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Key Terms For Robust Collaborations

Date of publication: October 26, 2009

by Susie Middlemiss, Slaughter and May

The previous month included an article on licensing in the biotechnology sector. The issues discussed there also apply to collaborations. In addition, there are particular considerations that apply to collaboration agreements. This article looks at the areas specific to collaboration agreements.

The key features of a collaboration in comparison with a straight intellectual property licence is that both parties are working together and, typically, cross-licensing. This often requires a closer working relationship with regular contact.

The best prospects of success stem from a sound working relationship but it is important that the agreement properly reflects the agreed terms and contains an ‘exit’ strategy for both parties, particularly in an unpredictable economic environment. It can be difficult to maintain a constructive relationship while negotiating clauses that are only likely to be relevant if there is a breach or termination, but it is crucial that these arrangements are tackled early on.

Strategy for Collaborations

Collaborations allow parties to:

• obtain access to resources they do not have, such as potential drug candidates or expertise in development and clinical trials;
• obtain synergies from complementary technology or products;
• generate valuable intellectual property that the parties could not develop independently;
• control spending: collaborating may give an established company access to a greater pipeline of products more cost effectively than investment in a new R&D programme, or access to expertise in clinical trials that would be expensive for a research-based company to acquire; and
• assist in funding research and, particularly in the case of universities or hospitals, in raising the profile of the institute (to attract students and funding) and stimulating other research.

Key Terms in Collaboration Agreements

The main points that a collaboration agreement should cover are:

• project management and control;
• licensing of existing or ‘background’ intellectual property rights (‘IPRs’);
• treatment of IPRs arising from the project (‘foreground’ IPRs);
• payment;
• exclusivity;
• term and termination, including rights to IPRs; and
• confidentiality.

Project Management and Control

Determining who is to lead the project and have responsibility for decision-making can be the single most contentious issue in collaborations. There is inevitably a tension if one party is chiefly contributing research results or expertise and the other is primarily contributing financial support. The research-based party will wish to control the direction of the research and the funding party will need to have control over budgets, with the balance of power generally resting with the funder. The direction of the project will need to be controlled by a project management team or committee. The balance of power within that team will depend upon the relative bargaining positions of the two parties. The quorum and voting rights on the committees can be different for different stages in the collaboration. A hierarchy of committees to resolve disputes is often effective, as project managers may be reluctant to demonstrate to seniors that they are unable to resolve a problem. Where the participation of particular levels of staff or even particular individuals in the research and development is critical, the agreement should cover selection and replacement and perhaps a right to terminate on loss of key personnel.

The Focus of the Collaboration

A balance will need to be struck between the desire to keep the subject-matter of the collaboration flexible and to have identifiable targets. The agreement must be sufficiently flexible to adapt to the needs of the parties as the work develops.

However, it is important that specific goals or milestones are identified – perhaps with deadlines so that the parties can objectively measure whether the collaboration is working and extract themselves from it if the results do not justify the investment. These can be difficult conversations to focus on in the early, optimistic stages of a commercial relationship but they are critical, particularly where exclusive arrangements are involved.

Even in a harmonious relationship, the research may not develop as expected or priorities may alter. It is important to have objective ways to monitor progress. Where the relationship is strained this is all the more critical, and the parties need to be clear as to when and how they can extricate themselves from the arrangement.

Background Intellectual Property Rights

Background IPRs are the rights that each party brings to the project, namely IPRs which each collaborator has at the outset, or develops independently of the project. In a research and development collaboration agreement, the usual position is that each party retains ownership of its background IPRs and gives a licence to the other of those rights that are necessary for the purpose of the project.

It may be the case that the technology developed in the course of the collaboration is based on one or other party’s existing rights. In this situation, the party or parties exploiting the results will require a licence to use elements of the other party’s background IPRs to enable it to exploit the results. Thought should be given to the extent to which improvements to background IPRs are also licensed. The collaboration agreement should deal with this at the outset, otherwise the party exploiting the results may find itself being forced to negotiate a further licence from the other collaborator at a later stage. As with any licence, the definitions of the relevant ‘fields’ in which each party can operate are crucial and these will need to be carefully identified in relation to the background IPRs to ensure that the collaboration does not unintentionally restrict the party from exploiting its IP in fields outside that of the collaboration. Where both parties are engaged in distinct technical fields, the issue is generally straightforward. Where there is overlap and improvements are valuable to both parties, the issue can be contentious.

