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How Joint Ownership Impacts Royalty Negotiations

I was briefed to assist a university negotiate the grant of an exclusive worldwide license. What made this brief unusual was that the negotiation had started months ago, and it had taken a bad turn.


The university and the prospective licensee had almost agreed on everything, including the royalties and an up-front payment.


Unexpectedly, the licensee arrived at the next meeting and announced that as it was a joint owner of the IP to be licensed, it should not be paying the commercial rates for royalties and the up-front payment, but only half of what had already been agreed. It proposed a 50% reduction in the agreed royalty, and a 50% reduction in the agreed up-front payment.


At this point I was briefed.


On the face of it the licensee’s demand that there be a 50% reduction in the financial terms, given its joint ownership, was hard to argue with.


However, it is the circumstances that led to that result, and that licensee’s negotiation strategies in the years that followed which is the real purpose of this issue of IP Bits.


Two years earlier the university and the company negotiated a research agreement. The company provided research funds. It did not make any inventive or intellectual contribution to the research. At the tail end of the research agreement negotiation the company required joint ownership of the IP to arise from the research. To finalise the negotiation, sign the research agreement and get started on the research, the university conceded. The company then demanded joint ownership of the Existing IP, which was encompassed in a pending provisional patent application. It argued that the research funds would be used to pay for progressing the patent application through to PCT, and as the company was paying for it, it should own half the patent. The university, wanting to end the negotiation, conceded joint ownership of the Existing IP as well, and assigned a 50% interest in the patent application and the underlying IP to the company.


Two years later, the university and the company were negotiating the terms of a license of the Existing IP that existed before the funded research, and the New IP that arose in the course of the funded research.


The university approached the negotiation as it would any other, seeking financial and other terms all within usual commercial parameters, but making no allowance for the IP being jointly owned. After all, the company had not contributed anything to the Existing IP, either monetarily or intellectually, and the New IP was really no more than validation data from experiments that validated the Existing IP.


In the University’s view, the company having made no financial or intellectual contribution to the Existing IP, and that being where the real value lay, the New IP’s value being modest as it only validated the Existing IP, the University should be entitled to the full royalty and other financial terms as if there had not been joint ownership.


The license negotiation started on that basis, and the university thought, had finished on that basis. The university was astonished by the demand that the agreed royalty and up-front payment be halved.


That is when I was briefed.


Regrettably, I had to inform the university that the company’s position was very hard to respond to. There was joint ownership, and absent any ownership apportionment when the Existing IP was assigned two years earlier, it was presumed to be equal joint ownership.


We tried nevertheless to resist the reduction of financial terms. We argued that inventorship rested solely with the university. We argued that the company’s reduction by 50% of the financial terms when it had not contributed financially or intellectually to the Existing IP and getting a 50% reduction on the commercial value of the IP solely created by the university, was unfair. These arguments did not influence the company.


At the end of the day, arguing that there was more IP that the company needed, namely know how and trade secrets not encompassed in the patent application, as well as the IP to arise in a further research agreement, where the IP would not be jointly owned, we succeeded getting the financial terms reduced by 25% instead of 50%.


It was still an unsatisfactory result.


It demonstrates that conceding joint ownership, simply to get over an impediment in a negotiation can devalue your IP by 50%, or by whatever ownership proportion you concede.


Joint ownership should not be conceded, it should be earned, and that occurs only when all the joint owners have contributed inventively to the IP.


This is not where the story ends. Fast forward a few years. I was briefed to assist a different university to assist it in the negotiation of a license of IP that was solely owned by it. The prospective licensee was the same company. I was briefed at the start of the negotiation.


The negotiation was going well, including the negotiation of the financial terms. Towards the end of the negotiation the company arrived at a meeting and said “There is a serious issue we need to raise with you. It is a question of patent validity.”


That was indeed a serious issue. If there is a failure to name all the inventors, or a person is included as an inventor who is not an inventor, a patent’s validity can be challenged, and the patent can be revoked.


The company explained that it had reached the conclusion that one of its employees had made an inventive contribution and needed to be included as an inventor in the patent application, to ensure that there would not be a validity defect.


If this was to be done, it would mean that the company would have 50% ownership of the patent application and its underlying IP and could argue that as a result all the financial terms should be reduced by 50%.


Déjà vu.


The chief investigator, who happened to be at that meeting asked who the employee was and what was the employee’s inventive contribution. The company identified the employee and described what it asserted was the employee’s inventive contribution.


The chief investigator became very cross. He said that no such inventive contribution was made by that employee or any other of the company’s employees. He insisted that the inventive contribution described was made by a member of the university’s research team. He described the meeting when that inventive contribution was made. The chief investigator demanded that the patent attorneys making the patent application be asked to make another inventorship determination.


The chief investigator did not appreciate the implications of the assertion that a company employee had made an inventive contribution. It would have resulted in equal joint ownership of the patent, resulting in a demand that the agreed upon financial terms be halved.


After much discussion the company declined to have the patent attorney make another inventorship determination. The company informed us that it was happy with the chief investigator’s recollection, and it would not press the matter. It abandoning its position was surprising given how serious a validity issue is. Or perhaps it was not that surprising at all.


I had now witnessed this company’s strategy on two occasions, with two different licensors: engineering a situation where it asserted joint ownership, so as to justify a 50% reduction in agreed financial terms. I wondered on how many other occasions that company had employed that strategy, and done so successfully


The lessons:


  1. don’t concede joint ownership unless there is joint inventorship,

  2. if there must be joint ownership, agree on ownership proportions that reflect inventive contributions so that joint ownership is not automatically equal

  3. ensure that the respective rights of the joint owners are agreed upon - See a previous issue of IP Bits - Joint Ownership of Patents Does Not Result in Joint Benefits.

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