Intellectual Property Issues in Collaborative Research Agreements

by
Gene Slowinski
Director, Strategic Alliance Research, Rutgers University
&
Kim William Zerby
Associate General Counsel – Intellectual Property
Global Household Care, The Procter & Gamble Company

Overview

The number of collaborative research agreements is increasing rapidly.  Industrial Research Institute member firms are engaging small high technology companies, Federal Laboratories, Universities, international firms and competitors in ways not dreamed of just five years ago.  Central to these collaborations is the need to share proprietary intellectual property (IP) to meet the collaboration’s objectives, and to jointly create new IP.    Firms face a number of predictable pitfalls as they work to achieve these objectives.  The purpose of this article is to outline the pitfalls and suggest ways to deal with them.

Introduction

The number of collaborative research agreements is increasing dramatically as firms seek to access innovation from a wide variety of organizations.  Dealing with intellectual assets is a critical aspect of planning, negotiating and implementing these relationships.  The purpose of this article is twofold.  First, we will point out key intellectual property (IP) pitfalls that IRI managers and their direct reports may face as they enter the world of collaborative research.  Second, we will share techniques to deal with each one.  Our goal is to provide line managers with the information they need to avoid the most common IP pitfalls.  Nothing in this article should be considered legal advice.  Managers entering into collaborative research agreements MUST utilize the skills of a competent and experienced Intellectual Property lawyer as they plan, structure, negotiate and implement their relationships.

We are using the term “collaborative research” in its broadest sense.  The issues we address are relevant to any relationship in which the proprietary IP of one firm are used by another firm in a business context.  We are also using a broad definition of proprietary IP.  They are intangible business assets for which various types of legal protection or ownership rights are given.  For example, the principles in this article are relevant to patents, trademarks, copyrights, domain names, trade secrets and a wide variety of know-how that differentiates one firm from its competitors. 

The “Want, Find, Get, Manage” Model® is a useful framework to explore IP issues in collaborative research agreements.  It divides the collaborative process into four segments (see Figure 1).  Each section has its own IP issues and challenges.  Intellectual property decisions made in one segment may impact IP decisions in other segments, and the overall value of the collaboration.  In the ‘Want” segment, executives determine the assets, IP or skill sets they want to access externally.  In the “Find” segment, they search the world for high quality sources of the identified resources.  Next, they “Get” the resources contractually; including acquiring all necessary rights to carry out their business intents.  Finally, they “Manage” the collaborative relationship to success.

Figure 1 – the “Want, Find, Get, Manage” Model is a framework for implementing Open Innovation.  It allows managers to identify IP issues at each stage of collaboration

Issues in the “Want” phase

The foundation of a powerful collaborative strategy is a clear definition of what the firm “Wants” to access from the outside world.  “Wants” come in many forms including physical assets such as products or capital assets, IP such as patents or trademarks, and human assets such as skill sets and access to specific researchers.

Business and technical managers conduct their “Want” planning at both the strategic and tactical levels.  From the strategic perspective, they must understand the firm’s strategic intent, business model for the relevant product line, and generally accepted IP practices in the industry.  This may sound trivial but it is not.  A clear understanding of how the firm converts technology into value allows managers to determine what activities they should carry out internally, and what activities they must carryout with partners.  It also allows them to define the “Wants” at a level of detail sufficient to move to the tactical level.  Planning at the tactical level revolves around determining their specific IP needs.  The following questions should guide managers’ thinking:

While this list is not exhaustive, it makes an important point.  Managers have a specific responsibility during the “Want” phase to ensure that their employees, and the employees of the potential partner firm, have clearly defined the IP they “Want”, and how those assets will be used inside the scope of the collaboration during the relationship’s life and upon its termination.  Fuzzy thinking on the part of either partner should raise warning flags in managements’ mind because the IP collaboration rules defined in the “Get” phase are directly related to these marketplace issues.

Issues in the “Find” phase

Once managers have a clear description of the firm’s technical needs, the next step is to “Find” the necessary resources.  The first rule is, “try not to find what you already have”.  Many firms lack the communications infrastructure to accurately link each researcher to the firm’s current IP portfolio.  The problem is particularly acute in companies with large patent estates and technical staffs distributed among multiple business units.  Mergers and acquisitions further complicate the issue because linking researchers to the new IP portfolio is low on the list of post M&A integration activities.  These issues can result in managers seeking external IP that overlaps with already existing internal IP assets.

While there are no generic solutions to this challenge, a close relationship between the legal staff and technical employees during the “Want” and “Find” stages minimizes the problem.  IP counsel and technical staff both benefit when they share their understanding of the current IP portfolio as well as the firm’s IP needs as it relates to the external project. 

