collaborators. They will then need to obtain agreement to that from all of the other collaborators before they sign the funding agreement. Only once the funding agreement is signed, will the European funding become available. Any party that wishes to keep its IP out of the licensing pool will have to remain very determined to obtain agreement from all of the parties. This is particularly so in the face of the likely pressure to sign from other collaborators who are keen to start receiving funds for their research as soon as possible. On the other hand, a party that needs funds quickly in order to finance its research could face a frustrating wait while licensing terms are negotiated.
Even where there are no prescribed terms and conditions, governmental organisations may propose contractual terms as part of a tender process. Part of the tactics for winning the tender will be deciding to what extent these terms can be negotiated or rejected altogether. Sometimes, the tender contract will contain terms that are completely unacceptable to a bidder. To give one example from our own experience, in a tender for a contract to supply fairly standard medical devices to a government body, the successful bidder was to grant the government body a world-wide, royalty free license to use, reproduce, adapt and sublicense all of its IP rights that would be used in connection with the manufacture and supply of the devices. The license was to be perpetual, although two years after termination of the supply contract the supplier would begin to receive royalty payments. The reason for the provision was presumably to enable the government body to guarantee supplies of the products by making the IP available to a third party if the successful bidder became unable to supply. That is perhaps reasonable, at least in situations where the customer is dependent on a single supplier. But in this case, the government was not setting up an exclusive supply arrangement. Instead, it was free to appoint other suppliers at any time and to pass on the successful bidder's IP directly to those other suppliers, who would most probably be the bidder's direct competitors. This is an extreme example in our experience. However, if they are accepted, provisions of this sort can end up costing the successful bidder more than the tender is worth.
F. Framework and Project Agreements
The collaborating parties may plan to work together on research, development, manufacture or supply activities on a regular basis. Companies active in completely different technological fields, for example semiconductors and medical devices, might intend to co-operate on various projects for the development and manufacture of integrated circuits and chip sets for commercial use in medical devices and systems. If the collaboration is to be ongoing, then the parties may wish to set out the general terms and conditions of their co-operation in a framework agreement. The framework agreement can then be used for all co-operation activities between the parties. This approach can be very efficient for the parties: negotiations on the details of specific projects will be much quicker if the general terms are already agreed. For example, the parties will not need to re-negotiate the allocation of intellectual property rights for each individual project, as this will be governed by the framework agreement.
If this contract structure is chosen for ongoing collaborations, i.e. a framework agreement followed by specific project agreements, then the parties should agree how to deal with cases where the project agreements and the framework agreement contradict each other. The usual approach is that the framework agreement prevails over the project agreements in cases of inconsistency.
Once a framework structure for the collaboration is agreed, delegation of responsibilities among the individuals working on the collaboration becomes easier. A steering committee, for example, would only need to survey the most important activities and decisions made in the course of the collaboration, leaving project managers and their project teams to work on the project day-to-day. This works particularly well under a framework agreement because the project managers are not burdened with negotiating the legal terms and conditions applicable to each new piece of work. What is more, even if the people involved in the specific project forget to agree upon certain items, the framework agreement will apply. So the parties will not be left in a situation where they are working without an agreement. For example, if the engineers forget to sign a non-disclosure agreement, the clauses regarding the treatment of confidential information in the framework agreement will serve instead.
Furthermore, the framework agreement can be used as a management tool for the cooperation managers (or steering committee) when they are concluding individual project agreements either by themselves or through delegation to project managers. The framework agreement should, therefore, contain a list of the items which should be dealt with in each project agreement. This then serves as a guide or checklist for the cooperation manager or project manager, if he has been tasked with concluding the agreement. The list might look like this: (1) list of pre-existing technology being brought to the project; (2) specification of the product to be developed under the project; (3) qualification protocols; (4) project cost and payment schedule with incentives and penalties; (5) frequency of project review meetings; (6) time schedules in general; (7) definition of work packages; (8) commercial supply objectives; (9) licensing and cross-licensing particularities; (10) sealed packages containing information necessary to make use of the right of own manufacturing in case the other party is no longer able to fulfil its obligations; (11) ordering procedures; (12) rolling stock of product units; (13) packaging and product identification; (14) delivery schedules and handling of delays; (15) delivery conditions; (16) quality control issues; (17) corrective action issues; (18) product supply prices and incentives for cost reduction in the course of the supply.
The use of a framework agreement combined with specific project agreements is not only of interest from a legal point of view. It can also be an effective management tool for delegating responsibilities within the collaborating parties' corporate organisations, e.g. delegation to subsidiaries or affiliates that operate as separate legal entities. The framework agreement can be signed by the parent company. Provided it is drafted in such a way that all group companies are covered, individual subsidiaries working on particular projects can then conclude the relevant project agreements.
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