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Glynna K. Christian, a partner at Thelen Reid and Priest, discussed the various ways to structure IP rights in complex multi-jurisdiction and multiparty deals.
In discussing the advantages and disadvantages of joint ventures, she noted that they are often used where the parties seek new markets and distribution channels. She noted that telecommunications companies that have no distribution channels into traditional technology markets seek to have joint ventures with technology players to get a distribution channel.
Speed to market is also a factor in considering a formal joint venture. If one of the parties is small but has a great idea, forming a joint venture with a larger partner will provide scalability. The most important factor in forming a formal joint venture is risk sharing. Issues like capital and human resources are also important reasons because often clients won't have the people knowledge to do what they want to do or go where they want to go, so they'll partner with someone who does. These issues will come forward during negotiations between the parties and your representation of your clients and will determine how your clients will want to structure the deal – especially upon termination.
The biggest disadvantage of a joint venture is loss of control of the business plan where a partner who has control over something your client doesn't have will insist on having a say over how things are done; sometimes clients may not be completely comfortable with that loss of control, thus creating tension in the relationship or negotiation.
Dependence on the joint venture partner's performance is high in a joint venture, be it formal or contractual. Whether a partner can actually perform from a practical standpoint is a completely different issue from just having a breach of contract remedy. Due diligence is more than just looking after your client's IP rights and will be very important to ensure that the promises will be fulfilled.
Larger, multinational clients, however, do tend to favor a contractual relationship rather than a formal joint venture. However, regardless of the form, the relationship will most often be tax-driven or dictated by the location of the business. While you often can't control that, you should be cognizant of those issues.
If you do form a separate entity, it will provide a bit more liability protection. However, fiduciary duty issues can arise. Many times, clients will want to place members of their senior management into the new joint venture, and the decisions they make for the joint venture may be inconsistent with the interests of the client. It may even come up in a contractual context where the client will provide employees, who may have to report to employees of the partner; the issue then becomes where their loyalties lie. If those employees move to another jurisdiction, you need to be aware what local laws apply to their employment relationship and fiduciary duties. So fiduciary relationships are something to keep high on the list regardless of what form you decide in pursuing a joint venture relationship.
When putting together a joint venture, the clients or attorneys may want to put together a term sheet. However, there is case law that suggests you can have an implied joint venture even when there is non-binding language but the parties act as if there is a joint venture before it is formed based on oral agreement. Often the business people want the agreement done as soon as possible without waiting for the paperwork to be finished. However, don't let them get too far ahead of the agreement; the process of negotiating those definitive agreements and due diligence is often when you find out why a particular joint venture is not going to work. If they've started moving on the agreement, an implied joint venture may make it difficult to back out.
Make sure the relationship is conditioned on particular events happening that are key to whether the business can move forward. For example, depending on the size of the parties or the jurisdiction, you may need antitrust approval or regulatory license. Check the name of the joint venture, and make sure that name makes sense in the jurisdiction that you're going to use it.
Due diligence is the most important part of forming the joint venture at the outset. Perform the same due diligence that you would do at the beginning of an acquisition: Make sure they can perform, have the money, are going to dedicate the resources, and ask if there is anything in the industry that might prevent these things.
Structuring capital contributions: A new entity requires capital contributions and the appropriate equity/value structures. Even with a contractual arrangement, parties will still want to make sure that their contributions are appropriately valued, especially those that have a cost. Make sure the client will recover those costs.
Corporate governance issues will also be important if your client has a minority interest. Many clients like working with an informal steering committee relationship with subcommittees on particular topics important to the joint venture, such as customer service, technology/IP issues, day-to-day operations and a mechanism to resolve the issues before they can threaten the relationship. Basically, try to prevent surprises because when surprises come up it threatens the relationship.
Payment: If you have a separate entity it is easier to determine how the joint venture is paid. With a contractual relationship, payment can be more free-flowing. For example, if you have a joint venture between a hardware vendor and a service provider and the hardware vendor has a fixed cost for their equipment, the service provider should understand that they need to cover those costs and structure the revenue agreement to allow them that cost coverage. Understanding the revenue model of all the partners allows you to structure the revenue to work for all the parties. Because if it doesn't work for one of the partners, the joint venture will not survive.