At a business unit level, the firm benefits from cross business unit links that monitor potential collaborations.  These links allows each business unit to describe the potential collaboration, its need to access pre-existing company IP (background IP), the likelihood of creating new IP (foreground IP) and the need to grant or acquire licenses to meet the collaboration’s marketplace intent.  A great deal of thought goes into this issue in larger corporations.  Large firms have extensive IP portfolios.  They may have granted exclusive and non-exclusive licenses in various fields of use, geographies and/or for clearly limited periods of time.  The goal is to ensure that they do not improperly grant the potential partner rights that have been granted to others or, that they do not frustrate the business intent of a business unit by granting the potential partner certain rights.  The Intellectual Property groups in these firms have invested in systems that categorize IP.  These systems track patents and trademarks, as well as in-licensed IP.  These systems also support the compliance effort of ongoing relationships by flagging obligations such as milestone payments and IP maintenance obligations.  Finally, the patent portfolio review process is a regularly scheduled exercise that focuses patent investments on business needs and provides an in-depth view of the entire portfolio.   

The “Find” process itself is multifaceted.  Firms use a variety of techniques to search for the resources they want such as database searches, internet search engines and contacts in professional networks.  Recently a network of for-profit firms has emerged that specialize in helping firms “Find” what they “Want”.   

Managers are well advised to conduct as much evaluation as possible using only non-proprietary information from the partner.  The goal is to avoid being unnecessarily polluted with the partner’s proprietary information.  Remember, there is no collaborative agreement in place.  Either party may end discussions and partner with another firm.  If an exchange of proprietary information is necessary, it must be done under the appropriate agreement.  Even in this circumstance, both sides are well advised to learn only the information they need to make the next go-no/go decision. 

Issues in the “Get” phase

The purpose of the “Get” phase is to negotiate a mutually agreeable contract that meets both firms’ business and technical needs.  The first challenge is to understand each firm’s business and technical needs from an internal perspective.  These include how the firm(s) will deploy the technology in the marketplace, the required fields of use, anticipated geographies, required third party licenses and the need for exclusivity.  Once each firm comes to an internal understanding of how the relationship should function along these parameters, the two firms can begin the process of negotiating a set of mutually agreeable principles that will govern the relationship. 

While this process seems straight forward, it is not.  The nature of alliances leads to an important complication that hinders each firm’s ability to understand its own needs as well as the needs of the partner.  Specifically, every alliance is really “Three Alliance in One” (see Figure 2).  The obvious relationship is the external alliance between the two companies.  The two hidden relationships are the internal alliances within each partner that provide critical resources at critical times to the external alliance.  For example, in both firms, marketing, R&D, and manufacturing play multiple roles.  Each must shift resources from internal projects and refocus them on the external alliance.  Each has to coordinate its efforts with other internal groups, and integrate its efforts with groups inside the partner firm. If the two companies are going to achieve their mutual objectives, all three alliances must be planned and negotiated in parallel. 

Figure 2 – Collaborations are three alliances in one, and they must be created and managed simultaneously

Absent a process for ensuring that all internal stakeholders are in agreement on goals, milestones, timelines, business objectives, resource needs and the use of the firm’s IP, the alliance is at risk.  Of particular concern is the need to project timing, quality and quantity of resources flowing into the alliance.  Internal groups in one or both firms may not have the needed resources at the needed time or, they may not have the needed quantity or quality of resources.  The resource issue is further complicated in the case were internal people are fully committed to other projects and participate in the alliance in addition to their regular job.  The internal stakeholder buy-in process covers resource needs and other issues such as defining each firms’ objectives, the roles each will carry out, and how financial risks and rewards will be shared.  From an IP perspective, each firm must come to internal agreement on the following issues:

Once internal agreement is reached inside both firms, the parties enter into negotiations for the purpose of reaching mutual agreement.

A full discussion of each issue as well as a process for both firms to reach a mutually acceptable agreement can be found in The Strongest Link by Gene Slowinski and Matthew W. Sagal, Amacom Books, June, 2003.

Don’t start collaborating without the appropriate agreements in place

An important responsibility of every manager is to minimize risk.  Keeping the activities of the alliance in phase with the legal agreements is an important risk reduction technique.  Let’s take two scenarios; the normal course of events when two firms begin to collaborate and, the nightmare scenario.  In the normal course of events, two firms begin discussions based on an analysis of non-confidential information.  Next, they move to an evaluation of each other’s proprietary assets using a Confidentiality Agreement (CDA).  In some cases, a Material Transfer Agreement allows the firm(s) to test the specific material in question.  If all goes well, a Joint Development Agreement (JDA) is signed.  Each of these agreements is bound in important ways.  They allow each party to take certain steps, yet do not allow each party to take other steps.  Both firms understand how their IP will be used by the other, and they understand the impact of that use on their own business strategy. 

