IP Frameworks in Contracts for Emerging Technologies

Emerging technologies, almost by definition, involve unpredictable challenges, risks and rewards. As a result, contracting well for the development or implementation of emerging technologies requires different deal structures and negotiation processes than contracts for established technologies. The rewards, of course, can more than justify the additional investment in the contracting process.

In this unpredictable environment, intellectual property rights are uniquely suited to the creation of incentives and rewards that correspond with the real value of the innovation. To best achieve those goals, the IP provisions must be tailored for the dynamic, interdependent relationships between the parties and consider many scenarios for how the development or implementation will proceed. In this chapter, we describe how flexible, transparent, purpose-built frameworks for IP rights, going beyond fixed up-front allocations, can create efficient, effective incentives in a way that aligns with how modern technologies often emerge: collaboratively, iteratively, and against a backdrop of unknown risks and rewards.

Hallmarks of Emerging Technologies

We use the term “emerging technology” to refer to a means or method that is relatively new but is rapidly advancing, and which has the potential for practical applications or impacts that have not been fully recognized or understood. As such, its development and adoption are likely to lead to as-yet unquantifiable (and often evolving) value, opportunities, and perils, whether technical, economic, legal, or even societal. As with any uncertain venture, those pursuing emerging technologies must be sufficiently motivated by the potential upsides in order to invest the time, money, or ingenuity required.

Contracting Challenges

Though the concepts in this chapter can apply in other contexts, for sake of example, consider a contract between a sponsoring party and an innovating party. The sponsoring party has identified a problem that would be lucrative to solve, while the innovating party knows the emerging technology well. Both believe that a solution is possible by combining the sponsoring party’s understanding of the problem with the innovating party’s ability to solve problems using the emerging technology.

If this contract were for an established technology, the innovating party might agree to deliver the solution in compliance with the contract requirements on or before a milestone date for a reasonably firm price. However, using that approach for an emerging technology invites friction—and possibly impasse—as the parties struggle to put a price tag on nascent or future innovations, or as each attempts to manage uncertainty by stacking the deck in its own favor, particularly with respect to ownership or control of IP rights. Even the idea that a failure to deliver constitutes breach is fraught when the parties do not know if a solution is possible.

Allocation of IP rights also presents contracting challenges. Fields of use may be difficult to foresee. Allocating too little IP to a party may lead to that party deciding to invest fewer resources or even to enter into exclusive arrangements with other parties for some of the resources that might be helpful. Allocating IP in a manner that primarily helps one silo within a party may mean that other silos in that party do not cooperate, withholding information or other resources. And, when the most important innovations will come from collaborative work, it is difficult to draw clear contractual lines based on who came up with an innovation, whether it was based on a party’s preexisting IP, which field it relates to, or other factors that the contract uses to delineate “your” new IP from “mine.”

Innovation-Friendly IP Frameworks

An innovation-friendly, adaptable IP framework can help the parties get past contract signature to jointly innovating (despite the unknowns) instead of arguing until every hypothetical problem is solved. To this end, we recommend focusing on these principles:

Clarity of Common Purpose

Begin with a clear, joint statement of the common purpose of the relationship, such as to advance specific business goals of each party by developing or implementing a solution based on a specific emerging technology. For example, the purpose of the relationship might be to synthesize a new enzyme to enable the sponsoring party to commercialize a new drug on an exclusive basis and the innovating party to obtain royalties commensurate with its contribution. Or, it may be to develop a new enzyme that solves the sponsoring party’s industrial waste processing problem cheaply while also creating a solution that the innovating party can commercialize profitably. These differing purposes likely call for differing presumptions about the parties’ respective IP ownership and usage rights.

The shared purpose can take on additional power when it is clearly articulated in the form of a common directive or set of directives, and then formalized as a core part of the contract—not just a passing recital. Such a provision can serve as a touchstone for interpreting other contract terms, and also for the parties’ mutual decision-making and project governance (discussed in more detail below), including IP strategy decisions—and, potentially, contract termination rights if the relationship’s objectives turn out to be elusive.

The very process of jointly articulating the purpose will help the parties to ensure that their objectives are truly aligned or complementary—or it will help expose diverging goals so that an ill-fitting relationship can be avoided in the first place.

Joint Governance and Dynamic Coordination

A key ingredient of many effective emerging technology contracts is a joint steering committee (JSC). A JSC generally includes project leadership from both parties. The contract defines the JSC’s membership, composition and protocols. A JSC serves to maintain the relationship and to adapt and improve the contract as new information becomes available.

