Tech transactions: The secrets of successful corporate collaboration
Inside stories: What we’ve learnt from recent collaboration deals
We help businesses across sectors shape their critical collaboration agreements, working with leading players in life sciences, manufacturing, technology, consumer and more. Here, our global team share their insights on the missteps that can undermine these relationships – and how companies can avoid falling into the most common traps.
‘Planning IP and tax structuring in parallel is critical to manage risk’
David Beutel, Tax Partner, Munich
Organising an R&D partnership through contracts, rather than a standalone legal entity, can raise some tricky tax questions. How will the development work be funded, for example? If it’s through cost-sharing, where each party covers their own costs rather than reimbursing the other, they need to make sure the work they’re contributing is treated correctly for VAT and possibly withholding tax purposes.
If one of the parties is reimbursing the other’s costs using deferred or milestone payments, again they need to ensure the proper VAT treatment as well as documenting the relevant service description, the timing and the assessment criteria they’ve used. The way background and foreground IP is licensed will also have VAT and withholding tax implications, and we’re finding that tax authorities around the world are scrutinising WHT transactions more closely than ever. The transfer or sale of copyrights or software during the collaboration also needs to be carefully thought through, as these may be reclassified as licensing deals in some jurisdictions. The good thing is that if you plan the tax and IP structuring in parallel, the contracts can be structured to manage these risks.
‘The antitrust implications of R&D collaborations have become significantly more complex in recent years. Companies now walk a fine line’
Uta Itzen, Antitrust Partner, Dusseldorf
We have seen first-hand how the European Commission is shining an antitrust lens on innovation through our work advising a leading car-maker involved in the diesel emissions case. Even though, strictly speaking, it doesn’t involve a formal R&D contract, the case illustrates the key issues these agreements raise.
The case is unique in that, for the first time, the Commission has based a cartel prohibition decision on an alleged collusion solely relating to technical development, rather than on price-fixing or market and customer allocation. According to the Commission, the car companies discussed, in regular technical meetings, the development of a technology to reduce harmful diesel emissions. The Commission concluded that the manufacturers avoided competing with one another to reduce emissions beyond what was required by law, even though, theoretically, the relevant technology should have been available. Any such restriction of innovative competition, following the Commission’s reasoning, undermines efforts to meet sustainability and Green Deal objectives.
The case demonstrates the fine line between legitimate cooperation in R&D and technical matters on the one hand, and alleged competition law infringements on the other. Without clear guidance from written and case law, and with increasingly creative approaches on part of the Commission, staying on the right side of the line is increasingly challenging.
Following a recent evaluation of the rules on horizontal agreements, including the R&D BER, the Commission announced its plan to clarify and simplify relevant rules with a view to providing additional legal certainty. However, they won’t become effective before the end of 2022.
For the time being therefore, firms considering R&D contracts will continue to face heightened legal uncertainty – underlining why antitrust risk analysis is so important from the outset of any corporate collaboration.
‘We’ve seen collaborations raise issues in M&A deals, where companies may have developed technologies without having the data rights they need’
Giles Pratt, Data and IP Partner, London
We sometimes find issues relating to R&D collaborations during M&A deals, when we’re diligencing a target to work out whether it has the rights it needs to continue developing key technologies.
Where we see this play out most frequently in a data and IP context is around algorithms and modelling. Algorithms ‘learn’ from data, and we’ve worked on deals where the target company has entered into collaborations with third parties to bring data into its systems without it being clear whether it can use that data how it intends to. The data may have been ‘scraped’ from the internet by bots – in some cases it will be publicly available information, but in others the scraping may have infringed database rights or some other IP right.
In the US there’s a legal doctrine known as the ‘fruit of the poisoned tree’, which determines whether a business that makes something good, using an input it didn’t have the rights to, can monetise it. When data is used to create an algorithm without the relevant permissions, is that algorithm ‘poisoned’? If it is, it might be injuncted by the person whose data was used.
How you address the issue depends on how the buyer wants to play it – there may be a way to identify the data and remove it, or it may be that the algorithm or model is ‘refreshed’ sufficiently frequently with clean data that any risk is mitigated. It may be possible to include a warranty or indemnity in the deal documentation to insulate the buyer from subsequent litigation, the buyer might require the target to go back to the counterparties to secure the necessary licences, or you can reflect the risk in the price. What these examples show though is the value of robust agreements from the outset of any collaboration.
‘When companies negotiate an R&D collaboration, they’re obviously keen to get started. But they need also to focus on how the partnership will end’
Theresa Ehlen, Data and IP Partner, Dusseldorf and Frankfurt
I’ve seen some businesses run into difficulties around the exit provisions in their R&D contracts. Unlike an M&A deal, a collaboration is generally time-limited from the outset, but despite knowing that the partnership will eventually end, the parties are often more focused on getting started than they are on negotiating the terms around how the bring their relationship to a close in a mutually beneficial way. I’ve seen agreements that have an extraordinarily broad termination clause yet little detail around what happens to any background IP, foreground IP and incurred costs if one of the parties chooses to walk away. In other contracts we’ve worked on, the exit provisions run to 30 pages.
A robust termination clause will cover specific trigger events and explain what happens to IP and other rights at that point, potentially using a termination matrix. It will also provide clarity around payments and outline whether any claims can be brought. It might be counterintuitive to focus on the end at the beginning, but if you get it wrong, you may find yourself unable to operate your business as you need to without a costly and time-consuming dispute.