Now, the nightmare scenario.  Scientists and engineers are eager to get started.  The collaboration holds great promise and administrative matters are seen as “slowing things down”.  Armed with a 2 way CDA and comforted by the fact that the lawyers are negotiating a JDA, the technical staffs collaborate and invent something BIG.  However, the JDA is not signed and negotiations break down.  If the parties cannot come to an agreement, United States law defines ownership of the invention based on inventorship.  If only one party’s researcher(s) are inventors, that party solely owns the invention and has the exclusive right to exploit it.  This includes licensing or selling their IP interest to anyone they wish, including the partner’s significant competitor. If invented by researchers from both party, then the invention is jointly owned, but joint ownership may not meet the business needs of one or both partners.  In the U.S. such jointly owned inventions can be independently exploited by either party; again, even with the partner’s competitor.  Further, some patent laws outside the U.S. require joint exploitation of joint inventions; absent agreement, neither party may be able to exploit the invention in such regions.  This could have negative marketplace consequences for one or both parties.

We are not arguing that a complete JDA is required before collaboration may begin.  Sometimes a CDA with an invention ownership clause will suffice.  Sometimes a binding Heads of Agreement may be enough.  However, these are questions for counsel to resolve in cooperation with the responsible business and technical managers. 

If possible, avoid having IP ownership depend on inventorship

The reason firms enter into collaborative research agreements is to create new technology.  Both parties expect to commercially exploit newly created technology under agreed terms.  But there is an inherent conflict built into all R&D collaborations.  The conflict is captured in the following question: should “rights to use” (RTU) the fruits of the venture depend on which party’s technical staff is the legal inventor of the patentable invention?  The answer to that question has a profound impact on the working relationship between the technical staffs of the two firms and on the marketplace impacts of inventions.

First, note that we are discussing each firms’ “rights to use” the fruits of the venture, not which firm owns the patent.  Ownership and inventorship are vital issues that affect such matters as patent filing, prosecution, and associated costs.  However, we are addressing a separate issue, the rights each firm has to exploit the invention in the marketplace.  Two possible options are: 

Option 1 – Often called the Sole option, inventorship and RTU are equivalent; meaning that only the firm that invents the IP can exploit the IP.

Or,

Option 2 – Often called the Joint option, rights to use the invention are independent of inventorship.  Each firm will have the rights to use the IP no matter which firm’s employees made the invention. 

While at first glance the option 1 (Sole option) might be the obvious way to approach allocation of patent rights, there is a major drawback.  It has a chilling effect on collaboration.  Scientists and engineers ask for openness from the partner’s scientific staff but are reluctant to share information of their own.  Why?  Each party has an important stake in controlling information that they view as likely to lead to an invention.  The goal is obvious: to ensure that only their inventors are identified as the source of each foreground invention, because the source controls how the IP is used in the marketplace. 

In option 2, (Joint option) the RTU of each party are independent of the source of the invention.  Both partners can use the foreground IP in the marketplace regardless of which firms’ technical staff created the foreground.  This option fosters collaboration because the RTU are unaffected by inventorship. 

The actual words are found in United States patent law at 35 U.S.C. 262: “In the absence of any agreement to the contrary, each of the joint owners of a patent may make, use, offer to sell, or sell the patented invention within the United States, or import the patented invention into the United States, without the consent of and without accounting to the other owners.” Laws in other countries may differ.

This section draws heavily from, “Allocating Patent Rights in Collaborative Research Agreements”, Research * Technology Management, Vol. 49 No. 1, January – February, 2006 by Gene Slowinski and Matthew W. Sagal.

The differences between the Sole and Joint options seem quite stark.  Fortunately, there is a middle road between option 1 and 2.  Firms can foster collaboration between scientists by selecting the Joint option, yet enjoy the marketplace benefits of the Sole option by allocating exclusive rights, in clearly defined business areas, to each partner.  These rights are allocated with the intent of allowing each partner to meet its marketplace and strategic interests.  Each firms’ rights are defined along three dimensions; field of use, geography and time. 

An illustration is helpful here.  The business needs of each partner can be viewed as a three-dimensional cube that contains many mini-cubes.  Each mini-cube has value in different geographies, fields of use and timeframes.  By understanding the business and technical needs of both partners, the parties can agree on which min-cubes fall under Company A’s business interests, Company B’s business interests, both firms’ interests, or neither firms’ interests.  The three dimensional nature of Figure 3 shows how firms maximize the value of a collaboration by allocating rights to each mini-cube separately.

Figure 3 - The business needs of each partner can be viewed as a three-dimensional cube that contains many mini-cubes.  Each mini-cube has value in different geographies, fields of use and timeframes.  This cube shows how two different companies can allocate rights between them to the same innovation.

