Tech transactions: The secrets of successful corporate collaboration
Key issues: during/post-collaboration
Here, we share our insights on the most important issues to address while the R&D work is being done – and after it has finished.
As is the case during the pre-collaboration phase, tax considerations are critical to the way an R&D relationship operates – and to how the parties commercialise any resulting innovations.
The way foreground IP is treated in collaboration agreement can give rise to compliance-sensitive tax issues, depending on the ownership structure and other technicalities.
As an example, copyrights (for example in relation to documentation or software), may constitute foreground IP under the arrangement, and the transfer or full sale of copyrights in the course of an R&D collaboration may be re-qualified as a licence due to peculiarities of the applicable copyright laws, therefore making them subject to WHT. However, if the agreement is carefully structured and assessed, compliance risks can often be mitigated.
R&D agreements also often contain provisions for the distribution of income derived from the use of foreground IP, which is often not limited to profits generated by the (sub-)licensing of this IP. Additionally, profit sharing may also be calculated based on the sale of products manufactured by each party using the foreground IP. Profit sharing of income generated by foreground IP may often be difficult to categorise for tax purposes: does the respective tax law (WHT, VAT or something else) put the emphasis on the pooling/sharing component of the arrangement, or the provision of certain services? This may depend on various factors, for example on the breadth and structure of the ownership of the foreground IP and the granted rights of use.
Relying on tax treaties to mitigate or eliminate WHT exposure becomes increasingly difficult as tax frameworks tighten and tests including main benefit, substance and anti-treaty shopping are applied to assess the eligibility of treaty benefits. The issue is also on the agenda of several EU member states as well as of the European Union itself, so more legislative activity is expected.
R&D contracts usually allocate the parties’ responsibilities at the commercialisation phase, which may include the manufacturing as well as the supply of the respective products. Often the details are governed by a dedicated commercialisation plan, the implementation of which is overseen by a commercialisation committee.
It’s often impossible to know at the outset of a collaboration whether the final product will be successful, or indeed the exact use cases for commercialisation. On the flipside, each collaboration partner may have an interest in ensuring that it has the exclusive right to a specific commercialisation route. If, as a result, the partners want to allocate the commercialisation between them, competition law considerations also come into play.
For similar reasons, the commercialisation aspects might only be agreed later – for example in a pharma partnership after clinical trials have produced promising data, or after the required marketing authorisations have been obtained.
Depending on the setup for commercialising the project results, the parties may also need to consider distribution and marketing, agreeing provisions in relation to (joint) branding, quality control, marketing spend or similar issues.
R&D contracts contain provisions around the funding of the research and development program, usually linked to the parties’ responsibilities. Additionally, the contract may also contain terms on external funding (eg to what extent the parties can approach third parties for funding).
Unless the parties started the R&D program together and jointly own all relevant IP, R&D contracts usually foresee a deferred purchase price mechanism. This could include upfront payments to cater for one of the parties’ prior efforts, milestone payments, and/or royalties on the net sales of the products as consideration for the licences granted.
Financing a collaboration agreement
High value potential
High risk of failure
Deferred purchase price mechanism
While upfront and milestone payments are one-off (usually non-refundable) sums, royalties are a reoccurring obligation for the licensee based on the net sales they generate from the products developed under the contract.
Against this backdrop, defining net sales (in particular the relevant deductibles) in the contract is critical and often the subject of intense negotiations. The royalty term (ie the term during which royalties are due on net sales) is usually linked to the term of any licensed patents.
In a situation where both parties contribute equally to the R&D project and both are active in the commercialisation of the developed products, they might agree to a profit-share (eg 50:50 or another split that better reflects their contribution) rather than milestone payments and royalties. Again, these arrangements raise complex tax issues that must be carefully managed.
4. Intellectual property
The R&D contract should allocate ownership of foreground IP. Either one party solely owns certain parts of the foreground IP, or the parties jointly own it. Again, the allocation usually depends on the parties’ contributions to the project.
Especially if IP rights are to be owned jointly by both parties, R&D contracts should include provisions on their prosecution, enforcement and defence.
In the context of an exclusive licence where the licensee ‘commercially owns’ the IP (at least for a specific field/territory), the licensee often requests control over the prosecution (this depends on the importance of the field and the size of the territory – the less the licensor can do with the IP itself due to a broad out-licensing, the more they may be willing to grant the licensee control).
Any prosecution (regardless of who is in charge) must be coordinated between the parties, with the non-controlling party sometimes receiving a step-in right if the other party doesn’t make use of its first right. In case the parties jointly own any IP, the R&D contract should designate a lead party in charge of prosecution, while R&D contracts usually contain provisions on how the proceeds of any enforcement action should be allocated between the parties.
Depending on the structure of the project, the contract may also contain provisions regarding the back-transfer of an out-licensed program (in case a party brought a pre-existing development program into the R&D collaboration) or specific rights (eg any assigned patents or foreground IP) to the licensor.
The agreement should also ensure that any background IP contributed by the parties can be used to commercialise the foreground IP. In some cases, especially where one party contributes significantly more background IP than the other, this may result in a royalty obligation.
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