A practical point of view: IP and antitrust compliance requirements for research and development agreements
By Dr. Claudia Milbradt and Dr. Joachim Schütze
Clifford Chance, Düsseldorf
In the face of strong global competition, research and development (R&D) create a competitive edge for industrial companies. It is particularly important to make optimal use of the legal framework: The intellectual property (IP) rights that result from collaborative research can be a significant asset for a company’s future development. In order to properly negotiate R&D agreements, awareness of the potential pitfalls is essential.
R&D agreements are an efficient way for companies to expand and develop their technology portfolios without investing in costly infrastructure of their own. The structure and substance of these agreements varies widely depending on the form of collaborative research. It may involve awarding universities or research institutes research contracts or entering into research collaborations with other companies, including competitors. From a compliance perspective, violating the law in relation to R&D must be avoided. In order to ensure that no liability risks for company management emerge, a comprehensive system of compliance rules must be included in R&D agreements.
IP rights: infringement of third-party IP rights
One particular risk associated with R&D agreements is the danger that developed IP rights are not recognized in due time, applied for and protected or in the case of those belonging to contractual partners or third parties, infringed during later commercialization. If preventive measures are not implemented and compliance structures are inadequate, companies may end up being liable for infringement of third-party know-how or of other IP rights by their employees with regard to contracting parties. Throughout the research project and prior to the commercialization of any research results, parties should ensure that their use does not infringe any third-party IP rights. In addition, a freedom-to-operate search should be conducted in order to ensure that the results of the research can be utilized without infringing third-party rights.
Due diligence review
Before a R&D agreement is signed, technical and legal due diligence checks should be carried out on the other party’s IP rights portfolio if the research will be based on this portfolio. Since there is no requirement to record this transfer of rights in the German patent register(s), the other party should guarantee ownership of the involved IP and many other rights. Access to the other party’s existing rights (background IP) should then be agreed on. It is possible for the R&D agreement to create a pool of IP rights for a party’s use for the duration and purpose of research activities. However, the R&D agreement should prevent the other parties from using their own IP rights in other projects or after the research work has ended.
Handling of proprietary and third-party know-how
Research work is also generally based on the parties’ know-how. “Know-how” is defined as practical knowledge that is secret, substantial and identified (cf. Article 1[f] of Regulation [EC] No. 2709/1999). Under Section 17 of the German Unfair Competition Act (Gesetz gegen den unlauteren Wettbewerb, or GUCA), criteria for classifying knowledge as know-how include that (a) the information is not public, (b) it belongs to the company, (c) the company intends to keep the knowledge secret and (d) the company is interested in such secrecy. This definition is not limited to technical knowledge, but may also concern business knowledge. The parties should make factual and contractual arrangements to prevent both loss of their own know-how and infringement of others’ know-how. >> Know-how loses its specific value as soon as it is made publicly accessible and becomes “state of the art” << The European Commission has recently submitted a proposal for a directive on the protection of trade secrets, which is currently being discussed by the European Parliament. By implementing standardized rules, the European Commission aims to harmonize the varying levels of protection across European countries and thereby facilitate crossborder innovation and the transfer of know-how. The directive is likely to be adopted before the summer of 2015. Member states will then have a maximum of two years to implement the directive into national law. That way, the protection of trade secrets shall be adopted on a Europe-wide basis.
First of all, know-how owners should focus on handling private knowhow that is essential for research. Know-how loses its specific value as soon as it is made publicly accessible and becomes “state of the art”. The know-how owner may face enforcement problems if other parties are provided with confidential information and continue to use it after the end of the research collaboration. It is necessary to ensure that the other parties’ project teams are placed under an oath of confidentiality and that the relevant know-how is acknowledged as the property of a given party prior to the start of the collaboration. One way of disclosing know-how is gradually disclosing more detailed information to other parties until a higher level of knowledge is reached (“need to know basis”). Following notification, other parties will acknowledge all information above this level as existing know-how and handle it accordingly. As a safeguard, a party may submit its own know-how with a notary beforehand, making it easier to prove that information prior to disclosure by or to other parties was already known. Problems may also arise when working with third-party know-how. Findings can be restricted to certain projects, and it will be difficult to keep know-how a secret, especially when research-active universities, research institutes and companies concurrently work on multiple research projects with various partners. An effective compliance structure should control access and flows of information both within a company and within the research team. With regard to personnel, every staff member involved in research projects should be aware of related issues and the value of the involved know-how. From a technical and organizational perspective, taking into account employees’ various obligations can lead to an infrastructure enabling the creation of “clean teams” that are not given any ongoing responsibilities related to projects involving competitors of other parties. The infrastructure should also organize the management of and access to data in such a way as to ensure that know-how can be effectively protected. Tiered-access systems, which only permit authorized employees access to project data, might be one suitable solution.
Foreground IP arrangements for the future use of IP
Regarding the research subject matter (foreground IP), arrangements are required to ensure that commercial exploitation of the research results by one party does not infringe the rights of the other parties. Parties should agree on the ownership of the research findings: whether the findings should be exclusively owned by one party—in the case of contract research or in regard to copyrights—and whether the other party has any right to a license. Co-inventorship is another instrument the parties might agree on. Co-ownership might be combined with a field-of-use clause, specifying and restricting how the parties may apply and use the research results. Furthermore, the R&D agreement should specify arrangements for third-party licensing since a lack thereof might lead to the exploitation of research findings.