Take the example of two firms collaborating on the development of a new vaccine.  The firms will collaboratively develop the vaccine, but will market it independently.  If Company A has a strong market presence in North America and Europe, and Company B has a strong market presence in Asia, the firms can allocate rights between them along geographic lines.  The “field of use” dimension provides even more flexibility.  If the vaccine works in humans (Company A’s area of interest), animals (Company B’s area of interest) and fish the firms can define “humans” as one field of use, and “animals” as another and fish as a third.  The third dimension is time.  Each firm may enjoy exclusivity for any time limit that makes business sense.  That time limit may be a day, a year, or the life of the patent.  In our example, both firms are interested in exclusivity for the life of the patent.  Figure 3 reflects this allocation of rights based on mini-cubes.

It must be noted, however, that anti-trust and competition laws in the regions affected must be carefully considered since they may limit the options legally available.

The middle road solution allows the firms to enjoy the benefits of close technical collaboration because the technical staffs are working under the Joint option.  However, the firms achieve their marketplace needs by allocating exclusive market rights to mini-cubes between them.  

Whichever solution you chose, make sure the agreement has clear walk-away provisions.  Not all alliances succeed.  Each firm must have the ability to reenter the marketplace independently of the other and meet its marketplace objectives.  While the hope is for a successful relationship, planning for failure is the sign of an experienced and thoughtful manager.

Issues in the Manage Stage

Companies that avoid IP conflicts in the Manage stage focus attention on three good laboratory practices.

Know your obligations under the agreements

An important way to minimize conflict is to ensure that team members from both firms understand what the agreement requires them to do.  A common technique is to hold a joint session in which executives describe the agreement to team members from both firms.  While there is no hard and fast rules to describe the content of the session, from an IP perspective it should cover:

Maintain up to date documentation

Good laboratory practices make for good partnerships.  Both firms must require their employees keep lab notebooks updated, provide meeting summaries and confirm in writing confidential information disclosed orally.  An important part of documentation management is keeping track of the other party’s confidential information.  Each team member must know how broadly this information may be shared, and under what circumstances.  Team members must clearly label proprietary information as confidential information of the other party, especially if sharing outside the team.  It is becoming more common for partners to use a shared file system to collect and track all confidential information with password protection providing differential access to different team members and executives from the partner firms.

Plan patent filings and publications to allow for review by the other party

If all goes well, the collaboration will result in innovation; often protectable by patent.  While the parties cannot predict when inventions will be made, they can and should plan for how they will manage the process of pursuing patents.  A best practice (under the agreements for the Program) is to provide the other party with a set time period to review patent applications before filing.  The amount of time depends on marketplace realities (e.g., the need for consumer tests).  By soliciting the partner’s comments, inventors are correctly identified, the patent claims cover all areas of both firms’ business interest, and no confidential information of the other party is included without consent.  While this may seem difficult to manage, the time period for review of patent filings is generally short enough (a few days to typically a few weeks) to allow development efforts like consumer testing to stay on schedule.  Problems most frequently arise because the team pays little attention to creating a patent filing strategy.  This results in last minute filing decisions that are made to meet other project deadlines.  When the patent filings are planned as part of the overall project management effort, the patent review process can be completed without difficulty and more strategic, well aligned patent applications result for both parties. 

A related issue is publication of results.  Academic institutions are particularly sensitive to this issue.  It is important to have a candid discussion about the marketplace needs of the for-profit firm early on.  If the collaboration is in a sensitive area, the for-profit firm may not want the results published until its marketplace advantage is secure.  This may be a lengthy period.  Depending on the tenure status of the investigator and the career implications for his/her graduate students, a lengthy publication delay may prevent the relevant academic researcher from entering into a collaboration.

Summary

The assumption that yesterday’s innovation model will lead to prosperity in tomorrow’s business world is flawed.  Traditional internal innovation is being augmented by a wide variety of collaborative agreements that allow firms to access world-class technology; globally.  Collaboration requires the technical staff to build a new set of skills.  This is more than overcoming the “not invented here” syndrome.  This is overcoming the “I do not know how to work outside” syndrome.  Part of the mindset change requires an open discussion of risk.  Linking external agreements to the work program, and clearly communicating each party’s obligations under the agreement is a risk minimization tool.  These techniques lessen the chances that one firm’s IP will be used in inappropriate ways such as outside the fields of use or in projects not covered under the agreement.  Part of the mindset change is linking the agreements to the marketplace and technical intents of each party.  Even the best agreements cannot substitute for enthusiastic technical and business team members who understand how their activities will create marketplace value.  Once the businesses decide what they want to achieve, IP counsel supports their business intent by drafting the appropriate legal language.

Finally, this article is primarily based on United States business experiences.  Collaborations have a long history in Europe and Asia.  We invite our colleagues around the globe to share their experiences around protecting IP.  RTM readers will benefit from a global perspective of this important topic.