A primary type of new information is the new IP developments. The JSC can play a central role in the IP framework by identifying, categorizing, and allocating new IP in real time as innovations occur. The group can also dynamically catalog each party’s other-IP-related contributions to the project (such as assigned or licensed-in “background” intellectual property), especially as they relate to the contract’s default provisions for IP ownership, exploitation, royalties, or enforcement. By making these decisions jointly in real time, the parties increase trust and reduce the risk that one party will defect from the relationship out of fear of being treated unfairly in a later determination. Also, the parties are more likely to make fair decisions in real time because of their shared interest in continuing the relationship.

The contract should also include required methods for how the JSC will make determinations on IP issues. These should include ways to resolve JSC deadlocks. For example, final-offer or “baseball” arbitration—where the arbitrator may choose only the best answer from the parties’ respective final-offer proposals—can efficiently bring the parties closer together when trying to establish something like a fair royalty for an IP license or the value of a party’s contribution.

Maximizing Innovation Value

Setting a goal of maximizing innovation value—the parties doing all that they can do together to accomplish the shared purpose—can help build a culture of teamwork and collaboration and avoid inefficient withholding of information or other resources. Accomplishing this may involve allocating not only IP but also other rewards of the innovation, including future revenues, profits or opportunities. For example, the innovating party might own the rights to commercialize certain IP, subject to a royalty back to the sponsoring party. As another example, the parties might agree on payments for resource contributions.

Joint ownership is one way to share the benefits of newly developed IP, and often comes to mind first for a naturally “fair” solution. However, joint ownership may have unwanted effects depending on the laws of the relevant jurisdiction. Therefore, if the contract allows for joint ownership, best practice is usually not to rely entirely on default legal rules, but to spell out where practicable the co-owners’ rights and duties related to protection, practicing, licensing, and enforcement of the jointly owned IP, and to require any key joint-IP decisions not addressed explicitly in the contract to be made by the JSC.

Broad cross-licensing is another way to foster IP value, allowing each party to enjoy the upsides of innovation arising from the relationship (if not in conflict with the shared purpose), regardless of which party owns the associated IP. This can natural encourages collaboration, as a rising tide will lift all boats. It can also reduce the perceived need a party to own IP.

Flexibility and Optionality

To provide flexibility, the project might be divided into stages. At the end of each stage, the JSC would determine whether to go forward to the next stage. If so, the JSC would decide whether to modify the allocations or other aspects of the IP framework. In the right circumstances, this approach can provide a best-fit arrangement for each stage based on the facts known at the end of the prior stage.

Because emerging technology development and implementation processes (and opportunities) are often evolving, consider including options for modular expansion and other adaptive provisions in the contractual IP framework for such technologies.  Contractual options fit cases where a party does not, at signing, have enough information to make a commitment.

For example, the contract may permit a party to obtain, or widen the scope of, license rights upon meeting certain contribution thresholds or for other consideration. Or it may include buy-out options, enabling one or both of the parties to obtain sole ownership of jointly developed IP (subject to retained licenses) as a way out of joint-ownership tangles, or simply to put jointly developed IP where it will produce the most value. These provisions might require first a good-faith effort to have the JSC negotiate an acceptable solution.

While fair option-exercise prices for future IP may be impossible to set when the contract is signed, they may often be determined using final-offer arbitration or a mutually acceptable expert. Another approach is a reciprocal buy-sell mechanism (as is sometimes seen in joint venture contexts) allowing either party to propose a buy-sell price in order to trigger an obligation—and right—for the other party either to sell at that price or to buy from the proposing party at the same price (or a proportional amount, if the starting interests were unequal).¹

Benefits and Drawbacks

When built upon the principles outlined above, IP frameworks can help to align the parties’ interests, reduce negotiating friction, create an environment for true collaboration, and unlock the full value of emerging technologies. This approach does require more initial trust as the parties step away from traditional, self-protective approaches to IP ownership and control. It also involves more complexity, communication, and “overhead” investment than some traditional structures, particularly with respect to the governance process and real-time tracking of contributions and intellectual property creation. It may therefore not be suitable for all deals, particularly those of a more straightforward nature, lower value, or shorter duration. But the greater the uncertainties or anticipated value of the innovation, the more these investments can pay off.

Conclusion

The potential promises of emerging technologies are great, but so are the associated challenges and unknowns. An IP framework built around clarity of purpose, dynamic coordination through a JSC, focus on maximizing total value, flexibility, and adaptability can address the risks and capture the benefits of emerging technologies. In doing so, that IP framework can help to maximize value and avoid costly pitfalls in developing and implementing emerging technologies where more traditional contracting approaches would fall short.

¹ Note that a buy-sell option tends to favor the party with more cash at its disposal, so adjustments in the contract may be needed to reduce the likelihood of an inefficient or inequitable stockpiling of IP in a lopsided cash scenario.