“Joint development relationships can bring significant opportunity. But when your newest investor has a front row seat to the most confidential aspects of your technology – and is also a potential competitor – things can go downhill.”
As investors and business-minded IP litigators, we see many situations where IP holders get the short end of the stick. But one stands out from the rest: joint development relationships. Too often we see great American startups losing their technology and competitive edge to joint development partners/investors with a front-row seat to everything. What follows is a multi-part series that we hope any company going down the joint development path will take to heart. We start with tips to prevent a problem. Future installments will focus on what companies can do after their “partner” uses the guise of venture investment to steal critical IP and know-how.
Preventing Blur and Safeguarding the IP
More than ever, technology is an integrated affair. We associate fancy new products with famous tech companies, but the real tech stars are often hiding in the background. With every new product comes technology challenges that are solved not by big tech engineers, but by smaller, innovative companies specialized in making that technology work. The hardware and software of these silent technology heroes makes its way into the tech we love through joint development relationships.
Joint development relationships are what allow larger tech companies to stay ahead. Perhaps an LED TV needs chips that produce better blues. Or maybe a “zero trust” cybersecurity environment must be implemented to stay current. When big tech engineers can’t solve the problem themselves, they turn to joint development relationships with smaller companies that can. In these relationships, the smaller innovator works in partnership to develop the technology critical to solving engineering challenges in the larger company’s product(s). Often, the smaller innovator receives an equity investment from its new partner as well.
The Joint Development Agreement (JDA) governs it all. In a JDA, ownership and license rights for existing and future IP are determined. Payment structures are put in place tied to IP licenses and developmental milestones. Usually, the parties agree that ownership of all IP created before the agreement (“Background IP”) will vest with the original owner, but that IP developed via the joint development relationship (“Foreground IP”) will be jointly owned by both parties to the agreement. The JDA almost always provides the larger company with a license to the smaller company’s background IP, including broad license rights to foreground IP.
Yes, joint development relationships can bring significant opportunity. But when your newest investor has a front row seat to the most confidential aspects of your technology – and is also a potential competitor – things can go downhill. The goal of this piece, and those that will follow, is to warn innovators of the complications from joint development relationships, and to provide strategies to come out ahead. We start with how to prevent problems in the first place, particularly “IP Blur”.
When engineers from both sides begin working together, full disclosure becomes the norm. Key engineers from the smaller company also become heavily involved in the process — the larger partner has demanding expectations and smaller company staffing limitations make it impossible for that company to dedicate a team solely to the joint development activities. Over time, the joint development activity comes to dominate the smaller company’s focus.
Ultimately, with key staff immersed in the joint development activities, it becomes harder for the small company to claim sole ownership over its IP. Background IP is created less and less, and everything becomes foreground IP. Even true background IP looks like foreground IP when the background IP inventor also invents for the joint development project.
The complications can multiply. Future M&A with any party other than the joint development partner becomes difficult because potential acquirers cannot cleanly differentiate between background (thus not subject to broad licenses or co-ownership rights) and foreground IP (usually heavily licensed or co-owned). Important inventions of the innovator begin showing up in patent applications of the joint development partner. Valuable trade secrets find their way out the door as well.
In an ideal world, the company with the least leverage in the joint development relationship will take measures to protect itself, including:
- Prior and subsequent to commencement of the joint development relationship, creating a written record, via patent filings, disclosures and/or other forms of summaries that memorialize the background nature of the Company’s IP and prove it was created outside of the joint development relationship;
- Documenting disclosures of the Company’s foreground IP to its larger partner;
- Negotiating the JDA such that the larger partner’s license to background IP is limited to a discrete set of future products;
- Creating the ability of the smaller partner to solely own foreground IP that the larger partner did not jointly invent;
- Restricting the scope of the foreground IP license;
- Maintaining a “clean team” that continues the work of the company outside of the joint development relationship in order to maintain clean title to the resulting background IP; and
- Implementing a clear process, during the course of the joint development relationship, to agree in real time to the foreground or background nature of resultant IP.
But more often, the ideal world is not what happens. When your partner has access to your most cutting-edge innovations, and potentially seeks to compete with you, the stage is set for bad things to happen. In the next installment, we explore how joint development relationships go wrong and what innovators can do to reclaim leverage.
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