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Jorge Contreras, partner at Hale and Dorr LLP, discussed how to select the best structure for deals in IP joint ventures. He observed that in his experience, clients use contractual relationships versus formal joint ventures with equal frequency. Larger companies tend to favor contractual relationships. Smaller companies or technical companies tend to favor formal joint ventures. Formal joint ventures have more flexibility, especially if partners are large companies that are also competitors. However, formal joint ventures are also more complicated.
In negotiating and deciding how to structure a joint venture, it is important to consider the constituents involved. Venders usually want to come up with a new product, an extension of an existing product or a new market. Customers usually come together to allow vendors to come up with the products that will meet their needs – usually when the customers are larger than the vendors. Academic institutions have different goals than companies, such as getting grants or greater prestige. Government entities have political interests, job formation, and regional promotion. Nonprofit entities have charitable purposes. Other consortia have interests in setting industry standards or care for the health of industry in general. It is important to consider the categories when organizing or splitting IP in the joint venture.
- Background IP is what the parties had prior to the agreement or what they bring to the table. It's something they own or have a license for. Will members contribute their entire portfolio of IP rights or only a part?
- Foreground IP often refers to material developed within the context of the joint venture – during the project or with project resources solely, jointly or individually within the joint venture.
- New IP is something totally new whereas derivative IP expands or improves on an existing patent or IP. Ownership of derivative IP rights is often highly contested. It is often difficult to determine if something is derivative or new.
- Sideground IP is something developed at same time as the joint venture but may be outside the scope of the joint venture, by another division of a member or in another country.
IP contributions to the joint venture are often hard to value, so parties might just contribute their IP and view it as being equal in value. Contributions can either be assigned to the joint venture or licensed to the joint venture. Companies are often reluctant to assign their rights to something with only a limited life, so they will usually license their IP rights.
When licensing something consider the field of use and be sure it is well-defined. How will the joint venture will use the IP and will it develop a new product or supplement an existing one? Consider whether the joint venture members will be excluded from further development or have everything developed go back to the joint venture. Whether the licenses are royalty bearing or royalty free is another issue; if there are no royalties, there are tax consequences.
Other types of IP contributions include personnel and technical know-how. In-kind contributions are hard to value but may be required if one party does not have its own IP to contribute.
What IP comes out of the venture depends on the purpose of the joint venture. Is it to develop products and sell them to the public or to provide products to the members to sell? What access will members have to equipment and resources of the joint venture? The manner of allocating those resources needs to be described in the governing contracts. Finally, what IP rights go between the members? That can vary depending on the entity. If there is a formal joint venture entity, members will cross-license; if not, then all the rights go in between.
How does the joint venture use the IP? Does the joint venture sell the IP, license it or serve as a licensing agent? If it licenses, allocating the royalties can be complicated.
Other IP rights will mold the character of the IP in the venture. Prosecution rights govern whether patents are filed or maintained in various countries. Often, joint ventures will have a steering committee to determine these issues but there should be a formal mechanism in place to determine these issues in a timely basis. Issues include who has first rights, sole rights, and refusal rights for various patents in various countries.
Another concern is enforcement against third parties on the joint venture's IP. Disputes arise as to who gets to sue, who decides to sue, where to sue, and how to allocate prosecution costs and proceeds. This can be a problem if the infringing party is a large customer of one of the members. It can also be a problem if there is more than one patent involved and more than one member.
Termination methods become the most important set of clauses because most joint ventures end. Termination for default is more complicated if the joint venture has more than two parties. What happens to the joint venture in that circumstance and who decides? What happens when the members reach a deadlock in what to do? Does the joint venture terminate upon acquisition or IPO?
What survives after joint venture ends? Sometimes a member may need a license in order to continue its business, so it may need irrevocable licenses. Another option is to divide and assign the IP from the joint venture to the members. Also consider royalty obligations that occur after the joint venture is terminated. In multiple party joint ventures, the agreement often has a termination matrix that will set out which party gets what upon termination, so be aware of what's in the matrix to ensure your client doesn't get stuck with something that hinders its ongoing business.