Foreground Intellectual Property Rights

One of the key questions, which must be resolved in advance of entering into the collaboration, is who should own the IPRs resulting from a project (generally referred to as ‘foreground’ IPRs) and in which circumstances each party can use those IPRs. This can be a contentious topic in negotiations since each party may justifiably feel that the end result would not be possible without its input.

For a collaboration between two companies, deciding who should own any foreground rights is likely to depend on a number of factors, including: who has primary responsibility for commercialising the results of the project, the areas of expertise of both parties, and the respective bargaining power of the two companies. The parties may also agree that ownership is split according to a predetermined formula. For example, one party may own rights in compounds developed, and the other any developments made to platform technology, assays and so on. However the ownership is split, a collaboration agreement will usually incorporate a cross-licensing structure to allow both parties to benefit from the results of the project. As with any licensing, care must be taken to ensure that the total effect of the arrangement is not anti-competitive.

Joint ownership is one option that is often raised. Generally speaking, joint ownership of patents is not advisable under English law. This is because while joint owners may exploit the jointly owned IPRs themselves, unless they agree otherwise neither can license or assign their interest in the technology without the consent of the other. These restrictions can lead to difficulties at a later stage, on termination of the collaboration or on the sale of one party’s business. Although the position can be set out by careful drafting, extensive provisions are required to deal adequately with the issue. The position is different in other jurisdictions, for example in the United States joint ownership is a more commonly favoured option since both parties have much greater freedom to exercise their jointly held rights outside the terms of the contract. Further, where it is important to limit the use the other party can make of the IP, the limitations imposed by joint ownership (such as restrictions on licensing) may be a benefit.

There is also the question of who pays to file and maintain patents arising from the collaboration and who has the right to enforce the foreground IPRs. The issues are similar to those already discussed in the earlier article on licensing.

Confidentiality

Confidentiality is naturally an issue in research collaboration agreements. Regard must be had to confidentiality provisions when negotiating the agreement, for the following reasons:

• If no patent results, the use that the parties can make of any know-how generated will depend on the term of the agreement. The value of that know-how will only be retained if the parties have ongoing obligations to maintain its confidentiality, but those provisions must not unduly restrict the parties’ rights to exploit the information.
• If a patent is to be filed, prior disclosures might make that patent unpatentable.
• There is much less of a culture of confidentiality in the academic environment and publication may be an important part of a university partner’s objectives in order to validate its research and attract further students and funding. Including a right to publish subject to the business collaborator’s approval is one way to ensure that commercial interests are not prejudiced.

Confidentiality provisions must be provided for at the start of the relationship (for example by signing a simple confidentiality agreement) before the collaboration agreement is drafted, as well as in the agreement itself, and they must cover information supplied in the collaboration.

Payment

The first consideration in a collaboration is who funds the research project itself. In a classical collaboration, the pharmaceutical partner will invariably fund the project. Where universities or academics are involved, it is more likely to be the biotech company providing money and resources. Where two commercial parties collaborate, both may provide funding or fund their own contribution or there may be a more complex sharing of costs and responsibilities.

Parties will also want to consider payments where the research project successfully leads to ongoing development of a key product or key products. Payments may be structured using up-front payments, milestone payments and royalties. Up-front payments are often one-time payments. Milestone payments are made according to a predetermined event, such as the move from pre-clinical development to Phase I clinical trials or the occurrence of regulatory events. Royalties are payable on product sales. The exact combination of these payments will usually depend on the analytical assessment of the value of the product and the negotiating position between the parties.

It can be notoriously difficult to predict an appropriate royalty at an early stage where there may be no identification of a relevant product nor of what other rights (that may themselves attract royalty payments) may be needed to exploit it.