Arrangements regarding employee inventions
The arrangements relating to employee inventions are another risk in R&D agreements. The German Employee Inventions Act (Arbeitnehmererfindungsgesetz or GEIA) balances the principles of employment law—the employer is entitled to the fruits of his or her labor—with the law on intellectual property rights—inventions belong to the inventor. As a rule, employees are obliged to inform their employer about any invention they develop. If the employer claims the invention, the employer is required to compensate the employee according to Sections 9 and 12 of the GEIA. The obligation to pay this compensation should be outlined in the R&D agreement. Under Section 6(2) of the GEIA, the employer has a right to the invention if the employer releases the inventions within four months of being duly notified. When working on a research project with a university, Section 42 of the GEIA needs to be considered. Section 42 provides special rules for research carried out by university employees. To ensure that remuneration and the ownership of inventions are definitively agreed on, the R&D agreement should be concluded as a tripartite contract between the university and the individual academic. Clauses can involve other research staff under the academic’s obligations to ensure that background and foreground IPs are handled as agreed. Academics may also waive their rights to publish information concerning their research (positive Publikationsfreiheit) or to refrain from notifying the client of their research results (negative Publikationsfreiheit) in order to prevent the information’s publication prior to a patent application or to uphold conflicting interests in secrecy.
Antitrust law: provisions of Article 101 of the TFEU and Section 1 of the ARC
Regarding the limits of R&D agreements under the antitrust law in Germany and the EU, the provisions of Article 101 of the Treaty on the Functioning of the European Union (TFEU) and Section 1 of the German Act against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen or ARC) must be considered. These provisions prohibit agreements between companies, decisions by associations of undertakings and concerted practices that are meant to effect the restriction or distortion of competition. Companies violating these rules may be subject to fines of up to 10 percent of their global group sales. In Germany, persons may also be fined up to €1 million under Section 81(4), Sentence 1 of the ARC.
Block exemption under the R&D block exemption regulation
Even if the majority of R&D agreements do not usually fall within the scope of the cartel prohibition under Article 101 of the TFEU and Section 1 of the ARC, the far-reaching consequences of infringements imply that the requirements of the antitrust law must always be kept in mind. If an R&D agreement contains an appreciable restriction of competition, this restriction may benefit from an automatic and legal safe block exemption under Regulation (EU) No. 1217/2010, which provides for a block exemption for R&D agreements (R&DBER). If the conditions for the R&D-BER application are not met, the parties can generally conduct a self-assessment to determine whether the conditions of the individual exemption under Article 101(3) of the TFEU and Section 2 of the ARC are fulfilled. However, a self-assessment performed by the participating undertakings does not provide the same degree of legal certainty as the block exemption under the R&D-BER. In light of this, the R&D-BER is of significant importance in practice.
Positive conditions for exemption under Article 3 of the R&D block exemption regulation
The starting point for the assessment under the R&D-BER are the “positive conditions” for the block exemption in accordance with Article 3 of the R&DBER. The key element of Article 3 of the R&D-BER is the parties’ access to the joint R&D results, including intellectual property rights and know-how for the purposes of further research and exploitation. This access may be limitedly subject to certain conditions, such as the agreement of reasonable compensation, but such compensation must not be so high as to effectively impede access (cf. Article 3(3) of the R&D-BER). If the R&D agreement does not allow exploitation, each party must be granted access to any other parties’ preexisting know-how if this know-how is indispensable for the purpose of exploitation. An appropriate fee may be applicable here as well.
Market share thresholds under Article 4 of the R&D block exemption regulation
If the positive conditions for exemptions are satisfied, the market share threshold requirements in accordance with Article 4 of the R&D-BER must be assessed for compliance. Under Article 4(1) of the R&D-BER, collaborations between noncompeting parties fall under the R&D-BER for the complete duration of the R&D project and for a further period of seven years if the results are jointly exploited. For R&D agreements between competing undertakings, the relevant market share threshold for both R&D and the subsequent exploitation phases is 25 percent. The block exemption may apply after the end of the seven-year exploitation phase as long as the market share threshold does not exceed 25 percent.
Hardcore restrictions under Article 5 of the R&D block exemption regulation
If the R&D agreement contains one of the hardcore restrictions laid down in Article 5 of the R&D-BER (the so-called blacklist), for example, a provision prohibiting cooperation with third parties in a field unrelated to the field of the R&D agreement, the entire agreement will be automatically excluded from the scope of the R&DBER. The admissibility of the agreement under antitrust law is then subject to a comprehensive assessment of the prerequisites of the individual exemption of Article 101(3) of the TFEU and Section 2 of the ARC. If there is a “gray clause” within the meaning of Article 6 of the R&D-BER, it will be excluded from the scope of the block exemption, while the rest of the agreement will continue to benefit from the block exemption under the R&D-BER.
R&D agreements that address the interests of the parties can be achieved through careful and thoughtful contract design. The objectives of the agreement and the aspects it needs to cover should be clearly defined in order to implement appropriate solutions in case problems relating to the collaborative research arise. To ensure effective implementation, participating employees should receive special training because only close collaboration among compliance officers, the individuals engaged in drafting the agreements and research staff will ensure that all rules are implemented and complied with, thereby guaranteeing a successful joint research project.