Avoid jointly owned intellectual property like the plague

By Donal O’Connell

Not all the smart people work for you

Traditionally, internal innovation was the paradigm in which most companies operated.  Most innovating companies kept their discoveries highly secret and made no attempt to assimilate information from outside their own research and development laboratories.  This was driven by the belief that “the smart people in our field work for us”.  However, in recent years the world has seen major advances in technology and society, changes which have facilitated the diffusion of information.  Companies have also come to realise that “not all the smart people work for us, and that we need to work with smart people inside and outside our company”.

Various forms of collaborative innovation

Collaborative innovation can take many forms, including working with Universities, cooperating closely with key suppliers and vendors, collaborating with application developers, content providers, and technology and design houses.  This would also mean working with various communities including ‘open’ communities, innovation networks and inter-operability standardisation bodies, as well as customers and end-users.  It can also involve working with start-ups and Venture Capital funded entities.  Collaborative innovation can also vary in terms of the number of the actual parties involved, the nature of the research or type of development work in question, the actual technology classification, the funding model applied, timescales involved and the overall scope of the collaboration and cooperation.

Different types of collaboration partners

Collaborating with an external innovator might be thought to mean an equal partnership between two (or more) parties who are pursuing mutually interesting and beneficial research or development type work.  Today, however, many collaboration projects involve parties from very different types of organisations and of very differing stature and funding status.  External innovators collaborate in many ways and innovators may find themselves working together on a sponsored project.  They may make equal contributions to the project or one may be leading the project whilst the other is providing expertise on a smaller or more narrowly defined aspect of the project.  Interdisciplinary projects occur when innovators from different disciplines are involved in a project in which, for example, they are looking at a problem from different perspectives, or when a project involves a complex set of questions that cross disciplines.  Sometimes innovators work separately and yet collaborate on a project.  This can occur in a variety of ways, but most frequently it is when they are working on different aspects of the same project, but exchanging data between one another.

IP ownership

As a creator of a patent, you are considered to be an inventor, and therefore have rights to be recognised as such.  Intellectual property rights are the way by which intellectual property can be protected and give legal recognition to the ownership of intellectual property.  A patent is an exclusive right granted for an invention.  A patent owner has the right to decide who may, or may not, use the patented invention.  The patent owner may give permission to use the invention, or license other parties to use the invention on mutually agreed terms.  The owner may also sell the right to the invention to someone else, who will then become the new owner of the patent.

Who owns the inventions and the resulting intellectual property rights created when cooperating and collaborating with an external party is a key issue which needs to be clearly defined for all parties concerned within the intellectual property terms and conditions section of the cooperation agreement.  Ownership of the intellectual property which arises as a result of the innovation is the most critical issue to resolve.

Intellectual property ownership in cooperation agreements

It is important that intellectual property ownership is agreed in a cooperation agreement before any work takes place, although I accept that this is often not possible. At the very least, intellectual property ownership should be discussed and agreed before any money has been expended on the patenting process. When a company pays for external innovative work to be conducted, it will typically expect to own any resulting intellectual property.  It may also expect to manage the filing of any patent applications at the Patent Office and to maintain any granted patents at its own expense.  A company will typically seek to own all inventions relevant to their business, but needs to accept that the other party, especially if it is a University, can own the intellectual property.  In such a case, the company will then usually seek exclusive access rights for a negotiable period.  The rules of intellectual property ownership can vary according to different national legislation, and it is therefore important to take these into consideration.

Jointly owned intellectual property perceived as the ‘fair’ solution

With more and more companies and organisations entering into this type of collaborative innovation joint venture, strategic alliance,  or other form of collaborative arrangement, joint ownership of IP rights has become quite commonplace.  The most common form of intellectual property allocation in collaborative innovation projects is some form of joint ownership, because joint ownership is perceived to be a “fair” solution in situations involving multiple parties.

Jointly-owned intellectual property may also be the “’easy” option, as it does not require in-depth discussion about how the intellectual property should be divided out, plus it does not seem to give any advantage to one party over another.  Unfortunately, joint ownership of intellectual property is fraught with danger.

Avoid jointly owned intellectual property

It is advisable to avoid jointly owned intellectual property rights.  Jointly developed intellectual property rights may be defined as intellectual property rights developed together by the two or more parties, where the list of inventors includes employees from both parties and where the parties share the cost and risk of the research and development work and its results.  Jointly owned intellectual property rights however may be defined as two or more parties having shared ownership and control of the very same intellectual property rights or patents.  This may mean that a joint decision is required by all parties for practically any or all disposal of the intellectual property rights.  It may mean that any exploitation rights must be handled contractually for example, with written consent needed from one party for the other party to enforce its rights, with perhaps some limitations specified for the sub-licensing and/or licensing of rights and with an obligation to share license revenues.

