Tech transactions: The secrets of successful corporate collaboration
Key issues: pre-collaboration
There are a range of strategic, commercial and regulatory considerations that combine to create a successful R&D collaboration. Understanding the full range of issues from the outset of the relationship - and ensuring they are correctly handled in the contracts - is critical. Here, we look at the primary challenges that arise before the R&D work begins. For insights on the issues that emerge during and after the collaboration itself, click here.
One of the first decisions for parties to make is exactly how they want their collaboration partnership to run. For example, R&D work can be performed on a contract basis, particularly where one party already owns specific IP rights or knowhow and doesn’t want to share the rights arising in the course of further development with another party. The commissioning party normally provides the contractor (for example an OEM or supplier) with precise specifications for the R&D to be carried out or the products to be developed. Payment for the contractor’s work is usually agreed in the form of milestone payments but may also include an upfront payment. The foreground IP (ie the IP that is developed through the R&D work) is allocated or transferred to the commissioning party, with the supplier potentially granted discounted licences.
R&D contracts based on a cooperation agreement need to allocate the parties’ responsibilities in relation to the R&D itself. Usually, the parties agree on a dedicated plan describing the research in detail. The plan contains the envisaged R&D work to be carried out and a cost breakdown of the services to be provided by each party (for example personnel and material costs). The parties will typically establish a steering committee or dedicated development group who are responsible for implementing the plan and managing any amendments throughout the project.
Often (particularly in a pharma context), one of the parties will have already done some R&D prior to joining the collaboration. Where pre-existing programs are out-licensed to one of the parties via an R&D contract, the terms often contain diligence obligations under which the licensee must use reasonable/best efforts to further develop and commercialise products (sometimes complemented by hard requirements such as fixed development/marketing budgets or timelines). These diligence obligations are a key aspect for the licensor, as exclusivities might prevent them from commercialising the product itself, while milestone and royalty payments depend on the further development and commercialisation of products.
In addition – depending on the field of the collaboration – the parties will often allocate responsibility for regulatory workstreams such as obtaining and maintaining marketing authorisations, often based on territories.
R&D agreements – and the fact they give rise to a multitude of service relationships designed to deliver their goals – raise complex issues around corporate taxation and value-added tax (VAT). The way collaboration agreements are structured from a tax perspective – in particular the way they set out IP licensing arrangements between the parties – can therefore be transformational from a commercial perspective.
Cross-border licensing transactions often attract withholding taxes (WHT), and we have begun to see a growing focus from tax authorities around the world on these provisions. It is therefore critical to get the contractual thinking right, particularly as the tax treatment of IP- and R&D-related arrangements is intricate and subjective, depending on the peculiarities of the tax systems and IP laws involved. These dynamics are making it more difficult for tech-heavy corporates to ensure compliance using only their internal legal and tax resources, and those that get it wrong risk big sanctions and potentially significant reputational damage given the broad stakeholder focus on ESG.
Cross-border licensing arrangements often attract withholding taxes, and we have begun to see a growing focus from tax authorities on these provisions
Some of the broader tax issues raised by R&D collaborations include:
- the WHT and VAT treatment of the contribution of background IP to the collaboration by each party (via licences or otherwise). It is often unclear whether different tax regimes consider these arrangements taxable exchanges of services or a means to further the mutual common goal. While this may be straightforward in a joint venture (where a separate legal entity is formed), it is often challenging to assess under a cooperation arrangement;
- whether costs incurred through the R&D collaboration can be deducted for tax purposes up front, or only over time as part of the cost base of know-how, IP, components or products; and
- whether the R&D project should be structured to access special ‘IP box’ regimes available in some jurisdictions that offer lower effective corporate tax rates on income derived from foreground IP.
EU antitrust law prohibits agreements between firms that have as their object or effect an appreciable restriction of competition. Parties can be fined up to 10 per cent of their annual global group turnover as well as risking subsequent damages actions and reputational harm So how can an R&D contract restrict competition? The answer largely depends on the category it falls into.
R&D contracts are unlikely to be anti-competitive where, for example, the cooperation concerns R&D at an early stage of the innovation process or where the parties don’t compete with one another, either in particular markets or with respect to innovation. This also applies to contracts that only concern collaboration in R&D, leaving the exploitation of the results to the parties individually.
However, R&D contracts will almost certainly be anti-competitive (constituting so-called ‘by-object’ restrictions), where they serve as a fig leaf for what is, in fact, a cartel agreement (involving for example price-fixing or the partitioning of markets or customers). Agreements restricting competition by object are generally found to infringe competition law whether or not they actually affect competition.
R&D contracts that don’t fall into either of these categories may have anti-competitive effects subject to a fact-specific assessment. This is true, for example, where the cooperation relates to both R&D and the exploitation of possible results. Here, the assessment will turn on whether the R&D agreement creates or maintains market power on existing markets or appreciably diminishes competition in innovation (which may be independent of existing markets). Competitive effects are particularly difficult to assess where the R&D is designed to develop new products that cannot be associated with existing products and their respective markets. In these cases, it may be necessary to predict the future characteristics of envisaged products and whether enough independent and promising R&D projects or innovation competitors will remain after the contract has been executed. However, predicting the future success of R&D projects with any certainty is extremely challenging. In addition, the R&D may not (yet) be directed at specific new products, but instead aimed at vaguely defined product spaces. Here, assessing the effects of R&D contracts on innovation competition may not be feasible at all.