Exclusivity

Some of the most successful collaborations occur when the parties have different, but complementary, technology. Where the parties are in similar or competing fields, there is scope for considerable tension. These issues are best resolved at the stage of drafting the agreement but it can be difficult to get enthusiastic teams of scientists to focus on issues related to exclusivity, particularly where they do not have immediate impact, but which will be crucial when the agreement ends.

The majority of collaborations are exclusive arrangements.

The effect of this is that neither party may conduct research and development in the designated field outside the collaboration, nor can they retain others to do so. The initial challenge is the definition of the field, which poses the problem of defining a new area using terminology which may be inapplicable when the results of the research are known.

Commercially, there are risks in defining a field too narrowly or too widely. It is not uncommon for a bioscience company to reserve rights to commercialise developed compounds for indications not of primary interest to the major pharmaceutical company. Competition law issues need to be considered in relation to exclusivity.

A related and significant issue is how to handle rejected compounds. If control has been ceded to the funding party, a collaborator may not have the right to make decisions as to whether to proceed to the next stage or to delay or reject the compound altogether. For this reason, the biotech company may request that if a compound is rejected against its wishes, it will be free to develop the compound itself, either alone or in conjunction with others. While such a request may appear reasonable, it can undermine the exclusivity and introduces a conflict of interest.

Term and Termination

The term of a collaboration agreement will depend on the nature of the activity. The project could be a nine-month screening programme or a development and marketing collaboration lasting until all the relevant patents have expired. Relationships are often formed in stages, for example:

• stage 1: early stage assessment of a drug candidate;
• stage 2: three-year research and development project; and
• stage 3: full-scale collaboration to take the product through clinical trials and beyond.

Each stage can be the subject of a separate agreement, but once confidential information is disclosed it is difficult to monitor whether that technology has been used. It may be desirable, prior to any substantive disclosure, to negotiate full terms for all stages including a commercial licence if the initial investigations are promising.

When the parties reach the stage of actually marketing a drug, there are many ways in which the relationship can be structured, for example as a licence, a commercial collaboration or a full-scale joint venture. It may be practical and desirable to renegotiate the arrangement if things are progressing well. However, if the key commercial terms are not clear at the start, there is a higher risk of a dispute if the collaboration is less successful than anticipated.

Rights on Termination

On termination of the collaboration or rejection of a single compound, issues arise as to who has the right to own, exploit and protect the IPRs arising from the project. The following issues need to be considered at the outset and dealt with in the contract:

• Does it matter who terminated and why? Are the consequences of termination different if one party is in breach?
• Who should have the rights to exploit the technology developed during the collaboration? In what field? Are these rights transferable? Should a licence or cross-licence continue? Should any rights be assigned from one party to the other?
• Should a different position be taken for foreground and background IPRs? Should the parties continue to have rights to each other’s background IPRs?
• What approach should be taken to know-how and clinical data?
• If sub-licences of technology (or licences of products resulting from a collaboration) have been granted to third parties, should these continue?
• Should the parties accept any post-term restrictive covenant? If not, should a more limited non-solicitation covenant be imposed?

Competition issues

Some collaboration agreements may run into problems under competition law, although many of these issues can be avoided if the collaboration is established properly from the start. As IPRs confer a legal monopoly (which can translate into market power), there are some tensions between EC rules on competition which aim to promote competition (particularly Articles 81 and 82 of the EC Treaty) and national laws protecting IPRs, which aim to encourage and reward innovation.

Collaborations may offend the provisions of the EC Treaty if they affect trade between Member States and competition within the EU. A collaboration agreement which restricts the free use of IPRs can affect trade. Under Article 81(3), however, an agreement may escape prohibition if it gives rise to benefits that outweigh its anti-competitive effects.

Recognising that some arrangements are inherently likely to be good for competition, the Commission has issued ‘block exemptions’, which provide automatic exemptions for certain categories of agreement that fall precisely within the terms of the block exemptions (such as certain collaboration technology transfer agreements).