Challenges at each and every stage

Jointly owned intellectual property rights face challenges at each and every stage of the patenting process and differing business needs create different patent coverage needs.  The drafting, filing and prosecution of a patent therefore becomes complicated and more expensive, and the end result may not be optimal for some or all of the parties involved.  The licensing of jointly owned patents dilutes the value for both owners if a license is available from both owners.  There is no effective means to grant a covenant not to sue or a non-assert.  The divestment of jointly owned intellectual property rights also creates challenges.  The value is diluted since it is only possible to transfer the owner’s share, not the entire rights.  Also warranties typically require full ownership.  When declaring essential patents for an interoperability standard, both owners must declare and commit to the same rules to make the declaration effective.  If involved in patent litigation, most countries require both owners as plaintiffs and without common interest to sue, the patent is basically worthless.  As far as business accounting is concerned, it may be a tough challenge to put the correct financial valuation of jointly owner intellectual property rights onto the company’s balance sheet.

US law regarding jointly owned intellectual property

There are differences in intellectual property law, or the interpretation of intellectual property law, between jurisdictions. The “territorial” nature of intellectual property refers to the fact that countries enact their own intellectual property laws, typically by statute, and these intellectual property laws have no application or force outside the country in which they are enacted.

A patent can be owned jointly if devised jointly by more than one person.  As far as US patent law is concerned, the default rule is that each joint owner can utilise or exploit the patent without the permission of the other joint owners.  Further, the exploiting joint owner has no responsibility to share royalty revenues with any other joint owner.  However, to enforce the patent, all the joint owners must join in the law-suit.  If one joint owner wishes to sue rather than license a third party, any other joint owner can terminate the law-suit by simply refusing to join in or by granting a license.

It is most important to realise that there are multiple regimes of intellectual property protection. The situation with joint ownership becomes even more complicated if multiple forms of IP are involved, each with differing default rules.  For example, contrary to the US patent rule joint owners of a US copyright must share royalties.  Almost all useful products are protected by multiple forms of intellectual property such as patents, designs, trademarks and copyright. Such complexity arises for example when a software product that is covered by both patent and copyright is licensed by a joint owner. Joint owners would need to determine which percentage of the software product is exempt from royalty-sharing under US patent law and which percentage is subject to royalty sharing under US copyright law.

Chinese law

The Chinese Patent Law was first promulgated in 1984 and has since been amended twice, in 1992 and 2000.  China passed the Third Amendment to the PRC Patent Law in 2008, becoming effective in 2009.  One of the important changes in this amendment concerned joint ownership as the existing law did not address the rights of joint owners of patents.  The new law now includes a provision that specifies the rights of joint owners of patents.  It provides that unless otherwise agreed upon by joint owners, a joint owner is entitled to exploit the jointly owned patent alone or grant a non-exclusive license to a third party to exploit such patent, and any fees generated from such license must be shared among all joint owners.  All other types of exploitation of a jointly-owned patent must be agreed upon by all joint owners. Therefore, under this new law, assigning or granting exclusive license to a jointly owned patent must be agreed upon by all joint owners of the said patent.

UK law

In relation to UK patents, section 36 of the Patents Act 1977 addresses the rights of co-owners. It states that, subject to an agreement to the contrary, each co-owner has the right to exploit the patent itself but it must obtain the other owner’s consent: (a) to amend or revoke the patent; (b) to grant a licence under the patent; or (c) to assign or mortgage its share of the patent.

The issue of joint ownership of intellectual property is therefore even more complicated when the same IP asset is protected in multiple jurisdictions because different countries have different laws on this subject matter.  In addition, parties based in different countries, looking at joint ownership according to their individual national laws, may have entirely different expectations and/or experiences of what it means to be a joint owner.

Alternative approaches

There are a number of alternative and better approaches worth considering instead of agreeing to jointly owned intellectual property.  One party may own all of the intellectual property generated as a result of the collaborative innovation and license it to the other party.  The portfolio of intellectual property created may be divided out between the parties, based on the vested interests of each party.  If multiple parties are involved in the collaborative innovation, and there is a large portfolio of intellectual property in existence, then a “patent pool” type arrangement may be considered, with an administrator appointed. Or the intellectual property portfolio may be divvied up between the parties to distribute the costs and provide coverage with cross licenses.

Final thoughts

Many business people and even experienced intellectual property Attorneys and practitioners lack the in-depth appreciation of what joint ownership really means in practice, but they accept it nonetheless because “it seems fair” or “it has always been done that way.”  In reality, joint ownership of intellectual property is fraught with danger and contrary to common perception, it is often unfair and, even worse, is usually unworkable.

Personally, I would recommend to avoid jointly owned intellectual property like the plague. If the parties do decide that joint ownership is the best solution, then the most important thing to remember is that the agreement between the parties should set out in detail the worldwide rights and obligations of all of the parties involved in relation to the jointly owned intellectual property. Joint ownership should never been seen as the “easy option”.

[Originally available at Chawton Innovation Services.]