‘Collaborations with Chinese universities are increasingly common in corporate innovation programs. But companies must understand who exactly they’re dealing with’
Richard Bird, Data and IP Partner, Hong Kong
In recent years, collaborations with Chinese universities have become an increasing regular component of global companies’ R&D programmes. However, there are a few things businesses need to understand when they’re negotiating these deals in order to secure chain of title to the resulting IP.
The first is to understand exactly which entity they’re collaborating with. Chinese universities typically operate commercial ventures through separate research units or other commercial arms. These are public service organisations in their own right (ie separate legal entities), and while the research unit will often leverage university academic staff, and research and postgraduate students, in its development teams, it may be unclear what their relationship is to the research unit and whether any formal documented arrangements are in place. Many of these research personnel may not be formally employed by the contracting entity.
At the same time, university personnel may remain subject to the institution’s IP policy, which is likely to assert ownership over research results that academic staff and students have contributed to. Without the usual employment ties to rely on, a contracting solution will instead be required to clarify the relationship between personnel and the project, and provide for a clean transfer of IP as well as procuring the necessary waivers from any conflicting provisions of the university’s policies.
It’s also worth noting that Chinese universities will generally insist on acquiring joint ownership of resulting IP, including both Chinese and international patents, although they may be willing to cede control over prosecution decisions. As with any university collaboration, the university’s publication of research findings will need to be aligned with publication of pending patent applications.
Added to this, Chinese scientific universities frequently access national and local government funds and work on state-sponsored projects. The use of government money is liable to bring with it funding conditions, such as commitments to commercialise within a particular municipality or province. First use in China is the default position under Chinese law. And the grant of transfers and exclusive licences of IP to foreign entities requires approval from the project management institution (which may or may not be the university itself) or a government authority, and may additionally require waivers of funding conditions.
These blurred lines between state and private commercial activities join when foreign businesses contract with Chinese commercial companies to which a university professor is associated. These companies may have been nurtured within a university’s startup ecosystem and may themselves have benefited from government funding. Added to a lack of discipline around contracting (eg assignments of patents and other IP) and role separation, this can create an uncertain picture around the ownership of any IP that is being contributed to a partnership. Indeed, a single professor may have affiliations with several different public institutions, such as university-affiliated hospitals, alongside a teaching role, and may be involved in more than one commercial side-venture.
Understanding who you are dealing with and the arrangements that sit behind these organisations is therefore critical.
‘You need to develop contracts that are practical and flexible but that also give the parties enough certainty and comfort for the future’
Lutz Riede, IP and tech Counsel, Vienna
The quality of the results coming out of a collaboration – the foreground IP – heavily depends on the parties’ input – ie the quality and usability of their background IP. In our experience, parties tend to think more about whether the IP assets their partner is bringing to the project are state-of-the-art and free from third-party rights, rather than whether the IP they’re contributing carries similar risks. It’s always important for parties to do their homework on their IP up front, because any contractual protections they demand from their partner will typically need to be reciprocated. This is very relevant for example in tech collaborations where the background IP involves software, which often contains open source code or has been built by external developers. Likewise, there may be intra-group issues if the IP is being transferred from a different entity within the overall corporate structure. Similar issues apply to tech and data that are insourced from third party suppliers, where the parties need to make sure that the respective supply agreements cover the contemplated use for the collaboration. These issues also have to be factored into the licensing and allocation of rights in IP created during the collaboration. Sometimes it can be difficult to exploit this foreground IP if the background IP it’s built from has limitations – you may be able to include warranties and indemnities in the contract, but it’s possible the parties will, to some extent, need to get comfortable with the risk of third-party claims during the commercialisation phase.
It’s important as a lawyer to sit down with the technical teams and really understand how they intend to exploit the results of the collaboration. What rights do they need and where are their pain points? Antitrust advice is also essential where the commercialisation plans cover different territories and markets. Especially if the parties decide to own the foreground IP jointly, you need to design a regime to handle this over the long term as joint ownership ties the parties together beyond the collaboration itself. These rules must be practical and flexible but also give the parties the certainty they need for the future.
This links to a more general point about project governance – the parties need to work with each other for a sometimes lengthy period, so the contracts need to set out how any disputes are escalated in a way that doesn’t see everything landing on the CEO’s desk or progressing to litigation unless it’s necessary. Change management is equally critical – R&D collaborations are designed to develop innovative new products, so at the outset you often won’t know exactly how the work will progress, especially in areas that are undergoing rapid digital transformation such as automotive. The parties may need to change the specifications or the timescales, so the agreements should explain how this works. Change management always has financial consequences, so who pays? And does every change need to be agreed, or are there certain categories where one of the parties can insist it goes through? You need experience to negotiate these sorts of issues, and striking the right balance must be carefully tailored to each project.
How can we help?
Our integrated team of market-leading tax, commercial IP, IP litigation, corporate and antitrust lawyers ensure our clients create successful collaboration agreements. We advise across the innovation lifecycle, helping our clients choose the right strategic approach to achieve their objectives and managing the associated legal issues. Our work ensures they maximise the potential in their R&D efforts while minimising commercial, legal and reputational risk.
Dr. David Beutel Partner
Dr. Theresa Ehlen Partner
Düsseldorf, Frankfurt am Main
Dr. Uta Itzen Partner
Kristen O. Riemenschneider Partner
Giles Pratt Partner
Richard Bird Partner
Dr. Lutz Riede Counsel
Dr. Philipp Lehmann Principal Associate
New York, Hamburg
Niklas Andree Associate
Miriam Benmoussa Associate