Competitive effects are particularly hard to assess where the R&D is designed to develop innovations that cannot be associated with existing products and their respective markets
Having said this, it’s also generally accepted - including by the Commission - that R&D contracts can deliver efficiency benefits that outweigh any potential harm to competition, for example where they enable firms to undertake R&D that they wouldn’t be able to carry out on their own. These contracts may be exempt from restrictions under EU antitrust law.
First, they may fall under the R&D block exemption regulation (R&D BER) which, on a general basis, exempts certain types of agreements for the duration of the R&D process, plus an additional seven years. This is subject to certain conditions being met which are primarily intended to enhance the parties’ independence following their collaboration and to prevent partitioning and foreclosure of (future) markets. If the contracting parties are competitors, their combined market share on the relevant product or technology markets must not exceed 25 per cent. The exemption does not apply where R&D contracts contain certain hardcore restrictions, such as on the parties’ freedom to conduct R&D in unrelated areas, limitations of production and sales, or price fixing.
Second, R&D contracts that don’t fall under the R&D BER may be exempt on an individual basis. This requires that they are indispensable to deliver specific efficiency gains which are passed on to consumers, and that they do not eliminate competition in respect of a substantial part of the relevant products or technologies.
4. Intellectual property
As far as IP ownership is concerned, R&D agreements usually separate background IP (ie the IP the parties either own or otherwise control (for example via a licence) at the start of the relationship or that is developed outside of the R&D project) and foreground IP (ie the IP that is developed under the R&D contract).
As we have mentioned above, in addition to allocating ownership, R&D contracts also enable parties to grant each other licences to their respective background IP for the purpose of the collaboration, as well as to the foreground IP. Often, licenses are granted on an exclusive basis but are limited to a specific field of use (eg a specific indication/disease in case of R&D projects in the life sciences sector) as well as a specific territory.
Each party will usually retain ownership of its background IP (with certain exceptions, such as when one party completely out-licenses a program and assigns the relevant IP to the other party which is, in turn, solely responsible for its further development and commercialisation). This allows them to remain recognised as the owner of the relevant technology, and because it makes terminating the R&D project easier.
Where unregistered IP (such as data) is concerned, the contract should be tailored to ensure the assets are accessible and protected, given they usually need to be kept confidential to retain their value
In some cases, it may be appropriate to fully transfer IP, but typically businesses will be careful to retain control over their IP assets. In case of exclusive and worldwide collaborations that are not limited to a specific field (or where the background IP has no additional scope of application outside the collaboration), the receiving party usually requests assignment of the background IP as it makes it easier to prosecute, defend and enforce it, and lowers the risk in case the licensor falls insolvent (which is particularly relevant if they are a start-up or younger company).
Where unregistered IP, such as know-how, software and data are concerned, the R&D contract should be tailored to ensure the necessary access, handling and protection of these assets, given that they typically need to be kept confidential to retain their value.
Data, including personal data, plays an important role in every collaboration; scientific research depends on the exchange of ideas, knowledge and information, while an increasing number of business models now rely on data analytics.
Research in the context of R&D collaborations often generates large quantities of data that the parties require for further development, and potentially for obtaining regulatory approvals (for example data from clinical trials in the life sciences space). As a result, the parties usually agree contractual access and reference rights to each other’s data pools, while collaboration agreements allocate ‘ownership’ in any data that is generated as part of the relationship either individually by one party, or jointly. The parties also need to allocate rights in any newly generated data or insights from that data, while it’s also important to keep in mind to what extent either party will have access to, and rights in, data after the collaboration has ended (see case studies for more detail).
Where the collaboration involves the processing of personal data, any data exchange is subject to data protection laws which apply principles such as lawfulness, purpose limitation and data subject rights. However, many such laws – including the EU General Data Protection Regulation (GDPR) – contain special provisions that offer a degree of flexibility from the usual strict obligations for genuine research projects that operate within an ethical framework and aim to grow society’s collective knowledge and wellbeing. This includes the presumption of compatibility of processing for scientific research purposes of data collected in commercial and other contexts, provided appropriate safeguards are in place. Against this backdrop, the parties usually agree that each is responsible for complying with applicable data protection laws to the extent they act as data controller (eg where one party is responsible for conducting a study or trial) but at the same time agree to assist each other and to enter into additional agreements where required under applicable data protection laws (eg in case one party processes personal data on behalf of the other or where the parties act as so called joint controllers).
Where the parties intend to share and jointly use personal data generated by only one party, data protection requirements must be considered at an early stage because the transfer of personal data is an act of processing which must be based on specific legal grounds and might require an additional data sharing agreement. Where no statutory provisions allow for the sharing and joint use of personal data, the relevant data subjects’ consent must be obtained when collecting the data. Such consent as a legal basis for processing must be freely given, specific, informed and unambiguous and can be revoked any time. In cases where one of the parties is located within, and the other party is located outside, the European Economic Area, transfers of personal data are subject to an even stricter regime that requires additional safeguards (eg the EU Standard Contractual Clauses).
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 Partner
Dr. Philipp Lehmann Counsel
Niklas Andree Associate
Miriam Benmoussa Associate