In general terms, an agreement must be assessed as a whole to establish whether the pro-competitive benefits outweigh its anti-competitive effects. It will be important to assess the market shares of the parties and the extent to which they are competitors. Certain clauses are likely to be problematic, although the extent to which this is the case for some provisions will depend on the circumstances and, in particular, whether the parties are competitors.

Various hardcore provisions are likely to be problematic (or at least require special consideration) including non-compete restrictions, ‘no challenge’ clauses prohibiting attacks on IP validity or ownership, quantitative, pricing, customer or territorial restrictions, restrictions on licensing third parties, and restrictions or concerted practices impeding parallel trade.

In the context of collaborations, the R&D Block Exemption or the Technology Transfer Block Exemption (‘TTBE’) may be relevant. To benefit from the block exemption provided in respect of R&D, the agreement must be either:

• an agreement which contemplates co-operation covering not only joint R&D but also the joint exploitation of the results; or
• a ‘pure’ R&D agreement; or
• an agreement involving the joint exploration of the results of R&D prior to a related pure R&D collaboration between the same undertakings.

The application of the R&D Block Exemption will also depend on the extent to which the parties are competitors.

Recognising that technology licensing is generally pro-competitive, the Commission has adopted the TTBE under Article 81(3). The TTBE sets out the basis of the exemption of certain agreements (between no more than two parties) relating to certain technology and, as such, provides a safe harbour from Article 81 (as clarified by the Guidelines).

In assessing whether the TTBE applies, it is necessary to consider the following three steps:

• whether the parties to the agreements are competitors or non-competitors by considering the competition in the relevant technology, product and geographic markets;
• what the market shares attributable to each party are, as the TTBE is not available if the parties’ market shares exceed a 20 per cent threshold (between competitors) or a 30 per cent threshold (between non-competitors); and
• whether the agreement contains any problem clauses such as ‘hardcore’ or ‘excluded’ restrictions. In very general terms, for competitors, hardcore restrictions include: price-fixing restrictions; limitations on output; allocation of markets or customers; and restrictions on the exploitation of technology. For non-competitors, this includes price fixing and allocation of market or customers. The excluded restrictions include exclusive grant-back by the licensee, no challenge clauses, and restrictions on exploiting the technology.

Other Key Terms

Collaboration agreements will contain provisions in many other areas, including so-called ‘boilerplate’ clauses which, although fairly standard, are nevertheless significant. These will deal with such matters as force majeure, governing law, exclusion of pre-contractual statements, variation of the agreement and so on (and were discussed in the earlier article on licences.

The dispute resolution provisions are particularly important in relation to collaborations since the parties may work together over a prolonged period. The concerns which are relevant to licensing generally will apply equally to collaboration agreements.

In addition, it will be all the more important to consider effective ways of managing and resolving issues while avoiding confrontation that might sour the day-to-day relationship. This may be part of the remit of the project team.

However, it can be helpful to have input from others who are less directly involved in the detail. It may help to have a series of escalating levels of commercial teams to discuss issues (perhaps with certain decisions being made by a joint committee, although thought must be given to who has the balance of power on the committee – one option is to give the casting vote for different issues to different parties). It may also be useful to provide for expert determination on specific issues, for example, technical issues relating to progress of the research or financial issues relating to payments.

Conclusion

As with all commercial arrangements, for collaborations it is key to have a good agreement in place. A good agreement is clear and accurately reflects the commercial arrangement reached between the parties. It is important that the termination arrangements are appropriate and in particular give adequate protection to intellectual property rights, should the commercial reality be less rosy than anticipated.

Key agreements (fundraising and other) are part of the core assets of a biotechnology company. Investors will often require a company to have in place agreements which demonstrate that a company’s technology has been validated and gives some promise of future revenue. In due diligence for all varieties of transactions, the terms of those agreements will be crucial and on some IPOs may well be highlighted in public documents. The value generated by an exclusive licence out must be balanced against the limitations that are placed on further licensing, resulting in reduced flexibility. A young biotech company may have limited bargaining power but it is important to ensure that any early collaborations do not unduly limit its ability to commercialise its technology in the future.

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This article was provide by Bio-Science Law Review, published by Lawtext Publishing Ltd. For further details visit: www.lawtext.com